Perverse logic in MCX-SX case: Is CBI chasing honest babus instead of the crooks?

The Central Bureau of Investigation’s (CBI’s) bizarre decision to launch a preliminary enquiry against two highly regarded former regulators - ex-Sebi chief CB Bhave and ex-Sebi wholetime director and now Additional Chief Secretary, Kerala, KM Abraham, will send shivers down the spines of the honest parts of India’s bureaucracy.

According to a Times of India report yesterday (13 March), the CBI wants to know how MCX-SX, the stock exchange launched by NSEL-scam tainted Jignesh Shah of Financial Technologies (FTIL now), was given permission to start an exchange by Sebi. (Read about the NSEL scam here and here)

This is nonsense. Bhave and Abraham were the regulators who had opposed MCX-SX tooth-and-nail because they suspected Shah’s bonafides. Even their successor, current Sebi Chairman UK Sinha, continued this opposition till his hands were forced by the Supreme Court and Sebi was forced to alter its regulations to let MCX-SX trade in stocks.

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So to think that Bhave and Abraham are the ones who need inquiring into turns the idea of justice on its head: the supercop (CBI) is chasing the market cops instead of the crooks. It seems to be bracketing those who worked to protect investor interests with those who manifestly failed to do so at the scam-tainted National Spot Exchange Ltd (NSEL), Shah’s other baby in the under-regulated commodities segment of the market.It was precisely to avoid Sebi’s glare that Subrata Roy of the Sahara Group sought to raise money through private placements. Jignesh Shah’s NSEL got into trouble because it too operated in the underpoliced space of commodities trading, which is regulated by the Forward Markets Commission, which does not yet have the statutory powers of Sebi.

Bhave and Abraham, neither of whom got an extension at Sebi despite being eligible for it in 2011 when their initial terms expired, are said to be among the best and brightest in the business, and going after them suggests how rotten our system has become.

If the CBI has been reading the newspapers, Bhave and Abraham were precisely the regulators standing in the way of Shah’s moves to start stock trading because he was not in compliance with Sebi’s MIMPS (Manner of Increasing & Maintaining Public Holding in Recognised Stock Exchanges) Regulations, 2006. These regulations suggest how much shareholding promoters of an exchange can hold if they want to run a demutualised stock exchange.

The history of MCX-SX and the roles of Abraham and Bhave run something like this.

In 2008, MCX-SX got permission to launch currency trading. It then sought Sebi permission for stock trading, which Sebi declined because MCX-SX was not in compliance with MIMPS, which required a dilution of the promoters’ stockholding. MCX-SX reported compliance in April 2012, but when Sebi didn’t respond, the case moved to the Bombay High Court, which asked Sebi to get on with it. Sebi then issued show cause notices to MCX-SX for alleged violations, and in September 2010 it finally rejected the exchange’s applications to start trading in stocks.

KM Abraham, the diligent Sebi director who was also instrumental in nailing the crooked money-raising plans of Subrata Roy of the Sahara Group (for which he is now spending time in jail after being in contempt of Supreme Court orders), was the key player in the rejection of MCX-SX’s application.

In his final order dated 23 September 2012, Abraham gave five reasons for rejecting MCX-SX’s applications, and also made caustic remarks on the apparent dishonesty of the applicant. He said: “Applicant has been dishonest in withholding material information on arrangements regarding the ownership of shares of its shareholders and, therefore, has not adhered to fair and reasonable standards of honesty that should be expected of a recognised Stock Exchange.” (Bhave’s role in the MCX-SX issue was that of being the Sebi chief when Abraham was adjudicating the case. He can be presumed to have been in agreement with Abraham’s order, though the latter had independent authority to pass orders on MCX-SX)

In other words, one of the five reasons for denying MCX-SX the right to trade in shares was the (lack of) ethical standards in the applicant - a doubt that has proved correct in the light of the NSEL scam, where the commodity exchange went into default when trading members failed to honour their contracts, leading to severe losses to several clients.

So if there is anyone who does not need to be investigated, it is Abraham. However, he needs to be brought in as a witness to talk about the kind of pressures being applied on Sebi to help corporates.

At a different stage, after Bhave had left and Sinha was the new Chairman, Abraham wrote a confidential letter to Manmohan Singh complaining that there were pressures from the finance ministry under Pranab Mukherjee to go easy on MCX-SX, Reliance, Bank of Rajasthan and Sahara. Abraham also offered to testify to these facts under oath, if need be. (Read Abraham’s full letter to the PM here).

So who sent the CBI to chase Abraham and his former boss Bhave? We obviously don’t know the answer, but whoever did so, is on the wrong track.