What is common between CRISIL (Credit Rating and Investment Services Limited), NSE (National Stock Exchange) and PricewaterhouseCoopers (PWC)? Two things. All three have filed applications with the Securities and Exchange Board of India (SEBI) to settle some very serious charges. More importantly, these are not your regular market intermediaries; each of them either has a regulatory role or a serious fiduciary responsibility towards other stakeholders such as investors and lenders. The business decisions of stakeholders—mainly lenders and investors—and, consequently, their income or losses depend on these entities fulfilling their responsibilities with diligence, fairness, honesty and impartiality. But each of them has been found wanting.
Under SEBI’s consent rules, serious offences that have market-wide impact or cause substantial losses to investors or affect the rights of investors in securities, especially retail investors and small shareholders, cannot be settled through consent. But there is a strong lobby of powerful lawyers, consultants, bureaucrats and the media pushing SEBI and the government to relax the rules and settle investigations against these three by paying a fine. Clearly, NSE, PWC and CRISIL have filed their consent applications based on the expectation that these will be favourably considered. SEBI, say sources, will make the punishment appear tough by levying a fat fine, but that is a mere fig leaf since it is the organisations that will be paying the money and let off the individuals responsible for dereliction of duty or fiduciary responsibility.
Sources say that key SEBI officers are unwilling to bend rules and process the applications without clear instructions from the top and this has, possibly, delayed disposal of the consent pleas. I also learn from reliable sources that a law firm connected with a senior political figure in this government is lobbying behind the scenes to push for the NSE settlement. If that goes through, it is safe to bet that PWC and CRISIL will slip through the door, unless investor groups move court in protest. Before discussing this further, a quick recap on each of these consent applications is warranted.
• NSE’s senior management (past vice-chairman, managing director, head of operations and 12 others) have been served a show-cause notice for their failure to ensure the integrity of its high-frequency trading (HFT) and co-location system which allowed certain brokerage firms to consistently log-in ahead of others and profit from it. Two separate reports have confirmed that NSE’s trading system gave preferential access to a few firms. Strangely enough, a confident NSE is pushing ahead with its attempt to close the sordid saga even as a forensic investigation is going on. Those who gained from preferential access have not been punished nor asked to disgorge these gains. The exact role of senior management has not even been investigated. SEBI’s studied silence and NSE’s confident push for a settlement only signals a nudge from the finance ministry.
The Exchange is paying the legal bills for all those who have received notices and has also committed to pay the fine. The moot point being ignored is this: HFT trading accounts for the bulk of NSE’s turnover; this means that unfair access allowed a few brokers to profit at the cost of the wider market. Clearly, the case cannot be settled by filing consent; but hectic lobbying is an effort is on including a move to reconstitute SEBI’s ‘high-power committee’ on consent (comprising NSE consultants and directors) to make it happen.
• In September 2017, PWC approached SEBI to settle the investigation launched after Ramalinga Raju, founder of Satyam Computers, confessed to fraud in 2009 and announced that the company was bankrupt. PWC was the auditor of Satyam Computers. Apart from the arrest of some senior partners and a loss of reputation, PWC has emerged almost unscathed. SEBI comes off poorly in this case too. In January this year, the Supreme Court pulled up SEBI for the interminable delay in investigation and asked that it should be completed in six months. In February, SEBI amended its consent rules and set the stage for PWC’s filing. The rules now provide that “exceptional circumstances, such as the lapse of time since the commission of the alleged default” (para 5 of the regulations) could be one of the grounds for admitting a consent plea or settlement with a fine. So, the shocking delay also works to PWC’s advantage.
Now consider this. SEBI has already let down Indian victims of Satyam and PWC by failing to support class action against them in India. In contrast, within two years of the fraud, Mahindra Satyam (the new owner) and PWC paid $125 million and $25.5 million, respectively, to settle class action by US investors in 2011. Satyam and PWC also paid $17.5 million to settle claims made by the US Securities and Exchange Commission and Public Company Accounting Oversight Board.
So, US investors got compensated for the fraud by Satyam and PWC, but Indian investors only lost money. Virendra Jain of Midas Touch Investors Association had led the battle for compensation seeking Rs5,000 crore on behalf of 300,000 retail investors of Satyam Computers. Midas did not meet with success because it received no support from SEBI. It will be ironic if PWC wipes the slate clean by paying a ‘consent fee’ while Indian investors, who have been defrauded by PWC’s failure to fulfil its fiduciary duty, get nothing.
• CRISIL is the latest entity with a big fiduciary responsibility to the larger market that has filed a consent application mid-October. But this is not the first time CRISIL has been found wanting, or has lowered its rating only after a payment default or scandal. In August 2015, Amtek Auto defaulted on a Rs800-crore repayment leading to a redemption crisis in a couple of JP Morgan’s mutual fund schemes. For the first time, SEBI decided to act tough and served a show-cause notice on the two rating firms involved and even tightened oversight on raters. CRISIL and CARE (Credit Analysis and Research) had clearly failed to evaluate the company’s debt position correctly and did not take cognisance of delays in servicing debt obligations. The very purpose of mandating credit rating for debt instruments is defeated, if rating agencies fail to do their job. The fact that the rating agency is paid by the companies that it rates has always been a source of unease, since it ensures that the agencies’ first concern is not to lose a client with a fair but lower rating. In the Amtek Auto case, CRISIL’s failure had a large impact on a mutual fund scheme and thousands of its investors who placed their trust in its rating.
The consent mechanism is already flawed. The money collected from those who file consent proceedings is never used to compensate victims of their actions. The consent fee is retained by SEBI, while the investors get nothing. If the scope of consent is expanded to include cases like the three mentioned above, it will only weaken our regulatory structure. Check how the narrative is spun in their favour. S Raman, SEBI’s recently retired whole-time member, told a newspaper, “It is wrong to exclude many infractions from the consent mechanism. We are actually diluting the system by filing so many inefficient cases. Instead, hefty penalty should be a sufficient punishment.” The answer to SEBI’s delays and inefficiency is surely not to close cases by filing consent. This preposterous argument makes no mention of the rights of those who have been defrauded and reveals why investors distrust markets and regulators.
At a time when the Companies Act, 2013, seeks to impose draconian responsibilities and penalties on independent directors, who have nothing to do with day-to-day management, allowing regulators, rating agencies and auditors to file consent and walk away would make us seem like a banana republic.
https://blogs.timesofindia.indiatimes.com/valuesfirst/can-we-afford-to-be-silent-spectators-to-compounding-of-criminality/
The question is: What does the 'law adiding' ordinary citizen of India do? How can we support your cause to strengthen our 'framework' amidst these insitiutionsl ruins?
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