The finance ministry has directed the Securities and Exchange Board of India (Sebi) to submit proposed regulations to an independent committee for vetting before they are passed by the regulator’s board, two people aware of the matter said.

It is not clear if the new committee will comprise external members or independent directors on the Sebi board. In either case, the finance ministry’s department of economic affairs (DEA) will name the members of this committee.

“The DEA earlier this month directed Sebi that all proposed regulations would need to be placed before an independent committee for vetting before they are approved by the regulator," said the first of the two people cited above, asking not to be named. This might also require an amendment to the Sebi Act, the person added.

All through its 25-year history, the markets regulator has independently drafted regulations for approval by its board. The latest move revives the autonomy-versus-accountability debate at India’s financial market regulators, sparked by the recent turmoil that ended in the resignation of Reserve Bank of India (RBI) governor Urjit Patel.

“From an accountability of Sebi perspective, it is a good move. Statistically, there has not been a single regulation or its amendments, which has been rejected or modified by the Parliament. Having an oversight by experts looking at regulations from a constitutional outlook is a good move," said Sumit Agrawal, partner at RegStreet Law Advisors and a former Sebi official.

An email sent to a spokesperson for Sebi seeking comment remained unanswered.

“We do not know the composition of this independent committee and whether it will include only the independent board members," said the second of the two people cited earlier. “Typically, independent members are 50% of the Sebi board, but currently, independent members are less than half. The government will need to appoint new independent members and will also need to communicate the composition of this independent committee."

The Sebi Act prescribes that half of its directors be independent. However, its board currently has eight members, including the chairman and four whole-time directors named by the government. As such, less than half the board is made up of independent directors.

The issue of regulatory autonomy bubbled to the surface in October when RBI deputy governor Viral Acharya spoke about the importance of central bank independence. In the ensuing tense standoff with the finance ministry, the government contemplated the use of Section 7 of RBI Act that empowers it to give directions to the central bank, following which Patel resigned.

Even though Sebi has always made its regulations independently, the flip side is a lack of transparency.

“Sebi releases its board meeting agenda in the public domain, but the comments or deliberations of the independent committee may not be made public," said the first person cited earlier.

The other impact could be a delay in important regulations, as a new layer of approvals comes in.

“Under various financial regulatory laws including Sebi Act, the rule-making power is with the ministry of finance, while regulation-making power is with the board of the regulator," Agrawal said. “If regulations are also to be vetted by an independent committee of ministry of finance, amending the main statutes will require tweaking. Also, there are many regulations, which are proposed by independent committee itself to Sebi board. In those cases, having another committee reviewing the text may be time-consuming and needs to be thought through."

Under its current chairman, Ajay Tyagi, Sebi has adopted a committee-based approach for drafting key regulations. In his 21 months at the helm, Tyagi has set a unique record, constituting 15 committees, including working groups, and introducing a whopping 34 consultation papers.

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