The Lemons Approach: Madhabi Puri Buch Brings Changes To SEBI's Regulatory Framework
SEBI shifts its focus to make capital creation its primary goal.
Madhabi Puri-Buch is no stranger to markets, having spent 25 years as a banker and the last five years as a regulator. She is also the first woman to head the Securities and Exchange Board of India and is changing the way the regulator looks at the capital market.
"There is nothing else that justifies our (SEBI's) existence, unless we facilitate the formation of capital in equity and debt," said Buch, chairperson of SEBI, while speaking for the first time after taking charge.
Nation-building, according to her, is done on the ground by corporates who are building businesses, producing products, delivering services to the consumer, exporting and that is creating wealth for the nation.
This shift in approach towards businesses requires an understanding of what is needed to build trust and transparency for the markets.
In the regulatory framework being put in place for the coming years, the consultation process continues to be the centre of policy, with an important role being given to the advisory committee consisting of market participants, Buch said.
However, Buch does not believe in market feedback on the need for regulatory stability. If the market environment is changing rapidly, then the regulator needs to evolve to change in the global environment and the market needs to be in pace with the regulator, she said.
SEBI has been pushing for a disclosure-based regime where the emphasis is not on micromanagement, but on managing the environment to create trust and transparency.
According to Buch, SEBI is moving towards the principle that any policy change needs to be backed by data and every policy change needs to be back-tested with data.
The Lemons Approach
Buch spoke on the "Lemons Approach" to regulatory framework, pointing to lemons in four colours—green, yellow, orange and red.
The approach hinges on freedom to do business, knowing the rules, disclosure requirements and regulatory action.
Here's what each colour represents:
Green Lemon: What a corporate does is none of SEBI's business. We have no right to say anything on your business, she said.
Yellow Lemon: It represents the rules of the game. It looks at how businesses do their business, and so, as a regulator how a business is done to ensure trust in business for investors.
Orange Lemon: It is all about disclosure. What businesses will disclose will have a lot to say about the business. SEBI's regulatory framework is a disclosure-based regime. Businesses should do what they believe is right and in a manner that has been suggested and disclose everything about it, she said.
Red Lemon: This comes in the picture when somebody crosses the line. Then, SEBI will not only have something to say about it, but also do something about it.
The market regulator has mandated market development as a key responsibility area for all departments in SEBI. It means that every department will have dedicated manpower whose key responsibility is to ensure market development policy at the end of every year.
The policies will continuously evolve and will not wait for the end-of-the-year changes, she said.
This is a marked shift in approach for the market regulator which has, so far, been conservative in approaching any innovation or market products, as investor protection continued to be its focal point.
SEBI is indicating a willingness to change the outlook towards products or technology-induced innovation, which will ultimately lead to capital or wealth creation in the market.
While the SEBI Act currently does not allow for a regulatory sandbox, the regulator is seeking a detailed review of the act, which will give it scope to allow experimentation and headroom to handle future challenges imposed by market dynamics and technologies.