This could not have come a day too soon. At a recent press conference, the Chairperson SEBI referred to a new regulatory design. While setting out the details, she referred to the consultation mechanism leading to the writing of regulations, and the subsequent, not necessarily consequent, difficulties being faced by the regulated universe at the time of implementation. She articulated the new approach in the following words:

“Essentially, this new element in the regulatory design is as follows: We have seen over the last many months that as we bring out various regulations or modify various regulations, we find that at a policy level we have a lot of valuable inputs that comes to us from advisory committees and public consultation. We get a lot of input, we take that and create our regulation, then public consultation and we approve it.”

“However when they are implemented, we find that two things happen. One is that a lot of queries come to us on how are these supposed to be implemented…and will this be adequately compliant etc. First we tried to explain this through FAQs and more detailed circulars. On deeper reflection, we came to the conclusion that what we are dealing with is standard setting for implementation… this is not the regulation but about implement. This task is done by industry bodies themselves.”

“Now our regulations will take us to a certain stage of expressing regulatory intent and what is to be done, but a lot of ease of doing business lies in the details of how to implement.”

The argument proceeds on the assumption that the present consultative process is satisfactory in all aspects. A few points might be worth pondering over. Is the time given for absorption of the proposal, consideration of its implications, and articulation of concerns, if any, adequate to get an informed response? It is relevant to note that elsewhere information has been put out to show that in the last six months, SEBI issued 40 consultation papers, which is a multiple of what had happened during similar periods in the past. The extraordinary number of consultation papers, and the limited time available for responding to the content of those papers, would necessarily have led to either an absence of an adequate number of responses, or responses that did not carry evidence of completeness or of comprehensiveness. The first element in the reform process ought to be the putting in place of a meaningful and pragmatic consultation process. It is also necessary, in the interest of all concerned, that consultation should be at least a two-stage process, the first being the receipt and collection of the initial responses, and the second being responses to a revised consultation paper, factoring in all the worthwhile suggestions that have been received.

Going further, Chairperson SEBI has observed as under, in the context of implementation of the regulations:

“However when they are implemented, we find that two things happen. One is that a lot of queries come to us on how are these supposed to be implemented…and will this be adequately compliant etc. First we tried to explain this through FAQs and more detailed circulars. On deeper reflection, we came to the conclusion that what we are dealing with is standard setting for implementation… this is not the regulation but about implement. This task is done by industry bodies themselves.”

“Now our regulations will take us to a certain stage of expressing regulatory intent and what is to be done, but a lot of ease of doing business lies in the details of how to implement.”

There ought to be the clear recognition that regulation is a means, and implementation is the desired objective. Further, it is not industry bodies that undertake implementation, but the regulated entities to whom the regulations apply. Industry bodies come into the picture when they offer comments on the contents of the consultation paper, and thereafter, on occasion, pointing out the difficulties in implementation, based on representations made to them, by their member entities, which are the regulated corporates. If a wider role is contemplated for the industry bodies, the proposal set out in the following paragraph, could be given some thought.

The first consultation paper may be put out in the public domain, and also sent to the representative chambers and confederations, giving them enough time to offer their comments on the various elements of the proposal. Where there are serious concerns expressed, the Regulator should convene a meeting, with representatives of the chambers and confederations, to discuss and understand the practical difficulties that are being faced, and to iron out those problems. Improving the ease of doing business is the common aspiration of both entities across the regulatory divide, and a constructive conversation is, without argument, the best method of reaching agreed conclusions.

A related aspect merits consideration. For some years now, we in Excellence Enablers, have articulated the need for an in-house body that examines the Regulatory Impact Assessment of proposed regulations. This could take the shape of a Regulatory Review Authority, also functioning as a Regulatory Preview Authority. What this in-house body should do is to look at the proposed regulation, and ask a few questions. Firstly, is this new regulation necessary, or are existing regulations adequate to address the identified problem. Secondly, if this proposed regulation is implemented in the present form, what benefit, if any, will accrue to the intended beneficiaries, and what costs will be attached to such regulations. The fact that compliance riding on regulations comes with a cost, should not be lost sight of.

Chairperson SEBI also referred to an earlier consultation paper on tracking unpublished price sensitive information (UPSI), and mentioned that since there will be more USPI events, a good trading plan is all the more essential. She indicated that by the end of August, there would be a consultation paper to make the trading plan easier. Before embarking on this revised consultation paper, it might be worthwhile for SEBI to ascertain, from the listed entities, how many persons serving in them, have opted for trading plans. Our guess is that the number would be abysmally low, and we would be delighted to be proved wrong.

The improvements required in delisting norms also figured during the press conference. Chairperson SEBI rightly identified that the reverse book building mechanism has several concerns, one of which is that some persons in anticipation of delisting, acquire shares in order to cross the 10% limit, so that the persons attempting the delisting, cannot cross 90% of the shareholding. This gives an opportunity to those holding a little higher than 10%, to quote very high prices, thereby frustrating the delisting attempt. The requirement of ensuring that persons on both sides of the transaction get a fair value is one that SEBI is expected to address. One option that the media has commented on is the determination of a fixed price. It would be prudent to await SEBI’s considered response on a worthwhile policy in this area.

The vexed question of rumour verification also figured in the press conference. Chairperson SEBI observed as under:

“Let’s take for instance one of our circulars on rumour verification. The regulation in the circular conveys the intent of saying that if there is a rumour in the market… it is there and making the price move, then the company needs to come in and verify that rumour. That is a regulation that no one has a dispute about… but the challenge is how to implement it. What we understood is that most corporates already has a media-tracking service… it is already there. Is it our desire as a regulator that they invest hundreds of crores to invest in a parallel system? Of course not!”

The present circular, which is laudatory in intent, regarding rumour verification, raises quite a few implementation related issues, and the corporates have been genuinely concerned about them. The intent of the circular cannot be questioned, but to assert that “this is a regulation that no one has a dispute about” is a bit of a stretch. If, as admitted, the challenge lies in implementation, clearly the regulation is not undisputed or indisputable. SEBI’s suggestion is that since most corporates have a media tracking service, they should use the services of such entities to help them with the implementation of this circular. It is necessary to ask the question as to the extent of coverage that the media tracking service provides. Good media tracking services make available the entirety, or nearly the entirety, of published material, on any aspect relating to the company, including every unverified rumour, that is published. It is thereafter for the management to plough through that information, and to make judgement calls on what are the rumours that are either already influencing, or might have the potential to influence, the movement of share prices. This has to be done in real time, and a well-considered response sent to the Stock Exchanges within the stipulated time. Secondly, Chairperson SEBI is also have reported to have said that it is not SEBI’s desire, as a Regulator, that corporates invest hundreds of crores to create a parallel system. She is reported to have said that this will cost only a few additional thousands of rupees. Informal consultations, with a couple of renowned media tracking agencies, give the impression that while it might not necessarily lead to crores of investments by individual entities, it would be far more than a few thousands of rupees, to set up a worthwhile system. Setting up a system, and collecting the information, is the least of the problems. The real issue is whether unverified rumours should be legitimised by detailed responses, rather than a simple denial. The collective wisdom of the confederations and the apex associations could possibly help in separating the grain from the chaff. Until a reasonable system is devised by them, and endorsed by SEBI, would it not be more prudent to put this regulation on hold?

Earlier in this article, a reference was made to a large number of consultation papers that have been put out in the recent past. Some numbers will help to explain the position. In 2023, 40 consultation papers have been put out in the first 6 months. The highest number in the previous 13 years has been 24 in 2021 (the full year). Further comment on this is superfluous.

Since a new regulatory design is on the anvil, may we present our wishlist, which hopefully echoes with much of the regulatory universe?

1. SEBI should put in place a Regulatory Review Mechanism, which doubles as a Regulatory Preview Mechanism.
2. A Regulatory Impact exercise should be a condition precedent to undertaking any new regulatory initiative.
3. Regulations must be written in simpler language, and with attention being paid to grammar and syntax, so that there are no interpretation issues likely to arise.
4. Capacity building, both in numbers and in contemporary skillsets, should be given high priority.
5. When it is reasonably clear that a regulation is intended to address a current set of problems, it should contain a sunset clause, so that it does not remain on the statute book after its relevance is lost. A few months before the sun sets on the regulation, a review should be done to assess whether it is needed after sunset date.

Even as this newsletter was being put to bed, came an announcement from the Hon’ble Minister of Finance and Corporate Affairs that Regulatory Impact Assessment should be given priority. To say that this was music to the ears of those who have, for several years, like a stuck record, kept repeating this demand, is to make a gross understatement. There is reason to expect, not merely hope, that the Minister’s exhortation would usher in a regulatory regime that is not laden with unnecessary regulations, and focusses on what is necessary and contemporary.

“Hope dwells eternal in the human breast”.