MUMBAI : In November 2019, at a conference in Mumbai’s Trident hotel located in Bandra Kurla, scribes crowded around Ajay Tyagi, the former chairman of the Securities and Exchange Board of India (Sebi). He had finished speaking at the conference but didn’t take any questions from the waiting media. One journalist, however, persisted.
“What prompted Sebi’s order against Karvy?", the scribe asked as Tyagi stood near an elevator, ready to leave.
Tyagi turned around. “I want to answer this question," he said, looking a bit agitated. “We have said this time and again. Brokers cannot use client securities for any other purpose. If you do that, we will take action."
This was perhaps a rare occasion when the usually mild-mannered and soft-spoken executive raised his voice a notch. He wanted to be heard.
Sebi, a few days earlier, had banned Karvy Stock Broking for misuse of clients’ securities. The brokerage pledged its clients’ shares worth ₹2,319 crore with banks such as HDFC Bank, Axis Bank, ICICI Bank to raise funds. The bank funding was then further misused by the firm to buy real estate assets. The market regulator reversed all the shares back to the investors.
Safeguarding retail investors and cutting down on broker shenanigans was a priority for Tyagi. This was key to a fair market, he believed.
No doubt, Tyagi’s five-year tenure, which ended on 28 February, was action-packed. He constituted the most committees to consult on policy changes. By the end of February, committees under him rose to 28—there were only 11 committees under his immediate predecessor U.K. Sinha.
More or less, Tyagi stuck to policy decisions despite resistance from market participants. He did allow for minor tweaks in the policies formulated but retained the spirit of every new law. The big exception to this approach came towards the end of his tenure when he made the splitting of chairman and managing director’s (CMD) post in listed entities voluntary. This was a U-turn—the market regular had earlier mandated all listed companies to mandatorily split the roles by April 2022 as this would lead to a more balanced governance structure. However, only half of the Nifty 500 companies complied with this norm till February 2022.
Tyagi, a 1984 batch IAS officer, was appointed as the chairman on 1 March 2017 for a period of three years. Subsequently, he was given a six-month extension. In August 2020, the tenure was extended yet again by 18 months. He was eligible for another extension but the finance ministry chose to replace him with former banker Madhabi Puri Buch.
People aware of the development said that it is Sebi’s February order on the National Stock Exchange of India Limited (NSE) that may have scuttled Tyagi’s chances to stay on. The order, around hiring irregularities and governance lapses at the NSE, attracted a fair bit of criticism—Sebi imposed fines and bans that were far smaller compared to punitive actions taken in other cases. The order also failed to identify an unknown third person who received the exchange’s data from NSE’s former chief executive officer (CEO) Chitra Ramkrishna.
How will history judge Tyagi, given the many policy changes he tried to push through? We will have to wait for that answer. For now, let’s delve into how he went about his work. In short, in a far quieter way than his more vocal predecessors.
Predecessors
Tyagi’s immediate predecessor Sinha had a six-year stint at Sebi. That was a rocky affair. Numerous petitions were filed on his appointment—some alleged irregularities in the selection process. The Supreme Court dismissed them. The other highlights of Sinha’s tenure were orders against companies such as the erstwhile Satyam Computer Services Ltd, DLF Ltd., and the Sahara Group.
C.B. Bhave, who headed the market regulator between February 2008 and February 2011, is known for his public fights with Jignesh Shah, the former chairman of 63 Moons Technologies Ltd. Shah’s MCX Stock Exchange (MCX-SX) had the licence to operate in a limited segment of currency derivatives in 2008. However, Sebi did not allow it to act as a full-fledged bourse at the time because of compliance issues.
Meanwhile, M. Damodaran’s tenure, between February 2005 and February 2008, is best known for his crackdown on participatory notes, which are often considered to be opaque and thus carry the possibility of round tripping.
Tyagi tried his best to keep himself away from any controversy. This was not to be. His tenure, too, saw significant investigations. There were orders against both the Ambani brothers, Karvy, PricewaterhouseCoopers (PwC), and Franklin Templeton.
However, it was the February order on the NSE that held the public’s attention the most. The order, which revolved around the bizarre email exchanges between Chitra Ramkrishna and an unknown mystic, unfair access to a few brokers, and the favoured hiring of Anand Subramanian as the chief operating officer, made for juicy reading.
“Tyagi was saddled with a tough investigation against India’s leading exchange on an extremely technical issue of unfair advantage in high frequency trading. He fulfilled his role in some ways by passing six orders in the NSE case of preferential access to a few brokers and governance lapses at the exchange," said a senior counsel who didn’t want to be identified.
The investigations
At Sebi, Tyagi began his tenure with all guns blazing. Within a month of joining, he passed an order against Reliance Industries Ltd (RIL) for making alleged unlawful gains in securities trading. Tyagi had inherited the case—the order was nine years in the making. In 2008, Sebi had launched an investigation into the matter and initiated quasi-judicial proceedings in 2010. In 2017, Sebi ordered the Mukesh Ambani-led RIL to give ₹447 crore with 12% interest. The regulator also banned RIL and 12 of its promoter group entities from equity derivatives trading for a year. RIL is currently contesting the case before the Supreme Court.
More recently, in February this year, Sebi passed an order against the younger Ambani brother, Anil. The regulator banned him and three associates from the capital markets for three months for allegedly siphoning off funds from Reliance Home Finance Ltd.
Under Tyagi, Sebi also classified brokers who mis-sold products of the scam-ridden National Spot Exchange Ltd (NSEL) as ‘not fit and proper’. However, one of the most stringent orders were reserved for audit firm PwC. In 2018, the regulator placed a two-year ban on the firm for its role in the Satyam scam. The company had resorted to large-scale financial manipulation and its accounts were audited by PwC. On PwC’s appeal, the Securities Appellate Tribunal (SAT) said that Sebi has no jurisdiction on auditors. The case landed in the Supreme Court. In November 2019, the apex court restored Sebi’s powers to act against erring auditors. PwC can technically audit listed firms now since the ban period is over.
Then, an investigation against Franklin Templeton India found conflict of interest and lack of fulfilling fiduciary by its top brass. Sebi ordered Franklin Templeton to refund investment management and advisory fees worth ₹512 crore, collected from its six debt schemes, which are now shut. The matter is currently being contested at both SAT and the Supreme Court.
Many of these investigations are legacy cases. The biggest, of course, is the NSE case of unfair access to some brokers—some brokers were able to access NSE’s algo trading platform through secondary servers giving them an unfair advantage. In the world of high speed trading, there is no silver medal for traders who finish second. This probe started in 2016 under UK Sinha but was taken over by Tyagi. During his tenure, he expanded the scope of the investigation to NSE’s cash and derivatives systems. He also undertook a massive exercise to figure out which brokerages gained. The probe hasn’t closed yet.
Overall, just in 2020-21, Sebi took enforcement action in 3,208 cases; 476 are still pending.
Apart from the flak Tyagi received for the NSE order, the regulator has also been criticized for the time it takes to pass an order.
“What has not worked well has been the speed of enforcement action. There have been significant delays, which has resulted in many cases being overturned by the appellate tribunal on grounds of delay," said Sandeep Parekh, managing partner, FinSec Law Advisors.
“In the future, it is possible to significantly reduce action where mistakes or errors were made while increasing action around very serious violations. The former can just be closed with a reprimand letter," he added.
The policies
Market watchers like Parekh believe that in the last few years, Sebi has covered significant ground when it came to regulatory design. Areas such as mutual funds and broking received much-needed attention. This has reduced systemic risk in the markets.
Following the Karvy stock broking scam, various regulatory measures impacting brokers were implemented. The margin rules were tightened, for instance, to ensure that the clients’ securities cannot be used for any other purpose. Besides Karvy, there have been as many as 20 broker defaults in the past couple of years, which explained Sebi’s zeal to regulate the business.
Similarly, Sebi under Tyagi made major strides in regulating mutual funds. The practice of handing out upfront commissions to distributors ended and the expense ratios of mutual funds (from which commissions are paid) were capped at reasonably low levels.
However, Sebi failed to spot the problem of risky debt taken on by mutual funds until the issue blew up. Starting September 2018, a series of downgrades and defaults plagued debt mutual funds, culminating in an unprecedented winding up of six mutual fund schemes by Franklin Templeton Mutual Fund. This winding-up process was done without unit holder approvals, prompting a lengthy litigation even as investors waited for their money.
Meanwhile, under Tyagi’s regime, a record number of initial public offerings (IPOs) saw the light of day. Many of them were hugely successful. Even as concerns around pricing of an IPO persisted, Tyagi made it clear that the market regulator wouldn’t interfere in IPO valuations.
Nevertheless, Sebi urged merchant bankers to engage in wider consultations for a proper balance between the issuers’ aspirations and investors’ interests. Sebi also asked new-age technology companies to provide proper rationale when it comes to pricing their shares in the IPOs.
When it came to intermediaries, Sebi placed an unduly heavy burden on the nascent financial advisory profession. Financial Advisors in India, for instance, need to have a post-graduate degree and at least five years of experience in activities relating to ‘advice in financial products or securities or in fund, asset or portfolio management’. The amount that investment advisors can charge is capped at ₹1,25,000 if they charge a flat fee or 2.5% if they charge a fee linked to assets under management.
These onerous requirements have paused the profession’s growth. At the end of October 2021, India had 27.5 million mutual fund investors and 73.8 million demat account holders, a Lok Sabha response stated. Against this, there were only 1,324 registered investment advisors (RIAs).
“Unlike other professions where regulations came in after the profession had matured, with RIAs, the profession had regulations from the very inception. Many of them are impractical," Suresh Sadgopan, a Mumbai based RIA told Mint in December.
Nevertheless, market watchers held that Ajay Tyagi is leaving behind an institution that has made meaningful strides in many areas. Working quietly, he has left his stamp on the regulator.
