Mid-term report card of Sebi chief shows her priorities have worked

This month, Madhabi Puri Buch has completed half of her three-year term as chairman of the Securities and Exchange Board of India (Sebi). Since both her predecessors got more than that at the helm, she may also get that. U K Sinha was chairman for six years, and his successor Ajay Tyagi completed a five-year term. These long spells offered by the government to the regulator for nearly fifteen years, have helped to provide continuity in decision-making. 

While a three-year term seems, therefore, more of an appointment formality, a recap at the halfway stage of how the chief executive of Sebi has performed seems appropriate. Since March 1, 2022, when Buch was promoted from her post as whole-time member to that of chairman, Sebi, it does seem like an inflexion point for her two immediate predecessors, too.

It is also striking that Buch came in as the first private sector chairman of Sebi exactly 30 years after the institution got statutory powers in 1992. The scales, however, have changed. "India is now a large economy, so how companies are seen to have behaved in the markets is big news globally", said a former top finance ministry official. 

The times have changed, though. Unlike Sinha and even Tyagi who came in with the challenge of making investors believe in the power of the capital market, Buch has often faced the opposite, that of exuberance. The exuberance is part of the game for the regulator of the markets of an economy that has rapidly climbed to fifth position in global gross domestic product (GDP) and will be even larger soon. The challenge is to keep the equity and debt markets attractive for both the sellers and buyers of capital, but without cheating. 

Setting priorities

Buch has described this challenge in terms of adding to capital formation by investors through the market. "Our core purpose is to make possible capital formation, and everything else we do is incidental to it", she said at Ficci's annual capital market conference in 2022. 

Anything that, which therefore, misguides investors to add to their capital has, therefore, to be nixed. She has been remarkably candid about this, writing in the Sebi annual report that "identification of misconduct cases, which otherwise would have missed the human eye" has been one of her key priorities. "Notwithstanding the challenges in terms of evidencing, adoption of technology and analytics has made it very difficult for fraudsters to hide price manipulation, front running or insider trading". 

While Sebi has always defined its role as that of a troika of development of the capital markets, their regulation and protection of investor interests, Buch has drawn the lines linking them.

She faced the first of those challenges when she faced the Parliamentary Standing Committee on Finance just a month after her appointment. The members wished to know how Sebi had handled the colocation issue at the National Stock Exchange (NSE). For investors, a possible crisis of confidence at India's largest stock exchange was most disconcerting. 

But the NSE case and the more significant challenge of the Adani cases for Buch has been to assure investors credibly that there has been no cheating. Since January this year, when the Hindenburg report on the Adani group was released, there have been commentaries about whether the regulators have been on the ball. 

The Supreme Court (SC) asked Sebi to investigate if there was a violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957. That rule says 25 per cent of a company's shares must be available in the stock exchanges for the public to invest in. The Sebi report filed with the Court has drawn some flak, but judging from the response by domestic investors and foreign investors, Buch's hard work of making capital formation from the market has got a heads up. This is significant. Setting priorities early has helped all three incumbents since 2011

History lessons 

Corporate malfeasance in the market was why Sebi was set up 30 years ago. Sinha had faced the heat over the Sahara collective investment schemes and on tweaks to the rules on insider trading cases. Tyagi, for instance, had reformed the Listing Obligations and Disclosure Requirements (LODR regulations) for FPIs. Those changes done early in the terms of her predecessors are now being assailed. 

But like Buch, both had quickly moved in to set their priorities early. As one of them put it, the Sebi job does not allow one to learn the trade. "You have to come in with your tool kit ready. But always remember to remain aloof from corporate battles". 

Sinha's first battle was to revive investor confidence in mutual funds. It meant having to rewrite some of the rules governing them, giving more freedom to advertise, for instance. He abolished the concept of entry load brought in by Sebi earlier. Coupled with the after-effects of the global financial crisis, it had deepened the adverse impact on the industry, which struggled to recover and remodel itself. Once the Sinha reforms bore fruit, from just a 1 per cent growth in the calendar year 2011, the AUM of the mutual funds grew by 15 per cent in 2012. This was the surest way to give retail investors an entry into the capital market. The fact that today the portfolio of mutual funds matches that of bank deposits is a huge testament to those efforts.

The other was the clean-up of IPO rules, clearing out the infamous "first-day gains" when companies listed. It was a roulette game and in the aftermath of the global financial crisis, had made investors duck for cover. His battles with Sahara would begin later into his term. It was a dramatic corporate battle, involving all regulatory agencies, but with Sebi at the forefront. 

Tyagi, who took over in February 2017, had to face the aftermath of demonetisation. Within a month of his joining, Sebi issued an order against Reliance Industries Ltd (RIL) for making alleged unlawful gains in securities trading. Tyagi had inherited the case—the order was nine years in the making. By 2018, the regulator served a two-year ban on PwC for its role in the Satyam scam. The Supreme Court upheld the order. 

By the end of his five-year term, he had constituted a massive 28 committees to examine a range of issues. The results of those deliberations took time, but the process results are impressive. 

Possibly his finest hour came when coronavirus struck. The Indian market did not shut down even for a day when lockdown was announced. There was no run on any institution, and it became possible because of the focus on deep technology usage. It was developed not only as an analytical tool to offer investors a clear insight on markets, and their risk and reward ratio but also as the workhorses. 

Buch has reaped the rewards. A signal achievement from that focus in her term is transitioning to a T+1 settlement cycle in the equity market. There is no doubt it has increased the efficiency of settlement and reduced the risk of outstanding trades being settled. As a Sebi report notes this is "well ahead of both developed and emerging markets".

As Sinha puts it. "The challenges for Sebi stem from the huge expectations of the investors and companies alike. The chairman has to be vigilant but not resort to overkill".