In the Union Budget speech, the finance minister made special mention of the Securities and Exchange Board of India for how well it has done in the 25 years of its life. Indeed, praise well deserved for an institution, despite its fair share of highs and lows.
However, this column is not about Sebi. It is about the bigger picture of our economic history as a nation and how we have performed during the same period. Sebi was given statutory powers in 1991 as an integral part of the economic liberalisation policy that was introduced when we were on the verge of economic breakdown. "Controls" were sought to be replaced by "regulation".
Sebi came into existence in 1988, but in 1991, it was felt the time had come to introduce a regulator, and a Presidential Ordinance was promulgated, followed by an act of parliament in 1992. Therefore, Sebi's lifetime is pretty much the lifetime of India's departure into an "era" of economic liberalisation. The finance minister's commendation of Sebi's performance over its lifetime, therefore, begs an analysis of how the rest of the economic and regulatory policy, has fared. Creating Sebi was only a part of the bigger picture.
Unfortunately, while Sebi has acquitted itself creditably over the long term, from a bigger picture perspective, the regulatory policy does not much to be commended for. Whenever any regulator was sought to be introduced, the government would always say a "Sebi-like" regulator is being considered. However, there is not much to write home about in relative terms about the rest of the system. Different segments of the system are regulated by different regulators, each with a mind of its own, a zealous insecurity of its own turf, and indeed, an equally zealous desire to expand the turf.
Lack of clarity on regulatory roles and oversight continues to dog the financial sector - the capital market regulator does not see eye to eye with the insurance regulator. The insurance regulator does not see eye to eye with the banking regulator. The banking regulator does not see eye to eye with the government. The government struggles to resolve policy conflicts to present a seamless and user-friendly platform to stakeholders in the financial system.
At a policy level, even those involved in authoring the departure from the control raj, have forgotten why they did what they did. Control is seeping back into the system - only it now dons the fabric of "regulation". A policy of control is preferred by statists, who believe that enormous wisdom vests in the State, which can determine what is good for the subjects. So, the government would decide if an investment into the country is good, the government would decide how many cars a car plant should manufacture, the government would determine if steel used in making cars would be better used to make train compartments, and whether a financial product offered to the public is of a good quality. An approach of control typically is fed by perceived shortage of resources (we were a poor country for very long) and propriety as determined by those in government (whether steel should go to make cars of trains), and paternalism (the view that Big Daddy would decide what is good for the family).
Instead, a policy of regulation would entail the State laying down the rules of the game upfront, and enabling subjects to play the game to the best of their ability. So, instead of controlling what financial products can be offered, the rules of what disclosures would need to be made to enable stakeholders to make informed choices, would be the norm. It would involve not having to judge whether steel is better used for cars or for trains, and instead focusing on whether price discovery for steel in the market is free and fair and letting forces in the market determine where the resources should be deployed. It would involve letting investors in car plants decide how many cars they want to manufacture, on the basis of the cost pattern, resource availability and demand for cars.
When the bigger picture in 1991 was to move from controls to regulations, India prospered. The Foreign Investment Promotion Board was set up to be a single-window through which a foreign investor could get all necessary approvals for investing in India without having to run around multiple ministries and government departments. Capital was scarce and investment was welcomed. Over time, as money flowed in, and India grew faster than other economies, we forgot why we began this journey. The belief system in New Delhi changed to: "We opened up when we needed capital badly, but today, capital needs India more than India needs capital". All sorts of conditions and terms got imposed on capital inflows. Today, the economic growth is projected at sub-5 per cent per annum compared to the over 8 per cent annual growth, when policy was freer.
The past 20 years can actually be mapped to how philosophy changed. The finance minister who opened things up, backed by a strong Prime Minister, is now the Prime Minister. The finance minister who bloomed and had his best days in office as part of two patchwork coalition governments in the mid-1990s is now the finance minister. Yet, both of them achieved a lot more in their earlier avatars than how they are getting to perform now. Each of them empowered Sebi immensely in their respective tenures. However, political will has now given way to unelected bureaucrats, who find it easier to say "no" than to say "yes, why not" having a stronger say in policy.
Deep-rooted suspicion of investors, lack of trust in the functioning of markets, and the inability to over-rule bad policy at the political level, is ensuring that the glory of Sebi's 25 years that is now being commended may elude the rest of the policy framework in the next 25 years.