World Bank, IMF to assess Sebi's regulatory framework

Move to help market regulator align closer to global standards, get feedback on current functioning

The Securities and Exchange Board of India (Sebi) will go through a third-party assessment of its regulatory framework by the World Bank and the IMF this year, an exercise which will help the former align itself closer to global regulatory standards and get feedback on its current functioning.

The assessment will be conducted as part of the Financial Sector Assessment Program (FSAP), a joint programme of the IMF and World Bank established in 1999. The programme analyses the resilience of a country's financial sector, the quality of its regulatory and supervisory framework, and the capacity to manage and resolve financial crises.

This is the third time Sebi is going through this programme, with previous supervisions in 2012 and 2001, which was a pilot assessment. In September 2010, IMF had made it mandatory for 25 jurisdictions (including India), with systemically important financial sectors to undergo financial stability assessments under the FSAP every five years.

Among other things, the programme will test the regulations that are being prescribed by Sebi and the manner in which they are being implemented, said sources. The market impact of the regulations on the financial sector, including the cost of compliance, will be scrutinised. Accounting and auditing standards as well as financial disclosures by listed firms will be examined.

"While the programme will look at the theoretical aspect of regulation it will also assess the manner in which the rules are being practically implemented. This will serve as a gap analyses and lay down the roadmap for future regulatory changes," said J N Gupta, managing director at Stakeholders Empowerment Services, and former executive director of Sebi.

IMF's 2012 "detailed assessment report" published the subsequent year had asked Sebi to focus on strengthening its supervision of securities market intermediaries including fund managers. The report had also observed that Sebi needed to improve mechanisms to ensure compliance of issuers with reporting requirements, and put in place mechanisms to ensure compliance with accounting and auditing requirements.

"It is important to do a cost-benefit analysis and take in industry feedback while formulating regulations. Regulators will be much more responsive to feedback and criticism from international agencies rather than domestic players," said Sandeep Parekh, managing partner, Finsec Law Advisors.

The regulator has in the past been criticised for trying to micro-manage the functioning of market players. Increasing compliance costs have also been an area of concern, especially for brokers and mutual funds. In a survey conducted by a broker body last year, for instance, 744 out of a total 1,134 broker members said they could not earn enough as compliance and administrative expenses ate into their revenues.

"The resources, particularly in terms of headcount, and the time taken in disposing of cases are some of the key areas which the regulator needs to work on and learn from overseas counterparts in developed economies like the US and UK," said Tejesh Chitlangi, partner, IC Legal.

In his last press conference in Mumbai, former Sebi chief UK Sinha said that while Sebi wanted to maintain a balance between protecting investor interests and developing the market, investor protection remained a priority.

Sebi has taken a number of big-bang initiatives in the past few years which include implementing the Takeover Code, minimum public shareholding norms and uniform know-your-customer norms. It has introduced a new corporate governance framework based on the Companies Act, 2013.

It has brought down the listing time frame for initial public offers to six days, introduced circuit filters to reduce volatility and curb manipulation on listing day and changed the IPO allotment process to accommodate more retail investors.

Keeping careful watch

• World Bank and IMF to assess Sebi’s regulatory framework
• The assessment will part of the duo's Financial Sector Assessment Program or FSAP
• The programme analyses the resilience of a country’s financial sector and the quality of its regulatory framework
• Compliance cost, accounting and auditing standards, as well as financial disclosures by listed firms to be scrutinised
• Building resources and disposing of cases quickly are some of the areas the regulator needs to work on
• This is the third time Sebi is going through with this programme, with earlier supervisions made in 2012 and 2001