The Securities and Exchange Board of India (Sebi) has told the government that recent budget proposals could undermine its role as regulator, particularly with respect to the recommendation that the minimum public shareholding be raised to 35 per cent from 25 per cent. Already, government-owned companies are laggards in raising this level to the current 25 per cent norm, said a senior Sebi official. “Going forward, this has to go up from 25 per cent to 35 per cent and ensuring compliance would be greatly impacted particularly from PSUs as Sebi has to depend on government for funding,” the official said. FM Nirmala Sitharaman’s July 5 budget proposals require the regulator to transfer its surplus funds to the Consolidated Fund of India (CFI). It will also need prior government approval for its annual capital expenditure plans, she has proposed. That could lead to a conflict of interest with respect to the regulator having to enforce the shareholding cap and PSUs being unable to meet even the current requirement and seeking delays and exemptions for various reasons. “Regulatory financial independence is core to ensuring arm’s length relationship with the government,” said the Sebi official. “This is essential to ensure regulatory compliance from listed PSUs and other government companies without getting adversely influenced by the presence of government shareholding and representatives in these companies.”
As many as 31 PSUs including Punjab National BankNSE -0.89 %, Hindustan AeronauticsNSE -0.04 % Ltd, Bank of India and Corporation BankNSE -1.92 % have still not complied with the 25 per cent minimum public shareholding norm. Sebi chairman Ajay Tyagi has already written to Sitharaman that the proposal to transfer its surplus funds and needed prior government approvals will affect its financial autonomy, ET reported on July 18. “The proposed amendment (is being made) through a money bill as against the current provisions in the Sebi Act, which were well debated in Parliament and enacted thereafter,” said another person familiar with the development. “Any substantive amendment to the Sebi Act should be debated in the Parliament before the law is changed.” Money bills only have to be approved by the lower house, in which the government has a clear majority. The regulator believes that any move to transfer its surplus funds to the CFI would mean the fees levied by Sebi on investors and traders will become a type of additional tax, resulting in a perverse incentive to increase the generation of such revenue for the government.
The question of whether Sebi has the statutory authority to levy a fee on market intermediaries had been raised in a 2001case between the regulator and the BSE Brokers Forum. The matter before the Supreme Court, which was decided in favour of Sebi, was “whether this fee, as a matter of fact, is a tax in the guise of fee and is so excessive as to lose the character of a fee as contended by the petitioners” The Supreme Court had said that Sebi requires substantial sums of money to regulate the securities market and protect investor interest. It said Sebi could charge a regulatory fee for the services it renders to the market. The regulator currently has the flexibility to increase and decrease fees but the budget proposal will limit its flexibility. “Sebi’s accounts are audited by the CAG (Comptroller and Auditor General). If in any given year, the fee amount is less compared to the previous year, then questions will be raised that Sebi has caused loss to the exchequer and would be under pressure to keep generating revenues for the government by charging higher fees,” said the person cited above.
The Economic Times, 19th July 2019
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