As the government moves to revamp India’s securities legislation, unifying three different laws into the Securities Markets Code (SMC), regulatory experts and market insiders have raised concerns on potential funding challenges for the stock market regulator.
Photograph: Francis Mascarenhas/Reuters
While the new code simplifies several norms and sets timelines for investigations by the market regulator, it proposes the constitution of a reserve fund for the expenditure incurred by the Securities and Exchange Board of India (Sebi) and the transfer of the residual corpus to the Consolidated Fund of India.
“Twenty-five per cent of the annual surplus of the General Fund in any financial year shall be credited to such a reserve fund which shall not exceed the total of annual expenditure of the preceding two financial years,” the proposed Bill states.
“The amount credited to the reserve fund will be utilised to meet Sebi’s expenses.
“After crediting the portion of the annual surplus… the remaining annual surplus of the General Fund for that financial year shall be credited to the Consolidated Fund of India,” states the proposed Bill. Settlement amounts and penalties collected by Sebi are already deposited to the Consolidated Fund of India, and are not included in the regulator’s income since 2003-04.
“The market regulator cannot withdraw funds from the Consolidated Fund of India so once the surplus is transferred, it is out of bounds.
“Unlike the Reserve Bank of India (RBI), Sebi does not manage funds and has no income except for the fees it levies on market intermediaries,” said an expert with regulatory experience, adding the 25 per cent cap may need to be enhanced.
According to sources, the surplus available to Sebi at this stage is between Rs 3,000-4,000 crore, a significant portion of which is to be utilised towards its expansion.
The proposed reserve fund could put constraints on Sebi, specifically when it is at a stage of expanding its pan-Indian reach with regional offices and will need more resources to expedite probes, said a market veteran, requesting anonymity.
“The new code prescribes strict timelines for investigations, inspections, and interim orders. To meet such timelines, Sebi will be required to invest more in technology and other resources.
“Such investments may be affected with limitations on the surplus,” said the person quoted above.
Sebi plans to set up local offices in cities like Chandigarh, Lucknow, Jaipur, Hyderabad, Bengaluru, among others, in its first phase of expansion.
“Sebi cannot indefinitely retain or build large surpluses under the Bill’s architecture.
“Sebi’s operational funding stream remains intact: the Fund is still primarily fed by fees and charges that are its core recurring revenues, and the Code explicitly permits using it for capex under a Board-approved plan,” said Abhimanyu Bhattacharya, Partner at Khaitan & Co.
A few experts also flagged the need for greater clarity on the remit of the Ombudsperson framework in Sebi to resolve grievances under the new code, as well as the reasoning for the different approach taken compared to other financial regulators.
For instance, the RBI has the Banking Ombudsman created through a scheme but not through the law, while the Insurance Regulatory and Development Authority of India (Irdai) has an external ombudsman constituted through rules notified by the government.
“The Securities Markets Code approach — putting an ombudsperson framework in the principal legislation — can be seen as a deliberate elevation to this framework,” said Bhattacharya.
Sebi already has grievance redressal mechanisms such as the Sebi Complaints Redress System platform, better known as SCORES platform, and an Online Dispute Resolution mechanism, complaints on which are flagged to the exchanges for resolution through an electronically assigned arbitration-like process.
Vanya Singh, partner at Cyril Amarchand Mangaldas, noted that an Ombudsperson will step in only once the regular investor grievance redressal process has been pursued without success for 180 days with Sebi or the concerned securities market service provider or issuer or its agent.
“Therefore, the idea does not appear to be to replace all other grievance redressal processes, but to fortify them with definite, time-bound outcomes for investors,” she reckoned.
However, another securities lawyer is not as sanguine.
“I am not clear how the Ombudsman plan will pan out. Under the new code, Sebi officers may only act as ombudspersons.
“The difference between RBI and Sebi is that all Sebi orders can be appealed in the Securities Appellate Tribunal (SAT).
“If the Ombudsperson orders also go to SAT, then it can burden the system that is already facing high pendencies,” said a securities lawyer, requesting not to be identified.
Sebi, unlike the RBI and Irdai, deals with a large set of intermediaries with various types of contracts, so even if 0.00001 per cent of investors or market participants complain through the Ombudsman, the case load can be high, he pointed out.
