A Securities Market Code on the Anvil for New India

Introduction 

With the Union Budget 2021 announcements, wheels have been set in motion for a consolidated framework to deal with securities laws under a single Securities Market Code (Code). In a move to rationalize and eliminate overlapping and outdated laws, the proposed Code would intend to consolidate the provisions of the SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and the Government Securities Act, 2007.  

Neither the FM’s Budget Speech nor the Budget fine print contains any details on the contents of such unified Code, though, the underlying intent seems to consolidate the legislation into a modern law and avoid regulatory entanglement. At this stage, however, an optimistic outlook guides us to suggest that a properly drafted Code for the securities and capital market framework, once effectuated would reduce compliance costs, friction between the stakeholders, avoid multiple regulators and provide policy clarity to investors, thereby allowing India to ascend on ease of Business ladder.  

Will the Code make SEBI a Super Regulator? 

SEBI, an outcome of early 90’s reform-era, has acted as the watchdog to monitor key aspects of the capital market transactions with regard to equity, debt, commodities and derivatives along with a vast number of investment vehicles such as mutual funds and foreign investors. Steadily, over the years, more regulatory oversight functions were developed upon SEBI. Integration of Forward Markets Commission in 2015 was another example. Budget 2021 has separately announced that SEBI shall take over the governance of gold spot exchange and a newly introduced form of investment vehicle, 'Pooled Investment Vehicle' within its regulatory fold.  

There is already a buzz amongst the stakeholders in view of the announcements of consolidation of the legislation as to whether there would be a complete overhaul of these laws into a renewed Code, making SEBI the Super Regulator. It would be interesting to examine whether the proposed Code will carry demarcation of powers of SEBI to avert perils of regulatory proliferation and the associated potential for turf battles. This is particularly important considering that the Supreme Court (in the context of SEBI versus IRDAI battle over unit-linked insurance plans) issued a clarion call back in 2010 towards a revamp of financial regulations, possibly hinting at the formation of a super-regulator by the Central Government. Recommendations for a super-regulator which unifies regulatory bodies, strengthening the financial sector and promoting financial inclusiveness were also made by Justice BN Srikrishna headed Financial Sector Legislative Reforms Commission in 2014. More recently, regulatory overlaps seem to have arisen between SEBI and NFRA in penalizing quality lapses by auditors and audit firms.  

Interestingly, the management and regulation of government securities (G-Secs) currently lies with the Reserve Bank of India (RBI), whereas trading of G-Secs along with other financial instruments on the stock exchanges is regulated by SEBI. Bringing the Government Securities Act under an umbrella with the SEBI Act and SCRA, which are the regulatory foothold of SEBI, poses potential overlap of powers yet again, this time between SEBI and RBI.  

The unified Code can therefore be an avenue for clarification of regulatory jurisdiction of these agencies. Further, the unified Code coupled with the Investor Charter (which is a separate announcement made by the Finance Minister in this very Budget speech) presents an opportunity to instil confidence in domestic and foreign investors, through customization of laws to provide for a flexible approach to international equity investing in response to changing market opportunities. 

Historical Review of the Securities Laws Framework 

A look at the history alludes to indicators of SEBI towering almost all aspects of financial regulation, through instances where consecutive amendments to the securities and capital market regime have converged into extensive powers to SEBI. 

Legal reforms in securities laws began with the enactment of the SEBI Act, 1992, which established SEBI with statutory responsibilities to (i) protect the interest of investors in securities, (ii) promote the development of the securities market, and (iii) regulate the securities market. The same year also saw the repealing of the Capital Issues (Control) Act, 1947 which paved way for market-determined allocation of resources. Later in 1995, an amendment to the Securities Laws Act extended SEBI’s jurisdiction over corporates on the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with the securities market. It empowered SEBI to appoint adjudicating officers to adjudicate a wide range of violations and impose monetary penalties.  

The SCRA of 1956, primarily aimed at preventing undesirable transactions in securities, already provides for SEBI’s direct and indirect control of virtually all aspects of securities trading through regulation of the business of dealing in securities (covering a host of market instruments including shares, G-secs, bonds, debentures and derivatives) and the running of stock exchanges. SEBI’s role in the regulation of foreign portfolio investors entering the debt segment including G-secs has also evolved with subsequent amendments to the Regulation. The 2014 Securities’ Laws Amendment facilitated setting up of a special SEBI court to fast-track the investigation and prosecution process, including granting approvals for search and seizure operations in suspected cases of frauds. Adding to this, in September 2015, the Forward Markets Commission which was the regulator of a commodity futures market was merged with SEBI, under SCRA to strengthen regulation of trading in the segment. Thus, history, if regarded as an indicator, also has the message of an empowered regulator. 

International Trends on Market Regulator 

Let us address this from another perspective to examine the possibility that SEBI may be conferred enhanced powers considering that its equivalents in foreign jurisdictions exercise oversight beyond capital markets players and intermediaries.  

To exemplify, in the United States, Securities and Exchange Commission (SEC) additionally oversees the functioning of the regulator of accounting firms - the Public Company Accounting Oversight Board (the equivalent of India’s NFRA) and overlooks consumer protection. In the United Kingdom, the market regulator Financial Conduct Authority houses regulator of anti-money laundering supervisory regime (Office for Professional Body Anti-Money Laundering Supervision). Will this inspire the Indian Parliament is a moot question, with a good likelihood of such possibility. 

Conclusion  

For the past two decades, SEBI has set the pace for regulation of capital markets while being sensitive to developments which could have a profound impact on the development of the securities market. It has time and again batted for forward-thinking measures, for illustration, SEBI’s endeavour to create Social Stock Exchanges and encouraging adoption and usage of FinTech through the latest revised framework for Innovation Sandbox etc. are amongst few examples of SEBI’s initiatives. Further, in its 2018 Report, SEBI had pushed for direct listing of Indian equity share capital with overseas stock exchanges, which finally attained fruition through an amendment to the Companies Act in September 2020. Keeping in mind SEBI’s evolution, a renewed Code giving more teeth to the regulator may auger well, compounded by the competitive edge that the announced Investor Charter may usher in for India. The directions of the Karnataka High Court in Franklin Templeton urging SEBI to be more proactive in mutual fund space may also find incorporation in the text of the consolidated Code. The paradigm shift in the regulatory and operational framework necessitates a more thorough review and critical analysis of such reforms. And just like with the experiences of the Insolvency & Bankruptcy Code, once past the initial hiccups, the Securities Market Code with SEBI as the Super Regulator might go a long way in simplification of securities laws towards steady development & enhanced integrity of the securities and capital markets and protection of investor interests. An area to be eagerly watched out for. 

Note: The author is a Partner BMR Legal. He was assisted by Madhura Bhat (Senior Associate). Views are personal.