sebi’s objective and functions – a legal perspective _ mostly economics

8/10/2019 SEBIs Objective and Functions a Legal Perspective _ Mostly Economics

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11/5/2014 SEBIs objective and functions a legal perspective | Mostly Economics

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SEBIs objective and functions a legal perspective

Dharmishta Raval (http://www.pramericamf.com/Aboutus/Trustees.aspx) (ormerly an ExecutiveDirector at SEBI) has this superb paper (http://www.igidr.ac.in/pdf/publication/WP-2011-008.pdf) onthe topic. Securities Exchange Board of India or SEBI is a capital market regulator of India. One wouldusually assume papers on SEBI would be in area of finance etc. However, there some strong legallinkages as well and one is amazed how much it is a legal body as well and has been designedaccordingly. Raval was instrumental in drafting the SEBI Act and is an authority on the subject.

She says India set up few regulators post 1991 reforms to regulate and develop markets independent ofthe government.

n India, there have been several regulators that have been set up, the more prominent of which have beSEBI (securities markets), TRAI (telecom) and CERC (energy). Of these, SEBI was among the rst, and hbeen seen to be one of the more effective in terms of delivering on a mandate that includes (a) protectiothe investor, (b) prudential regulation of securities markets intermediaries and (c) development of t

arkets.

n order to implement the mandate, the legal foundations to create regulators must have broad enablinglegislation. The legislation gives the regulator powers to issue regulations for the sector, and to supervisebased on the regulation. But most importantly, the regulator must be empowered to conduct investigationof misdemeanours, adjudicate and have the authority to impose nes and other penalties if wrong-doing isestablished. Lastly, the credibility of the regulatory process of the regulator is enforced when there are in place appeals processes by courts that have specialised domain knowledge to review regulatory action(which, in the case of the SEBI and securities markets, is the Securities Appellate Tribunals or SAT).

This paper examines various aspects of the legal process at SEBI, starting with the separation of powersbetween Government and SEBI. To date, there has been little intervention by Parliament in the regulationimplemented by SEBI. While legislation places much of the details of how regulation isoperationalised within SEBIs powers, the government retains the powers to decide the organisationalstructure, with the powers to appoint the top management at SEBI. Aside of this, SEBI has the freedom tdecide how regulation is to be operationalised, which uses the three mechanisms of regulations, circularsand guidelines.
http://www.igidr.ac.in/pdf/publication/WP-2011-008.pdfhttp://www.pramericamf.com/Aboutus/Trustees.aspxhttp://mostlyeconomics.wordpress.com/http://www.igidr.ac.in/pdf/publication/WP-2011-008.pdfhttp://www.pramericamf.com/Aboutus/Trustees.aspxhttp://mostlyeconomics.wordpress.com/


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She looks at this entire legal aspects of setting a regulator. What should be the objective? What should be the legal powers to achieve the objective? What should be the tools in functioning etc

The legal foundations for regulators involves broad enabling legislation. The legislation also gives poweto the regulator to issue subordinate legislation which are required to be tabled in Parliament after theyhave been issued. This makes it possible for detailed domain knowledge to be embedded in subordinatelegislation, which could evolve rapidly. The regulator would then operationalise these regulations in its

supervisory function. Regulators feature a unique combination of functions of writ ing law andadministering it. Besides conducting investigations, regulators are also responsible for adjudicating andimposing nes and other penalties for misdemeanours.

There are three steps to establishing regulators:

Definition of mandate of the regulator Creation of subordinate legislation Enforcement of the regulatory mandate

SEBI Act 1992 establishes SEBIs mandate:

1. Investor protection,2. Regulation of the securities market, and3. Promotion and development of the securities market

Unlike SEBI, both in US and UK there is no explicit mandate to develop securities markets.

She discusses SEBI Act 1992. It is broadly in two parts:

Role of Government It appoints board members, SEBI accounts to be maintained by GoI,Functioning of SAT

Role of SEBI: regulating intermediaries, Framing regulation on insider trading/ take-overs etc,regulations on stock exchanges etc.

SEBI act is different from other acts:

The SEBI Act, 1992 gives SEBI power to draft regulations in order to regulate the market and discharge unctions and duties. While the objectives are provided in the SEBI Act, 1992, the implementation detailare left to the regulator. The securities market is regulated more through regulations than through theSEBI Act, 1992.

This is in marked contrast to other statutes in India, which provides for the regulatory framework in the parent Act. For example, the Income-Tax Act is a complete self sucient code, and the income tax authoritiare required to implement the Act as against notifyingthe regulatory framework. They are not expected t


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notify the regulatory framework and be policy decision-makers. The government notifies not only the Abut also the rules. Similarly, the Parliament notifies the Indian Companies Act, 1956, and the governmennoti es the rules thereunder.

n the case of SEBI, Parliament has delegated its powers of drafting the regulatory framework to SEBI.esides the parent Act, SEBI also has powers under the provisions of the Securities Contract (Regulationct, 1956, (referred as the SCR Act) to notify the framework to regulate stock exchanges, and transaction

on the stock exchanges, as well as the depositories under the provisions of the Depositories Act, 1996.

The paper moves on to discuss how SEBi frames regulations, circulars and guidelines. Circulars aremeant to clarify regulations. For regulations, SEBI has a more transparent method.

ight from the start, in 1992, before notifying any regulation, SEBI has issued a public concept note policy paper on the proposed regulations. For example, the SEBI (Insider Trading) Regulations of 19which were aimed at prohibiting insider trading, were preceded by a concept paper containing tobjectives, rationale and provisions of the proposed regulation. This concept paper was posted on SEBI website seeking comments and suggestions from the public. On receipt of the comments from public, these were internally debated within SEBI. The revised draft regulations, along with commereceived from the public, were then circulated for the consideration and approval of the SEBI Board.

SEBI also appoints committees to recommend the contents of regulations. The committees, which consisexperts as well as policy-makers, study the matter and present recommendations in a report. The reportrst gets placed before the public for a period of time for comments. At the end of this period, SEBI takesdecision, and the regulations are amended. On the day SEBI Board approves the regulations, the decisionthe SEBI Board is communicated to thepublic by means of a press release.

She goes on to discuss SEBIs other functions of enforcement, inspection and penalties. Also reviewsSAT appeals.

Overall it has been great going by SEBI. It has been very transparent in its operations and has evolvedwell overtime. She then recommends some changes right from its organisation to its functions.

I am not getting into all the recommendations. However, I would just like to add one. SEBI shouldhave good economists (both finance and macro) as well. Taking a cue from SEC which has justappointed (http://sec.gov/news/press/2011/2011-114.htm) Craig M. Lewis as Chief Economist, SEBIcould have such experts as well. It just helps connect many dots.

An amazing paper. Covers many aspects of SEBI functioning.
http://sec.gov/news/press/2011/2011-114.htm


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sebi’s objective and functions – a legal perspective _ mostly economics

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