M. Damodaran: Sebi’s regulatory approach should reassure the market

In his first week as the head of India’s securities market regulator, Chairman Tuhin Kanta Pandey has sent the right signals and articulated the regulatory philosophy that will inform the functioning of the Securities and Exchange Board of India (Sebi) over the next few years. In his keynote address at a summit on 7 March 2025, he said, “All reforms need not be big-bang. Many a time, small reforms cumulatively are more effective. Going forward, Sebi will use a right mix of both to achieve the objectives."

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The words ‘going forward’ are of significance. Sebi has been known, especially in the last few years, to do things that no regulator or jurisdiction has either attempted or considered worthwhile. The tendency to be the first to undertake a new initiative sometimes turns out to be disruptive, and with negative consequences.

The commitment that a sledge-hammer approach would be a thing of the past should be music to the ears of those who conduct business with integrity, and have been at the receiving end of a plethora of regulations, giving rise to compliance challenges and costs.

In the same address, Chairman Pandey observed that the “capital market is a dynamic space, so change is imminent, but we will certainly not be looking for maximum regulation, but for optimum regulation." The frequency with which new regulations were written, and changes were made, did create a sense of unease in the regulated universe. It was almost as if regulation was an end in itself, and not a means to an end. Happily, the promise of optimum regulation should allay those fears, and enable market participants to concentrate on their business.

In the same speech, he made the following important statement. “If some statutes [or regulations] are redundant and outdated over the years and not serving any purpose, we are happy to review the same. We are open to ideas on this."

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For several years now, Excellence Enablers has pleaded for the setting up of a Regulations Review Authority, on the lines of what exists in the Reserve Bank of India, to discontinue regulations that are past their sell-by date. If a similar approach is followed by Sebi, the stock element of the problem of outdated regulations will disappear. It will then be necessary to concurrently address the flow element of unnecessary regulations by previewing the regulations contemplated—to determine whether they are superfluous, or irrelevant, or not cost effective.

There has been talk of regulatory impact assessments being undertaken. It will be a healthy practice to study the prospective impact of proposed regulations, as well as the impact of existing regulations, to see that the regulatory landscape is cleaned, leaving behind only what is necessary for ensuring orderly conduct in the marketplace.

On 29 March 2025, before he had completed a month in office, Chairman Pandey delivered a keynote address titled, ‘Maintaining market integrity: Sebi’s role and initiatives.’ He spoke of the several initiatives that Sebi had undertaken in the recent past, and referred to the strengthening of market infrastructure institutions (MIIs), both by empowering them as first-level regulators and by increasing their accountability by checks and balances, and independent external evaluation.

This was long overdue in the case of some older MIIs, which had become a law unto themselves. Referring to “a robust and transparent consultative process when formulating any regulatory requirement," Chairman Pandey highlighted that stakeholders would be consulted at every stage.

This is music to the ears of those who had been articulating their expectations that consultation would be meaningful, rather than mechanical. Pandey noted that the practice of formulating regulations has now been institutionalized by a separate regulation, which lays down the procedure by which regulations would be made and how amendments would be carried out.

The regulation in question provides for a consultation period of 21 days. While this is more than the two weeks that had been given for comments in some cases in the recent past, it might not be adequate if there are, at the same point of time, a multiplicity of consultation papers seeking comments and/or suggestions.

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That market participants should understand, respect and practise compliance has also been well articulated. Chairman Pandey has observed that “While Sebi will continue to enhance its supervision capabilities, it is desirable that market participants are also nudged towards voluntary compliance with regulations."

Speaking of “the right level of enforcement action," he stated that there are sufficient internal checks and balances to ensure that the right action is taken, and that entities are given opportunities to take corrective steps for technical or procedural violations. His stated intention is to ensure uniformity of action and do away with arbitrary enforcement action on the part of the regulator. While this is a welcome move, it might be worthwhile to examine whether the present level of enforcement action, especially in cases of systemic importance, are adequate to dis-incentivize disorderly conduct.

It is said that ‘well begun is half done.’ Both market participants and observers of the securities market scene will be encouraged to believe that the morning shows the day.

The author is chairperson, Excellence Enablers and former chairman, Sebi, UTI and IDBI.