The Hindu Business Line : Will SEBI bite, at least now?

THERE is now every reason for investors in the markets to hope that the Securities and Exchange Board of India (SEBI) will play a more effective role in safeguarding their interests. SEBI now has the powers of search and seizure that it has been asking for quite a few years now.

For much of the past decade, SEBI has put in place a fairly comprehensive regulatory framework (though it can still be bettered) and improved the trading and settlement structure beyond recognition. But when it comes to such key issues as price manipulation, insider trading and, in general, implementation and decision-making, the quality of its work has left a lot to be desired.

SEBI has often cited the lack of powers as a reason for its inability to play a more effective role. The SEBI Act has now been amended to make some key changes in the functioning of the apex regulator of the capital market. What do these changes mean for SEBI and investors? :

Search/seizure powers: This should enable SEBI to enforce the regulations and investigate violations more effectively and on time. So far, even if the circumstances warranted such action, SEBI had had to depend on other investigative agencies for action.

This arrangement had room for delays, problems in co-ordination and, to some extent, even differences in the understanding of a given situation. Now SEBI will be able to carry out enforcement and investigations on its own, making its response to complaints of violations quickly and effectively.

But surveillance, enforcement, investigations and penalties form one integrated component of the functioning of a regulator such as SEBI. The problem with SEBI has been on the surveillance front as it has made barely any impact in the area of tackling price manipulation, insider trading and informed trading. Unless SEBI gets its act together here, no amount of new powers can tone up its performance.

Broad-based board: The board of directors of SEBI is to be enlarged from six to nine. This exercise, which would also create three full-time directors, should help improve the quality of SEBI's oversight of the market. It would also allow SEBI to have a board with experience in a variety of areas. Rather than inducting corporate chieftains, the attempt must be to induct people of quality, integrity and credibility who would play an effective role in implementation, which is the major problem area.

More accountability: In a much-desired move, the wings of the SEBI Chairman in decision-making have been clipped. Now the Chairman's decision in various cases would be subject to oversight and approval by the entire board. This should lead to better quality decision-making in cases involving violation of the regulatory framework. The scrutiny and approval by the board would be after the SEBI Chairman pronounces the orders. This appears to be a suitable arrangement.

Decision-making quality has left a lot to be desired as almost every SEBI decision in major cases such as BPL, Sterlite, Videocon, Anand Rathi and Associates, and Hindustan Lever has been overturned in the appeals process. The conviction rate in major cases has been poor and this does no good to SEBI's credibility. In this backdrop, the proposed change assumes importance.

Overdue SAT expansion: The Securities Appellate Tribunal has been expanded from one member to a bench of three.

This is also a desirable change as a more broad-based appeals process is always better than one-man decision making (though it must be noted that SAT's decision-making, despite being a one-man body till now, has been superior to that of SEBI).

More punitive penalties: A key area where SEBI had been hampered was in the area of penalties it could levy. The maximum monetary penalty that it could impose was Rs 5 lakh, which companies and market players cough up easily, even readily, as their benefits from infractions of the regulatory framework tend to be much larger. This penalty structure neither disgorged the ill-gotten profits nor was it of an exemplary nature.

Now the penalties that SEBI can impose have been raised to Rs 25 crore or three times the ill-gotten profits. This appears to be a more realistic level of penalty structure and could be exemplary if imposed without any room for escape.

Clearly, SEBI's emerging structure is much better than what it has been so far. If it functions under the new framework and powers objectively, with a high of integrity and devoid of extraneous influences, it may be able to improve its image as an effective regulator.

Much would depend on the quality of manpower and leadership at SEBI now. The track record of the last seven-eight years in implementation does not inspire confidence.

But investors would expect SEBI to now become a body whose actions are more effective and carry a higher degree of credibility.

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