T K Arun
They also serve who stand and accuse. Hindenburg Research’s allegations against the Sebi chief should, regardless of the specific merit or otherwise of charges, lead to some systemic improvement of the regulatory regime.
Madhabi Puri Buch has denied the allegation of any conflict of interest – the context is past association with a fund related to the Adanis – either while Sebi investigated charges raised by Hindenburg against the Adanis or while issuing a show-cause to Hindenburg. Buch and her husband issued a statement yesterday.
Buch is the first person from the private sector to be appointed to head the markets regulator. She and her husband have had successful careers in corporate and financial worlds, saved amounts that look significant to most Indians, and invested those savings, including in overseas instruments.
The ethical nature of such investments has to be judged by the manner in which such savings were accumulated, and the normative legitimacy of the investment methods adopted. It would be wrong to proceed on the assumption that if the savings in question involve a confusingly large number of zeros, the confusion must be smoke emanating from a bonfire of ethics.
Past heads of Sebi have all come from within the govt, and they have done a decent job, too. India’s capital markets serve to let Indians deploy their savings to claim ownership of and/or returns from the economy’s productive capacity. The market is able to absorb large inflows from abroad and tolerate outflows, without being overwhelmed. Securities are dematerialised, trades are cleared and settled, with total reliability and speed.
It is the absence of such a functional capital market that lies at the root of China’s current property crisis: most Chinese see property as their most reliable form of savings, and buy second homes, and, in some cases, even third homes. Oversupply of real estate, financed through loans, can avoid a crisis only for so long. Thanks to a well-regulated capital market, India’s savings find more diversified deployment.
This does not mean that there remains no scope for regulatory improvement, in terms of structure or practice. Finance is a continuum and calls for unified regulation, with macroprudential regulation alone being left to another agency, say a committee of the central bank, as in UK, or, ideally, an economic advisory council. When different regulators oversee different segments of finance, the borders between the segments either go under-regulated or lead to turf battles.
To take an example, credit default swaps insure bonds against default. Should these be regulated by the insurance regulator or the bond market regulator? What public purpose is served by having separate regulators for pensions and insurance, considering that annuity plans are formulated by the insurance industry, making use of its actuarial expertise?
The accumulation stage of a pension fund is similar to the accumulation stage of a life insurance policyholder who refuses to die in a hurry. Why have two different regulators for govt bonds and corporate bonds? Fortunately, we have done away with separate regulators for commodities and securities markets, and never had the US idiocy of separating the regulatory responsibility for spot and forward markets.
These are problems of regulatory structure, fashioned by law and flawed policy. But regulators alone are to blame for deficient regulatory practice. India has a stunted market for corporate bonds, and only large companies, for whose custom banks grovel, have access to the bond market. The regulatory practice does not support a market for corporate control. In fact, the delisting norms reinforce incumbent control, at the expense of the small shareholder.
Some problems are created by uninformed investors, such as overvalued small companies. Others, by deficient regulation: for example, the futures and options market functioning virtually as a casino, rather than to hedge against risk. The budget’s solution of a higher securities transaction tax induces inefficiency, whereas regulatory action to significantly increase the lot size would preclude gambling by the small fry.
A practitioner from the industry is better equipped to improve regulation than a civil servant. The US markets regulator is headed by Gary Gensler, a Goldman Sachs veteran.
The service rules for Sebi staff are outdated – these bar employees from badla, for example, long after badla itself has been abolished. Regulation 64 bars employees from investing in equities, the restriction extending to spouses and children. More sensible is the comparable US regulation, requiring employees to not misuse privileged access to information, to have minimum holding periods and full disclosure.
The biggest change required in the regulatory regime is to make all regulators periodically testify before multi-party committees of legislators, as happens in US. This would give them autonomy from the executive, and yet hold them accountable to the ultimate sovereign, the people.
Buch deserves a chance to explain how her conduct entails no conflict of interest to a committee of elected representatives.
TK Arun is a senior journalist based in Delhi.
The article was first published in The Times Of India as The Point About Regulators Hindenburg Didn’t Raise.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Acknowledgment: This article was posted by Bhaktiba Jadeja, a research intern at IMPRI.
