This week, it was thought likely that the Securities and Exchange Board of India (SEBI) would have the ninth new chairperson in its 28-year history. Instead, SEBI's eighth chairman U K Sinha, considered a safe pair of hands across the political spectrum, has been granted another extension. According to media reports, "until March 1, 2017 or further orders, whichever is earlier" - in itself a typical Indian policy formulation, that usually keeps the regulatory chairperson on the government's leash.
The path ahead for the incumbent is challenging - there is much that needs sustained and long-term attention, even though he has just a year or so. This is a second extension for him - he was first appointed for three years, a tenure that was then extended by two years, and now, by another year, with a vague possibility of truncating it. During this period, there is need for course correction on some fronts, a sustained review of initiatives taken in the past five years, and the need for some fresh thinking.
Most arms of the Indian State that are connected with the conduct of business and industry have been gaming the World Bank's computation methodology in its "Ease of Doing Business" survey. SEBI would need to do much more substantive thinking to see how things can change for the better in some areas that need urgent attention.
First, primary market regulation requires a complete overhaul. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 is a culmination of a long journey - from a range of circulars in the early 1990s to guidelines in 1999 to regulations in 2009. When SEBI was given statutory powers in 1992 with the passing of the SEBI Act and the Controller of Capital Issues was abolished, it was a conscious policy choice to move away from a merits-based regime (of someone in government playing god, deciding if a company was worth being allowed into the market) to a disclosure-based regime (of letting markets decide if a company is worth investing in, with an informed decision based on truthful disclosures). Over the last 20 years, that direction has reversed. SEBI sits in judgment over the quality of the issuer of securities.
The trauma of "vanishing companies" that raised funds in the 1990s has come to define what the law should be for all issuers in the primary market. Companies do not vanish. Their promoters, key employees and board members do. If they have violated the law, stringent action should follow, but against such persons. Currently, the regulatory regime entails stringent treatment of anyone choosing to tap the capital market with a securities offering. Extraordinary transaction costs without commensurate benefits have come to define the system. Prospectuses and offer documents run into hundreds of unreadable pages. They are filled with disclosures of facts not material to the offering. The market is crying for a new path to be beaten.
Second, a market can be only as good as its intermediaries. A predictable expectation of conduct from market intermediaries is critical. Today, expectations from market intermediaries are unclear. Regulatory reaction to the failure to meet unclear expectations is unpredictable. Examples abound. When it is found that a client of a merchant banker has done something wrong, the market intermediary gets charged with collusion and negligence, both in the same breath. One could have either participated in a wrong (collusion), or not been careful enough (negligence) - being guilty of both is not possible. Despite the best efforts of an intermediary, a wrong can take place. Intermediaries are demoralized, being at the receiving end of uncertain regulatory action.
Third, there is a rampant use of powers to "issue directions" on an ex-parte basis (without hearing the affected party) purporting to secure the "interests of investors in the securities market". Serious debilitating restraints akin to preventive detention are inflicted ex parte, but once restrained, the file can be forgotten for months, and at times, for years. Even in the current social environment where jail is becoming the rule with bail being the exception, it may be easier to get bail than to get restraints on commercial liberty imposed by SEBI reversed. There is no timeframe to review such decisions and unless courts intervene, there is no incentive for the regulator to move to closure.
Finally, a new trend that severely tests the limits of constitutional principles has emerged. Even before investigations are completed, SEBI computes the size of an alleged wrongdoing and "impounds" all bank accounts of folks who are being investigated by simply quoting their income-tax permanent account number. There is no notice given to them, and financial assets far in excess of the value claimed get frozen. This is unprecedented - akin to a taxman freezing bank accounts of an assessee even before completing assessment of tax payable. Examples of accounts being frozen in 2016 for alleged wrongdoing in 2005, investigated in 2011, without even issuing a notice, are par for the course. This, despite the SEBI Act allowing only attachment of proceeds of wrongdoing under investigation (not full-scale attachment of all bank accounts) and that too with the permission of a judicial magistrate, just for a month.
At reappointment, the chairperson sits over a SEBI far more powerful that it was when he first took charge. It is time for pause, to reflect, meditate, and then act on what can be done differently in the short period of time left, to leave a great legacy behind.
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The path ahead for the incumbent is challenging - there is much that needs sustained and long-term attention, even though he has just a year or so. This is a second extension for him - he was first appointed for three years, a tenure that was then extended by two years, and now, by another year, with a vague possibility of truncating it. During this period, there is need for course correction on some fronts, a sustained review of initiatives taken in the past five years, and the need for some fresh thinking.
Primary market regulation requires a complete overhaul.
Most arms of the Indian State that are connected with the conduct of business and industry have been gaming the World Bank's computation methodology in its "Ease of Doing Business" survey. SEBI would need to do much more substantive thinking to see how things can change for the better in some areas that need urgent attention.
First, primary market regulation requires a complete overhaul. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 is a culmination of a long journey - from a range of circulars in the early 1990s to guidelines in 1999 to regulations in 2009. When SEBI was given statutory powers in 1992 with the passing of the SEBI Act and the Controller of Capital Issues was abolished, it was a conscious policy choice to move away from a merits-based regime (of someone in government playing god, deciding if a company was worth being allowed into the market) to a disclosure-based regime (of letting markets decide if a company is worth investing in, with an informed decision based on truthful disclosures). Over the last 20 years, that direction has reversed. SEBI sits in judgment over the quality of the issuer of securities.
The trauma of "vanishing companies" that raised funds in the 1990s has come to define what the law should be for all issuers in the primary market. Companies do not vanish. Their promoters, key employees and board members do. If they have violated the law, stringent action should follow, but against such persons. Currently, the regulatory regime entails stringent treatment of anyone choosing to tap the capital market with a securities offering. Extraordinary transaction costs without commensurate benefits have come to define the system. Prospectuses and offer documents run into hundreds of unreadable pages. They are filled with disclosures of facts not material to the offering. The market is crying for a new path to be beaten.
A predictable expectation of conduct from market intermediaries is critical.
Second, a market can be only as good as its intermediaries. A predictable expectation of conduct from market intermediaries is critical. Today, expectations from market intermediaries are unclear. Regulatory reaction to the failure to meet unclear expectations is unpredictable. Examples abound. When it is found that a client of a merchant banker has done something wrong, the market intermediary gets charged with collusion and negligence, both in the same breath. One could have either participated in a wrong (collusion), or not been careful enough (negligence) - being guilty of both is not possible. Despite the best efforts of an intermediary, a wrong can take place. Intermediaries are demoralized, being at the receiving end of uncertain regulatory action.
Third, there is a rampant use of powers to "issue directions" on an ex-parte basis (without hearing the affected party) purporting to secure the "interests of investors in the securities market". Serious debilitating restraints akin to preventive detention are inflicted ex parte, but once restrained, the file can be forgotten for months, and at times, for years. Even in the current social environment where jail is becoming the rule with bail being the exception, it may be easier to get bail than to get restraints on commercial liberty imposed by SEBI reversed. There is no timeframe to review such decisions and unless courts intervene, there is no incentive for the regulator to move to closure.
Even before investigations are completed, SEBI computes the size of an alleged wrongdoing and "impounds" all bank accounts of folks who are being investigated...
Finally, a new trend that severely tests the limits of constitutional principles has emerged. Even before investigations are completed, SEBI computes the size of an alleged wrongdoing and "impounds" all bank accounts of folks who are being investigated by simply quoting their income-tax permanent account number. There is no notice given to them, and financial assets far in excess of the value claimed get frozen. This is unprecedented - akin to a taxman freezing bank accounts of an assessee even before completing assessment of tax payable. Examples of accounts being frozen in 2016 for alleged wrongdoing in 2005, investigated in 2011, without even issuing a notice, are par for the course. This, despite the SEBI Act allowing only attachment of proceeds of wrongdoing under investigation (not full-scale attachment of all bank accounts) and that too with the permission of a judicial magistrate, just for a month.
At reappointment, the chairperson sits over a SEBI far more powerful that it was when he first took charge. It is time for pause, to reflect, meditate, and then act on what can be done differently in the short period of time left, to leave a great legacy behind.
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