The fight for order in the market
Think tanks are increasingly assisting the government and regulators for better drafted regulations, howsoever much incumbents and vested interests want status quo
Two weeks back, on 4 May 2018, capital markets regulator Securities and Exchange Board of India (Sebi) uploaded a five-page document that I thought should have made more news. Titled Consultation Paper on Review of SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009, it is a call for public comments on a big rehaul of the Indian capital issue regulations. The document links to three annexures that read over 369 pages with details of regulations that were changed or deleted and the reason for it, the draft regulations and the schedules. Post public comments, the draft regulations will go to the Sebi board soon.
This is the front story. There is a back story and it goes like this: for several years Prithvi Haldea, the founder of PRIME Database, a pioneer in India on creating a primary capital market database, had been raising the issue of the mess in the capital market regulations around public issues and disclosures. Like an ancestral home in which rooms are built as the family expands, the regulations around the primary market have grown in a random manner since these were first enacted as Disclosure and Investor Protection (DIP) guidelines in 1992. There was a need to bring order to this mess that was growing with each passing day.
The period from 2009 to 2018 specifically, has seen large changes, not just in regulation in the related regulatory space (for instance, the Companies Act was redone), but also in the complexity and size of the Indian capital market. The primary market regulations were haphazard, badly structured and out of step with time. For example, there are rules that still refer to obsolete Acts and regulations. There are rules that were framed to placate a specific set of people and circumstances and have no relevance today. There are rules that contradict other rules. There are rules that go against the basic premise of a capital market—for instance, the provision of a safety net for retail investors. In addition, there was the plethora of the many instruments that Sebi uses to carry out its work—circulars, informal guidance, FAQs (whether Sebi should do that or stay with just one instrument to make regulations is another discussion)—and these too were in disorder; only insiders and lawyers could make sense of the real meaning of the regulation. The complicated and sometimes vague language did not help.
When Ajay Tyagi took over as Sebi chief in February 2017, he readily accepted the urgent need to rewrite the regulations and requested Haldea to undertake the assignment. Haldea, in turn, created a team of three experienced non-Sebi professionals, and also kept Sebi in the loop. It took nearly eight months of being drowned in paper for the team to finish the work. The regulatory changes were then run past the Primary Market Advisory Committee. Each issuance type now has a chapter, is comprehensive, and has the right flow. The entire regulation has been rewritten in simple English. The result is up on the web here.
Rewriting regulations is so tough because the incumbents and vested interests want status quo. If rules were drafted well and did not leave scope for wall-to-wall interpretations, many lawyers would be out of work. It helps to have badly drafted, conflicting regulations to keep the legal fires burning. The other push-back to this work, it seems, had come earlier from inside Sebi. An outsider coming in, working pro bono, doing the work that should have been done internally as a matter of process, is typically not done.
But despite the incumbents, the overall direction in the financial sector has been towards better drafted regulations. Pick up the Insolvency and Bankruptcy Act, 2016, or the draft Financial Resolution and Deposit Insurance Bill, 2017, and see the clarity of thought that removes most of the ambiguity in law. There is an increasing role for think tanks that assist the government and regulators in drafting these laws. For instance, the Indian Financial Code (IFC) was cooked at the National Institute of Public Finance and Policy in Delhi. The Insolvency and Bankruptcy code was drafted with Indira Gandhi Institute of Developmental Research (IGIDR), Mumbai, as the research and drafting wing.
Policy and regulation in the financial sector has moved a long way from whimsical and knee-jerk responses, towards a more thought through and professional process. The system can still be gamed by individual regulators by stuffing the committee with incumbents, but overall the process works.
Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation