## Wednesday, June 21, 2006

### The enforcement process at SEBI

The debate on retail quotas for IPOs appears to be continuing, while in the meantime, the SEBI "IPO Scam" order has been having a rough time in the courts and the SAT. An editorial in Business Standard yesterday looks beyond the specifics of this order, and has suggestions for improving SEBI's processes:

• The infamous "ex parte order", which is supposed to only be applied in a grave emergency, is being misused; each SEBI chairman should have only one go at doing this in his three years.
• The first step of an enforcement action should be a well-drafted show-cause notice sent - in private - to the accused. This should come up to UK/US standards of drafting quality.
• The release of this show cause notice to the public constitutes libel, for it is a mere accusation.
• The next step should be a quasi-judicial hearing, in private within SEBI, where the investigators argue as the "prosecution", and a dedicated "bench" of two board members listen to the defence, and award a penalty. There should be a full separation between this "bench" within SEBI and the board member(s) who handle investigations. This will reduce the mistakes caused by prosecutorial zeal.
• It is better to take on one entity at a time, with "five pages of top quality order", instead of writing one jumbo order about 24 entities. It is better to not have policy mistakes like the retail IPO quota, for that sets up an insuperable task of enforcement when millions of households are given an incentive to break the law.

I am, personally, an optimist on how SEBI is faring and where SEBI is going. I think that SEBI is on the right track on the core issue of : rule of law. SEBI has full clarity through SC(R)A and the SEBI Act on what it does. Both these acts are philosophically sound, and have been amended repeatedly so as to solve problems. Regulated entities regularly challenge SEBI at the level of the letter of the law, and SAT has proved to be a successful specialised court hearing financial cases. So while it looks messy, I think the basic framework "rule of the law in the public eye" is in place, and there are self-correcting forces - such as the public failure on the "IPO Scam" order - which will keep pushing SEBI in the right direction. It's messy, like democracy, but that's about okay in my book.

If all of finance operated in such a fashion - with repeated legal challenges to the regulator, and a rule of law - then many of the problems of Indian finance would be solved.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.