SEBI has been in the news a lot recently. Its overall approach needs some context and analysis of the way our institutions conduct their business.
India has had social institutions for several thousand years that regulate its society. But it is a relative newcomer to politically democratic and market focused economic institutions.
So it’s hardly surprising that it is still trying to accept them in a governmental environment that’s refusing to change from the colonial times. So what we have is what Arun Shourie once called the “We are the rulers” problem. It comprises a ‘Us V Them’ mindset inherited from the British.
It also has a rigid approach to hierarchy.
As the late Subir Gokarn, former Deputy Governor of the RBI, used to say, the chaturvarna has been replicated in government jobs. It’s has class 1-4 employment.
This colonial approach has had serious implications for the modern political and economic institutions which we are seeking to evolve. Consider in this context only the following four of them: Judiciary, CEC, RBI and SEBI.
Of these the first confronts the government but not always. The second always cooperates. The RBI always complies. And SEBI does none of the three.
To a large extent this conduct is inherent in their mandates. The judiciary is intended to confront. The CEC must cooperate for the holding of elections. These institutions can, if they want, be totally independent. But they often choose to comply and want us to believe it’s cooperation.
Judiciary and CEC
The judiciary began confronting the government from the word go. The Supreme Court’s predecessor, the Federal Court, stopped the colonial government in its tracks a few times. Then in 1947 the Supreme Court took over via its constitutionally mandated power of judicial review contained in Articles 13, 32, 131, 136, 143, 226 and 246.
Of the skirmishes with the central government it’s best to quote a para from a long forgotten and neglected scholar of the Indian Supreme Court, the late George Gadbois:
“’Whereas decisions of the Federal Court which embarrassed the British won the acclaim of the Indian nationalist leaders... decisions of the Supreme Court which have thwarted the government have produced the opposite effect. The ease with which the Constitution may be amended... indicates that while the Court’s jurisdiction is extraordinarily wide, its ultimate power is limited... the Constitution means what the Congress party says it means…”.
He wrote this in 1962. Substitute BJP for Congress now and you realise how absolutely nothing has changed. Overall, however, things have worked as they should and we must be grateful for that.
The CEC, in contrast, discharges both a management function and a quasi-judicial one. It’s done a fantastic job of the former in holding elections but has declined to be uniformly and consistently fair. The word that describes it perfectly is cooperative.
One consequence is the diminution of its reputation for being like Caesar’s wife — totally above suspicion. But as in the case of the judiciary, these instances are tenth in the order of smalls. They don’t really matter.
RBI and SEBI
The RBI’s role was spelt out as far back as 1934 by the extraordinarily powerful governor of the Bank of England, Sir Montague Norman. He said it should behave like a ‘Hindoo wife’: advise but not dissent.
The first governor, an obstreperous Aussie called Osborne Smith, dissented and was forthwith removed. That set the rules template. As TTK, Finance Minister in 1958, told a RBI governor, the RBI is nothing more than a “subordinate department of the Finance Ministry.”
But to make doubly sure that the RBI doesn’t get too big for its boots, the government has mostly appointed ICS/IAS officers as governors. They fully understand how ‘Hindoo wives’ are expected to behave.
Lest you think this is a bad thing, let me hasten to add: it’s not. India has conducted its monetary and fiscal policies in an exemplary way. Egos haven’t got in the way of cooperation.
Finally SEBI, the ugly duckling. It’s getting pretty long in the tooth now, almost 40 years old. It presents a huge paradox. It’s very active. It’s also very ineffective. It micromanages a lot. But it’s rulings are very often overturned by the appellate tribunal. There’s also a lot of flip-flopping for no clear reason. Worst of all, whenever anyone talks of regulatory capture, SEBI comes to mind.
SEBI neither confronts, nor complies or cooperates. We thus have a situation where while the macro aspects of the financial sector are generally well managed, its micro bits are often very unruly.
Clearly there is an institutional problem here that successive governments have not been able to sort out because as can be seen in high schools, the students are able to intimidate the teacher.