CBI’s PE against C.B. Bhave undermines Sebi and vitiates the regulatory environment.
The haste shown by the CBI in registering a preliminary enquiry (PE) against former Securities and Exchange Board of India (Sebi) chairman C.B. Bhave, does more damage to the regulatory processes and the institution than to Bhave himself. The agency registered the PE because it believes Bhave gave permission for MCX-SX, an exchange set up by the Jignesh Shah-promoted Financial Technologies India Ltd (FTIL) and its commodities exchange arm, MCX, despite information from the finance ministry that there were income tax raids on the promoters.
The CBI is simultaneously probing a multi-crore scam by the National Spot Exchange Ltd (NSEL), another entity promoted by Shah, and has also registered a case of cheating against him and others in the investments of the state-run Projects and Equipment Corporation (PEC), which caused a Rs 120-crore loss to the exchequer.
As Finance Minister P. Chidambaram said in an interview to this newspaper on Wednesday, the CBI does not seem to have complete information about two different licences given to MCX-SX. The first permission, granted in September 2008, allowed the company to commence trading in currency futures. While Sebi did have information about IT raids on FTIL and MCX, these files were closed by the tax department.
If raids were a matter of concern, the first finger should have been raised against the Forward Markets Commission, then under the ministry of consumer affairs, which allowed MCX (the entity raided) to continue as a commodities exchange. Sebi, it is worth recalling, was being highly criticised then for not encouraging competition in the derivatives market. In giving MCX-SX a licence, though with riders, Sebi took a correct view to allow new players to provide depth and encourage efficiency in the currency futures market, otherwise dominated by the National Stock Exchange.
The second permission to MCX-SX came in mid-2012, more than a year after Bhave had demitted office. This was for trading in equities and came after a prolonged two-year legal battle that MCX-SX had waged with the regulator. Bhave had refused the second licence because the promoters consistently failed to dilute their equity, as specified by Sebi when granting the first licence in 2008.
Over the last 15 years, Sebi has matured not just in intellectual capacity, but also in its processes. It has effectively managed the phenomenal stock market growth despite the complexities of the instruments traded. Questioning judgement calls taken by mature regulators will only serve to vitiate the independent and autonomous environment under which they function today.