Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Opinion | Building regulatory capacity in Sebi

The efficacy of the innumerable recommendations made by several committees depend upon Sebi's enforcement capabilities

The recent report by the T.K. Viswanathan Committee giving the Securities and Exchange Board of India (Sebi) sweeping powers to prevent white-collar crimes raises some important questions about corporate governance in its spirit.

For various reasons, governance—be it corporate, political or societal—has often been viewed narrowly as starting and ending with the enacting of effective laws. However, governance deals not only with the de jure, but also the de facto aspects of the law.

Thus, the laws, as they are laid out in letter, acquire their teeth primarily through the manner of implementation, which, in turn, requires institutional capacity.

Sebi’s role as a regulator and enforcer of fair capital markets assumes particular importance for white-collar crimes, which not only destroy the fairness of capital markets, but also drive an asymmetric wedge between the returns that small, unsophisticated investors can obtain vis-à-vis large, sophisticated investors. By damaging small investors’ tenuous faith in capital markets, white-collar crimes also hinder the process of capital formation.

The detrimental effects on stock markets of scams periodically witnessed in the Indian capital markets bear testimony to such injurious effects. Regulation of equity capital markets, therefore, requires diligent detection, monitoring and enforcement of actions to punish white-collar crimes a posteriori and deter such crimes a priori. Thus, the efficacy of the innumerable excellent recommendations made by several high-powered committees depend critically upon Sebi’s enforcement capabilities.

In recent times, these capabilities have come into the spotlight despite Sebi bringing out numerous enforcement orders. So it needs to empower itself to detect irregularities a priori.

This series of articles focuses on various steps required to build capacity at Sebi. Regulatory organizations worldwide complement their high-quality personnel with the power of technology on one hand, and the outsourcing as well as crowdsourcing of capabilities on the other.

Let us start with comparing the staff strength at Sebi with the US’ securities market watchdog, the Securities Exchange Commission (SEC). In 2017, the US had 3,616 publicly-listed companies, while 5,818 companies were listed on the Bombay Stock Exchange (BSE). As the companies listed on the BSE should be a super-set of the companies listed in the National Stock Exchange (NSE), we can take the number of companies listed in the country’s two major stock exchanges to be around 5,800.

As of March 2017, the SEC had 4,554 employees while Sebi had 780. Setting aside discussions about the quality of employees for now, just look at the staggering disparity. SEC’s 4,554 employees monitor 3,616 listed companies. Thus, each listed company in the US is monitored by 1.26 SEC employees on an average.

In contrast, 780 Sebi employees monitor 5,818 listed companies in India. Thus, every Sebi employee monitors 7.45 listed companies in India.

Ignoring the differences in other factors, one Sebi employee will have to be almost as effective as 10 SEC employees (7.45x1.26 = 9.4). Even if all other factors that affect the quality of corporate governance in listed firms remain the same in India and the US, each and every one of the 780 employees in Sebi will have to be superhuman to be able to do the monitoring work that 10 SEC employees can do.

As I will highlight in subsequent articles, the differences are stark—in the quantity and quality of staff, the ability to exploit the power of data science and technology to leverage scarce human resources, and the strategic use of outsourcing and crowdsourcing of less-sensitive monitoring tasks, where the comparative advantage inherently rests outside the regulator’s organizational boundaries, especially the considered use of whistleblowers to complement the task of monitoring.

Why should we compare the level of monitoring of listed firms in India with that in the US? While blind xenophilia is unwise, choosing not to learn from the strengths of other countries is equally imprudent.

In this context, despite recent headwinds, the checks and balances for governance, that have been built by the 215-year-old democracy in the US provide a good benchmark for India to aspire for. To bring down white-collar crimes in India, providing powers to Sebi is necessary. However, building cutting-edge regulatory capacity at Sebi is paramount.

This is the first in a four-part series.

Krishnamurthy Subramanian is associate professor of finance at the Indian School of Business, Hyderabad.

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