Sucheta Dalal :Mirror Mirror on the Wall…
Sucheta Dalal

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Mirror, Mirror on the Wall…  

September 21, 2010

Why CB Bhave’s tenure as SEBI chairman will go down as among the worst in nearly two decades

By his own admission, Bhave often looks in the mirror to ask: "Am I proud of what this guy did today?" The answer invariably is a resounding yes, Bhave had told this newspaper some time ago. He also said, "Nothing else bothers me, as your conscience will never lie".

- Business Standard, 14 September 2010

It is intensely gratifying to be able to look into the mirror and like what one sees. But there is always the danger that the image in the mirror is really one's self-image! It is widely reported that (barring the possibility of last-minute manipulation) Chandrashekhar B Bhave will demit office in February 2011 as the seventh chairman of the Securities and Exchange Board of India (SEBI). Mr Bhave came in with the highest possible expectations. He will arguably leave behind massive disappointment and an extremely controversial legacy, one that should force the government to do some hard thinking on how it chooses who will head its regulatory bodies.

In May 2005, I had written that the National Securities Depository Ltd (NSDL), which Bhave headed then, had achieved the "fastest record of dematerialisation of equity in the world" (of course, due to a regulatory fiat) and also established a reputation "for integrity, security and leadership." Consider how rapidly things started changing thereafter. A year later, when the IPO (initial public offering) scam happened, it was clear that NSDL had failed to detect what any alert system should have caught very quickly-tens of thousands of IPO applications, which were getting consolidated into less than a dozen depository accounts even before the shares were listed for trading.

The investigation that followed, and NSDL's cases against SEBI's indictment, are all too well-documented. Less well-documented is how in the past three years, under Mr Bhave's supervision, most of the IPO scamsters filed consent terms and closed their cases. SEBI made a show of paying out some 'disgorged' money to investors through a calculation that nobody wants to go into, because no one opposes the principle of disgorgement.

In fact, over the past few years, we have also come to understand how transparent, fully automated systems can also hide a lot. For over 10 years, we were all carried away by the phenomenal daily trading numbers (over one lakh crore rupees a day) on the bourses and the market value of assets held by the depositories. It is only recently that questions in Parliament exposed how, at the core of this vast cloud of trading volumes, there are only a few hundred people. Forget about the India-Bharat divide, we discover that most of middle-class India has also not participated in the 'booming' capital market.

How and why did Mr Bhave become the SEBI chairman? He told Business Standard in August 2009 that "When the PM or the FM asks you to take up a challenge, you simply can't say no." In fact, both Mr Bhave and the NSE managing director Ravi Narain had turned down the SEBI chairman's job in late 2004 when they were first asked by the then finance minister P Chidambaram. Both had said they couldn't afford the sharp pay cut that it would involve because they had children studying abroad. Over the next three years, Mr Bhave at NSDL and Mr Narain at the NSE saw sharp increases in their paycheques. Ravi Narain is now among the highest-paid CEOs in the country with a gross package of Rs6.6 crore.

It was only when M Damodaran's tenure ended in February 2008 and, after all the allegations and litigation over NSDL's performance were in the public domain, that Mr Bhave accepted SEBI's chairmanship-after initially telling the selection committee that he was not interested in the job because regulatory action against NSDL was still being contested before the appellate authority. In fact, until the very last day, it was almost certain that Mr Damodaran would get an extension, but some high drama changed everything in just a few hours.

Dr KP Krishnan, who was then joint secretary (capital markets) at the finance ministry, swung into action calling senior journalists, including this writer, to explain the 'ring fence' that would separate chairman Bhave from NSDL-related issues. How miserably the 'ring fence' collapsed and all the machinations that went into protecting Mr Bhave (including discrediting a committee of the SEBI board), have been documented in detail by us. It was only after a public interest litigation was filed in the Andhra Pradesh High Court that the committee's report was made public. It revealed that there were three cases relating to NSDL of which two had been buried by SEBI for several years.

Mr Bhave's actions to 'clear' his name on the NSDL issue dented his reputation (no matter what the mirror told him), but those in the capital market were still willing to condone it. His actions on other fronts have been far more perplexing. Let's look at just four of these.

First, the open bias and acute partisanship in favour of the NSE and NSDL and the brazenly biased actions against MCX-SX and the Bombay Stock Exchange (which is not publicly vocal). Second, the bizarre but constant attempt to drum up more business for NSE-NSDL. The attempt to dematerialise mutual fund units, which began in 2005 and which Mr Bhave continues to push today, is one example; standardising fees is another. Third, the damage caused to the mutual fund industry by the hasty scrapping of entry-loads, without putting in place an alternative, followed by the stubborn refusal to admit a mistake or initiate course-correction. Fourth, the strange decision to initiate a turf war with the insurance regulator which has only ended up in statutory changes that give more power to the finance ministry over all financial regulators, including the Reserve Bank of India.

Moneylife has documented each of these issues extensively; so let me only quote a SEBI executive who said, rather perceptively, that "He (Bhave) never really became the SEBI chairman; he continued to act as though he worked for NSE and NSDL combined." Well, the capital market paid a price and so will he, because his tenure at SEBI will go down as traumatic, damaging and eminently forgettable. — Sucheta Dalal

-- Sucheta Dalal