It has taken close to a decade for SEBI to make operational the SEBI (Self-Regulatory Organizations) Regulations, 2004. SEBI's recent notice (March 2013), inviting applications from entities desirous of being registered as an SRO for distributors of mutual funds and portfolio managers, would mark the beginning of a new era of securities regulation in India.

IOSCO, an international group of national securities regulators, has recognised the importance of SROs in emerging markets as a part of an important strategy to enhance the effectiveness of securities regulation and market integrity. The effectiveness of the traditional exchange-based SRO model is increasingly being questioned in the background of commercialization of exchanges, inability of statutory regulatory authorities to cover new areas of regulations, and globalization of capital markets.

Post the international financial crisis of 2008-09, a general shift has been observed towards a more powerful statutory securities regulator supplemented by an independent SRO. However, countries have differed on the role of an SRO. For instance, most European countries minimise the use of SROs and the statutory regulator reserves most regulatory functions, whereas, the US has preferred a more dominant role for an independent SRO. This was done in light of the increasing complexity of the marketplace, greater conflicts of interest and the fragmented structure of an exchange-based SRO model.

An independent SRO can tap the expertise of practitioners and pay them market compensation to enhance the quality of surveillance. This will allow the statutory regulator to address priority sectors and major systemic risks rather than routine supervision.

Although, at present, the scope of the proposed SRO under SEBI is restricted to mutual fund distributors and it does not have extensive rule making powers, it is worth noting that several full-fledged SROs evolved from industry association with limited legislative and enforcement power viz. the NASD in the US and the IDA in Canada. It would therefore be interesting to observe how SEBI facilitates the development of SROs or a single SRO and thus pushes for more effective regulation.