SEBI plans to experiment with 'shift' in regulatory architecture: Chairperson Madhabi Buch

Regulations will take us to a certain stage of expressing the regulatory intent (or what is to be done) but a lot of the ease-of-doing business lies in the ‘how’ it is to be done, said Sebi Chairperson Madhabi Puri Buch.

The Securities and Exchange Board of India (Sebi) is planning a new regulatory design, which will see more participation from the industry players.

SEBI Chairperson Madhabi Puri Buch said in a press meeting held on July 24 that the regulator’s circulars say ‘what’ is to be done but not ‘how’ it is to be done. Now, the regulator will try a method of asking the industry to decide the standards on the ‘how’, or the standards for the implementation of the regulations.

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A forum under the aegis of exchanges may be created, with representations from industry associations and professional bodies, which can set standards to be followed to meet regulatory requirements.

The standards would be best finalised in consultation with SEBI so that there is no risk of “overengineering” or no risk of the standards not aligning with the regulatory intent, she said.

“This is an architectural shift that we wish to experiment with in SEBI,” she said, adding that they have already sent out letters to participants.

Elaborating on the new element of the regulatory design, she said that SEBI gets a lot of valuable inputs from its advisory committees when balancing the need to ensure ease-of-doing business and the integrity of the market. Then these inputs are shared with the public for comments, and after they come in, a new regulation is drafted or an existing regulation is modified.

But, when it comes to implementation of the regulation, SEBI finds that two things happen. One is market participants wondering how the regulation is to be implemented and the other is if the implementation will be adequate or still in the realm of violation.

The first response of the regulator is to release a set of Frequently Asked Questions (FAQs). If there are more questions, then a more detailed circular is released.

“On deeper reflection, we have come to conclusion that what we are dealing with is standard setting for implementation. This is not about the regulation but about execution or implementation of the regulation,” she said.

“This task is best done by the industry bodies themselves,” she added.

The regulator has some experience in this mode of functioning in the mutual fund space. For example, a circular on valuation may say that the Association of Mutual Funds in India (AMFI) will stipulate the standard for valuation and then everyone will follow that. Or a circular on benchmarking may say that the industry body will select the entity which will do benchmarking.

“Our regulations will take us to a certain stage of expressing the regulatory intent (or what is to be done) but a lot of the ease-of-doing business lies in the ‘how’ it is to be done,” she said.

For instance, there was a recent circular on rumour verification for listed companies. The regulation conveys that if there is a rumour in the market and it is making the price move, then the company need to either confirm the rumour or deny it.

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From discussions with industry players, the regulator has understood that there is already a media-tracking service engaged by companies. The regulator was never intending for the companies to spend “hundreds of crores” to build a parallel system, she said.

“What is the solution to this (this confusion on what companies must do)? It would be to say that, if the industry sets a standard, that if the media-tracking agency has the following coverage, this will be considered adequate for the purpose” of tracking and responding to rumours, she said.

Buch said that another concern the industry has raised about this regulation is mentioning “specific rumours”. “The best way to do this is for the industry to set a standard on what specificity means… (then) everybody knows these are the rules (and can follow them),” she said.