Finance Minister Nirmala Sitharaman stands next to Minister of State for Finance and Corporate Affairs Anurag Thakur (L) as she leaves her office to present the Union Budget in the parliament in New Delhi on February 1. (File image: Reuters)
While presenting the Union Budget for the financial year 2021-22, Finance Minister Nirmala Sitharaman proposed merging some of the most important Acts that govern the capital markets and securities into one common code. So why has the government taken this decision and what does it mean for the capital markets or the investor community?
What did the finance minister propose in the Budget?
“I propose to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalised single Securities Markets Code,” said the finance minister while presenting the Union Budget on Monday.
The SEBI Act is like a mothership Act, which gives the regulatory body the power to regulate the capital markets through various regulations while also ensuring that investor interest is always protected.
The Securities Contracts (Regulation) Act, or SCRA, largely governs the affairs of the stock exchange, which is one of the most important institutions in the capital market. The Depositories Act regulates the depositories of the country that hold the all-important securities worth billions of dollars.
Lastly, the Government Securities Act is a legislation that gives the Reserve Bank of India (RBI) the power to amend the laws governing the government securities or G-sec market.
Why is the government proposing to merge three important Acts?
While the finer details of the proposal are awaited, a common view that has emerged is that a single code would provide more operational efficiency to the regulator that has the task of regulating various forms of securities like equity, commodity, currency and interest rate. Further, it also regulates stock exchanges, which provide a trading platform for government and private sector bonds as well.
Hence, there was a view that some of the Acts that have been in place for decades can be repealed and a new more efficient and modern framework can be put in place.
“There are a lot of overlapping regulations that require tweaks or amendments and a single Securities Markets Code could just achieve that,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal.
“A single code would consolidate all the regulations thereby providing operational efficiency to the regulator and will also provide an opportunity to remove outdated provisions and have a lean code, which is more in sync with the current ecosystem. While designing a single code, the policy makers could address all the current ambiguities in the regulatory framework and also introduce provisions that may be currently missing,” added Chitlangi.
Would Sebi be a better regulator with a single Securities Markets Code?
The capital markets regulator has largely been looked upon as an efficient regulator and while there have been a few cases of inordinate delays in investigations, the Indian stock market is considered to be robust with strong settlement and surveillance mechanisms.
A common code could enhance the operational efficiencies in terms of bringing down the turnaround time in terms of regulatory approvals. It could even provide market intermediaries and the investor community at large with better clarity in terms of the legalities of certain matters as, at times, different Acts could provide a conflicting scenario.
What the government has proposed is basically rationalisation of the different laws and it will be very helpful for SEBI from an administrative point of view. Many of the administrative problems of the regulator would be resolved and enhance the ease of regulating quotient - JN Gupta, managing director of Stakeholders Empowerment Services, a proxy advisory firm and also a former executive director of SEBI.
Is this the first time that a common Code has been proposed?
While it is indeed the first time that the government has proposed consolidation of Sebi regulations, it is not the first time that such a concept has been mooted.
Way back in 2013, the Financial Sector Legislative Reforms Commission (FSLRC), which was formed under the chairmanship of Retd Justice B N Srikrishna, had proposed repealing various Acts and creating one common Indian Financial Code, which would be non-sectoral in nature and replace a bulk of the then prevailing regulations for the financial markets.
While the latest proposal talks about merging four Acts into one single Code, the FSLRC had suggested repealing as many as 15 Acts, including those regulating the insurance, banking, foreign exchange and public debt segments among others.