Proposed Changes in Securities Markets Code, 2025

The recently introduced Securities Markets Code, 2025, Bill during the Winter Session of Parliament focuses on consolidating and amending securities market laws. A significant aspect of the Bill is Clause 124, which pertains to the transfer of the Securities and Exchange Board of India’s (Sebi) annual surplus general fund to the Consolidated Fund of India (CFI).

Current Fund Structure and Proposed Changes

• The inflows to Sebi's fund come from fees and charges levied on market infrastructure institutions, regulated entities, and market participants.
• The fund is utilized for the regulator's revenue and capital expenditures.
• Under the proposed amendment, a reserve fund will be constituted, with 25% of the annual surplus credited to it, not exceeding the previous two years' expenditure.
• Any remaining surplus will be transferred to the CFI.

Rationale Behind the Amendment

The government's rationale for this amendment stems from noticing a significant surplus buildup in Sebi’s fund, drawing parallels with earlier actions involving the Reserve Bank of India (RBI). However, these comparisons are considered flawed for several reasons:

• Sebi's fund was originally established to allow financial independence from government grants.
• Fees and charges are meant to cover Sebi's expenditures, not serve as government revenue.
• Constant pressure to increase government receipts could undermine Sebi’s operational independence.

Concerns and Implications

• Fixing an expenditure ceiling on a statutory regulator is arbitrary and conflicts with international principles of regulatory independence.
• The proposed transfer could lead to perceived conflicts of interest, particularly as Sebi regulates government-owned companies.
• Unlike the RBI, which generates seigniorage income, Sebi's surplus transfer is not a dividend and thus not comparable.

Financial Comparison

• In FY25, the RBI transferred ₹2.69 trillion to the government, while Sebi's closing balance and surplus were approximately ₹5,500 crore and ₹1,000 crore, respectively, for FY24.
• The surplus from Sebi is insignificant to government budgetary revenue.

Recommended Approach

• As a first measure, reducing fees and charges is suggested to manage surplus buildup.
• If surplus remains high, a one-time lump-sum transfer to the government could be considered, but not as a recurring action.
• Sebi's board, comprising experienced officials and independent directors, should manage surplus issues without statutory revenue ceilings.

The author, a distinguished fellow at the Observer Research Foundation and former Sebi chairman, asserts these views as personal opinions, not reflective of the Business Standard.