SEBI top management is focused on its entitlements, guarding its turf, it has little interaction with investors
In the 23-odd years since it got its statutory teeth, the Securities and Exchange Board of India (SEBI) has already had its statute amended to become one of the most powerful regulators in the world. But SEBI is certainly not a lean, mean and ferocious watchdog for investors and financial consumers. It is a big bureaucracy, focused on its own entitlements, and guarding its regulatory turf; it has minimal interaction with those it was set up to protect and makes little effort to understand their needs and concerns.
Ignoring its core constituency of financial consumers and investors has meant that SEBI fails to inspire confidence among them or work cohesively in the financial system. This is probably one of the reasons why the Financial Sector Legislative Reforms Commission has recommended the merger of all financial regulators into one super-regulator and a separation of their grievance redress functions into a new financial redress agency to offer unified grievance resolution across the financial sector.
In June 2015, a task force was set up to draw a road map for this redress agency; but, unless it studies the mistakes of the past, a new agency will only repeat the problems of existing financial regulators. Worse, it may create a new bureaucracy supported by costs and fees collected from users and, yet, fail to provide the most tangible redress that all investors seek—refund of the money lost due to cheating, mis-selling and misrepresentation or compensation for poor service or delays. The record of all Indian regulators has been pathetic on this front.
When SEBI got its statutory teeth after the 1992 securities scam, over half the senior officials were brought on deputation from other enforcement and investigation agencies. The new watchdog required people with experience of regulatory and supervisory responsibilities and handling investigations. Soon, SEBI became a coveted destination because of its powers, connections with corporate India, a less bureaucratic set-up, frequent opportunities for foreign travel, better perks and significantly more attractive allowances than other government departments. A stint at SEBI also guaranteed extremely well-paid jobs and foreign postings with the world’s top finance companies. Consequently, attrition rates were high in its first decade of operations. Today, senior positions at SEBI, as chairman or whole-time members (WTMs), are coveted for the same reasons with the bonus of extending the career of retiring bureaucrats by five years.
The focus on power and perks has led to a lopsided growth of the organisation where the all-powerful chairman, with a say on coveted assignments, directs everything that is good, bad and ugly about the regulator. A former chairman had told me, “SEBI is a chairman-centric organisation,” even though he himself built a nice façade of decentralised decisions made by key committees. But, after several SEBI chairmen have imperiously bent and interpreted rules to appoint their chosen people to key senior positions, the organisation is beginning to rebel.
A resurgent SEBI Employees’ Association is now a formally registered body and has begun to voice its protest about capricious appointments at senior level which deny promotions to those who have been with SEBI for over two decades and can offer a wealth of knowledge and experience. Even highly competent officials of proven integrity are now forced to report to officers who are junior to them, because they have joined SEBI on deputation from the income-tax department, the police or other government agencies. The situation has become extremely messy after the merger of SEBI and the Forward Markets Commission in 2015.
Various chairmen have encouraged such migration and deputation, not because it brings new competency and experience to SEBI, but because executive directors (EDs), on short duration contracts, owe complete allegiance to them. Several have seen their SEBI appointment as a post-retirement perk and many serve out their contract with very little connect with the organisation or the capital market. But chairmen, who know how to work the system, can skilfully manipulate these appointments too, especially when it comes to granting extensions to a favoured few.
One chairman got a WTM to exonerate a large corporate house embroiled in a scam by dangling the possibility of an extension. Once the exoneration was done, he wrote to the government against extending the tenure of the pliant WTM. The reappointment of Prashant Sharan for a second term as WTM in 2012 has been challenged by an NGO (non-governmental organisation) in the Delhi High Court. The NGO claims that Mr Saran was appointed without a valid clearance from the Central Vigilance Commission (CVC). The NGO also alleges that chairman UK Sinha got SEBI’s chief vigilance officer, RK Padmanabhan, to give clearance to Mr Saran, although he was his direct boss—the same SEBI lectures the corporate sector on governance. Interestingly, both these officers have been ‘examined’ by the Central Bureau of Investigation (CBI) in connection with an investigation into irregularities by the promoters of Bank of Rajasthan. The CBI is investigating whether the case against the Bank’s promoters has been deliberately weakened, delayed and penalties against it have been diluted by SEBI. There are whispers in SEBI about who issued directions to do this and whether there was a quid pro quo for following such orders.
The department of economic affairs (DEA) at the finance ministry, which is in charge of supervising SEBI, has maintained a studied silence on the matter, even though the secretary, DEA, is on the SEBI board. The simmering discontent within SEBI’s ranks is not merely about appointments, but also a sense of neglect of their rights and welfare by the organisation.
On 14th December, the SEBI Employees’ Association wrote to the chairman expressing their concern at the large number of officials being summoned by various investigation agencies such as CBI, the income-tax department and the economic offences wing to record their views on various decisions taken in the course of their work. The letter says that 70 out of SEBI’s 652 officials have been summoned—this has doubled in the recent past.
While it is true that all officials should be accountable and open to investigation of dubious actions, organisations such as the Reserve Bank of India (RBI) have evolved a system of dealing with inquiries. Income-tax officers are protected by their statute when it comes to work-related decisions. Both organisations have evolved an informal protocol of sorts, where investigation agencies, such as CBI or the police, will visit their offices for routine inquiries and summon officials only if a ‘preliminary enquiry’ is formally opened.
SEBI has not evolved any such mechanism to support its officials, says the Association. This is partly due to callousness and partly because of the machinations of SEBI’s own top brass. That the SEBI chairman was listed as a regular visitor to the home of a controversial former CBI director has been a matter of much speculation inside the organisation.
Ironically, the officers’ protest comes at a time when several of SEBI’s senior-most officers have been ‘examined’ by CBI, not only in the Bank of Rajasthan matter, but also the Saradha chit fund scam and the MCX (Multi Commodity Exchange of India) group. Moreover, allegations of corruption had dogged the organisation right from the early 1990s and, yet, no official has ever been held accountable, despite two massive securities scams, a permanently damaged primary capital market and the exodus of retail investors.
But SEBI officers are not arguing for immunity: they say that indiscriminate summons, humiliation and questioning by other agencies at the fact-finding stage, is causing widespread demoralisation, especially when the organisation offers no support. All this points to a dysfunctional organisation which needs a complete overhaul of its structure, appointments and human resources policy, in order to make it an effective regulator. More importantly, we need to ensure that new agencies, such as the super regulator or grievance redress body, if they are formed, are structured correctly from the beginning and do not merely add to the number of useless institutions and regulators in the financial market.
is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]