Further investigation by the Securities and Exchange Board of India (Sebi) has thrown up evidence of probable collusion by officials of a depository with market intermediaries to open fake depository accounts. The depository in question allegedly allowed a set of intermediaries to open a few hundred dummy accounts or ‘blank’ depository accounts each to route multiple applications to Initial Public Offerings (IPOs). The investigation seems set to zero in on a prominent intermediary who has not been identified so far.
But apart from investigating and punishing this mischief and plugging loopholes that permitted the opening of thousands of benami accounts, this finding raises a larger issue—whether the regulation and supervision of independent entities entrusted with fiduciary responsibility to safeguard the savings of ordinary people is adequate?
In the past decade, there has been a large body of research and regulation regarding the duties and obligations of listed companies to their minority shareholders. Over the years, a combination of shareholder activism and financial scandals have forced listed companies to follow a stringent set of disclosure norms and regulations covering insider trading, corporate governance and appointment of directors and auditors.
In India, in the same period, there has been an evolution of several ‘independent,’ unlisted entities that are quasi-financial institutions, but outside government regulation. These were floated by the development financial institutions (DFIs) and their shareholding is scattered among a bunch of banks and institutions, each with a stake small enough not to have a significant voice in management decisions. They include National Stock Exchange (NSE), its clearing corporation, the National Share Depository Ltd (NSDL), the BSE depository, the National Commodity Exchange and even Infrastructure Leasing & Financial Services (IL&FS) Ltd.
Even though they have public sector companies as shareholders, they are in the wonderful position of being able to pursue their business plans without suffering from the stifling bureaucracy, controls, government audits or salary restrictions that bind the public sector. While they are regulated and inspected by Sebi, the regulator has never meddled with appointments, management decisions or perks.
Consequently, all appointments at these institutions are part of a circle of friends of the top management, which has remained unchanged for the decade of their existence. Their loyalty to core management is unquestioned.
• NSE, NSDL, etc don’t suffer many restrictions binding the public sector
• Why aren’t they subject to the disclosure etc rules they impose on others?
• The depositories’ scandal and the reaction to Sebi’s probe raises issues
Admittedly, these institutions have earned this independence due to their stellar role in transformation of India’s capital markets. However, all of these (barring IL&FS) are less then a decade old and all (including IL&FS) still operate under the original management team. IL&FS itself has a curious record of attempting to go public since 1991, having at one time even warehoused a part of its shareholding with Unit Trust of India (UTI) in preparation for a public issue that has not happened in 15 years.
Is the government being far too complacent about the functioning of these institutions? Is their management record an adequate protection for the future? And how is it fair for listed companies to be forced to part with so much of information, while unlisted institutions overseeing the listed ones are not subject to similar standards of public disclosure?
This is not a hypothetical concern but is based on several events. For instance, right until the year 2000, the NSE simply refused to make its annual report public. Academics and journalists who asked for a copy were smoothly rebuffed. The reason, strangely enough, was not its poor performance but the opposite. If its profitability had become a matter of discussion, it may have been forced to reduce charges and that may have affected its expansion plans. But even today, while NSE has grown into a near-monopoly, nobody questions its various fees, charges and levies on brokers.
Similarly, the NSDL, originally promoted by the NSE, decides for itself what disclosures to make. Until recently, its other activities (the ones not under Sebi regulation) were not even mentioned on its website and it has always been stubbornly cagey on disclosing details about the extent and nature of its insurance cover.
Similarly, IL&FS also began to disclose its financial, shareholders and project positions on its website only fairly recently.
In each case, a tiny management group is fully in charge of decisions and appointments. Ironically, where there are no independent directors, even the stakeholder directors sometimes plead helplessness about asking tough questions or demanding changes.
It is unclear whether this is mutual accommodation—“I don’t question your decisions too closely and you don’t question mine.” Indeed, if one company gets its board to agree to a hike in remuneration, it is only a matter of time before others follow.
The depositories’ scandal and the reaction to Sebi’s investigation has raised the very first doubts and questions about independence and accountability of these institutions, especially since a couple of these are near-monopolies. The depositories even operate under their own statute and are not even fully accountable to the capital market regulator. Is this healthy in the long run? Is the current supervision structure and occasional questions by a standing committee of Parliament adequate to ensure fiduciary responsibility? Or should Sebi have more of a say in demanding disclosures, making appointments?
Many would say, don’t try to fix something that ain’t broke. But that, I believe, must depend on the willingness of these institutions to adopt the same level of accountability and transparency in decision-making as the listed entities whose disclosure they monitor.