Mumbai: Ajay Tyagi, who takes charge as chairman of the Securities and Exchange Board of India (Sebi) on 2 March, has his plate full.

While some challenges he has to tackle have been around for long, like refunding the Sahara investors, some are of recent origin, like high-frequency trading.

Some issues pertain to the regulator itself.

We look at some of the key challenges for the new chairman:

High-frequency trading

Sebi is trying to create a level-playing field for small investors and large, sophisticated ones using algorithms that can potentially execute thousands of orders—high-frequency trading or HFT—in less than a second.

On 5 August, Sebi released a discussion paper stating it was examining ways to check concerns on HFT.

It has also discussed the matter with regulators in developed nations. In his last press conference, Sinha said the regulator has appointed an external expert to recommend changes.

The share of HFT in order numbers and turnover have surged in the last five years.

HFT orders, which was 65% of overall orders in the cash equity segment in 2011-12, rose to 94% in 2015-16, while HFT turnover as a percentage of overall turnover rose from 25% to 42%.

In equity derivatives, HFT orders are up from 78% to 98%, and as a share of turnover, up from 22% to 56% in the same period.

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Commodities

In September 2015, the erstwhile Forward Markets Commission was merged with Sebi, making the latter the regulator for both equities and commodities. It was expected that new products such as commodity options would be launched and new investors such as foreign portfolio investors, banks, mutual funds and other financial institutions would come in. At its 11 February board meeting, Sebi decided to allow new participants to trade and hedge in commodity derivatives in a phased manner. Last week, Sinha said mutual funds will be the first new category to enter commodity derivatives.

Order quality

In the last year, the Securities Appellate Tribunal (SAT) referred many Sebi orders back to the regulator, raising questions over the quality of its orders. In 2016, nearly 30% of cases heard at SAT were remanded back to Sebi, against 20% and 9% in the previous two years. According to two people familiar with the regulator’s adjudication proceedings, including a Sebi official, officers at the regulator find it difficult to ascertain the exact amount of illegitimate gains made by defaulters in collective investment schemes.

Refunds

In 2013, Sebi was asked to regulate collective investment schemes (CIS), and it has since banned at least 150 illegal money-pooling schemes. Sebi orders CIS firms to discontinue their schemes, repay investors in three months and file a winding-up report.

However, not even one CIS company has filed a winding-up report so far; not even for PACL Ltd, which owes Rs49,100 crore to 58 million investors.

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Sebi usually has no clear way of identifying assets of these firms and recovering them. Often, promoters disappear once Sebi steps in. There are also shell companies that don’t keep records with the Registrar of Companies. Sebi typically follows up by initiating recovery proceedings by attaching the bank and demat accounts of promoters and related entities. But that is hardly sufficient.

“Sebi deals in the securities market, not land or plantations or animal farms (that are usually at the heart of most CISs)," said Kumar L. Desai, advocate in the Bombay high court, who has almost four decades of experience in dealing with cases involving money-pooling. In this year’s budget, the government has talked about bringing a new law for regulating money-pooling schemes.

Sahara saga

Three years after the Supreme Court empowered it to recover money from the Sahara Group to refund 30 million investors, Sebi is struggling.

According to four people, including two Sebi officials, with knowledge of the refund process, Sebi has managed to refund merely Rs80 crore so far, since only 13,000 investors were found to be genuine.

In 2011, Sebi said two Sahara companies had collected around Rs25,000 crore through bonds illegally issued in 2008. On 31 August, 2012, the Supreme Court directed Sebi to recover and refund money to investors with interest, which works out to be around Rs40,000 crore. The value of deposits made by Sahara to Sebi so far is around Rs12,000 crore, according to a Sebi official.

Start-up listing

While public listings of small and medium enterprises has seen some success, the same cannot be said of the start-up platform introduced a year and a half back. There is much work to be done to help entrepreneurs raise money through stock exchanges easily.

Internal matters

Sebi employees are upset at not having a strong vigilance policy to protect them from what they feel is unfair interrogation by external agencies. In the past three years, around 80 Sebi officials have been examined by external agencies. On 20 September, CBI searched the homes of four Sebi officials, among others, in a case relating to the grant of recognition to the MCX Stock Exchange in 2008. In a 4 October letter sent to Sinha, the 700-strong Sebi Employees Association (SEA) said Sebi’s internal vigilance department should be the first point of contact with external agencies.

Employees also want such inquiries to be first handled by the in-house vigilance department, like in the Reserve Bank of India. Employees are also displeased about appointments at the executive director level, and have sought policy changes to ensure career growth.

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