Sebi, under Madhabi Puri Buch, needs to restructure its regulatory approach to regulating the domestic debt market. This makes the latter more lucrative.

By Sandeep Parekh

The appointment of Madhabi Puri Buch as Sebi’s new chairman has ushered in an era of firsts in the regulator’s history. She is not only the first woman to lead the regulator, but also the youngest. Having previously worked with several prestigious private sector institutions, including as head of ICICI Securities and board member of ICICI Bank, she brings decades of private sector experience. During her tenure at Sebi, she has held several portfolios and chaired several committees, most recently heading the Advisory Committee on Exploiting Regulatory and Technology Solutions, which was established to “enhance technology capabilities and enhance solutions for early detection of market anomalies”.

At a time when markets are extremely volatile due to the conflict between Russia and Ukraine and India is experiencing an exodus of foreign investors, her appointment could pave the way for a more pragmatic, data-driven and hands-on approach for Sebi.

As markets rattle with uncertainty, investors have moved from stocks to safer assets. But even in these turbulent times, the domestic debt market is failing to attract investors due to the myriad of supply and demand problems. Problems facing the market include crowding out corporate borrowing leading to higher borrowing costs, lack of diversity in instrument types, lack of liquidity and limited supply. Sovereign debt and private bonds work in a mutually exclusive manner. An increase in the former leads to higher prices of liquid and safer AAA-rated corporate bonds, causing large companies to source money from abroad. Furthermore, the market is dominated by fixed rate coupon bonds, to the exclusion of other instruments that not only reduce investor leeway but also lead to a lack of liquidity in the secondary market. Also, the secondary market is dominated by a few players trading instruments of highly rated entities (AA or higher). So there are very few players in the bond market. PSU and housing financial institutions are the largest corporate bond issuers, with only a handful of AAA or AA rated private players. Another major problem plaguing the debt market in India is the fragmented regulation. To solve these problems and make investing in debt a more lucrative option, Sebi will have to restructure its approach to regulating these markets. Given her decades of experience and expertise in bond markets, Buch could be the perfect person to handle this mammoth job. The key is to address the “death by a thousand austerity” problem of the debt markets and not to try to copy the stock markets.

A second focus for the new Sebi chief may be the interplay between technology, finance and securities market regulation. An upcoming section full of potential, this space requires constructive regulation and guidance from the regulator. The establishment of the Advisory Committee on Harnessing Regulatory and Technological Solutions is the necessity of the hour; however, given the influx of tech startups acting as intermediaries in nearly all spaces in the securities market, Sebi must also focus on creating systems that help it develop and maintain expertise on the technology aspects of the markets in order to guide them through favorable regulations. to lead, and not just play catch up with the developed innovations. Sebi needs to give more support to regulated sandbox applications, which have not really taken off as expected.

A third area that Buch can focus on is the efficiency of Sebi’s investigation and enforcement procedures. Recently, the regulator has been criticized by the Appellate Body in several cases for inefficiencies in its investigation and enforcement procedures. Various decisions have been annulled due to delays in initiating the relevant procedure. Furthermore, multiple issues, such as the issue of NSE colocation, have also exposed the shortcomings of Sebi’s internal investigation mechanism. There is a wave of new age companies being listed in the markets, many of which have yet to become profitable. Coupled with an increase in their popularity and market position, and fintech startups acting as intermediaries in the securities market, there is a need for Sebi SEBI to ensure that its oversight mechanisms can efficiently detect potential problems. The regulatory mechanism can resolve such issues to protect the interests of investors.

Another major concern for Sebi is investor protection and education. There has been a surge in private investor participation in the securities markets, heralded in part by easy access and increasing penetration in Tier II and III cities. The presence of these young and relatively inexperienced investors makes the markets vulnerable not only to fraud, but also to unreal expectations of free money that could wipe out investor wealth. Therefore, Sebi needs to review and strengthen its investor protection policies and reinvigorate its investor education initiatives for an entirely new class of domestic retail investors. This also balances the role of a modern, disclosure-based regulator who must eliminate market ignorance and not stupidity (which can be suppressed, but never eliminated).

This increase in investor protection should also be accompanied by regulation that is conducive to retail investors. The influx of new investors brings liquidity and depth to the markets; however, in order to retain these investors for the long term, the regulator will also need to think about the investment opportunities currently being offered in the markets and be aware of the investment potential of these investors, while setting the thresholds of advanced investment opportunities. Combined with a reset of expectations and strong anti-fraud enforcement, Sebi can ensure that these investors, who are growing by the millions, remain the backbone of domestic markets rather than foreign ones whose sneezes have had dramatic consequences in the past.

Buch’s appointment as chairman of Sebi could potentially usher in a new era of market regulation. Her pragmatic and data-driven approach and impressive credentials make her the ideal candidate to drive the required changes and make markets more efficient and inclusive.

The writer is Managing Partner, Finsec Law Advisors. Co-authored with Mihir Deshmukh, associate, Finsec Law Advisors.

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