Financial regulators, across the world, have unenviable jobs. Either they take hard positions against the industry or individual, thereby inviting the wrath or displeasure of one or both.
In 2024, Indian financial regulators were able to achieve both, though the balance is debatable. The Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), and the Insurance Development Authority of India (Irdai) were all criticised by industry and individuals univocally. But the good news is that they took corrective measures across the sector.
For example, the market regulator waited for a long time, perhaps too long, some may say, before it acted on the two biggest threats to investor wealth—futures and options (F&O) and small-and-medium enterprises (SME) initial public offerings (SME IPOs). This, despite its own reports indicating that over 90% of investors were losing money in the derivative segment. But when it did, there were a series of steps, some indirect, such as introducing uniformity in fees to discourage discount brokerages, and then direct ones like increasing the contract size to Rs 15 lakh, reducing the number of weekly contracts to one per exchange, and imposing a 2% addition extreme loss margin.
With SME IPOs, Sebi tried to improve the quality of companies getting listed by mandating that the firm needs to have an operating profit of Rs 1 crore for two out of the three preceding years, phased release for promoter lock-ins, and the offer for sale should not exceed 20% of the total issue size. Of course, it could have been harsher by increasing the lot size from 2 to 4 lakh, as proposed in the consultation paper. But it is enough handholding for now.
The former prompted Nithin Kamath of Zerodha—India’s most profitable broking—to comment that regulatory risk is the biggest risk for any regulated business. He went on to say that times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options.
Even exchanges were not so thrilled because their volumes have taken a severe hit and will lead to lower profitability. NSE’s most traded Nifty Bank index, which made up 50% of trading volumes in F&O, is no longer trading. Some have even argued that instead of so many guidelines, the government could have simply banned people with low incomes and net worth, say Rs 10 lakh, from trading. Of course, there is the additional danger of money moving to cryptocurrencies or other riskier assets.
Besides these two key steps, there were headline-grabbing orders like banning industrialist Anil Ambani from the market and fining the company and officials a whopping Rs 600 crore, and Zee’s Subhash Chandra and Puneet Goenka also continued to face Sebi’s ire.
Meanwhile, RBI’s corrective measure of banning microfinance institutions from charging usurious rates caused a lot of heartburn, especially since it had allowed them to set interest rates in 2022. This led to questions that after freeing up interest rates, can a board-approved rate be classified as ‘too high’? After all, banks are allowed to charge credit card holders over 36% a year, or even more.
The strict action led to a slowdown in credit to segments that were prone to spending. While proponents argued that a nominal slowdown was acceptable to rein in bad loans, a segment also said that the timing—during the festival and marriage season—wasn’t correct.
It’s not that only microfinance institutions or non-banking financial companies are upset; even the banking sector itself is dreading the imposition of expected credit loss framework, liquidity coverage ratio, and project finance guidelines—all of which could have a combined effect of over 400-500 basis points on the credit cost.
But the banking regulator, under the usually affable Shaktikanta Das (former governor), didn’t shy away from taking stern action even against big banks or NBFCs—Bank of Baroda, Paytm Bank, Kotak Bank, and Bajaj Finance can testify to that.
Of course, Debashish Panda of Irdai made a significant move by providing a higher payout to individuals who wish to surrender the policy. This has forced insurers to change their business models. Some are paying lower commissions to their agents while others are making other tweaks.
Panda’s decision is extremely important from the perspective that agents have been known to mis-sell products to earn hefty commissions. This move will temper the aggressiveness of agents as well as give comfort to buyers that there is an exit route with some return.
But the best part of the regulatory development in 2024 was the coordination of Sebi and RBI to crack some key cases.
To put it in perspective, Indian financial regulators have always worked in silos. Worse still, they have been at loggerheads with each other many times.
Late Pranab Mukherjee, in his avatar as finance minister, had famously said in Parliament that he had no option but to resort to an ordinance when key regulators were fighting like petulant children, thereby disrupting the market. The children—Sebi and Irdai. The super regulatory body, the Financial Stability and Development Council, or FSDC, was formed by Mukherjee to deal with such sticky situations.
Against this backdrop, when RBI and Sebi quoted each other’s investigations while issuing orders, it was a pleasant surprise. The bonhomie between regulators was evident when Das said that options and futures volumes are larger than the nominal GDP of the country. “Sebi and the RBI, together we are monitoring that. We have discussed this matter with Sebi, and they will deal with it,” he said.
At a time when the government wants to move towards a common know-your-customer (KYC) for all individuals across financial products, such developments are welcome.
Of course, the year was marred by accusations against Buch by US-based short seller Hindenburg Research, which diminished the stature of the institution. Even the exit of Das as governor came as a bit of a surprise to many.
But overall, Indian financial regulators can be proud of what they achieved in 2024. When you are getting flak from both sides, you are surely doing something right. As Finance Minister Nirmala Sitharaman told FE: “Our regulators are doing a world-class job.”