Sucheta Dalal :Who Dictates SEBI's Actions?
Sucheta Dalal

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Who Dictates SEBI's Actions?  

December 16, 2008

CROSSHAIRS (MoneyLIFE Issue, 1st Jan 09)

The Securities and Exchange Board of India (SEBI) has decided to ask its board members to adhere to a code of conduct; it has also resolved to put the agenda for each board meeting as well as the final decisions in the public domain. These are important initiatives because SEBI decisions often provoke intense speculation and volatile price swings, especially when they pertain to investment through participatory notes (PNs). I was all set to applaud the decision when a SEBI insider pointed me to a blog post by Sandeep Parekh, a former executive director of SEBI. Parekh says that SEBI’s decision was ‘co-incidentally’ just two days after he wrote to the chief public information officer seeking information under the Right to Information (RTI) Act. He has asked for SEBI’s board agenda from May 2008 to early December 2008 and ‘final minutes’ of board meetings for the same period. Where final minutes are not available, he wants the current
draft of the minutes.
This astonishing revelation puts a whole new perspective on SEBI’s move to increase transparency. Parekh also points out that the
US Securities Exchange Commission (SEC) goes far beyond what SEBI is proposing to do. It often webcasts proceedings of the entire board meeting that deals with investor issues. Will SEBI have the guts to do that? A webcast would ensure a correct representation of issues to the board and also force bureaucrats who pack SEBI’s board to study the proposals instead of making decisions based on first impressions.
Meanwhile, Sandeep Parekh’s connection with SEBI is interesting. M Damodaran, SEBI’s former chairman, cut through the eligibility rules to appoint him as an OSD (officer on special duty) in the rank of executive director. At SEBI, Parekh was responsible for bizarre decisions such as ordering the disgorgement of unlawful gains even before completing investigation into the multiple-application scam. The action was essentially directed at the National Securities Depository Limited (NSDL), which was then headed by CB Bhave. NSDL and a few others were ordered to pay up substantial sums of money, although it was clear that they had made no unlawful gains. Naturally, Parekh quit soon after Bhave became SEBI chairman. Ever since, he is a trenchant critic of the regulator. Parekh’s blog makes frequent references to actions and discussions that took place when he was at SEBI. This is ironical because successive SEBI chairmen, starting with GN Bajpai, have worked at turning SEBI into a fortress (like the Reserve Bank of India); its senior executives are barely known and are heard only at seminars and public interactions. Unlike Union ministries, Mumbai-based regulators do not provide media briefings and are intolerant of criticism. That is probably why many SEBI officials and market participants follow Parekh’s blog.
Insider Trading  
Another intriguing action this week is SEBI’s decision to tighten insider trading regulations far beyond the scope of the discussion paper that was put out for public comment or what exists abroad. Here too, some claim that the decision is in response to the attempt of the new Companies Act to encroach on SEBI’s turf. SEBI’s rules have expanded the scope of the definition of insider to include a wider range of people; it also prevents such insiders from trading in their company’s shares for six months after one leg of the transaction.
This tightening of rules seems impressive, especially when the market is witnessing the winding down of hugely manipulated prices of realty stocks and they have dropped almost 90% from their peak. However, the new rules would have been more credible if we had seen regular, well-publicised action from SEBI against insider trading and price manipulation. Instead, the only indication that SEBI’s market surveillance mechanism is still functioning is the release of a steady stream of consent orders where market intermediaries settle charges by making paltry payments. The orders come long after the offence, usually stock price manipulation, has occurred. SEBI never releases any information on investigations initiated by it and even the consent orders are often sorely lacking in detail.
This has extracted the teeth of provisions which were meant to shame offenders and warn investors while cutting down the investigation process. Instead, consent orders have killed the deterrence factor and suggest that you can violate any rule so long as you can cough up a payment if you are caught – the law of probability invariably favours the offenders.
Broadbase Transparency
Having decided to be more transparent about crucial decisions, SEBI now needs to push stock exchanges to fall in line too. So far, the two national stock exchanges have fought hard to avoid RTI scrutiny. Their media interactions are also based on a policy of selective disclosure and discriminatory exclusion. This is the opposite of what the regulator is doing. The National Stock Exchange (NSE) receives plenty of kudos for transforming the Indian capital market, but disclosure about its own actions is not among its virtues. Stunning as it may sound, the NSE’s annual report used to be secret until SEBI ordered it to be posted on the Internet.
Now that it has attained a near-monopoly status and increased its influence over policy making, a sense of hubris has set in. This is evident in its handling of the alleged problems with broker front-end software provided by Financial Technologies (FT), which has an 80% market share. NSE put FT on a ‘watch-list’, but has refused to provide any details about the basis for this. If there is, indeed, a problem with FT’s technology, it will affect systems across the capital, currency and commodity markets. Brokers that we contacted say they have no issues with the software and many have got it customised to suit their specific requirements. Neither SEBI, as the regulator, nor the NSE has found it necessary to clarify the issue so far. What does the silence signify? That the regulator is unconcerned about the quality of FT's technology and the probable systemic risk it poses? Or does it know this is just an anti-competitive gambit by the NSE? Either way, shouldn’t SEBI’s transparency initiative extend to this issue as well?
The second example is an Economic Times report that SEBI will respond to RTI queries pertaining to stock exchanges by seeking information from the bourses. Well, The BSE (Bombay Stock Exchange) had challenged SEBI’s attempt to seek information from it to respond to an RTI query. It moved the appellate tribunal which ruled that “stock exchanges are bound to furnish information sought by the regulator even if it is for the RTI purpose.” This has dealt another blow to the stock exchanges’ bid to avoid RTI queries.

The NSE has challenged a ruling by the Central Information Commissioner that stock exchanges are a public authority under the RTI Act and are bound by its provisions. It has obtained a stay from the Delhi High Court against the order. Since then, both national bourses do not respond to RTI queries even if they pertain to non-confidential information about utilisation of funds or arbitration processes. The pressure on bourses to respond to RTI queries is mounting, but one can’t help thinking that a strong regulator would have found a way of making it easier for investors to obtain information.

-Sucheta Dalal

-- Sucheta Dalal