Cut all that flab from reg laws: Why SEBI's securities laws need a revamp
regulations from two lenses: one, errors: whether the law will harm innocents or let the guilty get away; two, cost-benefit analyses: every law has a cost on the market. For good process, regulators look at views of expert committees and expose draft regulations to public comments.
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Students of criminology will recognise the two error types. Type 1 occurs when a guilty person escapes because the law is too lax. This error prioritises protecting the innocent at the risk of letting some guilty individuals go free. Type 2 occurs when an innocent person is found guilty. This reflects an overly stringent or biased system that compromises individual rights and undermines justice.
Sadly, a lot of current regulations falls within these errors. In fact, the Sebi law against fraud is drafted so sloppily that it simultaneously creates both type 1 and type 2 errors at the same time. While it's easy to blame Sebi, many of these laws were created by market experts from industry. The law against fraud and insider trading, and the takeover law, are the most egregious examples.
Take the securities law against fraud. Fraud has been well understood for centuries under common law, even before a formal legislation came in. Based on the common law, five ingredients were identified: intent, materiality, mis-statement, causation, and harm. With minor
