Why capping Sebi's surplus risks weakening India's market regulator

Capping Sebi's surplus under the Securities Markets Code risks eroding the regulator's financial autonomy and independence, with implications for market governance and investor confidence in India

In the recently concluded Winter Session of Parliament, the government introduced the Securities Markets Code, 2025, Bill to consolidate and amend the laws relating to the securities markets.

 

This column focuses on Clause 124 of the Bill, which deals with the transfer of the Securities and Exchange Board of India’s (Sebi’s) annual surplus general fund to the Consolidated Fund of India (CFI).

 

So, what in a nutshell is the proposed change to the existing provisions? What are the inflows into and outflows from this fund? The fees and charges levied by Sebi on market infrastructure institutions, regulated entities, and market participants constitute the inflows to this fund. The fund is utilised to meet the expenditure, both revenue and capital, of the regulator. The regulator’s annual budget is approved by its board. This is how a financially autonomous institution is expected to work.

 

Now, according to the proposed amendment, the statute hard-codes the ceiling of the regulator’s annual funding requirement, with the balance of the fund accruing to the CFI. The relevant excerpts from Clause 124 say:

 

“… (3) The Board shall constitute a reserve fund and twenty-five per cent of the annual surplus of the General Fund in any financial year shall be credited to such reserve fund which shall not exceed the total of annual expenditure of the preceding two financial years.

 

(5) After crediting the portion of the annual surplus under sub-section (3), the remaining annual surplus of the General Fund for that financial year shall be credited to the Consolidated Fund of India…”

 

The statement of objects and reasons of the Bill relating to this clause is: “Clause 124 of the Bill provides that the General Fund, established under section 14 of the Securities and Exchange Board of India Act, 1992, shall be deemed to be the Fund for the purposes of the Code.” This doesn’t explain, or even talk of, either the objective or the reason for the regulator constituting a reserve fund, and transferring surplus fund to CFI!

 

So what is the logic of proposing this change in the existing provisions? Commentary available in the public domain suggests that it was triggered by the government noticing excessive build-up in Sebi’s fund over the years, and the government’s right to transfer this surplus to itself to meet budgetary requirements. Some draw a parallel to what the government did about transferring the Reserve Bank of India’s  (RBI’s) surplus funds to the CFI a few years ago. These arguments are specious on several counts.

 

The logic of establishing Sebi’s general fund under the Sebi Act, 1992, was pretty straightforward — namely, to enable the regulator to earn income to meet its own expenditure and not be dependent on government grants. Now the tables have turned — the government is looking to receive an annual revenue stream from the regulator!

 

As the fees and charges levied on regulated entities are its only source of income, the projected  expenditure of the regulator in the short to medium term is the major factor while taking a view on  their quantum at any given time. The regulator is expected to calibrate the fees and charges on a regular basis so that the inflows to the fund are adequate to meet the projected expenditure. Admittedly, at times, despite being diligent in making assumptions and projections, there could be a mismatch between the inflows and outflows. One of the reasons for the sizable build-up of surplus in Sebi’s fund in recent years is the increased activity in the capital markets in India, with an increased number of participants and the entry of new entities. As a first step, the right course of action for the regulator to correct this situation would be to appropriately reduce the fees and charges after due analysis and pass on the benefit to the regulated entities.

 

In any case, the fees and charges levied by the market regulator on regulated entities and market participants cannot legitimately become a source of annual revenue for the government. These aren’t taxes or duties. Nor can this transfer be construed as a dividend paid by Sebi to the government. A major problem with this formulation is that once income from Sebi becomes an annual revenue stream for the government’s deficit budget, there would be constant pressure to increase such receipts year on year. This is absurd as it would amount to — tasking the regulator with earning more and more from regulated entities to feed the government’s budget. One is not sure whether the proposed annual transfer is even legally tenable.

 

Moreover, how can a law arbitrarily fix a ceiling on the expenditure needs of a statutory regulator? Then there is the question of adhering to the basic and well-accepted international principle of the regulator working at arm’s length from the government. Note that the market regulator also regulates government-owned listed companies. Any possible conflict of interest, or even its perception, is highly avoidable. This is likely to be adversely commented upon by the World Bank and the International Monetary Fund in their financial sector assessment programme report.

 

The comparison with the transfer of the RBI’s surplus funds to the CFI is totally misplaced. The government allows the central bank to earn, on its behalf, seigniorage income from printing and issuing currency. The RBI also earns income from various commercial activities and operations. The RBI’s transfer of funds to the government is categorised as a dividend payment.

 

The logic apart, what is the comparison of the amounts involved? While the RBI transferred about ₹2.69 trillion to the government for FY25, Sebi’s general fund closing balance and surplus were only around ₹5,500 crore and ₹1,000 crore, respectively, for FY24. The transfer of the surplus fund wouldn’t be even a drop in the ocean for the government’s budgetary revenue requirements.

 

So what is the way out to deal with the surplus fund build-up with the market regulator? As argued earlier, the first step should be to reduce fees and charges. In case, at any given time, the surplus becomes too big — and is likely to remain idle and unutilised in the foreseeable future — the board may decide on the transfer of some lump-sum amount to the government. Of course, this should be considered a one-off action, and shouldn’t be taken as a norm or precedent. Sebi has senior, responsible persons on its board — secretaries from two ministries, of finance and corporate affairs, a deputy governor from the RBI, and independent directors of repute. Let the board handle the issue. Fixing a statutory ceiling on the revenue requirements of the regulator and proposing an annual stream of receipts from Sebi to the CFI is a bad idea, which should be dropped.

 

The author is a distinguished fellow at the Observer Research Foundation, former Sebi chairman, and a former IAS officer