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Over-regulation could potentially kill a market: Panel

BS Banking Bureau

The advisory group on securities market regulation set up by the Reserve Bank of India has said that the over-regulation could potentially kill a market though it may minimise market friction.

The group has said that it is necessary to recognise the trade-off between over-regulation and high cost of compliance. It is also important to modernise the microstructure in order to dilute the trade off. Regulatory objectives can be attained through changes in micro-structure rather than further addition to regulatory law, the group said.

Deepak Parekh is the chairman of the group. The other members of the group are Shitin Desai, I C Jain, Nimesh Kampani, Anand Rathi, Uday S Kotak, Ravi Narain, Pratip Kar, R Kannan and A K Mitra.

The group has also called for bringing the UTI under Sebi's purview as well as the introduction and implementation of international accounting principles across the mutual fund industry, which will help promote fairness and stability of the sector.

The group is also in favour of reducing asset management companies' discretion in valuation of thinly traded or non-traded securities, as regulations specify only broad guidelines.

It has also pointed out that there is no upper limit on the total holdings of voting and non-voting shares of any single company by a mutual fund. It has also pointed out that there is no restriction on corporate investment in a mutual fund's units.

It has pointed out the fact that though Sebi has powers of direct surveillance of the stock exchanges, members of stock exchanges and other market intermediaries registered with it, it does not have powers over listed companies.

Also, the present penalty levels in many cases are not high enough and the monetary penalty for non-compliance for disclosure, information requirements, insider trading and market manipulation is "very inadequate" to effectively deter market players from violating regulatory norms.

The group has also pitched for demutualisation of the exchanges to promote fairness and reinforce investor protection. The report adds that the current ownership and governance structures of many stock exchanges allow scope for conflict of interest as they are owned and managed by members who enjoy exclusive trading rights.

The group has also said that the RBI's regulatory powers over FIs are not as comprehensive as over banks. It has also pointed out the absence of margin requiremnt for instutional trades and has said that this lacuna has to be addressed.

The report has added that regulatory interventions or their absence in one market tend to have repercussions in other markets that are more serious and more widespread than in the past due to integration of markets.

Also due to the emergence of more financial supermarkets and growing complexity of financial transactions, the same market intermediary is under the purview of multiple regulatory bodies.

This has raised the potential for regulatory gaps as well as overlaps, underlining the need for greater cooperation among various regulators.

The problem of multiplicity of regulators emerges from the existence of multiplicity of Acts governing securities market regulation. The legal framework comprises inter alia the Sebi Act, Securities Contract Regulation Act, Indian Contracts Act, Companies Act, Public Debt Act, the RBI Act and the Banking Regulation Act. "Although the scope of the Acts is well defined, problems of interpretation have led to confusion," the group noted.

The group has pushed for the consolidation of the SCRA and the Sebi Act in line with the recommendations of the Dhanuka Committee. It has also said that there is a need to simplify and streamline the legal framework.

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