Sucheta Dalal :Unaccountable regulators: Cancerous caucus
Sucheta Dalal

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Unaccountable regulators: Cancerous caucus  

June 9, 2011

The recent capricious record of the SEBI top brass has shown that Indian regulators may continue with their whimsical ways if investors/savers don’t assert their rights and demand accountability from politicians 

Sucheta Dalal

If the board of directors of a regulatory body wantonly subverts regulatory processes; if a board comprising representatives of regulatory bodies (like RBI, SEBI or the ministry of corporate affairs) cannot ensure good governance and fair play, can we expect any better from the listed companies that they regulate? Who will discipline a regulator that fails to discharge its responsibilities?

These are the broader issues arising from an explosive letter written on 24 December 2010 by Dr Mohan Gopal, a former member of the board of the Securities and Exchange Board of India (SEBI), to the prime minister (PM) of India. It must worry all of us that the PM and the finance minister (FM) have faced no pressure from our Parliamentary system to respond to Dr Gopal’s charges or initiate corrective action.

In fact, Dr Gopal’s letter became public only because Subhash C Agarwal, an intrepid activist, accessed it using the Right to Information (RTI) Act. Yet, the core issue of equity, justice and the regulator’s accountability finds no discussion in the media.

But, before going into Dr Gopal’s charge about how an “informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated a subversion of the due process of law”, here is the background.

In the IPO (initial public offering) scam of 2006, SEBI indicted the National Securities Depository Ltd (NSDL) along with banks, registrars, brokers and investors for allowing a cabal of market manipulators to corner big chunks of the retail investment quota in scores of IPOs. While banks and other intermediaries were punished, NSDL, which was then headed by CB Bhave, decided to contest SEBI’s charges. Later, when the government appointed Mr Bhave as SEBI chairman, the finance ministry decided to ‘ring-fence’ him from the NSDL-SEBI litigation issue by asking a two-member bench of the SEBI board to investigate and decide the issue. The bench comprised Dr Mohan Gopal (who also heads the National Judicial Academy at Bhopal and has taught at the Harvard Law School for over a decade) and ex-RBI deputy governor V Leeladhar.

The ‘ring-fence’ developed huge holes when the bench did not play to the script to exonerate NSDL. Instead, it upheld some charges and questioned why NSDL’s systems were not robust enough to detect the scam. Moneylife has extensively documented the subsequent saga of suppressing the report, humiliating Dr Gopal, and the scandalous board meeting which spuriously declared orders against NSDL as void, or ‘non est’. Remember, most other intermediaries indicted in the IPO scam have been punished or have paid consent/disgorgement charges to settle their cases; banks bore the brunt of the scandal by not being allowed to open new branches during 2006-08, a period when the economy witnessed accelerated growth. Only the two depositories had gone unpunished; a couple of others are in litigation with the regulator.

Since SEBI has now done a U-turn and upheld the Gopal-Leeladhar bench orders, this column will focus on the ‘four structural flaws’ that allowed a cabal of ‘former and serving bureaucrats’ to vitiate and subvert the regulatory framework.

•  Unprofessional Discharge of Quasi-judicial Functions: Writing about “inadequate transparency, public accountability and parliamentary oversight,” Dr Gopal says, “one of the most shocking and unprecedented actions” by the SEBI board was to set aside quasi-judicial orders which can only be subject to ‘judicial review’. He points out that a non-judicial person (TV Mohandas Pai), representing a regulated entity (Infosys), with a clear conflict of interest (the board ‘generously excused’ the fact that Infosys does business with NSDL) chaired the crucial meeting instead of other regulators who were on the SEBI board. SEBI’s whole-time directors, who reported directly to the ‘ring-fenced’ chairman, were allowed to participate in the decision, although it had been specifically decided earlier to keep them out. More importantly, Mr Pai decided to ignore the opinion of none other than JS Verma, former chief justice of India, who had issued a statement that SEBI’s action “violated established legal and Constitutional principles”, although it was submitted by Dr Gopal in his capacity as a board member of SEBI.

•  Ineffective Framework Law Enforcement: Dr Gopal highlights the fact that the SEBI Act allows overlapping enforcement and punitive provisions, with the result that intermediaries can be bullied and harassed by subjecting them to “multiple proceedings without a clear distinction between them.” We, at Moneylife, too have repeatedly pointed out that ‘major violations’ “are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers—in such cases, review by SAT (Securities Appellate Tribunal) would never be sought” because neither SEBI nor the wrongdoer wants it. In addition, Moneylife (10 March 2011) wrote about how some intermediaries (including many repeat offenders) are let off with ‘administrative warnings’ which, unlike consent orders, aren’t even recorded.

•  Flawed Governance Structure: Dr Gopal raises many governance issues showing how the finance ministry dominated and dictated actions at SEBI and that many of its senior officials had no domain expertise. Worse, for the past six years, two successive SEBI chairmen have ensured the loyalty of executive directors (EDs) heading the legal department by keeping them on a short leash through a three-year contract. While the legal department is most sensitive, we are just as concerned about the fact that the new SEBI chairman will bring a brand new team of his own loyalists to head all senior positions. The EDs heading the two important portfolios of investigation and mutual funds are on their way out and so are two whole-time members after the new chairman’s appointment. These four and the ED-law were seen as core loyalists of the previous chairman. A new team again forming a coterie around the new chairman is hardly healthy for the capital market.

Add to this, Dr Gopal observed, that there is no framework for whistleblower protection and so he was subjected to “retaliation and attack without any protection.” He also touched upon the fact that SEBI tends to be hostile to investor voices (including those in the media) “unless they are friendly in which case selective patronage may be extended to them.”

•  Poor Oversight: SEBI will continue to get away with such capricious actions, because it has no public accountability, little transparency in its functioning and poor Parliamentary oversight. Dr Gopal points out that board meetings of the US Securities and Exchange Commission (SEC) as well as US Senate hearings are open to the public. Not so in India. Even the proceedings of the standing committee of Parliament on finance are shrouded in secrecy, except for its reports which are tabled in Parliament, but usually so late that they cease to have much actionable value. Most members of the committee have little knowledge of finance or the capital markets and are in no position to counter the submissions made by SEBI, the RBI or any other financial regulator. Even that would not have been an issue, if our parliamentarians had made an attempt to engage with activists, investors and civil society to understand issues that affect them and raise them with the regulator. Only if investors/savers assert their rights and demand accountability from politicians will this state of affairs change.

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

(This article was first published in Moneylife magazine, edition dated 2 June 2011 that was available on the newsstand from 19 May 2011.)


-- Sucheta Dalal