NSE Scam: Did the safeguards fail or were they weak in the first place?

And finally, the role of other safeguards in place such as the Compensation Committee and the compliance-in-charge needs to be questioned to assess whether anything was missing in either their mandate and powers, whether they failed or whether it was a combination of both.

The SEBI order highlighted two major concerns. One was the appointment of Anand Subramanian (AS) by Chitra Ramkrishna (CR) to a very senior post for an unreasonably high remuneration and with hefty pay hikes.

And this was done without following due process and without placing accountability on AS. Second was the sharing of confidential, sensitive information by CR with the yogi from whom instructions on important matters relating to the exchange were sought.

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While the SEBI order, running into 190 pages, talks of these violations, it does not address the question of systemic failure. SEBI exercises elaborate, close and detailed control over the functioning of stock exchanges. Appointment of public interest directors is subject to approval by SEBI. The appointment and remuneration of key management personnel (KMPs) has also to be in line with norms laid down by SEBI, which sets limits on the remuneration of directors.

Internal regulations of the exchanges are also in line with standards laid down by SEBI, which can also direct the bourses to make further changes. The exchanges cannot change a word in them without the approval of the market regulator.

SEBI rules regulate minutely almost every part of the operations of exchanges and cumulatively run into hundreds of pages. A fair question then is whether even these mammoth sets of rules were not enough or whether there was something lacking in their implementation and oversight.

In short, did these regulations exist mostly on paper and provide false assurances? Curiously, post detection of irregularities at NSE, the rules were upgraded and enlarged on paper. Indeed, the regulations of 2012 that governed stock exchanges were totally replaced by new regulations [Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations] in 2018.

Then let us consider the Board of the exchange, which consists of PIDs, shareholder directors and other members in line with regulations existing at that time.

The PIDs specifically represent interests of investors and are also expected to be independent. The appointment of PIDs and the chairman (who has to be a PID) is subject to approval by SEBI.

SEBI Regulations then existing (and even today) provide an almost decisive say for PIDs on Board matters. The Compensation Committee that determines the remuneration of KMPs needs to have a majority of PIDs and the chairman also needs to be a PID. The functions of PIDs are elaborately laid down. The question is whether SEBI has examined the appointment, qualifications and performance of such PIDs who were expected to play a significant supervisory role on the Board.

The definition of a KMP is very wide and if one considers the designation and powers of AS, listed in the SEBI order, he would easily fit within the definition. The remuneration of KMPs has to be determined by the compensation committee in line with a policy approved by SEBI. It appears that AS was not identified as a KMP and so the remuneration policy bypassed him.

Then there is the question of the status of PIDs. As already discussed, their role is very wide. Curiously, their remuneration is arguably meagre. They are eligible only for sitting fees, subject to limits specified in the Companies Act, 2013 (which is a maximum of Rs. 1 lakh per meeting). This is hardly adequate to do justice to the time and responsibility PIDs are expected to commit.

Also, while they have wide responsibilities, they have very few powers individually. They can function only collectively and that too at Board meetings. A provision in the Companies Act rightly absolves independent directors of liability for violations if the matter is not something that has come in a Board meeting and the director has not connived with or participated in the violations. While questions can be raised as to whether they did their job well, systemic issues in the law governing them and their lack of effective power need also be examined. And, indeed, this is an issue concerning generally all listed companies and their independent directors.

Stock exchanges are surely expected to make profits for their shareholders. But they perform significant public functions and are even the first-level regulator on several areas. It is for this purpose that SEBI is empowered to not just regulate them closely but exercise a direct say in many important matters.

Serious lapses at exchanges can have wide ramifications, more so as the number of retail and other investors has increased massively in recent times. A holistic review of the system is required to examine which provisions exist more on paper, what is lacking in oversight and how serious lapses do not happen or are detected well in time. The situation, as presented by SEBI itself in its order, presents a sorry and embarrassing picture.