Regulator8217;s challenge

Sebi has notched many successes.

Sebi has notched many successes. But regulatory governance needs to become stronger,clearer

As the Securities and Exchange Board of India Sebi turns 25,its achievements must be celebrated,while honestly recognising its failures and committing to a programme of change. Along with the National Stock Exchange NSE and the National Securities Depository Limited NSDL,Sebi gave us the finest component of the Indian financial system: the equity market. A genuine speculative financial market ecosystem has developed with free participation by households,Indian companies,foreigners,with minimal distortions by government or PSUs. The Indian equity market has reached out and funded software,for instance,which was shunned by staid banks,and thus enabled growth. The NSE and BSE are ranked among the top five in the world by number of transactions. While India has many regulatory bodies,Sebi comes closest to the proper functioning of a regulator. It is empowered to issue regulations that have the status of law. It polices the market. It writes reasoned orders inflicting punishment on offenders. These can be appealed at the Securities Appellate Tribunal. No other Indian regulator,such as the RBI or TRAI,has achieved this full rhythm of regulatory governance.

At the same time,it is important to recognise the challenges. Regulation making at Sebi leaves a lot to be desired. There is arbitrary meddling in the economy,and vulnerability to lobbying by special interests. A much stronger regulation-making process needs to be put in place,animated by clear objectives,drawing on scientific evidence,and weighing the costs and benefits of intervening in the free market. The investigation process is marred by allegations of incompetence,corruption and violations of the rule of law. Sebi has an empowered board that can restructure the organisation and recruit better people. The fact that this board has not transformed Sebi shows that it does not feel the pressure of accountability mechanisms.

Also,there are serious problems in Sebis role definition. It does not make sense to have a regulator of the stock market what India needs is a regulator for all organised financial trading,looking at all these components. It does not make sense to look at mutual funds all financial firms must be looked at in a consistent way. Sebi and the equity market were key to Indias progress of the last 25 years. The Indian Financial Code,which transforms the legal foundations of financial regulation in India,will be key to the countrys progress in the next 25 years. It has drawn upon lessons from Sebis functioning,both in terms of successes and failures,to chart out the path of regulation of financial trading in the India of the future.