Don't tread on Sebi

The market regulator needs financial autonomy

The Securities and Exchange Board of India (Sebi) has asked the finance ministry to reconsider aspects of the Union Budget for 2019-20 that seek to amend its governing legislation, the SEBI Act of 1992. The Finance Bill has made some major changes to requirements on the market regulator. For example, the proposed amendments suggest that three quarters of the surplus retained by the market regulator every year be handed over to the government. The remainder should go into a “reserve fund” — but that, too will be capped. The level set by the government is two years’ expenditure. This is not all that the government proposes. The amendments also would require Sebi to seek the approval of the government for any capital expenditure. Put these together, and an unfortunate pattern of reduction of a well-functioning regulator’s independence and powers becomes apparent. 

While the government may reasonably argue why a market regulator should sit on any pool of capital at all — and the Comptroller and Auditor General feels this undermines the parliamentary oversight of public funds — there are significant moral hazard questions that arise as a consequence of these proposed amendments. The sums involved are not enormous. Unlike the Reserve Bank of India, which earns a considerable income from its regular operations, in 2016-17,  Sebi earned just over Rs 200 crore from investment income; the remainder, just over Rs 500 crore, came from its regulatory actions. Sebi’s general reserve is estimated at Rs 3,800 crore in March 2019.
 

So the amount of funds the government is likely to receive from Sebi will hardly make much of a difference to the government’s kitty, giving rise to concerns that the latest move is a desire to increase control over the regulator. The Sebi chairman is right in arguing that the proposal is already being discussed by the Financial Stability and Development Council, and that the amendment to the Sebi Act, through the Finance Bill, could have waited for the Council’s final decision.
 

The Sebi employees’ association has written to the prime minister, pointing out that transferring the regulator’s surplus automatically to the Consolidated Fund of India is tantamount to regulatory action becoming “a kind of additional tax on market participants”. This is broadly correct. The letter goes on to warn that “perverse incentives” would be created. Governments always want to raise revenue, while Sebi has broader concerns such as market stability. A moral hazard problem would be created, in which these two incentives would clash.
 

The control of capital expenditure is similarly troubling. It should be up to the regulator to decide if its duties require additional capital expenditure, through discussions of its duly constituted board. The fact is that if Sebi feels it is earning too much through fees on market participants, its current mandate would mean that it would reduce its fees to broaden the market. If it requires updated facilities and more staff to monitor increasingly complex financial markets, then the decision on this matter should be taken by the regulator with the consent of the board, not by the finance ministry. This is fundamental to what regulatory independence means. The government should rethink its insistence, especially as the stability and regulation of the Indian markets are very much in the broader national interest.