Sebi chief U.K. Sinha should focus on the big picture

The government has extended U.K. Sinha’s tenure as chairman of the Securities and Exchange Board of India (Sebi) until 1 March 2017 “or until further orders, whichever is earlier”. The decision came two days before Sinha finished a five-year tenure at the capital market regulator.

An earlier announcement would have helped this important institution maintain momentum in its policy- and decision-making process. Nevertheless, the extension means that Sinha has another year to leave Sebi in far greater shape than it was in when he took the helm.

In recent years, Sebi’s responsibilities have grown considerably—they now include oversight of commodity markets and collective investment schemes—and are likely to grow further. One way to look at this is that the work is cut out for the regulator’s chair. But the enormity of the tasks at hand also means that Sebi chairs could spread themselves too thin. It’s important, therefore, for Sinha to focus on the big picture.

Three important areas to focus, in our view, are: growth in thought leadership, a vigorous pursuit of justice and robust rule-making processes.

Aim for thought leadership

Sebi already has over 27 years of rich experience. It is regarded as one of the great successes India has had in the area of public administration, and rightly so. Some of the processes followed in markets governed by Sebi are world-class. Of course, there’s always room for growth—for instance, in the areas of enforcement and rule-making.

Even so, Sebi is well placed to provide thought leadership in a number of areas that regulators world over are grappling with.

J.R. Varma of the Indian Institute of Management, Ahmedabad, says there are few regulators in the world that have the luxury of appointing an advisory committee headed by a person of the stature and experience of N.R. Narayana Murthy, and which includes vastly experienced executives from finance and industry. The committee’s report on start-ups and alternative investments, he says, will without doubt be read with interest the world over.

In a different sphere—telecom—policymakers world over were closely watching and awaiting India’s decision on the subject of Net neutrality.

The Sebi chairman must be mindful of this influence India has, and pursue excellence in all its decision-making processes. There are a number of areas—algorithmic trading and crowdfunding to name a few—where policymakers world over are grappling with finding the right regulatory framework.

Of course, providing thought leadership is easier said than done. It will require a shift towards evidence-based policymaking and a rigorous use of data to support decision-making. S.G. Badrinath and V. Panchapagesan of the Indian Institute of Management, Bangalore, point out in a column for this series that tomorrow’s regulator should be agile, flexible, data-driven, research-friendly and tech-savvy.

Sinha should work hard on these lines and ensure that Sebi makes the most of every opportunity to provide leadership.

In like manner, Monika Halan, editor, Mint Money, points out in her column that Sebi should take the lead among financial regulators in ensuring that issues of consumer protection are upheld even in areas where there is an overlap of jurisdictions.

Up the ante on enforcement

Sebi’s primary role is that of being a watchdog. A high point in this regard was when it pursued the Sahara case to its logical conclusion. When Sebi staffers can see that its chief isn’t shying away from vigorously pursuing justice, even if means taking on the big and mighty, it does wonders to their morale. It goes a long way in encouraging them to do the same in the cases they are investigating and adjudicating.

On the other hand, one of the low points for Sebi has been the excessive delay in the closure of another high-profile case, related to insider trading charges against Reliance Industries Ltd. Needless to say, such delays would have the opposite effect on the morale of staffers.

What has made matters worse in recent times is that several Sebi employees—both past and present—have been the subject of investigations by the Central Bureau of Investigation. Unless there is a check on this menace, employees will certainly think more than twice about taking decisions on sensitive matters. For Sebi to thrive, its workforce must be protected from needless investigations. Somasekhar Sundaresan, partner at J Sagar Associates, says that Sebi’s senior management must stand up for evidently bona fide and innocent decisions by junior officers.

Of course, this is not to say that the Sebi chairman and its employees should be a law unto themselves; but an adequate workaround must be found as far as accountability of the regulator’s actions go. The fact that Sebi decisions can be appealed in the Securities Appellate Tribunal is a great safeguard. But there can be additional safeguard mechanisms, such as accountability to a parliamentary committee, as Pankaj Vaish, head of markets and securities services at Citi South Asia, suggests.

In sum, the Sebi chairman must be seen as himself vigorously pursuing justice, and also providing a suitable environment for employees to do the same. Of course, the flip side to this is the possibility of over regulation, which must be avoided at all costs.

Raise the stakes in rule-making

When compared to most other regulators in the country, Sebi’s rule-making process looks impressive. But that’s not saying much, given where the others are. In fact, the performance of the securities market regulator is chequered in this area, and there is much scope for growth.

Of course, there’s much to commend in what Sebi already does. For most of its decisions, it adopts a consultative process, and takes feedback from market participants and experts on board before arriving at a decision. But there are occasions it doesn’t follow this process.

A case in point is when it recently decided to increase the minimum contract size for equity derivatives contracts. The decision on this suddenly appeared one day in the form of a circular, with no data or clear rationale presented to support the decision. Similarly, recent circulars that clamped down on commodity derivatives were not supported by any data either.

Sebi needs to be far more consistent in this area. It is well positioned to take the lead among financial regulators to raise the stakes as far as rule-making processes go. It may already have a research team, but there is a need to engage with and use the assistance of researchers outside. Sinha must also ensure that decisions are transparent, with a clear statement on the objectives behind the new rule/change in rule.

Effective 31 December 2014, all financial regulators had agreed at the Financial Stability and Development Council that they will comply with certain minimum standards even for all subordinate legislations. Instead of falling behind on this commitment, Sebi should show the way to other regulators.

All told, it is well known that it won’t be long before India is among the five largest economies in the world in terms of the nominal gross domestic product. Sinha can help provide a strong foundation that ensures that the country’s markets keep the same pace.

The wish list

Mint spoke to a panel of experts who listed some of the key challenges and opportunities for the Sebi chief. Here’s what they had to say.

1. Foster an environment for credible competition in the exchange space.

2. Put a time limit for how long interim orders will be in force; use of emergency powers may be required at times, but the normal course of law should kick in soon after.

3. Use better technology for real-time market surveillance.

4. Prod the government for routing pension fund money into equity markets.

5. Use social and digital tools for better investor education.

6. Work with the central bank for reforms in the currency derivatives market.

7. Revisit the quota system for initial public offerings; retail investors can be educated and encouraged to invest in equities through mutual funds.

8. Follow through on the plan to allow listing of stock exchanges.

9. Work at enhancing the corporate bond market.

10. Make evidence-based policy decisions on market microstructure, and openly debate concerns related to high frequency trading.

11. Bring closure to the matter of refunds for Sahara investors.

12. New regulations for crowdfunding.

13. Quickly come to grips with commodity markets, especially agricultural commodities.

14. Open up commodity markets for new participations such as banks and foreign investors, and allow new products.

15. Provide exchanges and market participants far greater freedom in new product development.

16. Work closely with the government to ensure some segments such as SME exchanges are not used for tax evasion.

17. Revisit rules for new segments such as real estate investment trusts and infrastructure investment trusts to make them more attractive.

18. Revisit commission structure for mutual funds and decide on the Bose committee’s recommendations.

Anirudh Laskar and Jayshree P. Upadhyay contributed to this article.