Sucheta Dalal :Chance to cleanse SEBI
Sucheta Dalal

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Chance to cleanse SEBI  

February 25, 2011

If the new SEBI chairman UK Sinha chooses to clean up the regulatory body, restore legitimacy of rules and processes and recognises the importance of quick and transparent dissemination of information, he would have more than fulfilled ordinary investor’s expectations

Sucheta Dalal

As he gets set to become the eighth market watchdog in under two decades, UK Sinha knows well that this coveted chair had turned too hot for almost everyone of its occupants. And, so far, only GV Ramakrishna has left the Securities and Exchange Board of India (SEBI) with a blaze of achievements, despite the fact that every market intermediary lobbied incessantly for his departure.

In Mr Sinha, the government has opted for the tried and tested—an IAS officer who has been associated with the capital market both as a government official in the ministry of finance and as a market-intermediary-regulated entity. But nobody really expects him to ruffle too many feathers with idiosyncratic experiments. Fortunately, he also comes without any of the heavy baggage that accompanied Chandrasekhar Bhave. Mr Bhave headed the National Securities Depository Ltd which had a pending regulatory action from SEBI under litigation. This cast a shadow on his tenure from the word go.

Yet, Mr Sinha too will have a tough job coping with expectations from various quarters. The mutual fund and distributor industry, badly battered under Mr Bhave, hopes for some positive strokes. Market intermediaries expect that he will put an end to the acute arbitrariness, arrogance and partisanship that marked SEBI’s actions in the past three years. Long time insiders at SEBI hope that he will initiate a much-needed administrative clean-up and end groupism. But expecting change is easier than implementing it, especially without sweeping hire-and-fire powers.

It is, of course, possible that Mr Sinha may get to choose a fresh team because several senior executives, who were brought in by Mr Bhave may decide to move on, just as those close to M Damodaran left after his exit. While this may give Mr Sinha a lot of flexibility, we must hope that he puts in place a strong management team and not another set of yes-men. It is especially imperative that the executive director in charge of legal affairs is a permanent appointee who can act independently and not as a contract employee whose continuance in office is dependent on the SEBI chairman’s approval.

So what are the core issues on which we would like the new SEBI chairman to focus his attention? For now, we will discuss issues that impact investors at large and not allude to the more controversial or partisan decisions of the Bhave period.

These include the extraordinary largesse towards the Bharti Mittal group (the lightning advance ruling for its MTN deal and the foot-dragging regarding an investigation against it in another case), the strengthening monopoly of the National Stock Exchange of India and the war with MCX-SX.

Consenting with offenders

Some eulogisers have lauded Mr Bhave for collecting over Rs150 crore through consent orders and given him credit for a sharp reduction in SEBI orders that were challenged before the Securities Appellate Tribunal (SAT). Well, the very purpose of introducing a ‘consent’ regime was to avoid precisely such litigation by settling cases ‘without admitting or denying guilt’.

Naturally, appeals against SEBI orders have dropped. In any case, SEBI is not a revenue agency of the government. The settlement under consent terms was to act as a deterrent, not a toll that you pay to break the rules. High collections through settlements are an indicator of poor supervision, rather than tough enforcement and that was the reality under Mr Bhave. The settlement amount too depended on the whims of SEBI officials and even repeat offenders were allowed to file consent or get away with warnings if they ‘found favour’ with SEBI’s top brass.

Those who failed to toe the line were punished so severely that they served as a warning to others—a good example is that of Manmohan Shetty, former chairman of Adlabs, who was ordered to pay a whopping Rs1 crore for a small lapse.

On the other hand, consider even the biggest consent order of Rs50 crore against the Anil Ambani group. Has he been banned for a year or hasn’t he? Since he says he isn’t, why does the order give the impression of a ban? SEBI collected Rs50 crore, but investors are clueless about the gravity of the charges leading to a surmise that the group actually ‘got away’ with massive violations by paying its way through. A crucial aspect of the consent regime was that the order would contain details of the wrongdoing charged against individuals, firms and intermediaries, which would be publicly available. SEBI under Mr Bhave deliberately ignored this and most of its orders protected wrongdoers by being vague, sketchy and opaque.

Even more extraordinary is my recent discovery that some privileged law-breakers were let off by issuing ‘administrative warnings’ even for things as serious as synchronised trading. These warnings are nothing short of conniving with offenders, because, unlike consent orders, these warnings do not have to be quoted in applications to the regulator, initial public offering (IPO) documents, etc. Several activists have been working on plans to challenge consent proceedings in court. Maybe, Mr Sinha can avoid a court ordered clean-up by putting this high on his agenda.

Perhaps the single biggest expectation from Mr Sinha is that he would pronto sign an order to restore status quo ante on entry-loads for mutual funds. But this, too, is unlikely to happen as easily. Nobody would like to revert to the high-cost, high-load mutual fund regime of the past when investors were conned into subscribing to new fund offerings (NFOs).

Loads and commissions, even if restored, will have to remain modest and be transparent and strictly monitored by the regulator. Indeed, Mr Sinha may permit funds with ‘loads’, but it is clear that they will have to come with plenty of checks and balances.

Finally, the real test of a good SEBI chairman is whether he is able to create a credible capital market with a strong grievance-redressal mechanism and impartial enforcement of rules. By this yardstick, SEBI has failed in all departments in the past three years; this is evident in dwindling investor numbers in the primary and secondary markets as well as mutual funds.

Changing this would require a regulator who listens to differing views and perspectives and is prepared to accept and act on unpleasant feedback about his organisation if it reflects the genuine concerns of the investor community rather than the vested interest of various intermediaries and companies.

If Mr Sinha chooses to clean up the regulatory body from inside, restore the legitimacy of rules and processes and recognises the importance of quick and transparent dissemination of information, he would have more than fulfilled ordinary investors’ expectations. 

-- Sucheta Dalal