The amount of money RBI ends up pumping into or sucking out of the market through any open market operation is usually less than 1% of the total broad money supply in the economy. But it works to give a direction to the market as banks and others read the signals carefully. The same goes for a regulator like the Securities and Exchange Board of India. It does not need, and neither does it have, the authority to clap offenders away in irons, but when it imposes a puny fine of R25 lakh on companies and brokers, the lesson is salutary.
In other words, the tap from the regulators for white collar crimes is based on the authority they command from those whom they supervise. The authority, in turn, takes years to develop through a carefully cultivated array of decisions, which are backed fully by the government of the day. That equation has got strongly impacted by the current spate of troubles at Sebi. The possible loss of authority will hurt most the retail investors of the country and consequently their faith in the ability of the market regulator to take upon itself the role of an unbiased referee vis-a-vis corporate shenanigans.
Controversies around Sebi are, however, not new. Each market scam since the 1993 Harshad Mehta one has created a demand for removing the then head of Sebi. From GV Ramakrishna to
M Damodaran, every chief has realised how hot the corner office at the market regulator is. But this is the first time, where two successive chiefs, CB Bhave and UK Sinha are in trouble apparently for things that have little to do with any market scams. Indeed, the markets are doing fine. Rather their troubles are related to the way they have gone after corporate wrongdoings or prevented them. This is where the government has possibly failed to support them.
At a time when there is a huge amount of informed discussion in the media on the over-arching role of corporates (for instance, should they enter the banking space), this is a serious perception problem. But the responsibility for the matters to have come to such a head mostly lies with the way the finance ministry has handled relations with the regulators in the past couple of years.
The current spate of accusations made by former Sebi member KM Abraham against the ministry in particular, accusing it of taking sides in corporate issues and the response by Sebi chief UK Sinha, can be traced back to Pranab Mukherjee?s handling of the Sebi-Irda spat of 2010. Differences between regulators on the territory they cover are not unusual in economic literature. But the Sebi-Irda spat was singular for India as it was the first time when two financial regulators differed publicly. At that point, instead of intervening, the finance ministry strangely asked them to sort it out through a court battle. There is no reason, and certainly no precedent, in India why the courts needed to come into the issue at all, especially as successive finance ministers have assured Parliament that there is a high level committee on capital markets where all regulators are represented to sort out any differences.
To make matters worse, Mukherjee then decided to issue an ordinance, following it up with an order to settle the dispute. The ordinance was immediately objected to by RBI as it constituted a new financial sector development council to be headed by the minister. To settle this new row, the ordinance was modified to set up a sub-committee under the rubric of the council to be headed by the RBI Governor, which was in essence a reinstatement of the high level committee. The embers from that spat still linger. The latest is the emerging differences between Irda and Pfrda over which of them should regulate the pension market. It does not help that in the finance ministry, Pfrda and Sebi are under the secretary, economic affairs while RBI and Irda work with the secretary, financial services.
The loss of credibility hurt Sebi. The subsequent leaks of ministry file notings over the tenure of Bhave and Sebi members showed up the differences. Some of the companies that were to be hauled up promptly tapped these differences to try to save themselves. The issue was complicated as around the same time NSE?s numero uno position in the equity market was sought to be challenged by MCX, where again going by Abraham?s letter there are serious differences between the ministry and Sebi. That case, incidentally, is up for judgment in the courts next week.
The Abraham letters basically revolve around this fundamental issue, viz whether Sebi?s ability to glare at corporate wrongdoers has got eroded.
Unlike other ministries, finance has had a long history of dealing with regulators. But as the setting up of the FSDC shows, in recent years it has tended to forget that history. The root of the problem lies there. That it has to face Parliament is no reason why it should usurp the role of the regulators. The government must only govern, leaving it to the regulators to resolve issues among those regulated.
As far as Abraham?s accusations are concerned, there is no way they can be dismissed as trivial. If they are, there is no reason why the Sebi chief was asked to respond to them by the finance ministry and why the finance ministry in turn decided to issue a long release. Each of the Sebi members wield quasi-judicial authority and to dismiss their statements regarding some of the orders passed by them, would put under question the orders too. Surely that cannot be the government?s intention.
Instead, the best course is to put every file on the issues in the domain of an investigating authority. That authority should ideally be the sub-committee of FSDC, where the Sebi chairman could recuse himself. This body has the eminence and the understanding of the financial sector that not even the CVC has, to come to a considered decision. It will also bring the clock back to where it all began, for retail investors to believe sanity has been restored in the conduct of the financial markets.
subhomoy.bhattacharjee@expressindia.com
