The Securities and Exchange Board of India (Sebi) is the primary regulator for the securities and commodities markets in India. Sebi exercises power provided under the Sebi Act 1992 (the Act), and various rules and regulations issued in exercise of the powers granted under the Act. The orders and directions issued by the Sebi in exercise of its power could be first challenged in the Securities Appellate Tribunal (SAT) and then in the Supreme Court of India.
In the past 27 years of its operations, Sebi has been often censured by the SAT and the Supreme Court for a variety of reasons. The securities market participants, viz., self-regulatory organisations such as stock exchanges and depositories, intermediaries like stockbrokers, service providers like asset management companies, portfolio managers, merchant bankers, and investors and traders in securities, etc, have all been more critical of Sebi than appreciative.
Sebi has been recently accused of being "callous", "overreaching", "inert" in performance of its duties and in exercising its power. Besides, the regulator has often been accused of being inconsistent and lacking transparency in its conduct. Without delving into specific cases and instances where Sebi might have erred in performing its duties, I would like to highlight a fundamental issue that may be responsible for below-par performance of Sebi.
In my view, the problem with Sebi is more congenital in nature.
The preamble to the SEBI ACT reads: "An Act to provide for the establishment of a Board to protect the interests of investors
in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. (emphasis added)."
Section 11 of the ACT that defines the primary functions of the Sebi echoes the preamble and reads, "Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit."
What are the challenges before Sebi?
The challenges of Sebi, therefore, begin right from the preamble of the Act. The function of protecting investors, development the securities market and regulating the market are self-conflicting in many cases. More often than not, Sebi is faced with the situation where meeting one objective would jeopardise the other.
For example, if Sebi finds that the management of a company has indulged in the manipulation of its stock prices and finds it fit to prohibit trading in the shares of such company, the move may be prejudicial to the interest of the investors as it blocks exit route for them. Similarly, a restriction imposed a major stock exchange for indulging in malpractices, may be prejudicial to the cause of orderly market development.
To fully assimilate the genesis of this conflict in the primary object of establishing Sebi, it is pertinent to note the background in which Sebi was established and the template adopted by it to formulate its framework for the regulation of securities market adopted by it.
When was Sebi established?
Sebi was established in 1988, as an administrative body, through a government resolution to promote orderly and healthy growth of the securities market and for investors’ protection. The board so established was assigned the task of monitoring the activities of stock exchanges, mutual funds and merchant bankers.
In the wake of the first major stock market scam in India, an urgent need was felt to institute a strong regulatory mechanism for the securities markets. Sebi was accordingly given legislative powers in January 30, 1992 through the Securities and Exchange Board of India Ordinance 1992. The statutory powers of Sebi were further reinforced in 1995 through comprehensive amendments to the Sebi Act.
Since inception, Sebi faced a delicate task. It had to acquire a reputation for strength and independence in the face of opposition from entrenched interests, such as broking community, but it also had to avoid being ham-fisted and hyperactive. One of Sebi’s principle tasks was to improve the functioning of the Indian stock market which had a reputation for being a snake-pit, lacking in fairness and integrity, prone to speculative excess, and showing scant regard for the interests of small investors.
Immediately after its statutory constitution, Sebi framed a set of rules and regulations dealing with the licensing and regulation of the working of various intermediaries associated with the securities market. Besides Sebi also issued norms for the companies desirous of raising capital from the public. These norms were termed as Guidelines for Disclosure and Investor Protection (DIP Guidelines).
As per the legislative mandate outlined in the preamble to Sebi Act, the regulator has to play twin roles of market developer and market regulator. This dual approach has resulted in avoidable distraction and unfocused regulations. As observed by Dr LC Gupta: “The Indian regulatory authorities, being focused on encouraging speculators for the sake of market liquidity, have paid no attention to the improvement of the market’s function of evaluating securities more efficiently and have not been able to effectively eliminate price manipulation. As a result market’s price signals often misguide genuine investors, causing them losses. The authorities need to refocus their regulatory function.”
The performance of Sebi also came under severe criticism in the report of the Joint Parliamentary Committee (JPC) constituted to examine the stock market scam and matters relating thereto in April 2001. The committee indicted Sebi for all-round failure in properly regulating the market.
The problem of a confusing template
In the global context, primarily three kinds of templates are used for instituting the framework for the regulation of securities markets in any jurisdiction.
The laws and rules that govern the securities markets in the USA are based on a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment product or service prior to buying it. The main objective of securities market regulation is to ensure that:
(a) The companies whose securities are publicly traded or are being offered to the public for sale, must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing; and
(b) The people who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.
The FSA is the single statutory regulator directly responsible for the regulation of deposit-taking, insurance and investment business. The Financial Services and Markets Act 2000 (FSMA) requires the FSA to pursue four objectives, viz., -
The MAS Act gives MAS the authority to regulate all elements of monetary, banking and financial aspects of Singapore. The three primary objectives of the MAS are:
It appears that the Sebi Ordinance 1992 was drafted hurriedly taking inputs from all three major templates, resulting in an unpalatable potpourri of sorts.
To make the matter worse, the SEBI Act does not make the SEBI accountable for its deeds. The accountability of the SEBI is limited to submitting to the Central Government an annual report under section 18 of the SEBI Act, giving a true and full account of its activities, policy and programmes during the previous financial year.
In my view, to make the Sebi more effective as a regulator, the government must consider amending the Sebi Act to rationalise its functions, power, duties and accountability.
In the Indian context, applying the FSA (UK) template, to the extent it is applicable to securities markets, will be more suitable rather than the SEC (USA) template that the SEBI presently follows, for the following two simple reasons:
Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation.
What Ails the Indian Stock Market?, L. C. Gupta, Economic and Political Weekly (July 1998). Dr. Gupta is a former member of the Board of SEBI.