Securities Market: On The Cusp Of Change

Context: Budget announcement of 2021, exactly 30 years after 1991, could be the beginning of the next round of financial sector reforms.

Financial reforms after 1991

• Starting with the Securities Exchange Board of India (Sebi) Act, 1992, there have been till now 14 legislative amendments to the laws relating to the securities markets.
• One constitutional amendment (to facilitate dematerialisation of securities) to reach the present state of the markets.
• These reforms were the foundations through which, today, we see that the overall market capitalisation of the equity market is Rs 230 trillion ($3 trillion), and foreign investors have a stock of investment in listed equities of Rs 43 trillion.

Issues with the financial sectors in India:

• Regulators having concentrated powers: This extreme power, placed into the hands of officials, sits uneasily with constitutional norms in a liberal democracy and creates a problematic level of unpredictability for a sophisticated market economy.
• Gap in the bond market and its associated elements (the bond-currency-derivatives nexus):
  • Many Indian firms are avoiding the traditional journey of maturity of an initial public offering in India and instead opting for overseas ownership/listing structures.
  • The funding of private firms needs to shift away from banks to the bond market, and this transition has been hampered by policy constraints.
• Unclear laws: The present laws are not clear on the objectives of consumer protection, prudential regulation, resolution, systemic risk regulation and market abuse.
  • For e.g. The present law on market abuse, the Sebi Prohibition of Fraud and Unfair Trade Practices Regulations, confers unbridled discretionary penal powers in the hands of Sebi and creates corresponding regulatory risk for private persons.
• Breach of separation of powers:
  • In two landmark cases, the Supreme Court has demanded democratic legitimacy in regulation-making (against TRAI in 2016) and proportionality in state intervention (against the RBI in 2020).
  • The more recent rulings about the National Tribunals Commission potentially raise concerns about the legality of judicial hearings conducted by regulatory officials.

Budget provision: Regarding financial sector reforms – Single securities code: Finance minister proposed to consolidate the provisions of the Sebi Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956, and Government Securities Act, 2007, into a rationalised single Securities Markets Code.

Way Forward:

• Refresh and Update: The Financial Sector Legislative Reforms Commission or FSLRC (2011-2015) material on the working of regulators, including the role and composition of the board.
• Bring clarity of objectives of financial market regulation where the FSLRC work is broadly complete.
• Build a financial agency architecture surrounding the bond-currency derivative nexus and Public Debt Management Agency.