The tendency to elevate form over substance applies to almost everything we do; it is especially true for government policies on investigation, regulation and enforcement agencies.
Consider the latest kite-flying about formalising the High Level Coordination Committee (HLCC) on financial markets. The HLCC, when it came into being, was headed by the finance secretary and comprised the governor, Reserve Bank of India (RBI) and the chairman of the Securities and Exchange Board of India (SEBI). The idea was to ensure regular coordination between the government and these two independent regulators, in the aftermath of the securities scam of 1992. The insurance and pensions regulators were included later; the Ministry of Corporate Affairs (MCA) needs to be represented in the HLCC too. The creation of independent regulatory bodies itself was part of a larger process of deregulation and transfer of power from bureaucrats at the finance ministry and the MCA to efficient and focused independent regulators.
The past couple of decades have seen two other developments. Independent regulators have turned into blinkered and bureaucratic fiefdoms while liberalisation and the rapid strides in automation and technology have led to global capital flows and made markets efficient and innovative. In India, derivatives trading in stocks, commodities and currency has led to regulatory overlap and inevitable turf issues. This is likely to bring regulatory power a full circle with the proposal to create a super-regulator for financial markets with the objective of eliminating turf issues.
Proponents of the super-regulator concept argue that each regulator needs expensive ancillary infrastructure such as ombudsmen (based on the success of the banking ombudsman scheme) for faster grievance redressal and appellate tribunals against regulators’ orders. A super-regulator will allow for the creation of common infrastructure and also formalise coordination between the regulators. The Financial Services Authority of UK has often been recommended as a model to emulate.
Today, exchange-traded currency derivatives have a formal regulatory overlap while the corporate bond market has failed to take off due to turf issues between the two. Similarly, there are bound to be issues between SEBI and the Forward Markets Commission (FMC), which regulates commodity derivatives and does not report to the finance ministry. A move to bring the FMC under SEBI was earlier shot down by Sharad Pawar as minister for agriculture & consumer affairs, but it has been revived through the recommendations of two committees headed by Percy Mistry and Raghuram Rajan. But this suggestion hurts the RBI more than the commodity regulator and has been vociferously, and correctly, shot down by RBI governor Dr D Subbarao.
But the effort to bring multiple regulators under a common statutory structure by formalising the HLCC continues. This again is a recommendation of the Raghuram Rajan committee. While the idea may have a strong theoretical basis, it must take into account the reality of SEBI’s regulatory structure, organisation and effectiveness.
In the past few years, there has been a systematic effort to whittle SEBI’s stature and even its whole-time members today are lower in seniority (in terms of government service) and market-related experience than its executive directors until a couple of years ago. Naturally, all regulatory power is concentrated in the post of the chairman. In fact, market intermediaries point out that the finance ministry’s capital market division has now become the centre of power. This is hardly conducive to expanding SEBI’s role.
Another issue merits examination. Pay-scales and perks at SEBI and other market intermediaries have turned these jobs into attractive career opportunities for IAS officials who use their clout to first grab deputation assignments which then become a stepping stone to top jobs in the capital market. Two joint secretaries who headed the finance ministry’s capital market division and SEBI chairman, CB Bhave, have quit the IAS to do just that. If Wall Street is notorious for dictating to Washington DC, it is the reverse in India. Babus have their cake and eat it too.
A super-regulator will only mean that we will be back to where we started, with the finance ministry in charge of markets and their regulation and development, except with a bigger and more expensive bureaucracy that collects fees from market participants. The route to creating a super-regulator would be to formalise the HLCC through a statute, as recommended by the Raghuram Rajan committee. A newspaper report quoting unnamed sources says that a formal HLCC will force members, who are all chairmen of independent regulatory bodies, to share information that could have systemic implications. Right now, they don’t.
Isn’t this strange? Regulators are appointed on the recommendation of the finance ministry and they are not constitutional posts whose incumbents cannot be removed before their term ends. Is it conceivable that members of an HLCC headed by the finance secretary will not share information? After all, the regulators and the ministries are also answerable to Parliament. And if, indeed, they do not share information, how will a statutory status to the HLCC help?
Interestingly, the Rakesh Mohan committee on financial sector assessment, which submitted its report in March 2009, felt that the HLCC was a formal enough platform for sharing information, but needed better delineation of its role and function. This committee, too, had a strange suggestion. It wanted the HLCC, which is a group to top regulators, to include market participants through representatives of self-regulatory organisations (SROs). Surely, the Rakesh Mohan committee would know that there are no effective SROs in the financial sector. Even stock exchanges, the first line of regulation, prefer to limit their enforcement activity to market intermediaries and are notoriously unwilling to expand their regulatory role even to crosscheck corporate disclosures made under the listing agreement.
Instead of meddling with regulatory structures, we need to focus on effective regulation, supervision, disclosures and enforcement. And, as Moneylife points out every fortnight, there is plenty to be done on all these fronts to build public confidence. Isn’t it time we had a committee that examined why India’s investor population is so low, while stock indices and trading turnover have soared dramatically?