Insights into Editorial
26 July 2016
1991 was a great year for SEBI. It was in this year that the government announced the decision to give statutory powers to the Securities and Exchange Board of India to regulate India’s capital markets. Sebi, which was established in 1988, got statutory backing in 1992 through the SEBI Act, 1992. This reform has undoubtedly done the country a world of good. But in the 25th year of its existence as a statutory body, it is still far from being a mature regulator. In fact, recent evidence points to the contrary.
All you need to know about SEBI:
It is composed of-
- The chairman who is nominated by Union Government of India.
- Two members, i.e., Officers from Union Finance Ministry.
- One member from the Reserve Bank of India.
- The remaining five members are nominated by Union Government of India. Out of them at least three shall be whole-time members.
Important functions performed by SEBI:
- Approve by−laws of stock exchanges.
- Require the stock exchange to amend their by−laws.
- Inspect the books of accounts and call for periodical returns from recognized stock exchanges.
- Inspect the books of accounts of financial intermediaries.
- Compel certain companies to list their shares in one or more stock exchanges.
- Register brokers.
Following few incidents make reform necessary:
- Recently, the Securities Appellate Tribunal (SAT) reprimanded one of Sebi’s whole-time members for dealing with its directions in a “shoddy manner”. SAT found that Sebi tried to pass off a letter by a Sebi officer as an order issued by a whole-time member. Also, in what was perhaps a first, Sebi was asked to pay the appellant Rs.1 lakh for making it “run around”.
- Earlier in the year, Sebi attracted SAT’s ire for the lack of consistency in its orders with respect to penalties for similar offences.
- In another instance, it was told off for supporting contradictory orders by its adjudicating officers. Such a conduct on part of Sebi is disgraceful to say the least.
It’s liberal use of interim orders, without hearing the affected party, is always criticized. It turns out that in many such cases, the regulator takes its time to issue the final order. For the market intermediary that is being investigated, there are clear timelines for responding to Sebi’s queries and being present for hearings. But there are no timelines prescribed whatsoever for Sebi. In the interim, affected parties are left to deal with the consequences of the strictures in the interim order. Also, the strictures are often harsh, involving debarment from securities markets and, at times, freezing of bank accounts.
What needs to be done?
- The government should revisit the unbridled powers it has given the regulator, and create some checks and balances. For instance, if an investigation is taking longer than three months, the regulator must be required to obtain court approval for continued attachment of properties.
- The executive should provide guidelines on how long Sebi can take with its investigations, before passing its orders. The lack of accountability on this front and the fact that there is no concept of performance appraisal for Sebi members, have led to the many problems.
- Sebi is need of a performance audit by a peer. For instance, every three years, independent organisations perform a peer review of the US Government Accountability Office (GAO), to determine whether it is suitably designed and operating effectively.
- The Office of the Auditor General of Canada and the Office of the Auditor General of Norway have been involved in these audits in the past decade. Likewise, a suitable overseas organisation can help with a thorough review of Sebi’s practices.
- Finally, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), Sebi must publish a performance report, which incorporates global best practice systems of measuring the efficiency of the regulatory system.
- Besides, as recommended by the FSLRC, a review committee, comprising the non-executive members of the regulator’s board, should be formed. This committee is to provide oversight of compliance of the regulator with governing laws and ensure greater transparency in the functioning of the board of the regulator.
Sebi can embrace the above said reforms without waiting for the Indian Financial Code to be passed. It will go a long way in changing the perception of Sebi, which is getting eroded with every scathing SAT order. It is high time steps are taken to bring checks and balances on the regulator.