Law Enforcement in the Financial Sector
The need for significant improvement in law enforcement within the country's financial sector is undisputed. Effective and timely enforcement actions that deter wrongdoing can often eliminate the necessity for additional regulations and disclosure requirements, which can impose costs on law-abiding entities without necessarily improving enforcement.
Role of Regulators
- Regulators handle both regulatory and developmental functions, with some mandated by law and others self-created.
- Developmental roles often take precedence, promoting innovation and market visibility.
- Regulatory functions, such as monitoring and enforcement, are crucial yet often undervalued.
- A robust regulatory framework is essential for market development.
Inadequate Enforcement
- The securities market regulator faces a high volume of pending cases, with about 500 cases in the Supreme Court and 850 in High Courts at the end of FY25.
- Penalties recovery is low, around 5% annually.
- Criminal prosecution by regulators is rare, leading to ineffective deterrence.
- Other regulators, such as the RBI, also face challenges, with decisions often not being appealable.
Challenges in Regulatory Framework
- Financial markets are driven by greed and fear, with participants often misusing technological advancements.
- Firefighting and knee-jerk regulatory solutions often lead to more regulations and oversight.
- This approach may impede the "ease of doing business."
Role of Disclosures
- Regulators rely heavily on market disclosures under the "caveat emptor" principle.
- More disclosures do not equate to better enforcement.
- Regulatory impact assessments often remain superficial.
Path Forward
- Effective enforcement of existing regulations is crucial for deterrence.
- Criminal prosecution requires proving cases beyond a reasonable doubt, making it challenging.
- The de-criminalization of corporate laws is beneficial, but serious offences still require criminal prosecution.
- No insider trading convictions have occurred, highlighting enforcement gaps.
Conclusion
Regulations need continuous evaluation and enforcement to remain effective. The focus should be on delineating serious offences and ensuring timely action against offenders. Simply prescribing new regulations may not address underlying issues.
