SEBI needs to be tough but not disruptive: former chief Sinha

Capital markets regulator SEBI can be unpleasant to the extent that it creates confidence but it must send across a message that nobody can go unpunished, its former chief U K Sinha has said.

Under Sinha, who retired last week after completing his six-year long innings, the Securities and Exchange Board of India (SEBI) earned an image of being 'harsh' with the market manipulators and defaulters -- a tag about which the former IAS officer has famously said that there was nothing to be "shy" about it.

Following SEBI's strong action against some large corporates for lapses on governance issues, Sinha was described by some as 'dragon' and of acting like 'activist', to which he had said that the companies should indeed be afraid about their investors resorting to activism.

In a case study on SEBI, done by Professor Suraj Srinivasan of the Harvard Business School along with Research Associate Radhika Kak, Sinha has now shared his thoughts and experiences of helming the markets regulator.

"SEBI's task is to strike a very delicate balance between being very tough and theoretical on the one side and ensuring that it is not disruptive. Anyone with reasonable intelligence can decide what needs to be done and prescribe that, but if measures are undertaken in the wrong way, they can be so disruptive that they will defeat the purpose they set out to achieve," Sinha said.

As per the study, Sinha was reflecting on his tenure as the Chairman of SEBI. "It was February 2016 and he had just been appointed by the Government of India to a second term as the Chairman of SEBI," it said.

In his last press meet as Sebi chief on February 27 this year, Sinha had made it clear that the regulator does not have to feel shy for taking "harsh" action against violators.

In the study, Sinha further said the momentum of capital markets can easily be disturbed by one incident of market misconduct.

"Trust and faith can quickly erode. Our overarching goal is to remain alert, actively monitor market participants and anticipate future events, and act fast in cases of malfeasance. Maintaining trust is key," he said.

Talking about his tenure, Sinha said one of his key priorities was maintaining investor confidence in the markets.

"We need to not only maintain, but also grow trust in capital markets. Law enforcement is critical. The first step is active surveillance, then supervision, and then enforcement. This means acting fast against evidence of malfeasance. 

People should realise that nobody can go unpunished," he said.Often it has been highlighted by the experts that theregulator needs to visualise the forthcoming crisis or at least detect it at the earliest so that the remedial measures can be put in place immediately.

"Our task is to remain very alert and attempt to forecast likely developments. Still, we cannot anticipate everything," Sinha said.

SEBI was also often criticised in the past for being slow with its investigations and in completing its enforcement actions.

Sinha last year therefore set a target of one year for completing all enforcement actions. Besides, the regulator improved its success rate at the Securities Appellate Tribunal, where SEBI's orders can be challenged, to well above 90%.

On how narrowly SEBI should regulate the capital markets, Sinha said, "We have to retain a micro approach on regulations to eschew repeated incidents of a similar nature.

"At India's stage of development, SEBI would be taking too many chances by focusing only on broad corporate governance principles. Stakeholders in India are not yet ready to self-comply with principles.

"A principle-based approach works well in markets where institutional investors play a dominant role. Given India's unsophisticated investor base, we have a bias towards introducing specific rules and regulations. Over time, as the market matures, we hope to move incrementally towards a broad principle-based approach."

He also said that it was very important for SEBI to restore and retain the investors' trust in the market, otherwise the investment would start eroding.

Sinha said SEBI faced a unique challenge in striking a balance between regulating and developing the capital markets.

"Effective regulation is necessary for long-term development of capital markets. Taking action against those that manipulate the system will improve investor confidence over time. This will help deepen financial markets.

"However, our duals goals can be contradictory at times. We do not have the luxury of focusing exclusively on the protection of investor interests. If regulations are too severe, they can stifle the industry's growth. We also need to ensure that the regulatory environment is not too punitive for corporates, and that the supply of investment products remains intact.

"This is an important priority. SEBI's task is to strike a very delicate balance between being very tough and theoretical on the one side and ensuring that it is not disruptive.

"Anyone with reasonable intelligence can decide what needs to be done and prescribe that, but if measures are undertaken in the wrong way, they can be so disruptive that they will defeat the purpose they set out to achieve. We can be unpleasant to the extent that it creates confidence," the Harvard study quoted him as saying.