The appointment of Ajay Tyagi as chairman of the Securities and Exchange Board of India (Sebi) is unlikely to face as much scrutiny as his predecessor U.K. Sinha’s. The outgoing Sebi chief had to face a number of public interest litigations, questioning his appointment as well as an extension of his tenure. The courts have dismissed each of these petitions. While Tyagi may not have to go through this ordeal, things have been a bit wobbly even before his first day in office.
The government’s first communication on Tyagi’s appointment as Sebi chairman suggested he has been appointed for a period of five years. It was later clarified the appointment was for three years, which led to reports that Tyagi’s tenure was cut by the government. It’s not clear what exactly transpired, although it’s fair to conclude that the announcement could have been handled better.
A larger concern is the government’s choice to restrict the new chairman’s term to three years initially, with the possibility of an extension later. A number of experts have said that the so-called “carrot of extension” works against the principle of independence of Sebi chairman’s office. They say that the government can potentially dangle this carrot and get Sebi to toe its line.
This isn’t merely a theoretical debate. Question marks about Sebi’s autonomy have surfaced in the past.
Given the possibility that the autonomy of the regulator can be compromised, experts have suggested a five-year term for a Sebi chief, without any scope for extensions.
The Financial Sector Legislative Reforms Commission (FSLRC), for instance, has recommended a five-year term for the chief of the markets regulator. “All members of a board (including the chairperson) would have a fixed term of five years, subject to a retirement age for executive members. Members of the board can be reappointed for another term of five years as members. This provision will, however, not be available for the chairperson of the board who cannot be reappointed,” the Commission said as part of its recommendations to the government.
Hopefully, Tyagi can make the most of the three-year term and go about his job without fear or favour. A Delhi-based observer of the finance ministry says he is hard-working, meticulous and adopts a data-driven approach to policymaking. Ajay Shah of National Institute of Public Finance and Policy wrote in a column for Business Standard, “Ajay Tyagi and Vikram Limaye, at Sebi and National Stock Exchange respectively, are a great new leadership at the centre of India’s financial reforms. They have a difficult journey ahead of them. We should all put our shoulders behind their task.” The government should do its bit by giving the regulator the required independence to carry out its functions effectively.
Of course, demands for the regulator’s autonomy can’t be made in isolation. With great power comes great responsibility. The FSLRC puts it best, “Regulatory independence is essential to support the functioning of the regulator as an expert body, and to ensure that regulation-making and enforcement do not fluctuate with changes in political executives. But independence is not an unmixed blessing: when unelected officials are given strong powers, this needs to be accompanied by appropriate accountability mechanisms.” While the FSLRC report describes these mechanisms in great detail, one key takeaway is that Sebi’s objectives need to be more clearly defined.
The regulator’s annual report currently contains a myriad set of numbers and graphs about how the markets it regulates are performing. It needs to be more specific. For instance, India has been losing market share in derivatives trading for some of the most popular products such as the rupee-dollar and the Nifty. Sebi should explain in its performance report what steps it has taken to arrest the export of India’s financial markets. Of course, the government should first clearly define what the regulator’s objectives are in specific terms, before it can ask for an account from Sebi in specific terms. As things stand, its stated objectives include broad terms such as the development and the regulation of the securities market.
Some question a clear five-year term for the Sebi chief, stating that a relatively long term can result in abuse of power. But apart from better accountability mechanisms, which can be used to keep checks, the government also has the option to terminate the services of the chairman, in case of misconduct. As such, there are no good reasons to continue with the current policy of granting only a three-year term, with the possibility of a two-year extension.