How Sebi's new consultation framework caused a flutter
Summary
- Empowering the chairperson to skip the consultation process may make the process less transparent, while the procedures proposed to amend existing rules will foster greater confidence in the process, lawyers said.
Mumbai: Papers, panels and discussions - India's stock market watchdog typically follows a voluntary system of stakeholder consultations before making key decisions. Recently, the regulator moved to codify the process, binding itself to the consultative process for all future regulations and amendments.
A provision in the new framework that empowers Sebi's chairperson to skip the consultation process and act swiftly during emergencies may make the process less transparent, while the procedures proposed to amend existing rules will foster greater confidence in the regulatory process, lawyers said.
Currently, the Securities and Exchange Board of India (Sebi) turns to committees with diverse stakeholders to discuss proposed regulations, publish consultation papers for public comment and upload agenda papers (excluding confidential information) after board decisions.
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The new regulations released on 17 February will mandate a 21-day period for public feedback on proposed changes. In emergencies, though, the chairperson can shorten or waive the consultation or feedback period if it might delay critical market decisions. The Sebi board will, however, review if the reason for such fast-tracking is explained transparently.
If stakeholders feel that bypassing consultations is arbitrary or inconsistent with natural justice principles, it may lead to legal challenges, said Sangeeta Jhunjhunwala, partner at Khaitan Legal Associates. “On one side, it ensures swift regulatory responses to protect investors and stabilize markets during crises," she said. “On the other, it risks undermining transparency and stakeholder trust if overused or inadequately justified."
Ketan Mukhija, senior partner at Burgeon Law, echoed this view, adding that upholding transparency in consultations will raise confidence in Sebi's responsiveness among investors and public interest groups.
Consultative approach
The market regulator, which follows a heavily consultative approach to regulation, has released 165 consultation papers since 1 January 2023.
The government has also been pushing for more public consultations while drafting rules. The latest Economic Survey pointed out that the Union budget for 2023-24 had recommended that the financial sector regulators include public consultations in the regulation-making process. The survey also called for creating independent agencies within financial sector regulators to evaluate their regulations “from all angles."
“To balance urgency with public input, Sebi could adopt measures such as pre-consultation with relevant stakeholders, use technology for swift feedback and publish reasons for expedited actions," Jhunjhunwala said.
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To be sure, the new regulations will not apply to all matters. They exclude internal board matters, procedural rules or provisions that do not require substantive policy changes. Additionally, they will not affect regulations already in force unless amended or repealed.
Amending existing rules
The new regulations outline the procedure for amending and reviewing existing rules. Amendments will follow the same process as introducing new regulations and ensure consistency and transparency. Sebi will conduct periodic reviews, considering effectiveness, enforcement actions, global best practices and market changes.
All these will help foster greater confidence in the regulatory process, according to legal experts.
To address concerns over lack of transparency and avoid legal challenges, Zubin Morris, partner at law firm Little & Co., proposed a “narrow interpretation of exigency, limited to imminent and demonstrable threats to market stability or investor interests."
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Explaining exigencies
That would require a detailed written justification, made public as soon as possible, explaining the exigency and the least restrictive measures taken, he said. Morris suggested a mandatory review within a defined period to assess if the regulation is effective, helping address any unintended consequences.
There are others who say the flexibility to shorten the consultation period will lead to greater confidence in the regulatory process.
It’s a valuable mechanism that will allow Sebi to act swiftly during market crises, said Jyoti Prakash Gadia, managing director at financial advisory firm Resurgent India. “This flexibility is beneficial, as it provides Sebi with the necessary leeway to prepare regulations in urgent circumstances, particularly when any delay due to the consultation process would defeat the purpose of the proposed regulation."
