Watchdogs may weigh impact on investors

NEW DELHI: This could be a sort of poetic justice for investors still licking their wounds from the sharp stock market crash in October following a surprise crackdown on investments from unregistered foreigners.

The government is set to change the way financial regulators make and announce their decisions by making them more responsible and accountable, while arming the investors with enough chances to question their decisions.

The finance ministry would introduce a mechanism, called regulatory impact assessment, that will mandate all watchdogs to do their homework more thoroughly and specify the potential impact of their decisions upfront, sources told ET.

In other words, the regulator should quantify the cost, risks and the possible benefits and state how the benefits outweigh the risks involved while announcing a decision. This would allow a market participant to question the regulator’s wisdom and judgement in the light of past experience and evidence emerging after the decision.

For example, if SEBI wants to amend the disclosure requirements or broker registration norms, then it will have to say upfront how it will help the system, investors and other stakeholders and what is the cost of compliance. Later, if the regulator’s calculations go wrong or do not achieve the goal, the affected parties can raise questions.

It is understood that there is total consensus on this decision among the government and various financial regulators. The government has already started working on this and is expected to take some serious steps later this month. The proposal was mooted by an expert committee appointed by the finance ministry on how to make Mumbai an international financial centre.

The idea of introducing regulatory impact assessment, something widely followed by many OECD countries, is to provide world-class financial regulation and supervision in terms of policy, approach, attitude and practice. The committee’s recommendations went far beyond making Mumbai a global financial centre and suggested how to revolutionise the regulatory system to make it market-friendly.