Not so long ago, the exchange of information among financial sector regulators on wrongdoings and sharp practices by market participants was informal in nature. They mostly worked in silos that were criticised as attempts to protect their turfs. The result was the offenders aided by a battery of legal stalwarts managed to locate the loopholes and get away with mostly minor fines.
Now a lot of that seems to be changing, at least on the face of it as regulators appear more inclined to come together to take on the wrongdoers. An example was the recent case where the Reserve Bank of India and the Securities and Exchange Board of India seemingly moved in tandem to act against JM Financial Group, which has been accused of wrongdoings as an investment banker in an NCD issue.
Market participants wanting a safe and transparent environment to invest in the country’s securities could thank former Sebi chairman Ajay Tyagi for this. It was this former reticent bureaucrat, who in 2019, put in place an institutional mechanism to facilitate sharing of information and data from Sebi to RBI and vice-versa.
“Though higher level officers of RBI and Sebi meet often, including in FSDC (Financial Stability and Development Council) subcommittee meetings, typically these meetings don’t discuss case-specific issues. In that sense, the institutional mechanism was set up at an operational level to go into nitty-gritty,” Tyagi told ET.
With senior regulatory officials being part of this system, information sharing and debating on it happens more seriously. Executive directors from both organisations were nominated as contact persons to operationalise the mechanism, said Tyagi.
Sharing of information among the regulators, however, depends on the gravity of the financial irregularities and the impact they could have on the system. Securities lawyers said coordination plugs the loophole of regulatory arbitrage and assists in achieving the fundamental goal of investor protection.
In the case of JM Financial Group, it was Sebi which unearthed the wrongdoings and passed the information to RBI, which then barred one of its non-banking entities from providing fresh loans against non-convertible debentures (NCDs) and initial public offering (IPO) subscriptions.
Subsequently, Sebi issued an order banning the holding company of the JM Financial Group from taking fresh mandates as lead manager for NCDs.
Some read the timing of the RBI’s and the capital markets regulator’s actions against JM Financial Group to be synchronized though Sebi chief Madhabi Puri Buch chose to downplay the probability of any coordinated efforts in terms of issuing orders.
“We have a lot of specific as well as consolidated data. When we examine something from a securities law perspective, we also gather information that would be more relevant to other financial sector regulators. We then send information to them,” said Buch. Unlike in India, countries such as the UK and Singapore have unified regulatory authorities overseeing the entire financial market.
“Coordination is the most effective way for the regulators to navigate a multitude of sectoral legislations. It plugs the loophole of regulatory arbitrage and fragmented action with regard to multi-product and multiregulated financial intermediaries,” said Robin Shah, founder of Bodhi Legal.
