Swiss National Bank chairman’s resignation—A pointer to all regulators in India

The scandal involving the chairman of Swiss National Bank and his consequent resignation brings to the focus the need to formulate appropriate guidelines on insider trading, corporate governance standards, conflict of interest, etc. for all the regulators in India and this should be taken up on priority by India’s Financial Stability & Development Council in the interest of improving the credibility of these institutions

The resignation, forced or otherwise, of Philipp Hildebrand, chairman of the Swiss National Bank (SNB) from his post on 9 January 2012 over allegations relating to a suspicious currency transaction made by his wife during last year is a concrete case of how things can turn out for people at high offices, when their family members, whether knowingly or unknowingly, enter into transactions which have a semblance of insider trading. Mr Hildebrand claims to have had no knowledge of the transactions entered into by his wife, but was forced to resign because of mounting political pressures. He, however, reportedly said that he resigned because it was “not possible to provide conclusive and final evidence” to prove that his wife traded without his knowledge.  

The SNB, the central bank of Switzerland, in its press note released on 9 January 2012 made a crypt statement that based on the events and findings of past few days, their chairman had decided to resign in order to protect the institution and that the Bank’s Council accepted the same and thanked him for his outstanding achievement in the field of monetary policy, and for his enormous dedication in the service of both the Swiss National Bank and Switzerland. 

SNB on 4 January 2012 published a report about private currency dealings of its chairman, Philipp Hildebrand, amidst allegations that he had profited from inside information.  The report of PricewaterhouseCoopers, (PwC) which was engaged by SNB to investigate into the matter, revealed the following:

  1. During 2011, a year in which the Swiss franc rose sharply and then fell following an intervention by the SNB, the Hildebrands entered into a series of foreign exchange transactions as detailed below.
  2. On 10 March 2011 the Hildebrands sold 1.1 million Swiss francs and purchased US dollars out of the cash got from a property sale made by them earlier.
  3. On 15 August 2011, Kashya Hildebrand, a US citizen of Pakistani origin,  sold additional 400,000 Swiss francs and bought US dollars, as she, a former hedge fund manager herself, reportedly  wanted to hold 50% of her family’s liquid funds in US dollars. As per the bank’s report, the chairman did not know about the transaction until the following day, when he immediately reported it to the bank.  
  4. On 6 September 2011 the chairman of SNB said to have announced that the Swiss National Bank would cap the value of the Swiss franc against the euro, thus forcing a de facto depreciation of the franc against all other major currencies. This resulted in the value of his wife’s investment improving by almost 20%. 
  5. On 4 October 2011, the Hildebrands sold US dollars for 475,000 Swiss francs, to enable them finance a property purchase.
  6. All these forex deals, as per the media reports, resulted in the couple making a profit of approximately, 65000 Swiss francs (equivalent of about Rs35 lakh)
  7. An investigation by PwC has concluded that Mr Hildebrand did not breach the central bank’s insider-trading rules. As per the media report, the PwC statement said that because the money was converted to buy a property, and not to invest in financial products, it was within the bank’s rules on currency exchanges. It further said that the larger transfer, made in March, also fell within the rules as it was not used for six months and was considered a passive investment. 
  8. PwC was called only in mid-December, when Mr Hildebrand became aware of rumours about his wife’s dealings. And the SNB only published PwC’s report after Sarasin & Co, the Swiss private bank, announced on 3 January 2012 that one of its information technology employees had illegally passed bank data about Hildebrands’ personal finances to a lawyer connected to the right-wing Swiss People’s Party.
  9. From then onwards, it became a political issue which forced the chairman to resign on 9 January 2012. And the employee of the Swiss private bank who had leaked this information was also sacked by his employer for stealing the confidential information and passing it on to outsiders.  
  10. The Roman Emperor Julius Caesar had reportedly responded to baseless allegations of adultery against his wife by divorcing her, saying “Ceasar’s wife must be above suspicion”. But here Mr Hildebrand reportedly donated the profits that his wife made on these transactions to charity probably to prove his innocence.  

That is so far as Swiss National Bank and Swiss banking rules are concerned and the recent scandal revolving around them. But what about the position obtaining in India in respect of our own regulators and their senior managements are concerned?

The insider trading in stock market is regulated in India by Securities and Exchange Board of India (SEBI) under the SEBI (Prohibition of Insider Trading) Regulations 1992 and amended on 19 November 2008. These rules apply to all listed companies and each listed company is expected to formulate its own rules for its staff on the basis of model rules framed there under. One of the rules under the aforesaid SEBI regulations reads as under:

“All directors /officers/designated employees who buy or sell any number of shares of the company shall not enter into an opposite transactions i.e. sell or buy any number of shares during the next six months following the prior transaction.”

Obviously this six months rule may have been borrowed from the international practice, as PwC, too, has given a clean chit to the SNB chairman based on this six months rule. 

These rules are applicable to all listed companies. But surprisingly nowhere it is mentioned that these rules are equally applicable to the officials of the regulators and their board members. 

However, SEBI has put on its website “Code on Conflict of interest for Members of Board” adopted on 4 December 2008 to ensure that it conducts in a manner that does not compromise its ability to accomplish its mandate or undermine the public confidence in the ability of members(s) to discharge his responsibilities. It also stipulates that a member shall not deal in securities of a company listed on a recognized stock exchange based on unpublished price sensitive information which he may have got access to.  

The Reserve Bank of India’s (RBI) website is silent in this regard and does not give out any details of the rules and regulations applicable to its directors and the senior management of the bank with regard to insider trading either in shares or in foreign exchange. RBI will definitely have its internal rules applicable to its staff but unfortunately, this is not put in public domain. In many cases, it appears that the rules applicable to banks are not made applicable to the RBI, as it is not a listed bank. For instance, all banks have to have a policy on “protected disclosure scheme”, but whether a similar scheme exists for RBI is not known, as it is not published on its website. 

Surprisingly, corporate governance regulations applicable to all listed companies under Clause 49 of the Listing Agreement are also not applicable to the regulators, even to the extent relevant to them, as they are not listed companies. The regulators are more sacred than the regulated entities. Should they, therefore, not have appropriate governance guidelines which should lay down all these sensitive issues like insider trading, conflict of interest, protected disclosure norms, etc, to ensure their credibility among the public? 

As the saying goes, “what’s sauce for goose is also sauce for the gander”. But this does not appear to be applicable to our regulators as rightly pointed out by Sucheta Dalal in her article “Regulators: Holier than thou” (Moneylife Digital newsletter dated 23 January 2012).  There are a number of regulators in our country, which have enormous powers to move the markets and they make statements to the electronic media almost everyday without bothering about their consequences.

It is, therefore, necessary and expedient for the newly formed India’s Financial Stability & Development Council (FSDC) to look into this aspect and codify a set of regulations applicable to all regulators and their senior management not only in respect of insider trading in stocks, shares, securities, commodities and foreign exchange, but also with regard to the conflict of interest, corporate governance standards, etc, drawing from the example of Swiss National Bank, which has since put up a revised code for its board members and senior management in the wake of the scandal involving its chairman. 

Source: References:

BBC News, Reuters, Bloomberg. 

Financial Times

(The author is a financial consultant and he writes for Moneylife under a pen-name ‘Gurpur’)




Nagesh Kini FCA

5 years ago

Now that there is a good precedent it sends out a clear message to our Regulators to come clean.

Courage or laxity? Bad debt mountain does not faze RBI

RBI deputy governor Anand Sinha recently said that from 15% (of total loans of the banking system) the NPAs came down till 2008, but they have risen sharply by 91% or Rs46,670 crore between 2005-2006 and 2010-2011. The situation is serious and banks had better do something about it quickly

When one of India’s senior most central bankers describes a situation as “not alarming”, do we take him at face value and relax? Or is he talking bankers’ double-speak, which needs to be translated as “the situation is serious and all of us had better do something about it quickly?”

Take for instance the speech of Anand Sinha, deputy governor of the Reserve Bank of India (RBI), at the fifth Mint Annual Banking Conclave in Mumbai a few days ago.

Mr Sinha warned anyone who would listen that the non-performing assets (NPAs or bankers’ long-hand for bad debts) of the banking system had risen beyond the comfort zone.

“The situation is under control but there is an underlying reality that is not very comfortable”, he said. Backing up his statement with figures, Mr Sinha said that from 15% (of total loans of the banking system) the NPAs came down till 2008, but they have risen sharply by 91% or Rs46,670 crore between 2005-2006 and 2010-2011.

In a related development, State Bank of India (SBI), the nation’s largest bank, said that its bad debts rose to a record Rs40,098.43 crore in the December 2011 quarter. “Not alarming”? No bells ringing in RBI or SBI headquarters?

Mr Sinha explained the spike in bad loans thus:

“A boom in economic activity preceded the world economic crisis set off by the sub-prime lending in the United States. During the period of fast expansion, the banks lent ‘aggressively’ to industry and the corporate sector.

But they were not careful about the entities to whom the lent huge amounts. Monitoring of loans was lax; the banks did not look too closely at how the borrowers were spending the loans, where the money went, whether it was siphoned off to be used in activities that had no relation to the purposes for which the banks had lent money. The banks would have kept a close watch on the borrowers and the funds trail if they had “done proper due diligence” (what an ugly phrase; can’t they find a more elegant way of putting it?).”

Mr Sinha admitted “due diligence” had been largely ignored. Hence the banks suddenly found a mountain of bad debts blocking their way.

Automation was also what the bankers would describe as the “villain of the piece”.

A loan becomes a bad debt when the borrower delays payment of interest or loan instalments beyond 90 days.  In the “bad old days” of about a decade ago, the missed instalments were recorded manually i.e. clerks wrote in the big ledgers that borrower X, Y or Z had delayed payment beyond the deadline of 90 days.

The manual system was replaced by an automatic, computerized system which, like time and tide, waited for no man: it identified a bad loan as soon as a borrower delayed payment beyond 90 days. Therefore, NPAs were identified more quickly and showed up in large numbers in the books.

More often than not, bankers and bureaucrats play down a crisis. This may be the case with Mr Sinha’s analysis of bank NPAs. For it is a crisis, notwithstanding Mr Sinha’s “not alarming” diagnosis.

For instance, Mr Sinha said bad loans were rising despite write-offs. Banks are given limited powers to write off loans, allowing the borrowers to go their merry way without paying back the loans.

Also, the ratio of actual recoveries to total creation of NPAs was 40.74% in 2008. The ratio plunged to 28.74% in 2010.

Mr Sinha however consoled himself, and hopefully the nation, by quoting from the Financial Stability Report of the RBI. The report showed, according to Mr Sinha, “that even with 40% of restructured advances turning NPAs, the banking system will not collapse.”

Thank you, Mr Sinha, that is reassuring. But do we have to wait for the collapse? Can’t you do something to reduce bad debts to an irreducible minimum? If you do so, banks will be able to lend more to industry. And this time, hopefully, due diligence will get more importance.

The seriousness of the crisis was underscored by a letter, reported in the newspapers, from the finance ministry that rapped several public sector banks on their knuckles. It warned the banks that they had not set aside thousands of crores to cover loan defaults. Therefore the banks had overstated their profits.

In one bank, under-provisioning for bad loans was in excess of Rs5,000 crore over the last three years. If the banks had set aside funds in line with RBI rules, they would have reported losses, the ministry said.

Like Nero, is someone fiddling while Rome burns?

(R Vijayaraghavan has been a professional journalist for more than four decades, specialising in finance, business and politics. He conceived and helped to launch Business Line, the financial daily of The Hindu group. He can be contacted at [email protected].)




5 years ago

This comment from the Leader of Banks “The situation is under control but there is an underlying reality that is not very comfortable” is political to say the least. How can the situation be "under Control" if it is NOT comfortable ?
And why is the RBI not taking the rising NPA's seriously? Is it waiting for financial system to fall as it did in the US - housing loans defaults in 2008 ?
Is it playing pro-Govt in this time of scams ?
Also, where is the defaulted money going ? - funding terror or into Swiss, etc banks ?
RBI and the Govt needs to get this under proper control.

Shashidhara S R

5 years ago

Banks have failed to understand customers need and were only interested in interest income raising limits which starts with a credit card and ends in multiple credit cards and personal loans when an an account is opened in a bank with change of job/employers obligation to open a new account.and this continues the receiver account holder and banks(not worrying about the other bank ) which encouraged such a system both end in problems

2G scam: SC refuses to grant protection to Essar and Loop

A two-member Supreme Court bench, however, agreed to hear their petition challenging the jurisdiction of the special court to hear the case on the ground that corruption charges have not been slapped on them like other accused in the multi-crore rupee scam

New Delhi: In a setback to the Essar group and Loop Telecom, the Supreme Court today refused to grant interim stay on the summons issued against them and their officials by a special Central Bureau of Investigation (CBI) court to appear before it on 22nd February for their alleged involvement in a second generation (2G) spectrum scam offshoot case, reports PTI.

A bench of justices GS Singhvi and SJ Mukhopadhaya, however, agreed to hear their petition challenging the jurisdiction of the special court to hear the case on the ground that corruption charges have not been slapped on them like other accused in the multi-crore rupee scam.

“We would quash the proceedings if we come to the conclusion that the court has no jurisdiction to hear the case,” the bench said.

The bench also issued a notice to CBI and other parties and asked them to file their responses within two weeks on the companies’ plea.

The two telecom firms, in their petitions, had said they have been charge-sheeted under Section 420 (cheating) and 120B (criminal conspiracy) of the IPC and the charges were triable by a magistrate and not by the special court constituted under the Prevention of Corruption Act for hearing the 2G case.

Other accused named in the third charge-sheet are Essar group promoters Anshuman and Ravi Ruia along with Loop Telecom promoters Kiran Khaitan, her husband I P Khaitan and Essar Group director (strategy and planning) Vikash Saraf.

They have been asked to appear before special CBI judge OP Saini on 22nd February.

The companies and their promoters have denied any involvement in the scam.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)