Performance of SEBI: Sebi at age 31. Or is it 35?

Source: The post is based on the article “Sebi at age 31. Or is it 35?” published in the Business Standard on 28th April 2023.

Syllabus: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About the performance of SEBI.

News: Securities and Exchange Board of India (SEBI) recently unveiled a new logo on the occasion of its 35th anniversary. However, the Sebi Act came in 1992, which is only 31 years ago.

About the history of SEBI

The journey of SEBI can be seen as emanating from the G S Patel committee of 1984. In 1988, a non-statutory SEBI was constituted, through an administrative resolution of the Government of India. In 1992, Parliament passed the SEBI Act.

Significance of SEBI’s formation: a) The statutory SEBI of 1992 is the first regulator in India to be legislatively autonomous in the area of human resource and finance, b) SEBI was the first of the full and modern regulators in India.

About the performance of SEBI

No market scams: Since the Ketan Parekh scandal of the early 2000s, there have been no serious market scams under its watch.

Impressive rise of Market capitalisation: The gross domestic product to market capitalisation ratio, which was 0.123 in 1989-90 had risen to 1.115 in 2021-22.

Other areas: Such as assets under management of mutual funds, the total number of dematerialised accounts, dematerialised turnover, number of derivatives contracts, etc, have all grown exponentially.

Financial reforms also played a role in these improvements primarily through (a) the reduction of capital controls and (b) the emergence of equity market liquidity and market efficiency.

What are the challenges SEBI need to work upon?

Issue with the turnover ratio: The turnover ratio (TR) is calculated by dividing the trading volume of the latest one year by the current market capitalisation.

The baseline adopted for the turnover ratio is of 2003-04. In 2003-04, the trading volume of the spot market was ~11.86 trillion and the turnover ratio was 1.34. In 2022-23, the corresponding values were ~25.8 trillion and 0.54.

Over this 20-year period, the turnover ratio of the Indian equity spot market actually went down. This requires fresh thinking about the functioning of SEBI and the exchanges.

What more should be done?

Focus on market performance: Financial economic policy should focus less on the market capitalisation of the equity market, and more on the extent to which the securities markets are deep and liquid. The key attributes of this are market depth, market resiliency and market efficiency.

Overall, India needs to create better regulations governing the working of the equity market to generate better liquidity and market efficiency.