G.V. Ramakrishna, the first chairman of Securities and Exchange Board of India, once made an interesting remark. “Brokers should know that the road from Dalal Street (where the Bombay Stock Exchange is located) to Mittal Court (where Sebi was then based) doesn’t run through North Block (where the finance ministry is located),” he said. Back then, the Securities and Exchange Board of India Act, 1992 had just been passed. So market participants were still getting used to the idea that securities market regulations were no longer controlled by the finance ministry, but by an independent regulatory body called Sebi.
Sebi is now in the 20th year of its existence and has proven to be a well-functioning regulator. Unfortunately though, some recent events suggest that its autonomy is under attack.
Consider the manner in which the proposals of Bimal Jalan committee are being followed up. This committee was set by Sebi to review issues related to the ownership and governance of market infrastructure institutions, including stock exchanges. It took feedback from the market, deliberated on them and then submitted its recommendations to the Sebi board in November. The report was put up on the Sebi website and public comments were invited..
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The report included some contentious recommendations such as a cap on profit of stock exchanges and disallowing listing of the exchange’s shares. Not surprisingly, it generated heated debate in the media as well in various seminars.
So far, so good. The process is typical of how Sebi frames new rules for the marketplace. It appoints a committee, which follows a consultative process before submitting its report. The recommendations are then placed for public comments, and the Sebi board considers the feedback before making its final decision.
In this case, however, the government has jumped in to help the Sebi board make its decision on the matter. News reports suggest that the finance ministry is in consultations with some market participants. According to the Business Standard newspaper, the corporate affairs ministry has set up a committee to advise the government on the Jalan committee report. This committee is also holding consultations with market participants. According to a report in Mint, after its consultations, the finance ministry will communicate its position to Sebi, effectively forcing the regulator’s hand.
While holding discussions and consultations on the Jalan committee report is welcome, this should be done by the Sebi board. In all of the above, the Sebi board is missing in action. It’s as if the market regulator is irrelevant in the discussions.
Similarly, the finance ministry set up a committee to decide its position on the recommendations of the Achuthan committee on takeover regulations. Again, the ministry’s decision is expected to prevail.
All of this is being done under the garb of encouraging a consultative process and taking on board the feedback of market participants. But this argument doesn’t wash, because the process Sebi follows is consultative to start with. In fact, all responses the government will now get on the Jalan report will be already with Sebi, as part of the comments it received after the report was put out for discussion.
The government’s interference points to a clear trend reversal from what has been achieved in the past 20 years. Sebi was established as an independent body and all matters related to securities regulation were delegated to it by law. If the finance ministry is going to take decisions for the Sebi board, the markets regulator would soon morph back into a department of the ministry.
A few months before Sebi’s previous chairmen C.B. Bhave finished his term, he gave a speech on the appropriate regulatory structure for development, where he stressed on the need for autonomy of regulators. Referring to the possibility that regulatory organizations’ surplus funds would have to be merged with the government’s funds, he said, “If the government finally accepts this line of thinking, substantial damage will be done to the autonomy of regulatory institutions. If regulators have to depend on the executive for release of funds, the question of independent behaviour by the regulators would be jeopardised.” Just last week, the Sebi board decided to keep its surplus funds in government accounts.
With all these events happening simultaneously, it’s not far-fetched to say that Sebi’s autonomy is increasingly under attack. This is a disturbing trend and should be nipped in the bud. It won’t be long before everyone who has a grievance with Sebi would first attempt a trip to North Block.
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