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The Securities and Exchange Board of India (Sebi) is celebrating its 25th anniversary this week and both the Prime Minister and the finance minister will grace the occasion. What they’re likely to say at the function can be guessed based on what the finance minister said in his budget speech this year: “I believe that India’s capital market is among the best regulated markets. This year is Sebi’s silver jubilee year and I offer the regulator our congratulations."

Gushing praise from top bosses makes it all the more difficult but Sebi just can’t afford to feel smug about what it has achieved in its first 25 years. The market regulator continues to face challenges in enforcing rules, some markets such as corporate bonds and interest rate derivatives are yet to take off, and while the exchange-traded markets seem liquid, many of them lack depth.

This is not at all to suggest that what Sebi has achieved isn’t praiseworthy. The regulator has played a major role in cleaning up India’s equity cash market, established a modern equity derivatives market, and transformed the primary market through better processes and making the large shift from merit-based approvals to disclosure-based regulations. Besides, it has put in place clear and effective rules (well, mostly) for the segments it regulates. As a result, for instance, participation from foreign institutional investors has grown steadily over time, the takeover process is streamlined, and instead of having one large, malfunctioning mutual fund in the pre-Sebi days, India now has a well-regulated mutual fund industry.

In short, the securities market has gone through a sea change in the 25 years of Sebi’s existence. It must not be forgotten here that the finance ministry has played a large role in this as well—starting, of course, with the establishment of Sebi, but also in initiating and pushing for key reforms in the securities markets. But Sebi can’t afford to rest on its laurels, nor should policymakers be overly content about what has been achieved with the creation of Sebi.

According to an expert in securities market infrastructure and regulation, most regulators have a typical life cycle—in the first few years, they are incompetent and clueless. They then get their act together through hard work and creative thinking, leading to some malpractices getting stooped and processes falling into place. Unfortunately, this phase doesn’t last for too long—as regulators mature, there’s nothing much original left to do, resulting in a highly conservative and bureaucratic organization. Sebi has largely followed this life cycle, according to him, adding that it has now reached a mature phase where it is left mainly with the extremely painful and thankless job of enforcing regulation.

The challenge with the task of enforcement is that unlike framing regulations, which can be done by a handful of people, you need a whole army of people who are sufficiently motivated and talented. To be fair to Sebi, it has grown in this area over the years. Not so long ago, most Sebi rulings would be overturned by the Securities Appellate Tribunal (SAT), forcing the regulator to pull up its socks in the area of investigation and writing orders.

The regulator has done fairly well on this count in recent years. However, a lot of offences still go undetected and there are still cases of orders being overruled by SAT. The regulator must spruce up its staff strength and talent. Besides, while it has grown in the use of technology for market supervision, it must soon move towards real-time market surveillance.

And just as how the regulator has in the past been energetic and creative in setting right the equity cash and derivatives markets, it must pursue the formation of other markets such as robust interest rate derivatives. It’s true that the ball is not entirely in Sebi’s court, and this will involve coordination with other regulators such as the Reserve Bank of India. But Sebi has done this in the past. It initiated the coordination process with the central bank when the currency derivatives market was established.

Similarly, tackling the issue of market depth means getting the critically important government-run pension funds to invest in equity markets. This will involve a buy-in from the ministry of labour and employment. Besides, doing away with the distortive securities transaction tax is the finance ministry’s decision. Likewise, regulating collective investment schemes effectively will first require clear regulations from the government. But just because these constraints exist, it doesn’t mean that Sebi can’t take responsibility for these measures to be put in place. It can find motivation from its own history—as an example, replacing the badla market with a modern equity derivatives market involved battles against powerful and entrenched market participants and steering changes in law through the parliamentary process.

Of course, the list of “to-dos" mentioned is not exhaustive. For instance, there’s a lot to do in the area of investor education; depth in most markets needs to improve. In sum, however, both Sebi and policymakers must reject the premise that all is well the Indian securities market. While Sebi has done well, thus far, there’s more left to be done.

Your comments are welcome at inthemoney@livemint.com

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