The scandalous ganging up of some SEBI members to protect CB Bhave and NSDL—reported extensively only in Moneylife and conveniently glossed over by all mainline media—is coming back to haunt SEBI
There were two major developments over the weekend, which underline the murky and the capricious nature of capital market regulation (Mirror, mirror on the wall…) over the past three years that we have been highlighting.
Moneylife has been the only publication to point out that the spate of eulogies about CB Bhave’s tenure as chairman of the Securities & Exchange Board of India (SEBI) while the mainline media's coverage like,“best SEBI chairman” and “the best three years of SEBI ever”, were motivated and highly misplaced.
Strangely, with Mr Bhave gone and with a new chairman at the SEBI, the mainline media is now quietly changing its tune.
Moneylife has long pointed out how the government had appointed CB Bhave as chairman when there was pending litigation between SEBI and the National Securities Depository Ltd (NSDL), which he founded and headed for over a decade. The SEBI action against NSDL was based on an independent inspection ordered by the regulator into the systems, processes and the multiple initial public offering (IPO) applications scam that went unnoticed by both depositories, indicating serious flaws in their operations.
For the record, the inspection report showed that the systems in the Central Depository Service Ltd (CDSL) were far worse than that in NSDL.
The Finance Ministry came up with a dubious strategy to “ring-fence” Mr Bhave as SEBI chairman from the NSDL-SEBI litigation by appointing a two-member bench of the SEBI board to investigate the allegations afresh. It comprised Dr Mohan Gopal, who headed the National Judicial Academy and RBI's former deputy governor V Leeladhar.
However, it was soon clear that the ‘ring-fence’ was a sham and SEBI moved rapidly to eliminate all traces of the IPO scam, paving the way for whitewashing NSDL and exonerating Mr Bhave. Almost everyone accused was cleared through consent orders. The most outrageous was the one-line order closing the case against CDSL, with no attempt to ensure that it has cleaned up its act.
While Mr Bhave recused himself from these meetings and decisions, SEBI’s whole-time members acted for him with strong support from Dr KP Krishnan, then Joint Secretary, Capital Markets. However, the Finance Ministry’s plan (formulated by Dr KP Krishnan, under finance minister P Chidambaram) received a big jolt when the Mohan Gopal-Leeladhar bench upheld many of the charges against NSDL instead of dismissing them.
Immediately thereafter, SEBI with the support of the finance ministry launched a series of actions to bury the report, then discredit and humiliate Dr Mohan Gopal and finally throw out the orders of the bench by declaring them ‘non est’. Mohandas Pai, then with Infosys Ltd, and the only private-sector employee to grace the board of a regulator, lent his muscle at that stage.
A Chartered Accountant who moved to oversee human resources in Infosys, Mr Pai doubled up as a legal expert and chaired a crucial SEBI board meeting which declared the Pai–Leeladhar orders ‘non est’, or not existing in the eyes of the law.
Even the RBI deputy governor Usha Thorat and other government nominees chose to play along, rather than raise questions.
The issue was taken to court by an NGO, leading to the Supreme Court hearing the case more sympathetically after Mr Bhave’s term as SEBI chairman had ended. On 8th May, Manoj Mitta of the Times of India, who had first reported how SEBI has buried the orders of the Mohan Gopal-Leeladhar bench reported that SEBI had now filed an affidavit (after its quick board meeting on 26th April 2011) in the Supreme Court (on 5th May) saying it would "reconsider" the very (two) orders it had declared as "non-est" (invalid) in November 2009 when Mr Bhave was chairman. The SEBI board’s U-turn happened after the Supreme Court pulled up the regulator for preventing the orders against NSDL from coming into effect and asking it to "pass an appropriate resolution and place it before this court for further consideration".
With intriguing coincidence, in the run-up to this affidavit, several publications (Mint, Times of India and The Economic Times, among others) started a loud drumbeat on how Mr Bhave was unfairly denied an extension to his three-year tenure. Each report conveniently ignored the dubious goings-on during his tenure to bury the investigation and orders against NSDL.
For the record, however, NSDL is a fairly well-run organisation, which has an unclear regulatory structure that Moneylife alone has pointed out so far. This could pose serious issues in the future, but engages neither the regulator nor the media.
Unfortunately, a headstrong Mr Bhave took the attitude that NSDL is a perfect institution and cannot be criticised for any failing. This attitude led to a rash of dubious actions, where he ended up twisting all systems and processes to justify his stand.
On 8th May, PTI reported how RTI (right to information) activist Subash C Agarwal had obtained a letter written by Dr Mohan Gopal on 24th December 2010 to the Prime Minister, where it said that SEBI had “abused” its power to protect Mr Bhave from an independent inquiry into NSDL’s role in the IPO scam.
The PM’s inaction (the letter was forwarded to the finance ministry), is yet another example in the long lost of wrongdoing that the Prime Minister condoned with his silence and inaction. In fact, neither the PM nor the Finance Ministry looked into any of the dozens of capricious and motivated decisions of SEBI that were reported by Moneylife over the past two years.
To recap the various issues leading to the current, here is the report of a two-member bench of the SEBI board, whose findings were declared void. This was part of a series of dubious decisions that Moneylife has reported earlier.
1. Appointment of CB Bhave as SEBI chairman when there were SEBI investigations pending against the organisation he previously headed.
2. The assumption, implicit in this decision that NSDL was not even guilty of minor transgressions or carelessness.
3. Attempt to artificially "ring-fence" Mr Bhave from NSDL-related issues.
4. Appointment of a two-member board committee (comprising Dr Mohan Gopal and RBI's former deputy governor V Leeladhar) to decide NSDL-related issues.
5. The mistake in assuming that NSDL will get a clean chit from the bench.
6. The attempt to bury the Gopal-Leeladhar report for several months.
7. Making the report public only after a public interest litigation was filed in the Andhra Pradesh High Court.
8. Exoneration of the rival CDSL through a one-line order, although charges against it were far more serious.
9. And finally, the controversial board meeting which exonerated NSDL and refused to consider a contrary legal opinion by no less than Supreme Court's former chief justice JS Verma.
Unfortunately for SEBI, a Delhi-based NGO called Manav Adhikar filed a special leave petition before the Supreme Court, which led to a direction by the apex court (on 28 March 2011) to reconsider its decision.
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The idea behind exempting persons earning less than Rs5 lakh a year from filing I-T returns is that in cases where there are no other sources of income, filing of a return is a duplication of existing information
New Delhi: As many as 85 lakh tax payers will benefit from the government’s decision to exempt persons earning less than Rs5 lakh a year from filing income tax (I-T) returns, reports PTI quoting a finance ministry official.
“The decision, which will come into effect from 1 June 2011, will reduce the compliance burden about 85 lakh small taxpayers,” he said.
As per the memorandum to the Finance Bill 2011, the government will issue a notification exempting the ‘classes of persons’ from the requirement of furnishing income tax returns.
Tax payers with income of less than Rs5 lakh will not have to file tax returns for the assessment year 2011-12 and a notification in this regard is likely next month, the official said.
In case such a salary earner has income from other sources like dividend, interest, etc and does not want to file returns, he will have to disclose such income to his employer for tax deduction.
However, if such an assesse wants to claim a refund, he will have to file the I-T return.
The Form 16 issued to salaried employees will be treated as Income Tax Return.
The idea behind the move is that in cases where there are no other sources of income, filing of a return is a duplication of existing information.
The crash in silver and some other commodities highlights the dilemma of every investor in a potential bubble. Do you see the market heading for the cliff and sit out? Or, do you believe the growth forecasts and stay on board?
Momentum is a prime ingredient of any investment decision, but how do you know when it is time to get off the train before it goes off a cliff? Many silver traders received a harsh lesson when they ran out of greater fools. Recently we have seen run-ups in a number of other commodities and markets. Have these markets run out of momentum? Is this the beginning of a global meltdown or is this the pause that refreshes?
The main point about silver was that its run and fall, despite the commentators, had little to do with economics. The 26% (and counting) decline was not triggered by any major change in supply, demand for the commodity or change in the global political or economic situation. It was triggered by a rise in the Chicago Mercantile Exchange (Comex) margin requirements on silver futures four times in two weeks. But this is not that unusual. Silver can swing 2% in a day and margin requirements must go up when prices go up. So the Comex damping volatility was simply doing its job.
Other reasons given for the fall have to do with the failure of the market to breach the psychologically important $50, or simple profit-taking. The apologists have plenty of reasons why the collapse should not have happened, such as increased industrial demand and tight supply, although both of these things existed before the current run-up. If you are really desperate, you can always cite the declining dollar and Chinese growth. Although both assumptions are considered religious dogma among financial analysts and economists, they are still assumptions open to question.
The reality is that it was a bubble and it was time. Silver had risen 57% in 2011 alone and the turnover of the leading vehicle for US retail speculation, the iShares Silver Trust, was up over 10 times in April. Certainly these are extremes, and financial historians will no doubt tell us that all the signals were there, but the speculators simply didn’t read them. But is there something more here, and what does silver’s collapse tells us about potential bubbles in other frothy markets?
Two famous stars of investing have radically different views on the subject. One, John Paulson, the head of hedge-fund giant Paulson & Co, has kept his portfolio of gold investments. The other, the legendary George Soros, is head of Soros Fund Management, one of the biggest hedge-fund firms in the world that has sold much of its gold and silver investments over the past month. The reasons for this diametrically opposed strategy represents the Apollonian (rational) versus Dionysian (emotional) view of investing.
Mr Paulson appears to be the more rational investor. Paulson has most of his personal wealth in gold-denominated funds and believes that gold could climb as high as $4,000 an ounce over the next three to five years, a courageous view after this week’s sell-off. Mr Paulson’s view is very logical and rational. He sees gold as a hedge against currency devaluation. With various central banks in developing countries printing money as never before, any good economist, and Mr Paulson uses the best, would assume that paper money would depreciate against hard assets such as gold. It would also be rational to assume that such depreciation would be reflected in the market. In other words, the markets accurately reflect economic reality and gold would appreciate substantially against the dollar.
Mr Soros also has access to the best economists. But Mr Soros does not necessarily believe that markets reflect economic truth. He believes in what he calls ‘reflexivity’. Reflexivity is a special condition that can arise due to excess leverage and the trend-following tendency of traders. In these circumstances, which may have occurred with metals and other commodities, the investor bias grows and creates a bubble. So according to Mr Soros, the market is often irrational and completely wrong.
What is interesting is that both investors followed the trend, using momentum to make money. This is despite Mr Soros’s prediction last September that gold was the “ultimate bubble.” Mr Soros could have followed his reason and not invested in what he knew was a bubble. He could have stayed out or shorted the market, but he still followed the herd to his profit as did Mr Paulson.
All of which leads to a dilemma for investors. Assume it is April 1999. The dot.com fury is beginning to escalate. Do you see that the market is heading for a cliff and sit it out? Do you believe the forecasts of an ever-growing internet and stay on board. After all, the market did recover 20% by August 2000 after its first bottom in May. Or do you realize that the market is irrational and get on board, but feel confident you can leave before the cliff? Or be a contrarian and short the market? Perhaps the lesson is that there is nothing more rational than understanding the irrational.