On 13th April, the Securities and Exchange Board of India (SEBI) dealt a serious blow to its own credibility by seeking legal advice on whether the board has the authority to examine an order of a special bench appointed to ‘examine and dispose of’ issues relating to the National Securities Depository Ltd (NSDL). It also decided to continue suppressing the order that has been under wraps since 4 December 2008. No SEBI order, whether issued by an adjudicating officer or a whole-time board member, has ever been reviewed by the board; it could only be challenged before the Securities Appellate Tribunal (SAT).
Is SEBI opening a Pandora’s box by re-interpreting the Act merely because the two-member bench did not give a clean chit to NSDL (it actually faulted NSDL for poor supervision of depository participants)? The SEBI chairman
CB Bhave is the founding chief of NSDL and setting up the bench was a way of ring-fencing the NSDL issue. As MoneyLIFE wrote last fortnight, SEBI’s whole-time directors, who report directly to the chairman, began the process of discrediting the order by picking holes in it and claiming that the bench exceeded its mandate. But why were SEBI members sitting on judgement of an order of the bench, when their own orders are immediately published and served on market intermediaries?
If the legal expert consulted by the board agrees that the board can review the order of the two-member bench, it could have other consequences. For instance, can investors then demand that the board review many of the weak or downright dubious orders issued by SEBI’s whole-time members? Or, the instances of corporate groups involved in the Ketan Parekh scam that have been let off with a mere warning, despite a pile of hard evidence against them? There are innumerable examples where exactly the same violation has led to a hefty penalty in one case and a mere warning in another. But the SEBI board would not intervene even in the most blatant cases by taking the stand that it had no power to review such orders. This allowed SEBI’s adjudicating officers and members the extraordinary power to selectively let off certain market intermediaries and punish others heavily. If the external judicial expert opens this door, will it be a one-time action to let off CB Bhave, or will it be left open so that aggrieved investors can demand a review of dubious orders as well? If SEBI wants to hold on to its now shaky claim of transparency, it will also have to define the ‘extraordinary’ circumstances in which orders of the whole-time members or adjudicating officers can be held back, vetted, debated by the board and only then served on market players.