by C. B. Bhave.
Thank you, Bangalore International Centre, for the invitation.
I joined SEBI in 1992. SEBI was given statutory status in that year
and was facing huge hostility from brokers. They thought that their
freedom would now be curbed by the new regulator. In any case, they
did not think that SEBI knew anything about the markets. Some parts of
Government were also hostile to SEBI since they thought that their
turf was being encroached upon. In 2014, SEBI is a respected regulator
nationally as well as internationally. You must have recently read
that according to a study carried out by IOSCO and BIS, Financial
market regulation in India was rated among the top 6 in a study of 27
top markets.
In 1996, I quit SEBI and the administrative service to set up NSDL -
a depository for keeping share ownership records electronically and
for facilitating easy settlements. In 1998, the magazine Global
Custodian described the Indian market settlement system as the
worst in the world (in a study of more than 80 markets) but facing
stiff competition from the Russian market for the last place! By 2001,
the same magazine placed India in the top 10 markets in the
world. These rankings are in sharp contrast to India generally being
placed between 100-120 when 150 countries are compared internationally
whether it be on health parameters or on poverty or on corruption. The
examples of SEBI and NSDL show that we don’t always have to be among
the worst, even though we may be starting there. SEBI’s journey from
being a fledgling institution to an internationally respected
regulator is both fascinating and instructive. It tells us first and
foremost that notwithstanding the enormous challenges, reform and
overhaul of huge structures is possible in India.
It appears to me that our resistance to change is on account of our
being a risk averse society. We are quick to agree that the existing
state of affairs in a given area is no good, but each suggestion for
change meets with such a multitude of objections that the status
quo appears to be the best option. We need to develop tolerance
for failure. By trying to keep away from failure, we miss out on
valuable learning. We overdo this to an extent that we lose faith in
ourselves. We persuade others as well to lose faith in us.
In 1996, I made the decision to give up the administrative service
and set up NSDL, the depository. It was an exciting challenge and it
was crucial to further reforms in the market. It is amusing to recall
what people said to me then. There were many who believed that the
depository would fail in India. The conversation would run like this:
"The US and Europe have depositories: we cannot be compared with them. That is
a developed world. Singapore has a depository: Oh, it is also more
developed and is just a city-state. Even Sri Lanka has a
depository. It is a developing country. Yes, but it is again just a
small island nation. China is setting up a depository. Where does
China have democracy? How can you compare China and India?"
India seemed to be in a peculiar place where the problems
associated with paper certificates could not be handled. At least do
not give up the Service was the last argument. I had a problem
there. If the depository was so likely to fail, how would I carry any
conviction with the people I was to recruit? Would they be comfortable
with a boss who had a safe harbor or one who would sail and sink with
them? I had to burn my boats. The irony was that these were my well
wishers telling me why the depository would not work. We, in India
believe that we have a problem for every solution. There is a lot of
truth in this humour. There is hope, however. Young people are an
exception by and large. The India we see today is different from the
India of 1996. We seem to be well on our way to `can do' from a
position of `cannot happen'.
In July 1993, I was invited to a seminar to be on a panel that was
to discuss some fundamental changes that the panelists expected to see
in their respective areas. One CMD of a nationalised bank was
presiding over the panel. I was the last person on the panel before
lunch. As is usual in our seminars, I had very little time because
earlier panelists had been generous with their interpretation of the
time allotted to them. NSE was expected to start its operations that
year and automation of trading was, to my mind the most exciting thing
that would change the shape of things in the capital market. I was
barely five minutes into describing the changes and the presiding
officer declared that I needed to wind up in the next two minutes. I
was disappointed but wound up saying that time does not permit me to
say more. While the rest of the audience and the speakers made their
way to lunch, a group of 15-20 youngsters sat me down and said they
wanted me to complete what I was saying and wanted to interact with
me. There is hope in the young.
Let me give you another example of how young minds work. We needed
to set up our mainframe in September 1996 in order to meet our
deadline of starting depository operations in November 1996. This was
to be done in a building that was still incomplete. We needed to take
the mainframe to the fourth floor. The lift was installed but did not
have the lift inspector’s permission to be made operative. We did not
want to bribe anyone. The mainframe could not be carried via the
staircase. Youngsters in NSDL found a solution. We operated the lift
mechanically to load the mainframe. We did not break the law and yet
kept to our principle.
Reform can be a long and painstaking process. It is almost never a
one shot exercise. SEBI identified `Badla' (a particular method of
carrying forward the settlement of a trade by getting a lender to
intervene) as one of the structural issues in the trading system in
India. SEBI’s initial attempts to do away with Badla met with fierce
resistance. So much so that the then SEBI Chairman was moved out!
Badla was eventually reintroduced. Most people thought that the issue
had been buried forever. It appeared that there would be no way that
the Indian Market would ever be rid of Badla. However, there were many
reasons why the Badla system was popular. These related to lack of
many other legitimate facilities needed in the market. SEBI kept
working on these issues. Finally, when Badla was done away with eight
years later, there was hardly any murmur. Reforms need
persistence.
The proponent of a new idea must take into account the reasons why
the existing idea came about in the first place. It may have come into
place because something else did not work. These linkages are
important. If we act to take care of those aspects as well, reform
will be so much the easier. Our market used to have very long
settlement periods. Long settlement periods introduce avoidable risk
in the market. Despite SEBI’s best efforts we found that delays could
not be reduced to less than ten days. A modern depository system was a
must before any further reduction could be attempted. Today India has
a settlement system that matches with the best in the world. There are
less than ten countries in the world that settle as fast as the Indian
Market.
In capital market regulation, the regulators find that they will
not hear the voice of the retail investors unless the regulator makes
a specific attempt to hear them. The big corporations have access to
media and the powers that be. They can make sure that their
difficulties reach your ears. The intermediaries and the institutional
investors are similarly placed. If special efforts are not made to
reach out to non-institutional investors, there is a danger of missing
out an important piece. This is a difficult job. The non-institutional
investors are not very well organized. There are investor associations
that serve as a fair proxy for this work. It can sometimes be a
thankless job. If, in the process of securing the interests of
investors, market intermediaries are hurt, you can face a lot of
criticism and voices would be so loud that it would appear that your
judgment was altogether wrong. It is important not only to stand firm
but communicate your view effectively.
Acting for investors can be a difficult task sometimes. Let us say
I am serving one lakh clients and I find a clever way of charging my
clients Rs. 10 extra every month. The clients do not feel the pinch of
that extra money and if I am clever they do not even know about it. In
any case what does Rs 10 buy today? But my gain is Rs 10 lakhs a
month. Now if a regulator comes along and stops this practice, I have
a huge incentive to cry foul. I would brand the regulator market
unfriendly, would advise it not to interfere in small matters and
focus on issues of policy. What is the incentive for the man who
gained Rs 10 to argue the opposite? Very little. So this may appear a
thankless thing to do. Regulators need the will to go the extra mile
and do it all the same. When we questioned banks about the float money
in IPOs and tried to eliminate it, the situation was similar.
The intermediaries act as agents of investors. One would imagine
that their interests would be aligned. That need not be the case. The
regulator has to be alert to this. Once interests are misaligned,
there will be mis-selling. Brokers routinely take the power of
attorney from clients to trade in the clients' account and to debit
their accounts when required. The broker gives an incentive fee to his
employee based on the brokerage revenue generated by the employee. It
is easier to maximise brokerage by churning a client portfolio, than
by acquiring new clients and convincing them to invest in the
market. This is not in the client’s interest. One might argue that
regulators should not micro-manage by getting into the nitty gritty of
incentive structures of the employees of an intermediary. It is a
good argument, but fails to address the issue of misaligned
interests. If the regulator does not address this issue, there is
little chance that investors will be able to do much about it.
At times there is confusion about the role of agents. Let us look
at mutual fund agents. Whose agents are they? They are agents of the
fund manager because they earn their commission from the fund manager
and the fund manager appoints them. They claim that they are also
agents of the investor because they give advice to the investor on the
appropriate scheme to invest in. But the investor does not appoint
them nor does the investor control their payment on the basis of
quality or quantity of service delivered. When you are the agent of
both the investor and the fund manager, and the fund manager has
appointed you, in whose interest will you act? It was clear that the
whole theory of the agents acting in the interest of investors was
just a theory. When SEBI abolished the entry load, we faced criticism
even to the extent that we were killing the mutual fund industry. We
had thousands of schemes, and constantly new schemes were being
floated. This whole operation definitely worked well for the agents
and the fund managers. It was not in the interest of the investors.
It was like churning a client portfolio for generating
brokerage.
One of the lessons we learned in NSDL was that changes like a
depository system affect different elements in the market in varying
ways. Unless one listens to these carefully and understands the
affected party, we may end up with wrong answers. We used to address
investors seminars all over the country to explain demat to them. One
question used to come up frequently: "If your system is good and will
provide excellent audit trail, why will people who have bought shares
with unaccounted money join you?" Our initial reply used to be that we
were setting up the system for law-abiding citizens of the country. We
did not care if people who employed unaccounted money could not use
the system. This reply satisfied us but some how did not seem to
satisfy the audience though they would keep quiet. We decided we
needed a better answer. We brainstormed. Our reply in the next seminar
was that if all people with clean money came to the depository the tax
department will just have to ask the companies the list of those
shareholders who still have shares in paper form. They would be
sitting ducks. This drove the point home. One has to speak the
language of the consumer to win him over.
We quickly realized that while implementing such a large scale
system you cannot achieve your ultimate goals by following a
predetermined path. While you need to have an idea of how you intend
to get to your goal, you must have the flexibility and humility to
change course. On reaching one lakh accounts, when we analysed the
pincodes in the addresses of the investors, we found that a vast
majority was from Kerala. This was counterintuitive. Mumbai or the
state of Gujarat would have been the logical candidates. We realised
the reason. We changed the language of our literature and seminars
from being merely in English to Hindi and eight regional languages as
well. In a couple of years the balance was restored.
The moneyed and the powerful form a cozy club in India. The first
rule is that you should mouth the principle of equality before law but
must understand that this does not apply to the members of this
club. If you act tough with small fry, there will be all round
appreciation. If you, however, try to enforce the rule of law on the
members of this club, there will be public appreciation and private
anger. Retribution will follow. Lack of ethical values and morality in
our public life has degenerated so much in the recent decades that it
threatens our very core. Citing examples of aberrant behavior in other
countries is just fooling ourselves to believe that here the problem
is not all that severe. Earlier the unethical needed a place to
hide. They carried out their activities covertly. Now, any talk of
morality or ethics is seen as a mere fetish, an impractical virtue, an
impediment in the path of the getting things done. It is not just
that. We first transited from tolerating the corrupt to tolerating the
honest. The corrupt are now saying that the honest are too much of a
nuisance in this cozy world of give and take. Let us harass the
honest. Even if they are foolish enough to fight back and win, the
dishonest would still have achieved their goal. After seeing the
harassment caused to these honest people, they hope that the
succeeding people will not entertain any thoughts of behaving in this
odd honest manner, Am I exaggerating? No. Things are so bad
that one of the Supreme Court judges who recently retired had this to
say:
There are matters pending with the court, but the
pressure, tension and strain both of us have undergone is
unimaginable. I can't explain. The pressure was reflected on my wife
and family. I can't speak much on the Sahara case.
What would one's reaction be, when one hears this? We would be
shocked, horrified and wonder `How dare anyone do such things vis-a-vis
a Supreme Court judge?' Not one eminent lawyer. His comment was that
the judge should not have said this!
A two judge bench had delivered a judgment in that case just a few
days prior to
this. The entire
judgment is instructive and should be read in full. I am just
referring to para 147 of the judgment:
The number of similar litigants, as the parties in this
group of cases, is on the increase. They derive their strength from
abuse of the legal process. Counsel are available, if the litigant is
willing to pay their fee. Their percentage is slightly higher at the
lower levels of the judicial hierarchy, and almost non-existent at
the level of the Supreme Court. One wonders, what is it, that a Judge
should be made of, to deal with such litigants, who have nothing to
lose. What is the level of merit, grit and composure required, to
stand up to the pressures of today’s litigants? What is it, that is
needed to bear the affront, scorn and ridicule hurled at officers
presiding over Courts? Surely one would need superhumans to handle
the emerging pressures on the judicial system. The resultant duress
is grueling. One would hope for support for officers presiding over
Courts, from the legal fraternity, as also, from the superior
judiciary upto the highest level. Then and only then, will it be
possible to maintain equilibrium, essential to deal with complicated
disputations, which arise for determination all the time,
irrespective of the level and the stature, of the Court
concerned. And also, to deal with such litigants.
If Supreme Court judges are saying this, you can imagine the
circumstances under which regulators work.
That brings me to the point of the recent investigation launched by
the CBI regarding the license granted by SEBI to MCX-SX for running an
exchange to trade in currency derivatives. They say it is a
preliminary enquiry so there are no charges; they are merely
investigating. When I asked them what they meant by `a PE against
Bhave and Abraham', they said it is an unfortunate use of
words. Unfortunate indeed, but by whom and for whom? They leak news
all the time. The only time they have come on record is to say `Why
all this fuss when there have been no arrests or raids!' Do we expect
the citizens of a free country to protest only after they are raided
or arrested? The second statement on record is `Thousands of crores of
investor money have been swindled by MCX and it was incumbent on the
agency (CBI) to look at the very procedure of registration of MCX' by
SEBI. This is ill informed and if not ill informed then ill
intentioned. The money was lost in NSEL and not in the entity licensed
by SEBI. To date, CBI has not revealed whether they are investigating
anyone who sanctioned NSEL, the exchange in which people actually lost
those thousands of crores. What is our remedy against this arbitrary
behavior of an investigating agency? What does one do when they
publicly say that the PE is against Bhave and Abraham and privately
tell me that it is an unfortunate use of words?
I believe there is no remedy because CBI is an autonomous
investigator and no one can question them. In our effort to free CBI
from the clutches of the political executive have we gone too far and
forgotten the issue of accountability? At last count, CBI’s rate of
successful conviction on launching prosecutions is less than 5 per
cent. Who questions them about this? We cannot, in a democracy, have
an institution exercising coercive powers of the State without any
accountability. This question needs the attention of the Government as
well as the judiciary.
Is investigation and successful punishment to wrongdoers such a
difficult thing? At SEBI we found that investigation and successful
conviction is not a rocket science. Robust common sense, and an
unbiased evaluation of the material gathered, can help you reach the
right conclusion. We need to proceed not because we want to fix
someone but because the evidence is against the entity concerned. I do
not believe that competence is an issue. People can be trained. It is
usual to blame the courts: that they are unreasonably strict in terms
of the standard of proof required. That was not our experience. We did
not lose a single high profile case launched by SEBI in those
years. The inevitable conclusion is that lack of will and objectivity,
and not the lack of skill, is the problem.
With such low conviction rates, the general public has lost any
faith that the moneyed and the powerful will ever be punished. They,
therefore, rejoice when raids are conducted and arrests are made. The
society has come to see raids and arrests as a proxy for
convictions. In the process we do not realize that if the agency raids
or arrests an innocent person, he or she will also be seen as a black
sheep by all of us. A raid or an arrest is only an aid to gathering
credible evidence and not an end in itself. The agency has to be
accountable for the rationale and the timing of the raid or the
arrest. Such questions are rarely asked. The NSEL scam came out in the
open in August 2013. CBI raided NSEL in March 2014. Our anger against
the scam is such that, to us, the raid was the right thing to
happen. Nobody asked the question as to what was gained by raiding an
entity 8 months after the scam. Was CBI of the belief that the entity
would have preserved incriminating documents for full 8 months so that
CBI would discover them in a raid?
The whole system is so vitiated that pendency is used as a potent
weapon. As long as CBI is investigating something the concerned person
better not speak up, otherwise he will face the consequences. He will
be denied promotions. If it is an entity there will be no permissions
or licenses for the entity. If the government finds some officers’
honesty or outspokenness too uncomfortable, why not start a CBI
enquiry or an income tax investigation against him? The chances are
that the officer will keep shut. Attempts have been made and they
continue even today to harass my colleague Abraham. Fortunately, he
has spoken up, refusing to be cowed down. The investigation can remain
pending for months or years and no one is answerable for the
delay. Procrastinating is not only the norm today but CBI seems to be
taking it to a new level. One of the questions they have of us is `Why
did we not keep license pending when an income tax raid had been
conducted against a related entity'! They want to elevate
procrastination from a level of the tool of the timid or the crooked,
to being a virtue. They suspect criminality when you do not
procrastinate!
There is a section in the Prevention of Corruption Act that is the
cause of most of the mischief. The government's attention has been
drawn to it. There was some attempt at amending this section. Let us
hope that the newly constituted Parliament will take it up as a
priority.
Such is our fascination with raids and the details of what was
found that we do not see beyond the raid itself. About a decade ago,
there was a raid on a senior officer of the central excise
department. There were details about how much cash was found in the
raid and how it was difficult for the raiding party even to count the
cash. There was also description of the moveable and immoveable
property discovered in the raid. The officer was suspended. This is
not uncommon. We needed to go beyond that. Firms had obviously paid
off this officer for getting illegitimate concessions. How about
reviewing the major cases decided by the officer in (say) five prior
years and getting the firms to pay up what was legitimately due to the
public exchequer? I made this suggestion to who ever I could approach
in the Government. (I was not in the Government at the time). There
was no appetite for this. Why? Your guess is as good as mine. Should
we give up? I have not. I still make this suggestion to who ever will
hear me. You are my captive audience today, so I am making this point
to you.
When you are in authority and people appreciate you for meeting
them at the appointed time, when they thank you for returning their
calls and when they compliment you for your honesty and for owning up
responsibility for your decisions you might feel happy. But may I
submit to you, that these things should be a cause for deep
reflection. The first two tell you how feudal our mindset is and how
free citizens of this country still expect to be treated with disdain
by the authorities. They are surprised and thankful that normal
courtesy is extended to them! The other two make us wonder if our
expectation of ethical behavior is so low that what should be normal
behaviour is treated as a great virtue. Should public servants not
normally be honest and ready to own up responsibility?
Despite all the gloom around us there are many in the country that
have not given up. The recent appointment of the SIT on black money is
a case in point. There were some people who did not give up the idea
of bringing the tax evaders to book. They used the PIL route to get
the attention of the Supreme Court. After some dithering and a change
of Government we have an SIT in place. Notwithstanding some pundits
who have already declared that nothing worthwhile will come out of
this, I have no doubt that a process has been set in motion that will
solve at least a part of the problem.
To sum up, ladies and gentlemen, I have tried to make the following
points. The state of ethical standards and moral behavior in our
society is really down in the dumps. We are in bad shape but we do
not have to be that way. There is no reason for us to give up. Reform
and improvement is possible. The progress made by us in the area of
capital market regulation and infrastructure shows that things can be
changed dramatically. Reform is a long and painstaking process. We can
make our contribution by standing up for the right causes.
This talk was based on my own experience and observations. The
challenge was to talk about my own experience but stay focused on
ideas and issues. If I had talked merely about issues and ideas it
would have sounded like homilies. If I had talked excessively about my
own experience I would have committed the mistake of
self-projection. I have tried to achieve a balance. I leave it to you
to decide if the balance was right. Thank you for your attention.
