The CBI should also investigate the letter of K. M. Abraham to the Prime Minister in 2011

Bizarre. That is the word to describe the Preliminary Enquiry (PE) registered by the CBI against former Chairman of the Securities and Exchange Board of India (SEBI) C. B. Bhave and its former whole-time member K. M. Abraham for granting sanction to MCX-SX in 2008 and renewing it again in 2009 and 2010. These two gentlemen carry a well-earned reputation for honesty and integrity and the period between 2008 and 2011 when they were in SEBI was one of its brightest phases when the regulatory body initiated several investor-friendly policies.

But that is not why the CBI’s action is strange. The PE is weird because it alleges exactly the opposite of what Mr. Bhave and Mr. Abraham did in the MCX-SX case. If at all anyone stood between the Multi-Commodity Exchange of India (MCX), the now disgraced Financial Technologies (the promoter of scam-hit National Spot Exchange, MCX and MCX-SX) and their vaulting ambitions built on dubious foundations, it was Mr. Abraham and his boss.

The CBI’s case is that SEBI, under Mr. Bhave and Mr. Abraham, granted sanction to MCX-SX in 2008 to start currency derivatives trading giving it one year to comply with regulations enshrined in the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006, or MIMPS regulations for short.

The sanction was further extended in 2009 and 2010 for a year each even as MCX-SX went to court seeking a direction to SEBI to permit it to begin trading in equities and derivatives. The CBI’s PE says that SEBI ignored an October 2007 communication from the Finance Ministry that referred to income-tax violations and raids on MCX and FTIL in June 2007 which disqualified the two companies under the ‘fit-and-proper’ criteria.

The question has to be addressed in the light of the prospective wisdom that guided SEBI’s decision back in 2008 and not with the benefit of hindsight, as the CBI now seems to be doing. And what was that prospective wisdom? SEBI, vested with protecting the integrity of the market, was concerned about the lack of competition in the derivatives market which then had just one player in the National Stock Exchange (NSE). And here was an application from a group with established credentials in running a commodities exchange.

This fair objective of promoting competition had to be weighed against the Finance Ministry communication on the IT raids on MCX and FTIL. SEBI’s legal team took the view that a mere raid does not mean that the ‘fit-and-proper’ criterion was debased; that could happen only if there was a conviction. The regulator had anyway allowed FTIL to acquire 5 per cent stake each in the Delhi Stock Exchange and Vadodara Stock Exchange in August 2007.

And so, in its wisdom based on then prevailing circumstances, SEBI granted sanction to MCX-SX to start currency derivatives trading with the condition that MIMPS and other SEBI regulations would be complied with within a year. The worst that one could accuse Mr. Bhave of in this is that he was probably very conscious of his moorings in National Securities Depository before he became SEBI’s chairman and hence wanted to be seen as a fair regulator in promoting competition against NSE. But that is not malfeasance.

Interestingly, it is the same Bhave-Abraham team that ultimately found that MCX-SX was not ‘fit-and-proper’ to run a stock exchange and denied sanction to MCX-SX for starting equities and derivatives trading through its order of September 23, 2010, signed by Mr. Abraham.

The order found that MCX-SX not only failed to satisfy MIMPS norms but it had also violated other regulations. “I am of the considered opinion that the Applicant [MCX-SX] has failed to adhere to fair and reasonable standards of honesty that should be expected of a Stock Exchange,” the order said, further adding, “The Applicant [MCX-SX] has been dishonest in withholding material information on arrangements regarding the ownership of shares of its shareholders…”

It’s another matter that MCX-SX went to court again and managed to secure its licence to function as a stock exchange. But subsequent events have vindicated SEBI’s stand. The scam at the National Spot Exchange (NSEL), promoted by FTIL, proved that the group indeed was not ‘fit-and-proper’ to run an exchange, which is a systemically important institution and a vital part of market infrastructure.

Yet, SEBI, under its present chairman U. K. Sinha, renewed MCX-SX’s licence as late as October 2013, a couple of months after the NSEL scam surfaced.

The CBI might be interested in getting to the bottom of how the regulator found MCX-SX ‘fit-and-proper’ when its promoter and group companies were embroiled in what was then a Rs.5,600 crore scam. Will the CBI register a PE on this now? The grounds are stronger here than the 2008 sanction which was allegedly vitiated by mere income-tax raids on FTIL and MCX.

Finally, this point also needs to be made. Mr. Abraham, who is in focus now, is the same officer who passed the landmark order on the Sahara group that nailed its misdemeanours and landed its promoter Subrato Roy in Tihar jail. Mr. Abraham, in the last few months of his tenure at SEBI in 2011, was harassed and intimidated, in his own words, for working against corporate interests.

He was then either pursuing or had passed orders on different cases related to Reliance Industries, Anil Dhirubhai Ambani Group, Sahara, Bank of Rajasthan and MCX-SX.

Mr. Abraham was impelled into writing directly to the Prime Minister a whistle-blower letter that was explosive in its content. The letter said that SEBI’s Chairman U. K. Sinha “directly or indirectly, referred to how these cases [listed above] are sensitive and are engaging the attention of the Union Minister of Finance [Pranab Mukherjee] or Smt. Omita Paul, Advisor to the Finance Minister.”

The letter, available in the public realm, quotes Mr. Sinha as mentioning on several occasions that “they are not interested in too many cases in SEBI” and that if he is able to “manage” these few cases then it becomes “easy” for him.

Mr. Abraham also quotes Mr. Sinha telling him that everything is being done at the instance of Ms. Paul and that Bimal Julka, then Additional Secretary (Capital Markets), Department of Economic Affairs (DEA), is a “schemer” and that Thomas Mathew, then Joint Secretary (Capital Markets), DEA, is “executor”. Mr. Mathew and Ms. Paul are now attached to Rashtrapati Bhavan and enjoy immunity from any probe or prosecution.

Mr. Abraham pleaded in his letter that “if the integrity of SEBI is to be preserved, Mr. Sinha should not be subjected to and should be insulated from the kind of pressures and fears that he is facing now.”

He even offered to testify under oath in any judicial and administrative forum but what did the Prime Minister do? He forwarded the letter to the Finance Ministry and Mr. Pranab Mukherjee promptly sent it onward to Mr. Sinha in SEBI. That led to other consequences, including Mr. Sinha questioning Mr. Abraham’s mental state and IT raids on the latter. But that is another story and we are digressing.

The question now is: if the CBI thought it fit to file a PE against Mr. Bhave and Mr. Abraham based on the Finance Ministry’s note, will it also pursue the leads from Mr. Abraham’s letter of June 1, 2011, to the Prime Minister that makes serious allegations against top government functionaries? Now, that’s a real test of fairness and integrity for the CBI.

raghuvir.s@thehindu.co.in