BackThe top challenges facing U.K. Sinha
It is absolutely critical for Sebi to base its decision-making on transparent, data-driven research
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Now that U.K. Sinha has gotten one more year as chairman of the Securities and Exchange Board of India (Sebi), what should he do? While it is tempting to continue the trodden path—more rules, more enforcements and so on—we believe that he can do something else that will have far more impact on the future of Sebi and for India’s financial markets. It is the transformation of Sebi itself from a bureaucratic, ad-hoc and reactive regulator to an agile, research-driven and proactive regulator. Obviously, this effort cannot be completed in a year but he can at least set it in motion.
At Sebi now, rule-making is often arbitrary and appears to be based upon strongly held opinions rather than an evidence-based determination arrived at after weighing competing arguments. Enforcement actions are selective and often not commensurate with the size and nature of the offence. The process seems to be reactive, not proactive.
The recent financial crisis exposed the shortcomings of the reactive, piecemeal approaches of regulators worldwide and led to calls for a coordinated, data-intensive, proactive approach that seeks to isolate risks before they materialize and destabilize markets. Without the capability to understand complex new financial products and the research that makes them possible, regulators can hardly be expected to do their jobs effectively in an integrated financial marketplace. In other words, it is critical that tomorrow’s regulator be agile, flexible, data-driven, research-friendly and tech-savvy.
Transforming Sebi in this manner is, in our opinion, the most important task ahead for the chairman. You are probably wondering why we do not mention specific challenges such as investor protection (from practices such as misselling of financial products or fraudulent investment schemes) or in market development (such as corporate bonds). It is because we believe that the effectiveness of everything that Sebi does, including addressing these urgent priorities, depends on the quality of its rule-making and enforcement framework.
Our aim is, therefore, to highlight the need for structural reforms at Sebi and, we suspect, at other regulators as well. A reformed Sebi would make for a more successful regulator, one that is not structurally behind the entities that it regulates, one that has processes in place to address current and potential regulatory transgressions more effectively.
Such a transformation must start with people. According to its recent annual report, only a quarter of its workforce has any legal training or accounting background while there are almost no economists on its payroll. In contrast, nearly half of its employees carry general purpose MBAs. Enforcement actions originating from such a workforce are more likely to lack legal basis and may not stand up in the courts of law. Rules without proper enforcement promote moral hazards and increase costs of trading, and eventually cost of capital for our firms.
Good policies require good data and research to guide them. While it is not unusual to see global regulators put out data and encourage academic assistance in analysing the data, Sebi has been markedly reserved in this effort. Most of its research is conducted in-house and rarely shared with the broader research community. Without transparency, it is hard to determine whether Sebi’s proposals are really rooted in sound economic rationale or are just a simple response to a complex problem that could potentially do more harm than good.
The backtracking by Sebi on its safety net proposal for retail investors in an initial public offering is one such example of a proposal backed by in-house research that did not pass muster either with experts or market participants. Given that there are significant costs to be borne by market participants, it is absolutely critical for Sebi to base its decision-making on transparent, data-driven research.
Regulating India’s financial markets is still a work in progress. Globally, organizations such as the Bank for International Settlements, the US Securities and Exchange Commission and the European Securities and Markets Authority routinely engage academic researchers in creating and advising on their regulatory initiatives. India’s approach has been to rely on the recommendations of expert committees with limited academic inputs.
Greater provision of data could help address this shortage and catalyse data-driven policymaking.
Increased participation of the research community facilitates deeper understanding of issues and allows regulators to assess the true costs and benefits of regulation, objectively using the best-of-breed scientific tools and techniques.
S.G. Badrinath is chairperson, Centre for Capital Markets and Risk Management, IIM-B. Venkatesh Panchapagesan is adjunct professor, finance and control area, IIM-B.
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