Global body Iosco flags challenges to operational independence

Iosco says Sebi in line with all its principles but one

The International Organisation of Securities Commissions (Iosco) has said statutory powers vested with governments to direct their securities regulator are in contravention of one of its five principles. It has called for governments to reconsider the appropriateness of their powers to direct market regulators in five jurisdictions, including India.

The worldwide association of securities regulators on Wednesday published the Iosco Standards Implementation Monitoring (ISIM) report, which is based on self-assessments submitted by the 55 member regulators, including the Securities and Exchange Board of India (Sebi).

The association has acknowledged Sebi for good practices on several counts, but has flagged the issue of operational independence. “Even if the government body does not, in practice, get involved in the day-to-day operations of the regulator, such statutory powers are not fully in line with the underlying premise of Principle 2 (KQ1a),” said Iosco.

Besides India, regulators from Hong Kong, Japan, Australia, and the United Kingdom have reported statutory powers of the government to direct them about policies, priorities, and performance of functions.

“The governments of those regulators should consider the appropriateness of retaining such a power in light of the political systems in their jurisdictions,” said Iosco in its report.

Iosco further noted that in Section 16 of the Sebi Act, 1992, the Indian markets watchdog is bound by the directions of the central government in writing on questions of policy, and not on matters with regards to supervisory or other functions.  It added that the decision of the central government, whether a question is one of policy or not, is final.

Legal experts, however, said Iosco’s assessment doesn’t deep-dive into the issue of regulatory independence.

“Section 16 of the Sebi Act empowers the central government to issue directions to Sebi on questions of policy. However, Sebi needs to be given an opportunity to express its views before any such direction is issued by the government. This power has never been used,” said a securities expert.

He added that the market regulator does not require any approval from the government or any other department for policy- and decision-making.

But two officials from the finance ministry are nominated by the central government on Sebi’s board.

“The presence of these officials on Sebi’s board helps in ensuring better coordination with the government and other authorities. However, Sebi does not have to consult with the government or any governmental authority to carry out the various functions entrusted to it under the SEBI Act,” explained a former Sebi official.

Iosco, however, is of the view that such appointments lead “to a public perception that there may be political interference in operational matters”. It has assessed member regulators on the implementation of its five principles.

The Spain-headquartered body has lauded Sebi on several counts. It has praised the regulator for being entirely self-funded, for having an investor charter, and for having a body to hear appeals for those aggrieved by its decision. “In India, Sebi is entirely funded by the regulatory fees it levies on regulated entities, intermediaries, and market participants. It does not avail any grant/assistance from the government even for unexpected or large capital expenses,” Iosco said.

“The Securities Appellate Tribunal (SAT) has been established and any person aggrieved by the order of Sebi may appeal before the SAT. Further, any person aggrieved by an order of the SAT may appeal before the Supreme Court of India,” it observed.  Further, Iosco cited Sebi’s efforts towards investor education through investor charters to promote transparency, enhance awareness, trust and confidence among investors about the securities market. 

In 2021, the finance minister in the Union Budget had proposed setting up an investor charter on all financial products, including mutual funds and insurance. Sebi had taken a lead over most other Indian regulators in notifying investor charter, elaborating on the rights and responsibilities of investors.

IOSCO’S 5 PRINCIPLES FOR A REGULATOR

• Responsibilities should be clear and objectively stated 
• Should be operationally independent and accountable in the exercise of its functions and powers 
• Should have adequate powers, proper resources, and capacity to perform its functions and exercise its powers 
• Should adopt clear and consistent regulatory processes 
• Staff should observe the highest professional standards