A number of bureaucrats and journalists have defended former Securities and Exchange Board of India (Sebi) chief C.B. Bhave and former whole-time member K.M. Abraham after the Central Bureau of Investigation (CBI) said it had started a preliminary enquiry against them.

CBI, on its part, has cited alleged irregularities in granting recognition to MCX Stock Exchange Ltd (MCX-SX) in 2008, and in renewing the recognition in 2009 and 2010, and has said that this is merely a preliminary enquiry, which will be closed if nothing untoward is found.

The best defence, by far, has come by Bhave himself. In an interview with The Economic Times newspaper, he rightly questions why his regime had been singled out, given the fact that both his predecessor and his successor at Sebi were involved in similar decisions relating to the Financial Technologies Group.

The first allegation CBI is dealing with is that Sebi approved Financial Technologies (India) Ltd (FTIL), Multi Commodity Exchange of India Ltd (MCX) and Jignesh Shah as “fit and proper" persons to own shares in stock exchanges, despite the explicit disapproval of the ministry of finance. Armed with documents from a search and seize operation conducted by the income-tax department, the ministry wrote to Sebi in October 2007 that there is adequate basis to conclude prima facie that the above-mentioned persons were not fit and proper persons to acquire shares in stock exchanges.

Sebi wrote back saying an initiation of an enquiry may not by itself act as a disqualification. It’s important to note here that this communication between the ministry and Sebi happened in the context of FTIL’s stake purchases in Delhi Stock Exchange and Varanasi Stock Exchange, many months before Bhave dealt with MCX Stock Exchange’s application, when M. Damodaran was chairman at Sebi. Bhave said in his interview that he agrees with Sebi’s decision under Damodaran, and added that subsequently the income-tax case against the FT Group was closed.

Consider a scenario where Bhave had rejected MCX-SX’s initial application, citing the income-tax enquiry. If the case was indeed closed later without a charge being brought, there could also be an allegation that he worked against the applicant’s interest deliberately to thwart competition and protect the interest of incumbents (read National Stock Exchange). Incidentally, such allegations were doing the rounds after Sebi rejected the exchange’s equity application. This only shows that it’s fairly easy to allege foul play in regulatory decisions and that great care should be exercised before a formal investigation is ordered.

Some journalists have also questioned how Sebi overruled the ministry of finance on the matter related to the tax raid. It must be noted, however, that Sebi is an autonomous body and the appellate authority with respect to decisions related to stock exchanges. Hence, the question of overruling the ministry doesn’t arise. And as pointed out above, Sebi under Damodaran did give a fair response to the ministry’s concerns.

In 2012, Sebi, under its current chairman U.K. Sinha, allowed MCX-SX to launch new segments such as equity and equity derivatives without disclosing how it resolved Abraham’s charges about the exchange’s dishonesty and lack of integrity.

For instance, Abraham’s order had said that the exchange was dishonest in withholding material information on ownership arrangements of its shareholders and, therefore, had not adhered to fair and reasonable standards of honesty that should be expected of a recognized stock exchange. This relates to FTIL’s buyback arrangements with certain shareholders to whom it sold shares. Sebi’s 2010 order had likened the buyback arrangements to a form of gold smuggling to circumvent shareholding restrictions, apart from pointing out that these arrangements were in any case illegal under existing rules.

And six months ago, Sebi extended MCX-SX’s licence to run as a stock exchange with FTIL and MCX as shareholders even after the 5,500 crore payments crisis at a group firm, National Spot Exchange Ltd.

In this backdrop, it seems fair for Bhave to ask why only he and Abraham have been targeted.

Apart from the objection from the finance ministry, the other question being raised is how Sebi, under Bhave, considered MCX-SX as fit and proper to run a currency futures platform in August 2010, and just a few weeks later, declared it was not fit and proper to run other segments. This charge is misinformed on numerous fronts. To start with, Abraham’s order didn’t get into the “fit and proper" status of either MCX-SX or its promoters. His order was in response to a Bombay high court directive to dispose the exchange’s application for operating new segments. Since the exchange contended that it had already met required shareholding guidelines by restructuring its share capital, the issue before Abraham was to decide whether Sebi approved of such a restructuring and whether the exchange did actually meet its guidelines.

It was in the midst of deciding on this application that the date for the exchange’s renewal came up. Clearly, it would have been unfair to not renew the licence without having concluded the process of investigation. It may have also amounted to contempt of court.

Interestingly, MCX-SX’s counsel had made a similar argument before Sebi in 2010, stating that since Sebi had just granted the exchange recognition to operate as a stock exchange for another year, it implied that it met the “fit and proper" criteria. Sebi’s order stated, in response, that the renewal was granted without prejudice to the disposal of the application for the new segments, adding, “On the contrary, withholding this renewal of the Stock Exchange without a proper examination would have been unjust in law."

In sum, there are already answers in the public domain to some of the questions that are being raised about Bhave’s dealings with MCX-SX.

By choosing to ignore these, CBI has unwittingly allowed some people to score brownie points.

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