Is Sebi’s Autonomy Under Threat?

Image: Dinesh Krishnan

CB Bhave, Former Chairman, SEBI

A public interest litigation (PIL) filed in the Supreme Court is threatening to snowball into an embarrassing controversy for the government and deepen rifts between the current and former finance minister. The PIL has reignited the question of the Securities and Exchange Board of India’s (Sebi) autonomy and alleges ministerial interference in key appointments and investigations on behalf of high-profile corporate houses.

The PIL, filed by former Chief of Air Staff S. Krishnaswamy, former top cop Julio Ribeiro, and former joint director of CBI (Central Bureau of Investigation) B.R. Lall, says that the finance ministry has systematically tried to control the regulator by twisting rules of appointment of top officials, including the chairman. They have asked the court to quash the appointment of U.K. Sinha as Sebi chairman. They have pointed out that the finance ministry did not extend the tenure of previous chairman, C.B. Bhave, in spite of him having been eligible and then changed the appointment procedure to get U.K. Sinha selected.

In a rebuttal filed in court on Friday, that indirectly even questions the process of Bhave’s appointment as chairman, the ministry says Bhave was not asked to stay on longer because Sebi was gathering flak in the media for “protecting its chief” in a case relating to NSDL (National Securities Depository Limited)when it was headed by him.

“On or about the same time that the finance minister approved the committee proposal in November 2009, serious controversies broke out with regard to the entire NSDL issue relating to the IPO scam during which period Mr. C.B. Bhave was the CMD of NSDL,” the ministry says.  

On December 15, 2009, when the file was placed before Finance Minister Pranab Mukherjee regarding the NSDL issue coming up before the board of SEBI, it contained some of the relevant documents including the press reports and a letter from Dr. Mohan Gopal, it says. “This letter contained serious allegations in relation to NSDL and the role of Mr. Bhave and the attempt on the part of SEBI as an institution to ring fence the Chairman despite his complicity,” the ministry says. Gopal, along with former RBI deputy governor V. Leeladhar, were a special committee appointed by the Sebi board to look into the NSDL issue. It says the finance minister stopped the extension at that point of time as he was fully aware of the controversy with regard to Bhave but chose not to make adverse remarks on the file.

Speaking to Forbes India over telephone from his residence in Pune on Saturday, Bhave said that it appears like an effort to malign him. “The affidavit is full of selective information. It does not even mention a letter I wrote to the finance minister and the prime minister in which I had stated my position clearly,” Bhave said.

Forbes India accessed the file relating to the extension for Bhave using RTI (Right to Information Act). Official notings show that the file was with the advisor to the finance minister until December 21 but the affidavit says it was placed before the finance minister on December 15. On that day, C.K.G. Nair, then a director in the ministry has noted, “As desired, file is submitted for the perusal of advisor to FM.” Advisor to finance minister, Omita Paul, submits the file to the minister on December 21 with a note: “FM may kindly take note on page 22 ante regarding the composition of the Sebi board and present tenures of the chairman and W.T.Ds [whole time directors] of the board.”

The Sebi board was meeting the next day. It reviewed the issue of corporate governance and ownership structures of stock exchanges and decided to mandate a minimum net worth requirement of Rs. 100 crore on new stock exchanges. It also discussed the NSDL issue, among other things. On the same day, finance minister closed the door for Bhave writing: “The present tenure of the chairman Sebi is up to February 2011. The tenures of other three whole time members extend beyond middle of 2011. The appropriate time to move the ACC [Appointments Committee of the Cabinet] for any extension will be six months before the end of existing tenures. No further action is required at this stage.”

Mukherjee had already approved Bhave’s extension and the ministry had written for ACC approval exactly a month before. It is, however, not clear why the ACC had not moved for a month. The ministry, in fact, did not withdraw the application until mid-January.

The ministry also says that whole-time member K.M. Abraham failed to get permission from it or the ministry of personnel and training, which is administratively responsible for bureaucrats, before buying an apartment at concessional rate. According to a former bureaucrat, no rule insists that he had to take permission from any ministry before buying the flat. He merely needed to inform Sebi as well as his parent cadre of Kerala, which he did. The government also was informed when Abraham applied for a loan against his provident fund to finance the transaction, he says.

A government official, who has intimate knowledge of the issues involved, says that two enquiries were done, one during Bhave’s tenure and another after U.K. Sinha took over as Sebi chairman into the allegations against Abraham. Both found the transaction clean and Abraham clear of any offence.

Pranab Mukherjee and his advisor Omita Paul have reason to be miffed. In a letter to the prime minister on June 1 this year, Abraham cited several occasions on which chairman Sinha asked him to go easy on certain corporates who he was investigating for various offences. The corporate houses, he pointed out, include Reliance Industries, Sahara group, MCX-SX and Bank of Rajasthan.

Abraham writes in the letter that while discussing his own case of being personally harassed, Sinha had, on more than one occasion, said, “I know that the Lady [referring to Omita Paul, Advisor to the Union Finance Minister] is behind this.” Sinha also apparently referred to Julka (referring to additional secretary Bimal Julka) as the “schemer” and Thomas (referring to joint secretary Thomas Mathew) as the “executor”. He quotes Sinha as saying, “There is no single person there to whom one can talk – first one has to convince Thomas, then Julka and then finally the Lady.”

The ministry says that Abraham wrote the letter because he was denied an extension even though he tried to get one. It does not elaborate Abraham’s efforts to get an extension. It also said that Bhave made an improper recommendation to make Abraham the director of the National Institute of Stock Markets. Bhave told Forbes India that he did not make any such recommendation. According to him, he thought it best the next chairman took the decision as he had only a few days left in the position. “I didn’t need to give him (Abraham) any recommendation. If I wanted to make him the director, I could have just appointed him. Nobody could have stopped it,” he said.

As allegations and counter allegations fly, the issue is likely to gather steam in the coming days as the Supreme Court hears both parties. Turning down the finance ministry’s request to throw out the PIL, the chief justice had remarked that the court was well aware of what was going on in Sebi.