I am very happy to be here among the bright students of the Jindal
Global University and especially at the Centre for Regulatory Governance in the
Law School. My Regards particularly for the Vice Chancellor of the University,
Prof Raj Kumar have taken this initiative, which I must say is most needed–the
study of the regulators of India as its economy speeds ahead.
A critical question I shall address today is that of the accountability
of the regulators. In my discussions with Subhomoy (Bhattacharjee) I understand
this is an area where the Centre will be most involved.
I should begin by explaining that so far as the working of the
regulatory system in the country is concerned, and here I include all of them
like SEBI, RBI, IRDA, CCI and so on, all of them only have got regulation
making powers. The critical test to apply is what happens when it is discovered
that the regulation framed by a regulator is in conflict with the rules framed
by the government or the law passed by Parliament or the provisions of the
Constitution of India. We are very sure what will prevail and of course the
regulations framed by the regulators shall not prevail.
But then what happens when we are coming to a situation or a stage where
the regulation framed by the regulators has the force of law and that implies
they also have the force of law meaning the exercise of coercive powers.
So, the question arises, what should be the accountability of the
regulators. Here, I will also, just as an aside, would like to tell you that
when SEBI Act was passed, in 1992, the regulation making power of SEBI was
subject to concurrence and approval of the government. So, all the regulations
in draft form would be sent to the Ministry of Finance and based on whether the
Ministry of Finance would say yes or no, the decisions would be notified.
Subsequently, in their wisdom, the government and Parliament have
allowed that the law making power, the regulation making powers of Sebi as
exercised through the Sebi board do not require approval from the government.
The SEBI board is competent to do it and now the same applies to all the
other regulators.
So, now the question arises, how do you enforce their accountability?
There are various approaches to this question of accountability. By the way,
let me come back also to state that in post-independence India, we have
inherited a number of laws and regulations relating to commerce, trade and the
financial markets. The regulators have come up therefore not with a clean slate
but within a body of existing laws.
For instance the Companies Act was passed in 1956. Subsequently the
Security Contract Regulation Act, SCRA was passed. The Forward Market
Commission Act was passed.
The Controller of Capital Issues Act was passed. And you will be
surprised that almost all these acts happened within a span of two years,
1956-1957. These laws brought out a very new concept that there will be an
authority sitting in the government but it will be named differently.
For example, The Controller of Capital Issues sitting in the North Block
in the Ministry of Finance used to decide which company in which season of the
year could raise how much money and at what price. So if a company had to issue
shares, he could not decide. It was decided by the Controller of Capital
Issues.
Same was the situation with regard to the Companies Act, the Company Law
Board and others. The important thing to note here is that all these
authorities were part of the government. Most of the time these were designated
as attached offices. So if you were a Director or a Joint Secretary in the
government, you are also made Controller of Capital Issues or if you were DG
Investigation (income tax) or whatever.
The appellate power against their order was also given to a senior
officer in the same ministry. So if the Joint Secretary was passing an order,
the Secretary or a group of additional Secretaries would review it. The real
change which is relevant for all of you and for all of us is the real change
that happened in post 1991 and the first act to be passed was the Securities
and Exchange Board of India Act in 1992 where the concept of independent
directors came in.
So although the law was passed by the Parliament, it created a class of
independent directors who were not beholden to the government for their day to
day work. And I would also like to highlight here they were not beholden to the
government even for their finances. So they were allowed to raise their own
levies and through those levies they could be financially independent.
This meant an important way in which the government exercises
control over agency, by allocating finance to them was done away with. Just as
these independent regulators came in, the practice was repeated in all the
subsequent IRDA, CCI etc Acts. The laws were passed by the Parliament but there
was now a separate independent authority. Of course the chairman of that
authority was appointed by the government.
Now I come to the question of accountability in the new framework,
because here are a set of people operating away from the government and yet
they frame laws and those laws affect the rights of you and me, for example. If
there is something happening, if some mishap is taking place in the securities
market, I lose my money, where do I go? The regulator can pass orders against
any individual or any company and you know the powers are very, very serious.
Sebi is one of the most powerful regulators in the world today.
They can pass what is called the cease and desist orders. They can pass
several other types of order too. Another thing to be noted here is that in our
Constitution there is a separation of executive power, judicial power and
legislative powers.
But these new generation regulators had all three of them combined in
this, even today. So prima facie it will appear to you who are students of law
that this is in violation of the constitution. How is it possible? But that is
a fact.
And there are multiple examples where this matter has been taken to the
Supreme Court and the Supreme Court has held that because of the sensitivity of
the matter that they are dealing with, this separation will not apply and they
will exercise all the three powers. So Sebi has, as I said earlier, regulation
making power which is called subordinate legislation. They also have executive
powers. They also have policing powers. They can investigate a matter. And they
of course have quasi-judicial powers and the chairman and the member of the
Sebi can pass orders which are enforceable.
In fact, based on their orders people have been penalized for as high as
25 crore rupees or they have been barred from practicing in the securities
market for a period of 10 years or more. So imagine what serious powers they
have. So coming to accountability, yet the law provides that they are not
accountable to the government of the day.
This is again a concept which we have to understand and appreciate.
Because if the regulator is accountable to the government of the day, then day
to day political developments will start affecting its working. So there is a
conscious decision that they are not accountable to the government of the day.
So the question is who are they accountable to? Number one, they are
accountable to their board which has outside members. Secondly, they are also
accountable to Parliament. And the mechanism through which it happens is that
there is a committee of subordinate legislation of the parliament.
And all the regulations which are framed by the regulator have to be
presented before this. And within six months, the parliamentary committee on
subordinate legislation can decide whether this regulation is right or wrong or
it needs to be amended. They have that power.
Unfortunately, friends, not a single regulation has ever been studied by
the parliament, not only with regard to Sebi, but by anybody. So this is a very
serious lacunae in our country. While the government of the day doesn't have a
direct power, the Parliament through its committees is also not exercising the
power.
So one or two ways in which the governments try to control or hold the
regulator accountable is through the power of making appointments. So the
appointment making powers are there. I'll give you a very interesting case.
The rules framed under SEBI provide that the chairman of SEBI, for
example, can be appointed for a period up to five years. The word is up to. So
you can appoint him for one year also.
It is as per the law. It's not a violation. So the system which has now
become prevalent for the last 15, 20 years, that is they are appointed only for
a period of three years.
So the word in the notification is that the appointment will be
initially for up to a period of three years. Of course, if it is found that
there is nothing against that person and he can be given an extension, then he
is given a five year term.
The second way the government exercises control over these regulators is
through the mechanism of vigilance. You know, the government has several
vigilance authorities like CBI or the ED. If a complaint emerges, then the
vigilance agencies start working. And of course, the committee of the
parliament, the standing committee of finance and all, they can summon the
regulator.
In the past, whenever there has been a crisis, as you might have heard a
joint parliamentary committee is set up. So they can summon the authorities and
they can do this. Here I will take you to some recent developments in the USA.
The USA also follows almost the same thing. But in practice, it is very
different. For example, recently, the president of the United States has passed
what is called an executive order saying that no regulation can be passed by
any of the regulators unless they are approved by us.
So if the SEC in the USA wants to frame any regulation, the draft will
go to the White House. Similarly, the US Government has passed an order saying
the case for cryptocurrencies needs to be reconsidered. In the process the earlier
regulator Gary Gensler was asked to go. A new person, Paul Altman, has come. In
India, by the way, that does not happen. With a change of government, you do
not change the RBI governor or change the SEBI chairman. But there it
happens.
And the first decision he has taken as the new chairman is that
cryptocurrency, which Gary Gensler felt were very risky assets and they cannot
be held to be securities, he has allowed that to be done. And some of you might
be aware that even a very close family member of the president has himself
floated a new crypto asset. So these are the changes which are happening there.
There are many other areas on which we can talk subject to your
interest. For example, we can talk about how insider trading is prevented, how manipulation
and fraudulent practices in the market are controlled. What does SEBI do about
corporate governance? What is happening in the area of ESG? What is happening
in the area of ensuring that the corporate boards in India have diversity, not
only gender diversity, but other diversities.
But I'll stop here and I'll wait for your questions because I don't know
exactly which particular area you would like to study in depth or hear from me
in depth. So I'm stopping here. Please feel free to ask questions.
Q&A:
Q: Mr. Sinha, the first question I have for you is that in 2014, SEBI
floated a discussion paper that effectively banned equity crowdfunding. I
believe this was during your time. Could you take us through the thought
process as to why equity crowdfunding was effectively banned and it remains
prohibited even today?
Ans: The correct sequence of developments was the following. Without
anybody asking for it, SEBI floated a discussion paper to allow crowdfunding in
the country. Around the same time, there were several reports about
crowdfunding in the debt market in China leading to a serious crisis. I'm not
aware whether you are aware that there were mishaps involving about $200
billion in China. And one of the things which happened there was that the
providers of that platform, which were providing that crowdfunding, were
floating on the sidelines their own fictitious companies.
And those companies didn't exist, but people did the crowdfunding hoping
that they had come onto such a valuable platform, and they will get their money
back. Another experience and feedback which SEBI got was that nowhere in the
world has crowdfunding in equity markets succeeded.
What has succeeded is crowdfunding for a social cause or to some extent
for debt market. So the advisory committee of SEBI then decided and recommended
to SEBI board that it's too premature in the country to go towards that route,
so that was not allowed. However, what was allowed was that in alternate
investment funds, AIFs, if there are investors who are coming through what is
called the accredited investor route, then they should be allowed.
So that was provided. So in short, my response is that floating that
paper and also not taking it forward was a conscious decision in the best
interest. Can SEBI review it? Yes, of course SEBI can review it, but personally
I feel the time has not yet come.
Q: Just a follow up to that question. So having gone through some of the
orders that SEBI has passed and also those passed by the Registrar of Companies,
you don't impose a penalty on the platform which facilitated crowdfunding. It
is understandable that crowdfunding is not something that SEBI wants to take
up, but then why aren't the platforms being penalized if they are facilitating
something that's illegal?
Ans: They should be penalized because number one, under what law or regulation are these platforms running. I'll take you back to what is called the collective investment schemes or unauthorized money collections and this used to be very rampant around 2011–14. There is a very famous case, I am sure all of you have heard of, where SEBI had to take the strictest possible action. This was the Sahara case. Now by the way SEBI has a regulation called collective investment schemes regulation. We had to go through a laborious process of investigation followed by court cases before the company could be made to cough up its proceeds.
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