After a skirmish between the Centre and RBI over the latter’s reserves last year, a similar disagreement is now brewing with respect to Securities Exchange Board of India. In SEBI’s case however, the Centre seems to have already made a suo motu decision. New amendments to the SEBI Act 1992 lurking in the latest Finance Bill, seek to make material changes to the way the market regulator meets its capital requirements. They propose that SEBI obtain the approval of the Centre, in addition to that of its own Board, for all capital expenditure plans. They also mandate that SEBI retain just 25 per cent of its annual surpluses in a Reserve Fund while ploughing the rest into the Consolidated Fund of India. The Reserve Fund is also proposed to be capped at two year’s annual expenditure. The intent seems to be to prevent SEBI from accumulating material reserves, or proceeding with major expenditure plans, without the Centre’s go-ahead. Predictably, this hasn’t gone down well with SEBI which is protesting that this would compromise its regulatory autonomy.
Though the NDA regime has been particularly creative about milking unconventional revenue sources, on this issue it has the support of the government auditor. For the last many years, the CAG has been pulling up India’s financial regulators for sequestering their surpluses from the Consolidated Fund of India, as this undermines Parliamentary scrutiny of public money. While the CAG’s point on the accountability of public institutions is valid, there is merit in SEBI’s reluctance to clean out its reserves as the Government demands. Unlike the RBI, which makes windfall profits from the sovereign right of seigniorage, SEBI’s revenues mainly originate from its own regulatory actions. Penalties and settlement fines it collects already flow into the Centre’s coffers, with only the subscription, registration and renewal fees levied on market participants retained by it. SEBI’s latest audited results for FY17 show that it earned ₹518 crore through such core revenue and supplemented this with investment income of ₹225 crore to meet expenses of ₹388 crore. Forcing SEBI to disgorge the bulk of its reserves would therefore materially dent its income, impairing its ability to invest in regulatory capacity-building.
Given the increasing sophistication of market offenders, SEBI sorely needs to expand its staff strength and buttress its in-house legal, technical and technological capabilities to function as an effective regulator. If at all SEBI is found to have surpluses after making such investments, it can always lower the steep fees levied on market participants, to aid market development. But having said this, given the dated audited accounts that SEBI has put out in the public domain, the CAG is quite right to critique the opaque manner in which India’s financial regulators manage public money. While demanding greater financial autonomy, regulators must also show themselves to be accountable to the public by being more transparent about their financial affairs.