SEBI & The Smell Test

Moneycontrol, September 04, 2011

The issue of regulatory independence has hit a new low, thanks to a 3-way war of words involving Dr KM Abraham, Former Whole Time Member at SEBI; UK Sinha, current SEBI Chairman and the Finance Ministry.

Abraham has accused the Finance Ministry of interfering in high profile cases being decided at SEBI. The ministry says his allegations are ‘defamatory, devoid of truth and are a complete distortion of facts’.

Abraham has accused UK Sinha too of interfering at the ministry’s behest. Sinha has denied the allegations, calling them ‘unfounded’ & ‘motivated’. He’s also said Dr Abraham is suffering from a ‘persecution complex’ and ‘delusion’.

Abraham says he’s being harassed by the tax department regarding the purchase of an apartment in Mumbai. The ministry says it has received several complaints that the apartment was purchased at a confessional rate from an entity that had benefited from the sale of the office space to NSE- an entity closely regulated by SEBI

Sinha has apparently given Abraham a clean chit on that transaction. But he says Abraham was ‘frustrated as he was neither given extension as SEBI Whole-Time Member nor given the post of Director, NISM, which he canvassed with the Chairman to the ”state of embarrassment”’. And that Abraham interfered to try and prevent SEBI from changing its stand on NSDL.

Abraham has raised quite a stink! The question is will SEBI pass the smell test? Joining CNBC TV18’s Menaka Doshi to discuss that are Sucheta Dalal, well known financial journalist and Managing Editor Moneylife. She’s watched SEBI from very close for many years now. And joining in from Jaipur – Pradeep Mehta, Founder Secretary General of CUTS – a consumer organization that also tracks regulatory reform.

Doshi: Since you have been on top of this story from day one and you have more information and detail than any of us do – Is this a straight case of ministerial interference or is there more here than meets the eye?

Dalal: It may be a case of ministerial interference but that is the tradition in India. The Ministry has always interfered. Even when SEBI was set up, the Ministry was interfering. The ministry didn’t want to part with powers; so there is nothing new about it. It has happened throughout Mr Bhave’s tenure including in his own appointment.

Doshi: But that it is old, doesn’t make it any better. S do you believe that this story has more weightage or places more weightage on Mr Abraham’s accusations against the Ministry and Mr Sinha or would you believe the other side- which calls Mr Abraham all kinds of names and says in fact his allegations are motivated?

Dalal: Personally, I feel there is something very strange about Mr Abraham’s allegation. In fact, I would like to know and maybe Mr Mehta knows better, but isn’t he a serving IAS Officer and he paints himself as a whistleblower. As far as I can see, there are service rules that require him, maybe, to go to the Ministry of Personnel or to the Cabinet Secretary. How does every IAS officer jump up and write about his bosses to the Prime Minister- this is news to me. I thought there were service rules that governed it. I am fairly certain there are.

Doshi: Alright. May be the process was wrong but do you believe that he has reason to complain?

Dalal: If you look at what we have written in the last three years about how SEBI has been functioning- the manner in which consent orders are issued, the strange creature called administrative warnings that they have been issuing by the hundreds, they have been letting the same people get away with the same offence as much as 5-6-7 times and we have written to them repeatedly asking them what it is. For instance, administrative orders are the most shocking thing I have ever come across and I have written to the Chairman and I have written to all the Board Members in SEBI and I have asked them what these are- none of them even bordered to reply.

So I think there was a lot that was wrong at SEBI in the last three years including starting from the way the Chairman was appointed, going on to the manner in which NSDL’s case was handled. I think there were really a nasty set of things that were happening in SEBI in the last three years. So I wouldn’t go by what Mr Abraham is saying at all because he had no problems all these three years. If he was complaining about things that happened during that tenure, I would take it more seriously than when he is talking about last three months when he is on his way out.

Mehta: I am not aware of the government rules but apparently if the Finance Ministry was putting pressure on Abraham, then he did the right thing to go the Prime Minister’s office. I don’t know whether the Department of Personnel & Training would have been the right kind of forum.

I don’t see anything wrong per se that he went to the Prime Minister’s Office; the only tragedy is the timing was bit wrong. This happened when he was about to ask for his extension and therefore people have misconstrued that to be a case of sour grapes which may not be actually the fact. He was working there for three years; in case they found his performance bad they should have taken action earlier.

The point here is the Finance Ministry interfering in the work vis-à-vis a particular case is something which if you ask Damodaran or DR Mehta- they would also bear with me that there are many instances where the Finance Ministry has interfered in the regulators function. How the regulator comes out of these kind of pressures would depend entirely on how strong the regulator is; what kind of character he is.

Doshi: Irrespective of whether Dr Abraham is in the right or wrong, the way this is come to light, the leaked letters, the shadowboxing that has been going on, the three page press release that came out from the Finance Ministry- all of this is doing more damage to SEBI than a clean up, if at all, one was required, would have done?

Dalal: Absolutely, you are completely right. To start with, I agree completely with what Mr Mehta said that they should be accountable to parliament. One of the problems in the last 20 years is that SEBI is not accountable to parliament. If it can manage the Standing Committee, as in let something fly below the radar, it gets away with all kinds of mischief.

The second problem is that SEBI has become such a fantastic posting in terms of perks and power and other things that the kind of lobbying that is going on for each of those posts from Chairman to Whole Time member is obscene. I think something needs to be done to correct this situation in the interest of the capital market.

Doshi: I am going to turn the question around and ask it to you in this fashion. The Finance Ministry’s press release says that it received many complaints against Abraham regarding abuse of power and corruption and those are serious charges- some of these date back all the way to January 2010 but since the Ministry did not want to interfere with SEBI’s functioning, it asked the complainants to take the required legal recourse – how do you react to that?

Are you happy that great, the Ministry stayed off because we really don’t want any ministerial interference within SEBI and it is better to make SEBI accountable to say a Parliamentary Standing Committee and strengthen that process? Or would you react by saying how could a Ministry ignore complaints over two years regarding corruption and abuse of power? Or do you think the Ministry is saying all this just to make Abraham look bad now? I am curious about how the Finance Ministry has responded to this situation and I would like your view on that?

Mehta: I agree with you entirely; it just stinks. The Finance Ministry has every right to, if in case, there are issues of probity to certainly interfere. After all SEBI is the creature of Finance Ministry in a sense. It is an organ which works under the Finance Ministry.

Except the fact is that, as we all agree, that there has to be a arms-length relationship between the Ministry and Regulator and that can only be given the short shift when there are allegations of this nature. But to come out with the allegations of this nature at this point of time doesn’t make sense.

Secondly anybody can file a complaint. Today I or you or Sucheta can send a complaint- does it mean that the compliant is genuine? It can be vexatious, it can be frivolous. So let there be a judicial inquiry if in case these are matters of fact rather than be dependent upon just the media to it. I am not defending Abraham, I do not know the details of the case, and I am only looking at the processes involved.

Doshi: One of the issues I know Sucheta feels very passionately about is the selection of people within SEBI. She has already pointed out how its become a very desirable post to have and so I am going to ask her what she thinks are some of the weaknesses in the process and later if you think you could come in with regards to the appointment of regulatory positions and how that, in a sense, in this country is vitiated- not just at SEBI but across regulators. Sucheta you go first on what you have in terms of the selection issue?

Dalal: I think it starts with the appointment of Chairman itself. I think the last three Chairmen, from what we hear from the grapevine; obviously we don’t have documents is that the two names that went to the Prime Minister were different from the person who was finally selected.

I think we need to have transparency; we need to have public hearings because these bodies are becoming so powerful today that I think the parliament should have hearings the way they do the Senate hearings in the US. So all of us know- we have a right to object and should be televised exactly like it’s done in the US; lets have transparency.

The second is the members – last time when two Whole Time members- one is Mr Abraham’s colleague MS Sahoo was selected- he was the Member Secretary; he was the Director in the Finance Ministry. If he is member secretary to the selection committee, overnight he becomes a selected candidate? And there are no questions asked?

I think there is something completely wrong in the process that is adopted for these very-very powerful posts.

Mehta: Sucheta I can write a book on what you have just pointed out in terms of Mr Sahoo and many regulatory appointments in our country- whether its Anurag Goel in Competition Commission of India or P. Basu as the Chairman of Central Electricity Regulatory Commission- all have been exactly in the same way. Selectors have become selectees; how does it happen? It happens because they are in power and they manipulate the whole system in this way.

The only good news about these SEBI last three Chairmen is that they are not retirees. What I am talking about is retirees- so you can well understand the kind of corruption which drives sinecures and Sucheta I would be happy if you can contribute to my book on this- how regulatory appointments are manipulated.

Doshi: What is this incident going to mean for image of SEBI and we have already held forth on that a bit but more importantly we have a new Chairman in SEBI. He has been here for barely 3-4 months and this reflects very poorly on the way either things are being run within SEBI or the kind of interference that the finance ministry does. This is going to impact the freedom with which he operates over the next few months?

Dalal: Absolutely; in fact if you look at the team that he is going to get around him. One of the problems that has been happening in SEBI now is that every Chairman comes in with his own team of people. Mr Damodaran did that, Mr Bhave did that and now that UK Sinha has come in, there are so many exits and he has to fill those vacancies. So within three months, the kind of blow that he has got his credibility, he is going to spend the next two and half years just defending that.

I think the damage to the system and the organization has been so huge. I agree with Mr Mehta about not taking sides on this Abraham versus UK Sinha issue or Abraham versus Finance Ministry issue but look at what it is doing to the system. You are going to have a Chairman who is hobbled; whose credibility is going to be questioned and every time he tries to get tougher with anybody, they are going to raise issues. They are going to go and create problems elsewhere, allege bias, allege interference- is this what we want in the capital market?

Doshi: So what do you think is the best way to deal with this because if I was to bring in one other angle to this conversation as we try and understand what should be done next – is the fact that Abraham’s credibility is now under question, could it benefit the many very big companies that he issued orders against in the last year or year and a half because they are going to stand up and say if the Finance Ministry is saying that this guy had several complaints regarding abuse of power and corruption against him and that there is serious question mark over his credibility, then how could he pass those orders that he did- that is going to vitiate the atmosphere further because now we certainly have a situation where in the last one year important orders that were passed against very large corporations could come under question?

Dalal: Absolutely and it’s worse than that. If you look at the letters of UK Sinha that we have put up on our website, he actually talks about an internal study that he got done where it clearly shows that three Whole Time members were hugely divergent in the manner in which they looked at the seriousness of any given issue.

We don’t know who these people are, he hasn’t named them. But I think today somebody can go to court and put these statistics on the table and say we want to know if we are victims of an extra strict whole-time member or director and I think this is bad and I think the government now needs to consult legal experts and find a way to put a lid on this entire issue one way or the other.

Doshi: Come in on this from the outside- you have got maybe someone who is a whistle blower. He writes a letter to the Prime Minister’s office. The Prime Minister automatically forwards the letter to the Finance Ministry who is in fact the accused in the whistle blowers letter and somewhere in this whole process, the letter leaks. That is a horrible process to encourage whistle blowers in this country- that is one.

Then you have got a Finance Ministry press release raising all kind of questions about this man’s credibility and not only raising questions about this man’s credibility, by extension, what the Finance Ministry is saying- we are not sure what kind of orders he has passed in the last one year- that reflects very poorly on the institution of SEBI itself.

What do you think that the Ministry, the government, the parliament – whoever the body needs to be, now needs to do to ensure that this process is dealt with some degree of maturity? If Abraham’s allegations are motivated, then they are investigated properly and there is some form of judicial process attached to that. If his allegations are true, then in fact, that too is brought to light – what should be the ideal way of dealing with this?

Mehta: The best way is now to take the matter up with the Parliamentary Standing Committee of Financing headed by Yashwant Sinha- let them look into this whole muck and come out with a very clear sense of direction including the lessons that will come out from here should address these issues we have already discussed in terms of appointments, etc- that is the way forward I think.

We cannot leave it to the government to resolve it. The Finance Ministry press release has been very juvenile in my opinion. I have never seen a government issuing such a press release calling names. This is something which we as children used to do and that in itself; the press release itself is abysmal.

Doshi: It looks to me no matter which way this story goes, it is going to leave a very ugly taste in the mouth.

The Firm Alert: MS Sahoo responded to comments made about him in this discussion. He said ‘I was not in any way associated with the selection committee, leave alone being its member secretary.’ The panellists maintain their scrutiny of the vagaries in the selection process at SEBI.

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