The Curious Case of Bhave: SEBI Act Needs An Overhaul

13 April, 2012

How and why Chandrasekhar Bhaskar Bhave did not get another term as the chairman of market regulator Securities Exchange Board of India is now being revealed. Indian Express on Saturday reported that Bhave did not get an extension despite having a positive recommendation from the then Finance Secretary Ashok Chawla and the Finance Minister Pranab Mukherjee clearing a two-year extension for the ex-bureaucrat at least a year before his term ended.

Then what happened? The report says FM's advisor Omita Paul came into the picture and put up a note saying no such action was needed that early. Later, FM called back his recommendation and the proceedings started for selecting a new chairman. The rest is history, as we know. UTI AMC chairman UK Sinha emerged as a dark horse as the appointment committee suggested his name for the SEBI chief's post which Prime Minister Manmohan Singh promptly approved.

The actors are not important here, but the institution is. For one, SEBI chairman's, or for that matter, even the SEBI board member's chair is becoming ever important. The stock market is becoming the most important financial institution with several thousands of crore at stake. Unless you have a strong and fearless regulator, the people's trust in this institution is going to go down.

SEBI under Bhave had emerged stronger with some of the toughest steps being taken by the regulator in its history. For the first time, a large industrial group was banned by SEBI from the stock markets. Remember the consent order passed by SEBI in which ADAG Group chairman Anil Ambani and four top executives Satish Seth, Lalit Jalan, SC Gupta and JP Chalsani were not only banned from the stock market till December, 2011, but they also had to pay Rs 50 crore as settlement.

In another case, in February, 2011, Reliance Industries was issued a notice for violation of insider trading regulations. SEBI has also not accepted an offer for consent order from RIL.

Then take the instance of National Stock Exchange-Financial Technologies Ltd squabble in the case of a new equity exchange. SEBI under Bhave rejected the application of MCX-SX for equity trading, citing the case of shareholding of FT in the new exchange. An individual shareholder's stake in an exchange cannot be more than 5 per cent.

All these were tough steps. Bhave is known to be a no-nonsense professional and one who strictly plays by the rule book. So it was natural that the vested interests in political or bureaucratic leadership connived to make sure that Bhave did not get another term.

There are several questions that need serious pondering. Should one or two bureaucrats or the central government decide who should be the SEBI chairman, which is the most important job in Indian business now? Is there transparency in the process of appointing the SEBI chairman? Also, why should the central government have overriding powers on SEBI and its board?

Some of the provisions of The Securities and Exchange Board of India Act of 1992 look very flawed in the current context. One provision says the central government (some sundry bureaucrat in the North Block) has the power to sack the SEBI chairman or the board member with three months' notice.

As SEBI has emerged as a serious regulator with a very important job to do, isn't there a case for treating the market regulator as an institution equivalent to the Election Commission or Central Vigilance Commission? There is. SEBI has to be made a constitutional body and the chairman and the members should be given a five-year term, instead of a three-year term. They should only be removed by a two-third of the majority in the Parliament, instead of the whims and fancies of a minister or a bureaucrat. Such a strong regulatory mechanism will help build India's financial markets.


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The Curious Case of Bhave: SEBI Act Needs An Overhaul

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