Sebi chief’s new power during emergencies may have an unintended outcome, say experts

Currently, the Securities and Exchange Board of India (Sebi) uses committees with diverse stakeholders to discuss proposed regulations, publish consultation papers for public comment and upload agenda papers (excluding confidential information) after board decisions. These practices, though voluntary, are now being codified into law.

The new Sebi (Procedure for making, amending and reviewing of regulations) Regulations released on 17 February will mandate a 21-day period for public feedback on proposed changes, except in emergencies. This exception in case of “emergencies” has evoked concerns.

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The provision allows Sebi to expedite action in urgent cases, giving its chairperson the power to shorten or even waive the consultation or feedback period if it might delay critical market decisions. The Sebi board will, however, review if the reason for such fast-tracking is explained transparently.

Allowing Sebi to bypass or expedite the public consultation process could lead to legal challenges if stakeholders perceive this amendment as arbitrary or inconsistent with natural justice principles, according to Sangeeta Jhunjhunwala, partner at Khaitan Legal Associates.

“On one side, it ensures swift regulatory responses to protect investors and stabilize markets during crises,” she said. “On the other, it risks undermining transparency and stakeholder trust if overused or inadequately justified.”

Raising concerns

The new regulations may also raise accountability concerns and limit public input.

“If stakeholders feel sidelined, legal challenges could arise, especially if expedited decisions lead to adverse outcomes,” said Ketan Mukhija, senior partner at Burgeon Law. “These changes could boost confidence in Sebi’s responsiveness for investors and public interest groups if transparency in consultations is upheld.”

The market regulator follows a consultative approach to regulation. From 1 January 2023 to today, it has released 165 consultation papers.

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The government has also been pushing for more public consultations while drafting rules. The latest Economic Survey pointed out that the Union budget for 2023-24 had recommended that the financial sector regulators include public consultations in the regulation-making process. The survey also called for creating independent agencies within financial sector regulators to evaluate their regulations “from all angles.”

“To balance urgency with public input, Sebi could adopt measures such as pre-consultation with relevant stakeholders, use technology for swift feedback and publish reasons for expedited actions,” Jhunjhunwala said.

To be sure, the new regulations will not apply to all matters. They exclude internal board matters, procedural rules or provisions that do not require substantive policy changes. Additionally, they will not affect regulations already in force unless amended or repealed.

The new regulations outline the procedure for amending and reviewing existing rules. Amendments will follow the same process as introducing new regulations and ensuring consistency and transparency. Sebi will conduct periodic reviews, considering effectiveness, enforcement actions, global best practices and market changes.

All these will help foster greater confidence in the regulatory process, according to legal experts.

And to address concerns over lack of transparency and avoid legal challenges, Zubin Morris, partner at law firm Little & Co., proposed a “narrow interpretation of exigency, limited to imminent and demonstrable threats to market stability or investor interests.”

That would require a detailed written justification, made public as soon as possible, explaining the exigency and the least restrictive measures taken, he said. Morris suggested a mandatory review within a defined period to assess if the regulation is effective, helping address any unintended consequences.

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There are others who say the flexibility to shorten the consultation period will foster greater confidence in the regulatory process.

It’s a valuable mechanism that will allow Sebi to act swiftly during market crises, said Jyoti Prakash Gadia, managing director at financial advisory firm Resurgent India. “This flexibility is beneficial, as it provides Sebi with the necessary leeway to prepare regulations in urgent circumstances, particularly when any delay due to the consultation process would defeat the purpose of the proposed regulation.”