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SEBI’s IPO order sparks conflict of interest debate

By clearing mismanagement charges against National Securities Depository Ltd (NSDL) on February 2, capital markets regulator Securities and Exchange Board of India (SEBI) has opened a Pandora’s Box involving conflict of interest in public life, reports Gautam Chikermane.

business Updated: Feb 04, 2010 20:52 IST
Gautam Chikermane

By clearing mismanagement charges against National Securities Depository Ltd (NSDL) on February 2, capital markets regulator Securities and Exchange Board of India (SEBI) has opened a Pandora’s Box involving conflict of interest in public life.

A stream of questions are flying out on the issue on the basis of the composition and power of quasi-judicial orders because SEBI’s current chairman C.B. Bhave was heading NSDL before he took charge of his current job on February 18, 2008.

Pivoting around an order castigating NSDL on the 2006 IPO scam in which large investors using fake demat accounts illegally acquired shares of companies and sold them at high prices on listing, this order is all set to mushroom into a national debate on the country’s adjudication process.

It raises an important question: does the SEBI board have the authority to reject an order passed by its own members and replace it with a new one?

“Since powers were delegated to the (Leeladhar-Gopal) committee with specific terms of reference, this does not become an order unless cleared by the board,” said a part-time member of the SEBI board.

In its November 9, 2009 board meeting, Sebi nullified a December 4, 2008 order — passed by a two-member committee comprising V. Leeladhar, then deputy governor, RBI, and G. Mohan Gopal, director, National Judicial Academy — saying that it exceeded its terms of reference.

Leeladhar has since retired; Gopal, who did not participate in this board meeting, refused to comment.

“We are not saying you can’t find Sebi guilty,” a part-time SEBI member said on condition of anonymity. “But under law, prosecution begun under a section has to conclude under the same section. The board not only has the power but duty to set this order aside.”

This quashing was based on legal opinion of C. Achuthan — former presiding officer Securities Appellate Tribunal (SAT) — who said the order was “null and void”.

The opinion, a copy of which is with Hindustan Times, does not mention that Achuthan is currently a director on the board of National Stock Exchange, that has promoted NSDL, leading to a conflict of interest. SEBI too has not disclosed this fact in its latest order.

“Any opinion given to any client is confidential,” Achuthan told HT. “Professional ethics prevent me from talking about my client or the contents of the opinion given, if any.”

Any legal entity, a whole-time SEBI member said, “would at some stage have represented some client. Should that be seen as a conflict of interest?” He said Achuthan’s firm had represented one of the IPO scam accused in the Hyderabad High Court against SEBI, but “Achuthan’s reputation and integrity is above board”.

The Leeladhar-Gopal order had sought executive accountability from NSDL. “We direct the NSDL board to conduct an independent inquiry… to establish individual responsibility for failures of NSDL to meet its legal duties and responsibilities… and to take necessary action to ensure individual accountability for such failure,” the Dec 4, 2008 order had directed.

Since Bhave was heading NSDL when the scam — the biggest since Harshad Mehta’s securities scam in 1992 — broke, fingers are likely to be pointed at his leadership. While that can be defended, a conflict around Bhave arises now that he is the head of the regulatory body examining the organisation he headed in his previous job.

“Having recused myself, I am unable to speak on this matter,” Bhave said.

An August 13, 2008 resolution attempted to tackle that. Based on the suggestions of Ministry of Finance, SEBI formed a committee comprising independent members (Gopal and Leeladhar) of SEBI board. The committee was not to have whole-time members of the board since they report to Bhave and could be seen to be taking decisions in Bhave’s favour.

“There is no record of any such decision,” a whole-time SEBI member said. “Also, we report to the chairman only administratively, not while giving legal decisions. To that extent we are independent.”

“The recent decision of the SEBI board to review and declare as ‘non-est’ two quasi judicial orders of Sebi violates established legal and constitutional principles,” former Chief Justice of India J.S. Verma said in a December 5, 2009 statement, a copy of which is with HT. “It is essential to ensure that the quasi judicial orders should not be subject to review or interference by executive authorities that have neither the power nor the expertise to review, alter or nullify (such) orders.”

Coming in the heels of the Satyam fiasco of a year ago, the debate on conflict of interest has acquired a new character.