Regulations
Power without Accountability: Repeated Raps from Higher Judiciary are Dangerous Portents for SEBI
It is good that the capital market watchdog had the sagacity to defuse, with an unconditional apology, an ugly situation with dangerous portends. It was also mature of the Securities Appellate Tribunal (SAT) to accept the apology and close the matter in order to protect the regulator’s standing with market participants (on 26th July). But is it okay for the Securities & Exchange Board of India (SEBI) to be repeatedly caught making irresponsible use of its regulatory powers, only to backtrack when it is rapped hard by a high court or an appellate tribunal? Here is what happened this time. 
 
In May 2016, SAT had asked SEBI to give a hearing to Adventz Finance and dispose of the matter within seven weeks or by 24 June 2016. Since then, SAT granted SEBI at least three opportunities to produce the order passed by its whole-time member (WTM). After much subterfuge and trying to pass off a letter by a chief general manager as an order, SEBI finally admitted that no formal order had been passed. Even then, SAT first asked the member to pass an order immediately, only to be informed that he was travelling. A livid SAT ordered SEBI to pay a fine of Rs1 lakh to the appellant for giving him the ‘run around’ and ordered a different WTM to hear and decide the Adventz Finance matter. It also expressed distress at the manner in which SEBI’s WTM had ‘discharged his quasi-judicial’ duties and asked that its ruling be forwarded to the finance minister and the SEBI chairman. After SEBI tendered an unconditional apology, SAT has relented and withdrawn the fine and permitted the WTM, Rajeev Kumar Agarwal (not named in the order), to pass a proper order within a week. This is not the first time that SEBI’s conduct as a quasi-judicial body has been questioned. Consider two examples.
 
1. In March 2015, the Bombay High Court set aside SEBI’s first ever exercise of its newly acquired power of arrest in the case of Vinod Hingorani. The Court said that it had exercised “the power of arrest in total contravention of the provisions” and its order was “arbitrary, illegal and void.” In fact, the Court had called it an ‘abuse of power’. 
 
2. In April this year, SAT had rapped SEBI for passing contradictory and inconsistent orders and penalties for similar offences. It was especially disturbed by a SEBI lawyer’s stand that the regulator stood by ‘both orders’. While SAT castigated SEBI’s conduct as ‘disgraceful’, the problem lies at a level much higher than that of the lawyer who was probably following instructions from the top. 
 
Significantly, it is SAT rather than the regulator, who seems concerned that SEBI’s contradictory orders are “detrimental to the interests of the securities market.” The need for confidence in the market and its regulation ought to be a national concern. There should be consequences for those who fail to understand the responsibility and gravity of their role as regulatory body and as a quasi-judicial authority. SEBI is now armed with enormous powers of search, seizure, arrest, freezing of bank accounts, barring entities from the market and stoppage of operations that can damage businesses and irreparably destroy reputations. Only the very brave or well-funded intermediaries have the courage to challenge the regulator legally and risk vengeful action in the form of interim orders that can shut down a business, with no obligation on SEBI to provide a hearing or issue a time-bound order. 
 
Indeed, many are silently crushed due to their reluctance to challenge the regulator. SEBI’s misguided policies, cumbersome procedures and constant tinkering with the rules is only making people fearful, confused and frustrated. The capital market thrives on information and savvy investors slowly learn to separate the grain from the chaff of insiders and speculators. But SEBI’s rules often end up gagging open discussion in public forums even while it is unable to monitor or check shady tipsters who use social media and SMS with impunity to entrap gullible and ignorant investors.

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COMMENTS

DR MUKESH

7 months ago

SEBI ,members should be made to pay for their inaction , lethargy and arrogance !. They think they are above the law , which will soon catch up with them . The judiciary is watching ! Beware guys !

Vaibhav Dhoka

7 months ago

The leniency is shown repeatedly to officials who gain arrogance at public cost.I would like to mention my correspondence with Mr Habibbullah then CIC,it was second appeal against RTI from SEBI the case was posted at New Delhi and a day before SEBI asked for adjournment,I wrote to CIC that officials attend at state cost and do not mind for eleventh hour adjournment as a common man one cannot go to New Delhi due to cost.He totally agreed with facts but said his inability to help as procedures.As procedures are prepared by babus they take undue advantage and judiciary or other authorities show leniency as they are also from same breed.

siva sankaran

7 months ago

Make the members of the SEBI pay for their actions/inactions.then only they learn in hard way

siva sankaran

7 months ago

Make the members of the SEBI pay for their actions/inactions.then only they learn in hard way

REPLY

DR MUKESH

In Reply to siva sankaran 7 months ago

Hon'ble PM , pl clean up SEBI now. They need to be shaken up !

Making Algorithms Accountable

Algorithms are ubiquitous in our lives. They map out the best route to our destination and help us find new music based on what we listen to now. But they are also being employed to inform fundamental decisions about our lives.

 

Companies use them to sort through stacks of résumés from job seekers. Credit agencies use them to determine our credit scores. And the criminal justice system is increasingly using algorithms to predict a defendant's future criminality.

 

Those computer-generated criminal "risk scores" were at the center of a recent Wisconsin Supreme Court decision that set the first significant limits on the use of risk algorithms in sentencing.

 

The court ruled that while judges could use these risk scores, the scores could not be a "determinative" factor in whether a defendant was jailed or placed on probation. And, most important, the court stipulated that a presentence report submitted to the judge must include a warning about the limits of the algorithm's accuracy.

 

This warning requirement is an important milestone in the debate over how our data-driven society should hold decision-making software accountable. But advocates for big data due process argue that much more must be done to assure the appropriateness and accuracy of algorithm results.

 

An algorithm is a procedure or set of instructions often used by a computer to solve a problem. Many algorithms are secret. In Wisconsin, for instance, the risk-score formula was developed by a private company and has never been publicly disclosed because it is considered proprietary. This secrecy has made it difficult for lawyers to challenge a result.

 

The credit score is the lone algorithm in which consumers have a legal right to examine and challenge the underlying data used to generate it. In 1970, President Richard M. Nixon signed the Fair Credit Reporting Act. It gave people the right to see the data in their credit reports and to challenge and delete data that was inaccurate.

 

For most other algorithms, people are expected to read fine-print privacy policies, in the hopes of determining whether their data might be used against them in a way that they wouldn't expect.

 

"We urgently need more due process with the algorithmic systems influencing our lives," says Kate Crawford, a principal researcher at Microsoft Research who has called for big data due process requirements. "If you are given a score that jeopardizes your ability to get a job, housing or education, you should have the right to see that data, know how it was generated, and be able to correct errors and contest the decision."

 

The European Union has recently adopted a due process requirement for data-driven decisions based "solely on automated processing" that "significantly affect" citizens. The new rules, which are set to go into effect in May 2018, give European Union citizens the right to obtain an explanation of automated decisions and to challenge those decisions.

 

However, since the European regulations apply only to situations that don't involve human judgment "such as automatic refusal of an online credit application or e-recruiting practices without any human intervention," they are likely to affect a narrow class of automated decisions.

 

In 2012, the Obama administration proposed a "consumer privacy bill of rights" — modeled on European data protection principles — that would have allowed consumers to access and correct some data that was used to make judgments about them. But the measure died in Congress.

 

More recently, the White House has suggested that algorithm makers police themselves. In a recent report, the administration called for automated decision-making tools to be tested for fairness, and for the development of "algorithmic auditing."

 

But algorithmic auditing is not yet common. In 2014, Eric H. Holder Jr., then the attorney general, called for the United States Sentencing Commission to study whether risk assessments used in sentencing were reinforcing unjust disparities in the criminal justice system. No study was done.

 

Even Wisconsin, which has been using risk assessment scores in sentencing for four years, has not independently tested whether it works or whether it is biased against certain groups.

 

At ProPublica, we obtained more than 7,000 risk scores assigned by the company Northpointe, whose tool is used in Wisconsin, and compared predicted recidivism to actual recidivism. We found the scores were wrong 40 percent of the time and were biased against black defendants, who were falsely labeled future criminals at almost twice the rate of white defendants. (Northpointe disputed our analysis. Read our response.)

 

Some have argued that these failure rates are still better than the human biases of individual judges, although there is no data on judges with which to compare. But even if that were the case, are we willing to accept an algorithm with such a high failure rate for black defendants?

 

Warning labels are not a bad start toward answering that question. Judges may be cautious of risk scores that are accompanied by a statement that the score has been found to overpredict recidivism among black defendants. Yet as we rapidly enter the era of automated decision making, we should demand more than warning labels.

 

A better goal would be to try to at least meet, if not exceed, the accountability standard set by a president not otherwise known for his commitment to transparency, Richard Nixon: the right to examine and challenge the data used to make algorithmic decisions about us.

 

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.

 

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On tap banking licence: RBI says entity must have Rs500 crore capital, get listed in six years
The Reserve Bank of India (RBI) came out on Monday with its guidelines for 'on-tap' licensing of universal banks in the private sector. According to the guideline the initial minimum paid-up voting equity capital shall be Rs500 crore and thereafter the bank should have a minimum net worth of Rs500 crore at all times.
 
A minimum start-up capital of Rs500 crore; minimum promoter holding of 40% (lock-in period five years); listing of the shares within six years; and promoters' holdings to be brought down to 15% in 15 years are some of the stipulations laid down by the regulator on Monday for getting a bank licence on tap.
 
The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per the latest census). The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks, RBI said.
 
As per the guidelines, promoters and the promoter group or non-operative financial holding company (NOFHC), as the case may be, should hold a minimum of 40% of the paid-up voting equity capital of the bank, which will be locked in for five years from the date of commencement of business of the bank.
 
The promoter group shareholding shall be brought down to 15% within 15 years from the date of commencement of business of the bank, the RBI said.
 
"The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank," as per the RBI guidelines.
 
As to the eligibility of the promoters the RBI said (i) Individuals/professionals who are 'residents' and have 10 years of banking and finance experience at a senior level;
 
(ii) Entities/groups in the private sector that are 'owned and controlled by residents' (as defined in FEMA Regulations) and have a successful track record for at least 10 years. However if such entity/group has total assets of Rs 50 billion or more, the non-financial business of the group does not account for 40% or more in terms of total assets or gross income;
 
(iii) Existing non-banking financial companies (NBFCs) that are 'controlled by residents' and have a successful track record for at least 10 years.
 
The RBI said the promoter of the bank should be 'fit and proper' with a past record of sound financials, credentials, integrity and have a minimum 10 years of successful track-record.
 
Promoters having other group entities shall set up the bank only through an NOFHC. Not less than 51% of the total paid-up equity capital of the NOFHC shall be owned by the promoter/ promoter group, as per the RBI guidelines.
 
No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC, the RBI has stipulated.
 
The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding of 10% or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.

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COMMENTS

MG Warrier

7 months ago

The RBI initiative to issue bank licences to those who are serious about doing the business of banking and can mobilise the resources needed and provide leadership to professionally manage new banks has not come a day earlier. Reserve Bank of India has been struggling to reconcile the interests of multiple institutional systems, broadly coming under commercial banks, cooperative banks and NBFCs, all trespassing each other’s operational jurisdictions and the competing claims for regulatory, supervisory and administrative controls from central and state governments and a variety of statutory bodies. Thank God, RBI has been there!
We had to wait 65 long years after passing of the Banking Regulation Act for Raghuram Rajan to arrive and tell us some ingenuous solutions to handle some of the tricky problems faced by Indian banking sector. He has opened many taps to ensure smooth and competitive functioning of the banking system and it will not be easy for RBI and GOI to take an easy diversion, as in the past. The institutional system that is emerging to take care of the banking needs in the present Indian context envisioned by RBI under his leadership will cover the entire banking business.
Ideally, all institutions which were hitherto ‘outside’ the definition of banks and were doing the business of banking in some pretext, will have to transform themselves into banks or transfer their banking business to banks. Consolidation of small private sector banks and professionalization of the working of cooperative banks (some initiatives in this direction have already been taken by states like Kerala) also need to be prioritised.

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