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Thursday, April 10, 2025

Be you ever so high, the markets are always above you

by Ajay Shah.

Purposive state action is fraught with error. Human and social systems are poorly understood and contain nonlinearities, so there is a law of unintended consequences. Grand schemes go wrong. What works well is a humble approach, of crossing the river by feeling the stones, in an environment of expertise. There are two rings of containment of power, that help address a regime which diverges from this approach.

Two rings of check-and-balance

The first ring of containment of power is the checks and balances of the political system. Liberal democracies work by dispersing power, by using ambition to counteract ambition. This curtails mistakes.

In some situations, these things break down. Power becomes concentrated, which induces mistakes. The second ring of containment is the financial markets.

  1. When Liz Truss was Prime Minister in the UK, the markets pushed back. The 30-year yield went from 3.6% to 5.1%. The GBP dropped 7.6%. The FTSE fell 7%. Ultimately, this led to her being ousted in 44 days.

  2. When Tony Blair and the labour party won the elections on 2 May 1997, the financial markets expressed skepticism. When a new government is greeted with a higher interest rate, this immediately curtails spending power. This pushed the new government to go through with a group of responsible decisions. On 6 May 1997 (i.e. 4 days after winning), they announced independence for the Bank of England coupled with the creation of an independent Debt Management Office so as to unburden monetary policy from the debt management conflict of interest. On 2 July, in the budget speech, they were cautious in their spending commitments. All these actions were crafted because the second ring of containment impinged upon the political leadership.

  3. Vijay Kelkar has long argued that the stock market crash of 17 May 2004 helped encourage Sonia Gandhi to choose the team of Manmohan Singh, P. Chidambaram and Montek Ahluwalia as the UPA economic policy leadership, which delivered the economic successes of 2004-2011.

  4. James Carville worked for Bill Clinton. A rough analogy into Indian politics would be Amar Singh. He once said: "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." This awareness tempered and shaped the early actions of the Clinton presidency, which worked out as a successful period for the American economy. 

  5. It is starting to work out similarly with the Trump Tariffs. The wheels of global general equilibrium started turning on 2 April, with forward looking forecasts embedded in financial market prices. Financial players everywhere asked: How well will the US economy work? Is the US the safe haven, with sound institutions, that we thought it was?

    The 10 year US Treasury went up from 3.9% to 4.5%. The 30 year bond briefly went up to 5%. The S&P 500 dropped 12.1%. Safe haven seekers turned to Germany, and yields on government bonds there fell. Larry Summers said on 9 April:  "We are being treated by global financial markets like a problematic emerging market".

    In my column in the Business Standard of 3 March, I had said that in the US, the first ring of containment has broken down --
    The US is in a constitutional crisis, with a failure of checks and balances, with the inability of the judiciary, the legislature, the electoral system, the agencies, the special counsel and the press to rein in a strongman.
    and that the second ring of containment would have to do its work --
    Market discipline will then impinge upon Trump and the MAGA world, and we hope, atleast partly kick them into shape. Be you ever so high, the markets are always above you.

Market discipline is not perfect. In the field of sovereign risk, we know well that the market tolerates a lot of fiscal misbehaviour for a long time, and then abruptly pulls access. Similarly, I have argued that the Indian equity market fares poorly on macro forecasting while it does well on micro-forecasting. The wrath of the market involves caprice. The key point here is that markets do speak truth to power, over and beyond the checks and balances of the political system.

A development perspective

The yearning for raw power is there in many people. On 9 April 2025, Donald Trump described his decision process: "Instinctively, more than anything else. I mean, you almost can’t take a pencil to paper. It’s really more of an instinct, I think, than anything else".  Montagu Norman, Governor of the Bank of England said in 1930: "I don't have reasons, I have instincts". For a country to have a high level of per capita GDP, this primeval yearning for power needs to be contained.

The first ring of containment is the checks and balances in the political system (e.g. converting the Bank of England into an inflation targeting central bank with dispersed power in the Monetary Policy Committee). A good financial system constitutes the second ring of containment that checks such impulses, that induces better decisions by the political masters.

From an Indian perspective, checks and balances are the essence of the growth journey. The first ring of containment is relatively well accepted (Kelkar & Shah 2022). More attention is required upon the second: a financial markets system that would induce checks and balances, that would matter enough to reduce the incidence of mistakes in public policy.

Consider government borrowing. When government borrowing takes place as a set of acts between consenting adults, where voluntary lenders negotiate a price on the bond market, this creates the checks and balances in the episodes narrated above. In India, about 95% of government borrowing is mobilised coercively (Chitgupi et. al., 2024), which limits the role that the financial markets play in reshaping the incentives of the state. 

Consider the exchange rate. The checks and balances in the episodes narrated above involved a starring role for the exchange rate. When poor countries run a government controlled exchange rate, this channel of influence is limited [EiE Ep67 Floating exchange rate], which sustains poverty.

In India, a disproportionate burden of adjustment falls upon the equity market as other markets adjust less.

In today's mainstream thinking, financial development is seen as integral to the journey of economic development through its allocative function.  `Finance is the brain of the economy', `Wall Street tells Main Street what to do'. The financial system should occupy `the commanding heights of the economy' and make all the detailed allocative decisions about firms, technologies or industries which receive investment [EiE Ep21 The beauty of finance]. A good financial system performs the allocative function better than `industrial policy' can [EiE Ep89 Industrial policy]. 

But finance plays another important function as well: that of reshaping the checks and balances of the state, or being the second ring of containment for power. The second ring of containment matters most when the first ring of containment -- checks and balances of the political system -- falters. These two lines of reasoning encourage us to place financial sector development at the centre of the growth journey [EiE Ep57 How to do development].

There was a time in India when we were making progress in building a financial system. This has faltered (Shah 2023;  EiE Ep71 The Journey of Finance). We need to get back to the knowledge building and community building that began in the early 1990s in this field.

Wednesday, April 02, 2025

Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading

by Natasha Aggarwal, Amol Kulkarni, Bhavin Patel, Sonam Patel, and Renuka Sane.

Insider trading is considered to undermine the fairness of the market and erode investor confidence. The Securities and Exchange Board of India (SEBI) has, in recent years, increased its focus on, and intensified its enforcement of, insider trading cases. Expanding enforcement actions should prompt a deeper examination of how effectively SEBI is performing this function vis-a-vis the "rule of law". Adherence to the rule of law by the regulator promotes transparency, creates a stable and predictable environment for businesses and individuals and builds public trust in the regulatory system. Regulatory actions need to be evaluated on benchmarks grounded in legal theory and the extant legal framework.

In a new working paper, Balancing Power and Accountability: An Evaluation of SEBI's adjudication of Insider Trading, we evaluate SEBI's orders on insider trading cases over a 15-year period (2009 - 23) as well as the performance on these orders in appeal before the Securities Appellate Tribunal (SAT). We develop an evaluation framework based on elements of the rule of law applicable to regulatory adjudication, with 56 indicators for SEBI orders, and 82 indicators for orders of the Securities Appellate Tribunal (SAT).

This paper addresses three critical questions:

  • What do SEBI's enforcement actions look like, and how have they evolved over the years?

    SEBI's annual reports provide some broad data about the total number of enforcement actions undertaken in a year, but do not provide details of the type of enforcement actions taken for each type of violation, the particular legal or regulatory provision alleged to have been violated, or the impact of successful enforcement actions in reducing instances of insider trading.

    Our dataset comprises 320 SEBI orders - 255 orders are by Adjudicating Officers (AOs) and 65 are by Whole-Time Members (WTMs). Each order can contain cases against multiple entities - we call them alleged violators. The 320 orders contain a total of 912 alleged violators. SEBI officers have imposed sanctions on 565 of the 912 alleged violators (62% of the alleged violators). AOs and WTMs have imposed penalties in 336 cases and 82 cases respectively. The median penalty amount for AOs is about Rs. 7.8 lakh, and for WTMs is about Rs. 15 lakh. Only WTMs, and not AOs, have the power to impose debarment and disgorgement. We observed that they have imposed disgorgement in 144 cases, and debarment in 192 cases. The average disgorgement amount is Rs. 46 crore, while the median is only Rs. 1 crore. The average period of debarment is 3 years, and a median of 1 year.

    Our paper illustrates the number of insider trading orders issued between 2010 and 2022. This shows that a spike in orders on insider trading from 2017, and then again in 2019. There has been a slight drop in the number of WTM orders in 2022. This is consistent with statements in the SEBI annual reports, which suggest that insider trading has been high on the regulator's agenda.

  • Are SEBI's orders consistent with the requirements of procedural and substantive rule of law requirements?

    The procedural rule of law measures are based on administrative law and natural justice principles, and deal with how SEBI has been performing in terms of procedural fairness while adjudicating insider trading matters. One aspect of procedural fairness is that the orders should include certain basic information. We find several shortcomings in providing factual information on basic rule-of-law indicators. First, several orders do not mention basic facts about the case such as the date of show cause notice (7%), period of investigation (17%), period of UPSI (27%), and a description of UPSI (20%). Second, orders do not cite precedent. We find that about 87% of orders do not cite any previous AO or WTM order. Finally, the orders do not specify the full details of the sanctions imposed. In 12% of cases where disgorgement was ordered, the time period for payment was not specified. Similarly, for both penalties and disgorgement, interest rate was not specified in a large number of cases.

    The substantive rule of law measures are based on the law relating to insider trading. These dive a bit deeper than the procedural requirements, and examine whether the orders satisfy the requirements of applicable law and regulation. For example, a key component of a good order on insider trading should be that SEBI has been able to clearly demonstrate that the violator is an insider. We find that SEBI has identified a clear insider relationship in only 335 (60%) of its orders. In the remaining 230 orders, it has described a connection in 152 (66%) orders. Describing a connection is not as clear as specifying the connection. If we were to give SEBI the benefit of the doubt and consider it as an acceptable description, even then, in 14% of the cases SEBI has failed to provide any explanation on how a person is an insider

  • How do SEBI's insider trading orders stand up to challenge before the Securities Appellate Tribunal (SAT)?

    Our analysis resulted in a set of 119 cases in the SEBI and SAT datasets. These cases result in 183 appeals (32%) out of the total 565 cases with sanction. Out of these, 97 (53%) were allowed, partly allowed, or remanded, while 86 (47%) were dismissed. This suggests that once appealed there is a 50% chance that the SEBI order will not hold in appeal.

    We find that the higher the sanction, the higher the proportion of appeals. 38% of AO cases and 17% of WTM cases with a penalty amount higher than Rs. 10 lakhs resulted in an appeal, relative to 22% of AO cases and 5% of WTM cases below Rs. 10 lakh. This is more pronounced in the case of debarment and disgorgement, where appeals are present for more than half the cases with higher sanctions. We also find that it is less likely that an AO or WTM case with penalty above Rs. 10 lakh or debarment for more than one year will be modified in appeal. 79% of WTM cases involving higher disgorgement amounts and all WTM cases involving a penalty below Rs. 10 lakh were modified in appeal.

Regulatory enforcement actions are necessary to ensure that those who violate the law face consequences, and may also have a deterrent effect on others. However, there are adverse consequences if these actions emerge from a flawed process, or if the actions taken are arbitrary or disproportionate. SEBI is ahead of other Indian regulators such as the Reserve Bank of India in at least publishing its orders. An appeal rate of between 30-38%, and a win rate of 50% at the SAT could be further improved by investments in order writing, and by re-evaluating the regulations on insider trading.


The authors are researchers at the TrustBridge Rule of Law Foundation.

Tuesday, March 25, 2025

Announcements

Socratic dialogues on cities, cooperation

Polekon is organizing socratic dialogues on 'The functional order of cities' and 'The architecture of cooperation'.

Also, a new cohort of political economy of development - a 4-week workshop on economic development - is starting April 5th.

About socratic dialogues

Socratic dialogues are guided conversations where participants explore ideas, develop habits of critical thinking and practice effective habits of communication.

This is a unique kind of conversation where asking "why?" isn't confrontational but rather opens a path to deeper understanding. Through sustained, structured dialogue, participants develop not just knowledge but the habits of mind essential for clear thinking - careful listening, precise speaking, examining assumptions, and tracing the roots of their opinions.

The functional order of cities

Cities shape our daily lives in profound ways, yet the principles that make them vibrant or lifeless, safe or dangerous, remain poorly understood. This program brings together two of the most insightful critics of urban planning and state simplification - Jane Jacobs and James C. Scott - to explore what makes cities work, why certain forms of planning fail, and how we might better balance the needs for both spontaneous vitality and planning in our cities.

Time: 5pm - 7pm
Dates: Sundays, April 12, 19, 26 and May 3, 2025
Learn more

The architecture of cooperation

There's a tendency to attribute all that is orderly to laws and legislations that must have made it so, and similarly attribute all that is disorderly to their absence or weak enforcement. But the machinery that enables the deep cooperation that is the defining characteristic of modern life has multiple gears; it is a mistake to attribute ubiquitous honesty to the single lever of state power.

We'll explore the architecture of cooperation - the hierarchy of instincts, norms and formal institutions that support cooperation in our modern world.

Time: 5pm - 7pm
Dates: Sundays, April 13, 20, 27, May 4 and 11, 2025
Learn more

Political economy of development

The workshop blends theory and history to provide a framework for thinking about India's economic development. It starts with the basics of economic growth, examines India's development path, and contrasts it with Taiwan, one of the rare success stories of the 20th century.

The full course outline is available on the course platform. Learn more about the workshop here.

Thursday, March 20, 2025

Announcements

Call for Proposals: VizChitra 2025

A Space to Connect and Create with Data

27th-28th June 2025, Bangalore

Data visualization practitioners in India are spread across different communities. VizChitra 2025 aims to bring them together through a first-of-its-kind conference. The goal is to build a community of diverse, interdisciplinary individuals working across the visualization spectrum and facilitate learning and connections between people from different industries and disciplines who share a common interest in the power of data and storytelling.

VizChitra's Mission

  • Consider & Curate: Build a rhythm of curated events to spread the practice of data visualization.
  • Cultivate & Care: Nurture a fertile space for learning & sharing of data visualization skills.
  • Create & Collaborate: Express and co-create to push the boundaries of data visualization.

Conference Details

Conference Day

Date: 27th June 2025
Venue: Bangalore International Centre (BIC), Domlur
Format: In-Person & Live Stream

Workshop Day

Date: 28th June 2025
Venue: Across Bangalore, Karnataka
Format: In-Person Only

Who should attend?

Individuals from diverse disciplines engaged in data visualization, including:

  • Communication & Design Roles: Journalism, Non-profits & Think Tanks, Media, Design Teams (UX, UI, Interfaces).
  • Functional Roles: Business Intelligence, Data & Analytics, Marketing Comms, Planning.
  • Domain-Specific Vis Roles: Public Policy & Planning, Sports Analytics, Healthcare Analytics, Legal, Fintech.
  • Researchers & Academia Roles: Information Visualization, Human-Computer Interaction, Scientific Communication.
  • Tool Builders & Creators: Data viz tool makers, Dashboard designers, Analytics & AI tools.

Submission Themes

1. Explain & Learn

  • Process & practices of dataviz
  • Storytelling & structuring narratives
  • Aesthetics & design principles
  • Accessibility, ethics & inclusion in dataviz
  • Unique works by Indian practitioners

2. Explore & Play

  • Dashboard & interaction principles
  • Domain-specific data visualizations
  • Collaboration & conversational interfaces
  • Scalable data exploration processes
  • State of data in India (availability, collection, etc)

3. Imagine & Innovate

  • Usage of AI & technology in data visualization workflows
  • Emerging mediums e.g. 3D, AR/VR
  • Beyond viz e.g. sonification, physicalization
  • Experiential viz e.g. data art, installations

Session Formats

  • Standard Talk (30 min: 25 min presentation + 5 min Q&A) - Deep dives into complex topics with insights and personal learnings.
  • Lightning Talk (15 min: 12 min presentation + 3 min Q&A) - Quick, impactful presentations on novel concepts or solutions.
  • Unconference / Birds of a Feather (BOF) Session (45 min) - Community-driven discussions on shared interests and challenges.
  • Hands-on Workshop (Half-day: 3 hours / Quarter-day: 1.5 hours) - Immersive learning experiences with direct guidance.
  • VizChitra (Alternative) Session - Have an idea that doesn't fit the above formats? Pitch it to us!

Submission Guidelines

Submission guidelines: https://hasgeek.com/VizChitra/2025/sub

The call for submissions closes on 15th April 2025, 11:59 PM. Selections will be made on a rolling basis.

Join us in shaping the future of data storytelling in India: https://vizchitra.com/

Pumped storage plants in India: assessing policies and progress

by Upasa Borah, Chitrakshi Jain and Renuka Sane.

The transition to renewable energy faces challenges related to intermittency and variability in energy availability. Energy storage systems (ESS) play a crucial role in addressing these issues by storing excess renewable energy (RE) during periods of low demand and releasing it during peak hours. This enhances the scalability of renewable energy systems worldwide, reducing reliance on fossil fuels and supporting the integration of renewables into the grid. ESS technologies enable the conversion of electricity into other forms of energy for storage and later use. Among these, pumped storage plants (PSPs) remain one of the oldest and most widely relied upon solutions. These are adaptations of conventional hydropower plants.

India has set a target to achieve 50% cumulative installed capacity from non-fossil fuel-based energy resources and to reduce the emissions intensity of its GDP by 45% by 2030. India has also seen policy changes in ESS over the last few years. Legal recognition to ESS was granted in 2022, and new policy guidelines for PSPs were notified in 2023. The Central Electricity Authority (CEA) has estimated the storage capacity requirements, which will enable greater integration of renewable energy sources. These include 26.69 GW of pumped storage capacity and 47 GW of battery energy storage system (BESS) capacity by 2031-32. Among the two commercially viable technologies, BESS and PSPs, the latter present several advantages. Batteries are restricted by their storage capacity and their lifespan, and will have to be replaced frequently. PSPs, on the other hand, have the longest service life of 50 to 150 years and can store and generate energy on a much larger scale.

Given the importance of ESS and PSPs for India's energy transition, our recent paper titled "Pumped Storage Plants in India: Assessing Policies and Progress" presents the evolution of policy on PSPs and their performance in India.

The paper addresses the following questions:

  • Where do PSPs feature in the overall storage policy?
  • How many PSPs are under various stages of development? How many are eventually being completed?
  • Are the policy measures encouraging the private sector to participate in the development of PSPs?
  • Is the stated requirement of adding 26.69 GW of PSPs storage capacity by 2032 likely to be completed in the current context?
  • What lessons from our experience of executing hydropower projects are relevant for the development of PSPs?

To study these questions, it builds a dataset of PSP projects from the information published by the Central Electricity Authority (CEA) and the CapEx dataset maintained by the Centre for Monitoring Indian Economy (CMIE).

Our analysis finds that the policy environment has become conducive to the development of energy storage systems in general and PSPs in particular. The participation of the private sector in the development of PSPs has increased considerably since 2018. Out of the 130 GW capacity that is under various stages of planning, 102 GW is being developed by the private sector. However, the ratio of projects which receive concurrence and are eventually completed remains low. Of the 91 projects in the dataset, 17 are under implementation, and six have been completed. The completed projects account for 3.3 GW of storage capacity. The low ratio of PSPs that are completed, combined with the experience of delay in executing hydropower projects, implies that the requirements of storage capacity addition from PSPs by 2026-27 and 2031-32 will be met only if the capacity under planning is realised and the projects are completed within six years.


The authors are researchers at the TrustBridge Rule of Law Foundation.

Thursday, March 13, 2025

A guide to writing good regulatory orders

by Natasha Aggarwal, Bhavin Patel and Karan Singh.

India has several regulators that are vested with quasi-judicial powers and that play a pivotal role in economic governance. In exercising their quasi-judicial functions, regulatory orders must: (i) demonstrate compliance with the principles of natural justice, (ii) establish legitimacy by showing how they are taken strictly in accordance with, and to the extent authorised by the governing law, and (iii) be accountable, by ensuring that all the information an appellate authority may require for its evaluation of the regulatory action is clearly documented.

Regulatory orders significantly impact market participants and public trust. In particular, four sets of stakeholders are impacted by regulatory orders: (i) parties involved in the enforcement proceedings, (ii) the regulator itself, (iii) appellate and review fora, and (iv) the market and the general public. However, deficiencies in reasoning, structure, and clarity in quasi-judicial orders often undermine regulatory legitimacy and efficiency, leading to diminished stakeholder confidence. Moreover, arbitrary orders that do not demonstrate application of mind can be challenged or overturned or remanded in appeal. Such challenges, overturns, and remands lengthen the enforcement process and increase costs for all those involved. They also take away from the certainty of regulatory orders and affect the predictability of the law. Regulatory certainty and predictability are important requirements of the rule of law and are critical for the smooth functioning of markets.

The need for regulatory orders to be well-reasoned is recognised in Indian law. In a recent paper, titled "A guide to writing good regulatory orders", we propose a method of structuring regulatory orders that would aid readability, strengthen the logical flow of arguments, and enhance the accessibility and transparency of regulatory orders. In particular, we identify four sets of requirements for better order writing: informational, structural, substantive, and stylistic. Broadly, the information requirements relate to identificatory and citatory information that should appear in orders, and to information that helps establish that procedural requirements have been complied with, such as dates of Show Cause Notices. Structural requirements relate to the logical arrangement of the contents of orders in a manner that aids reading and comprehension, and which strengthens regulatory arguments. The substantive requirements help establish that all the requirements of the substantive law applicable to the matter discussed in the order have been addressed. Finally, our suggestions on stylistic requirements include the use of plain language and writing styles that are accessible and comprehensible to all affected persons.

We propose to conduct further studies on how the suggestions in this paper may be implemented through tools and technologies that could augment regulatory capacity for order writing.


The authors are researchers at the TrustBridge Rule of Law Foundation.