Sucheta Dalal :Policy making through trial balloons
Sucheta Dalal

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Policy making through trial balloons  

Nov 13, 2006

The problem with using public speeches to float ideas is that a few hundred persons hear it, while the rest depend on excerpts highlighted by the media.

At its board meeting last week, the Securities and Exchange Board of India (Sebi) finally buried the moribund Central Listing Authority (CLA). For those who don’t remember, the regulator’s website says ,"CLA is a regulatory body established by Sebi and charged with the responsibility of scrutinising and approving all applications precedent to listing…" It was to recommend matters relating to policies, listing conditions and standards and "bring about a new paradigm in the entire pre-listing approval process." The CLA even had a 11-member board headed by Justice MN Venkatchaliah, including members of three stock exchanges.

Why did the CLA fail even before it got going? Possibly because the concept itself was redundant in a capital market dominated by two large national bourses. Why then was it set up? Frankly, only because a former Sebi chairman was sold on the idea and went ahead with it, despite doubts about its utility expressed by many quarters, including a Sebi-appointed committee. CLA was also killed by resistance within Sebi to the concept of an independent body.

Even as Sebi buried the CLA, which had an SRO structure, it has mooted a similar body to tackle market surveillance. As the name implies, an SRO (self-regulatory organisation) regulates a specific group of intermediaries—investment bankers, mutual funds, stock brokers, etc. However Sebi chairman M Damodaran said recently that its surveillance SRO will comprise a "body of market experts, which would include retired members of Sebi, representatives of MFs and asset management companies who can carry out surveillance." Another ‘thought’ of his was that "Sebi’s in-house surveillance and investigation functions could reside in a wing manned by specialists on contract basis."

This is part of a continuous effort by regulators around the world to keep up with rapid change in financial markets. A 2001 speech by David A Brown, then chairman of the policy-making committee of the International Organisation of Securities Commissions (IOSCO) perfectly articulated the sentiment behind such efforts. He said, "Regulators—like all market participants—see fresh evidence every day of what the Greek philosopher Heraclitus said a little over two-and-a-half millennia ago: "There is nothing permanent except change." Brown remarked that "there is almost no aspect of the capital markets today that is not undergoing rapid change." Five years later, advances in information technology have only accelerated the pace of change, forcing regulators to find new ways to regulate large portfolio funds forever zipping around the world in search of higher and better returns.

Academics point out that regulators as well as nations are increasingly seeking collaborative ways to make policy decisions instead of bureaucratic diktat. This involves discussion at multi-disciplinary committees, leading to a set of recommendations and public debate. Sebi, since its inception, had adopted the practice of evolving policy through debate and discussion, rather than the usual bureaucratic trick of trial balloons in the media to gather selective feedback.

Mr Damodaran does it differently. He often uses his public speeches to articulate new ideas or issue broad warnings over questionable practices. The idea of an SRO was similarly thrown up at a public forum and was consequently a little hazy about its ‘structure’. The regulator tells us (FE Letters, November 9) that the ‘possibility’ of a surveillance SRO was "articulated by the Sebi chairman in order to generate discussions on the subject."

The problem with this is that a few hundred persons hear the speech, while the rest depend on excerpts highlighted by the media. This causes confusion and leads to innumerable clarifications. And, not all policy decisions are necessarily opened for public discussion anymore.

The US Securities and Exchange Commission (SEC) avoids this by posting its commissioners’ speeches on its website. This is the best process to articulate new ideas and encourage serious debate. But that would require the Sebi chairman and whole-time members to avoid extempore articulation of new ideas. In effect, the regulator will have to acquire the discipline it expects from all regulated entities when it comes to dissemination of information.

-- Sucheta Dalal