Arrest regulation, improve control

WITHOUT CONTEMPT

It appears that capital market regulation is headed in a new direction. If signals emanating from the Sebi are any indication, the regulator is conscious that the motto"""Show me a problem, and I will write you a regulation"""is now passe.

In recent years, there has been a spate of law-making in the capital market"" knee-jerk circulars and clarifications, new regulations, ambush amendments, guidelines superseding regulations, and circulars injuncting regulations. Let us look at a few of these.

Sebi made regulations to set up the Central Listing Authority (CLA) in February 2003. By May 2003, the CLA had to beat a hasty retreat with Sebi clarifying that it had only notified the CLA regulations, not "established" the CLA.

The regulations were so poorly drafted that even before the CLA could start work, they had to be repealed and replaced in August 2003, with new regulations.

A year and a half later, the CLA regulations are still a dead letter. Although they represent law notified in the gazette, a mere press release from Sebi has declared these regulations to be inapplicable until the CLA is "established".

Of course, it is important to streamline the process for accessing the primary market. Today issuers have to deal not only with Sebi, but also with at least two big stock exchanges (often, with one exchange waiting to see how the other deals with them).

However, the CLA regulations do not address this multiplicity of regulations. You have to deal with the CLA and then also deal with the exchanges. For all practical purposes, they only confer a new name on Sebi's primary market division - in sum, nine pages of still-born law.

In February 2003, amidst much rhetoric for protecting the small investor from companies that were getting voluntarily delisted from stock exchanges, the Sebi (Delisting of Securities) Guidelines, 2003 were framed. While these are still guidelines, they purport to override the Takeover Code, which is a gazette-notified regulation.

These guidelines are iniquitous and overstate their case. They impose an extortionate king's ransom on any company seeking to delist securities. By pegging the price to be offered to the remaining public shareholders to a "reverse book building" auctioning process, today the law requires payment of a price un-related to market for these shares.

The control premium a promoter can command pales in comparison with the exit premium a minority shareholder can command. These guidelines merit a separate column altogether. Suffice it to say that in two years of its existence, the number of companies that have delisted can be counted on one's fingers.

In August 2003, the Sebi (Ombudsman) Regulations were notified. An Ombudsman is an official who examines public complaints and helps achieve equitable settlements"" in short a propriety policeman, and a friendly neighbourhood conciliator.

While the object of these regulations may be laudable, the ombudsman's role is something every regulator ought to play every single day. One does not need a separate administrative system, and quasi-judicial appellate machinery within Sebi to hear "review petitions".

If Sebi, using its vast powers cannot resolve conflicts, setting up a sub-delegate of powers would serve little purpose. In any case, a year and half after they were notified, the ombudsman regulations remain un-administered""no ombudsman has been appointed.

Then there are the Sebi (Self Regulatory Organisations) Regulations, 2004, notified in February 2004. These regulations contemplate powers for Sebi to dictate to the self-regulatory organisations, how to conduct themselves and how to regulate their members.

Sebi would have powers to write the internal rules of such organisations""or in other words they would be an extended arm of Sebi. Little wonder then, why no one is keen to form a self-regulatory organisation, a year since these regulations were notified.

A close look at these regulations would be a good way to start arresting over-regulation and under-administration.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed here are his)