Immediate challenges for new Sebi chairman

Within Sebi, the chairman should hold an umbrella for both young and old employees

By Somasekhar Sundaresan

Very soon, will take charge at the Securities and Exchange Board of India (Sebi) as the new chairman. The task requires calm reflection on the problems on hand, and a mind open to fresh ideas and innovative thinking. The capital markets regulator is at a crossroads.  Never in the regulator’s history has this role been more complex than it is now. Here is a brief heads-up with pointers to what needs immediate attention.
First, is in crying need of a peacetime general. The very assumption of this office can make some incumbents believe that they are now at war with the big bad world of securities markets. As an institution, there is excessive focus on regulation of market conduct and lesser emphasis on prudential regulation. (The is diametrically opposite in approach. Both need adjustment).
Never have Sebi’s statutory enforcement powers been more extreme.  Contrary to popular belief, is armed with far greater power to inflict serious economic injury than counterparts in the and the UK. needs to convince no judge before imposing serious restraints on economic activity. Routinely, this is done based on suspicion, leaving it to those affected to shoulder the burden of disproving the suspicion — somewhat like preventive detention. The check and balance is appellate review after has drawn blood. The onus is then on the person challenging Sebi’s conduct to show that it was wrong in taking action.
Sebi’s legislative powers, too, are near absolute. The Act grants wide discretion to to make subordinate legislation. Prior consultation with the market, a reasonable articulation of the link between the proposed solution and a problem statement, and a system of review of regulations to see if they have met the articulated purpose are substantially missing. There is indeed some form of selective public consultation but neither a statement of what problems are being sought to be solved nor a timely review of whether the solutions have indeed worked is mandated either by law or by a policy approach.
As a result, the fear of the regulator is widespread. With serious powers at hand, it takes maturity to structure the role into one of maintaining peace rather than of being ever ready to declare war. This is an attitudinal change that is necessary. Hundreds of inputs about the market being full of crooks necessitating a crackdown and severe intervention would be received. It would be easy to get carried away. Headlines screaming about the absence of powers or being toothless despite having powers would further an urge to lash out without thought. Eschewing a carpet-bombing approach and sifting the grain from the chaff are what the job at the top entails.
Second, the primary market regulation needs deep review and research as to what can be done better. The size of funds that get raised can never be a barometer of success for how this segment of the market regulation is performing. Securities offering documents are extraordinarily bulky, barely tell a story in clear terms and have substantially been reduced to bulky formal compliance rather than resulting in substantive disclosures of high quality. Cleaning up the policy space in this area of the market is a critical immediate objective to which the new chairman must apply himself.
Third, a review is overdue in the M&A space. It has been nearly six years since the “new” takeover regulations came into effect. Today, India is a unique jurisdiction where one body of law (takeover regulations) forces an acquirer to potentially cross the maximum limit of substantial shareholding permitted in a listed company while another body of law (listing conditions) forces the shareholding back down to compliance and a third body of law (delisting regulations) would need to be complied with if the intent was always to maximise shareholding and delist the company. Transaction costs mount, transaction timelines prolong unreasonably, defeating the very objective of mandating an exit opportunity by making an open offer for public shareholders to tender their shares.
Finally, Tyagi must give special attention to human resources and matters within the organisation. Too many junior officers have been tempted to be indecisive or to take wrong but safe decisions thanks to vigilance probes and hounding of honest bona fide decisions.   is now well over 25 years old, and a full cadre of loyal employees is available at hand, despite the organisation having been the poaching ground for the private sector. Enthusing smart bright talent inside and leading them from the front to shield them from unfair targeting in criminal anti-corruption probes have to become a priority. Alignment and fitment of senior employees upon merger of the Forward Markets Commission into remains an open area of work. To begin with, Tyagi must ignore his own HR problem — his tenure was shrunk from five years to three even before he could take charge. As a seasoned bureaucrat, he would know that this the way of the government systems; there is nothing personal in it. But many in the organisation may not be seasoned in the ways of the government but would be highly talented in handling their regulatory work.  Holding an umbrella for them and bringing in respect for punctuality and professionalism and rewarding them for it would help him create a legacy during his tenure.
This was published as my column titled Without Contempt in the Business Standard edition dated February 23, 2017

No Relief without Interim Relief

By Somasekhar Sundaresan

It is raining interventions from constitutional courts across nations. A court in the United States passed a temporary restraint order against newly elected President Donald Trump’s executive order to abruptly stop the entry of individuals from seven Muslim-majority nations from entering the country. The of the United Kingdom has ruled that parliament cannot abdicate its role in handling through just a referendum. A high court in Kenya has intervened to strike down laws that provide for criminal action against defamation.

Of course, we too have a robust and vigilant culture of constitutional review by the higher judiciary where executive actions are challenged. Not too long ago, the struck down of the Information Technology Act, which it found would curb free speech.

However, as a practical matter, the record can get patchy in terms of granting urgent temporary restraints on executive action or even legislative action. In other words, say, a new law has been passed by Parliament, and its constitutional validity is challenged. It would be a high expectation that the operation of the law would be restrained as an urgent, interim measure while the court considers full-blown proceedings on all aspects of its merits. Indeed, such stay orders do get issued. The point is that they can be really tough to get.

The state gets away with a lot — particularly in “heavy matters” where terms such as “national security”, “interests of investors”, “public interest”, “integrity of securities markets” can be invoked, and a law officer representing the government is willing to raise the decibel level about tragic outcomes if the judiciary were to stop a decision by the government. Eventually, the courts may rule on the constitutional validity of a law (it is tougher if the law has been in play for a while, as compared with a newly introduced amendment) and hold that the law is unconstitutional.  Likewise, without granting any temporary restraint, courts could eventually hold an executive decision to be unconstitutional. At times, this could lead to a situation of “operation successful; patient dead” (for example, Maneka Gandhi’s challenge to her passport being taken away).

Judge James Robart, the US District judge who stayed nationwide the enforcement of Trump’s executive order (incidentally, carrying a grandiose title: “Protecting the Nation from Foreign Terrorist Entry into the United States”), says it well in his concluding paragraph.  The entire portion is worthy of being reproduced:

Fundamental to the work of this court is a vigilant recognition that it is but one of the three equal branches of our federal government. The work of the court is not to create policy or judge the wisdom of any particular policy…  That is the work of the legislative and executive branches and of the citizens of this country who ultimately exercise democratic control over these branches.  The work of the judiciary, and this court, is limited to ensuring that the actions taken by the other two branches comport with our country’s laws, and more importantly, our Constitution. The narrow question the court is asked to consider today is whether it is appropriate to enter a (temporary restraining order) against certain actions taken by the executive in the context of this specific lawsuit. Although the question is narrow, the court is mindful of the considerable impact its order may have on the parties before it, the executive branch of our government, and the country’s citizens and residents. The court concludes that the circumstances brought before it today are such that it must intervene to fulfil its constitutional role in our tripart government.

The states of Washington and Minnesota had challenged Trump’s order. Trump had won an election on the promise of bringing in such restrictions on the entry of Muslims and also refugees. But if that popular measure is not in line with the Constitution, the court would intervene. Perhaps, another judge may have had a different view.  Indeed, one could argue that there are as many courts as there are benches of the court. So far, none has in the USA.

Shift to India. The law enabling the creation of the Aadhaar system was pushed through by labelling it a money bill to avoid a discussion on the floor of the Rajya Sabha. The Speaker of the Lok Sabha has certified it to be a money bill (the Rajya Sabha has next to no say in draft laws that are money bills). A constitutional challenge is pending in the and one of the issues to be considered is whether the “final” nature of a Speaker’s certification can at all be questioned. We will all know eventually, many years down the line, but Aadhaar would become a way of life by then.

Same is the story with Courts were indeed approached the morning after the government declared 85 per cent of the currency in circulation to be illegal — quite similar to an abrupt and arbitrary stoppage of people from select countries entering the US regardless of whether they were US residents. No court intervened with a stay order. If the executive branch were to say that the move is aimed at fighting terrorists using counterfeit money, there is not much left to expect. We would end up eventually with guidelines on how the government and the Reserve Bank of India must conduct themselves. And when that happens, courts would in fact be dispensing wisdom on executive action — exactly what Judge Robart warns against.


This piece was published as my column titled Without Contempt in the February 9, 2017 edition of Business Standard.