[By Rohan Kohli]
This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here.
Rohan Kohli is the Co-Convenor of CBCL and a 5th Year B.A. LL.B. Student at NLIU, Bhopal.
The corporate governance discourse in India today has moved rapidly, especially with contemporary developments in the form of Kotak Committee Report, [1] but still lags in several aspects vis-à-vis more mature financial jurisdictions. While our precocious model of economic development[2] has been instrumental in addressing governance issues such as equitable board composition,[3] or more recent niche issues such as separating key managerial positions,[4] there is still a glaring absence on understanding of certain nuanced issues.
One such nuanced issue is the recent trend of regulators taking up post-retirement private sector employments. In the past year, there have been a constant influx of regulatory and government companies’ seniors in the corporate sector, from former SBI Chairman Arundhati Bhattacharya [5] to former SEBI Chairman U K Sinha.[6] In the more distant past, this trend was also visible in several instances – from ex – SBI senior management [7] to ex – RBI Governor.[8] The trend of their preferred destinations being corporate law firms also is extremely intriguing.
Ordinarily such practices may seem in the usual course of events, there carry a number of ethically and morally problematic implications, the legal issue in which is insider trading. Indian laws on the subject [9] have been largely successful in preventing major embarrassment to the corporate sector in the recent times, due to a combination of reasons such as effective corporate compliance and harsh legal implications including financial and penal consequences.[10] Similarly, while the ethical implications of post-retirement political appointments such as Governors [11] is well recognised and even frowned upon in the mainstream media discourse, this does not translate into recognising similar examples in the corporate space.
The official line that corporates take while appointing such ex-regulators is that they are sought for their decades of experience in the field, their unique insight developed due to such extensive experience and use these insights to leverage the corporate’s interests in the market. While these are valid considerations and their insights are valuable for any corporate, the devil is in the details. While the PIT Regulations provide a clear demarcation to using these insightsin the form of price-sensitive information, they do not provide an absolute bar to such appointments.
In all probability the biggest selling factor of these ex-regulators provide is insight in what manner will regulatory authorities react and respond to contentious issues, be it approving or disallowing mergers, or macro-level policy inputs into future regulatory trends. At the same time, these ex-regulators also give firms opportunity to leverage their soft power, which in latent forms could be utilising their familiarity with current regulators (as in most cases the current regulator would be the ex-regulator’s junior and in most instances would have worked closely together till recent times), to more patent forms where firms use this familiarity to influence regulator’s decisions and engage in seriously problematic crony capitalism.
The government currently has a policy of mandating a one-year long (in most institutions) cooling-off period during which they eschew any private appointments. However, as the above analogy shows this period hardly serves its purpose given their juniors or peers will be in their erstwhile jobs at the time they accept appointment in the private sector. Further, the current examples of Mrs. Bhattacharya, Mr. Sinha shown earlier that occurred as soon as their cooling-off period lapsed, reducing this into a mere formality. A solution to this is making the cooling-off period in sync with the term of the previous office (i.e. the cooling off period for SEBI Chairman will be 5 years, beginning from the day of retirement). This might serve as a reasonable control and ensure that by the time the ex-regulators assume private employment, their peers and juniors might no longer in office to negate chances of influencing the regulator’s actions.
In more advanced markets such as USA, there is a greater mainstream understanding of the inter-corporate-regulator appointments, but that recognition does not necessarily translate into eschewing such practices. While India has seen examples of ex-regulators and government companies’ management taking up private employment, the former, i.e. corporate head taking up regulatory jobs is almost unheard of, until very recently.[12] USA has seen plenty of examples for each, from Alan Greenspan in the former[13] to Henry Paulson in the latter.[14] Their impact in deregulating the financial and banking sector has been so immense that its role in the sub-prime crisis was the subject of a widely acclaimed documentary – Inside Job. The US story in this regard also goes down to corporate-regulator appointments translating into impacting the entire discipline of economics at the world level, ably documented in Inside Joband in other media.[15]
Given that our regulators are more hawkish than US and other jurisdictions, especially given ours is a developing economy, we are in a much better position to prevent such corporate governance issues at a very nascent stage itself. Apart from the solution regarding cooling-off period offered above, comprehensive conflict-disclosure compliances should prevent any major future situations that US had to go through. SEBI’s current conflict-disclosure model for public-company directorships has proved to be a successful model so far in capital markets, and can surely be extended to other markets and even post-regulatory appointments that is the subject of this blog.
India is hardly at a stage that the US was in 2008, or is currently, with complex corporate governance issues such as detailed above. However, that does not mean that we negate those examples. Rectifying such issues will only happen after we start recognizing them.
[1] Report of the Committee on Corporate Governance, October 5, 2017. See, https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html.
[2] Subramaniam, Arvind, “Of Counsel: The Challenges of the Modi – Jaitley Economy”, Penguin Viking, December 2018.
[3] Supra Note 1.
https://barandbench.com/sbi-arundhati-bhattacharya-to-join-azb/.
[9] SEBI (Prohibition of Insider Trading) Regulations, 2015.
[10] No separate penalties have been prescribed under the Regulations. Reference is made however to the penalty provisions under the SEBI Act, 1992 which shall apply. SEBI is also empowered to prohibit an insider from investing in or dealing in securities, declare violative transactions as void, order return of securities so purchased or sold. Any person contravening or attempting to contravene or abetting the contravention of the Act may also be liable to imprisonment for a term which may extend to ten years or with fine or both.
[12] Lateral recruitment to senior positions in Government of India were opened up in June 2018 and January 2019 at the Joint-Secretary level. https://lateral.nic.in/.
[13] Alan Greenspan was Federal Reserve Chairman from 1987 to 2006 and is today a private advisor and consultant to financial services firms.
[14] Henry Paulson was Chairman and CEO, Goldman Sachs before being appointed as the US Treasury Secretary prior and during the 2008 economic crisis.
[15] Larry Summers was US Treasury Secretary during the Clinton administration and later President of Harvard University, and today is consultant to some of the biggest financial sector firms. https://www.chronicle.com/article/Larry-Summersthe/124790.