18 December 2012

SEBI's enforcement - looking back, looking forward

I have a piece in the 30th anniversary issue of International Financial Law Review, on SEBI's enforcement record and the way forward. Though the piece is behind a pay-wall (link here), I have put the full piece below:

Few would name the Securities and Exchange Board of India (Sebi) as a class leading, benchmark-setting regulator when it comes to enforcement of the securities law. Over 90% of new cases launched against alleged violators are by way of administrative action, and the balance by way of criminal prosecution in courts. Sebi's perception as an effective regulator is often wrongly criticised. The criticism arises from two pieces of what's deemed as evidence. First newspaper reports which discuss the overruling of Sebi's administrative findings by the appellate authority. Second, the perception that Sebi brings too few people to book to be able to act as a disincentive to other wrongdoers.

The first misperception is a result of man-bites-dog syndrome. The press only highlights those cases where Sebi's cases are overruled. It makes for a weaker headline to state that a person's guilt was upheld. The last available statistics show that nearly 70% of Sebi's rulings are never appealed, and of those appealed 80% are upheld by the appellate body. Thus a success rate of over 90% is not a bad outcome of Sebi's orders. The second perception is also incorrect. It's interesting to compare Sebi actions to those of the US Securities and Exchange Commission (SEC) against insider trading, for example. The numbers, according to Sebi and SEC annual reports, reveal that last year: the SEC, with an enforcement staff of over 1,000 people, brought 57 new cases of insider trading; and Sebi, with an enforcement staff of just over a dozen people, brought 30 cases.

That is of course not to say that all is well with Sebi. But that is to say that the popular focus is on the wrong aspects of enforcement. Enforcement does need to be bolstered in three ways. First, there needs to be more people from the private sector, who are able to better understand the market. Further, Sebi must whole heartedly support people from high profile law firms or forensic accountants from the so-called Big4 and appoint them on contract. That would drastically improve the quality of their actions. Second, while Sebi is reasonably effective in regulating the various intermediaries such as brokers, it is poor in policing listed companies. With the largest number of listed companies in the world, it is a difficult task, and Sebi must employ more people to clean up disclosure and other violations in listed companies. Finally, Sebi needs to speed up its investigation, and delays of more than a year in merely fact finding are not acceptable from an enforcement perspective.

No comments: