What The New SEBI Chairman Must And Must Not Do
The Securities and Exchange Board of India will have a new chairman in days. Here are three things the SEBI chairman must do and three things he must not do:
Consultation Before Implementation
Ensure pre-legislative consultation before making any new regulation, including amendments to existing regulations.
Today, prior public consultations on proposed draft law is selective and sporadic. When a large body of new regulations are introduced, they are put up for public comment (example: new insider trading regulations or new takeover regulations). However, when material amendments are made, despite far-reaching consequences, there is no consultation. Worse, material obligations and requirements are introduced through “circulars” with no consultation at all. The consultations and engagements with “advisory committees” are not public consultations at all – they primarily comprise of representatives of regulated market intermediaries, who are under the strong persuasion of regulatory officials and cannot bring to bear strongly independent external views. It may sound great for the short-term “success” of a regulator in pushing through an agenda, but in the long-run, it stultifies the regulator’s access to fresh thinking.
Review regulations governing the primary market covering public issuance of securities to make it simpler, less costly, and streamline disclosure requirements to exclude information that is not necessary for making informed investment decisions.
Once a regulation is made, it remains there forever. There is no mandate to review how it has worked, whether it has worked, where it is weak, where effective and where strong. A decision to review is pretty much taken by intuition rather than by schedule.
It would be a good measure to review any body of regulations that has run a five-year course and define a metric by which its functioning would be measured, and analyse if it has been overtaken by realities in the market.
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, which govern primary issuances is crying to be reviewed. It is nothing but a re-statement of the erstwhile ‘Disclosure and Investor Protection Guidelines’ and contains provisions initially thought through in the 1990s. The market has moved on to a completely different place, these regulations are musty and need a complete re-think and re-incarnation.
Get Back On TRAC
Dust off the Takeover Regulations Advisory Committee recommendations that were not implemented in 2011, and implement them after a review of the existing takeover regulations, and their interplay with delisting regulation and listing conditions.
It has been nearly six years since the ‘new’ takeover regulations were brought into effect. A range of interests fought the recommendations of the Takeover Regulations Advisory Committee to ensure that open offers were not really equitable across shareholders but were skewed in favour of enabling a full exit for substantial shareholders (read, promoters) and a rationed pro-rata exit for public shareholders.
As a result, one body of law (takeover regulations) forces an acquirer to potentially own over 75 percent stake, the maximum limit permitted in a listed company, another body of law – Securities Contracts (Regulation) Rules – forces the shareholding back down to 75 percent and a third body of law (Delisting Regulations) would need to be complied with afresh, even if the intent had always been to delist the company. Investors looking for merger and acquisition targets would rather skip India altogether and look for potential M&A deals elsewhere – and no data mining can compute the statistic of deals that never got signed due to the complexity in regulations governing doing business in India.
Must Not Do:
Pick Intuition Over Data
Don’t rely on intuition-based regulation. Bring in data-based regulation instead.
Intuition rules. The belief that ‘If I do X, then Y will happen’ is yesterday’s approach, not the approach that will work tomorrow.
Most regulations, despite best intentions, do not end up achieving objectives because of intuition.
To realise that, one needs to move beyond vague feel-good fuzzy spelling out of objectives – such as ‘investor protection’ and ‘public interest’. A simple example: forcing stock brokers to put money away when a disputed claim is a small sum from a small client even without the merits of the dispute being adjudicated may sound laudable. What it may achieve though is that stock brokers who worry about compliance may stop servicing small clients who have small claims since at an aggregate level their liabilities could expand.
Around the world regulation-making has moved to greater dependence on an empirical data-driven study of societal behaviour, while we in India still largely depend on intuition.
Don’t clamour for more powers.
This is a classic trap most SEBI chairmen fall into. Every time a scam is uncovered, there is a clamour for even more powers with wider discretion. Examples range from seeking powers to arrest individuals, to conducting search and seizure and raid of any person’s property without any check and balance of having to satisfy a magistrate. We already have a system where a regulator does not have to convince a judicial or quasi-judicial forum to impose serious restraint on economic freedoms. The need to convince a tribunal to review the regulatory action comes in only after the restraints are already imposed, and only in the case of those who have the courage to call the intervention into question.
There is a history of smaller businesses being put out of activity for years on end without respite ‘pending investigations’, with no time-frame for review of restraints imposed.
Don’t look for greater discretion in decision-making.
A senior lawyer once quipped to me: “Case by case basis means suitcase-by-suitcase basis.” This is universally true for human conduct. Law-makers across the world effortfully work towards reducing discretion in decision-making. Predictable treatment of human conduct is what markets look for.
Uncertainty about how a regulator would react is the worst trait any regulatory environment can have.
This is truer for regulatory frameworks that govern the conduct of business. Increasingly, the easy way out when administering complicated and intricate regulations is to write in a provision to excuse ‘strict compliance’ with the regulations. Instead, more time and thought spent on how to get the regulations right will obviate the need to leave room for case-to-case exemptions. Instead, if many seek clarifications on an issue, it would be better to issue generic clarifications of regulatory expectations. This would move the system from case-specific handling to issue-specific handling.
Somasekhar Sundaresan is an advocate specialising in securities regulations.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.