The formula for determining premium on share issues was a simple average of net asset value and profit-earning capacity value discounted at a fixed rate. Capacity in GoI to handle proposals was adequate to apply the prescribed parameters, but not for creative innovation, which wasn’t on the table anyway.
Ideas and new instruments came from Bombay’s small community of 3-4 merchant bankers. Thus were born debentures – fully convertible, and then partially convertible. But interest rate was capped. The market was thought to be ‘booming’ when in FY1985, the amount raised was the princely sum of a little more than Rs 100 cr. Forty years later, that number seems from another world. Today, market capitalisation of shares listed on NSE is over Rs 4 lakh cr (about $5 tn). More than 50 firms are estimated to raise about ₹70k cr in FY2025.
The winds of change came slowly but surely. Capital Issues (Control) Act was considered advantageous to small investors, but didn’t help businesses grow. Opening up of the economy required a new regulatory framework. Thus was born Sebi in April 1988. It got statutory powers from the Sebi Act 1992, and the Capital Issues Act was repealed, even as the transition between the two regulators led to manipulation for a while.
Sebi’s role is both to develop and regulate the capital market. In its first 10-15 years, Sebi functioned as a statutory regulator more focused on its developmental role. It has three powers: executive, legislative and judicial. It drafts regulations in its legislative capacity, conducts investigation and takes enforcement action in its executive function, and passes orders in its judicial role. There is an appeal process at the Securities Appellate Tribunal (SAT), with a secondary process at the Supreme Court.
In its 36 years of existence, Sebi has acquired credibility as an effective capital markets regulator. Despite its decent track record, though, it finds itself in the crossfire from time to time. There have been some half-a-dozen major scams during its existence. Market intermediaries have now and then brought it disrepute by fraudulent activities resulting in losses to investors. Insider trading cases and delays in their detection and punishment is another aspect.Three other areas of concern:
- Time taken to dispose of matters that come to its attention. Internal capacity can’t be trotted out as a defence since Sebi has been around for a while.
- Perception of Sebi sometimes ‘overdoing’ things, and in some others, ‘underdoing’. While this may not be entirely correct, perception among stakeholders is important in determining the level of trust.
- Sebi seen as constantly tinkering with the regulatory architecture rather than following the dictum, ‘Don’t fix it, if it ain’t broken’.
A final word about accountability. An arrangement where a parliamentary standing committee has an annual, detailed review of Sebi’s functioning should be institutionalised. It may be argued that this will curb the regulator. But this would actually move the needle from mere executive oversight to an arrangement that can be more broad-based.
Largely informal interventions will be replaced by a formal review of functioning that can be made public through the parliamentary committee’s report. Suggestions and directions would then flow and provide a matrix for work in the year ahead. This would strengthen the regulatory framework and help in taking the capital market to still greater heights.