It is great to see the Government of India trying to rein in fiscal deficit, but it is time to ask: Are they overdoing the act?
The Narendra Modi 2.0 approach in the Finance Ministry is to bet on a tight deficit to lower interest rates. It seems to want money for the government kitty from wherever: A super-rich tax that has hurt the market sentiment, surplus from the Reserve Bank of India (RBI) on which the Bimal Jalan panel has just pronounced its disbursal plan, a drive to penalise companies that under-utilise funds meant for corporate social responsibility and a proposal to draw out reserves from the Securities and Exchange Board of India (Sebi).
Some of all that is understandable, but the ministry's insistence on taking surplus funds from market regulator SEBI is clearly not. No wonder, SEBI employees are in a protest mode and so is its chairman Ajit Tyagi. You could argue that the RBI money can be used to revamp public sector banks. You could say turning the heat on unspent CSR funds is a way of making corporates spend to boost the economy. However, the Finance Ministry's Budget proposal to suck out to the Centre's kitty a quarter of SEBI's surplus every year is against the grain because what India needs badly now is a culture of progressive corporate governance, on which SEBI has barely scratched the surface.
SEBI's General Fund representing the surplus currently stands at Rs 2,300 crore. Even as the reserve funds were hitting the headlines, business pages of newspapers were oozing bad news that suggested that it is time for the market regulator to move from a somewhat passive approach it has displayed on supervision of the capital markets to a more aggressive, vigilant approach. It is almost as if the RBI's bad loan problem reflected in the pile of non-performing assets (NPA) adding up to around Rs 10 lakh crore had a follow-through conundrum to be resolved in the capital markets.
The IL&FS crisis seems to be a night without end. The disturbing news is that audits revealed even credit raters may have been compromised systematically in a match-fixing sort of arrangement. Mortgage lender DHFL is also going through a crisis in which the role of credit raters has been highly questionable.
InterGlobe Aviation, the company that owns IndiGo Airlines, is going through an ugly spat between partners Rahul Bhatia and Rakesh Gangwal in a manner that suggests that disclosures made by the company fell short of good standards of corporate governance. The role of independent directors began to be questioned after the Satyam Computer Services accounting fraud and you could stretch the logic to companies like Jet Airways and a slew of bankruptcy-bound ventures.
The resignation or sacking of auditors in some instances and a ban on auditors by adjudicatory bodies in some others is a disturbing inside story in India's labyrinth of corporate shenanigans. IL&FS, DHFL, Infibeam, Vakrangee, Eveready Industries, Reliance Capital...the list of companies hit by auditor-related controversies or incidents is a long one.
Some of that muck has to be handled by the Ministry of Corporate Affairs in New Delhi, but SEBI has gone well beyond its cliched, "mutual fund investments are subject to market risks..." approach.
The fact is that millions of unsuspecting investors are entering the so-called equity cult in India through systematic investment plans (SIPs) in mutual funds. In the end, small investors are also shareholders, and indirectly so through mutual funds.
It is important, therefore, for SEBI to more than keeping an eye on the governance side of the shareholder rights and responsibilities. This requires understanding board-level dynamics and educating India's notoriously self-centred promoters who seem to think an initial public offer (IPO) is the way to riches, not new responsibilities.
From disclosures to auditors and vigilance on credit raters, SEBI needs to supervise the general culture of equity investment in India. What guarantee is there for small investors in a situation where auditors, credit raters and independent directors are found wanting? In such a context, both the powers and responsibilities of SEBI need to be revisited.
The regulator needs sufficient empowerment as well as the required resources to police the markets as the rot seems to be deep. This is hardly the time for the government to be counting the pennies in its treasury while markets bleed in a sea of uncertainty.
For instance, SEBI has proposed stronger disclosures on auditor resignations but it is time to ask who will actually toothcomb disclosures to make sure everything is done in the spirit of the law. If mutual funds are largely passive investors, it does not make enough sense. They need to be educated to be more active from the governance side and the responsibility must fall on SEBI as a public entity to protect the interests of small investors and minority stakeholders.
It would also make sense for SEBI to think up new ways to deploy its resources in the interest of small investors and minority shareholders rather than make lame pleas citing autonomy for the funds to be retained. We need a vigilant regulator, not a turf-playing bureaucracy. The Financial Stability and Development Council (FSDC), the super financial regulator, held a pre-budget meeting but there is hardly any sign that it is seriously worried about the crisis in IL&FS, DHFL, and the like.
It is time for Finance Minister Nirmala Sitharaman to summon the FSDC including key corporate affairs officials and encourage SEBI to fix the governance crisis that is affecting small investors and foreign portfolio managers alike. You can't have a booming market economy in which capital markets are on shaky foundations.
(The writer is a senior journalist and commentator. He tweets as @madversity)
Updated Date: Jul 22, 2019 11:41:59 IST