India’s proposed securities market code holds promise but Sebi should be strengthened further

The Bill, which has been sent to the parliamentary panel on finance for comments and inputs, proposes to merge and replace three laws: the Securities and Contracts (Regulation) Act of 1956 and those related to the market regulator, Securities and Exchange Board of India (Sebi), and depositories. This was necessary to address multiple overlaps among those legacy acts of legislation.

The move is a follow-up of Sitharaman’s 2021-22 budget promise to consolidate various Acts into a single rationalized code. Broadly, the Bill is designed to strengthen investor protection, ease the compliance burden of sundry market operators and improve the overall governance framework for the market’s regulation.

The Bill proposes to achieve all this by increasing Sebi’s powers, strengthening market-infra institutions (such as depositories) and also decriminalizing a host of minor, technical or procedural lapses.

At first sight, the Bill’s tabling in the Lok Sabha may seem like rearguard action to bolster market confidence in the regulator and its regulatory capacity.

Doubts about Sebi’s oversight and investigative calibre were raised by perceptions in the wake of a US shortseller’s allegations against an Indian conglomerate, an episode followed by belated revelations of a big New York-based derivatives trader having manipulated indices and indulged in coordinated trades to accrue vast but allegedly illegal market gains. However, the fact that the FM had announced her single-code intention way back in February 2021 weighs against such a conclusion.

While a few aspects of the Bill appear to close gaps bared by recent episodes of market concern, its core purpose is to end the jurisdictional overlaps of outdated laws that made regulation both cumbersome and suboptimal. For example, the code is designed to bring stock exchanges, custodians, clearing corporations and depositories under a common umbrella.

Further, its ombudsman proposal will not only help shield investors better, but institute a structured mechanism for dispute resolution and grievance redressal, something India has lacked so far.

While there is no denying that such an omnibus code for India’s securities markets was long overdue, it is also necessary to point out that the code has some critical gaps.

One such lacuna relates to the regulator’s human capacity deficit. It is true that the code makes an extraordinary effort at adding heft to Sebi’s governance structure; it will expand its board size from the current nine to 15 members, with an allowance for a maximum of six independent directors with specialized knowledge of markets, law, finance and the economy.

The code will also grant the government the authority to oust any board member upon the discovery of a conflict of interest or impropriety. Yet, it shies away from proposing human resource structures that could deepen Sebi’s institutional and regulatory capacity.

As a regulator, Sebi is relatively young. Like the Reserve Bank of India, it needs to raise an independent cadre of personnel equipped with the regulatory skills needed to oversee fast-evolving markets with ever more sophisticated strategies at play. Hopefully, the parliamentary committee that’s looking at the Bill will give this issue some serious thought.