More Teeth For Regulator An Imperative

The role of the market regulartor has once again come under

scrutiny. This is mainly because of the several systemic

problems existing in the Indian markets linked to the recent CRB

scarn, sub-brokers registration problem and bad paper floating

in the markets.

Sebi is seeking to strengthenits legal framework, and sugges-

tions in the working draft of the proposed companies bill have

now been made to strengthen the role of the market regulator.

Experiences of regulatory bodies in tackling fraudulent market

Practices in the international markets reveal that active

support from the state and federal government is required in

developing teeth for the regulator.

 

The case to point is the US based Securitiees and Exchange

Commission (SEC). One of the earliest US markets regulatory

bodies was the Federal Trade Commission (set up in 1910) and

despite several attempts, it did not work.

In the mid-1930s, a separate comniission, called the SEC, was

set up. This, in the initial years, faced the same problems as

the market regulator here.

Over the years, autonomy at the regulatory level for SEC

improved with separate accoun. tants, bankers, legal counsels,

inspection teams and compliance officers.Crucially, there was

seb dom a case of the market regula. tor officer coming from

the bureaucratic set-up. While internal committees did have

independent experts as its members, if there were rules and

regulations to be framed on market-related issues, they were

made public and commented upon. There was never a case of

taking a consensus, instead it was always an effort to take a

decision. Further, penalties were always structured in such a

way that they actually hurt the defaulter.

Sebi, over the past two years, seem to be movingin the right

direction, with experts advising the regulator on key issues.

However, Sebi still does not have the authority to change the

direction of regulations or change the mandate of regulation

through the existing legal structure.

Somewhere along the fine, the regulator has lost its touch with

the retail investor. While all recent amendments and regulation

,a seek to aid the investor, there is no direct contact with

the investing public, and neither has the regulator been able to

define clearly who the investor actually is.

A similar effort to define the investor was raised by the

National Stock Exchange managing director R H Patil during a

recent meeting of the J R Verma Committee on the revival of

carryforward trading in tis original form. Patil was of the view

that the definition of investor and trader at the markets must be

clearly defined at the Indian markets.

Price Waterhouse, in a recent report submitted to Sebi, called

on the market regulator to decide on whether the presence of the

retail investor and the market intermediary is required at the

Indian capitid markets.

The report has been prepared under the Financial Institutions

Reforms and Expansion (FIRE) project under USAID.

The report categorically states that in recent years, one group

of stakeholders, the retail part of the securities market, has

not been adequately represented. The interface between the market

intermediaries, the main players and the investors would have to

improve.

Issues like registration of sub. brokers would be vital and if

the quest is to protect this retail investor, then it is a must

to bring the entire sub-broldng business under the regulatory

ambit

There is also a view that the line of regulation has altered

towards the institutions and not retail investors at the Indian

markets.

Market experts are of the view that if the regulator decides

that one area of the Markets requires greater attention, say

mutual funds as an investment channel for investors, then

complete atten. tion should be given to strengthen this area.

Further, in areas of capital market-, which are complex due to

their very nature, regulators abroad have sent out a clear

message. Either regulate yourself or else we will step in and

regulate.

The Proactive approach of a regulator could be adopted by Sebi.