Securities Markets Code: A Desirable Design For India
It was only a sentence in the Finance Minister’s Budget 2021 speech, but it may have the effect of radically altering the face of the securities law regime in India. The government’s proposal is “to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalised single Securities Markets Code.” The justification for such a measure is understandable. The current securities law is dispersed across different legislation that has led to some inconsistencies and possible regulatory arbitrage. Moreover, the legislation was drafted to suit the times when they were enacted and have been subject to piecemeal amendments periodically, thereby making them unwieldy.
Since the emergence of a Single Securities Markets Code is a fait accompli, what remains on the table for discussion is the actual shape the Code will take. Here it might be useful to visualise the contours and content of the Code across four parameters: territoriality, longevity, transparency, and efficacy.
The regulatory architecture for the financial markets generates considerable complexity, and multiple models have been experimented with around the world to define the territory of the securities regulator. At one end of the spectrum, there is a multi-regulator approach, a fragmentation of sorts, which is followed in countries such as the United States. At the other end of the spectrum is a consolidated regulator model, along with the lines of what the Financial Sector Legislative Reforms Commission recommended in India. A middle path is the ‘twin peaks’ approach with two distinct regulators, one for prudential regulation and the other for market conduct, followed in countries such as Australia and the United Kingdom.
The Indian approach has been fragmented and is largely likely to continue even under the Code, which only consolidates securities regulation, with other fields in the financial markets continuing to operate separately.
This does not help overcome issues surrounding regulatory overlaps and turf wars of the type that Indian markets periodically witness. Examples include the intersection of regulatory oversight of listed companies between the Securities and Exchange Board of India and the Ministry of Corporate Affairs; and other highly-publicised regulatory tugs-of-war between SEBI and the insurance regulator involving unit-linked policies and between SEBI and the Reserve Bank of India regarding foreign portfolio investments into the securities markets. The government has taken measures to engender synchronisation of regulatory measures through the Financial Services Development Council, but that does not seem to have received the required impetus.
In these circumstances, the Securities Markets Code would do well to address such territorial issues and instill a mechanism for regulatory coordination and information sharing into the legislation itself (similar to the position in the UK) rather than to leave it to informal mechanisms (as has historically been the case in Australia). Experts have already identified a thorn in the flesh with the proposed Code. While three of the four laws are capable of being integrated rather seamlessly, the Government Securities Act is a stark outlier as it is within the purview of the Reserve Bank of India. Questions of territoriality are bound to arise in the drafting of the Code itself, thereby increasing the likelihood that the route to consolidation and rationalisation will be arduous.
The success of any code is usually judged by its endurance, something that must at the top of the framers’ minds. It is common in such circumstances to recall the Indian Penal Code of 1860 or the Indian Contract Act of 1872 that have withstood the test of time for about a century and a half. Viewing comparatively, it is quite natural to refer to the Securities Act of 1933 and the Securities Exchange Act of 1934 in the United States, wherein the antifraud regime under section 19(b) of the latter legislation and the rule thereunder have constituted the principal regulatory tool.
This might mean adopting a principles-based approach, which requires enacting an all-encompassing and somewhat skeletal legislation. As experience has shown, the securities markets are dynamic, and the legislation must be capable of capturing innovations that are likely to occur constantly, whether they be newer forms of securities instruments such as initial coin offerings or other developments in fintech.
Under such a model, the details are to be contained in regulations issued by the securities regulator from time to time on individual aspects of the securities markets. This would be more functional, as it remains closer to the pulse of the market and does not require Parliament to be activated each time there is a new development that escapes the legislation.
In a model that involves the regulator issuing subsidiary legislation in the form of regulations, the success of the Securities Code depends upon the stewardship role the regulator performs. As an unelected body whose actions have a significant impact on the markets, it must be beyond reproach. This would necessitate a more streamlined process when the regulator issues regulations or other forms of instruments, which includes an elaborate consultation process that also displays transparency on how the feedback has been assimilated into the regulation-making process. Some advanced economies have also adopted mechanisms for regulatory impact assessments, which are worth considering.
Although the current securities law framework in India does not provide the precise mechanics by which SEBI should engage in consultation with various stakeholders, it has nevertheless gone above and beyond its mandate to establish a process. At the same time, there is scope for improvement. Regulators such as the Insolvency and Bankruptcy Board of India, the Airports Economic Regulatory Authority, and the Telecom Regulatory Authority have arguably instituted more elaborate mechanisms either through statute or regulations.
Even the judiciary has been seized of the issue surrounding regulatory transparency. In Cellular Operators Association of India v. Telecom Regulatory Authority of India (2016), the Supreme Court called attention to the concept of “openness in governance” and stated that “it would be a healthy functioning of our democracy if all subordinate legislation were to be ‘transparent’”. The Court even exhorted “Parliament to take up this issue and frame a legislation along the lines of the U.S. Administrative Procedures Act” that provides for due consultation with all stakeholders.
The current proposal would be a very timely opportunity to heed the Supreme Court’s call by pioneering such a transparent process legislatively through the Single Securities Markets Code.
Transparency is a key factor in obtaining a ‘buy in’ from all stakeholders, which will naturally lead to a greater level of compliance and reduced constraints in enforcement.
Any code would be only as good as it is implemented efficaciously. The burden would be on the regulator, based of course on the power conferred upon it by the Code. This will require the Code to offer effective enforcement tools to the regulator. In SEBI’s case, the enforcement tools have had to be built up gradually over time by way of amendments to the SEBI Act. At the same time, there have been concerns about the manner in which SEBI has been exercising its powers and functions. Its track record is replete with instances whereby its orders have been called into question by the Securities Appellate Tribunal and the Supreme Court. Similarly, criminal enforcement, which can be a useful deterrent against market misconduct, has been used successfully only in limited circumstances. Ultimately, the design of the enforcement mechanism under the proposed Code as well as actions by the regulators must smoothen the rough edges within the system.
The proposed enactment of the Code is not only a matter of external impact on the market but also an opportunity for the securities regulator to assess internal organisational considerations. For example, experts have pointed to how the number of employees per listed company it oversees is much less than that found in advanced economies. This might require constant capacity building in terms of both the quality and quantity of SEBI’s resources. In order to make the enforcement regime effective, the facilitative nature of the legislative provisions must work hand in hand with institutional vigour displayed by the regulator.
In all, the government’s move towards a Single Securities Markets Code is a laudable one but, as they say, the devil lies in the detail. The design for codification and the roadmap for accomplishing the same will hopefully be revealed in the near future.
Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.