Agenda ahead of Mr. Ajay Tyagi, New Chairman of SEBI

Mr. Ajay Tyagi, who took over as SEBI chairman on March 01st 2017 surely has a tough act to follow. His predecessor, Mr. U K Sinha, managed a very tough transition of the capital market regulator during his 6-year tenure. Additionally, Mr. Sinha also oversaw the integration of Forward Markets Commission (FMC) into SEBI and also came down heavily on high profile defaulters. The Sahara group is one such example where SEBI has chosen to set a benchmark by coming down really heavily on defaulters. Mr. Tyagi has been given a term of 3 years but this can be extended subject to the approval of the Finance Ministry….

Why Mr. Tyagi is likely to be the right man for the job…

Mr. Tyagi comes to SEBI with formidable credentials. An IAS officer with an impeccable track record, Mr. Tyagi has spent a fairly long time working in the capital markets division of SEBI as an Additional Secretary. This gives him a 360 degree view of the agenda ahead for the Indian capital markets. There are 3 reasons why Mr. Tyagi may be the right person at the right time. Firstly, as capital market reforms take precedence in the coming months, closer coordination between SEBI and the Ministry of Finance will be inevitable. This is where Mr. Tyagi’s background will be invaluable. Secondly, the immediate agenda for SEBI will be to complete the integration of commodity markets into the capital market mainstream. Mr. Tyagi brings an in-depth understanding of commodity markets; both from a business perspective and a regulatory perspective as he was personally involved in the FMC integration into SEBI. Lastly, India will eventually move towards a super-regulator which will encompass some of the roles of SEBI, RBI, IRDA and PFRDA. This transition will require the bureaucratic finesse of a person who has spent long years in the Ministry of Finance.

Six Point Agenda that Mr. Tyagi will have to address…

While there will be a plethora of micro issues that SEBI under Mr. Tyagi will have to address, there are six broad areas which will be in focus in the coming months…

• The first item on the SEBI agenda will be taking the integration of the commodity markets to the next level. While the regulatory and operational aspects of the commodity markets have been integrated, developing the commodity markets to a higher plane remains the big agenda now. Mr. Tyagi will have to push through a speedy solution to the NSEL imbroglio. After the NSEL defaulted on its Rs.5600 crore payment, the case has been languishing at various legal stages for the last four years. A quick resolution is essential for two reasons. Firstly, it will reinforce the faith of traders and investors in the commodity markets. Secondly, the regulator needs to catalyze the revival of the commodity spot markets so that institutional participation and non-directional transactions can be facilitated.

• The second item on the SEBI agenda will be an extension of the first item. SEBI, under Mr. Tyagi, needs to oversee the development and launch of new products pertaining to commodities. This includes commodity options, arbitrage products, spot-futures facilitation etc. The bigger challenge will be to enhance institutional participation in the commodity markets. Currently, regulatory scenario is not conducive to institutional participation and that is where Mr. Tyagi’s long years in the MOF will be critical. Getting banks to participate in commodity markets will require approvals from RBI and that is where lateral management will matter a lot.

• Thirdly, Algorithmic Trading and High Frequency Trading (HFT) have become quite controversial in the recent past. Here, Mr. Tyagi will have to tread a very delicate line. It is essential to ensure that small investors are not disadvantaged because of the preferential access given to institutional investors via co-location. At the same time, HFT and algorithmic trading are a part and parcel of most global markets and it accounts for a chunk of trading volumes in India too. Most institutional investors like FPIs, mutual funds, ETFs and Hedge Funds rely on HFT and algorithmic trades to execute trades efficiently. Their participation cannot be forsaken.

• Broadening and deepening the capital markets will be the fourth big item on the agenda for SEBI. Markets have made rapid strides in the last decade through the development of the Futures & Options market, greater institutional participation, fine tuning of the IPO process etc. It is now time for the next stage. A favourable environment needs to be created for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to list and help monetize assets more effectively. This will give a big boost to real estate and infrastructure and will have strong externalities.

• Lastly, the issue of corporate governance has come into prominence in the last few months after the Tata-Mistry saga. During the stand-off, issues like transparency, protection of minority shareholder interest and role of independent directors came under scrutiny. While SEBI has put out a paper for comments, this could be a lot more complicated than traditional capital market regulation since it involves business interests, ownership and control issues. Also, for a subjective matter like corporate governance, having an objective measurement mechanism is itself fraught with risks. That is where Mr. Tyagi will have to lead the fine line negotiations.

In a nutshell, Mr. Tyagi surely has his task cut out. For the capital markets, the good news is that they have a person at the helm with an in-depth understanding of the business and regulatory aspects of capital markets. Surely, the right person at the right time!