Will SEBI celebrate its 40th birthday? Reflecting on its silent transformations

This post is coauthored with my colleague Prof Parag Patel of Ahmedabad University.

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Many a times, transformations begin with small words and little attention. Such is the case of Securities Exchange Board of India (SEBI) which started in 1988 amidst high political and financial turbulence, but gradually took control and shaped Indian capital markets like never before.

As SEBI turned 30 in 2018, we should reflect on its amazing journey, both by drawing lessons from its history and suggesting a way going forward. Post-1991, we have made tremendous progress in financial markets but role of SEBI has been largely unnoticed and underappreciated.

First some history. On 28th February, 1987, Rajiv Gandhi who was doubling as both Prime Minister and Finance Minister in his budget speech proposed establishing a regulator for securities markets:

“The capital markets in India have shown tremendous growth in the last few years. Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87. They were only about Rs.500 crores in 1980-81. For a healthy growth of capital markets, investors’ rights must be fully protected. Trading malpractices must be prevented. Government have decided to set up a separate Board for the regulation and orderly functioning of Stock Exchanges and the securities industry.”

What must have read as another budget promise, was going to turn out to be a change agent. The Finance Minister would himself have not realized that this was about to change the landscape of Indian financial markets forever.

A year later, on 29 Feb 1988, then FM ND Tiwari in subsequent Budget speech added that “Necessary legislation in this regard is under preparation and the Board is expected to become operational soon.” Eventually, SEBI was formed in 1988 as a non-statutory body for regulating the capital markets.  It took four years for SEBI to get statutory status which was accorded by then FM Manmohan Singh in his landmark Budget speech on 24 July 1991.

SEBI started with a three-fold mandate. First was protection of interest of investors which was shaken during the 1992 scam. Second was development of securities markets which is interesting as India was home to several regional stock exchanges including the oldest in Bombay in 1875. However, the opportunities to invest were limited to a few people and funds available to a few companies. Both ownership and investment had to be made accessible to a larger pool. Third, was obviously regulation of securities markets. The Indian markets so far were governed by Controller of Capital Issues which was seen as inadequate and cumbersome and done away with as specified in the 1991 Budget above.

The timing of starting SEBI could not have been worse as the country was going through high political uncertainty and was about to witness an economic crisis coupled with a major scam in equity markets. However, one could take this more positively as crisis provides a steep learning curve. Fortunately, both the Government and SEBI took the second option. What we saw in the next two and a half decades is nothing short of extraordinary. The IPO pool has been widened to a large set of companies, small investors have much more opportunities to invest in capital markets especially via the mutual fund route, foreign investor participation has increased manifold and so on. SEBI also had a unique structure wherein it was given judicial powers as well. SEBI Act also went through multifold changes since inception.

Realising the strong control of Bombay Stock Exchange on Indian equity markets, the Government and SEBI first decided to break this monopoly. They nurtured National Stock Exchange (NSE) in 1993 which was demutualized and used state of the art technology right at inception. The regulator is often criticized for favoring NSE over other exchanges but the times demanded a stern action else all would be lost. NSE over the years has not just used best global best practices but has itself become a global benchmark in many parameters.

This was followed by action across all aspects of capital markets from trading to settlements to investments to corporate governance and so on. The trading and settlement cycle has been brought down from t+5 to t+2, all the trading has moved to screen based providing both transparency and investor comfort, ensuring retail participation in IPOs etc. One of the biggest changes have been the way mutual funds have been marketed to small investors allowing them to participate and diversify their savings. Equally important has been the way we moved from a paper based share system to an electronic demat system. The role of NSDL was also central to this transition.

One of the best moments in history of Indian capital markets was seen during the 2008 crisis. The crisis saw a few regulators in developed countries ban short-selling of stocks. SEBI which had just turned 20 showed remarkable and confidence and did not execute any such bans despite pressure from markets. This strategy of developing markets yet allowing markets to find their own trajectory is perhaps the best way to sum the tenure of the regulator.

The agenda is not to keep listing SEBI’s achievements. Instead, we need to learn how institutions develop and shape behaviors overtime. Late Douglass North, Nobel laureate in economics, defined institutions as humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).

SEBI has clearly contributed in shaping both formal rules and informal constraints in Indian securities markets. Yet, it remains the unsung hero of India’s reform story since 1991. How else does one explain that there has been barely any coverage of the institution touching this milestone of 30 years? This is a kind of history which should not just be reflected upon (time & again) but also told across the world. It is not very often that a developing country builds a world class institution for the world to emulate. SEBI is clearly in that league.

We also need to reflect on SEBI’s future going ahead as perhaps it will not celebrate its 40th year. The FSLRC and India Finance Code has recommended merging SEBI with all three other financial regulators (SEBI, FMC, IRDA and PFRDA) into a new unified agency. The idea is that a unified regulator will cover the gaps which exist in current financial product space where insurance funds can be sold as investment products and vice –versa.

We do not know the current status of FSLRC but its suggestions have been implemented in piece-meal form. RBI has adopted inflation targeting regime and devolved the powers of setting interest rates from RBI Governor to a Monetary Policy Committee. SEBI and FMC (Forward Markets Commission) have already been merged. We have to wait and watch whether the higher authorities do go ahead and merge all the four regulators into one single agency or not. Given SEBI’s success, we could even merge the remaining two with SEBI but this will require fighting turf wars and political capital.

Till then, let us step back and congratulate SEBI for its achievements and shaping Indian equity markets. We could obviously also make a case of SEBI’s misses and argue for its glass being half empty. Even then, the achievements in glass half full needs to be complemented and appreciated..

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