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Regulation: Paralysed regulators
With wrong people at the helm, distrust and lack of integrity are the norm
Sucheta Dalal
Consider some recent headlines. Chairmen of two large government insurers—Life Insurance Corporation of India (LIC) and New India Assurance—are under a cloud. The Central Vigilance Commission has issued an order against the Corporation Bank chairman. Gajendra Haldea, a senior Planning Commission official and IAS officer, has been accused of 'unethical conduct' by Vinod Dhall, chairman of the expert panel on public procurement for appending the signatures of eight members to an 'unauthorised report'.
And, worse, the new chairman of the Securities and Exchange Board of India (SEBI), instead of being a powerful market regulator and watchdog, is forced to write a 13-page letter to the government, explaining his every move, action and decision, just three months after taking over as head of the regulatory body. Why? Because an outgoing whole-time member (WTM) of the SEBI board, Dr KM Abraham, whose term was nearing an end, has chosen to hurl a series of allegations against the incoming chairman. Incidentally, Dr Abraham made these allegations of 'interference' with his work while pushing hard for a two-year extension at SEBI, or at the least, a two-year Mumbai-based sinecure at the National Institute of Securities Markets (NISM) with full perks and accommodation. CB Bhave, to whom Dr Abraham owned almost blind allegiance, is also working actively to find ways to keep him in Mumbai, after failing to clear his appointment to NISM a week before demitting office as chairman of SEBI.
(Read UK Sinha's letter to the government, here below.)
This article is not about the merits or demerits of Dr Abraham's allegations. Suffice it to say that had a journalist made such sweeping general allegations about a public official without facts, within three months of his taking office, it would have been considered hasty and vindictive. Hence, the emotional outburst from an outgoing WTM lobbying to remain in Mumbai certainly raises questions that ought to be answered. Moneylife is more concerned with the systemic implications of appointing the wrong persons in positions of authority who are then hobbled by a series of allegations. It happened with CB Bhave and is happening again with UK Sinha. Mr Abraham's allegations have ensured that the government finds no time to replace WTMs and executive directors who left SEBI soon after Mr Bhave demitted office.
Dr Abraham's charges against Mr Sinha coincide with allegations about the finance minister's top aide Omita Paul wanting to foist her brother (currently with the ministry of corporate affairs) as chief executive at UTI Mutual Fund (UTIMF) to replace Mr Sinha.
T Rowe Price, a leading US fund house which is a strategic investor in UTIMF, has serious objections to the appointment, while the three nationalised banks, which are also significant investors, are completely silent. So much for the debates and discussions on good governance and accountability!
The environment of distrust and lack of integrity is worrying because the world is facing an unprecedented economic crisis that is bound to affect us. It is a time when India needs strong political leadership and clear-headed, independent regulators and institutional heads, who can take bold and quick decisions in India's best interest. Instead, we have a government that is bumbling and clueless on most issues: whether it is the Anna Hazare-led agitation, tackling the corruption monster, the demand to bring back black money stashed overseas or to push economic reform and infrastructure development without permitting the neta-babu-businessmen nexus to plunder national resources such as land, iron ore or coal.
As Moneylife has often argued, the crisis begins at the top. The prime minister (PM) already stands accused of disregarding warnings and doing nothing to prevent the loot in the name of the Commonwealth Games (CWG) or telecom licences. He did nothing about the orgy of excesses at Air India by Praful Patel who removed an efficient chairman like Sunil Arora so that he could launch a series of destructive actions including the ill-conceived merger of Air India and Indian Airlines and the reckless purchase of new aircraft even while prized international routes were being given away to foreign carriers.
Let's turn our attention to the capital market. Structurally, 20 years of liberalisation has driven away retail investors and reduced their strength from 20 million to 8 million (including mutual fund investors). At no time has the finance ministry or SEBI engaged with stakeholders and investors to understand how they were affected by the frequent regulatory changes and the mindless push for automation, without checking whether domestic investors were able to keep pace with the change. Our regulators and intermediaries, such as the National Stock Exchange of India (NSE) and National Securities Depository Ltd (NSDL), worked at giving foreign institutional investors the ability to trade smoothly and seamlessly. It ensured a gush of foreign investment, sharp rise in trading volumes, soaring stock indices and bigger paycheques for those involved.
Retail investors, however, struggled to cope with the changed environment and ill-conceived regulatory changes. Starting with biometric identification MAPIN (market participant identification number), which was dropped after a huge controversy, to repeated KYC (know your customer) formalities for mutual funds, or the anger about high demat costs, pressure to open multiple demat accounts, one-sided power of attorney signed with brokers and losses due to poor portfolio management, were factors that put off investors. Others exited after being lured by the false promises by brokerage houses of 'safe and guaranteed' returns through speculative trades. Poor grievance redressal, difficult transmission of shares and having to keep paying for unlisted, demat stocks, are issues that remain unresolved even today. No SEBI chairman has bothered with these issues because neither the SEBI board, nor the finance ministry or the standing committee of Parliament has held them accountable for the exodus of retail investors from the capital market.
In the absence of significant retail investment, domestic mutual funds have not registered a strong presence with stable, long-term investors. They depend on corporate debt investment which is largely inclined toward liquid funds. After the collapse and split of Unit Trust of India (UTI) in the year 2000, public sector insurance behemoths—LIC and, to a lesser extent, the General Insurance Corporation—and private insurers are the only long-term domestic investors in the market.
So consider the situation. We have to face a global crisis; but the SEBI chairman is on the backfoot less than six months into the job; he has only one WTM and is still to replace three key executive directors. New India Assurance, LIC and UTIMF are headless. The finance ministry, which is also under a cloud, has decided that making no appointments is the safest path. The only exception to this bleak picture is the decision to grant a two-year extension to the Reserve Bank of India governor Dr D Subbarao in order to ensure continuity and stability. But it is safe to bet that the decision was mainly due to the PM's advisor, Dr C Rangarajan, who is also Dr Subbarao's mentor.
Given the situation, if the global economic scenario worsens and India needs to take some quick decisions, we can be sure that the government will make a hash of its handling, exactly the way it has done with the Anna Hazare-led protest against corruption. And that is a frightening thought.
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]