Book Excerpt: The Time UK Sinha Wasn’t Made SEBI Chairman 

Excerpted from ‘‘Going Public: My Time at SEBI’, By U K Sinha, with permission from Penguin Random House India.

Many people feel that the Vastu of SEBI is defective. Being dragged into controversies is in its DNA. It started with the selection of its second chairman, G.V. Ramakrishna (G.V.R. to many). He became the first chairman to function under the newly enacted SEBI Act. Other bureaucrats and he himself felt that because he could not be accommodated as a secretary in the Government of India in a ministry that he deserved, he was shunted to SEBI in Mumbai, an organization that was not yet fully functional. When SEBI came into existence in 1988, the first chairman was S.A. Dave. G.V.R. was appointed in 1990 at a time when there was no certainty when the SEBI Act would be passed. The stock exchanges did not want SEBI. The brokers did not like it as they had to pay fees to SEBI out of their own revenue. Several court battles later, which were settled in the Supreme Court, brokers agreed to pay fees to SEBI.

G.V.R.’s tenure saw the foundation for a solid institution being laid. He was a well-meaning person with vast knowledge of the government and public institutions. Public interest was uppermost in his mind in all situations. He was succeeded by D.R. Mehta, another respected person who had worked in the ministry of finance as well as in the RBI as a deputy governor. But in all these appointments, the question that remained unanswered was whether the government was selecting somebody out of expediency or actual suitability for the job. There was no consistency about the tenure of the chairman, and different people were selected for different lengths of time. A search-cum-selection committee was created. But who would be the members of the selection committee and who would be heading it was always left to the discretion of the finance minister. This left the impression that there was no objective and consistent criterion being followed.

Mehta was replaced by Bajpai. When the three-year tenure of Bajpai was about to end in early 2005, the search-cum-selection committee was headed by C. Rangarajan, and had, among others, members such as Rakesh Mohan in the committee. Interestingly, this committee considered many names, including that of Damodaran, but recommended that Bajpai should be given an extension of two years. When the proposal went to the Appointments Committee of the Cabinet (ACC), there was a change of heart at higher levels. The same search-cum-selection committee met again and modified its earlier recommendations in favour of Damodaran instead of Bajpai, and this decision was approved by the government. Damodaran joined in February 2005.

The Selection Process of 2008

The process becomes more controversial in 2008. An episode of manipulating the IPO process by some unscrupulous elements had come to light in 2005. Multiple applications under fictitious names and often having the same address were processed by the depository participants of NSDL and Central Depository Services Ltd (CDSL). SEBI arrived at the decision that there were serious lapses on the part of NSDL in handling the IPOs.

An enforcement action against NSDL by SEBI was going on at the same time that the chairman of SEBI was to be selected. Damodaran himself was keen to receive an extension. Chidambaram, as finance minister, had decided that in order to remove the perception of arbitrariness from the selection process, the setting up of the search-cum-selection committee should be institutionalized within the rules framed under the SEBI Act. As a result, a rule was framed about appointing a search-cum-selection committee with the Cabinet Secretary as its head.

This was a very wise move, and this concept of selection through a committee under the cabinet secretary has now been extended to appointments in all regulatory bodies in the financial sector. The rule also provided that the chairman of SEBI could be appointed for a period up to three years and was eligible for another term subject to the overall limit of sixty-five years of age.

The committee invited applications. Since it was a search-cum-selection committee, it was possible that in addition to those who had applied for the post, the committee, in its wisdom, could directly invite other suitable candidates for interaction and consideration. Damodaran was not prepared to apply for a second term for a post that he had already held for three years.

He and a few others were invited for an interaction with the committee. He refused to attend the interaction but wrote a long letter highlighting what all had been his achievements as chairman of SEBI. I did not apply for the post. However, I was invited by the committee, along with another candidate.

The other candidate met the committee and told them that in view of a regulatory action underway against NSDL, which he was heading, it would not be fair for the committee to consider him until the matter was resolved by SEBI. After interacting with all the candidates, the committee recommended two names in order of preference (i) U.K. Sinha and (ii) Jaimini Bhagwati. However, the government in its wisdom decided to appoint another candidate instead of either of the candidates recommended by the search-cum-selection committee. It was peculiar that in its communication to the ministry of finance about the decision of the ACC, a detailed note was sent from the PMO saying how Damodaran had done a good job and he ought to have been given an extension. But in view of the objections of the finance minister, the PM approved the appointment of another candidate.

This was quite an unusual situation. The views of the PM are normally recorded in the files of the PMO. Only the final decision is communicated to the ministries in brief. Here, quite unexpectedly, the full notes of the PM were communicated to the ACC and the ministry of finance. What was the anguish in the minds of the PM behind this selection is still a mystery.

U K Sinha is the Chairman of the Expert Committee on Micro, Small and Medium Enterprises and Former Chairman, SEBI.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.