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On February 13, 2025, SEBI issued the SEBI (Procedure for Making, Amending and Reviewing of Regulations) Regulations, 2025 (“Regulation Making Procedure Regulations” or “RMP Regulations”). It specifies the process of regulation making and for mandating public consultation and engagement of stakeholders in the interest of transparency and for matters incidental to or connected therewith.
It may be noted that SEBI has the power to make regulations consistent with and to carry out the purposes of the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, ,1956 and the Depositories Act, 1996.
Originally, SEBI could only make regulations with the prior approval of the Central Government. This requirement was then dispensed with in 1995. However, every regulation has to be laid before both houses of the Parliament, as soon as possible after it is made, for 30 days. The Parliament can modify or invalidate the regulations so made, without prejudice to the validity of anything previously done under such regulations.
SEBI's authority to formulate regulations is essentially a legislative power delegated by the Parliament to its unelected officials. Therefore, it is crucial to ensure that appropriate checks and balances are in place in the processes. The RMP Regulations is the first attempt by SEBI to codify its procedure for making regulations, and this blogpost analyses the same.
The 1st part summarizes the provisions of the RMP Regulations. The 2nd part compares it with procedures required to be followed by the Insolvency and Bankruptcy Board of India (“IBBI”), the US Securities and Exchange Commission (“SEC”) and the UK Financial Conduct Authority (“FCA”). The 3rd part analyses the hits and misses.
Regulation Making Procedure Regulations
Public Consultation
Primarily, Regulation 4 mandates publication of particulars such as (a) proposal(s) containing suggested changes to the policy, including the draft of the proposed regulations; (b) statutory provisions enabling the proposed regulations; (c) statement of regulatory intent and objectives of the proposed regulations; and (d) manner, process and timelines for receiving public comments. It also requires that minimum 21 calendar days is provided for receiving public comments. Concerned departments are required to publish the rationale for rejection if any, of comments.
Approval of Regulations
Prior to approving the regulations, SEBI has to consider the proposed regulations and the related agenda paper in terms of the SEBI (Procedure for Board Meetings) Regulations, 2001. If the agenda paper is prepared pursuant to the public consultation, it must include a systematic compilation of the comments received or a summary of the comments, and the remarks of the concerned department(s).
Emergency Regulations
When SEBI is of the opinion that it is expedient in the interest of the investors and the regulation and development of the securities market that the adherence to the public consultation process would defeat the purpose of the proposed regulation, the Chairperson may dispense with the process of public consultation or reduce the time period for receiving public comments. When such dispensation has been used, the information in its regard must be placed before the Board.
Periodic review of Regulations
The RMP Regulations have introduced the requirement for SEBI to periodically review the regulations in force, keeping in view factors including experience gained through surveillance, supervision and enforcement actions; relevant orders passed by the courts or tribunals; global best practices, if applicable; relevance and needs of a changed environment, if any; and scope for reducing redundancies and to promote ease of doing business. It can also do so for any other factor deemed to be relevant by the board.
Scope of the RMP Regulations
Certain instances have been exempted from above discussed procedures. These are
Internal organizational matters of SEBI including those governing the conduct of its meetings, administration and service conditions of its officers and employees;
Regulations only related to procedural requirements or which in the opinion of the Chairperson do not result in any substantive policy changes;
Any amendment to these regulations; and
Proposals for which the public comments have already been sought or received or those regulations which are approved by SEBI but not yet notified prior to coming into force of these regulations.
Comparative Analysis
IBBI (Mechanism for Issuing Regulations) Regulations, 2018
A comparison of the RMP Regulation with the IBBI (Mechanism for Issuing Regulations) Regulations, 2018 (“IBBI Regulations”) stresses the deficiencies in SEBI’s regulations. IBBI Regulations mandate IBBI to provide an economic analysis of the proposed regulations. It also provides that if the Governing Board decides to approve regulations in a form substantially different from the proposed regulations, it shall repeat the process under these regulations.
Specifically, the IBBI is required to cause an economic analysis of the proposed regulations to be made. This economic analysis is required to cover expected costs to be incurred by, and the benefits that will accrue to, the society, economy, stakeholders and to IBBI, both directly and indirectly on account of the proposed regulation; and how the proposed regulations further strengthen the objectives of IBC.
Moreover, the urgent regulation making powers also must be noted. Where there is a need to make or amend regulations urgently, i.e., by dispensing with public consultation and economic analysis, it requires the approval of governing board. Further, the periodic review is every 3 years unless warranted earlier. Moreover, the regulations also included outcome as a factor for review.
The IBBI Regulations also expressly provided that IBBI may consult stakeholders and advisory committees, as it may consider appropriate for making regulations.
UK - Financial Services Act, 2012
The Financial Services Act, 2012 of UK has also laid down detailed processes that the FCA is required to carry out towards making regulations. It provides that:
Ø FCA must publish a draft for public consultation after consultation with the Prudential Regulation Authority. Such draft is required to be accompanied by cost benefit analysis, explanation of the purpose of the proposed rules, explanations of the FCA’s reasons for believing that making the proposed rules is compatible with its duties under the law as well as a notice containing the timeline for submission of representations.
Ø Thereafter, the FCA has to have regard to the representations made to it, it has to publish an account of its response to the represents made if it makes the proposed rules.
Ø If the rules differ from the draft published, in a way which is significant, in the opinion of FCA, it must publish details of the differences together with cost benefit.
If the costs or benefits cannot be reasonably estimated, or it is not reasonably practicable to produce an estimate the FCA is not required to estimate them, but it is required to include a statement of FCA’s opinion and an explanation of it.
US SEC
The US SEC is also required to engage in some form of cost benefit analysis in terms of the National Securities Market Improvement Act, 1996 and the Securities Exchange Act.[1] In US these seemingly procedural requirements have become basis for litigants, for instance to challenge whether the SEC adequately assessed the economic consequences of a rule.[2]
Major Misses
A plain reading of the provisions of the Regulations highlights a major issue - the determination of when it is okay to dispense with public consultation or reducing time period for the same has been vested with the Chairperson instead of the governing board. Similarly, the determination of whether a particular regulation results in substantive policy change or not has also been left with the Chairperson.
A comparative analysis of the Regulations with IBBI two key misses – (1) absence of requirement for economic analysis prior to public consultation; and (2) no timeline for periodic review of regulation. This comparison also emphasizes the authority which must be vested with the discretionary powers discussed in the preceding paragraph.
It appears these regulations primarily formalize existing regulatory practices, rather than introducing any substantive reform therein. Mandating public consultation and periodic review, though a stride, is just not big enough. In essence, it offers limited accountability for SEBI, which may not be commensurate with the fact that it is exercising delegated legislative powers, and their implementation appears somewhat unstructured.
Summarizing, following things if done differently would have made this a valuable regulation:
In light of the principles of separation of powers enshrined by the Financial Sector Legislative Reforms Committee, the decisions vested with the Chairperson, would be ideal if vested with the governing board of SEBI, if at all they ought to be provided.
The urgency provision needs more safeguards. It, i.e., Regulation 6 indicates that the chairperson can dispense the process of public consultation or reduce the time period for it, where the Board is of the opinion that it is expedient in the interest of investors…. Proviso requires the information regarding this to be placed before the Board.
This language needs clarity and the governing board should have more than just the role of being informed of the use of such dispensation.
Incorporation of economic/cost benefit analysis prior to public consultation, as well as post, in case of substantial modification to the originally proposed regulation.
Specified timeline for periodic review of regulations – 3 years like IBBI, except in case of frequently amended regulations.
Last but not the least, SEBI has created multiple types of legal instruments – pertinently circulars and master circulars, neither of which face any legislative oversight or judicial review.[3] The procedure for making of these also (especially) ought to have been laid out. In an article, Shubho Roy et al had premised that public choice theory predicts that the staff of SEBI will prefer instruments having no parliamentary oversight,[4] and this is true if we take into account that around 400 circulars have been issued in the previous 3 years.
[1] Robert P Barlett, The Institutional Framework for Cost Benefit Analysis in Financial Regulation: A Tale of Four Paradigms?
[2] Ibid.
[3] Shubho Roy, Ajay Shah, B.N. Srikrishna, Somasekhar Sundaresan, Building State capacity for regulation in India, NIPFP Working Paper Series No. 237, August 3, 2018.
[4] Ibid.
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