It is SEBI season - the media is replete with articles on SEBI's achievements in the 25 years since its inception. A well-deserved celebration is scheduled. In a rare show of international statesmanship, India will host the Deputy Prime Minister of Singapore Tharman Shanmugaratnam as the keynote speaker at SEBI's silver jubilee event, with the Finance Minister P. Chidambaram presiding.
A time to celebrate is indeed a good time to take stock of what lies ahead and what should the future focus areas should be. This column will just list five key aspects of what SEBI should do to strive to move from having done "good" work to being a "great" institution. It is always easy to rest on the oars and feel good, but for any institution, such a juncture is when the next orbit of movement should be defined.
First, SEBI should make it a motto to bring in clarity and predictability in the regulatory framework it administers. A clear focus on who it would regulate, on what terms, and a justification of the regulation within the parameters of the SEBI Act, 1992, is critical to ensure that the world understands its contract with India's capital market regulator.
A recent example of laying fertile soil for future confusion and inter-regulator disputes is the newly-notified regulations governing investment advisors. These regulations purport to give SEBI jurisdiction to regulate provision of any piece of advice on any "investment product" (a broad term left undefined). The exceptions to the need to register with SEBI are worded such that if one were not an advisor "solely" in an area regulated by another sole and specific regulator, SEBI would have jurisdiction.
This is a case of regulations taking on jurisdiction rather pointing to any specific provision of the SEBI Act to look for powers to regulate. India has the option of following the example of its Keynote Speaker's financial regulatory system. The Monetary Authority of Singapore is the sole regulator of all financial services and it pre-empts jurisdictional disputes of the kind we saw between SEBI and the insurance regulator a few years ago.
Second, SEBI should mandate for itself the need for public consultation on every piece of draft regulation it intends to notify. Getting those affected by the regulations to actually work on the language of the regulations will not erode its sovereignty to regulate as it wills. Engagement with those regulated prior to regulation would only enhance the quality of compliance because society would know what was expected of it and the cause for the regulation by participating in such consultations.
Currently, such consultation occurs selectively, and in most cases, material amendments are pushed through without consultations. Consultations on draft regulations also pre-empts the chronic ability for well-meaning interventions to go horribly wrong, inflicting unintended consequences on society. For example, recent amendments to the takeover regulations to correct some initial errors have now given rise to newer issues.
Third, as a mantra, SEBI should publish a clause-wise legislative intent behind every regulation it writes. This involves great courage only for the insecure. For an author of law confident of what he wants, this would be but the articulation of what is sought to be achieved. Normal regulators shy away from this, but at age 25, SEBI should make bold to self-author a policy of making known what it actually wants when it writes regulations.
Fourth, SEBI should publish a transparent policy on when it would use which of its myriad powers. SEBI has powers ranging from initiating criminal prosecution to issuing remedial directions, to imposing civil penalty and taking disciplinary action against intermediaries regulated by it. Each of these powers runs in parallel and is often pressed into service concurrently.
Once the ultimate boss of a department has said a range of things about someone when passing an ex parte ad interim order as a remedial measure although pre-fixed by the magic words "prima facie", it would take enormous maturity and risk-taking capacity for a junior officer who ultimately adjudicates the matter to differ from boss, and to incur the wrath of Aam Aadmi party workers and relentless coverage of the electronic media.
Finally, SEBI would do well to introduce a system of its own internal review of its ex parte actions in a time-bound manner. Currently, a person put out of economic activity by an ex parte order can lie unattended for years. Reversing it even after a few years then attracts adverse comment in the uninformed court of public opinion presided over by the media. The result: not just unfair treatment of someone coming under adverse regulatory scrutiny, but also erosion of respect for the rule of law across society.
PROVISIONS TO STRENGTHEN THE REGULATOR
- Need for clarity and predictability in the regulatory framework it administers, focusing on who it would regulate, on what terms, and a justification of the regulation within the parameters of the SEBI Act, 1992
- Should seek public consultation on every piece of draft regulation it intends to notify to enhance the quality of compliance because society would know what was expected of it
- To publish a clause-wise legislative intent behind every regulation it writes
- Must publish a transparent policy on when it would use which of its myriad powers ranging from initiating criminal prosecution to issuing remedial directions, to imposing civil penalty and taking disciplinary action against intermediaries regulated by it
- Needs to introduce a system of its own internal review of its ex parte actions in a time-bound manner
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com
