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No beating about the bush.
The former member of the SEBI Board, in a letter to the prime minister, alleges how an "informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated a subversion of the due process of law". It vindicates Moneylife's stand on various regulatory issues that large media houses have been ignoring
Dr G Mohan Gopal, who heads the National Judicial Academy (NJA) at Bhopal, is in the news for his letter to the prime minister, pointing to “the gross abuse of power and corrupt practices in the SEBI board” to “protect SEBI Chairman CB Bhave”. Moneylife Foundation has accessed the letter written to Dr Manmohan Singh on 24 December 2010, which was obtained by activist Subhash C Agarwal using the Right to Information Act (RTI).
The letter, we find, is far more explosive and detailed than has been indicated by media reports so far. Dr Gopal has not only described the manner in which SEBI systems and processes were vitiated to protect Mr Bhave, but it also highlights four “structural flaws” in the “legal framework for securities regulation”, something that other self-appointed market experts have been labelling as perfect and getting favourable mention in the media.
Moneylife has already reported at length on the NSDL issue, which Dr Gopal describes as “ ’Sebi-under-Bhave’ judged and exonerated ‘NSDL-under-Bhave’ through a process that was thinly disguised as independent, but was, in fact, deeply vitiated and subverted”.
Here are highlights of the many larger issues raised by Dr Gopal, on which the prime minister’s office has remained silent for the past five months.
On subversion of the action against NSDL: Dr Gopal says, “an informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated this subversion of the due process of law. They illegally interfered with independent SEBI adjudication, manipulated legal opinions, suppressed and misrepresented facts and misled the SEBI Board and Government officials about the legality of the Orders. Law, regulations and established precedent were violated. NSDL was given undue special treatment. NSDL was relieved of a fine of crores of rupees, and SAT decisions adverse to SEBI but favouring NSDL, were not appealed to the Supreme Court as they should have been”.
On how the SEBI Board declared orders against NSDL as void: Dr Gopal says, “One of the most shocking and unprecedented actions taken by SEBI to exculpate NSDL was the board–for the first time in SEBI’s history–setting aside quasi judicial orders which are, under the law, subject only to judicial review. He goes on to describe how the SEBI board “entirely disregarded” a statement by one of India’s most eminent and respected jurists (former chief justice of India, J S Verma) who had said that SEBI’s action “violated established legal and Constitutional principles”.
On securities law: Dr Gopal says, four structural fault lines in the legal framework for securities regulation made this abuse of power possible. These are:
1. Inadequate transparency, public accountability; and parliamentary oversight: Dr Gopal points out that unlike in India, the US Securities Exchange Commission meetings are open to the public and the US Senate exercises close scrutiny over its workings. There is nothing comparable in India. There is also no framework for whistleblower protection. Dr Gopal points out how he was subjected to retaliation and attack without any protection. (It is stunning commentary of the poor governance in India that an extremely privileged and connected member of society, who heads a premier institution like the National Judicial Academy should complain of such harassment). Importantly, Dr Gopal joins voices like ours at Moneylife when he says, that there is ‘a serious deficit in investor voice’, essential for effective governance. He says, ‘SEBI needs to encourage investor voices instead of being hostile to them unless they are friendly, in which case selective patronage may be extended to them’. Some of the friendly voices which receive selective patronage are large media houses.
2. Lack of protection against conflict of interest: Dr Gopal says that a Code of Conduct for the SEBI board was evolved at his instance, but the “mechanism was violated and then dismantled in the context of the NSDL matter”. He says, that whole-time members of the SEBI board who were to be explicitly excluded from NSDL matters (since they report to the SEBI chairman operationally) were included in the decisions to favour Mr Bhave. Dr Gopal points to the role of Mr Mohandas Pai, who represented a SEBI-regulated entity, to chair the meeting that finally exonerated NSDL. The SEBI board, he says, “generously excused the conflict of interest arising out of the business relationship between Infosys and NSDL”. Also, “it was perhaps for the first time in Indian history that judicial power was exercised by a serving private sector corporate official”. As a result of these conflicts of interest, an influential bureaucrat-corporate-media nexus has emerged that has immense power to influence SEBI decision-making to its own advantage.
3. Ineffective framework for law enforcement: Dr Gopal says that the structure for law enforcement in SEBI is seriously flawed (something that Moneylife has repeatedly pointed out). There are overlapping enforcement and punitive provisions in the Act, which need to be rationalised. This subjects a regulated entity to multiple proceedings without a clear distinction between them. He also says, as we have in the past, that “major violations” established through investigation “are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers–in such cases review by SAT (Securities Appellate Tribunal) would never be sought” because neither SEBI nor the wrongdoer want it. Consequently, “investors at large and the market are the voiceless victims”. Dr Gopal points out to how a company guilty of “criminal market manipulation” was let off by a whole-time member asking it to “be more careful in future” (we believe this refers to the Zee group’s role in the Ketan Parekh scam). He says, SEBI does not have “adequate focus and priority on law enforcement”, with the result that it bent “backwards and violated the law to protect a favoured regulated entity rather than pursue it to enforce the law”.
4. Outdated governance structure: Under this head, Dr Gopal says that the SEBI Act badly needs to be redesigned. It contains “too many explicit and implicit levers of bureaucratic and political control of the regulator on one hand and too little public oversight, transparency and public accountability on the other hand. SEBI in effect is run by an informal caucus of serving or former civil servants rather than domain experts”. Having said that, Dr Gopal accuses the finance ministry representative (Dr KP Krishnan) of exercising “undue influence in the functioning of an independent regulator through informal back channels, through which SEBI officials were funneling information and documents to him, which he legally should not have access to. Dr Gopal says, “the government’s interaction with the regulator would be ‘over the counter’ and not ‘below the table’.” Apart from this stunning indictment, the former SEBI board member, also says how SEBI and the National Institute of Securities Management (its education affiliate) “command huge financial resources with little accountability and transparency in its use”. Further, the SEBI board “lacks relevant expertise” because it is “dominated by babus–serving and ex-bureaucrats”.
Dr Gopal ends his five-page letter by asking the prime minister to order a high-level inquiry into SEBI decisions in relation to NSDL during Mr Bhave’s tenure and to look into the structural issues raised by him.
What did the Prime Minister do? He merely forwarded the letter to the finance ministry. Frankly, even today, this explosive letter by Dr Gopal will probably attract some media attention, only because SEBI has been forced to do an about-turn due to the activist interest shown by the Supreme Court of India into the manner in which SEBI has been subverting regulations.
Here is a copy of the letter written by Dr Mohan Gopal to the prime minister
The scandalous ganging up of some SEBI members to protect CB Bhave and NSDL—reported extensively only in Moneylife and conveniently glossed over by all mainline media—is coming back to haunt SEBI
There were two major developments over the weekend, which underline the murky and the capricious nature of capital market regulation (Mirror, mirror on the wall…) over the past three years that we have been highlighting.
Moneylife has been the only publication to point out that the spate of eulogies about CB Bhave’s tenure as chairman of the Securities & Exchange Board of India (SEBI) while the mainline media's coverage like,“best SEBI chairman” and “the best three years of SEBI ever”, were motivated and highly misplaced.
Strangely, with Mr Bhave gone and with a new chairman at the SEBI, the mainline media is now quietly changing its tune.
Moneylife has long pointed out how the government had appointed CB Bhave as chairman when there was pending litigation between SEBI and the National Securities Depository Ltd (NSDL), which he founded and headed for over a decade. The SEBI action against NSDL was based on an independent inspection ordered by the regulator into the systems, processes and the multiple initial public offering (IPO) applications scam that went unnoticed by both depositories, indicating serious flaws in their operations.
For the record, the inspection report showed that the systems in the Central Depository Service Ltd (CDSL) were far worse than that in NSDL.
The Finance Ministry came up with a dubious strategy to “ring-fence” Mr Bhave as SEBI chairman from the NSDL-SEBI litigation by appointing a two-member bench of the SEBI board to investigate the allegations afresh. It comprised Dr Mohan Gopal, who headed the National Judicial Academy and RBI's former deputy governor V Leeladhar.
However, it was soon clear that the ‘ring-fence’ was a sham and SEBI moved rapidly to eliminate all traces of the IPO scam, paving the way for whitewashing NSDL and exonerating Mr Bhave. Almost everyone accused was cleared through consent orders. The most outrageous was the one-line order closing the case against CDSL, with no attempt to ensure that it has cleaned up its act.
While Mr Bhave recused himself from these meetings and decisions, SEBI’s whole-time members acted for him with strong support from Dr KP Krishnan, then Joint Secretary, Capital Markets. However, the Finance Ministry’s plan (formulated by Dr KP Krishnan, under finance minister P Chidambaram) received a big jolt when the Mohan Gopal-Leeladhar bench upheld many of the charges against NSDL instead of dismissing them.
Immediately thereafter, SEBI with the support of the finance ministry launched a series of actions to bury the report, then discredit and humiliate Dr Mohan Gopal and finally throw out the orders of the bench by declaring them ‘non est’. Mohandas Pai, then with Infosys Ltd, and the only private-sector employee to grace the board of a regulator, lent his muscle at that stage.
A Chartered Accountant who moved to oversee human resources in Infosys, Mr Pai doubled up as a legal expert and chaired a crucial SEBI board meeting which declared the Pai–Leeladhar orders ‘non est’, or not existing in the eyes of the law.
Even the RBI deputy governor Usha Thorat and other government nominees chose to play along, rather than raise questions.
The issue was taken to court by an NGO, leading to the Supreme Court hearing the case more sympathetically after Mr Bhave’s term as SEBI chairman had ended. On 8th May, Manoj Mitta of the Times of India, who had first reported how SEBI has buried the orders of the Mohan Gopal-Leeladhar bench reported that SEBI had now filed an affidavit (after its quick board meeting on 26th April 2011) in the Supreme Court (on 5th May) saying it would "reconsider" the very (two) orders it had declared as "non-est" (invalid) in November 2009 when Mr Bhave was chairman. The SEBI board’s U-turn happened after the Supreme Court pulled up the regulator for preventing the orders against NSDL from coming into effect and asking it to "pass an appropriate resolution and place it before this court for further consideration".
With intriguing coincidence, in the run-up to this affidavit, several publications (Mint, Times of India and The Economic Times, among others) started a loud drumbeat on how Mr Bhave was unfairly denied an extension to his three-year tenure. Each report conveniently ignored the dubious goings-on during his tenure to bury the investigation and orders against NSDL.
For the record, however, NSDL is a fairly well-run organisation, which has an unclear regulatory structure that Moneylife alone has pointed out so far. This could pose serious issues in the future, but engages neither the regulator nor the media.
Unfortunately, a headstrong Mr Bhave took the attitude that NSDL is a perfect institution and cannot be criticised for any failing. This attitude led to a rash of dubious actions, where he ended up twisting all systems and processes to justify his stand.
On 8th May, PTI reported how RTI (right to information) activist Subash C Agarwal had obtained a letter written by Dr Mohan Gopal on 24th December 2010 to the Prime Minister, where it said that SEBI had “abused” its power to protect Mr Bhave from an independent inquiry into NSDL’s role in the IPO scam.
The PM’s inaction (the letter was forwarded to the finance ministry), is yet another example in the long lost of wrongdoing that the Prime Minister condoned with his silence and inaction. In fact, neither the PM nor the Finance Ministry looked into any of the dozens of capricious and motivated decisions of SEBI that were reported by Moneylife over the past two years.
To recap the various issues leading to the current, here is the report of a two-member bench of the SEBI board, whose findings were declared void. This was part of a series of dubious decisions that Moneylife has reported earlier.
1. Appointment of CB Bhave as SEBI chairman when there were SEBI investigations pending against the organisation he previously headed.
2. The assumption, implicit in this decision that NSDL was not even guilty of minor transgressions or carelessness.
3. Attempt to artificially "ring-fence" Mr Bhave from NSDL-related issues.
4. Appointment of a two-member board committee (comprising Dr Mohan Gopal and RBI's former deputy governor V Leeladhar) to decide NSDL-related issues.
5. The mistake in assuming that NSDL will get a clean chit from the bench.
6. The attempt to bury the Gopal-Leeladhar report for several months.
7. Making the report public only after a public interest litigation was filed in the Andhra Pradesh High Court.
8. Exoneration of the rival CDSL through a one-line order, although charges against it were far more serious.
9. And finally, the controversial board meeting which exonerated NSDL and refused to consider a contrary legal opinion by no less than Supreme Court's former chief justice JS Verma.
Unfortunately for SEBI, a Delhi-based NGO called Manav Adhikar filed a special leave petition before the Supreme Court, which led to a direction by the apex court (on 28 March 2011) to reconsider its decision.
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Legal e-mag reports how much law firms made from IPO, QIP rush last year. Amarchand & Mangaldas, Luthra, Crawford Bayley top the list
2010-2011 saw quite a few memorable IPOs (initial public offers) and QIPs (qualified institutional placements) last year. Whatever followed afterwards-with the market, the issuers, banks, the buyer companies or individuals-it was a win-win situation for legal firms that were consultants.
In its second annual report on capital markets published recently, "Bar & Bench", a legal webjournal, has listed the top ten legal firms that benefited as counsellors during the last fiscal. Amarchand & Mangaldas & Suresh A Shroff & Co (AMSS) emerged at the top of the list. Second is Luthra & Luthra which undertook some 20 transactions, then Crawford Bayley & Co with 18, AZB & Partners with 16 deals and Khaitan & Co with 15.
"Top-tier domestic law firms charge anywhere between Rs30 lakh (about US$65,000) to Rs80 lakh (US$175,000) for an IPO. For the EIL (Engineers India Ltd) IPO, insider sources revealed that Luthra and DLA Piper jointly quoted about Rs1.35 crore (US$300,000), Amarchand and O'Melveny quoted Rs1.65 crore (US$366,000) and S&R along with Dorsey had put in a bid of about Rs1.75 crore (US$388,000)," the report says. Yes, you can raise your eyeballs now.
Bar & Bench's yearly review has everything on upcoming IPOs, commentaries on select sectors and market expectations, and a round-up of the IPOs and QIPs that happened last year. It may appear surprising, that a legal magazine would do the job of a market analyst. After all, legal discussions and cases are supposed to be their field of interest; and incidentally, lawyers are also supposed to be occupied with courts instead of watching the movement on the Sensex. But if you are a financial consultant, you will see why it is imperative.
Financial and legal counselling is big money today. With every IPO and QIP that hits the market, banks, companies and wealthy individuals will make a go at a law firm for advice. Whatever follows-whether the buyer goes bankrupt or emerges with flying colours, whether the market crashes or its sunshine-the counseller stacks up his safe in exchange for his pearls of wisdom.
And what a stack it is! Amarchand acted as counsellers in 43 IPO/QIP transactions, of which 19 were worth more than $100 million. Their transactions included the Coal India IPO, Standard Chartered PLC IDR and PO of Essar Energy PLC. If we take Amarchand's fees at Rs1.65 crore for all 43 transactions, it will come to Rs70.95 crore. Similarly, Luthra would have earned Rs27 crore. However, the report announces that the firms cut their fees 'drastically' for government IPOs this year.
Apart from the Coal India IPO, none created a buzz, and most of them have seen the public react hesitantly. As Moneylife reported earlier, the BSE IPO index has moved only 6%, since its launch on 24th August 2009 to 29th April 2011. However, whatever the outcome, the legal firms have surely profited. And this is money earned during a time when there was a lull.
The markets are picking up again. While no major IPOs are being talked about now, they could surface after some time. The Power Finance Corporation's Rs6,000-crore FPO is scheduled to hit the market soon. Meanwhile, there will be a lot of other places from where the legal firms will get their moolah. After all, advice is for all times, high or low.