As SEBI Strives To Fix Wrongdoing, Its Committees Have Hardly Any New Ideas To Improve Governance
Indian regulators are looking rather good after the collapse of crypto exchange FTX, following a gigantic fraud. This is especially true of Shaktikanta Das, governor, the Reserve Bank of India (RBI). Even as finance ministry mandarins seemed to vacillate, he held firm, despite intense pressure from the crypto industry to give some form of legal recognition to crypto currencies in the Union Budget this February. This may have protected many million investors from being hit by the meltdown that followed the collapse of FTX after its founder, Sam Bankman-Fried, sent out an email bombshell saying, “I’m sorry, I fucxxx up.”
FTX has turned out to be a gigantic fraud. Its 29-year-old wunderkind founder’s real brilliance may have been in getting the media to portray him as an altruistic genius billionaire, wanting to share wealth. To us in India, Bankman-Fried’s mea culpa harks back to Ramalinga Raju’s letter bomb of 2009 disclosing that the much-feted Satyam Computers, with its glittering board, had cooked its books for years and the cash on its balance sheet did not exist.
Admittedly, it is hard for regulators to stay ahead of ingenious scamsters who constantly find new ways to exploit situations, technologies and loopholes. The utter simplicity of the Eli Lilly stock collapse is sheer genius. Taking advantage of Twitter selling the coveted ‘blue check’ (called Twitter Blue) for a monthly subscription of US$8 without any verification, an imposter created an account in the name of Eli Lilly, the US pharmaceuticals company, with a handle @EliLillyandCo. He then tweeted a single sentence on 10th November – ‘We are excited to announce insulin is free now’. For the record, Eli Lilly’s official Twitter account is @Lillypad.
All hell broke loose at the apparent announcement that Eli Lilly was going to give away one of its biggest revenue-earners for free. The stock quickly erased US$15bn (billion) in market-capitalisation. The debacle forced Twitter to halt the hasty rollout of Twitter Blue, cancel the imposter’s verification, and set tweets from the account to private. But the damage was done and, for many investors, the impact is irreversible. The window of opportunity for a repeat of the same trick has perhaps closed; but social media lends itself to many such scams.
Some of you may recall a similar incident when my tweet in June 2021 relating to price-rigging in one corporate group (which I did not name) was deliberately misused and made to go viral by vested interests. It was a clear market operation to push down prices. Two mainstream business media publications helped create panic with non-stop coverage and analysis of the corporate group over the weekend; a misleading lead story by a prominent newspaper on Monday morning set the stage for a sell-off before trading commenced for the week. In a matter of minutes after the markets opened, the shares of the group fell heavily (recovering later) and, in no time at all, a host of pre-prepared memes appeared to claim that a single tweet had caused stock prices to crash! The regulator did not even bother to make an informal inquiry into the matter; perhaps they are aware that only a powerful entity with very deep pockets would have the audacity to execute such an operation or surreptitiously exploit an individual’s credibility.
In any case, Indian regulators are inimical to market intelligence. They fraternise only with market intermediaries who are inter-dependent and speak in the same voice, or are subservient to the regulator’s views. Every committee to discuss new regulation comprises regulated entities, proxy advisers, with legal, accounting and consultancy firms and stakeholder associations, providing the façade of an independent view point. Most often, the firms with relevant expertise have business connections with the market infrastructure institutions (MIIs) and acquiesce with their views.
Mere good intentions do not lead to better regulation; often, it only leads to more bureaucracy and friction. This is clear from the multiple investigations and committees that were set up after the co-location (Colo) scam and its aftermath,  exposing tremendous mismanagement, wrongdoing and concentration of power at the National Stock Exchange (NSE).
Madhabi Puri Buch, chairperson of the Securities and Exchange Board of India (SEBI), is a lady in a hurry and is trying to fix a lot that is wrong with system. She set up a string of committees and we now have discussion papers, recommendations and regulations being announced almost every week. Some of these are, indeed, good initiatives. But far too often, committees justify their creation by piling on more reporting and compliance requirements, which add to the cost and friction of doing business and are a serious distraction from the core function of most businesses.
SEBI issued three major reports/discussion papers last week.
It also streamlined norms for unpaid shares (SEBI Streamlines Unpaid Securities Norms), tweaked the rules for appointment and removal of independent directors and announced a framework to facilitate online bond platform-providers, etc.
Some measures, such as the one on unpaid shares and concern for shareholders of companies under insolvency processes touch upon long-neglected issues. However, the two main discussion papers on strengthening governance at MIIs and disclosures by top listed entities are unlikely to make a difference. Instead of focusing on outcomes, the committee suggests tinkering with processes, composition of boards and enhanced reporting requirements, all of which are unlikely to stop a future managing director (MD) or chief executive officer (CEO) going rogue or concentrating power and decision-making.
A committee looking to fix the shocking lack of governance and wrongdoing revealed at the NSE ought to have started with a frank discussion about what went wrong. For this to happen, SEBI would have needed a drastically different process, learning from a popular quote, misattributed to Einstein - “Insanity is doing the same thing over and over again and expecting different results.”
In SEBI’s case, doing the same thing again starts with the composition of its committees. They are headed by celebrated names with very little domain knowledge and are, consequently, dependent on the secretarial input provided by SEBI officials or select consultants, accountants and lawyers. The one on improving governance at MIIs was worse. It was headed by a former whole-time member (WTM) of SEBI who told a WhatsApp group that “all talk about regulatory capture by the NSE is unadulterated nonsense.” He also issued an order in the Colo scam declared that logging on first to high frequency servers did not give any advantage to brokers, weakening SEBI’s case against NSE. This, in turn, was used by NSE in its appeals against SEBI orders.
Further, the committee included Vikram Limaye, the NSE MD and CEO who spent most of his tenure protecting the previous management’s actions and oversaw an unprecedented 30 broker defaults during his tenure. The committee did not think that such scandalous defaults flagged governance issues or risk-assessment problems that warranted discussion. The outcome was predictable tinkering that will not fix what is broken. Some examples:
  • The committee wants the number of public interest directors (PID) on stock exchange boards to increase from half (50%) to 2/3rd. It does not explain how and why this will make a difference, when all of NSE’s wrongdoings occurred under the benign watch of successive boards comprising distinguished persons such as retired finance secretaries, Supreme Court judges, accounting luminaries, chairmen of leading financial institutions, academics specialising in technology, etc.
  • The committee prescribes a mix of skill-sets (technology, finance, accounts, law, risk management, capital markets, administration and management) among board members. But NSE boards invariably had this composition; what it lacked was  an open mind and the willingness to invest time and effort in understanding the Exchange and the capital market. A highly decorated former chairman, who was given specific feedback by us, also did nothing. It was easier not to question a hugely profitable entity whose management blithely asserted that it ran a perfect institution and bad-mouthed critics. How will things be different just because 2/3rd of those appointed to the board are declared ‘public interest directors’ (PIDs) if they have no connect with investors? Won’t they still be selected from among friends of finance ministry bureaucrats, top SEBI officials or those close the Exchange’s top brass? 
  • The committee now wants PIDs to file reports to cover themes prescribed by SEBI. This is a laughable suggestion. Industry reaction to all of SEBI’s attempts to make independent directors more accountable is simple—they ask managements to appoint an outside consultant (usually accounting firms and their affiliates) to prepare a report which is discussed and accepted by the directors. This will only add a layer of bureaucracy and costs, since there is no record in SEBI’s 30-year existence of ever holding directors accountable.
  • The same is true for key management personnel (KMP). Again, if NSE is the benchmark, then J Ravishankar, who was the third highest-ranked official and has been in charge of legal and compliance, was rewarded for his silence and SEBI has allowed him to get away scot-free in the seven-year-long investigation into NSE. 
  • The report is high on concepts like code of conduct, guiding principles, compliance and risk management; but there is no discussion on issues that transformed the NSE from a super-efficient organisation to a monster that was hell-bent on crushing competition and retaining its near monopoly with obscenely high profits derived through extortive charges. 
  • On the issue of broker defaults, which was left untouched by SEBI’s committee, NSE has set up a committee with a vague mandate to review the rules and suggest remedies for: a) detecting misuse of investor funds leading to broker defaults; and b) review the framework for processing investor claims, including limits on compensation. This is the only response by an exchange to losses running into hundreds of crores of rupees inflicted on investors, when large brokers (Karvy, Anugrah, Modex, BMA Wealth, etc) when NSE ignored findings of its inspection reports which revealed that they were running Ponzi schemes. NSE did not bother to initiate any preventive action so long as the racked a huge turnover and the exchange collected fees. When the brokerage firms collapsed, investors were blamed for their naivety and greed. NSE’s solution under a new MD is to set up a committee comprising mainly former SEBI officials who actively protected NSE during their stint with the regulator! The outcome will be predictable.
Since SEBI has sought a public discussion, my feedback is that good intent alone will not lead to good outcomes. SEBI needs to go to the root of the matter and get the right people on board to get different results.
1 year ago
Committees mean come and have Tea . it is prize posting for friends of Govt
1 year ago
I know when people in Regulatory body don't have ideas ???? they do study tour to Switzerland, Europe, USA, Manila etc. So on one side they get ideas on the other side they get free site seeing, 500 $ per day DA. Some time it help them to write on there CV that how many time they attended international traning and seminars. So it's win win for all ha ha
1 year ago
If you read my earlier comments on SEBI, I've been saying from time to time that nothing will change unless culture changes. Period. End of story. Full stop. I have little faith in SEBI, it's a joke now. Actually, the joke is on us, not them. Sad.
1 year ago
Good compilation of facts.
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