Tyagi and beyond: Tricky areas Sebi chief, successor will have to deal with

Amid bouts of volatility in the secondary market, largely because of concerns over the coronavirus epidemic and its negative impact on the economy, the Securities and Exchange Board of India (Sebi) faces several other challenges that may not get addressed in the next six months under the extended tenure of its chairman Ajay Tyagi. Here are a few tricky areas Tyagi, and his successor, will have to deal with:

Sebi’s independence: Though the market regulator has gained teeth over the years, the government has deprived Sebi of some of its autonomy by curbing its annual spends and targeting its surplus funds. Last year’s Budget proposed that Sebi constitute a reserve fund and transfer a fourth of its annual surplus into it. It said the transfer to the reserve fund should be less than the annual expenditure of the preceding two years. Also, after meeting all expenditure, Sebi is required to transfer the remainder of the surplus amount to the Consolidated Fund of India. Further, the government has also proposed that Sebi take its approval for its annual capital expenditure. Tyagi had opposed this proposal, saying they infringe on Sebi’s financial autonomy.

Last month, Sebi’s board approved the Budget estimates for 2020-21. The Budget estimates haven’t accounted for the transfer of surplus funds as the government is yet to notify the changes. Going ahead, this could become a contentious issue for Sebi and leave it with limited funds. To make up for this, it might resort to hiking the fees it levies on market players. 

Jurisdictional dispute: One of Sebi’s key objectives is to protect investor interest and market integrity. To achieve this objective, Sebi has often come in crosshairs with other regulators. A recent example of this is the order passed by Sebi barring Price Waterhouse (PW) for lapses in the Satyam scandal. Responding to an appeal by PW, the Securities Appellate Tribunal (SAT) even held Sebi didn’t have the power to debar auditors. This prompted the regulator to move the Supreme Court, which stayed the SAT’s observation. However, the issue has not entirely been settled. Experts say the jurisdictional dispute is posing an immense challenge for Sebi. Besides establishing its powers over auditors, Sebi has to work around other regulators when it comes to regulatory overlap with the Indian Bankruptcy Code or some RBI statues. “Overlapping jurisdiction has been a key challenge for Sebi. Fundamental jurisdiction issues were underscored by issues like PW, IBC and bank default disclosures,” says Vidisha Krishan, partner, MV Kini & Co.

Defaulting brokers:  Misuse of client funds by brokers has proved to be a major headache. While the regulator has tightened the framework to prevent future misuse, past issues continue to crop up.

Also, some lenders have been up in arms after it ordered depository firms to transfer the collateral pledged by brokers with banks to be transferred to respective clients. Market players say the issue may continue as concerned stakeholders are unlikely to go down without a fight.

Market development: Sebi has to constantly strive to develop financial markets. One area where the regulator has failed to achieve success is the development of the corporate bond market. Despite various initiatives, the domestic debt market is yet to take off. Also, new instruments, such as REITs and InvITs, have lost their appeal because of adverse tax changes.

The plan to make GIFT City an international financial hub hasn’t taken off well. Sebi has to sit with the government and oth-ers to address the issues.

During Tyagi’s three-year tenure, Sebi floated nearly two dozen discussion pap-ers. Though it finalised many regulations after public consultation, several areas still needed attention, say experts.

Regulating MFs: Domestic mutual funds (MFs) have grown in size with assets under management nearing Rs 30-trillion mark and regulating them has become more challenging. In the past two years, Sebi had to deal with tricky situations when it came to debt exposure of MFs to corporates. Given the weakness in the economy, the regulator has to keep a close watch on potential corporate defaults.

Quality of orders: The quality of some of Sebi’s recent orders has raised eyebrows of legal experts. Even the SAT has openly criticised it, saying Sebi had passed the order “without any application of mind”. Some legal experts point out Sebi had passed interim or ex-parte orders in important cases without understanding the nuance of the case, leading to disruptions. Market players say this could be partly because of inadequate staff strength. Also, by Sebi chief’s own admission, its enforcement action needs more improvement. To tackle this issue, Sebi is trying to make use of new technologies. Experts say it could increase the use of recently acquired powers, such as search and seizure, liquidation of assets, and use of call logs, to improve enforcement.