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SEBI: Issues related to Autonomy of Financial Regulators in India [Mains Article]

The government’s proposal to transfer surplus money with the Securities and Exchange Board of India (SEBI) to the Consolidated Fund of India (CFI) has met with a strong opposition from the regulatory body.
By IT's Mains Articles Team
July 29, 2019

Contents

  • Introduction
  • About SEBI (Securities and Exchange Board of India)
  • Present scenario in terms of SEBI’s income, balance and expense
  • Proposed amendments to Securities and Exchange Board of India Act, 1992
  • Criticism of the amendments
  • Regulators in India
  • Suggestions for the independent working of Financial regulators
  • Key Facts
  • Conclusion

SEBI: Issues related to Autonomy of Financial Regulators in India

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Introduction

  • The government has proposed an amendment to the SEBI Act,1992 which proposes transfer of surplus money with the Securities and Exchange Board of India (SEBI) to the Consolidated Fund of India (CFI).

SEBI-IASToppers-1

About SEBI (Securities and Exchange Board of India):

  • The Securities and Exchange Board of India was established in April 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

SEBI--IASToppers

  • Its main purpose is to provide such an environment for the financial market enthusiasts that facilitate efficient and smooth working of the securities market.
  • To make this happen, it ensures that the three main participants of the financial market are taken care of, i.e. issuers of securities, investor, and financial intermediaries.

Functions of SEBI:

SEBI-functions-1-IASToppers

Protective Functions – These functions are performed by SEBI to protect the interest of investors and other financial participants which includes:

  • Checking price rigging
  • Prevent insider trading
  • Promote fair practices
  • Create awareness among investors
  • Prohibit fraudulent and unfair trade practices

Regulatory Functions – These functions are basically performed to keep a check on the functioning of the business in the financial markets which includes:

  • Designing guidelines and code of conduct for the proper functioning of financial intermediaries
  • Regulation of takeover of companies
  • Conducting inquiries and audit of exchanges
  • Registration of brokers, sub-brokers, merchant bankers etc.
  • Levying of fees
  • Performing and exercising powers
  • Register and regulate credit rating agency

Development Functions – SEBI performs certain development functions also that include but they are not limited to-

  • Imparting training to intermediaries
  • Promotion of fair trading and reduction of malpractices
  • Carry out research work
  • Encouraging self-regulating organizations
  • Buy-sell mutual funds directly from AMC through a broker

Organizational Structure of SEBI

The SEBI Board consist of nine members:

  • One Chairman appointed by the Government of India
  • Two members who are officers from Union Finance Ministry
  • One member from Reserve Bank of India
  • Five members appointed by the Union Government of India

Present scenario in terms of SEBI’s income, balance and expense

  • The general fund of the SEBI, which currently has a balance of over ₹3,000 crores, is used to meet the expenses of the regulatory body, including salaries and allowances.
  • The general fund is funded by the registration or processing fees levied by SEBI on market participants. But all the penalties levied and settlements of the SEBI are added in the Consolidated Fund of India (CFI).
  • SEBI is also subjected to Comptroller and Auditor General (CAG) audit and so far, not a single instance of financial imprudence has been observed by CAG.

Proposed amendments to Securities and Exchange Board of India Act, 1992

  • The amendments propose that the SEBI should obtain the approval of the Centre, in addition to that of its own Board, for all capital expenditure plans.
  • As per proposed amendments, SEBI would constitute a reserve fund and 25% of the annual surplus of the general fund of SEBI would be put in the reserve fund. SEBI will have to transfer the remaining 75% to the government.
  • The Reserve Fund is proposed to be capped at two year’s annual expenditure.

Criticism of the amendments

  • A regulatory agency that is at the government’s mercy to run its financial and administrative operations cannot be independent.
  • Instead of putting into surpluses in CFI, the surpluses of SEBI have potential to lower the steep fees levied on market participants to aid market development,
  • Lack of financial autonomy can affect SEBI’s plans to improve the quality of its operations.
  • Lack or delay in investing in new technologies and other requirements to upgrade market infrastructure, can affect the health of India’s financial markets.
  • Centralisation of power by consolidating all existing regulatory powers under the Finance Ministry can be risky.
  • The proposed amendments will impair the ability of SEBI to invest in regulatory capacity-building.
  • Transferring surplus funds of SEBI to the CFI is a kind of additional tax on market participants.
  • SEBI will not have more than Rs 1,000 crore to transfer to government, which does not make any large impact in the government’s earnings.

Regulators in India

  • RBI is India’s oldest regulator and was set up under the Reserve Bank of India Act of 1934.

RBI-IASToppers Issues related to Autonomy of Financial Regulators in India

  • The regulators were constituted due to the various economic reforms of India.
  • The regulators are necessary for ensuring a level playing field, promote a predictable regulatory environment, democratize decision-making and balance conflicting interests.
  • Thus, the Telecom Regulatory Authority of India (TRAI), Electricity regulatory commissions (CERC/SERC), the Insurance Regulatory and Development Authority of India (IRDA) and the Securities Exchange Board of India (SEBI), among others, were constituted.

Issues related to Autonomy of Financial Regulators in India:

SEBI-regular-IASToppers SEBI: Issues related to Autonomy of Financial Regulators in India

  • The Financial regulators have been constituted by various acts of Parliament. Before the enactments of these regulators, the parliament was responsible for the work regulators are doing currently.
  • Following the economic liberalization of 1991, the autonomy to these regulators has been progressively strengthened.
  • However, there are provisions for the Union government to give directives on matters pertaining to public policy to theses regulators.
  • When these functions were part of the executive, legislative supervision was exercised through parliamentary questions, special debates on issues pertaining to various departments etc.
  • However, these mechanisms are not ordinarily available in respect of independent regulators.
  • In other parliamentary democracies, there is parliamentary interference by creating a special institution to fill this gap. For example, in the US, the house committee on financial services and the senate committee on banking, housing and urban affairs have jurisdiction over matters pertaining to the US Federal Reserve and federal monetary policy.
  • The excessive parliamentary interference can undermine the functional autonomy of financial regulators and may destroy their basic rationale.
  • Hence, there is always a question on when and where central government should interfere in the functioning of these regulators.

Suggestions for the independent working of Financial regulators

  • The existing departmental standing committees of Parliament should not examine the working of independent sector regulators. Instead, departmental standing committees should include members from the financial regulators.
  • To ease the burden on standing committee on finance and planning, a special committee like the committee on financial and regulatory management can be created which periodically interact with the RBI and other regulators in the financial sphere such as SEBI and IRDA.
  • In the non-financial sphere, the concerned parliamentary departmental standing committees could constitute specialized sub-committees designed to interact with sector regulators on policy-related issues.

Key Facts

  • The Finance Bill, being a Money Bill, is typically used to pass tax-related laws.
  • It is not voted upon by the Upper House i.e. Rajya Sabha.

Conclusion

  • Regulatory agencies such as SEBI need to be given full powers over their assets and it should be made accountable to Parliament.
  • Stripping them of their powers will affect their credibility.
  • At the same time while demanding greater financial autonomy, regulators must also show themselves to be accountable to the public by being more transparent about their financial affairs.

 

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