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New Leadership: An Agenda for new SEBI Chief Madhabi Puri Buch

Sandeep Parekh

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Co-authored with Mihir Deshmukh, Associate, Finsec Law Advisors

The appointment of Madhabi Puri Buch as the new Sebi chairperson has ushered in an era of firsts in the history of the regulator. She is not only the first woman to head the regulator, but also the youngest head. Having previously worked with various prestigious private sector institutions, including as head of ICICI Securities and board-member of ICICI Bank, she brings in decades of private sector experience. During her tenure at Sebi, she has held various portfolios and has chaired various committees, most recently heading the Advisory Committee for Leveraging Regulatory and Technology Solutions that was set up to “enhance technological capabilities and enhance solution for early detection of market anomalies”.

Ata time when the markets are extremely volatile due to the Russia- Ukraine conflict, and India is experiencing an exodus of foreign investors, her appointment can pave the way for a more pragmatic, data-driven, and hands-on approach for Sebi.

With the markets rattling with uncertainty, investors have been moving away from equity and towards safer assets. However, even in these turbulent times, the domestic debt market fails to attract investors due to its myriad issues on the demand and supply sides. Problems faced by the market include crowding out of corporate borrowings leading to higher borrowing cost of borrowing, lack of diversity in types of instruments, lack of liquidity, and limited supply.Government debt and private bonds operate in a mutually exclusive manner. Arise in the former leads to higher pricing of liquid and safer AAA-rated corporate bonds, causing large corporates to source funds from abroad. Further, the market is dominated by fixed-rate coupon bonds, to the exclusion of other instruments that not only reduces the scope for investors but also leads to lack of liquidity in the secondary market. Also, the secondary market is dominated by a few players trading in instruments of highly-rated (AA or above)entities. Thus, there are very few players in the bond market. PSU and housing financials are the largest issuers of corporate bonds, and there are only a handful of AAA- or AA-rated private players. Another key issue plaguing the debt market in India is the fragmented regulation. To resolve these issues and make debt investing a more lucrative option, Sebi will have to restructure its approach towards regulating these markets. Given her decades of experience and expertise in bond markets, Buch may be the perfect person to pull off this mammoth job. The key is to address the ‘death by a thousand cuts’ problem of the debt markets and not try to replicate the equity markets.

A second focus for the new Sebi chief can be the interplay between technology,finance, and securities market regulations. An upcoming section full of potential, this space requires constructive regulation and guidance by theregulator. The setting up of the Advisory Committee for Leveraging Regulatory and Technology Solutions is the need of the hour; however, given the influx of tech startups as intermediaries in almost all spaces in the securities market,Sebi should also focus on creating systems that will help it develop and hold expertise over the markets’ technological aspects to lead them through conducive regulations, and not merely play catch up with the innovations developed. Sebi needs to be more supportive of regulatory sandbox applications,which have not really taken off as envisaged.

A third area that Buch may focus on is the efficiency of Sebi’s investigation and enforcement proceedings. In recent times, the regulator has been criticised by the appellate authority at various instances over inefficiencies in its investigation and enforcement proceedings. Various orders have been set aside on the grounds of delay in initiating the relevant proceedings. Further,multiple issues such as the NSE co-location matter have also highlighted theshortcomings of Sebi’s in-house investigation mechanism. There is a wave of new-age companies  being listed in themarkets, many of which are yet to be become profitable. Coupled with a rise in their popularity and market-hold, and fintech startups acting as securities market intermediaries, the need is for Sebi SEBI to ensure that its surveillance mechanisms are able to detect any potential issues efficiently.The regulatory machinery can resolve such problems to protect investors’ interests.

Another critical area of concern for Sebi is investor protection and education. There is a steep rise in the participation of retail investors in the securities markets, partly ushered by the ease of entry and increasing penetration in Tier II and III cities. The presence of these young and relatively inexperienced investors leaves the markets vulnerable not just to frauds but also unreal expectations of free money that may lead to a wiping out of investor wealth.Thus, Sebi should revisit and strengthen its investor protection policies and reinvigorate its investor education initiatives for an entirely new class of domestic retail investors. This also balances the role of a modern, disclosure-based regulator that needs to eliminate ignorance from the market and not stupidity (which could be nudged down, though never eliminated).

This increase in investor protection also needs to be coupled with regulations conducive for retail investors. The influx of new investors brings liquidity and depth to the markets; however, to retain these investors for the long-term,the regulator will also be required to consider the investment avenues presently offered in the markets and be cognisant of the investment potential of these investors while determining the thresholds of sophisticated investment opportunities. Combined with a reset in expectations and robust anti-fraud enforcement, Sebi can ensure these investors, increasing by the millions,remain the backbone of the domestic markets rather than foreign ones, whose sneeze in the past had dramatic consequences.

Buch’s appointment as the Sebi chairperson can potentially usher in a new era of market regulation. Her pragmatic and data-driven approach and impressive credentials make her an ideal candidate to bring in the requisite changes and make the markets more efficient and inclusive.

(This article was first published in Financial Express)