Sucheta Dalal :Convert DCA Into A Sebi-like Body (8 July 2002)
Sucheta Dalal

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Convert DCA Into A Sebi-like Body (8 July 2002)  

One of the best things about what is billed as the Jas-Yash portfolio switch is that the finance minister is now in charge of the Department of Company Affairs. This means that depending on the finance minister’s will to do so, we can actually look forward to significant structural changes in the regulation of companies and financial markets.

Finance minister Jaswant Singh has begun his tenure in interesting times. Scams and frauds are exploding in the US markets every day and they are calling into question the very basis of American capitalism. They have blown the myth about conscientious auditors, good governance, independent boards, audit committees and have shown the need for stringent new legislation to keep a check on greedy management and their cohorts in the accounting and legal professions. In India, investors have gone beyond astonishment at corporate avarice and are actively shunning the capital markets. That is why Jaswant Singh’s first remarks on taking over as finance minister were about building confidence among investors.

If Singh is serious about rebuilding investor confidence, he must work at structural changes that will enable better supervision of companies. That is because every financial collapse and stock market scam is initiated by crooked management, which has siphoned funds from companies or colluded with market operators to manipulate their stock prices. His changes will have to go far beyond tinkering with the present system. In the wake of accounting scandals around the world, the government is planning to constitute a new regulator for the accounting profession, which will be armed with better penal powers.

At present, the Institute of Chartered Accountants of India is in charge of regulation, supervision and qualification of auditors. Media reports say that the new body will comprise judges, chartered accountants and experts to investigate the promoter-auditor nexus. Government also plans to amend the Companies Act to give regulatory and penal powers to the new regulator. Creating yet another regulator is meaningless. It will spend the first few years of its existence jostling with bureaucrats in the DCA for transfer of powers. And it is safe to bet that no powers will be transferred unless there is an embarrassing scandal to give things a hard push forward.

Ideally, one would like to see Jaswant Singh use his seniority, negotiating skills and proximity to the Prime Minister to merge the DCA into the finance minister’s portfolio in such a way that it cannot be separated in future. One would also like him to switch to a US type regulatory structure where the Securities Exchange Commission is primarily responsible for regulating listed companies as well as auditors, analysts and rating agencies. This would involve disbanding the dreadfully slow and incompetent DCA and Company Law Board and transferring all their powers to Securities and Exchange Board of India. But one realises that the latter suggestion may be far too drastic to even make it to the discussion table. But Mr Singh could at least consider going half-way and restructuring the DCA and making it a separate and independent body like Sebi with its own cadre of officials and subject to more direct public scrutiny.

This move will have several major advantages. Firstly, the DCA will be independent and have a more stable leadership. The last DCA secretary to have lasted more than 15 months was T S Krishnamurthy, and he shepherded the passage of the new Companies Act, which brought in specific provisions to strengthen investor protection. These included the need for a postal ballot of investors for certain special resolutions and the setting up of the Investor Education and Protection Fund.

Since then, no DCA secretary, additional secretary, joint secretary or senior official has lasted long enough to grow into their job, understand issues, complete an investigation or make serious improvements to the system. DCA that is constituted as an independent body can hire the right people and build specialised cadres of officers who are skilled in regulating and supervising the corporate sector. More importantly, they will not be subject to frequent transfers and will stay in their job long enough to ensure effective follow up of cases and to complete investigations. An independent body will also be more transparent and open to much greater public scrutiny than the dense government organisation it is today.

Secondly, it will eliminate the need for creating separate regulators for the accounting profession or company secretaries. These can be effectively supervised by the DCA itself under separate portfolios. It will also allow the DCA to constantly monitor, review and tighten regulation as is felt necessary from time to time. The DCA today has a terrible record of detecting fraud, completing investigations and punishing companies. It will, for the first time have an opportunity to improve its performance record and allow the new FM to fulfill his ambition of reducing the gap between promise and delivery.

Thirdly, there is a crying need for the DCA to review all the penal provisions under the Act. The penalties prescribed under most Indian statutes are ancient and have not even been revised in direct proportion to the diminishing value of the rupee. Investor groups have repeatedly said that the arrest of corporate fraudsters is of little comfort to them if it does not lead to the disgorgement of ill-gotten gains, change in management and a return of money siphoned away from them. Unless penalties under various statutes are drastically increased, the courts too are constrained not to go beyond the prescribed limits and award punitive damages.

Fourthly, an independent DCA can pay special attention to investor protection. So far, the DCA only has a nodding acquaintance with investor concerns via the Investor Education and Protection Fund. But that too has been a non-starter for nearly three years after it came into existence. Under a new structure, the DCA would be forced to hear investor issues and resolve grievances within a reasonable time frame. In his first interaction with the media, Jaswant Singh said, “I have to make this a ministry of service”. He also said that the “finance minister is not a policeman or a pickpocket”. One can only say that the finance minister has to be a policeman but he has failed to be one; instead he has indeed been picking the pockets of savers and tax payers. By re-constituting the DCA into an independent body, he will indeed make it more service-oriented and also give it the teeth to be an effective policeman.

-- Sucheta Dalal