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Reformist Ajay Tyagi was Sebi chief amid turbulence, but had more hits than misses. Should he stay on?

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Last November, Nandan Nilekani, non-executive chairman of Infosys, had quipped that the company’s numbers were so robust that even god couldn’t change them. The IT bellwether was under scrutiny after some whistleblowers cast aspersions on its financials.

A few days later, at the annual financial markets event of CII, when asked to respond to Nilekani’s comment, Sebi chief Tyagi had a curt repartee: “You have to ask him, or you can ask god.”

The media went into a tizzy. By Tyagi’s soft-spoken standards, even that was saying a lot.

“He is not an outspoken person, but he has spoken out when required,” says a senior professional associated with one of the stock exchanges, referring to the ‘god’ remark. Unlike some of his predecessors, Tyagi largely sticks to his prepared speeches at public events and avoids making extempore remarks.

But that approach, possibly an effort to steer clear of needless controversies, hasn’t helped Tyagi win a second stint in office. His term ends in March and the hunt is on for his successor. He hasn’t been a blue-eyed boy of finance ministry mandarins in the past as well. Tyagi was initially appointed for a period of five years, which was later snipped to three years.

Tyagi, a 1984 IAS officer of Himachal Pradesh cadre, has tried to be a low-key and non-confrontational Sebi chief, a consensus builder. That is perhaps seen in his efforts to have a plethora of committees to advice the regulator on just about everything. Many bureaucrats learn this art early as a survival strategy. Some Sebi chiefs have followed a similar approach in the past — but it’s been an article of faith with Tyagi who has been a passionate committee-builder.

Some say he is reserved to the point that he hates any attention, unlike a few Sebi chiefs in the past. “Each person has a nature. Each Sebi chief is different. The nature of the person should not be a yardstick. If someone is carrying out the processes, then it is fine,” the exchange professional adds.

However, this is construed a weakness by some market participants. “Framing regulations and monitoring the market is only one part of the Sebi chief’s job. The market players look up to him to set the tone and direction. For this communication is key. He could have done better,” says a senior official with a market-infrastructure institution.

Ear to the ground

“Tyagi himself says he is not a very social person,” says a retired IAS officer who has seen him work from close quarters. But he more than makes up for this introverted nature by his ability to listen, the officer says. “He is willing to listen to suggestions and take his own decisions.”

In fact, Tyagi has institutionalised this within Sebi in the last couple of years. In addition to the traditional primary- and secondary-market advisory committees, the regulator now has expert panels poring over several emerging areas.

For example, Sebi now has committees on financial and regulatory technologies, cyber security, fair market conduct, investor-protection fund, and even research. Eminent people from diverse backgrounds populate them including Paytm founder Vijay Shekar Sharma, former Infosys director TV Mohandas Pai, top economists such as Sankar De, Ajit Ranade, academicians and experts such as Jayant Varma and Prithvi Haldea, in addition to market professionals and top lawyers.

“The number of committees that he has set up in the last few years is amazing. He believes the combined wisdom of the market needs to be taken into account rather than relying only on the regulator’s internal processes and knowledge base. As a result, the output has been enriched,” says Prithvi Haldea, a primary-markets committee member and the founder of Prime Database.

Haldea recalls an instance when Tyagi allowed the redrafting of the Issue of Capital and Disclosure Requirements (ICDR ) regulations to be outsourced. “Though reservations were expressed internally about the need to outsource this, Tyagi decided to allow the experts to do it.” The new user-friendly structure of ICDR regulations came into effect in 2018.

Thus, Tyagi has been courageous enough to do away with bureaucracy when it comes in the way of achieving convenience for the user, he feels.

But good intentions can be translated into good results only if execution is in sync. Sebi’s track record here continues to remain patchy.

Execution problems

An area that has caused a lot of heartburn is the recent changes in the portfolio management services (PMS) regulations.

A PMS fund manager says on condition of anonymity that while Sebi is trying to improve regulations for more transparency, the resultant regulatory framework is really shoddy and it seems not enough thought has gone into it.

“For example, the regulations say that you have to do time-weighted return (TWR) reporting. Now, the problem is there are multiple ways you can do TWR calculation. Everyone has been doing it their own way, so Sebi has missed the bus on having a standardised-returns metric and has again allowed a lot of freedom in terms to report returns,” he says. “Then there are things like net-worth requirements which are totally counterproductive. It’s like saying that only a big guy should be able to set up a PMS,” he adds.

The fund manager believes that while Sebi’s intentions seem to be good, execution has been a problem area.

Another fund manager says, “the shoddy execution was proof that the consultation process is not functioning properly. Therefore, you change something without proper understanding and then you go back and tinker with it after it has been introduced.”

A big U-turn

One of the earliest projects Tyagi took up, soon after becoming Sebi chairman, was setting up a high- powered panel headed by senior banker Uday Kotak to review corporate-governance regulations. Three years on, it is still a work in progress with the recent extension of the deadline to split the post of chairman and managing director, a blot on Tyagi’s track record in the final weeks of his tenure.

“One big positive that happened in these three years was the adoption of the Kotak committee recommendations,” says Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research.

On giving a two-year extension to split the post of chairman and managing director, Subramanian says that this is not the first time Sebi has rolled back something. “Sebi wanted to implement a one-day default disclosures to stock exchanges which was withdrawn at the last minute,” he says.

He adds that splitting the post was a recommendation of the Kotak committee and not dictated by Sebi. “Back then there was an opportunity for companies to lobby or comment at that point because it was a discussion document, but corporates remained silent and then finally they lobbied at the final hours and got it changed.”

Others are a bit more scathing. In the last three years, whatever Sebi has done is very insignificant in terms of corporate governance, feels the fund manager quoted earlier. “They have been trying to do a lot of things, but they haven’t moved the scale in terms of corporate governance issues. All the stuff that has happened in the last couple of years, no action has been taken by Sebi against these companies and promoters, so the governance issues remain.”

Crisis after crisis

Early in his tenure, the financial markets began to reel with mega scandals. After the Nirav Modi-led fraud came to light in Punjab National Bank, within months, NBFC behemoth IL&FS was on the brink of collapse threatening to drag down the entire financial system with it. Yes Bank and DHFL followed soon. This meant the regulator was perennially in a fire-fighting mode.

Though these scandals were primarily within the ambit of the RBI, the role of credit-rating agencies, which fell under Sebi’s watch, was under scrutiny. Subramanian says that the crackdown on rating agencies was a major positive during Tyagi’s tenure.

Several top honchos, including former ICICI bank chief Chanda Kochhar, the Singh Brothers of Religare and Fortis, and Sahara’s Subrata Roy were under Sebi’s lens for various alleged irregularities. Large conglomerates such as Reliance Industries, Tatas and even Infosys faced allegations and scrutiny.

The work is still not complete. As recently as last week, the chairman of CARE was asked to resign.

The biggest shock for the securities market per se was the Karvy episode. Nithin Kamath, CEO and founder of discount brokerage Zerodha, says, “The way Sebi managed it by taking care of investor interest deserves to be given credit.”

Kamath says that since last year the regulator has been bringing a slew of measures to improve the capital-market ecosystem.

“Some of what they are trying to do now may hurt businesses like us in the short term, but it’s keeping investors’ interests protected,” Kamath says. “Disallowing brokers from pledging client securities would hurt the industry in the short term, but for the last 20 years pledging of clients’ shares was a very common thing and there was no way for the lender to know who the shares actually belonged to,” he adds.

While there has been a rush to clean up the industry, newer entrants like Kamath feel there has been support in areas such as easy onboarding of customers.

On investor protection, Kamath says that the introduction of the Additional Surveillance Margin (ASM) and Graded Surveillance Measure (GSM) has helped caution investors about fraudulent companies. These measures restrict retail investors from building a large position in a probably fraudulent company and also give them a chance to exit.

Bits and pieces

During Tyagi’s term, many small tweaks were made for more transparency in the working of the regulator. “It was in Tyagi’s term that a system of cause list was introduced to find out the status and hearing date with full public disclosure,” says Sumit Agrawal, Partner, RegStreet Law Advisors.

“Today, Sebi’s website provides hyperlinks to SAT and High court orders. It tells if any of Sebi’s orders were challenged and if they are upheld or set aside in appeal. Also, the whole time member (WTM) hearing or the adjudicating officer (AO) hearing date is also publicly available now,” adds Agrawal, a former Sebi official.

During his time, Tyagi also overhauled insider trading norms to encourage whistleblowers to assist the regulator, attempting to mimic the model adopted by the US SEC, points out Agrawal. He also streamlined Sebi’s settlement regulations.

However, his tenure has not been short of challenges either. “Despite resistance from listed companies as well as banks, he mandated disclosure of any loan default within 24 hours if there was any failure to pay principal or interval beyond 30 days,” says Agrawal.

Tyagi expanded Sebi’s infrastructure, and also resisted transferring 75% of surplus Sebi fund to the government’s kitty and the proposal to raise minimum public shareholding to 35%, adds Agrawal. “He worked around on related-party transactions, governance norms for credit rating agencies, in order to strengthen the system and even to save the government of India from the embarrassment certain cases could have caused. After much delay, when Ashok Rupani’s penalty orders passed by Sebi AO was set aside by SAT, rather than the usual practice of appealing in the Supreme Court, Sebi was perhaps pushed to look within.”

A bad time to go?

Despite a general feeling that regulations can be more soft-touch, but enforcement has to be better, Tyagi’s hits seem to outnumber his misses. Also, there is a feeling that he is being asked to leave at a time when he was best placed to show results and complete many initiatives he started.

“For someone who is not part of the system, it takes a long time to understand the market behaviour, its nuances, how it works, how the different players behave, what are their incentives and motivations.He now has developed the ability to read the market and the players and his term has come to an end,” says Amit Tandon, managing director of proxy advisory firm Institutional Investor Advisory Services (IiAS). “For me, that is unfortunate,” he adds.

“If you go back and see, his initial appointment was for five years and then it was revised to three years,” Tandon says.

Tyagi’s predecessor UK Sinha got two extensions and eventually went on to serve a total six years, double of what his predecessors CB Bhave and M Damodaran got.

Haldea believes Tyagi also deserves a second term as he is one of those officers who has been open to suggestions and did not show arrogance or high handedness like some other IAS officers.

However, the government has called for applications for the post and a rich list of qualified candidates are said to be in fray, including Injeti Srinivas, now secretary of corporate affairs and Madhabi Puri Buch, a whole-time member.

Extensions have been granted in the past even after calling for applications.

Going by the recent appointments to the post of central vigilance commissioner, where the candidate did not even apply, some dark horses could also spring a surprise.

“This government is very secretive. If somebody claims to have some idea, it is more likely to be of conjecture,” quips the IAS officer quoted above.

So, want to know who is the next Sebi chief? Well, you can ask the PMO or you can ask god, Tyagi may have said.