Madhabi Puri Buch is not the first Sebi chief to be caught in the 'Eye Of The Storm.' That credit should go to Chandrasekhar Bhaskar (CB) Bhave, the blue-eyed boy of UPA era Finance Minister P Chidambaram. The storm against Buch was kicked up by a rogue US based short seller Hindenburg, who thrives on falling stock prices and often attempts to crash the market with notoriously sensational reports. In this case, Hindenburg retaliated against Buch when Sebi issued a show cause notice against it. Unlike Buch, the allegations of 'conflict of interest' against Bhave were far more grave and Sebi had sought his removal as the chief of India's largest share depository NSDL. Later, when Bhave was made the Sebi chief, a two member committee had indicted him for lapse of duty in the demat scam at NSDL. One of the committee members Dr. Mohan Gopal had also told the then PM Manmohan Singh that “‘Sebi-under-Bhave’ judged and exonerated ‘NSDL-under-Bhave’ through a process that was thinly disguised as independent, but was, in fact, deeply vitiated and subverted." But Bhave never resigned as the Sebi chief and served his full five year term.
Sometime in 2007, a Sebi order had indicted NSDL in the Rs 500 crore multiple demat accounts scam involving operators with 'political influence.' The story goes that thousands of demat accounts were opened on a single name, which were then used to corner shares worth hundreds of crores in the IPOs - a report by former IPS officer Sanjay Pandey had revealed glaring lapses at NSDL, which pointed fingers at Bhave. Yet, when NSDL and Bhave's role were directly under Sebi's scanner, he was made the Sebi chief (a grave conflict of interest) in 2008 with the backing of Chidambaram.
As of now, nobody knows what will be the fate of allegations against Buch regarding her non-disclosure of employee stock options from ICICI Bank or other matters. Similarly, what happened to NSDL's role in the demat accounts scam is a different story but the fact remains that Bhave was chosen as the Sebi chairman by the Congress led UPA government, when he was facing allegations of management lapses and never removed even after being indicted by Sebiboard member committee.
How PM Manmohan Singh And Chidambaram Backed Bhave
In 2008, when the Sebi chief’s appointment came up for renewal, Chidambaram overwhelmingly batted for Bhave and suggested his name to the PM for the top job at the regulatory body. Since the Sebi chairman’s appointment required the PM’s signature, the FM harped upon Singh about Bhave’s ‘impeccable record’ and how the NSDL chief fulfilled all requirements to become the Sebi chief. But the story behind the scene was that Chidambaram was desperate to replace M Damodaran the then Sebi chief, since he had moved to ban Participatory Notes (Pnotes) without consulting the FM. Pnotes are the malicious derivative instruments that provided a perfect smokescreen for the flow of black money into India's stock markets but Chidambaram was not in favour of a blanket ban on these instruments. Once Damodaram became vocal about his stance on Pnotes, it sparked a deeply agonising animosity between him and Chidambaram and the grapevine was that they never saw eye to eye.
It was no secret that Chidambaram had the ears of the then Indian National Congress (INC) party President Sonia Gandhi on matters regarding the appointment of senior officials in the financial sector and regulatory bodies. Be it the chief of large government banks, insurance companies or RBI and Sebi, all had to have the FM’s blessings, and he had the blessing of the high command. Nudged by Mrs. Gandhi and accustomed to his tradition, PM Singh surrendered. Bhave, who was neither interviewed nor shortlisted by the committee responsible for the selection of Sebi chairman, was given the top job at the regulatory body.
But what about Sebi’s pending case and order against NSDL that had even sought Bhave’s removal for severe ‘lapse’ in duty?
Chidambaram and his protégé, Dr. KP Krishnan, the then Joint Secretary (Capital Markets) at the Ministry of Finance worked out the idea of ‘ring-fencing’ him, i.e., keeping Bhave away from the NSDL matter when Sebi presided over it. Krishnan at that time was also the board member of Sebi and had policymakers and experts in the financial market at his beck and call, as it was well known that the bureaucrat enjoyed the full support of Chidambaram. Notes put up by Krishnan at the Finance Ministry were seldom rejected by his boss. A Tamilian from Delhi, Krishnan was allotted the Karnataka cadre, but he never left the capital city until Chidambaram was in power.
Bhave ‘Ring-Fenced’ Yet Exposed: Skulduggery Laid Bare
After Bhave’s appointment as the Sebi chief, sometime in February 2010, Sebi board got together and disposed of the Show-Cause Notice (SCN) that the regulator had issued to NSDL under Damodaran for the illegal demat accounts scam. It kicked up a storm far bigger than the one Buch is currently battling. Chidambaram and Krishnan kept insisting that Bhave remained ‘ring-fenced’ from the proceedings, in which the Sebi board had disposed-off orders against NSDL without seeking any action against the depository. But Bhave’s conflicted role and the shenanigans of Chidambaram and Krishnan could not be suppressed for long.
Dr. Mohan Gopal, head of India’s National Judicial Academy, who was also the Sebi board member during Bhave and Krishnan’s time, laid bare the skulduggery that was deployed in giving NSDL a clean chit and attempting to wipe the traces of the IPO scam. He said the ‘fence’ that guarded Sebi in NSDL matters from Bhave had collapsed badly.
As part of the ‘ring-fencing’ measures in 2008 to appoint Bhave as Sebi chief, a two-member committee including Gopal and V Leeladhar, the former deputy governor was constituted into the NSDL matter. Both of them held Bhave guilty of glaring failure in duty of supervising, investigating, monitoring data in the demat account scam and directed NSDL to conduct an independent inquiry to establish individual responsibility. As soon as Gopal submitted his order to the Sebi board in December 2008, some 10 months after Bhave’s appointment as the chief of the regulatory body, Krishnan swung into action. A board meeting of Sebi was called and all of them vetoed the Gopal-Leeladhar order as ‘non-est’, simply non-existent in legal parlance.
In that meeting, although Bhave remained absent as he was supposedly ‘ring-fenced’ from the matter, the senior Sebi officials who reported to him and even a corporate honcho, Mohandas Pai (who’s company Infosys Ltd was regulated by Sebi), were present. Gopal, who was also a member in that meeting, of course, gave a dissenting note against such an action of the board that he believed was deeply laced in conflict with every board members’ fiduciary duty. But the Sebi board under Krishnan’s dominance said that they had taken legal opinion for exonerating the depository. The opinion was that the committee, which had passed three orders against NSDL and its top management, had gone beyond its scope of work and its orders were outside the confines of delegation and without the authority of law.
In essence, Gopal’s counter-argument dismembered the then Sebi board’s argument in holding his order void, which he said was to give an escape route to NSDL and Bhave. Gopal carried a reputation of a law reformer, whose opinion was seldom disregarded even by the Supreme Court (SC) of India. This time he wrote a long letter to PM Singh highlighting the cesspool of policymaking that Sebi had become under the influence of Bhave and Krishnan. His letter told a tale of raw abuse of power by the ‘bureaucratic brotherhood’ that ran deep in the vein of India’s administrative system. Gopal educated Singh about Sebi’s system and processes being vitiated to protect Bhave and whitewash his and NSDL’s role in the IPO scam. “‘Sebi-under-Bhave’ judged and exonerated ‘NSDL-under-Bhave’ through a process that was thinly disguised as independent, but was, in fact, deeply vitiated and subverted,” Gopal told PM Singh.
How The Sebi Mafia Operated During Bhave's Time
Gopal did not mince words and also made no attempt to hide his anguish in describing the happenings inside Sebi. He told PM Singh that there was a subversion of the action against NSDL to protect Bhave and the coterie that was defending him was highly conflicted.
“An informal clique of current and serving bureaucrats, Sebi officials, lawyers and corporate interests orchestrated this subversion of the due process of law. They illegally interfered with independent Sebi adjudication, manipulated legal opinions, suppressed and misrepresented facts and misled the Sebi Board and Government officials about the legality of the Orders. Law, regulations and established precedent were violated. NSDL was given undue special treatment. NSDL was relieved of a fine of crores of rupees, and Securities Appellate Tribunal (SAT) decisions adverse to Sebi but favouring NSDL, were not appealed to the SC as they should have been,” Gopal quoted.
A legal expert-par-excellence, he further noted: “One of the most shocking and unprecedented actions taken by Sebi to exculpate NSDL was the board–for the first time in Sebi’s history – setting aside quasi-judicial orders which are, under the law, subject only to judicial review.” Sebi is a quasi-judicial authority vested with powers to issue legally binding orders like a court of law. These Sebi orders can only be appealed in SAT or a higher court. But orders passed by Gopal, as a Sebi board member, were disposed-off by other Sebi officials, which not only was unconventional but a clear cause of conflict. Complimenting what Gopal said, J S Verma, another eminent jurist and former Chief Justice of India, too came in his support and said, “Sebi's action violated established legal and constitutional principles.”
To act as a ‘Devil’s Advocate’, even if one accepted Bhave’s contention that he had no role in obtaining this special treatment from Sebi – orders against NSDL being suppressed, then reviewed, then reversed and finally substituted by the board – was something that was never done for any other company in Sebi’s history. “Who then was behind this? Perhaps a judicial inquiry should be conducted into this affair to determine who was subverting the normal procedures ofSebi, and for what motive and for what consideration – inside and outside Sebi, including the counsel. This is a serious matter because the underlying issue involved is the IPO scam and we can’t rule out the hand of those responsible for the great securities fraud perpetrated on retail investors. The board relied on the legal opinion of a lawyer, whose firm was defending the prime accused in the IPO scam,” Gopal averred.
He also highlighted four structural fault lines in Sebi’s legal framework that had made this power abuse possible. These were: “Inadequate Transparency, (lack of) Public accountability; and Parliamentary Oversight.” On the ‘Lack of Protection against Conflict of Interest’, Gopal wrote, “A Code of Conduct for the Sebi board was evolved at his instance, but the mechanism was violated and then dismantled in the context of the NSDL matter.”
He said Sebi had perverse practices compared to the Securities Exchange Commission (SEC) in the US. “The SEC held open public meetings and the US Senate exercised close scrutiny over its workings. There is nothing comparable in India.” Gopal did not stop here but further pointed to the PM that he was subjected to, “Retaliation and attack without any protection.” On Pai and Infosys, Gopal said, “Sebi board generously excused the conflict of interest arising out of the business relationship between Infosys and NSDL. It was perhaps for the first time in Indian history that judicial power was exercised by a serving private sector corporate official.” As a tech company Infosys was engaged by NSDL and Bhave had a say in fixing the remuneration. Gopal also drew his anger towards Sebi’s ineffective framework for law enforcement.
“The structure for law enforcement in Sebi is seriously flawed. There are overlapping enforcement and punitive provisions in the Act, which needs to be rationalised. This subjects a regulated entity to multiple proceedings without a clear distinction between them. Major violations established through investigation are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers–in such cases review by SAT would never be sought because neither Sebi nor the wrongdoer want it. A company guilty of ‘criminal’ market manipulation was let off by a whole-time member (WTM) asking it to be more careful in future. Sebi does not have adequate focus and priority on law enforcement, with the result that it bent backwards and violated the law to protect a favoured regulated entity rather than pursue it to enforce the law.”
Gopal then directly accused Krishnan for, in his words, “Exercising undue influence in the functioning of an independent regulator through informal back channels, through which Sebi officials were funnelling information and documents to him, which he legally should not have access to.”
It was the most serious charge levelled against Krishnan by an eminent legal eagle and laid bare the bureaucrats’ true fangs and covert conduct. On the point of reforms, Gopal had the following suggestion, “Sebi Act badly needs to be redesigned. It contains too many explicit and implicit levers of bureaucratic and political control of the regulator on one hand and too little public oversight, transparency and public accountability on the other hand. Sebi in effect is run by an informal caucus of serving or former civil servants rather than domain experts.” The five-page letter ended with asking the PM to order a high-level inquiry into Sebi’s decisions in relation to NSDL during Bhave’s tenure and to look into the structural issues raised by him. He said that the Sebi board lacked relevant expertise because it (was) dominated by Babus – serving and ex-bureaucrats – pointing towards Krishnan and Bhave. Sebi under the influence of Bhave and Krishnan was waiting to explode. Gopal’s revelations had just torched it.
“The government’s interaction with the regulator would be over the counter and not below the table,” Gopal cautioned PM Singh in as many words. The letter was so explosive and blistering it blew the lid off on the theatrics playing at Sebi. Gopal’s indictment of Bhave and Krishnan was stunning.
Gopal later told the media that he was threatened and pressured. “Yes, pressured and threatened,” he told the media in an interview on November 17, 2011.8 So who was so powerful to pressurise the head of India’s National Judicial Academy? News reporters were abuzz with gossip about a powerful figure in Sebi having reached out to Gopal asking him to reverse his order. Those who could issue threats to a person with the stature of Gopal were ‘The Market Mafia.'
When Chidambaram returned as India's India's Finance Minister after a brief stint as Home Minister, Gopal was dropped from the Sebi board.
