BackSebi: Hits, misses and the road ahead
Sebi's history serves as a cautionary tale, illustrating the gargantuan challenges in creating effective independent regulators in the country
Premium
At an event to mark the 25th anniversary of the Securities and Exchanges Board of India (Sebi) in Mumbai, finance minister, P. Chidambaram exhorted the capital markets regulator to win the confidence of small investors by acting fearlessly against manipulators.
It requires an unblinkered assessment of Sebi’s history to understand why Sebi has failed to stand up as a fearless watchdog of investor rights so far. At a time when the Financial Sector Legislative Reforms Commission (FSLRC) has proposed several new financial regulators, Sebi’s history serves as a cautionary tale, illustrating the gargantuan challenges in creating effective independent regulators in the country.
To be sure, Sebi does have achievements to be proud of. Over the past 25 years, Indian capital markets have grown significantly, and a large share of the credit goes to Sebi, which helped initiate changes such as faster trade settlements and the shift away from physical to electronic share-holding. Part of the credit should go to the National Stock Exchange (NSE), which was quick to embrace new technology and helped steer important regulatory changes, in the early years.
While Sebi, in league with NSE, has managed to bring down frauds by market intermediaries, its record in acting against manipulative promoters has been extremely weak. It has often been reactive rather than proactive in tackling crises. The lack of stringent disclosure norms and the absence of strong punitive action have loaded the die in favour of insiders and against minority shareholders. Extreme volatility in stock prices prior to major corporate announcements, and opaqueness during mergers and takeovers are standard market practices even today. As a result, our markets have been trapped in a vicious cycle: disincentives for small investors limit their participation that in turn limits the constituency for genuine reforms. Also, Sebi’s slow decision making encourages a culture of lobbying to win favourable orders or to influence regulations.
The roots of Sebi’s weaknesses lie in its subservience to the political executive, which has “guided" the institution with a heavy hand since its early days. Since the Union government is seen as a higher court of appeal, entities regulated by Sebi pay obeisance at North Block to stop decisions or regulations unfavourable to them. Sebi’s authority to fight big abuses and frame long-term policies stands compromised. One of the rare Sebi chiefs to act independently and fearlessly, C.B. Bhave, ultimately ended up paying a steep price for his stance. Bhave and key members of his team were subjected to needless persecution by government agencies after they left office. This sent a disturbing signal to the market and to the new team that took charge at Sebi.
Throughout its history, Sebi’s major steps towards autonomy have come only when the political executive faced attack in the aftermath of crises. Its very founding as an independent entity was a reaction to the Harshad Mehta scam in the early 1990s. It took another scam in the early 2000s for Sebi to gain greater powers. In a 2010 speech highlighting the creeping control of the government, Bhave pointed out that the tension between the executive and the regulator was not just limited to the early days: “It still continues". Sebi’s relationship with the government was less “evolved" than that of the Reserve Bank of India (RBI), he said.
With access to its own finances, a large army of in-house technocrats and a long convention honouring autonomy in monetary policy, RBI is somewhat of an exception among Indian regulators. The lack of well-trained staff has meant that most regulators have all struggled not just to win autonomy from the government but also to avoid capture by regulated entities who enjoy an outsized role in framing policies.
Given India’s uninspiring record in setting up independent regulators, we need to think of statutory provisions beyond what FSLRC has recommended. The power to decide mandates and key regulatory appointments must vest with bipartisan parliamentary panels rather than the government of the day. In the near term, Chidambaram should act with speed on the pending amendments to the Sebi Act, if he actually wants a tougher regulator to patrol Dalal Street.
What explains Sebi’s shortcomings over the years? Tell us at views@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
