For those of us who have seen and reported the manipulation of capital markets during Harshad Mehta’s time, the corrective creation of the Securities and Exchange Board of India (SEBI) and the rise of the National Stock Exchange (NSE) as a modern alternative to the multitude of primitive exchanges that existed at that time, it’s sad to see the collapse of corporate governance – at the levels of the exchange and the regulator. This collapse of every element at the micro and macro levels was the reason and inspiration for the creation of the NSE in the first place.
The National Stock Exchange was created as an antidote to the Bombay Stock Exchange (BSE). The latter was seen as a club of brokers who did not follow the basic norms and ethics of running a stock exchange. The brokers who ran BSE in the early and mid ‘90s did not even ban Harshad Mehta from trading in spite of his firm Fairgrowth being indicted for manipulation, fraud and embezzlement in the securities scam. The clout of Harshad Mehta and the clutch of brokers behind him was so strong that he continued to trade on his personal broking card as a member of the BSE. It took the energetic SEBI chief Dr D.R. Mehta and some sustained intrepid reporting, including by yours truly in The Hindu Business Line, to get Harshad Mehta banned from trading years after the ban.
The government and policymakers of that time, including SEBI, had decided that the best way to clean up the BSE was to create a better-run exchange that would have the highest level of corporate governance. But the conduct of Chitra Ramkrishna, past CEO and MD, and other executives before her, during her time and after her, have belied the faith of the public, government and policymakers. Her collaborative shenanigans with some alleged high mountain guru as reported in the SEBI investigation report and the lack of action by the executives of National Stock Exchange in terms of mending a broken system shows that it’s not an individual but a systemic problem.
The system needs an overhaul, a serious one, starting at the board level. Selecting a new CEO and MD is a secondary issue. There is a need to have a better set of people at the board level – with an understanding of the capital markets and track record of non-partisan, non-conflicting probity and rectitude. An institution like an exchange is the first line of regulatory control in the capital markets. It cannot be left to a cartel of individuals in the financial sector to control its board. Even the selection of the CEO and MD is controlled by the same cartel. This cartel is made up of heads of housing finance companies, brokers and merchant bankers who basically worked very hard to brush the systemic failures under the proverbial carpet for years.
This means that India’s effort, which began almost 30 years ago, to create an independent, well-governed institution to replace the BSE has spectacularly failed. NSE’s con game is worse than the scam-infused regional stock exchanges of Ahmedabad, Calcutta, Delhi and Bombay of the early ‘90s. Not only is the management but also the board can be controlled by external cartels for protecting their self-interests.
As a first line of regulatory control, NSE’s board has to be holier than all. How can an exchange insist on better disclosures or governance from the companies listed on it if its own management and board cannot address governance failures?
The selection of the new MD and CEO, of both the NSE and BSE, should be done by an independent committee under SEBI with adequate representation from the Ministry of Finance as well as experts. The criterion for selection should not be based necessarily on experience in the financial sector. An exchange may be part of the financial system but it cannot be run by somebody who has run an NBFC (Non-Banking Financial Company) or bank. It needs somebody who has run a stock exchange or who understands the founding principle of the NSE.
For too long, Mumbai’s finance cartel has decided who runs NSE. This needs to change if capital markets are to be protected. Otherwise, it won’t be long before one of the largest and most efficient capital markets of the world will crumble and become a pale, puny shadow of what it was envisioned to be.
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This will affect not only an exchange but the overall corporate governance among listed companies. Bad design at the top in any system has a way of percolating and corrupting the whole ecosystem. This has happened in the past whenever we have had poor administrators in SEBI – the impact of that has been seen in the deterioration of entities down the line.
We have a real example of this. When the promoter of a bank that never said no to loans, took kickbacks for evergreening loans from other promoters, the whole bank got infected with this corruption. RBI, in this case, did not just change the promoter, it cleaned out the entire board. An investigation by the CBI was carried out and the bank’s promoter is in jail. SEBI has to take a cue from RBI when it comes to sending a message to the larger ecosystem. SEBI needs to send out a strong message.
Capital markets are a representative of trust in the financial system. NSE is a symbol of that trust; if there are cracks in the edifice, they cannot be papered over. Pretension that everything is well is not the solution to rebuilding trust. A fresh set of leadership is needed to rebuild. An organisation is only as strong as its leaders.
Only after a new board is appointed should a new CEO and MD be appointed. Every member of the board need not be a shareholder representative. More independent members in the real sense need to be appointed as some of the shareholders’ representatives on the board of NSE have brazenly failed in their fiduciary duty of ensuring its systemic cleansing.
The cozy club managing NSE from the shadows needs to be shaken up.
The author is CEO, Center for Innovation in Public Policy. The views expressed in this article are those of the author and do not represent the stand of this publication.
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