To get to the logic underlying the new regulatory regime outlined by the Securities and Exchange Board of India (Sebi) for market infrastructure institutions (MIIs) like stock exchanges, depositories and clearing corporations, it is necessary to understand what kind of animal the regulator considers them to be. They are hybrids — neither government departments nor private firms, but commercial enterprises discharging important regulatory functions. Hence stock exchanges should be able to attract capital by listing, and pay shareholders something. No cap on payout, that’s too statist, suggests Sebi, but please pay 25 per cent of profits to a settlement guarantee fund. Thus, Sebi has deviated from some of the specific recommendations of the committee headed by Bimal Jalan but accepted the spirit behind them — and Mr Jalan appears quite pleased.
A key decision taken by Sebi is to hold that the rule of a ceiling on stake ownership (at 51 per cent public ownership, five per cent for individual entities and 15 per cent for banks and insurance companies), put into place in order to avoid regulatory capture, will not only cover the de facto ownership but also off-balance sheet realities and the ownership reality that they reflect. This appears to strike at the root of the litigation initiated by MCX-SX, which has claimed that holding of warrants in lieu of shares does not constitute share ownership. Sebi has also ordained that as a stock exchange’s functions have a certain regulatory component, there will be a separate committee with a majority of independent nominees which will supervise regulatory functions like listing, trading and surveillance. This is also quite sound in theory — but directors who are truly independent and competent are difficult to find in India, and those who are there will not come cheap.
While there will be support for what Sebi has eventually come out with, there is need for caution. The scheme of things envisaged concentrates a lot of power in Sebi’s hands. Fixing management pay, for example. A lesson has clearly been sought to be learnt from the financial crisis by stipulating that variable pay will not exceed one-third of the total, and will be paid over time with clawback provisions. These particular regulations are eminently defensible. Yet such control could lead to micro-management and allow for intensive lobbying. Although more details will emerge later on, it appears that venture capital and private equity firms have been exposed to further discretionary powers of the state? That may be a grave error; smaller enterprises are particularly dynamic, and India should be smoothing the flow of capital into them, not making it harder. Further constraining venture capital runs counter to the spirit of many provisions in Budget 2012-13. However, it is not too late to correct that. Complex regulations evolve as you go along — and there is an all-important provision that they will be re-examined after two years. If glitches have emerged, they can then be sorted out. Regulation, like everything else, has to get better over time, through learning by doing.
