Securities Markets Code: Regulatory impact assessments can improve Sebi’s rule-making

The Securities and Exchange Board of India (Sebi) today administers over 44 principal regulations and 13 statutory rules, supplemented by more than 2,700 circulars (including master circulars), guidelines, FAQs, general orders and frequent amendments. These span listed companies, intermediaries, managers of portfolio management schemes, mutual funds and alternate investment funds, apart from rating agencies, disclosure norms, takeovers, insider trading, stock exchanges, clearing corporations and depositories.

Each framework evolves constantly, often with multiple changes in a single year.

Regulatory evolution is inevitable. As products, risks and market structures evolve, regulation must keep pace. But accumulation raises a sharper question: Are we adding rules or improving outcomes? The answer lies in embedding regulatory impact assessment (RIA) into rule-making.

Regulation is essential. Markets face information asymmetry, agency conflicts and systemic risk. Investor protection and integrity are non- negotiable. But regulation is also an economic intervention. It imposes costs, alters incentives and shapes competition. Disclosure mandates require systems, personnel and audit trails. Governance mandates reshape board behaviour and liability exposure. Entry norms determine who participates. These effects compound.

Frequent amendments amplify this burden. Large institutions absorb it; smaller players struggle. The result is not just higher compliance cost, but distortions in competition, higher entry barriers and reduced market diversity. RIA does not dilute regulation. It disciplines it. It asks whether a proposed rule is a necessary, proportionate and effective response to a clearly defined problem.

The first step is clarity. What problem is being solved? Is it systemic or episodic? Is it evidenced or anecdotal? Regulation built on isolated events risks overreach.

Second, alternatives. Regulation is not the only tool. Supervision, enforcement, better disclosures or market incentives may achieve the same objective with lower cost.

Third, costs and benefits. Precision may be elusive, but direction is not. Compliance costs, technology investments, liquidity impact, barriers to entry and effects on capital formation must be weighed against gains in transparency and stability.

Fourth, consequences. Markets adapt. Tightening one segment could shift activity elsewhere. With every regulation, grey areas emerge. Higher compliance accelerates consolidation. Entry barriers dampen innovation.

Finally, post-implementation review. Regulations must be tested against outcomes. Periodic review, sunset clauses and outcome-based monitoring prevent regulatory accumulation from turning into regulatory inertia.

Globally, these principles are embedded in statutory frameworks. In the US, Sections 2(b) of the Securities Act of 1933, and 3(f) of the Securities Exchange Act of 1934 require the Securities and Exchange Commission (SEC) to consider efficiency, competition and capital formation. Rule-making requires detailed economic analysis. Courts enforce this. In Business Roundtable vs SEC (2011), the proxy access rule was struck down for inadequate economic assessment. Regulatory authority must be exercised through reasoned analysis, not assumptions.

In the UK, Section 138I of the Financial Services and Markets Act of 2000 mandates a cost-benefit analysis for proposed rules. The Financial Conduct Authority must explain expected costs, benefits and rationale. Australia follows a similar model through regulatory impact statements. These frameworks strengthen, not weaken, regulators.

India lacks this discipline. While Sebi follows a consultative process, economic analysis remains neither structured nor visible. Practitioners would readily point out that systemic discipline of the kind fostered by RIA, designed to evaluate the costs, benefits and alternatives to any regulation before it is framed, is largely absent in India’s regulatory framework for securities.

Under a regime where Sebi operates predominantly through delegated legislation, this gap matters. Without structured ex-ante assessments, rule-making risks becoming convenience-driven rather than consequence-oriented.

Even after the government nudged regulators towards better rule-making practices and Sebi notified a framework in February 2025 on how regulations should be made, amended and reviewed, its implementation is largely absent from the public domain. The proposed Securities Markets Code, intended to consolidate and modernize core securities laws, also omits any mandate for RIA or its disclosure. That is a significant omission.

The need is evident. Regulatory activity is frequent and wide-ranging. Each change may be justified. The combined impact of changes is rarely assessed. Market participants must constantly update systems, retrain staff and recalibrate processes. The cumulative cost is significant.

RIA introduces a simple test: Does the marginal benefit justify the cumulative cost?

This is not a deregulatory argument. Investor protection and systemic resilience remain non-negotiable. In fact, RIA strengthens these objectives. Evidence-based, proportionate regulation improves compliance and enhances enforcement credibility. Over-regulation, by contrast, risks diffusing regulatory focus and diluting effectiveness.

This is not deregulation but disciplined regulation. Evidence-based rules enhance compliance and sharpen enforcement, while unchecked procedural layering dilutes regulatory focus. If Sebi Chairman Tuhin Kanta Pandey’s stated ‘4T’ framework of ‘Transparency, Trust, Technology and Teamwork’ is to succeed, it must rest on a foundation of mandatory regulatory impact assessment and public disclosure.

Institutionalizing RIA will require investment in capacity. Regulators need analytical expertise and access to data. Collaboration with academia, economists and data specialists will help. Impact assessments should accompany draft rules, enabling informed consultation. A tiered approach is feasible. Major interventions warrant full analysis; minor changes, lighter scrutiny. The objective is discipline, not delay.

India aims to be a leading global capital market. Investors, domestic and global, value predictability as much as protection. Transparent, reasoned regulation builds confidence.

The growth of India’s regulatory framework reflects the dynamism of its markets. The issue is not whether regulation should evolve; it must. It is whether each rule is tested for necessity, proportionality and consequence. As regulatory density rises, discipline becomes critical. The strength of regulation lies not in its volume, but in its value. India does not need more rules. It needs better ones—measured, not merely made.

The authors are, respectively, chairperson, Excellence Enablers, and former chairman, Sebi, UTI and IDBI; and managing partner, Regstreet Law Advisors and a former Sebi officer.