By Sandeep Parekh
The Securities and Exchange Board of India (SEBI) recently introduced the Industry Standards Recognition Manual (ISF Manual). It is a set of guidelines that governs the formation and functioning of fora known as Industry Standards Forums (ISFs). While the ISF Manual came out only recently, the journey of ISFs began in 2023 with a pilot project that sought to involve listed companies and stockbrokers for formulating standards based on SEBI’s regulatory instructions.
Subsequently, similar fora were set up on a pilot basis for other stakeholders/participants of the securities markets. The concept of ISFs, however, is not new. The UK has similar provisions allowing industry groups to create codes that help members implement existing financial laws. The UK’s market regulator, the Financial Conduct Authority (FCA), recognises these codes to ensure compliance. Thus, trade associations or industry bodies develop standards, and the FCA endorses them if they meet certain criteria.
In the Indian context, the ISF Manual has clarified that the role of ISFs is to identify regulatory directives that require implementation standards. Once such directives are identified, ISFs will, through a consultative process, draft appropriate standards primarily in the form of specifics, checklists, or standard operating procedures, assisting industry participants in compliance. ISFs will not be considered self-regulatory organisations and will not have any power to undertake regulatory action against any industry participant for compliance failure.
ISFs are expected to develop standards by seeking inputs from members and/or setting up working groups chaired by members to provide comments. SEBI has further clarified that throughout the process of formulating standards, consultation with it is a sine qua non. Its consent is mandatory for a standard to be considered for formulation and implementation. In case of a lack of consensus, ISFs are expected to submit all proposals received on the matter to SEBI with the pros and cons. The regulator may choose to independently issue (or not) relevant circulars, in part or wholly.
SEBI has also provided details of the structure/composition of ISFs. Essentially, ISFs will have a committee comprising members of the industry or regulated entities concerned, with adequate representation from all segments required to comply with the regulatory directions — a mix of large stakeholders and small- and medium-sized participants. Interestingly, SEBI has directed that 75% of the membership of ISFs will comprise current practitioners, that is persons who have to implement regulatory directions in their respective organisations. The remaining members can be lawyers, consultants, and regulatory advisors. Each member generally has a term of two-three years but in order to avoid all member posts vacating at the same time, the regulator has proposed to reconstitute at least one-third of the ISF composition every year starting from the third year of its functioning.
SEBI’s approach to ISFs is commendable. It shows regulatory maturity and a willingness to create a structured regulatory environment that benefits all market participants. However, one of the biggest challenges these forums will face is in ensuring they do not become an exclusive “big boys’ club”, where only large financial institutions or major market players end up dictating the agenda. For ISFs to be truly representative, small and mid-sized players must have an equal voice. Notably, the regulator has made efforts to address this by mandating such representation. However, ISFs must endeavour to select issues that affect all participants in the industry, not just the bigger players. If ISFs solely focus on dominant firms, the very purpose of fostering fair, competitive, and inclusive markets could be undermined. For ISFs to be a success, diverse stakeholders must contribute meaningfully. Structured consultations, representation quotas for smaller firms, and open feedback mechanisms are useful methods for achieving this. Their importance cannot be stressed enough, as the very effectiveness of ISFs will ultimately depend on their ability to balance the interests of all market participants, creating a regulatory ecosystem that promotes both innovation and investor protection. This should also include efforts to rationalise the current over-prescriptive laws. For example, the mutual fund regulations and master circular run into over 1,000 pages.
Another key priority for ISFs is incorporating industry feedback and conducting periodic reviews to keep standards relevant and manageable. Engaging with a diverse set of stakeholders will help identify unnecessary complexities and ensure compliance remains feasible for all.
Another major challenge ISFs will face is ensuring the standards they formulate are effective. They must therefore craft crisp, concise, and practical standards that address key industry challenges without becoming onerous. Standards formulated by ISFs should be principles-based, allowing for flexible implementation while ensuring the regulatory intent is met. ISFs must always remember that the primary goal of formulating standards is to reduce regulatory confusion, not to add to it.
Another aspect of the recent ISF Manual that merits further discussion is how the standards formulated by various ISFs will be published. Current practice suggests SEBI merely notifies the recognition of standards, and the actual standards themselves are available on the ISF’s website or that of its participating entities. It is advisable that such standards, in addition to being displayed on the website of the ISF concerned, must also be available on the SEBI website. This will make these standards having factual, if not legal, force of law more accessible to practitioners and regulated entities.
While ISFs are still in a nascent stage, their introduction helps us understand what the future of securities market regulation would look like. It is too early to comment on whether they will be a resounding success or a compliance burden. However, the underlying motive for their introduction is noble. For ISFs to truly emerge as valuable tools to ensure sustainable growth, it is important that they maintain a balanced approach that fosters ease of doing business while upholding market integrity.
Co-authored with Aniket Singh Charan, associate, Finsec Law Advisors.
The writer is managing partner, Finsec Law Advisors.
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