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Down and Out
An account of sebi's undoing under D.R. Mehta and the tasks for a new team that will be at the helm in the regulatory body early next year.

ECONOMY: SEBI

Down And Out

An account of the market regulator's undoing under D.R. Mehta and the tasks before the new team that will be at the helm early next year

By Vivek Law

David, the security guard on the first floor of Mittal Court B Wing at Nariman Point in Mumbai wears a bored look these days. The stream of journalists that trickled throughout the day has abruptly stopped. He can't figure out why. Inside, SEBI Chairman Devendra Raj Mehta is counting days. "One hundred and twenty-one days to go," he says. "Ask me tomorrow and I will tell you there are 120 days left," he told India Today in the last week of October. The usually hyper-energetic Mehta looks tired and defeated. Like him, SEBI, an organisation he would have run for seven years when he steps down on February 22 next year, is demoralised, its credibility in running the country's capital markets severely dented.

The crisis of confidence did not strike suddenly. In fact, SEBI's journey to ignominy is a result of a series of failures over the past decade. As its longest serving chairman, Mehta has to share the blame for some of the failures. With the hunt for a new SEBI chief on and an organisational overhaul on the cards, it's important to find out what went wrong with India's first regulator. Why did the capital market watchdog not even whine when unscrupulous brokers and financiers repeatedly took investors for a ride?

A major allegation against Mehta is that he seldom acted on his own. It took either a government fiat or a scam for SEBI to act. Be it Ketan Parekh and his associates diverting thousands of crores of rupees to rig the prices of some scrips or the rampant misuse of badla (the system of carrying forward a transaction by paying interest on the outstanding) at the CSE that eventually triggered payment problems across other exchanges, SEBI slept through most major capital market crises. Mehta resisted the introduction of rolling settlements which would have brought down the trading cycle to a day and ensured a uniform trading cycle in all stock exchanges. Rolling settlements would have killed badla and Mehta was not keen to perform the last rites of the age-old carryforward instrument.

Mehta was also opposed to derivatives (products that allow speculators to take a bet on the future price of a stock), though formally he maintained his commitment. As a result, futures and options trading could be launched only last year, instead of 1996 when it was first proposed. "By resisting rolling settlements and derivatives, Mehta ensured that critical reforms in the markets were stalled," says a senior capital market functionary. There are many who feel that SEBI did not back modernisation to the extent it should have. Says Ajay Shah, assistant professor at the Indira Gandhi Institute of Development Research: "If SEBI had shown the vision to go ahead with rolling settlements and derivatives in 1996, a lot of the problems the markets have faced today would not have happened."

It took a scam in March for the finance minister to announce the introduction of rolling settlements in Parliament. Under pressure from the Government, Mehta banned badla. Around the same time, allegations about the UTI's role in propping up Ketan Parekh's favourite shares were flying thick and fast. But SEBI refused to look into the UTI's transactions, with Mehta claiming that the UTI did not come under the regulator's purview. He forgot, perhaps, that any transaction in the capital markets can be scrutinised by SEBI and even individuals who are not registered with it can be probed for insider trading or price rigging.

By this time, SEBI's credibility had taken a hit and the action had shifted from Mittal Court in Mumbai to North Block in Delhi. With the Government tightening the screws on SEBI, the watchdog sacked broker directors at BSE and CSE, announced action against BPL, Sterlite, Videocon and Harshad Mehta, and barred broking outfits suspected of involvement in the scam from trading. However, the tough measures had come too late.

SEBI also failed to check the problem of companies raising money from the public and then vanishing. "It took SEBI and the Department of Company Affairs three years to decide who would take action against vanishing companies," says Prithvi Haldea, primary market expert who is also on SEBI's Primary Market Committee. Interestingly, this committee has not met for a year.

To be fair, some of SEBI's failures are rooted in the law that governs the regulator. Unlike in the US where the regulator investigates a case and then hands over the matter to a judicial authority, in India SEBI does everything on its own. It's a situation where the policeman framing the charges and the judge deciding the case is the same person. "We never wanted to be the policeman and the judge. In fact, half the problems arose because of this," says Mehta. Still, repeated pleas for amending the SEBI Act have gone unheeded. The question is not whether SEBI has enough powers but whether it has the right powers. As Mehta points out, many of the orders passed by SEBI are struck down by courts. "What do we do? How do we take action?" he asks.

Another flaw in the working of SEBI is that there are no full-time board members. This gives the SEBI chairman overriding powers, something many people feel can be dangerous. Mehta, who can't help but feel victimised, says the real issues have been marginalised. "We only highlight individuals and never issues. Take the case of a multiplicity of regulators. There are overlaps which are taken advantage of. If the country's capital markets are to be regulated properly this issue will have to be resolved," he argues.

Internally, SEBI has had a brain drain. Its top was packed with IAS and Revenue Department officials, which created dissent among the cadre. The grumbles snowballed into charges of favouritism and corruption. A number of young professionals quit SEBI to move over to higher salaries at FIIs. After the scam, the Government woke up and refused to give further extensions to officials on deputation. But Mehta asked for three more deputationists to replace those who had gone back. Nothing changed, much to the demoralisation of the staff.

SEBI hasn't been able to effectively use technology for market surveillance. Even though price movements can be monitored to detect an inordinate rise in a scrip's price, SEBI officials are dependant on exchanges for transaction details. "If regulators want to take out human discretion, they must rely more and more on technology," says Jayanth Varma, professor at IIM Ahmedabad and former SEBI member. Nor could SEBI do anything to prevent insider trading. Corporate disclosure is the best weapon against insider trading. But an online filing system, in which companies disclose every information of relevance to investors on the Internet, has been floundering for over a year. SEBI did enhance disclosures through a committee. But very little action has been taken against companies which have failed to disclose.

Mehta defends himself by reeling out a list of measures he took as chairman and the reforms he introduced during his tenure. The issue, however, is not about what has been done, but about what hasn't been done. And this is a question the person who steps into Mehta's shoes on February 23 next year will have to answer.

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