Long before he became Chairman of the Federal reserve, Alan Greenspan wrote in an essay on capitalism that “The guiding purpose of the government regulator is to prevent rather that to create something”.
if that’s true it makes measuring a regulator’s success tough—how do you count what has not happened.
This in someway describes why it’s tough to assess UK Sinha’s 6 year term (one 3 year term plus two extensions) as chairman of the Securities and Exchange Board of India (SEBI).
If the absence of any major scam is a measure of his success, then Sinha has done fairly well. Yes of course there were regulatory infractions, some of which BloombergQuint discussed in the interview with him, but no big rock-the-nation stuff. Not yet. Thankfully.
The more common approach, at least in India, is to assess a regulator by the new regulations and amendments he introduced. As if more regulations mean more success.
Nonetheless, since we can’t divine what didn’t happen, here’s a list of what did, at least the key highlights of the past 6 years...
- Shorter IPO timelines and merchant bank grading
- Enforcing a minimum public shareholding threshold for listed companies
- Rewriting the Insider Trading Regulations, ICDR Regulations, SECC regulations and many more
- Reworking the regulatory regime governing Foreign Portfolio Investors (FPI), P-Notes, Alternative Investment Funds (AIF)
- Cracking down on collective investment schemes
- Facilitating capital market access for small and medium enterprises (SMEs) and start-ups through specific listing platforms
- Continuing the battle against Sahara Group entities
- Overseeing the merger with FMC—the commodity market regulator
UK Sinha met BloombergQuint for an exclusive interview on his last day in office. The conversation focused less on what he did than what he didn’t and couldn’t. And why. Except for the first question.
The key highlights of the six years you spent as SEBI chairman?
One can go on and on but the main important point is - has the regulatory environment helped in enhancing the trust of investors in the market. If you look at it from that point of view, India has made good progress. And there are various indicators to point out that people have faith in the regulatory regime. Investments in various instruments have been going up. By and large, it is recognised today that the securities market in India is very well regulated. We have, for example, deliberations from the International Organisation of Securities Commissions (IOSCO) that also recognised that some of the reforms which have taken place in India have been far reaching and perhaps a starting point for some of them to follow up. My biggest satisfaction, and it happened only last week, is that Harvard Business School (HBS) has selected the work done by SEBI in the last five years as a case study and it will be taught to their students. They have come out with a very detailed report and the case study will be presented to students, it will be available to them. And our satisfaction in SEBI is that while case studies by institutes like HBS are normally done for very few selected companies, I don’t remember if they’ve done it for any other regulator anywhere in the world and more so, for any Indian regulator. So that is a matter for satisfaction and endorsement.
UK Sinha’s Toughest Challenges?
What was the most toughest, most challenging part of your job in the last six years?
There is a perception and an ongoing debate in this country on how independent a regulator is and what should be the level of interference from the government. I have said it in the past and as I am leaving, I would like to reiterate it. Successive governments have been very, very supportive of SEBI and without the government’s support, SEBI would not have been able to achieve even a fraction of what it has achieved. Whenever we required any changes in regulations or laws, we got full support from the government. If, for example, when we were dealing with the collective investment scheme (CIS) matter and we realised that there is a lacuna in the law and the law would have to be amended, in 2013 the then government came out with three rounds of ordinances and this is rather unprecedented. When the government changed and the next government came, and they were in the position to pass this law, it was one of the first things they did. So we have got full support from the government.
The question of independence of the regulator has to be taken, not at a superficial level, but at a very intensive level. And that intensive level is, what is the role of a regulator? A regulator, and especially SEBI, is created by an act of Parliament, so the regulator has independence in operational matters. But the SEBI board has representation from people in the government. So SEBI has to work within the parameters of the policy requirements of the government. For example, if the government of the day decides that there will be no minimum public shareholding in public companies, there is nothing more that SEBI can do. This is the law of the land. Take the example of foreign portfolio investors (FPIs). If the government of the day decides that there will be no inflows allowed for FPIs, there is nothing that SEBI can do. But once that policy decision has been taken, then the role of SEBI starts. As an expert body, we have full freedom to devise our regulations.
And once the regulations have been framed, the actions which are taken in specific cases...what can I say about the government interfering with me, even I can’t interfere with my investigation officers, I can't interfere with my adjudication officers, I can't interfere with my whole-time members. You'll be surprised that many orders that are passed by SEBI, I come to know of them once they have been put on the website. That is the level of independence given to our officers. So it's a wrong notion that the government of the day interferes in our work.
So the challenge you were talking of – about how the government interface has been – my opinion is that the government interface has been very, very positive. It has only helped in the strengthening the working of the SEBI.
Let me give you an example. The law of SEBI which was amended in 2014, has prescribed that the monetary penalty which will be imposed by adjudication officers, they have no discretion in that. So we said, ‘look this is not going to work out. There are accentuating circumstances where it has to be done.’ So the law was amended in 2014, and it said that based on certain criteria in the amended law, the officers can exercise their discretion. But there has been a case in the Supreme Court where the court has held that these amendments are prospective. So they can’t be applied retrospectively. The problem is that 80-85 percent of the cases we have on our hands today are prior to 2014. We have been urging the government to pass an amendment and issue a clarification that this also applies to retrospective cases. The government may have its own compulsions, and fine, they are not able to do it. But because of that, the adjudication process has been suffering. That is the point I'm making.
The Independence Of Regulators
In the last few months, several people from business and market community have questioned the independence of RBI given the role it played in the demonetisation effort. You said SEBI is an independent regulator. Have you in six years doubted the independence of institutions such as RBI and SEBI?
I can’t answer this question for a fellow regulator. They can answer this. And I’m not aware of facts.
You have served in the Finance Ministry, you have led a very important institution in our capital markets - UTI, you have led this regulator for the last six years. Therefore, I’m asking you on your last day in office whether you think if these were serious questions that should have been answered more effectively?
I have no evidence or material to guide me whether these consultations did take place or not. I’m not the right person to answer this.
SEBI Adopts A ‘Soft Enforcement’ Policy
The second issue that you brought up was about adjudication orders. There have been several complaints in the past few years about orders coming in very late, investigations taking very long. I’m not sure if you could pin that down to lack to resources at SEBI or some other systemic issue that stopped SEBI from being more efficient?
The question of delay in investigation, and thereby the delay in passing the adjudication has to be looked into from a historical perspective. If you look at the situation that was there six years ago and situation which is here today, I’m very proud to tell you that we have made substantial progress. Both in the manner of the quality of investigation as well as the outcome in its timeliness. So the data or the perspective that you have is about a situation which I inherited and the correct position today is that we have no cases which are pending for more than two years. And going forward, my officers have assured me, we had a series of discussions, and they have assured me we can bring it to a situation where no case is pending for more than one year and my expectation is that in the coming year 2017-2018 it will happen.
Why and how we have made this progress is important for us to understand. SEBI and every institution has been evolving and we are a young organisation compared with many other institutions.
That consultant looked at the global practice in enforcement and they came to a very clear-cut finding – that compared with the number of cases that we have, the size of the market and the manpower that we have, we are straightaway getting into too many hard actions – which means you penalise them, you debar them, you don’t let them work in the market, and that involves a series of quasi-judicial actions. For example, it involves passing an order under Section 11B of the SEBI Act. There you have to pass an interim order and then you have to pass a final order and then it goes into adjudication and then into prosecution.
SEBI had a very holistic look on how our enforcement could be more effective without getting bogged down by too many cases and thereby the pendency of our cases will get reduced. And that is exactly what has happened. The advice we received was that concentrate more on supervision. So now we have a system of risk-based supervision of all our intermediaries. So earlier we were either not supervising or we were waiting for something to go wrong and then we were taking harsh action. So starting from preventive actions, that is what SEBI has been able to do in the last six years. Through a risk-based approach we are now preventing any action, and then if an action has taken place, then we come to whether there is need for serious action or, for example, can it be done by a letter of warning, so we have started doing that. Also, here was a lot of uncertainty in the minds of officers of SEBI and also in the minds of public at large that the consent mechanism or the settlement mechanism, was it working effectively and was it serving its purpose? On one spectrum, our officers, who for want of any guidelines, were thinking that no case can be settled, everything should go under enforcement action. On the other end of the spectrum, there was a complaint that anything and everything can be settled and there was no certainty about the terms of the settlement. You can commit an insider trading violation and still pay some money and get out of it. What we have done is, we have come out with our circular and regulations, very clearly saying what can be regulated and what cannot be regulated. Having done that, we have also provided for penalties which can be mathematically calculated. If there is somebody who has committed an offence today, he can calculate if he goes for an adjudication, what will be his fate, or if he goes for a settlement, what will be his fate. That much transparency has been brought in. And because of all these measures, that is, more effective supervision which is preventive in nature, a very transparent mechanism for settlement, we have now been able to reduce the pendency of cases. Now, as I speak to you, we don’t have cases which are very old. So this is a transition which has happened. You can still have an issue that no you should have done better, yes I admit we should have done better.
SpiceJet And The Mystery Of The Missing Open Offer And Purchase Price
In 2015 there was a takeover of SpiceJet Ltd., a listed company. The takeover happened through a Reconstruction and Revival Scheme. The scheme somehow managed to get exemption from the mandatory open offer under the Takeover Regulations, even though it is not a statutorily approved scheme, it is a scheme approved by a department of a ministry. And interestingly it’s been two years since the takeover and we still don’t know the price it was done at. How has SEBI allowed for a takeover to happen without the disclosure of price?
I can’t comment on this specific case but you may be aware that in our takeover regulations there are provisions that if any scheme has the approval of a competent authority, under any act of parliament, then the Takeover Code obligations will not apply. So SEBI does apply this exemption whenever there are approvals from the various competent authorities. On the question of whether in a particular case the share price has been disclosed or not disclosed, I am sure if it has not been disclosed and it is in violation of SEBI rules, SEBI will take action or may be it has already initiated action.
This happened in 2015. We are in 2017.
I can’t discuss with you a particular case. I told you. But I am only informing you that if you think that there is a violation, and SEBI also thinks there is a violation, then it will be taken to its logical end.
Was that the first time a ‘competent authority’ was interpreted to be a department of a ministry by SEBI? Because often you have accepted decisions by international regulators when it comes to international merger schemes but to accept a ministry department as a competent authority to approve the scheme and grant it an exemption has not been the tradition at SEBI.
This is not the correct understanding. Various ministries, various departments in the country have power of competent authority under various acts that they regulate or administer. For example in this case, could be, that the ministry would have passed the order under the Aviation Act. So it’s incorrect to presume that only judicial authorities are competent authorities. Fortunately or unfortunately, there are situations where government departments also can be competent.
Why It Took SEBI 3 Years To Take Action Against Vijay Mallya?
Now about the Vijay Mallya case. In 2012-2013, Diageo Plc acquires a majority stake in United Spirits Ltd. In 2013-14, USL discovers accounting issues pertaining to payments to Mallya entities and has to make a very large provision in the next financial year, after considerable delay in filing accounts. Then USL conducted an internal investigation into those accounting irregularities. The National Stock Exchange (NSE) asked USL for the report of that internal investigation, the company refused to share it. Then Diageo enters into an agreement with Vijay Mallya to get him off the board as chairman, and pays him $75 million to do so. Till then, Diageo was supporting him as chairman because of a shareholder agreement. Finally in January 2017, SEBI wakes up and issues an order that debars Vijay Mallya from any key managerial position or board. What took SEBI so long to take action in this case?
At least SEBI has taken action..on that you agree? The right way to understand it is, if any information comes out in public domain which may be an allegation, there are stages provided for who is going to act on it. In the first stage, the rules provide that the stock exchanges have to ask for a clarification and then further developments take place. We also have to follow a process rather than acting immediately on anything which is out in the media. Unless it is something affecting the larger market or a large number of investors. So SEBI has taken action in this particular case. I must also tell you that the matter is not yet over and if you look at our order very clearly you will discover that further investigations that are going on involving other players in this episode, that is also mentioned in this order..
But it has been two years, 2015 is when USL’s board asked Vijay Mallya to step down because the internal investigation cast suspicion on him.
I told you earlier that we are now trying, and we are reaching a stage where nothing (no case) will be for more than two years. But if in this particular case it has taken two years, I am not particularly perturbed, especially because all the stakeholders and players in the drama are being covered by us.
The Wisdom Of Asking NSE To Self Audit Alleged Violations
Regarding the co-location controversy at the National Stock Exchange - SEBI came in for criticism when it asked NSE to conduct a self-audit. Why did the regulator ask a potentially offending party to self-audit?
I am surprised that intelligent people continuously fail to verify the facts. What gives you the impression that SEBI asked the board to have an audit and then take action? Why are you not taking note of the fact that SEBI conducted its own investigation? I am surprised nobody is talking about it. And we have some of the best technical brains in this country. So the Technical Advisory Committee of SEBI did get into this issue for an extended period of time and then they came out with certain findings. After those findings certain directions were given to the company and those directions have been substantially implemented. The question of what was asked to the board or to the audit firm led by the board, was to fix the accountability and responsibility – that who was responsible, was there any manner of cover-up? Please don’t forget that the whole thing started because SEBI took up this matter very seriously. I am amazed that you are not talking about it.
NSE is not any regular company, it is country’s largest stock exchange. I am curious to know why you asked the board to do its own investigation? If you thought there was a violation, why didn’t SEBI do the investigation?
Because it’s a new board. SEBI has inducted new public interest directors there. It is an entirely new set of public interest directors who had nothing to do with running that exchange at that particular moment. They are new people, and they are very honourable people. So it has been well thought out.
First of all, SEBI ensured that the public interest directors are changed. There were new public interest directors who had nothing to do with what happened at that particular moment or history. They were asked to do the verification and fix the accountability. What gives you the impression that SEBI can’t do it even now? If we are not satisfied with whatever findings are given, we reserve the right and we can look into it.
But don’t forget that the exchange you are talking of is a very large exchange. And SEBI cannot be playing to the gallery and playing to the media, SEBI has to do something which ensures that the larger trust in the market is maintained, we have to do it in a cautious way and this is what we have done. And I am sure, five years from now, or even two years from now, all of you will appreciate the approach that we have followed in this case.
I am surprised that consistently intelligent people, who should be knowledgeable, ignore a set of facts and get carried away by what somebody has written somewhere; all of you get carried away by this. The Technical Advisory Committee of SEBI did a marvellous job, and against very serious odds, and then SEBI came to the finding and then things followed up.
If there was an insider trading offence within a company then would you ask the board to take action or would SEBI investigate the offence? Departure from that practice is what raised eyebrows.
You are not getting my point. It is not a departure in the sense that you are presuming that this was the only action taken by SEBI. You are refusing to believe that action was taken through the Technical Advisory Committee which had very eminent people, and those people pointed out very specific deficiencies, and then action was taken. So, to believe that somebody, and I would say in a very ignorant way, started by thinking that only the board was given and SEBI was…..
If SEBI has investigated this it would come to some conclusion as to whether preferential treatment was meted out to certain brokers and if that was the case who was responsible for that preferential set of treatment and whether that person should be punished in any fashion. But that hasn’t been the case. That’s what SEBI has asked the board to do...
The board is to engage in a forensic audit so that the responsibilities could be fixed, and that exercise is ongoing. And if SEBI is not satisfied with the findings, nothing can stop SEBI from getting into it directly. SEBI can’t play to the gallery. SEBI has to ensure that it doesn’t destabilise the larger market. But yet, the rules have to be followed and we are working in that direction.
Exporting India’s Financial Markets
Well-known economist Ajay Shah said in his recent column that the looming threat to Indian finance is the departure of the Indian financial system. The two biggest financial products in India are the Nifty and the rupee. Nifty and rupee trading has increasingly shifted to overseas venues such as Hong Kong, Singapore and London. Ten years ago India had 100 percent market share in the trading of these products, this market share has declined to roughly 66 percent, it’s an area of concern.
The market in these two instruments growing out of India or going out of India, this diagnosis is correct, but it is incomplete. It is not happening due to lack of clarity or direction from the regulators, it is happening because of the cost of trading. And the cost of trading In India is primarily because of taxes. If you talk to a good expert, he will tell you the difference between trading in India and the cost involved outside. If the cost is outside India and it’s not illegal, people will go outside India. If there are two venues, and both are legal, and one is less expensive, people will go there. So, this is a good point to start a debate, but is should lead to a situation where the cost of trading in India is reduced. There are a few regulatory issues, some of them have to do with the Reserve Bank of India (RBI), and the Financial Stability and Development Council (FSDC) has been discussing it, but the primary reason if you want the markets to come back to India, the primary thing to be done is to reduce cost of trading in India vis-a-vis other jurisdictions and there the biggest element is tax. So instead of saying that this is the agenda of SEBI, let us link it to a holistic analysis of the situation. If you do that you’ll discover that.
Mr. Sinha you did not answer one question I asked you in the beginning. What is the toughest moment in the six years you have spent here in this office?
There are two moments. One is the set of five PILs (public interest litigations) that were filed against my appointment, right in the supreme court, one after another. I don’t know whether you and your colleagues in the media cared to take a note of it, five PILs were filled against an individual that too against his appointment and he doesn’t get appointed himself, somebody follows a system and appoints him and he is left completely to defend himself. He is on his own to defend himself and this is unprecedented. It has happened that may be one PIL has been filed against somebody, against me five PILs were filed. It might not appear very interesting to you, but imagine any individual who is facing five PILs. This is something very very serious, and the good part is all the five PILs were dismissed in the Supreme Court. The good thing is that the Supreme Court’s order has observed and if you care to read the last two pages of that order then you’ll discover what glowing things the Supreme Court has said about SEBI. I don’t need any endorsement from anybody, the Supreme Court’s order says that during Mr. Sinha’s time lot of action has been taken against some of the largest corporates in the country and it is no surprise that some of them might be behind it. This has been my biggest challenge.
And the second challenge which I am facing, and I am facing it for the last 2-3 years, is that the propensity of even quasi-judicial orders passed by SEBI officials being questioned, from the point of view of vigilance and from the angle of criminal investigation. That has been very serious. It has created a situation where SEBI officials are very feeling demoralised. If you pass a quasi-judicial order, there is a given path. There is an appeal mechanism to the SAT (Securities Appellate Tribunal) from there you can go to the Supreme Court, but why you have passed an order, why you have imposed a particular penalty that is being agitated (are being asked). And the good thing is or the funny thing is that it has been agitated at the appellate level and it has been shot down. People have said that the order passed by SEBI is right. In spite of that petitions after petitions, so by mere persistence, people have been filing petitions to various agencies and the agencies have been taking it up from a criminal investigation point of view. I hope that the media will recognise the damage that this will do to the sanctity of the Indian market and the regulation of the Indian market because if these things continue then the regulatory officials will find it very difficult to take any decision.