Well after Prime Minister Rajiv Gandhi announced in the 1987-88 Budget his government’s intention to form a separate board for the regulation and orderly functioning of the stock exchange and the securities industry, Finance Secretary S Venkitaramanan reached out to IDBI, then India’s top financial institution, for names of candidates to head the proposed new regulator — the Securities and Exchange Board of India, or Sebi. The IDBI management, headed by S S Nadkarni, nominated one of its executive directors, S A Dave, for the job. Dave took over in April 1988, and for a while operated from IDBI’s head office in Mumbai’s Cuffe Parade.
The markets were fairly vibrant then. From just Rs 500 crore in 1980-81, approval for capital issues rose to Rs 5,000 crore in 1986-87. Rajiv Gandhi, who had charge of Finance, announced more fiscal incentives for investors, including on capital gains, in the 1987-88 Budget, more famous for the introduction of the Minimum Alternate Tax (MAT). This was also the time when UTI launched its mutual fund, and India’s largest bank, SBI, too promoted one.
As part of his core team, Dave got several bright young officers from IDBI — Ravi Narain, Chitra Ramakrishnan, G V Nageswara Rao and Pratip Kar. After analysing the securities market regulatory model of the USA and UK — where the Financial Services Authority had just been formed — they worked on a draft law. The team also proposed a capital market transaction tax to generate revenue for the new regulator — a bold idea that raised the hackles of stock brokers and intermediaries.
But without any statutory powers, hardly anyone in the capital markets took the Board seriously. And in mid-1990, Dave was abruptly moved out to UTI. He held simultaneous charge of Sebi, until Prime Minister V P Singh gave the job to G V Ramakrishna.
GVR, as Ramakrishna was known, faced intial frustrations. The Ministry of Company Affairs, fearing a loss of turf, led the resistance to change.The Finance Ministry’s powers relating to the capital market were vested mainly in the Controller of Capital Issues or CCI, which had the last word on pricing of share sales. Discussions among Sebi and the Ministries of Finance and Company Affairs made little headway.
On January 30, 1992, the government issued an Ordinance giving Sebi statutory status. And in February, Ramakrishna held the first Board meeting, and formulated regulations that had to be operationalised for oversight of the capital market and its intermediaries such as stock brokers and merchant bankers.
These regulations had to be approved by the Finance Ministry then. This did not happen for close to eight months after the Sebi Ordinance became law on April 4, 1992. But Ramakrishna and his team started issuing directives to intermediaries and carrying out inspections in the interim. It worked — also because of the shadow of the securities scam of 1991-92, featuring “Big Bull” Harshad Mehta, which put many players in the industry on the defensive.
In early November 1992, Y V Reddy, GVR’s junior colleague in the IAS in Andhra Pradesh, was appointed in charge of the new capital markets division in the Ministry of Finance. In December, the first set of regulations — close to a dozen in number, including one on stock brokers — was approved and signed off by Reddy to be notified in the gazette.
Interestingly, the early Act had no mention of control of stock exchanges, intermediaries or company prospectus, leading to a bit of a crisis and a sort of regulatory vacuum. The first statutorily empowered chairman of the regulator then came up with the suggestion that the Board could issue investor protection guidelines or norms to surmount this hurdle. This was thought of as the Act had clearly stated that investor protection was a core mandate of Sebi.
This was a fig leaf that came in handy for a few years until the Act was amended. Having realised the drafting error, the Finance Ministry and Sebi then engaged in more consultations, which only expanded over the years. And for a long time, Sebi regulated the market with those guidelines, instead of regulations, which have the effective force of law.
After those initial years of what the regulator termed later as a dichotmous situation — with a promising capital market but no oversight in the market because of the lack of empowerment — Sebi has emerged as a key financial sector regulator.
The common thread then, and perhaps now, when it comes to creating new institutions, is the resistance to change and reluctance to cede turf. It only underscores the importance of choosing the right leader to head such institutions when they are set up.