Agenda for Sebi

New chairman should move towards more prudential regulation

The Securities and Exchange Board of India (Sebi) was established in 1992 with two primary goals: One, protect the investor; and two, develop and regulate the securities market. The regulator is set to have a new chairman on Wednesday when Ajay Tyagi takes over from U K Sinha, who finishes a six-year term — the second longest in the regulator’s short history. Looking back, Mr Sinha’s term was hugely eventful and saw a number of praiseworthy initiatives by Sebi. These include implementing the minimum public shareholding norms for private and government entities that helped deepen the capital market and improve price discovery. Sebi also introduced a new corporate governance framework that empowered minority investors — a key area where India improved its score in the World Bank’s ease of doing business ranking — by providing them equitable treatment and bringing greater transparency in board-level activities and related-party transactions. 

The implementation of the Takeover Code regulations was another key development, as was the seamless merger between Sebi and the Forward Markets Commission, the former commodities regulator. Sebi’s efforts to boost the primary market, such as shortening the listing time-frame and accommodating more retail investors, too, must be appreciated. Mr Sinha did well by focusing on shutting down regional stock exchanges, which had little trading activity and were becoming conduits for spurious activities. And in keeping with its primary role of being a watchdog, Sebi did pursue the Sahara case to its logical conclusion. 

But the new chairman has a formidable task ahead. Sebi has to push hard on developing the market. For instance, it has been pointed out that India fares poorly when it comes to the liquidity of the market. Market inefficiencies over the past decade have continued to grow and this can be seen in the fact that the rupee is increasingly traded in the more mature markets such as Hong Kong, Singapore, and London. The new chairman also needs to improve the research and review capabilities of the regulator so as to help primary market regulation. The focus should be less on bulky securities documents and more on substantive high-quality disclosures. Similarly, in the mergers and acquisitions space, transaction costs stay high because, takeover, listing and delisting regulations often impose contradictory demands. 

Market participants also say Sebi must move towards a prudential regulation regime. It is still seen as one with extreme statutory enforcement powers — much more than its counterparts in the US and the UK. Even though there are avenues for appeal against Sebi, the onus is mostly on the aggrieved party to prove that the regulator is wrong. The same criticism holds for Sebi’s overwhelming legislative powers. The Sebi Act allows the regulator to make subordinate legislation. Although public engagement does take place, it is nowhere near the kind of widespread consultation that is required. Overall, the new chairman will do well to get rid of a distinct sense of fear among market participants. At the same time, several Sebi employees— both past and present — have been the subject of intense needless probes by investigative agencies. Unless there is a check on this menace, employees will certainly think twice about taking decisions on sensitive matters. Mr Sinha did try to stop this in a limited way; his successor will have to follow it up aggressively.