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Moneylife » Investing » Regulations » Dr Mohan Gopal’s explosive exposé of SEBI’s functioning under Bhave

Dr Mohan Gopal’s explosive exposé of SEBI’s functioning under Bhave

Sucheta Dalal | 09/05/2011 04:49 PM | 

Dr G Mohan GopalThe former member of the SEBI Board, in a letter to the prime minister, alleges how an "informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated a subversion of the due process of law". It vindicates Moneylife's stand on various regulatory issues that large media houses have been ignoring 

Dr G Mohan Gopal, who heads the National Judicial Academy (NJA) at Bhopal, is in the news for his letter to the prime minister, pointing to “the gross abuse of power and corrupt practices in the SEBI board” to “protect SEBI Chairman CB Bhave”. Moneylife Foundation has accessed the letter written to Dr Manmohan Singh on 24 December 2010, which was obtained by activist Subhash C Agarwal using the Right to Information Act (RTI).

The letter, we find, is far more explosive and detailed than has been indicated by media reports so far. Dr Gopal has not only described the manner in which SEBI systems and processes were vitiated to protect Mr Bhave, but it also highlights four “structural flaws” in the “legal framework for securities regulation”, something that other self-appointed market experts have been labelling as perfect and getting favourable mention in the media.

Moneylife has already reported at length on the NSDL issue, which Dr Gopal describes as “ ’Sebi-under-Bhave’ judged and exonerated ‘NSDL-under-Bhave’ through a process that was thinly disguised as independent, but was, in fact, deeply vitiated and subverted”. 

Here are highlights of the many larger issues raised by Dr Gopal, on which the prime minister’s office has remained silent for the past five months.

On subversion of the action against NSDL: Dr Gopal says, “an informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated this subversion of the due process of law. They illegally interfered with independent SEBI adjudication, manipulated legal opinions, suppressed and misrepresented facts and misled the SEBI Board and Government officials about the legality of the Orders. Law, regulations and established precedent were violated. NSDL was given undue special treatment. NSDL was relieved of a fine of crores of rupees, and SAT decisions adverse to SEBI but favouring NSDL, were not appealed to the Supreme Court as they should have been”.

On how the SEBI Board declared orders against NSDL as void: Dr Gopal says, “One of the most shocking and unprecedented actions taken by SEBI to exculpate NSDL was the board–for the first time in SEBI’s history–setting aside quasi judicial orders which are, under the law, subject only to judicial review. He goes on to describe how the SEBI board “entirely disregarded” a statement by one of India’s most eminent and respected jurists (former chief justice of India, J S Verma) who had said that SEBI’s action “violated established legal and Constitutional principles”.

On securities law: Dr Gopal says, four structural fault lines in the legal framework for securities regulation made this abuse of power possible. These are:
1. Inadequate transparency, public accountability; and parliamentary oversight: Dr Gopal points out that unlike in India, the US Securities Exchange Commission meetings are open to the public and the US Senate exercises close scrutiny over its workings. There is nothing comparable in India. There is also no framework for whistleblower protection. Dr Gopal points out how he was subjected to retaliation and attack without any protection. (It is stunning commentary of the poor governance in India that an extremely privileged and connected member of society, who heads a premier institution like the National Judicial Academy should complain of such harassment). Importantly, Dr Gopal joins voices like ours at Moneylife when he says, that there is ‘a serious deficit in investor voice’, essential for effective governance. He says, ‘SEBI needs to encourage investor voices instead of being hostile to them unless they are friendly, in which case selective patronage may be extended to them’. Some of the friendly voices which receive selective patronage are large media houses.
2. Lack of protection against conflict of interest: Dr Gopal says that a Code of Conduct for the SEBI board was evolved at his instance, but the “mechanism was violated and then dismantled in the context of the NSDL matter”. He says, that whole-time members of the SEBI board who were to be explicitly excluded from NSDL matters (since they report to the SEBI chairman operationally) were included in the decisions to favour Mr Bhave. Dr Gopal points to the role of Mr Mohandas Pai, who represented a SEBI-regulated entity, to chair the meeting that finally exonerated NSDL. The SEBI board, he says, “generously excused the conflict of interest arising out of the business relationship between Infosys and NSDL”. Also, “it was perhaps for the first time in Indian history that judicial power was exercised by a serving private sector corporate official”. As a result of these conflicts of interest, an influential bureaucrat-corporate-media nexus has emerged that has immense power to influence SEBI decision-making to its own advantage.
3. Ineffective framework for law enforcement: Dr Gopal says that the structure for law enforcement in SEBI is seriously flawed (something that Moneylife has repeatedly pointed out). There are overlapping enforcement and punitive provisions in the Act, which need to be rationalised. This subjects a regulated entity to multiple proceedings without a clear distinction between them. He also says, as we have in the past, that “major violations” established through investigation “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 want it. Consequently, “investors at large and the market are the voiceless victims”. Dr Gopal points out to how a company guilty of “criminal market manipulation” was let off by a whole-time member asking it to “be more careful in future” (we believe this refers to the Zee group’s role in the Ketan Parekh scam). He says, SEBI does not have “adequate focus and priority on law enforcement”, with the result that it bent “backwards and violated the law to protect a favoured regulated entity rather than pursue it to enforce the law”.
4. Outdated governance structure: Under this head, Dr Gopal says that the SEBI Act badly needs to be redesigned. It contains “too many explicit and implicit levers of bureaucratic and political control of the regulator on one hand and too little public oversight, transparency and public accountability on the other hand. SEBI in effect is run by an informal caucus of serving or former civil servants rather than domain experts”. Having said that, Dr Gopal accuses the finance ministry representative (Dr KP Krishnan) of exercising “undue influence in the functioning of an independent regulator through informal back channels, through which SEBI officials were funneling information and documents to him, which he legally should not have access to. Dr Gopal says, “the government’s interaction with the regulator would be ‘over the counter’ and not ‘below the table’.” Apart from this stunning indictment, the former SEBI board member, also says how SEBI and the National Institute of Securities Management (its education affiliate) “command huge financial resources with little accountability and transparency in its use”. Further, the SEBI board “lacks relevant expertise” because it is “dominated by babus–serving and ex-bureaucrats”.

Dr Gopal ends his five-page letter by asking the prime minister to order a high-level inquiry into SEBI decisions in relation to NSDL during Mr Bhave’s tenure and to look into the structural issues raised by him.

What did the Prime Minister do? He merely forwarded the letter to the finance ministry. Frankly, even today, this explosive letter by Dr Gopal will probably attract some media attention, only because SEBI has been forced to do an about-turn due to the activist interest shown by the Supreme Court of India into the manner in which SEBI has been subverting regulations.

Here is a copy of the letter written by Dr Mohan Gopal to the prime minister


Dr Mohan Gopal's letter to the PM -

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Dr Vaibhav G Dhoka

Dr Vaibhav G Dhoka 4 years ago

SEBI has become WHOLLY CORRUPT regulator.The move should to SCRAP save investors from Financial sharks

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Rohit shah

Rohit shah 5 years ago

sebi should take the opinion of distributors as well as investor before deciding about entry load

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SEBI do not help the investors who are in difficulty. I have a complaint against ICICI Bank since 2001 that I lost Rs.5 lacs due to their mishandling my Demat account and due to their faulty Internet system. SEBI had given me 4 acknowledgements for the same complaint during the last 6 years but done nothing. The complaint was forwarded by RBI to SEBI. NSDL also is keeping quiet about the wrong doings of their participant/agent; even though they know that ICICI Bank is responsible to recoup my loss which also known to SEBI.

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C H Mehta

C H Mehta 5 years ago

Hanging SEBI and Mr Bhave without a trial.

There are lies,damned lies and statistics. I wonder what has led a legal luminary like Dr Mohan Gopal to resort to some of these tactics in order to lead a personal attack on Mr Bhave, one of the finest and honest product of the Indian Civil Service. In the process, Dr Gopal has conveniently forgotten how SEBI became the real champion of small investors under Mr Bhave’s regime and how transparency and objectivity became the hallmark of this regulatory agency. Let us therefore examine the facts which Dr Gopal has forgotten to mention:

1. Dr Gopal accuses Mr Bhave of not being investor friendly and of providing selective patronage. The reality is that it was only under Mr Bhave that interests of the small investors were truly promoted at the cost of big business houses and institutions. For instance, introduction of ASBA saved more than Rs 100 cr for the investors. The ban on entry load saved Rs 2500 cr for the investors. The allotment time for IPOs was reduced from 21 days to 10 days and the preferential treatment to Qualifying Institutions, which was grossly unfair to small investors, abolished. What is more, for the first time SEBI recovered more than Rs 25 cr from wrong doers and actually disbursed it to the investors. And while pursuing the cause of investors, Mr Bhave tread on many big shoes and displeased many big houses and institutions without any fear or favour. If this is not investor friendliness, then Dr Gopal has to provide us with a new definition in this regard.

2. Dr Gopal complains about lack of transparency in SEBI’s working. How far is this statement away from truth can be gauged from the fact that SEBI today is the only regulator that puts out its Board agenda and minutes on its web site. All its major decisions as well as compounding decisions are available on its web site for every one to see and criticise. In fact, SEBI which was a fortress of secretiveness earlier, became an open book under Mr Bhave whose own public career too has been like a open book. Through its compounding schemes which Dr Gopal criticises , SEBI has reduced litigation and pendency of proceedings significantly, and in the process has collected fines up 40 to 50 times the earlier levels. If this is a crime, then many of the Indian laws are flawed as they all have built in compounding schemes!

The big question is why Dr Gopal is resorting to such mud- slinging without facts and figures to back up his accusations. The reason probably lies in the fact that the SEBI Board which had met to discuss the report of Gopal & Leeladhar on the SEBI-NSDL controversy decided to reject the report. That this happened so even though Mr Bhave had reclused himself from its proceedings might have piqued Dr. Gopal all the more. He needs to understand that SEBI is a statutary institution created by an act of parliament. Both SEBI and its Chairman act under this Act. If Dr Gopal had serious misgivings about SEBI’s structure, its working and its decisions, he should not have served his full term of 3 years on its Board. Why wait for his term to get over before launching his so-called crusade against SEBI? I would also like to ask him, as the self appointed champion of governance, as to how many SEBI Board meetings he attended during his tenure with SEBI !

The pity is that Money Life has adopted the same vendetta type behaviour against Mr Bhave as Dr Gopal. I really wonder why?
C. H. Mehta

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Suresh Vaideeswar

Suresh Vaideeswar 5 years ago

Kudos to Dr. Mohan Gopal on this expose. That takes courage and conviction to speakup about corruption at high levels of governance. As one of the 'stupid' Indians who has been praising Bhave and Sebi, for their great work in MF area, I want to thank you for catching them with their pants down. I am still just a Subject in the SEBI Empire.

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