Opinion | The FPI fiasco holds important lessons for Sebi
Sebi should slow down on the rule-making front. Instead, it should focus on enforcement
Securities and Exchange Board of India (Sebi) did an about-turn of sorts last week. One of its committees has recommended new rules for foreign portfolio investors (FPIs), which runs contrary to a circular Sebi had issued in April.
The circular has been a cause of much controversy. A group of FPIs first said it would lead to an outflow of about $75 billion from the Indian markets, since it barred certain structures that market participants have been accustomed to. Sebi, in turn, called the suggestion preposterous, before backing down eventually.
Sebi’s limited communication in this regard has also led to conspiracy theories. One, given that the markets and the rupee were much more stable in April, Sebi tried to tinker with the FPI rules, to purportedly check money laundering. Now, it may have considered that the risk is not worth attempting. With the rupee having slid 11% since April, the last thing anyone wants is outflows on account of heavy FPI selling; which is what led to the policy reversal.
Whatever the reason, Sebi comes out looking bad. It first issued a circular without following a consultation process, and then held consultations when there was a furore over the circular. It eventually said it will issue a new circular, which from the looks of it, will incorporate the demands of the FPI community. The takeaway seems to be: If market participants complain enough and lobby enough, they can get the regulator to overturn its previous decisions.
A moot question is why it did not bother consulting market participants in the first place. As one finance markets policy expert says, since the contentious rules pertained to prevention of money laundering, it was in all likelihood issued after consultations with other government departments. Be that as it may, Sebi’s volte-face demonstrates a weak policy-making process.
And from the looks of it, it is not a one-off phenomenon either. Earlier this year, Sebi had issued another circular allowing stock exchanges to extend trading hours from 1 October. But with the deadline fast approaching, there are still no guidelines on how market participants are supposed to go about making changes to their systems. News reports suggest the regulator has asked exchanges to iron out concerns raised by trading firms, before issuing guidelines. Again, there seems to be a consultation process being followed after the regulator issued its circular.
According to the chief executive officer of a leading financial intermediary, “Sebi is making far too many changes and at far too frequent intervals; this has unsettled market participants needlessly”.
This column has said in the past that Sebi should focus more on ensuring its rules are enforced, rather than busy itself issuing new rules. In the FPI case, as well as the recent suggestion to restrict retail participation in equity markets, it seemed that Sebi was considering new rules that placed curbs on an entire market segment because of its seeming inability to enforce existing rules and nail wrongdoers.
In this backdrop, Sebi should slow down on the rule-making front. Instead, it should pull up its socks on enforcement. One tool that can help it is a better accountability mechanism. It should invite an outside agency for an audit of its rule-making process, as well as its enforcement function.
Additionally, it can get more proactive when it gives an account of its performance to the government. There are a number of suggestions in this regard in the report of the financial sector legislative reforms commission (FSLRC).
Unless Sebi embraces these best practices, it will be seen as a regulator that is not thorough with its processes, and one that can be arm-twisted into changing its stance. At least, that’s what the FPI fiasco demonstrates. Sebi should wake up and smell the coffee.
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