Securities market: On the cusp of change

Relevance: A robust financial market is critical for optimum channelization of surplus in an economy. 

Synopsis: We need to establish a capable financial market system. One of the challenges is the less than perfect functioning of regulatory bodies. 

Problems with the regulators 

• Concentrated power: Regulators in India are unique in having concentrated power, with an intermixing of legislative, executive and judicial functions.  

• Constitutional norms in a liberal democracy are not always in agreement with such kind of extreme power. This creates unpredictability for a sophisticated market economy. 

• There is a major gap in the bond market and its associated elements (the bond-currency-derivatives nexus). These are increasingly holding us back.  

• Problems with bond market: The government needed to vastly increase borrowing when faced with the pandemic, but faced constraints in the resourcing available through the present configuration of the government bond market.  
• Firms prefer listing overseas: Many Indian firms are avoiding the traditional journey of maturity, of an initial public offering in India, and instead opting for overseas ownership/listing structures so as to avoid the weaknesses of the Indian institutions, including financial markets regulation.  
• Shifting of funding from banks to bond market: The funding of private firms urgently needs to shift away from banks to the bond market, and this transition has been hampered by policy constraints. 

• Establishing sound foundations of law: The present laws are not clear on the objectives, of consumer protection, prudential regulation, resolution, systemic risk regulation and certain specialized elements of securities law such as market abuse.  

• The vagueness of objectives in the present law confuses the officials working on financial regulation, and creates uncertainty for the industry.  
• Example: As an example, the present law on market abuse, the Sebi Prohibition of Fraud and Unfair Trade Practices Regulations, confers unbridled discretionary penal powers in the hands of Sebi, and creates corresponding regulatory risk for private persons. 

What steps can be taken? 

Reforms aimed at consolidating and unifying the following can help: 

• Financial Sector Legislative Reforms Commission (FSLRC) material on the working of regulators, including the role and composition of the board, refreshed and updated, reflecting the 2015-2021 experiences on the ground. 
• Clarity of objectives of financial market regulation where the FSLRC work is broadly complete. 
• Financial agency architecture surrounding the bond-currency derivative nexus and Public Debt Management Agency (PDMA), which involves continuing the reforms announced in the 2015 Finance Bill and later withdrawn.  

Source: Business Standard