Sebi, a child of the 1991 reforms, needs reform

One of the highlights of the union budget speech in 1991 was the decision to give statutory powers to the Securities and Exchange Board of India (Sebi) to regulate India’s capital markets. Alongside, the Controller of Capital Issues was abolished. This reform has undoubtedly done the country a world of good.

But in the 25th year of its existence as a statutory body, Sebi is still far from being a mature regulator. In fact, recent evidence points to the contrary.

Earlier this month, the Securities Appellate Tribunal (SAT) reprimanded one of Sebi’s whole-time members for dealing with its directions in a “shoddy manner”. SAT found that Sebi tried to pass off a letter by a Sebi officer as an order issued by a whole-time member. The matter came to light when the regulator failed to produce the said order during a hearing at SAT. In what was perhaps a first, Sebi was asked to pay the appellant 1 lakh for making it “run around”.

Sadly, this is not an isolated case. Earlier in the year, Sebi attracted SAT’s ire for the lack of consistency in its orders with respect to penalties for similar offences. In another instance, it was told off for supporting contradictory orders by its adjudicating officers. “Such a conduct on part of Sebi is disgraceful to say the least,” SAT wrote in its order.

And note that these are only instances where a market participant has taken the effort to appeal (run around, to use SAT’s words) against a regulatory action. In many cases, intermediaries don’t take this route for fear of antagonising the regulator. It is high time steps are taken to bring checks and balances on the regulator.

One area regularly highlighted by securities lawyers is Sebi’s liberal use of interim orders, without hearing the affected party. It turns out that in many such cases, the regulator takes its time to issue the final order. For the market intermediary that is being investigated, there are clear timelines for responding to Sebi’s queries and being present for hearings. But there are no timelines prescribed whatsoever for Sebi. In the interim, affected parties are left to deal with the consequences of the strictures in the interim order.

Often, the strictures are harsh, involving debarment from securities markets and, at times, freezing of bank accounts. It’s clearly irresponsible on the regulator’s part to not dispose these cases quickly. The government should revisit the unbridled powers it has given the regulator, and create some checks and balances. For instance, if an investigation is taking longer than three months, the regulator must be required to obtain court approval for continued attachment of properties.

In any case, the executive should provide guidelines on how long Sebi can take with its investigations, before passing its orders. The lack of accountability on this front, and the fact that there is no concept of performance appraisal for Sebi members, have led to the above-mentioned problems.

Further still, Sebi is badly in need of a performance audit by a peer. For instance, every three years, independent organisations perform a peer review of the US Government Accountability Office (GAO), to determine whether it is suitably designed and operating effectively.

The Office of the Auditor General of Canada and the Office of the Auditor General of Norway have been involved in these audits in the past decade. Likewise, a suitable overseas organisation can help with a thorough review of Sebi’s practices.

Finally, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), Sebi must publish a performance report, which incorporates global best practice systems of measuring the efficiency of the regulatory system.

The FSLRC had said that performance systems must require the regulator to create and publish performance targets, and that the performance measurement system should be reviewed every three years to incorporate global best practices.

Besides, it had recommended the formation of a review committee, comprising the non-executive members of the regulator’s board. This committee is to provide oversight of compliance of the regulator with governing laws and ensure greater transparency in the functioning of the board of the regulator.

Like many of the FSLRC’s recommendations, these don’t need changes in legislation. Sebi can embrace them without waiting for the Indian Financial Code to be passed.

In fact, U.K. Sinha, who has had one of the longest stints as chairman of the regulator, can leave his stamp by implementing these best practices. It will go a long way in changing the perception of Sebi, which is getting eroded with every scathing SAT order.

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