SEBI’s recent assertion that it will not look into ‘anonymous’ whistle-blower complaints is a huge discouragement to whistle-blowers who provide ‘sensitive’ information to the regulator to help bring out corporate scandals.
Take the example of the preferential access or the algo trading scandal at the National Stock Exchange (NSE) where an unknown whistle-blower in 2015 exposed a broker-executive nexus and also brought out the role of highly-accredited scholars in extracting sensitive data from the exchange through deceptive means. Even there, SEBI had, initially, ignored the whistle-blower letter and acted only after a high court order.
Last Friday, SEBI while disposing a complaint from a whistle-blower in a case related to MCX said that “it will entertain only those complaints, where an investor discloses his identity and provides supporting documents to substantiate an allegation”. The statement exposes SEBI’s intention to ignore and brush aside sensitive matters where the identity of the informer cannot be disclosed.
“SEBI is putting itself above the law applicable to listed and deposit-taking entities. Listed companies have to compulsorily investigate every whistle-blower complaint, even if anonymous. Why should SEBI not follow the same rules it prescribes for regulated entities? SEBI must ensure it is open to receiving information about wrong-doing. It is called market intelligence. Instead, we learn from a recent SAT (Securities and Appellate Tribunal) order which rapped the regulator that SEBI is converting complaints filed on SCORES platform as market information/ whistle-blower information and closing the complaints. These are not even anonymous complainants,” said Sucheta Dalal, former board member of a listed company and Managing Editor, Moneylife.
As per rules followed by CBI and CVC, they probe ‘anonymous’ whistle-blower complaints if there is some substance and trail. Thus, when SEBI says it will look at the ‘identity’ of the whistle-blower first, it lacks genuineness of intent. In the matter involving the NSE algo case, the whistle-blower provided a detailed trail and ramifications of the scam and ‘pleaded’ to the regulator to investigate.
Dalal, who had first highlighted the NSE whistle-blower letters in 2015, says that in the NSE matter too SEBI had initially closed the complaint after seeking NSE’s response. It moved forward only due to the Bombay High Court order in the defamation case filed by NSE.
“But the fact remains that the whistle-blower had provided significant and detailed information about wrong-doing that was confirmed by multiple committees, including SEBI’s technical advisory committee. Even now, that case remains in limbo,” she said.
It is a fact that a lot many whistle-blower letters are received by SEBI. But instead of saying that it will not entertain such letters where the informer remains anonymous, the regulator should disclose the information publicly, as is required of listed companies. SEBI can also explain why it will not investigate them while making such information public. The NSE whistle-blower did not provide evidence but gave an elaborate modus operandi and trail to application of mind. If the matter was not investigated then the entire issue would have been buried.
Why was SAT irked by SEBI?
BusinessLine had reported on November 14 on how SAT was irked by SEBI’s approach to complaints. SEBI got scolded by SAT for converting a complaint or information filed on its online grievance platform SCORES by an ‘identified’ person into ‘market intelligence’ and declined to say what would be its outcome. SEBI said that the status of the complaint cannot be ‘ascertained.’ In fact, the regulator even made unappeasable remarks, according to SAT.
What SAT found most strange was that SEBI, in a communication to the complainant, had stated that the information submitted by the appellants would be analysed and investigated in a holistic manner, while in the same breath it said it would neither confirm nor deny the existence of any investigation conducted by the market regulator.
“We find the approach adopted by the respondents (SEBI) to be a strange one. Such computer-generated disposal of a serious complaint speaks volumes on the conduct of the respondents in treating the minority shareholders in this shabby manner. It seems that the respondents have lost sight of the mandate provided to them under Section 11 of the SEBI Act, which mandates SEBI to safeguard the interest of investors. Disposal of the complaint in this manner in the instant case indicates non-application of mind and non-consideration of the interest of investors. We have no hesitation in stating that SEBI, as a regulator in the instant case, has not performed its duties and has kept the complaint pending for more than six years, which speaks volumes by itself,” SAT said.
Whistle-blower complaint into MCX matter
BusinessLine had reported on August 12 about the issue with cotton delivery at an MCX-linked warehouse. MCX responded that the issue was “operational in nature and was addressed within the framework of the company’s by-laws and regulations”. Later, after the whistle-blower letter surfaced, the exchange said there was no issue at all. The fact that went against the whistle-blower letter was that it was poorly drafted and without using proper market-related jargon. Earlier, whenever there was any scare with regard to the quality of any commodity, the erstwhile commodity regulator Forwards Market Commission (FMC), without informing the parties and exchange(s) involved, carried out a proper quality test of the commodity samples from that particular warehouse so that the matter could be put to rest once and for all. FMC carried out these initial investigations in the commodity market when futures price of the contract fell below the spot price. Was any sample testing done in the case of MCX by SEBI? Nobody knows. Instead, the regulator wasted time and energy in locating the identity of the whistle-blower.