Monitoring the regulators

An apex council can bring in much needed coordination between different bodies to smoothen out irritants

Look who is courting controversy! Invariably, it is the Securities and Exchange Board of India that is caught in the line of fire. Its textbook mandate is to fence the ground, level the field, and catch and punish wrong doers. On ground, however, Sebi is expected to ensure there are no bumps in the quest of all the stakeholders to become rich effortlessly. Issuers of capital want low entry barriers and intermediaries hassle-free trading, while subscribers demand cost-effective transactions. In the process, it comes out as unreasonable (ask asset management companies), arbitrary (in taking action against insider trading and price manipulators), harsh (check out investment bankers at the receiving end), and out of touch (poll institutional and retail investors). If there is a regulator who manages to antagonize all the sections of the market that it touches, the honour surely must go to Sebi. Very rarely is the market watchdog lauded for the orderly transition of the capital markets from outcry trading on broker-dominated stock exchanges to seamless and paperless execution of trades. Yet, there is no cause to complain of its recent clampdown on unit linked insurance plans. Where it erred was in allowing these products to be marketed. It was right on insisting that as a portion of the corpus of these products is invested in the equity markets, suspending their sale was within its regulatory ambit. But good intentions rarely make for good policy. The combination of insurance coverage and market-oriented returns was too enticing to be torpedoed. The issue was lobbed into the courts like all other explosive themes that are too hot to handle. But the issue encompassed too many stakeholders—investors, markets, mutual funds and insurance companies---to let it linger and fester. The ball eventually landed in the politicians’ court. The finance minister issued an ordinance to restore custody of the products with the Insurance Regulatory Development Authority (Irda).

Sebi, however, must have enjoyed the last laugh as the Irda amended certain features that loaded the dice in favour of issuers. Overall costs charged by Ulips have been capped on the basis of 10-year tenor and limits imposed on surrender charges, confirming that the capital market watchdog’s objections to these products was not without merit. The spat, nonetheless, hastened the process of appointing a super regulator. Undeterred by the braying to drop the idea of a Financial Stability and Development Council, the government introduced the Securities and Insurance Laws (Amendment) and Validation, Bill 2010, to replace the Ulip Ordinance. The bill, passed in the Lok Sabha last fortnight, seeks to have a joint committee to resolve the differences among financial regulators Securities and Exchange Commission of India, Irda, the Reserve Bank of India and the Provident Fund Regulatory and Development Authority (PFRDA). The finance minister will head the committee. Is Sebi upset with the supposed emasculation of power? By now it must be pretty used to getting its orders reversed by the Securities Appellate Tribunal, approached by subjects aggrieved over the market regulator’s rulings. Surprisingly, the disquiet came from the Reserve Bank of India, so far not used to its decisions being questioned. The government contends such a body is required for coordination between regulators and sort out disputes over turfs. The Sebi-Irda friction was the latest in the long list that included even an RBI-Sebi skirmish over NBFCs in the early days of Sebi’s birth. They had to follow business transaction norms laid down by the RBI and trading criteria prescribed by Sebi. In the same way, the Telecom Regulatory Authority decides on the operational aspects of telecom companies, which have to adhere to disclosure norms laid down by Sebi while tapping the markets for capital. Insurance companies, too, will face similar dual control once they get listed. So a formation of super regulator, with the finance minister in the chair and comprising other regulators, does make sense to ensure that there is no cross-connection.

India is not alone on this page. The US has proposed the Financial Stability Oversight Council to watch Wall Street despite the presence of the Securities and Exchange Commission. The Treasury Department will lead the nine-member council comprising regulators from the Federal Reserve, SEC, Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies including state securities, insurance and banking regulators and credit unions as non-voting members. The principle behind the UK’s new Council for Financial Stability, which the new government proposes to junk, was straightforward. The heads of the Treasury, Bank and Financial Services Authority will meet, probably quarterly, to analyse the state of the banking system and take action when deemed necessary. The basic difference between the supervisory councils in India and those in the US and UK is the latter’s narrow purview. The US council’s limited objective is to supervise the Wall Street, while that of the UK is to guide the Bank of England. In India, the scope is wide. Therefore, there is fear of the regulators losing their autonomy. There is a crucial difference that needs to be considered. Though the US president appoints regulators, drawing them even from the private sector, they need to be confirmed by the Congress. As their independence is derived from the people, the regulators are free to act on their own without approval or guidance from the government. In India, regulators are invariably selected from the bureaucracy of the public sector. Though autonomous, they often consult with the government. Besides, the boards of the regulators including those of Sebi and the RBI have govrnment nominees. While there should be no interference from the government in their policing work, a super regulator will ensure that they are on the same page. During the later part of the boom of 2003-2007, for instance, finance minister P Chidambaram was at odds with the money tightening policy of the RBI, whose main job is inflation control, while growth is primarily the responsibility of government by introducing appropriate fiscal policies. At a time like this, when developed economies are in recession and emerging markets including India is facing inflation, it is necessary that both the government and the regulators calibrate their policies so as not to hinder growth as well as let inflation go out of control. The RBI and Sebi may, for example, need to coordinate regularly to ease the path of Indian companies in acquiring cheap but strategic targets abroad and raise funds for the acquisitions. Irda and Sebi could require regular dialogue when insurance companies get set to launch their IPOs. A super regulator who would facilitate a structured mechanism for problem solving and policy formation anticipating future changes could be of immense help rather than a hindrance.
MOHAN SULE