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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

The wrong targets in the NSEL scam

CBI's action sends a disturbing signal to the markets as well as Sebi

The investigation into the National Spot Exchange Ltd (NSEL) crisis has taken a curious turn, with the Central Bureau of Investigation (CBI) registering preliminary enquiries, not just against the promoter group, Financial Technologies (India) Ltd, or FTIL, and the men running it but also against the very men who first ruled that the FTIL group was unfit to run an exchange.

The latest turn in the NSEL saga has put the spotlight on the chequered history of the FTIL group and its run-ins with regulatory agencies. But it has also raised deeper questions about the manner in which exchanges are regulated in this country. It is important to distinguish between the two issues as the first issue could potentially involve criminality while the second issue pertains largely to policy flaws in designing India’s financial architecture.

The FTIL group first received a green signal from the Securities and Exchange Board of India (Sebi) to invest in stock exchanges during the term of former Sebi chairman M. Damodaran despite pending tax investigations against the group (which were subsequently closed). Under C.B. Bhave, Sebi allowed the group a conditional clearance to start a currency bourse, MCX Stock Exchange (MCX-SX). When the group failed to comply with some of those conditions, Sebi under Bhave took a tough stand—and ruled that the promoter group was not “fit and proper" to run an equity exchange because “they had not adhered to fair and reasonable standards of honesty that should be expected of a recognized stock exchange".

K.M. Abraham, who issued that order, wrote a letter to Prime Minister Manmohan Singh in 2011 alleging there was pressure from then finance minister Pranab Mukherjee to look at a compromise solution to the MCX-SX application. Abraham had also alleged that U.K. Sinha, who succeeded Bhave as Sebi’s chief, was sympathetic to the finance ministry’s cause.

The finance ministry made its own set of charges against Abraham, but he was subsequently cleared by the Prime Minister’s Office. It is still not known what action was taken based on Abraham’s allegations. Abraham’s order was overruled by the Bombay high court after MCX-SX challenged the order. Even though Sebi initially challenged the verdict in the Supreme Court, in its affidavit to the apex court, it agreed to reconsider MCX-SX’s application after revising its guidelines for stock exchanges, and later granted it the required approval.

Given the course of events involving senior public officials and the FTIL group, this newspaper had advocated a comprehensive probe by an independent agency into what went wrong when the NSEL crisis first surfaced. But by singling out the very officials who had first exposed the problems at the Jignesh Shah-led group, CBI has dealt a body blow to its own reputation and undermined the credibility of the investigation process.

At a broader level, the latest episode once again highlights the dangers of the flawed exchange regulation policy that Sebi and the finance ministry have pursued over the past several years.

As this newspaper has argued earlier, the current approach to deal with the problem of conflict of interest by imposing ownership restrictions and so-called Chinese walls is ham-handed, and does not yield the desired outcomes.

Bhave’s approach to regulating exchanges, like that of other Sebi chiefs, may not have been optimal. The exchange regulations formulated by Bhave’s team were haphazard attempts to resolve the issue of conflict of interest. But that was a policy rather than a criminal error. The action against Bhave and Abraham is tragic because it is a repeat of the drama that happened just after they left charge, when they faced needless persecution from government agencies because of their fearless and independent stance against powerful vested interests while in office.

The continuing persecution of Bhave and Abraham sends a deeply disturbing signal to the market as well as to the current team in charge of Sebi.

What can be done to improve transparency in Indian exchanges? Tell us at views@livemint.com

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