The PIL on top SEBI appointments raises too many questions
On 21st November, the Supreme Court dismissed as withdrawn (for the
second time) one of the most bizarre public interest litigations
(PILs) one has come across. It was regarding the selection process for
the post of the chairman and whole-time members (WTMs) of the
Securities and Exchange Board of India (SEBI).
The PIL was filed by a very eminent trio—former air chief marshal S
Krishnaswamy, India’s ‘super cop’ Julio Rebeiro, and former joint
director of the Central Bureau of Investigation (CBI) BR Lall. None of
them is known to have evinced any previous serious interest in the
capital market and its regulations.
Nevertheless, they seemed dead serious about SEBI’s functioning and
this litigation. After all, they had filed the writ directly in the
Supreme Court and also persuaded India’s former solicitor general
Gopal Subramanium to represent them.
Yet, their writ has had to be ‘withdrawn’ not once but twice. The
first time, the apex court asked them to remove unfounded allegations
against the finance minister. The next time, the court made it clear
that the badly drafted petition wasn’t going to be admitted. Instead,
it gave the petitioners (probably because of their own eminence and
that of their counsel) one last opportunity to plead substantive
constitutional issues.
Now that the Supreme Court, as expected (by us, not other media) has
seen through this, the question is: What motivated these eminent
persons to file this litigation? A simple reading shows that the
petitioners’ objective was extremely narrow: to get UK Sinha’s
appointment as SEBI chairman annulled and probably have CB Bhave and
his two WTMs—Dr KM Abraham and MS Sahoo—recalled for another two
years. Towards this end, a well-orchestrated media campaign launched.
The campaign stretches way back to last year when the finance ministry
made it clear that it was determined to find a new chairman.
Strangely, none of the journalists found it odd that the finance
ministry, under another minister and team of bureaucrats, had
surreptitiously tried to extend the term of the SEBI chairman and WTMs
just a year after they were given a three-year term.
Stranger still is the fact that such an eminent group hadn’t done its
homework about CB Bhave’s own odd, last-minute, selection for the
post—a result of some quick machination. A petition about Mr Bhave’s
appointment from the public interest angle would have certainly made
sense then. Consider this. The finance ministry’s affidavit in
response to the PIL shows there were three persons in the race for
SEBI chairmanship in 2008—M Damodaran (the incumbent), UK Sinha and
Jaimini Bhagwati. All three had been joint secretaries in the finance
ministry’s capital market division and had a good service record.
An objective PIL on the selection process would have made sense when
all three were ignored and CB Bhave (who had formally expressed his
reluctance to accept the post because SEBI had slapped a charge
against the National Securities Depository Ltd of which he was the
founding chairman for 15 years) was appointed. Why appoint a person
who would be hobbled by a ring-fence on important decisions, when
equally, or more, competent alternatives were available? Dr Jaimini
Bhagwati, then considered the strongest contender, has a PhD in
derivatives and, more uniquely, had hands-on experience at running a
derivatives desk at the World Bank. Surely, a PIL at the Supreme Court
level should have done adequate homework to know that past
appointments have been more capricious and arbitrary.
I also learn from an impeccable source that the ‘eminent’ petitioners
didn’t even brief their counsel Gopal Subramanium before the last
hearing and he ended up doing his own homework to find a
constitutional peg on which to hang the shaky petition and avoid
withdrawal. Unfortunately for him, it didn’t impress the bench.
Instead, Chief Justice SH Kapadia called it a ‘publicity-seeking
petition’ and told the petitioners that they could come back one last
time with proper pleadings based on constitutional doctrines. He also
observed that ‘regulatory independence’ is a very important issue. He
asked why only bureaucrats are appointed as regulators instead of
considering candidates from a wider circle with domain expertise.
Unfortunately, the withdrawn petition shows what concerned the Supreme
Court did not agitate the eminent citizens. After all, every single
person in the shortlist when Mr Bhave was appointed was from the
Indian Administrative Service (IAS). So was Dr Abraham; while MS Sahoo
had earlier worked with SEBI, the National Stock Exchange and the
finance ministry. But the eminent citizens who filed the PIL are
clearly not worried at the capture of all regulatory agencies by
bureaucrats with or without domain expertise.
What then are the issues that these citizens ought to raise to help
improve the functioning of SEBI? They will find plenty, in most issues
of Moneylife. In the past few years, SEBI’s failure to discharge its
regulatory duties has forced ordinary investors as well as market
intermediaries to approach high courts or the Competition Commission
of India for redress.
After nearly five years of capricious, non-transparent orders
amounting to a gross abuse of regulatory power, a group of investors
has challenged the legality of SEBI’s consent order mechanism. Once
the court took cognizance of the contentions, the entire consent
mechanism (which was often used to bury mega-scams by paying a
settlement fee) has come to a halt.
Moneylife has already reported how SEBI officials have illegally
issued ‘administrative warnings’ to repeatedly let off entities
involved in market manipulation, insider trading and worse. Although
the SEBI Act does not allow such ‘administrative warnings’, a former
executive director told us that it was done because of inadequate
proof or documentation to substantiate the charges. The fact is that
shoddy investigation, sloppy procedures and vanishing files are the
tricks used by all corrupt investigation agencies to let off
offenders.
SEBI’s failure to create fair market practices over the past two
decades has caused India’s retail investor population to shrink from
20 million to 8 million (according to official studies). The exit of
retail investors, victimised by mis-selling, price manipulation and
poor grievance redressal, has been concealed by large foreign
portfolio investment, soaring stock indices and frothy trading
volumes.
The irony is that our capital market system attracts kudos from
foreign investors because it works well for them. While domestic
investors are harried by paperwork and KYC norms, foreign investors
have no such issues. Hedge funds and India’s super-rich (with loads of
unaccounted overseas funds) route it through non-transparent
participatory notes (PNs) issued by foreign institutional investors
(FIIs) registered in India. So each FII has hundreds of sub-accounts
representing these separate investors. Moneylife has recently made the
shocking discovery that SEBI regulations simply do not require each
sub-account to disclose a separate permanent account number (PAN) for
their transactions. In contracts, domestic Indians have to submit PANs
for all transactions above Rs10,000. SEBI chairman UK Sinha has
maintained complete silence over our query on this vital issue.
Clearly, the group of ‘eminent citizens’ would have served public
interest far better by agitating these critical issues before the
Supreme Court. Calling their petition a ‘publicity-seeking’ ploy is
probably the most charitable comment on their action.
Sucheta Dalal is the managing editor of Moneylife. Subscribers get
free help in resolving their problems with select providers of
financial services. She can be reached at sucheta@moneylife.in
On 21st November, the Supreme Court dismissed as withdrawn (for the
second time) one of the most bizarre public interest litigations
(PILs) one has come across. It was regarding the selection process for
the post of the chairman and whole-time members (WTMs) of the
Securities and Exchange Board of India (SEBI).
The PIL was filed by a very eminent trio—former air chief marshal S
Krishnaswamy, India’s ‘super cop’ Julio Rebeiro, and former joint
director of the Central Bureau of Investigation (CBI) BR Lall. None of
them is known to have evinced any previous serious interest in the
capital market and its regulations.
Nevertheless, they seemed dead serious about SEBI’s functioning and
this litigation. After all, they had filed the writ directly in the
Supreme Court and also persuaded India’s former solicitor general
Gopal Subramanium to represent them.
Yet, their writ has had to be ‘withdrawn’ not once but twice. The
first time, the apex court asked them to remove unfounded allegations
against the finance minister. The next time, the court made it clear
that the badly drafted petition wasn’t going to be admitted. Instead,
it gave the petitioners (probably because of their own eminence and
that of their counsel) one last opportunity to plead substantive
constitutional issues.
Now that the Supreme Court, as expected (by us, not other media) has
seen through this, the question is: What motivated these eminent
persons to file this litigation? A simple reading shows that the
petitioners’ objective was extremely narrow: to get UK Sinha’s
appointment as SEBI chairman annulled and probably have CB Bhave and
his two WTMs—Dr KM Abraham and MS Sahoo—recalled for another two
years. Towards this end, a well-orchestrated media campaign launched.
The campaign stretches way back to last year when the finance ministry
made it clear that it was determined to find a new chairman.
Strangely, none of the journalists found it odd that the finance
ministry, under another minister and team of bureaucrats, had
surreptitiously tried to extend the term of the SEBI chairman and WTMs
just a year after they were given a three-year term.
Stranger still is the fact that such an eminent group hadn’t done its
homework about CB Bhave’s own odd, last-minute, selection for the
post—a result of some quick machination. A petition about Mr Bhave’s
appointment from the public interest angle would have certainly made
sense then. Consider this. The finance ministry’s affidavit in
response to the PIL shows there were three persons in the race for
SEBI chairmanship in 2008—M Damodaran (the incumbent), UK Sinha and
Jaimini Bhagwati. All three had been joint secretaries in the finance
ministry’s capital market division and had a good service record.
An objective PIL on the selection process would have made sense when
all three were ignored and CB Bhave (who had formally expressed his
reluctance to accept the post because SEBI had slapped a charge
against the National Securities Depository Ltd of which he was the
founding chairman for 15 years) was appointed. Why appoint a person
who would be hobbled by a ring-fence on important decisions, when
equally, or more, competent alternatives were available? Dr Jaimini
Bhagwati, then considered the strongest contender, has a PhD in
derivatives and, more uniquely, had hands-on experience at running a
derivatives desk at the World Bank. Surely, a PIL at the Supreme Court
level should have done adequate homework to know that past
appointments have been more capricious and arbitrary.
I also learn from an impeccable source that the ‘eminent’ petitioners
didn’t even brief their counsel Gopal Subramanium before the last
hearing and he ended up doing his own homework to find a
constitutional peg on which to hang the shaky petition and avoid
withdrawal. Unfortunately for him, it didn’t impress the bench.
Instead, Chief Justice SH Kapadia called it a ‘publicity-seeking
petition’ and told the petitioners that they could come back one last
time with proper pleadings based on constitutional doctrines. He also
observed that ‘regulatory independence’ is a very important issue. He
asked why only bureaucrats are appointed as regulators instead of
considering candidates from a wider circle with domain expertise.
Unfortunately, the withdrawn petition shows what concerned the Supreme
Court did not agitate the eminent citizens. After all, every single
person in the shortlist when Mr Bhave was appointed was from the
Indian Administrative Service (IAS). So was Dr Abraham; while MS Sahoo
had earlier worked with SEBI, the National Stock Exchange and the
finance ministry. But the eminent citizens who filed the PIL are
clearly not worried at the capture of all regulatory agencies by
bureaucrats with or without domain expertise.
What then are the issues that these citizens ought to raise to help
improve the functioning of SEBI? They will find plenty, in most issues
of Moneylife. In the past few years, SEBI’s failure to discharge its
regulatory duties has forced ordinary investors as well as market
intermediaries to approach high courts or the Competition Commission
of India for redress.
After nearly five years of capricious, non-transparent orders
amounting to a gross abuse of regulatory power, a group of investors
has challenged the legality of SEBI’s consent order mechanism. Once
the court took cognizance of the contentions, the entire consent
mechanism (which was often used to bury mega-scams by paying a
settlement fee) has come to a halt.
Moneylife has already reported how SEBI officials have illegally
issued ‘administrative warnings’ to repeatedly let off entities
involved in market manipulation, insider trading and worse. Although
the SEBI Act does not allow such ‘administrative warnings’, a former
executive director told us that it was done because of inadequate
proof or documentation to substantiate the charges. The fact is that
shoddy investigation, sloppy procedures and vanishing files are the
tricks used by all corrupt investigation agencies to let off
offenders.
SEBI’s failure to create fair market practices over the past two
decades has caused India’s retail investor population to shrink from
20 million to 8 million (according to official studies). The exit of
retail investors, victimised by mis-selling, price manipulation and
poor grievance redressal, has been concealed by large foreign
portfolio investment, soaring stock indices and frothy trading
volumes.
The irony is that our capital market system attracts kudos from
foreign investors because it works well for them. While domestic
investors are harried by paperwork and KYC norms, foreign investors
have no such issues. Hedge funds and India’s super-rich (with loads of
unaccounted overseas funds) route it through non-transparent
participatory notes (PNs) issued by foreign institutional investors
(FIIs) registered in India. So each FII has hundreds of sub-accounts
representing these separate investors. Moneylife has recently made the
shocking discovery that SEBI regulations simply do not require each
sub-account to disclose a separate permanent account number (PAN) for
their transactions. In contracts, domestic Indians have to submit PANs
for all transactions above Rs10,000. SEBI chairman UK Sinha has
maintained complete silence over our query on this vital issue.
Clearly, the group of ‘eminent citizens’ would have served public
interest far better by agitating these critical issues before the
Supreme Court. Calling their petition a ‘publicity-seeking’ ploy is
probably the most charitable comment on their action.
Sucheta Dalal is the managing editor of Moneylife. Subscribers get
free help in resolving their problems with select providers of
financial services. She can be reached at sucheta@moneylife.in
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