Petition against Sebi: The Case of the Curious Litigation  

November 28, 2011

The PIL on top SEBI appointments raises too many questions

Sucheta Dalal

On 21st November, the Supreme Court dismissed as withdrawn (for the second time) one of the most bizarre public interest litigations (PILs) one has come across. It was regarding the selection process for the post of the chairman and whole-time members (WTMs) of the Securities and Exchange Board of India (SEBI).

The PIL was filed by a very eminent trio—former air chief marshal S Krishnaswamy, India’s ‘super cop’ Julio Rebeiro, and former joint director of the Central Bureau of Investigation (CBI) BR Lall. None of them is known to have evinced any previous serious interest in the capital market and its regulations.

Nevertheless, they seemed dead serious about SEBI’s functioning and this litigation. After all, they had filed the writ directly in the Supreme Court and also persuaded India’s former solicitor general Gopal Subramanium to represent them.

Yet, their writ has had to be ‘withdrawn’ not once but twice. The first time, the apex court asked them to remove unfounded allegations against the finance minister. The next time, the court made it clear that the badly drafted petition wasn’t going to be admitted. Instead, it gave the petitioners (probably because of their own eminence and that of their counsel) one last opportunity to plead substantive constitutional issues.

Now that the Supreme Court, as expected (by us, not other media) has seen through this, the question is: What motivated these eminent persons to file this litigation? A simple reading shows that the petitioners’ objective was extremely narrow: to get UK Sinha’s appointment as SEBI chairman annulled and probably have CB Bhave and his two WTMs—Dr KM Abraham and MS Sahoo—recalled for another two years. Towards this end, a well-orchestrated media campaign launched. The campaign stretches way back to last year when the finance ministry made it clear that it was determined to find a new chairman. Strangely, none of the journalists found it odd that the finance ministry, under another minister and team of bureaucrats, had surreptitiously tried to extend the term of the SEBI chairman and WTMs just a year after they were given a three-year term.

Stranger still is the fact that such an eminent group hadn’t done its homework about CB Bhave’s own odd, last-minute, selection for the post—a result of some quick machination. A petition about Mr Bhave’s appointment from the public interest angle would have certainly made sense then. Consider this. The finance ministry’s affidavit in response to the PIL shows there were three persons in the race for SEBI chairmanship in 2008—M Damodaran (the incumbent), UK Sinha and Jaimini Bhagwati. All three had been joint secretaries in the finance ministry’s capital market division and had a good service record.

An objective PIL on the selection process would have made sense when all three were ignored and CB Bhave (who had formally expressed his reluctance to accept the post because SEBI had slapped a charge against the National Securities Depository Ltd of which he was the founding chairman for 15 years) was appointed. Why appoint a person who would be hobbled by a ring-fence on important decisions, when equally, or more, competent alternatives were available? Dr Jaimini Bhagwati, then considered the strongest contender, has a PhD in derivatives and, more uniquely, had hands-on experience at running a derivatives desk at the World Bank. Surely, a PIL at the Supreme Court level should have done adequate homework to know that past appointments have been more capricious and arbitrary.

I also learn from an impeccable source that the ‘eminent’ petitioners didn’t even brief their counsel Gopal Subramanium before the last hearing and he ended up doing his own homework to find a constitutional peg on which to hang the shaky petition and avoid withdrawal. Unfortunately for him, it didn’t impress the bench.

Instead, Chief Justice SH Kapadia called it a ‘publicity-seeking petition’ and told the petitioners that they could come back one last time with proper pleadings based on constitutional doctrines. He also observed that ‘regulatory independence’ is a very important issue. He asked why only bureaucrats are appointed as regulators instead of considering candidates from a wider circle with domain expertise.

Unfortunately, the withdrawn petition shows what concerned the Supreme Court did not agitate the eminent citizens. After all, every single person in the shortlist when Mr Bhave was appointed was from the Indian Administrative Service (IAS). So was Dr Abraham; while MS Sahoo had earlier worked with SEBI, the National Stock Exchange and the finance ministry. But the eminent citizens who filed the PIL are clearly not worried at the capture of all regulatory agencies by bureaucrats with or without domain expertise.

What then are the issues that these citizens ought to raise to help improve the functioning of SEBI? They will find plenty, in most issues of Moneylife. In the past few years, SEBI’s failure to discharge its regulatory duties has forced ordinary investors as well as market intermediaries to approach high courts or the Competition Commission of India for redress.

After nearly five years of capricious, non-transparent orders amounting to a gross abuse of regulatory power, a group of investors has challenged the legality of SEBI’s consent order mechanism. Once the court took cognizance of the contentions, the entire consent mechanism (which was often used to bury mega-scams by paying a settlement fee) has come to a halt.

Moneylife has already reported how SEBI officials have illegally issued ‘administrative warnings’ to repeatedly let off entities involved in market manipulation, insider trading and worse. Although the SEBI Act does not allow such ‘administrative warnings’, a former executive director told us that it was done because of inadequate proof or documentation to substantiate the charges. The fact is that shoddy investigation, sloppy procedures and vanishing files are the tricks used by all corrupt investigation agencies to let off offenders.

SEBI’s failure to create fair market practices over the past two decades has caused India’s retail investor population to shrink from 20 million to 8 million (according to official studies). The exit of retail investors, victimised by mis-selling, price manipulation and poor grievance redressal, has been concealed by large foreign portfolio investment, soaring stock indices and frothy trading volumes.

The irony is that our capital market system attracts kudos from foreign investors because it works well for them. While domestic investors are harried by paperwork and KYC norms, foreign investors have no such issues. Hedge funds and India’s super-rich (with loads of unaccounted overseas funds) route it through non-transparent participatory notes (PNs) issued by foreign institutional investors (FIIs) registered in India. So each FII has hundreds of sub-accounts representing these separate investors. Moneylife has recently made the shocking discovery that SEBI regulations simply do not require each sub-account to disclose a separate permanent account number (PAN) for their transactions. In contracts, domestic Indians have to submit PANs for all transactions above Rs10,000. SEBI chairman UK Sinha has maintained complete silence over our query on this vital issue.

Clearly, the group of ‘eminent citizens’ would have served public interest far better by agitating these critical issues before the Supreme Court. Calling their petition a ‘publicity-seeking’ ploy is probably the most charitable comment on their action.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at [email protected]