Question

Discuss how the proposed amendments to the Securities and Exchange Board of India Act, 1992 will affect its autonomy.

Answer 1

Approach:

• Give a brief introduction about the recently proposed amendments to the SEBI act
• Write about Concerns related to the recent move and whether they affect the autonomy of SEBI
• Provide a conclusion based on the arguments provided.

The Securities and Exchange Board of India was established on April 12, 1992, in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

It protects the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.

Their activities are overseen by the government, though they are supposed to be autonomous - meaning the government will not interfere in their daily functioning or in the rules and guidelines they formulate for market participants. But there is a regular interface between the government and the regulators over several issues.

Recently, 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.

The proposal is not something not practised globally. “The Securities Exchange Commission, the capital market regulator of the US, also transfers its surplus to the government.

But the capital markets regulator feels that the proposal would result in compromising its “autonomy and its ability to function effectively” towards the progress and development of the Indian securities market.

Concerns related with the recent move:

• 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 it alleged that 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.
• Also, 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.
• 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. This can affect the health of India’s financial markets in the long run.
• The employees’ association of the SEBI criticised proposal as “regressive” especially since the SEBI did not have any mandate to raise revenue for the government.
• Since inception, SEBI is also subjected to CAG audit and so far, not a single instance of financial imprudence has been observed by CAG. Accordingly, the involvement of the government in capital expenditure approval, in addition to the process of board approval, will not add any benefit to institutional efficiency, but rather slow down decision-making and would be contrary to the principle of minimum government and maximum governance”.

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. 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.