External consultant to revamp Sebi

External consultant to revamp Sebi

Mumbai: India’s capital market regulator is planning to revamp its structure to optimize its functions. The board of the Securities and Exchange Board of India (Sebi) has already cleared a proposal to appoint a consulting firm to advise it on the exercise, the first time it will turn to an external agency in its two-decade history, chairman U.K. Sinha said on Wednesday.

While the regulator has been hiring professionals from the industry to keep pace with the markets and their increasing complexities, it is in talks with a handful of private consulting firms to review Sebi’s organizational structure to derive the best results, Sinha said. He declined to the name the agency.

A committee appointed by Sebi and headed by former Reserve Bank of India governor Bimal Jalanhas recommended key reforms in the regulatory framework for domestic stock exchanges, clearing corporations and depositories after studying market infrastructure institutions.

The ministry of corporate affairs has sought clarifications on some suggestions made by the panel, which submitted its report in November 2010. A consensus on the report, which triggered an industry-wide debate, has been elusive.

Sinha said Sebi is closely looking at the Jalan committee’s report, but it will not be seen in isolation. Sebi wants to address the critical issue of regional exchanges, many of which are not functioning.

The three issues on which the ministry had sought clarifications are listing of exchanges, segregation of their commercial and regulatory functions, and their shareholding pattern.

One of the critical aspects the report did not touch upon is a framework to deal with the operations and exit of regional stock exchanges, Sinha said.

India has 25 stock exchanges and licences of eight have expired. Only two of them, BSE and the National Stock Exchange, have nationwide terminals and trading facilities.

“The report is silent about the businesses of regional exchanges, and ways to provide them and their shareholders a seamless exit. Also, we have so many regional exchanges, but 80% of the overall business is concentrated on two exchanges. These aspects are critical," said Sinha.

In the absence of clear exit rules, several regional exchanges are struggling to close their businesses without hurting shareholders and the investors in companies that were listed on the exchanges.

Also, there is no clear rule to deal with the assets of defunct exchanges. Assets of Hyderabad Stock Exchange are yet to be liquidated although the exchange’s licence has expired. Similarly, Coimbatore Stock Exchange is awaiting Sebi guidelines on asset distribution.

Sinha said Sebi is examining whether the Jalan panel’s report is sufficient or more consultations are required before finalizing the recommendations.

He also said the regulator is reviewing the framework of the consent process, under which a corporate entity settles regulatory issues by paying a sum of money without admission or denial of its guilt. It is planning to introduce parameters to classify “consentable violations". The new rules will also define settlement amounts commensurate with the seriousness of violations, Sinha said.

In the past, Sebi had drawn criticism from some quarters for settling disputes for lower sums, and not actively considering the interest of retail investors.

So far, the highest consent fee paid by a single entity to Sebi for a settlement has been Rs50 crore by the Reliance Group.

In another significant move, the regulator will allow a new set of firms to offer a KYC (know your customer) identity that will help investors avoid going through the hassles of multiple KYC processes each time they opt for different financial products or services.

To start with, this will cover all financial products that Sebi regulates, but in due course it will cover the entire spectrum, including bank deposits and insurance policies, that fall in the domain of other regulators.

Sinha declined to name the firms that would offer the KYC identity, but said many firms have evinced interest and the process will start soon.

Sinha’s effort will be to convince other regulators to join Sebi and opt for a single KYC for all financial products.