Two former chairmen of the Securities and Exchange Board of India (Sebi) have, over the last four months, called for studying the impact of regulation, so that it can be factored into decision-making. M. Damodaran, speaking at the recent Mint BFSI summit, argued that Sebi must convey the rationale of its decisions effectively because regulation must protect investor interests in appearance as well as substance.
Earlier, in a Mint op-ed, G.N. Bajpai had suggested four yardsticks for assessing Sebi’s decisions: Clarity of rationale, openness to public scrutiny, the conduct of an independent review, and an economic cost-benefit analysis. These words of advice are welcome. Independent assessments of Sebi’s calls must routinely be carried out.
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However, this evokes the question of who would hold Sebi to account—and oblige the regulator to make amends—if a review finds shortcomings. Right now, there is an institutional vacuum over the accountability of not just Sebi, but most of India’s autonomous regulators. In the case of our market regulator, a good way to plug that gap is to make it accountable to Parliament’s Standing Committee on Finance.
A vigilant media and an informed discourse based on its coverage of regulatory action and its impact would be necessary but not sufficient. Earnest evaluation calls for academic rigour and systematic gathering of evidence. A specialized body like the National Institute of Securities Markets can certainly help. Others like the Indian Institutes of Management and the economics faculties of universities could chip in. Parliamentary panels should be able to assemble ad-hoc teams of experts to study problems and submit reports.
The development of sound expertise in diverse fields, after all, is among the reasons we have invested in a higher-education system. We need wide-angled analysis. Often, regulatory efficacy is constrained by government policy and taxes. India’s stiff transaction levies on securities, for instance, impedes the working of the derivatives market—which recently attracted Sebi action. Insurance being overseen by a regulator different from the one that supervises bonds could get in the way of credit default swaps and hinder the evolution of our market for corporate debt. Rigorous studies of the impact of regulation, policy and taxation would help improve market efficiency.
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Are panels of legislators qualified to examine the working of sophisticated institutions like financial markets? Do enough lawmakers delve into high finance? How well are they equipped to resist lobbying by various vested interests? Such fears are misplaced.
We do not need our elected leaders to know the Black-Scholes formula for pricing options. They merely need to have clarity on where the common good lies, identify the issues that arise in a specific context and summon the relevant domain expertise. They should be able to call for expert panel findings that are open to peer review, ask regulators the right questions, and elicit answers that tell their own story to the public at large.
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We trust our MPs to form complex laws that govern our lives; they can be trusted with the oversight of regulators as well. Small investors put their money in diverse market securities, despite being at the raw end of an enormous information asymmetry vis-à-vis their issuers. Their MPs must secure their interests—not their returns on investment, but by assuring them market fairness and efficiency. That’s not just good economics, but good politics too.
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