09 May 2011

Mohan Gopal indicts SEBI's role

An independent member of SEBI, G Mohan Gopal (director of the National Judicial Academy) has written a strident letter to the Prime Minister of India. According to PTI this letter came out on a right to information request:

In a letter to the Prime Minister, the then member SEBI G Mohan Gopal wrote, "As an outgoing (part time, independent) member of the SEBI Board, I write to convey my strong concern about the gross abuse of power and corrupt practices in the SEBI Board over last two years to protect SEBI Chairman C B Bhave from being subjected to independent inquiry with respect to his actions as Chairman of NSDL during IPO Scam".

The letter written on December 24, 2010 has been made public by the Prime Minister's Office in an RTI reply to activist S C Agrawal.
This has been one of the only blogs to highlight the issue -  in a conspiracy of silence not just by the media but even by the alternative media to protect powerful people. In any case, here is the letter written by Mr. Mohan Gopal in all its glory. Interestingly, many things are happening a bit late i.e. the RTI letter response and the Supreme Court asking the current SEBI board to overturn its past illegalities (which they did in a hearing in the Supreme Court today).

The letter also interestingly spots four structural weaknesses in the governance and accountibility of SEBI which should be read very seriously. These are weighty words by an important jurist. Thankfully, the current SEBI board is making sensible choices and there appears a good chance that they will create sufficient distance between themselves and the previous board.


Anonymous said...

Here is a mail from Mohandas Pai - chief strategist of the board of crooks:
I do not wish to comment on the matter before the Supreme court as it is sub judice.I would wish to clarify the question that you have raised.The order of the SEBI Board dated December 22, 2009 states very clearly in page 4, para 6, the following; ( already in the public domain for long) The SEBI Board found that the orders of the two member committee in two of the quasi judicial proceedings including the one that is currently the subject of interest in this order, had exceeded the powers delegated to the committee ( as the delegate of the Board). The committee had inter alia entered into findings against SEBI itself which were well outside the scope of what had been explicitly delegated to it. After due consideration of these orders, without in any manner reviewing the findings of the committee on the role of NSDL in this quasi judicial proceedings, and after carefully considering expert legal opinion including guidance received from the Legal Department of the Government of India on the reference on this matter made to it by the Ministry of Finance, the Board decided to declare these orders of the two member committee non est&. In para 7, on page 4 the development since this Committee gave its original report has been explained so that the matter before the Board for adjudication is clearly spelt out. The SAT had passed orders on appeals against the earlier orders and there were submissions made before SAT too. The objection of SEBI had always been and is to the remarks passed against SEBI by this committee and not for any other matter as the above Para makes very clear. SEBI too has never spoken for itself before this Committee nor was SEBI asked any questions about its investigation before the Committee wrote this report as per our information. This is the crux of the issue as Legal opinion from two parties made clear that the remarks could not be separated from the whole order as the order was not seperable, SEBI could not appeal against its own order under law, these remarks were beyond the terms of reference as delegate, and the only solution was to declare this order non est.I firmly believe that the Board had acted in the highest standards of governance in this matter, deliberated deeply, sought legal opinion from two parties including the Legal Department of the Government of India which also answered the question whether the said comments are within the scope of the terms of reference and whether the Board had a right to examine whether the comments are within such scope too, and only then acted based on the legal opinion fully. If the legal opinion was otherwise I am sure the Board would have followed the same and acted otherwise too. I do not know what else the Board could have done or what other decision it could have taken as without appropriate legal advice the Board could have been accused as acting beyond jurisdiction. The whole matter has been handled in a transparent independent manner, based on legal principles, the original order has also been put on the web so that the public can see the order. All these facts are being placed before the Courts too. Shri Gokhale, we can all differ on a point of law and so long as the conduct is transparent and done as per the best standards of governance, it is not right to cast aspersions or motives as is being done by some people through the media.

Anonymous said...

No system can work when wrong motives are attributed to an institution which has no means to explain save what is provided under law. As a public representative I have fully discharged my obligations under law, been transparent and open and followed the best principles of governance as always. I trust you would read this mail and appreciate what has been done.As for the matter you have referred I had raised it with the Board and I was informed that the matter has been disposed off and I had sent a mail to you too earlier. As a Board member I have no power or authority under law to do more. It is upto SEBI to act appropriately and I am informed that it has so acted. No Board member who is a public representative under law or regulations can do more or take decisions on such matters individually. Warm regards,mohan

Anonymous said...

Various irregularities observed by SEBI during its investigations relate to (i) opening of bank account, (ii) opening of demat accounts, and (iii) Processing of applications made using such bank and demat accounts.

RBI, SEBI and the two depositories viz. NSDL and CDSL have put in place a well structured multi layered systems in the matter of opening and operations of bank and demat accounts. These systems are supplemented by various checks and balances, inspections by RBI, SEBI and two depositories, external and internal periodic audits etc.

In spite of the same, various irregularities took place repeatedly for over two years.

Similarly, SEBI has, through prescription of Rules, Regulations and Code of Conduct, put in place a multi layered IPO Allotment Process. Accordingly, (i) Syndicate Members are expected to vet each bid before entering the same in the system, (ii) Bankers to an Issue are obliged to ensure that each bid is accompanied by a separate cheque and also to issue refund orders marked 'account payee', (iii) Registrar to an Issue and Merchant Bankers are obliged to weed out multiple applications and detect fictitious applications and take appropriate actions prescribed by SEBI, (iv) Registrar is obliged to send refund orders by registered post etc.

In spite of these detailed procedure, the stated IPO Allotment Process malfunctioned repeatedly for over two years.

SEBI had referred the matter to CBI who after recording statements of officials from various Banks, Depositories, DPs, Bankers to an Issue, Registrar to an Issue, Merchant Bankers, Supdt. of Stamps has observed how these giant institutions knowingly subverted the systems.

Besides, SEBI also observes in one of its orders:

“It is found that Karvy group entities were ubiquitously present in the entire gamut of the IPO process running from introducing bank accounts, opening of dematerialised accounts, arranging IPO finance, bidding of applications, making allotment, issuing refund, making off-market transfers (DIS) and sale of IPO shares on the stock exchanges. The role of Karvy group entities at each stage of the process has been examined for uncovering Karvy’s role at every stage and to ascertain overall control beginning from opening of bank and dematerialised accounts till making refund and off-market transfer of IPO shares.”

“9. Had each market participant played their respective roles diligently with a degree of real time sensitivity, the rampant cornering of IPO allotments, particularly on this scale would not have taken place. The failure of each intermediary in the hierarchy of intermediaries contributed cumulatively, (jointly and severally) to the market abuse. Definitely, in the scheme of hierarchy, greater responsibility is cast on depositories, to be attuned to the market developments on real time basis, since they are, by virtue of their proximity to the developments in the markets are expected to check the happenings and take appropriate action in real time by exercising supervisory authority. These obligations are not amorphous but arise by a statutory mandate from the Depositories Act, SEBI Act, regulations framed there-under and the depositories bye-laws. These, inter alia, impose obligations relating to external and internal monitoring, review and evaluation of systems and controls. In addition other regulations of SEBI prohibit contributing to an activity amounting to manipulation or fraud on the markets.”

It is also important to note that SEBI periodically conducts inspections of its various registered entities and had in fact conducted such inspections and in spite of the irregularities observed no prompt actions were taken. In fact, since August, 2003, both NSDL and CDSL were providing details of off-market transfers to SEBI regularly.

Thus, the observations made by Mr. Mohan Goapl and his colleague are most apt.

Anonymous said...

The readers including Mr. Pai may note that what US SEC did post the surfacing of Madoff's famous Ponzi Scheme.

US SEC conducted an investigation and the investigation concluded that US SEC's various past investigations had grossly failed to take due cognizance of information / leads provided from time to time and had the past investigations take due cognizance the Ponzi scheme could not have taken such a large proportion.

Refer http://www.sec.gov/news/studies/2009/oig-509.pdf

Can SEBI draw a parallel from this act of US SEC and conduct an investigation as to why the stated IPO irregularities took place repeatedly for over two years under the nose of its SEBI registered Market Intermediaries who are saddled with statutory obligations under SEBI law?