SEBI’s Transformation over the years

INCEPTION OF SEBI:

SEBI stands for “SECURITY AND EXCHANGE BOARD OF INDIA”. The SEBI established on April 12, 1988 through an administrative order, but it became a statuary and powerful organization only since 1992. The Capital Issue (Control) Act, 1947 replaced and the SEBI was setup on February 21, 1992 through an ordinance issued on January 30, 1992. The ordinance replaced by the SEBI Act on April 4, 1992. The SEBI is under overall control of Ministry of Finance, has its head office at Mumbai and has Northern, Eastern, Southern and Western Regional Offices in New Delhi, Kolkata, Chennai, and Ahmedabad respectively. It has opened local offices at Jaipur and Bangalore and has opened offices at Guwahati, Bhubaneswar, Patna, Kochi and Chandigarh in Financial Year 2013–2014.It has now become very important organization of financial regulatory framework of India.

Securities and Exchange Board of India (SEBI) established as a non-statutory body for regulating the securities market. It became an autonomous body and accorded statutory powers with the passing of the SEBI Act 1992 by the Indian Parliament. Through the SEBI, the regulatory model, which is sought to be put in place in India, is one in which every aspect of securities market regulation is entrusted to a single highly visible and independent organization, which is backed by a statute, and which is accountable to the Parliament and in which investors have trust.

SEBI TRANSFORMATION OVER THE YEARS

Main Course – Fast Forward to 1990s

In 1980s and 1990s, it was increasingly realized that an efficient and well-developed securities market is essential for sustained economic growth. Without venturing into a detailed discussion, the securities market fosters economic growth to the extent it augments the quantities of real savings and capital formation from a given level of national income and it raises productivity of investment by improving allocation of investible funds. The extent depends on the quality of the securities market. In order to improve the quality of the market, that is, to improve market efficiency, enhance transparency, prevent unfair trade practices and bring the Indian market up to international standards, a package of reforms consisting of measures to liberalize, regulate and develop the securities market is being implemented since early 1990s. Let me  explain why the package included liberalization, regulation and development?

Why liberalization?

The more liberalized a securities market is, the better is its impact on economic growth. Interventions in the securities market were originally designed to help governments expropriate much of the seignior age and control and direct the flow of funds for favored uses. These helped governments to tap savings on a low or even no-cost basis. Besides, government used to allocate funds from the securities market to competing enterprises and decide the terms of allocation. The result was channelization of resources to favored uses rather than sound projects. In such circumstances, accumulation of capital per se meant little, where rate of return on some investments were negative while extremely remunerative investment opportunities were foregone. This kept the average rate of return from investment lower than it would otherwise have been and, given the cost of savings, the resulting investment was less than optimum. Hence, it was necessary to do away interventions hindering optimum allocation of resources.

Why Regulation?

Do you know what a ‘security’ is? Our laws provide an inclusive definition of ‘securities’. It says that ‘securities’ include shares, bonds, debentures, units of CIS, etc. It does not define in terms of ingredients an instrument must have to be considered as ‘securities’. I have not seen an ingredient type definition of ‘securities’ in any other jurisdiction. It is precisely because ‘securities’ are most insecure instruments. The only ingredient common to all types of securities is its associated ‘insecurity’. It is like a blind man named padmalochan. If it is a market for such insecure instruments, market would collapse if some body does not regulate away the insecurities.

We need regulations to correct for identified market imperfections which produce sub-optimal outcomes and to prevent market failures. In the absence of regulation by a specialized agency, each participant would do its own due diligence before undertaking any transaction in the market. This imposes huge social costs. Besides, regulations signal minimum standards of quality and hence enhance confidence in markets. With a known asymmetric information problem, risk averse investors may exit the market altogether if such minimum standards are not signaled. In its extreme form the market breaks down completely.

There is an apparent contradiction that the reforms aim at liberalization while regulations appear to restrict liberalization. Liberalisation does not mean scrapping of all codes and statutes, as some market participants may wish. It rather means replacement of one set by another set of more liberal code / statute, which allow full freedom to economic agents, but influence or prescribe the way they should carry out their activities, so that the liberalized markets operate in an efficient and fair manner and the risks of systemic failure are minimized. It is, however, desirable to keep in mind the contradiction to ensure that we do not resort to excessive regulation and regulations are designed and implemented properly. Otherwise the costs of regulation would exceed the benefits from regulation.

Why development?

Unless you develop market, what do you regulate? Unless there is regulation, how does the market develop? It is a chicken and egg issue. Regulation is necessary to develop market and once the market develops, it needs to be regulated. That is why many of the reform initiatives combine the elements of regulation and development. Besides, some developmental measures are introduced as a part of general program for economic and political development. The macro economic policies relating to interest rate, prices, etc. can have salubrious effect on the growth and development of the securities market. Other developmental measures include provision of reliable payment system and clearing mechanism, standardized accounting procedure, good corporate governance, skilled manpower etc. which improve the efficiency and transparency of the market.

Though it is incidental that reforms in true sense happened since early 1990s, that is, since the establishment of SEBI, I, by no means, propose to suggest that SEBI is the agency exclusively responsible for all the reforms. These reforms have been designed and implemented jointly by all stakeholders, including the government, the regulator, and the regulated.

The Securities and Exchange Board of India (SEBI) Act of 1992, gives this supreme regulator of the securities market of India statutory powers to make such laws and regulations, especially under its Section 30, and many other relevant sections, the list of all regulations applicable on any listed entities are as follows:

BRIEF INTODUCTION OF SIGNIFICANT REGULATIONS OF SEBI

RECENT INITIATIVES OF SEBI:

The margin trading and securities lending mechanism. This should promote liquidity in the market. We have also done away with the auctions. The clearing corporations / houses have been authorized to borrow securities to complete settlement without resorting to auctions. Hence there would be no short delivery in settlement. We have assigned NSDL the responsibility to construct and maintain a central registry of securities market participants and professionals. This would come very handy in market surveillance. We have recently set up the Central Listing Authority to dynamise listing requirements and to issue a gate pass for entry into trading platform. We are in the process of appointing ombudsman to redress the grievances of investors expeditiously. We have introduced limited STP in the securities leg for institutional investors. We have implemented market wide T+2 rolling settlement. We have expanded the availability of products for trading by making a variety of derivatives; including interest rate derivatives, corporate debt securities, retail government securities, available on exchanges. We have significantly improved disclosure and corporate governance standards.

Deserts – Road Ahead

SEBI is working continuously and in close co-ordination with the regulated and the government, to improve market design to bring in further efficiency and transparency to market and make available newer and newer products to meet the varying needs of market participants, while protecting investors in securities. The aim is to make Indian securities market a model for other jurisdictions to follow and make SEBI the most dynamic and respected regulator globally. Some of the initiatives on which SEBI is working are:

a. Set up a national institute to build a cadre of professionals to man the specialised functions in the securities market. We are also working on a nationwide certification to ensure that any person or agent working with a market intermediary has the necessary knowledge and skill to render quality intermediation.

b. Corporatise and demutualise exchanges where the ownership, management and trading rights would be with three different sets of people in order to avoid conflict of interest.

c. Introduce market wide straight through processing from trade initiation to settlement.

d. Migrate to T+1 rolling settlement.

e. Continuously review and upgrade accounting standards, disclosures, corporate governance practices in the interest of investors.

f. Continuously review and amend the various regulations to bring them in tune with dynamics of market requirements.

g. Introduce new products in the market to meet all kinds of needs of market participants.

We will continue to work to improve the functioning of the securities market to meet the challenges of the changing environment. We will do so because we are fully convinced that securities market allows people to do more with their savings and to do more with their ideas and talents than would otherwise be possible. In the process, we would ensure that every citizen of the country participates in the securities market in some form or other and shares the prosperity.