Regulatory capacity, hyperactivity and excessive prescription are the biggest challenges the financial sector is facing, said Meleveetil Damodaran, former chairperson, Securities and Exchange Board of India (Sebi).
Speaking at the Business Standard BFSI Summit on Wednesday, Damodaran highlighted the need for simpler, clear, and continuous regulations in the financial sector.
He opined that the industry had felt it challenging to keep pace with the changing regulations.
“Post 2008, financial sector regulation is suffering from excessive activity.
"There has been regulatory hyperactivity in order to justify one’s existence.
"It is not just regulators but includes rating agencies and investment bankers, and others in the financial sector, which are suddenly making out a case to show that they are relevant, counted, and are a part of the solution and not the problem.
"You need regulations that are simpler and don’t get changed, have continuity and clarity,” he said.
Damodaran, who chaired the capital markets regulator from February 2005 to February 2008, also suggested that there should be a sunset clause added to each regulation and a law to revisit its relevance over time.
“Unless it is very basic and paramount, it must have a sunset clause because then three years or five years later, the regulator is obliged to revisit the regulation to see whether it has contemporary relevance or not,” he said.
Speaking at the summit, the former bureaucrat added the need for specialised talent in the regulatory bodies, ranging from lawyers to accountants and auditors.
“Regulatory capacity building is something to which very few jurisdictions have paid attention to.
"You set up a regulatory organisation and then start thinking of how you will populate it — that it is not enough,” said Damodaran.
He added that the bigger challenge was whether the specialisation that people bring to the table was relevant to present times, and if it provided the regulator with the ability to understand the complexity of the issues and instruments they were dealing with.
He appreciated the stance of the current Sebi chairperson Madhabi Puri Buch on asking companies to focus on the spirit of the law and not just the letter of the law.
“You can comply with every regulation and still run a business in a manner which is not in the interest of other stakeholders,” Damodaran added.
On the sidelines of the Sebi board meeting on December 20, Puri Buch had warned that if the spirit of the law was not respected, then the regulator would need to tighten rules further.
At the BFSI summit, Damodaran asked regulators to have the right temperament and the ability to hear both sides in any matter before reaching a conclusion or order.
The temperament is to not look at the regulated universe as a bunch of crooks.
"If you start with that assumption, then you will not make any progress.
"My preferred philosophy is to trust and verify. Don’t go on the path of distrust and crucify.
"In an attempt to fix a small problem, you may kill the institution,” he said.
In his opinion, the right definition of governance is to do the right things at the right time in the right manner for the right reasons.
He also cautioned companies to not follow a “deny, defy, decry” formula in governance as it would only lead them backwards.
Damodaran holds director positions on the boards of many listed companies and has worked the last few decades with the government, financial institutions, and regulatory bodies.
He has also been a constant member on several committees formed by the Reserve Bank of India (RBI) and several ministries.
