Towards transparency

To insulate from government interference, chiefs of regulatory bodies need to be confirmed by parliamentary committees

By Mohan Sule

Even as India was riveted by the tug-of-war in the political capital between the government and anticorruption crusaders over creating a watchdog to monitor those in places high and low, another equally riveting drama continued to unfold with its twists and turns in the financial capital. The first act began as the three-year tenure of the then Securities and Exchange Board of India chairman, C B Bhave, was winding up. A whisper campaign referred to his stint at the National Securities Depository, one of the two repositories of investors’ demat shares. Hundreds of fake demat accounts were discovered in June 2005 to overcome the proportionate allotment system: more the number of shares applied for, higher the chances of allotment. Another obstacle for some retail investors was the Rs 1-lakh ceiling, now raised to Rs 2 lakh, on investment in the primary market. Nonetheless, the then finance minister, P Chidamabaram, sought out the NSDL boss to head the capital market regulator early 2008. Bhave went on to lead Sebi for the next three years with aplomb, executing many investor-friendly reforms. A year prior to the expiry of his tenure, the new finance minister, Pranab Mukherjee, even proposed extending his term for another two years in accordance with the new norm of granting a five-year course to chiefs of autonomous bodies. Suddenly, well into his last year, allegations about Bhave’s role, though he had recused himself from the decision, in suppressing a Sebi probe into NSDL sprung up.

In the meantime, the Sebi chief got into a spat with insurance companies for selling unit-linked insurance plans, or Ulips, with characteristics similar to mutual fund products, antagonised the mutual fund industry by banning commission to distributors disguised as entry loads, invited the ire of the ambitious promoters of commodity exchange MCX by exposing their plan to start an equity trading bourse without sticking to ownership parameters, and brought big players such as RIL, the ADAG and the Sahara group under the regulatory scanner. Eventually, the finance minister announced the appointment of a super financial regulator under his chair whose apparent purpose is to coordinate between the various regulators such as the Reserve Bank of India, the Insurance Regulatory Development Authority of India and Sebi to avoid turf wars. Initially, the antipathy towards Bhave did seem a genuine outlet of outrage against the double standards adopted by Sebi in dealing with an entity, which was headed by him earlier, and other market players and issuers. At the same time, events unfolding at UTI, whose boss was the replacement for the departing Bhave at Sebi, necessitated fresh examination of the timing and motivation of the campaign against Bhave. T Rowe Pice, the single largest shareholder of UTI, complained that a finance ministry bureaucrat was holding up the appointment of its nominee to head the mutual fund in favour of a relative. The same official had blithely retorted to the finance minister a year ago that it was too early to consider the proposal to extend Bhave’s term. Subsequently, one of the retiring members of Sebi has accused the finance ministry of interference and harassment through tax evasion investigation.

One of the major acts of the new Sebi boss was to bring back the entry load as a flat fee of Rs 150 for investment above Rs 10000 per scheme. An upfront fee is a better option than charges embedded in the subscription. Yet, it raises questions. Will this amount, constituting 1.5% of the eligible threshold, incentivise distributors to sell products for a lower subscription? The fee will be negligible for higher investments, implying that the structure will benefit high networth investors. The new takeover code too seems to be sensitive to promoters’ concern of lack of bank finances for takeovers by raising the minimum open offer size by a marginal six percentage points rather than addressing the anxiety of the minority shareholders of getting stuck in an illiquid counter. Meanwhile, the banking industry is set to be opened to industry houses despite protest from the RBI governor. At a time when accountability of lawmakers and law dispensers is occupying center stage, it seems appropriate to review the process of selecting heads of regulatory bodies. The government’s appointments need to be ratified by a parliamentary committee through televised hearings to allow the nation to understand their guiding philosophy. This way, they would derive power from the people and do what is right for the people whose interests they are supposed to safeguard. Also, it would avoid energy-sapping controversies like those that dogged Bhave as these could be dealt with during the confirmation hearings so that the incumbent is free to carry out his responsibilities, unburdened by past calls.

Mohan Sule