Cheques & Balances

Last week, Prof. V.Raghunathan, of the IIM, Ahmedabad, who is on SEBI’s primary market advisory committee, decided not to let things end with a verbal duel. He took the unprecedented step of putting on paper Mehta’s charges as well as his justification and sent this to Mehta and to the finance ministry representative on the primary market advisory committee. One has nothing against the regulator making his displeasure known, but if he has to do it so often, there is clearly a need for introspection on why SEBI’s self assessment is so different from public perception.

Mehta seriously believes that the enormous progress that SEBI has made over thelast five years as a policy maker for different aspects of the capital market is not recognised. SEBI feels that it has pushed the process of automation although with a lot of help from the NSE’s proven efficiency, it has helped introduce depositories and paperless trading. It has forced trade guarantees and made markets safer by reducing fraud connected with paper transactions. It also has an entire list of disciplinary and punitive actions against market intermediaries and investor protection measures such as forcing Canbank mutual fund and others to honour commitments to investors.

The fact, however, is that SEBI’s regulatory actions are seen as patchy and inconsistent; often a reluctant reaction to events, to criticism or to specific exposure by the media. Its deliberately cultivated image as market-friendly is only seen as a bias towards one exchange at the expense of another. Even after sacking the top BSE officials, SEBI is perceived as a weak and reluctant regulator wary about tackling issues seenas politically sensitive. That it continues to clear new bourses, while doing nothing to hasten the closure of defunct stock exchanges; and its refusal to bring about uniformity in the administrative rules of all bourses are some examples. Contrast this with its enthusiasm to re-start badla trading or to clear the Bombay stock exchange depository or even its on-line trading system across the country.

It is this weak image that has emboldened even industry associations such as Assocham to demand a restructuring of the regulatory body. One of Assocham’s demands is that SEBI’s board should be restructured. The call for restructuring is justified, but its demand to pack half he board with market intermediaries is doubtful at best. Some time ago, the government gave in to consistent demand from industry for representation on SEBI by appointing Kumaramangalam Birla on the board. So far, Birla has attended one solitary board meeting held at Delhi on March 19.

SEBI needs at least three to five full time directorson the board, on the lines of the commissioners of the SEC of the USA. This is all the more important in the context of a SEBI board member telling me, that the board only discusses policy and never individual issues. Individuals here include market intermediaries.

This, by definition and practice makes no distinction between a stockbroker and an institution like the stock exchange — they are both intermediaries. There is also no difference between a registrar and a mutual fund behemoth like the UTI. He insists that if the SEBI board is to decide things that it is not equipped to handle, then the composition of the board should change. Another reason for the need to change, is the concentration of power in the hands of the chairman. SEBI today lays down policy, interprets it, implements it, and then sits on judgement of violations in its role as a quasi-judicial authority. These multiple powers are all concentrated in the hands of the chairman. A direct fallout of this is that SEBI has not publisheddetailed orders on disciplinary actions. All it does is to put out a sketchy press release. As a result, it has not created clear precedent or generated case law with regard to capital market decisions. Legal experts who have dealt with SEBI insist that a proper publication of its orders will throw up several questionable and inconsistent decisions. One of the most glaring ones that comes to mind is its decision to allow Jensen & Nicholson to cancel a rights issue after allotment and letting it off with less than a slap on its wrist.

Another confidence building measure that is required, is the segregation of SEBI’s investigation and enforcement machinery. It is argued that clubbing the two functions causes the regulator to defend its investigation and not give a fair hearing to the other side. While there is no significant evidence of that at the moment, in the long run, it is an issue that clearly needs to be tackled. A drastic restructuring, coupled with clarity on the regulatory responsibilities of RBIand the Department of Company Affairs and less `market-friendliness’ will create a SEBI whose chairman has less reason to be angry about criticism.

Author’s email: suchetadalal@yahoo.com