Weed out regulatory gobbledygook

WITHOUT CONTEMPT

The Securities and Exchange Board of India (Sebi) announced its intention to formulate "master circulars" to consolidate its various circulars and directives that govern the conduct of the Indian securities market.

Sebi has promised to make life easy and predictable for practitioners by cleaning up not just the number of documents that one may have to read and review but also streamline the content of the circulars.

This is a welcome move. The Reserve Bank of India (RBI) first came out with the concept of master circulars relating to exchange controls under the Foreign Exchange Management Act (Fema) a couple of years ago. The market heaved a sigh of relief considering that the various circulars of the RBI issued from time to time were being consolidated in one place making life easy for the users of the law. The RBI now publishes master circulars on July 1 every year.

However, this process itself is not without problems. For instance, last year, the RBI consolidated a master circular on cross-border share transfers. Unfortunately, this is an area regulated not only under the RBI's exchange controls but also by the directions of the government. The consolidation of circulars issued by the RBI stopped with the circulars issued as of January last year, and in the process, fresh developments from the government's end did not get consolidated in the master circular.

Law-writing involves a lot of precision. Prior to 1990s, any regulation drafted by a delegated regulator had to be vetted and approved by the law ministry in the government. This was hardly a check-and-balance since the process led to immense delays with little difference caused to the quality of the drafting.

In fact, the more the number of participants involved in drafting a law, the worse it reads since everyone has some contribution to make. After all, Indian law has the unique distinction of being drafted by people who think in different languages. The original draft could be drafted by a person thinking in Tamil, the draft could get reviewed by a person who thinks in Punjabi and the ultimate supervisor could think in Oriya while contributing to it. With each one transliterating his thought, the result can be a heady cocktail. A review of some FIPB Press releases will bear this out.

Therefore, it is not only important to consolidate all rules on identical issues in one place, but also important to pick up errors that have been found in practice, problems that the market faces with specific provisions and then clean up the act through a consolidated master circular. This is not as easy as it sounds and can be an extremely daunting task.

Akin to software companies that urgently launch products to capture market share and then keep sending patches to clean things up, regulators are at times in a hurry to deal with a situation, and then keep patching up the rules. The result can be disastrous.

A simple example would be the rules governing bulk deals executed on the floor of the stock exchange. In 1999, Sebi issued a circular banning it, but found that the market simply required it because a range of other regulations, including those written by Sebi itself needed transactions to be executed by some market players only on the floor of the stock exchange. Making this worse, were orders passed against some intermediaries holding them guilty of manipulation even while holding counter-parties to the same transactions innocent.

Not all rule-making has to be in haste. Internationally, draft rules are published for public comment and then inputs are used and dealt with before making the rules public. Sebi has promised to do likewise. Another input Sebi should bear in mind is it would be much better for a new set of rules to be notified and yet give deferred prospective effect to the rules. This will help those impacted by the law to re-arrange life to be able to comply with the requirements. One instance when this had a disastrous effect was when the Takeover Regulations were amended by a notification in the Official Gazette in December 2004, but no one including the regulator was aware of it until end of January 2005.

In the mid-1990s, the Securities Exchange Commission launched for its staff a contest called the "Spot the Gobbledygook Campaign". The idea was to spot provisions across the minefield of regulations that had made comprehension of US securities laws terribly difficult. Staff was encouraged to read the rules and point out how they could state things simply, precisely and transparently. This was a very profitable exercise. Indian regulators would do well to reward their own staff for identifying how far things have gone wrong.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.