Why journalists should be more afraid of Sebi

Imagine that a man walks into a party with a gun in his hand. He may smile and assure everyone that he has no intention of using it, but people are still going to step carefully around him. And chances are the room will empty out pretty quickly.

The Securities and Exchange Board of India’s new set of research analyst regulations, which seek to regulate disclosures, conflict of interest and compensation practices for research analysts, has the potential to do something similar.

Sebi subsequently released a set of ‘Frequently Asked Questions’ which sought to provide clarity on the new regime. It clarified that journalists would come under the research analyst regulations. It also said that they would not need to register themselves with the regulator – like other research analysts are now required to – but would nonetheless need follow relevant sections of the regulation wherever applicable.

This registration exemption cannot hold, according to three lawyers that Business Standard spoke with, including one former senior Sebi executive director who was quoted in an earlier report on this topic. The regulator cannot exempt someone from its regulations through a set FAQs.

“While all regulations made by SEBI have the force of law under the SEBI Act, FAQs are not binding in the same way. SEBI cannot amend or minimise the applicability of Regulations by way of FAQs,” said Sandeep Parekh, former executive director at Sebi and founder of Finsec Law Advisors.

Another lawyer said that Sebi seldom goes against what it has said in its FAQs. This is good to hear. But it does not change the fact that any media organization which is not registered with the regulator is a violator under the new regime.

Sebi has become the person who took his gun to the party. It can announce to the world that nobody will be shot, but the weapon it now carries may well ensure media organisations are careful about where they step.

A Sebi spokesperson denied any such intention.

“Further, RA Regulations….are not intended to regulate the media. The purpose of RA regulations is to address various conflicts of interest while making research recommendations,” the spokesperson said in an emailed statement.

But an email, like an FAQ, does not carry the weight of law. And until Sebi takes legal steps to address the issue, the risk remains.

One way that media organizations may look to minimise their regulatory risk is to go ahead and register with Sebi. This can have a terrible impact on reporting. The media often has to take an adversarial position against the regulator. That's the whole point of having a fourth estate, to speak truth to power. How effectively will it be able to do this job when regulated by the very body it is reporting on?

One only needs to look at how rarely intermediaries in India speak on the record of their criticism of the regulator for an answer.

Worse, such registration would mean that journalism would essentially have a regulator. Sebi will have done what Parliament has not in all its years.

There is no reason that journalists should get a free pass on disclosures, and there is no doubt that the issue needs to be addressed. But maybe this wasn’t the best way to do it.