Financial Autonomy of SEBI

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Context

  • As part of the Finance Bill introduced in Parliament, the Centre had proposed amendments to the Securities and Exchange Board of India Act, 1992 that were seen as affecting SEBI’s financial autonomy.
  • To be specific, the amendments required that after 25% of its surplus cash in any year is transferred to its reserve fund, SEBI will have to transfer the remaining 75% to the government.
  • Prima facie, there seems to be very little rationale in the government’s decision to confiscate funds from the chief markets regulator.

Relevance: 

GS-2 Statutory, regulatory and various quasi-judicial bodies

Background

What is the Securities and Exchange Board of India (SEBI)

  • It was established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act, 1992).
  • The basic functions of SEBI
  • To protect the investors' interests in securities.
  • To be a platform to promote, develop and regulate the securities market in India as well as the relating matters that are connected with it.
  • To approve rules and laws pertaining to the stock exchanges.
  • Examines books of accounts of financial mediators and recognized stock exchanges.
  • To urge respective companies to list their shares in stock exchanges and manage the registration of distributors or brokers.
  • SEBI board has three main powers – Quasi-judicial, quasi-legislative and quasi executive.

What is the Finance bill about?

  • It has made major changes to requirements on the market regulator, Securities and Exchange Board of India (SEBI).
  • The proposed amendments suggest that 3/4th of the surplus retained by SEBI every year be handed over to the government.
  • The remainder 1/4th part should go into a “reserve fund” but that too will be capped.
  • The level set by the government is 2 years’ expenditure.
  • It requires SEBI to seek the approval of the government for any capital expenditure.

What are the differences in opinion?

  • Government – Argues that why a market regulator should sit on any pool of capital at all.
  • Comptroller and Auditor General – Feels these amendments would undermine the parliamentary oversight of public funds.
  • Unlike the Reserve Bank of India, the sums earned by SEBI are not enormous. So, the number of funds the government is likely to receive from SEBI will be very low.
  • This gives rise to the concern that the latest move is a desire to increase control over the regulator.

What does SEBI’s chairman say?

  • The SEBI chairman argues that the proposal is already being discussed by the Financial Stability and Development Council.
  • He adds that the amendment to the SEBI Act could have waited for the Council’s final decision.

What is the opinion of SEBI employees’ association?

  • It points out that transferring the regulator’s surplus to the Government is equivalent to the regulatory action becoming a kind of additional tax on market participants.
  • The letter also warns that “stubborn incentives” would be created.
  • Governments always want to raise revenue, but SEBI has broader concerns such as market stability.
  • A moral hazard problem would be created, in which these two incentives would clash.

What are other issues?

  • It should be up to the regulator to decide if its duties require additional capital expenditure, through discussions of its duly constituted board.
  • If SEBI feels it is earning too much through fees on market participants, its current mandate would mean that it would reduce its fees to broaden the market.
  • If it requires updated facilities and more staff to monitor increasingly complex financial markets, the decision on this matter should be taken by the regulator with the consent of the board, not by the finance ministry.
  • This is fundamental to what regulatory independence means.
  • As the stability and regulation of the Indian markets are very much in the broader national interest, the government should rethink its decision.

Key impacts

  • For one, it is highly unlikely that the quantum of funds that the government is likely to receive from SEBI will make much of a difference to the government’s overall fiscal situation.
  • So the amendment to the SEBI Act seems to be clearly motivated by the desire to increase control over the regulator rather than by financial considerations.
  • This is particularly so given that the recent amendments require SEBI to seek approval from the government to go ahead with its capital expenditure plans.
  • A regulatory agency that is at the government’s mercy to run its financial and administrative operations cannot be expected to be independent.
  • Further, the lack of financial autonomy can affect SEBI’s plans to improve the quality of its operations by investing in new technologies and other requirements to upgrade market infrastructure.

Long term impacts

  • This can affect the health of India’s financial markets in the long run. In the larger picture, this is not the first time that the government at the Centre has gone after independent agencies.
  • The Reserve Bank of India and the National Sample Survey Office have come under pressure in recent months, and the latest move on SEBI adds to this worrisome trend of independent agencies being subordinated by the government.
  • The Centre perhaps believes it can do a better job of regulating the economy by consolidating all existing powers under the Finance Ministry. But such centralisation of powers will be risky.

Conclusion

  • Regulatory agencies such as SEBI need to be given full powers over their assets and be made accountable to Parliament.
  • Stripping them of their powers by subsuming them under the wings of the government will affect their credibility



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