After the Finance Ministry shot down a proposal by SEBI to remove the RBI nominee on its board, the capital market regulator has now changed tack and instead sought a place on the RBI board. It has suggested that the RBI Act, 1934 be amended to provide a seat on the board of the banking regulator.
The capital market regulator’s move comes amidst crisis in the loosely-regulated NBFC sector that has adversely impacted some debt mutual funds which are directly regulated by it. Debt mutual funds have an exposure to the tune of Rs 1.7 lakh crore in NBFCs, according to industry estimates. If housing finance companies are included, the exposure swells to Rs 3.1 lakh crore.
A solution exists
For effective coordination, the Financial Stability and Development Council, the existing mechanism which is headed by the Finance Minister, can be strengthened to resolve inter-regulatory issues.
It is important to note that while RBI has no nominee director on boards of other financial sector regulators such as IRDAI and PFRDA, it has a nominee director on the board of Securities and Exchange Board of India. SEBI got statutory powers in 1992, while IRDA and PFRDA legislation were enacted in 1999 and 2003.
The capital market regulator had in the past proposed that the SEBI Act be amended to discontinue the presence of a nominee from RBI on its board. The finance ministry, however, held that the RBI’s financial sector experience would add value to the SEBI board.
Given that the NBFCs are loosely regulated, the RBI itself had sought a strengthening of its regulatory and supervisory powers under the RBI Act. Finance Minister Nirmala Sitharaman recently told Parliament that the RBI proposal was under the government’s consideration.
SEBI too is also learnt to have proposed a series of amendments to the Sebi Act that would give it more power. These include a proposal to inspect listed companies for violations and prohibit manipulation of books of accounts aimed at diversion and siphoning off of assets or earnings by companies. Besides this, it also sought to broaden the scope of persons against whom an order of disgorgement can be issued.
It has sought amendments to sections 12A and 15G of the Sebi Act that deal with prohibition from engaging in insider trading and monetary penalty for insider trading violation. It has proposed to prohibit “the act of altercation, destruction and mutilation of a record or document” that relate to contravention of the Act and sought to provide for monetary penalty for such violation.
Sebi board’s proposal to seek more powers come at a time when several listed companies are under scrutiny for bad corporate governance practices. In case of IL&FS while several agencies are probing the irregularities in IL&FS and its group companies, the group’s top officials are facing scrutiny over diversion of funds and negligence and several of them are under arrest on charges of fraud and money laundering among others.