SEBI’s funds transfer to the government is nothing new. The oddity is the amendments in this regard are inserted in the Finance Bill. A mention by FM or a separate Budget proposal would have just done the job
One should not judge a book by its cover and read the details, goes the oft-repeated wisdom. These words apply to the Union Budget, which has eons of information and policy hidden in a maze of documents.
One such piece of policy which has been missed by most analysts is spelt out in the Finance Bill for FY19-20, a document which was earlier used mainly for changes in taxation and is now being increasingly used for changes in laws and other policy purposes. In recent years, we saw how changes related to Aadhaar were included in the Finance Bill, a practice which was criticised by analysts.
On Page 51 of the Bill, there is a note on Amendments to the Securities Exchange Board of India (1992), which is quite interesting. The government has proposed following changes in Section 14 of the SEBI Act (1992):
"(3) The Board shall constitute a Reserve Fund and twenty-five per cent of the annual surplus of the General Fund in any year shall be credited to such Reserve Fund and such fund shall not exceed the total of annual expenditure of preceding two financial years.
(4) After incurring all the expenses referred to in sub-section (2) and transfer to Reserve Fund as specified in sub-section (3), the surplus of the General Fund shall be transferred to the Consolidated Fund of India."
To understand this proposal, we need to understand some basics about SEBI’s balance sheet.
Currently, the SEBI Act specifies that incomes (annual fees, subscriptions, interest on investments etc) of the regulator are to be credited to a General Fund, from which expenses (salaries, establishment etc) are to be paid. The surpluses, if at all, accrue to the General Fund. As of March 31, 2017 (which is the last disclosed figure), the General Fund amounts to Rs 3,162.78 crore.
The amendments in the Act will mean two changes. First, it says SEBI will now have a Reserve Fund (which is still there, but has nil amount). Second, the entire surplus which earlier accrued to General Fund, will now be divided into two categories: 25% of the surplus will be transferred to the new Reserve Fund and 75% of the surplus will be transferred to the Government of India. The government has also capped the amount of Reserve Fund at annual expenditure levels.
Let us apply above changes to the older financials of SEBI. In 2016-17, SEBI generated surplus worth nearly Rs 350 crore. Based on the amendment, Rs 87.5 crore will be transferred to the Reserve Fund and Rs 262.5 crore to the government. SEBI’s expenditure has been around Rs 380-390 crore and the Reserve Fund will be limited to these amounts unless there is an increase in expenditure. Thus, if the Reserve Fund reaches the level of expenditure, perhaps the entire surplus shall be transferred to the government.
In a way, this amount is not even a drop in the ocean as total government receipts during 2016-17 were staggering at Rs 20 lakh crore. Moreover, the Securities Exchange Commission, the capital market regulator of the US, also transfers its surplus to the government. Thus, it is not as if SEBI will be doing something new.
However, it is odd that the government chooses to include all such amendments in the Finance Bill. Either, they should be mentioned briefly by the finance minister in her speech or included as a separate policy proposal in the Budget.
Given the discussion on fiscal deficit target and how it is met, such policy changes are really important for the public to understand. It clearly signals that the government is looking for newer sources of financing the expenditure and deficit and share of SEBI’s surpluses is one such new avenue. The share of dividends/surpluses from the RBI, public sector enterprises and banks and other financial institutions, which will also include SEBI’s contribution, has been going up steadily. This figure was around Rs 90,000 crore in 2017-18, Rs 1.3 lakh crore in 2018-19 and budgeted at Rs 1.64 lakh crore in 2019-20. This is not a small amount by any means. Even if the share of SEBI is minuscule, it adds to the revenues and helps minimise deficit levels.
Then, there is another equally important matter of regulatory independence. SEBI is the regulator of capital markets and is subject to same questions as the central bank, which regulates banks. Whenever governments demand higher profits from the central bank, reams are written that it undermines central bank independence. Does this amendment undermine independence of the securities markets regulator as well?
Thankfully, the government has specified a rule for transfers from SEBI, which limits ad hoc transfers. It is these ad hoc transfers which lead to frictions between the regulator and the government. Also, SEBI unlike RBI does not generate seigniorage profits which are several times larger. The Jalan Committee, which is yet to submit its much-awaited report on RBI’s transfers to the government, could look at the proposals made for SEBI for some last-minute thinking.Amol Agrawal teaches economics at Ahmedabad University. Views expressed are personal.The Great Diwali Discount!
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