Recent headlines suggest it is wing-clipping season for independent regulators. On 22 January, a Mint headline stated: Drug price regulator’s wings clipped. About a week later, a similar story is being repeated, albeit with a different regulator. “Government moves to clip Sebi’s wings," Mint reported on 30 January. Worries about the government’s interference with the independence of Reserve Bank of India haven’t abated either, which makes things all the more disconcerting.

As Ian Fleming’s anti-hero Goldfinger said: “Once is happenstance. Twice is coincidence. The third time is enemy action." Experts say the way things are going, financial regulators may might as well be subsumed into the finance ministry, rather than continue with the pretence that they are truly independent.

For backdrop, the news report states 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. Like with the intrusion into the RBI’s turf, the garb under which all of this is being done is that it will ensure better accountability.

While the accountability framework of all regulators is an important discussion to have, and certainly needs attention, the government is adopting changes that will prove to be counter-productive.

In the RBI’s case, this column has already touched upon some of the challenges with the accountability process the government has in mind (bit.ly/2CUhpUp).

In Sebi’s case, an additional committee to vet proposed regulations defeats the very purpose of the Sebi board. And regardless of whether the Sebi board panders to the government-appointed committee, or chooses instead to clash with it, either outcome is undesirable. While the first puts a serious question on independence, the second will involve an unnecessary waste of time and resources.

Note here that the government already appoints its nominees to the Sebi board. Perhaps it should take this role of appointments more seriously, if it doesn’t trust the nominees to be able to vet proposed regulations.

Of course, all this is not to say that Sebi functions perfectly and doesn’t need any scrutiny. On the contrary, the regulator needs to get its act together in multiple areas such as framing regulations and adjudication. And a good accountability mechanism is actually much-needed.

But creating a parallel power centre, like the government is doing for drug pricing as well, is no answer. After all, if there is a blow-up, who would really be accountable—the independent committee or Sebi?

Let’s say, hypothetically, the committee shoots down Sebi’s proposal to have larger capital requirements for clearing corporations, after which one of them goes bust, who would be held accountable?

The government should rather improve the accountability framework for Sebi by implementing some of the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC).

The FSLRC had said Sebi must publish a performance report that captures the efficiency of the regulatory system, by creating and publishing performance targets, and that the performance measurement system should be reviewed every three years to incorporate global best practices.

Besides, it had recommended the formation of a review committee, comprising the non-executive members of the regulator’s board. This committee would provide oversight of compliance of the regulator and ensure greater transparency in the functioning of the board of the regulator. The commission has also listed out in detail the process to be followed for framing regulations, with requirements such as cost-benefit analysis and a consultative process with market participants. Keeping in mind Sebi’s haphazard track record on this front, perhaps it is time the government makes these requirements mandatory.

Such requirements have been mandatory for overseas regulators, such as Securities and Exchange Commission (SEC), for years. Now that the government is adequately concerned about accountability at Sebi, it seems like an idea whose time has come in India. Besides, this way, it wouldn’t end up clipping the regulator’s wings, but rather give it new wings.

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