A second question relates to Sebi’s autonomy. The amendment proposed to the Sebi Act, as part of the Budget, to require Sebi to take the government’s permission for making capital expenditure, does curtail the regulator’s autonomy. This is overreach by the finance ministry. To transfer surplus funds to the Consolidated Fund of India, there is no need to make the markets regulator run to a finance ministry joint secretary to clear the purchase of a new desk for the Sebi chairman. Independent regulators should not be in a subordinate position to the government. At the same time, they should be accountable for their work. As of now, the accountability framework is vague.
Ideally, all independent regulators should be made accountable to the relevant standing committees of Parliament, and should periodically testify before these bodies of the people’s representatives on what they do and why they do what they do. This would bring greater awareness about their working in society at large. Changes should be made to the relevant laws that created the statutory regulators to make them accountable to a committee of Parliament, rather than to a department of the executive.
The third question is what should be done with funds worth thousands of crore rupees that have accumulated with Sebi? In the bad old days, Chief Financial Officers of public enterprises used to make money as commission from the bank where it chose to deposit its free cash. There is no need to present Sebi with such opportunities. After keeping a prudent buffer with itself, Sebi should, indeed, transfer surplus funds to the Consolidated Fund of India.
And the fourth question is, is there no productive, market-regulation-related use for Sebi’s funds? Regulatory research offers itself as a productive use. There will always be some spokes around which you need to fit a band of steel, even after setting aside all the wheels that have already been invented.
Take Blackstone’s innovative triggering of credit default swaps. It identified companies in relative stress, bought credit default swaps — a form of insurance on bonds for repayment of the principal — on a series of bonds issued by a stressed company, offered the company attractive financing in return for triggering a default event on the bonds, which resulted in those who wrote the credit default swaps having to shell out money to the CDS holder, namely, Blackstone. All of this was deemed legal. But it clearly failed the smell test for determining where it stood on the scale from roses to rotten.
How should an Indian regulator respond to such innovation by a powerful private equity fund, as and when the Indian bond market matures to enact such drama? Surely, this is worth finding out, taking the help of experts in finance and law.
Is it possible to use insurance as an instrument to discipline rating agencies? Suppose rating agencies were liable for making good the loss, at least a fraction of it, arising from investment decisions based on their rating. Suppose, further, the rating agencies could buy insurance to cover themselves for the liability arising from being sued for wrongful rating. Would not the rating agencies then have an incentive to build up a credible track record that would minimise their premium outgo on such liability insurance?
Just a thought.
More worthwhile thoughts could be explored, if Sebi were to devote some of its funds to research in regulation of financial markets.
The money left over after financing its routine expenditure, a reasonable buffer and regulatory research should indeed make its way to the Consolidated Fund of India. That would not circumscribe its autonomy.