Typically, a regulator handles several functions, regulatory and developmental — some mandated by law and some of its own creation. There could be varying views as to how to prioritise activities, given the capacity and resource constraints of the regulator. However, generally speaking, and in normal circumstances, the developmental roles take precedence. This encourages innovation and new initiatives in market development. Importantly, this also gives better visibility to the regulator, and sends out positive signals about its functioning.
As against this, the regulatory functions, viz, monitoring, inspection, investigation, adjudication and enforcement, are viewed as routine and mundane. What is lost sight of is that without having a robust and deterrent regulatory architecture in place, the development activities are of little use, and may, in fact, prove to be counter-productive at times. Before introducing any new initiative, the regulator ought to be sure of, and see through, how the concomitant enforcement requirements would be met.
First, to get an idea of the lack of adequate enforcement actions by the regulators, take the example of the securities market regulator. At any given time, the number of matters pending before itself, the tribunal, and the courts is mind-boggling. For instance, as at the end of FY25, the total number of cases involving the regulator pending before the Supreme Court and High Courts was about 500 and 850, respectively. Out of these, the cases pending for over three years in these courts were over 300 and 600. In addition, 450-odd cases were pending before the Securities Appellate Tribunal (SAT).
Even in cases that reach finality, the required follow-up action is missing. For instance, the recovery of imposed penalties is meagre — maybe only around 5 per cent annually of the total outstanding amount. As for criminal cases, forget about convictions, there are hardly any prosecution cases filed by the regulator. The enforcement department’s resources are thinly spread over a large spread of cases. Resultantly, attention isn’t paid to separating and prioritising important cases with wider ramifications from amongst all cases. No wonder the regulator’s actions lack deterrence.
But then why single out the market regulator? The position of other regulators is likely to be no different. In the case of the central bank, it doesn’t even bother to pass speaking orders in most of the cases, including the contentious ones. Further, the Reserve Bank of India’s (RBI’s) decisions aren’t appealable before any tribunal or special court. Some are challenged as writ petitions before the high courts and the Supreme Court, which, besides delaying the final outcomes, only adds to these courts’ case burden.
The discussions on the need to streamline and simplify financial sector regulations are never-ending. Even the 2024-25 Budget talked of a light-touch regulatory framework based on principles and trust. To have a better appreciation of the actual situation, it may be useful to get a sense of the environment in which a regulator operates, and how it typically behaves in emergent situations.
Greed and fear drive the financial markets. Human ingenuity has no limits. The meek enforcement record encourages risk-taking by some, who also misuse technological advancements. The antics of market participants keep the regulator on its toes. In such a scenario, firefighting various situations remains the major activity. Lo and behold, if any episodic event affecting a large number of stakeholders happens, hell breaks loose. The regulator comes under fire from all quarters, including the media, government, and the courts. Knee-jerk solutions become the flavour of the day. The result is more regulations. The risk-based supervisory principle goes out of the window. Oversight gets tightened, and all regulated entities, irrespective of their size or differentiation, get saddled with additional disclosure and regulatory requirements. The possible downside of such actions, including that they may go against the “ease of doing business”, gets overlooked.
The financial sector regulators rely a lot on the disclosures made by market participants in discharging their regulatory functions. This is premised on the “caveat emptor” principle, i.e., let the purchaser beware. This argument also suits the regulators. Often, mandating more and more disclosures gives them a sense of a job well done. The regulatory impact assessment or cost-benefit analysis remains more on paper. Of course, more disclosures do not automatically imply better enforcement!
The answer to many of these problems lies in effective enforcement of the existing regulations, creating a deterrent impact. Passing a quasi-judicial order is not an end in itself. It must pass through the tests of the tribunals and courts, and be implemented. Typically, the statute constituting a regulator prescribes both civil and criminal penalties. The criminal prosecution of offenders in a court of law requires a lot of effort on the part of the investigation wing of the regulator, as the cases there need to be proved beyond “reasonable doubt”, as against the principle of “preponderance of probability” in civil proceedings. No wonder then, the performance of regulators in successfully prosecuting offenders is simply dismal. De-criminalisation of corporate laws is a step in the right direction. But what about serious offences for which criminal prosecution is the right course of action to deter and prevent reoccurrence?
Take the case of insider trading in the securities market. There hasn’t been any conviction to date in any insider trading case in the country. Anyone who believes that there aren’t serious enough insider trading cases deserving criminal action is living in denial.
While writing a regulation, examining its relevance over time, and substituting it with other regulations is an obvious and continuous activity, this job needs to be taken very seriously. At times, the cause of the ineffectiveness of a regulation may lie in its poor implementation. In such a case, substituting the existing regulation with a newer one may be of no use. The right way is to delineate serious law infringement cases, and ensure timely and effective action against the offenders. Prescribing additional or new regulations may be an easier option for the regulator, but may not address the problem.
The author is a former chairman of Sebi. The views are personal
 "financial sector, Supreme court")