There has been various parallel systems for organized financial trading in India. SEBI handles equity market, RBI handles bond-currency-derivatives, FMC for future market commodity at the same time IRDA regulates insurance industry in the country.
Securities and Exchange Board of India (SEBI) was established in the year 1988 and was made statutory body through SEBI Act of 1992.With the purview of equity market SEBI takes care of issuers of securities, investors, as well as market intermediaries.
Reserve Bank of India (RBI) on the other hand was established in 1935 under RBI act of 1934 as the apex institute of countries monetary system. It has three prime roles first of currency authority where it acts as the soul agency to print currency, acts as governments bank providing loans to government as well as handling governments borrowing program.
RBI though being Central Bank of the country was handling dual operations i.e doing investment banking for the government as well as handling money flow through quantitative tools of monetary regulations. Now because of this conflict of interest bond buyers were always in a jiffy while buying bonds from someone who already knew what the next interest rate would be.RBI always had an incentive to get their work done without making much effort by forcing banks to buy governments bonds which had an adverse impact over corporate and infrastructure bond market. At the same time monetary policy transmissions like rate cuts by RBI was not propagated easily to the end customers as seen during recent times.
At the same time SEBI which was merely handling equity market had quasi judicial, quasi-legislative and quasi executive powers entrusted upon it. Thus it can regulate, it can investigate as well as pass disgorgement orders if needed. Very much evident as the equity market started outperforming other markets it witnessed increased flow of insurance money. Local firms invested close to Rs 62000 Crore in equities in fiscal year 2009-10 of which Unit Linked Insurance Plan (ULIP) only accounted for Rs 50000 Crore unlike traditional insurance plans which predominantly invested in government securities and debt. It created standoff between IRDA and SEBI because ULIP had investment content at the same time it was an insurance product , thus initially SEBI had to put ban on insurance companies over investment until they get registered with SEBI and later on allowed the existing investment but putting ban over new launches under the scheme.
Looking at the increased potential of the market and to put check over ponzi schemes government amended SEBI Act. According to which any unregistered scheme having corpus of Rs 100 Crore or more would be deemed as Collective Investment Scheme (CIS) , will be under SEBI’s jurisdiction. Further it empowered SEBI to call for information and records from any person including any bank or any authority or board or corporation established or constituted by or under Central or State Act which in the opinion of Board, shall be relevant to any investigation or inquiry in respect of any transaction in securities. Now they can search any building, place, vessel, vehicle or even aircraft in search of needed documents with prior permission of designated court in Mumbai. They can seize any relevant document even If those are not directly related to security market but helps in the investigation. These amendments helped SEBI in streamlining the market operations and in putting check over illegal money raising. As a result of which SEBI issued more than 1700 attachment orders and detained one person this year, while ordering total refund of investor’s money amounting to around Rs 100000 Crore which according to it was raised through ponzi schemes majorly. These actions not only provided safeguard to common investors at the same time forwarded the message to everyone that SEBI was keeping a close watch on the market and any attempt by any one small or big to manipulate or defraud investors would attract immediate punitive actions.
Now it was very evident that SEBI was proving itself to be most disciplined regulator in the country and was in a better state to carry out smooth operations for all kind of markets. Most importantly in market like India same participants take positions across different asset classes and concept of different regulators to oversee different parts of their trading behavior was providing them additional regulatory arbitrage opportunity. Hence various experts committees recommended actions along the same line. For example setting up of Debt Management Committee was suggested by RBI Annual Reports, Jahangir Aziz Working Group, Justice Srikirshna Commission, Raghuram Rajan Committee, Urijit Patel as well as Percy Mistry Committee. Similarly merger of organized financial trading with SEBI and Inflation targeting was talked about in the Percy Mistry Committee Report, Urijit Patel Committee Reports, Raghuram Rajan Committee Report as well as Justice Srikrishna Commission Report.
Hence RBI agreed to sign Monetary Policy Framework according to which RBI now has an objective of delivering year on year CPI between 2-6%.Statutary PDMA will be established and government bond market regulation has been shifted from RBI to SEBI. Moreover FMC has been merged into SEBI thus making SEBI a single regulator of financial trading in the country. Merger of FMC with SEBI will improve the commodity forward markets and reduce speculations, at the same time it will facilitate domestic as well as foreign participation and launch of new and better products.
PDMA now will henceforth carryout investment banking for government of India a role which was earlier played by RBI, which will improve the corporate and infrastructure bond market which will in turn improve the investment climate in these sectors. It should be noted that RBI will continue to design, build and operate the infrastructure through quantitative tools like Repo and Reverse Repo Rates. It is expected to lead towards a better SLR freeing up greater space for banks to lend which will in return increase small as well as medium enterprise’s lending options.
There is no doubt that SEBI has earned this respect from the policy makers because of its disciplined approach, it should remember that “With great power comes great responsibility.”
Contributed by Sharique Hassan Manazir (Class of 2011-13, IBS HYDERABAD )