In October 2022, the Securities and Exchange Board of India (SEBI), in consultation with the Reserve Bank of India (RBI), cancelled the licence of Brickwork Ratings, a credit rating agency (CRA). This well-considered action was taken following an industry-wide review by the regulators of a string of debt defaults by highly credit-rated companies, in which CRAs had repeatedly failed in their fiduciary responsibilities. In this instance, the CRA was found to be a repeat defaulter, despite warnings and opportunities for reform.
The Securities Appellate Tribunal (SAT), however, immediately stayed the SEBI order. In June 2023, SAT quashed the cancellation order and referred the matter back to SEBI. Beyond the worrying message it sends to investors and markets about principles, rule enforcement, and the accountability of market intermediaries, the SAT decision also raises larger concerns about the regulatory, and adjudicatory framework that the government has tried to establish since the beginning of economic reforms in 1991.
Need For Sectoral Regulators
The philosophical basis for the establishment of all reform-period regulatory institutions and their quasi-judicial appellate authorities (except the RBI, established in 1935) was the belief that as India's market-driven economy grew, there was an urgent need for responsive, sector-specific regulatory architecture. This architecture would keep real-time track of market developments, formulate appropriate public policy and rules, and supervise, govern, and enforce them in a manner that was equitable to its stakeholders.
Two guiding principles were meant to underpin this architecture. The first principle was that, given the specialised nature of different markets, key appointments to these institutions would be based on their sector-specific knowledge and relevant experience. The second principle was that considering the well-known challenges of India's judicial system, a sector-specific appellate authority would be established for each regulator. Over the last 30 years, many regulators and their appellate authorities have been established in telecom, bankruptcy and company law, electricity, petroleum and natural gas, and other areas.
The financial sector is by far the largest, with numerous markets and regulators. Among its other statutory functions, the RBI regulates banks and non-bank financial companies. SEBI oversees capital markets. The Insurance Regulatory and Development Authority (IRDAI) regulates the insurance industry. The Pension Fund Regulatory and Development Authority (PFRDAI) is in charge of the pension fund industry.
The non-RBI financial sector has expanded rapidly in recent years. India's capital markets are now worth approximately $3 trillion, while debt markets are approximately $1.8 trillion. Insurance and pension markets are about $150 billion and $430 billion respectively. All of these markets are critical to India's plans to fund its infrastructure, manufacturing, and fiscal borrowings and become a $5 trillion economy by 2027.
Missing Experts
It is ironic, however, that for all of this multi-trillion-dollar, multi-market, multi-regulator, multi-million investor base, a financial sector of unimaginable complexity and nuance, a sector that requires informed, timely, and appropriate principles-based decision-making, and on which India's hopes and aspirations of economic growth are pinned, there is only one single appellate authority: the Securities Appellate Tribunal (SAT). With only one single bench, located in Mumbai. Which comprises a single presiding officer, a former high court judge who was chairperson of the Real Estate Appellate Tribunal of Uttar Pradesh before being appointed SAT presiding officer. And one member, who is a government officer from the audit and accounts service. It would not be an exaggeration to say that hopes for India's future economic story rest on this single bench. And its knowledge and expertise in financial markets, law, rules and principles, market practices, public policy, and governance, as well as its handling of appeals against financial regulatory authority decisions.
SAT orders can only be appealed to the Supreme Court of India. If the link in the chain of economic growth is only as strong as its weakest link, it is for government decision-makers to determine how strong these links are in this framework, whether guiding principles have been met, and whether these are reflective of the size, scale, and aspirations for India's financial markets.
Regulatory Capture
This dichotomy between twenty-first-century markets and nineteenth-century governance/adjudication encapsulates the repeated failure to establish effective market-facing institutions. It has been a recurring failure over decades, in institutions ranging from bankruptcy and debt resolution to telecom, power, and company law. Every government has attempted to reinvent the wheel by enacting new legislation, creating new institutions, and constructing new architecture. All have missed the existing operational and cultural deficits of this framework. The issue is not one of institutional weakness but of regulatory capture and the poor market knowledge and cultural norms of these organisations.
The market regulatory framework has almost always been the preserve of retired or soon-to-retire judges and bureaucrats. Like Bhasmasur, the great devotee of Lord Shiva, who sought the boon of immortality but received the boon of destroying whoever he placed his hand on and in turn, got so drunk on power that he tried to destroy Lord Shiva himself, they conduct great penance to extend their official lives and perks. And while the government too cannot grant immortality, it does appoint them to these sinecures as rewards. Where, with similar unaccountable power and equally little knowledge as Bhasmasur, they use these powers on the markets. Furthermore, similar to the dispute between the rishis and devas over Trishanku, who attempted to ascend to heaven in mortal form and has remained suspended between sky and earth since, disputes between regulators and their appellate authorities often result in similar outcomes. Clarity, principle-based governance, accountability, and enforcement, which are of utmost importance to market confidence and functioning, suffer as a result.
India's financial markets have grown significantly. There are now many eminent persons of sterling market and legal reputation, experience and expertise available to serve in these institutions. To deliver on its guiding principles, the government must recognise this large pool of talent, much like direct appointments from the bar to the bench in higher courts. The nineteenth-century hegemony of a colonial judiciary and administrative apparatus, which was the impetus for the creation of an alternate market regulatory framework, cannot be an impediment to the country's economic development in the twenty-first century.
Sandeep Hasurkar is an ex-investment banker and author of `Never Too Big To Fail: The Collapse of IL&FS’. Views are personal, and do not represent the stand of this publication.
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