Sucheta Dalal :Oh the problems of finding a capital market regulator!
Sucheta Dalal

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Oh, the problems of finding a capital market regulator!  

December 7, 2001

L ast week, Business Standard reported that the search for a new chairman for the Securities and Exchange Board of India had come to naught. The search committee set up to find a chairman had failed to "identify a suitable candidate for the job".

Actually, the committee did even worse. Not only could it not identify a suitable chairman, it also failed to identify any candidate for the four posts of Member Sebi that are planned to be created at the regulatory body.

Why should there be no takers for the job of a powerful capital market watchdog? Especially when the organisation takes credit for the rapid modernisation of India's large but primitive, faction-ridden and broker-controlled capital market? And why should the search for Member Sebi elicit one 'maybe' and several nays?

It is simple. It is not as though there aren't plenty of candidates for the job, it is their suitability that is the problem.

Had the usual selection route been adopted, there would have been hectic political lobbying for the post. But try finding a suitable candidate, especially one from the private sector with hands-on market experience and suddenly there are no takers.

Yet, ever since Sebi came into existence in the early 1990s, it has been fashionable for academics and capital market intermediaries to thunder at every opportunity that only a 'practitioner' can understand market mechanics and be a truly effective regulator.

Naturally, the most quoted example is Joe Kennedy, the first Chairman of the Securities Exchange Commission. President Franklin Roosevelt rewarded Joseph Kennedy, one of the richest men in the US and a notorious and unscrupulous speculator, for his contribution to his election campaign and for introducing him to the moneybags of the capital market.

The President had famously dismissed criticism and outrage at the decision by telling his colleagues "it takes a thief to catch a thief".

It is probably only fortuitous that Kennedy did not disappoint his President. Having lorded it over Wall Street and made a splash in Hollywood, Kennedy wanted to build the family's reputation and probably paved the way for the Camelot years of John F Kennedy's presidency. It must also be remembered that Kennedy resigned from the SEC in 1935, just over a year in the job.

As a 30-year-old stockbroker Joe Kennedy had made his money through insider trading and stock manipulation. He was known as a master of the 'stock pool' which involved a cartel of traders conspiring inflate a stock's prices and selling out just before the bubble burst.

If this has shades of Harshad Mehta and Ketan Parekh, then its only saving grace was that it was not illegal those days.

Kennedy changed all that. As SEC Chairman he went on to ban every malpractice that had gone into building his own fortune.

He even banned short-selling. Before he resigned in a little over a year, Kennedy had viciously pursued every Wall Street titan who was a former friend or cohort; he remained unfazed when his own unethical transactions were presented during hearings.

Kennedy later wrote in his book I'm for Roosevelt, "For month after month the country was treated to a series of amazing revelations which involved practically all the important names in the financial community in practices which, to say the least, were highly unethical." He described his work at SEC as "forcing their mouths open and going in with a pair of pincers and just taking all the gold out of their teeth."

I am willing to bet that no Indian capital market intermediary really wants a Joe Kennedy clone as Sebi chairman. Remember their outrage at the clean-up initiated by G V Ramakrishna -- effectively the first Sebi chairman and the man who gave Sebi a brilliant start as a formidable watchdog even when it hardly had any teeth. Ramakrishna was removed after continuous lobbying by market intermediaries against his clean-up attempts. Yet, Indian market intermediaries have us believe that they would accept a Joe Kennedy as regulator because he was one of them - a private sector man who 'understood' capital market issues.

So how come nobody wants the job when the government is actually willing to experiment? Simply because it is all very well to expound on issues at industry seminars but difficult to take on the responsibility of doing the job. Any attempt to get tough with big industrialists or powerful intermediaries such as investment bankers and mutual funds would trigger the same political pressures that ousted Ramakrishna.

Secondly, the only way a market intermediary could switch to being regulator would be by winding up his business - there would be no going back to it. Assuming that the selection committee had zeroed in on an institutional executive to head Sebi, it would still mean a huge sacrifice of salary, perks, travel benefits, club memberships and other emoluments.

Let us now turn to the search for the four posts of Member Sebi. The experiment with a Member Sebi is already a bit of a disaster. The first post was created almost two years when an academic -- Prof J R Varma of IIM Ahmedabad as made Member Sebi.

Finance ministry mandarins believed that a Member Sebi would check what was seen as excessive concentration of power in the hands of the Sebi chief. But it did not work that way. Varma, an outsider, was quickly reduced to just a Senior executive director whose background helped Sebi crystallise its proposals in fine academic terms.

He rarely acted on his own and his personal views on regulation and supervision (which is minimal supervision and government intervention) were exactly the opposite of what Sebi was supposed to be.

Varma was careful not to burn his boats at IIM and reclaimed his teaching assignment exactly a year after he joined Sebi.

The government then decided that the Sebi board should have four full time board members, on the lines of the four Commissioners (plus chairman) at the SEC.

Again, all 'suitable' candidates have turned down the offer. These include two who are honest, dynamic, experienced and tough enough to be chairman.

Their reasons are simple. Sebi at present is so directionless and demoralised that a clean up and a reorganisation will have to start at the very bottom and go all the way up to the top job.

And although the government professes to want such a shakeout, its seriousness will be known by whom it appoints as Sebi chairman.

So far there is little to indicate that the government is looking at radical change. Last heard it has two equally silly options. The first is to set up a three-member supervisory body comprising some heavy weights of the financial sector who would supervise the chairman and the board on a part time basis. They have magnanimously agreed to devote half of everyday to Sebi. This would give the trio enormous power without any responsibility. Can anything be worse than that?

Yes. The worst out of two bad possibilities would be for the post to be handed over to yet another bureaucrat who is looking for a post-retirement sinecure in the 65-year age limit for the Sebi chief's post.

-- Sucheta Dalal