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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• NSDL behind regulatory fog
  
• NSDL gets a clean slate in IPO scam, courtesy SAT & SEBI
  
• SEBI still mum on Board's decision on NSDL
  
• SEBI meeting on NSDL issue 'inconclusive' 
  
• SEBI board cannot quash order against NSDL: ex-CJI
  
• Mirror, mirror on the wall…