Securities market code: Sebi ex-chief warns of investor focus dilution

Former Sebi chief M Damodaran warns the securities market code may dilute investor protection, rely on delegated legislation, and create a top-heavy regulator

As the Securities Markets Code (SMC) Bill moves to the scrutiny of a Select Committee of Parliament, former Securities and Exchange Board of India (Sebi) chairman M Damodaran (pictured) has raised concerns on the Code shifting the regulator’s investor protection focus from the Sebi Act’s preamble to a ‘mere’ clause, and cautioned about prospects of the market regulator becoming ‘top-heavy’ and reliant on ‘delegated legislation’. 

While he commended the consolidation of three different Acts to ‘eliminate conceptual confusion and overlaps’ without any ‘major disconnect’ from what the Code sought to achieve, and lauded its focus on simplification, honest conduct of business, and removing ‘procedural and substantive cobwebs’, Damodaran said some aspects of the Bill merit closer attention. 

“The preamble of the Sebi Act, 1992 was more focused, in that it specifically referred to the protection of the interest of investors, the regulation of the market, and the development of the market. This seems to have been shifted to Clause 11(1). Moving this principal objective from the Preamble to a mere Clause seems to be inappropriate,” he said in the newsletter of his corporate governance firm Excellence Enablers. 

Noting that several provisions in the Code require details to be set out as “prescribed”, Damodaran said care should be taken while framing the Rules to ensure that substantive powers which ought to be in the Act, do not find their way into the Rules. “Excessive delegation has been the bane of quite a few enactments in recent times. Delegated legislation is not an instrument to fill gaps in legislation,” he noted. 

On the SMC Bill’s proposal to increase Sebi board members’ strength to 15, including six independent members and at least five whole time members (WTMs) apart from the chairperson, Damodaran, who led Sebi from 2005 to 2008, said the question is whether a 15 member board is “unwieldy”. “Given the present size of Sebi, the possibility exists that this would be a top-heavy organisation, with resultant complexities in reporting structures,” he said. 

Raising doubts on whether the Centre’s power to appoint at least three persons with securities market expertise is feasible, he said: “Assuming that conflict of interest is to be safeguarded against, it would be interesting to see from where at least 3 persons with expertise… but no present involvement, would be sourced.” 

On the proposal to designate one or more Sebi officers as Ombudsperson, Damodaran said the regulator already has a “fairly elaborate mechanism” to deal with investor grievances. “If it is believed that the mechanism is not measuring up, the logical step would have been to tweak or refine what exists, without creating a new institution in the form of Ombudspersons,” he reckoned, adding that “conceptually, an ombudsperson should not be on the rolls of an organisation”, grievances relating to which are to be addressed. “The expectation of neutrality and impartiality in the functioning of the Ombudsperson could itselfgive rise to challenges if they are insiders,” he averred. 

The ex-Sebi chief also said the Code’s 180-day deadline for investigations, failing which the investigating officer must provide the probe status to the Board recording the reasons for delay, and request the WTM for extension, “seems odd”. “Surely, this entire matter of ascertaining the status, and granting extension, where necessary, could have been left to the WTM concerned,” he argued. 

On Clause 11(3), which requires the Board to review its performance and functioning, including the proportionality and effectiveness of the regulations, he said it would have been useful to set out in the Code the manner in which the performance review will take place, rather than leave it to the Rules or regulations to be made later. He mooted taking a leaf out of the Schedule IV of the Companies Act, 2013, for this. 

“There is no certainty on the manner in which the Code will finally emerge… “A skeptic might well say ‘mischief thou art afoot. Take what course thou wilt’… Time will tell whether [the Code’s] intention translates to reality,” Damodaran concluded.