His name was approved at MCX without any cooling-off period or we say “without much ado” even when there were pending corporate governance issues against him at CDSL.
PS Reddy, current MD and CEO of Multi Commodity Exchange (MCX), will have to let go of an amount between Rs.2.5-2.8 million (25-28 lakhs), due to him from his previous employer Central Depository Services India Ltd (CDSL), unless he chooses to challenge the company and market regulator, the Securities and Exchange Board of India (SEBI). This amount that will not be paid to him is like a penalty imposed by CDSL on Reddy on orders from SEBI for ‘bad corporate governance practices’, sources told PGurus.
The so-called penalty amount may not have far-reaching consequence upon Reddy’s financials, considering that he earns more than Rs 30 million annually in just salary at MCX, but the SEBI diktat raises many questions with regard to Reddy that can be understood only by going into the background of the supposed fine being imposed on him.
Reddy was first appointed as MD and CEO at CDSL in April 2012 for three years. He was re-appointed for another three years and got one more year extension as the CDSL boss. Reddy got “double lucky” when the post of MD and CEO fell vacant at MCX as his term ended at CDSL.
In a letter dated September 11, SEBI asked CDSL to withhold Reddy’s variable pay for the financial year 2018-19. SEBI ordered CDSL board to initiate appropriate action against Reddy for ‘corporate governance lapses’.
What can be clearly analysed from SEBI’s own observations mentioned in the letter to CDSL is that Reddy mainly delayed the procedure for appointment of his successor at the depository company till the time he landed the top job at MCX.
Reddy’s term as the MD and CEO of CDSL was ending on March 31, 2019. As per SEBI observation, Reddy delayed the process of appointment of new MD and CEO at CDSL up to May, which is one of the key reasons for him to be penalised now. Due to Reddy’s mishandling of the situation, CDSL had to function without a full-time MD and CEO for months. Reddy took charge at MCX in May after which CDSL moved ahead with the process for appointment of new MD and CEO.
SEBI in its letter further says that Reddy was also conflicted in his role as the compliance officer of CDSL as he failed to distance himself from the discussions of his re-appointment at CDSL.
SEBI letter shows that CDSL was supposed to frame a nomination and remuneration policy for the appointment of new MD and CEO much before Reddy’s tenure could end. ‘However, such a policy was submitted by CDSL only on May 30 after Reddy moved out of the company.’ Not only this, but SEBI had to remind CDSL on March 28 to submit the policy despite which it was not done. Usually, such a policy needs to be framed months or weeks ahead of the completion of the term of any key managerial persons at a Market Infrastructure Institution (MII) like an exchange or depository. But that was not done by Reddy when he was the boss of CDSL.
Reddy was lax with the procedures until his name was announced for the top job at MCX in February and later till it was ratified by SEBI, sources say. Corporate governance issues at CDSL were reported by media in April 2019.
SEBI further says that the remuneration policy submitted by CDSL was also inconsistent with the norms. As a result, CDSL, a key MII, had to function without a full-time MD and CEO.
SEBI says at CDSL Reddy had a conflict of interest issue too.
“Shri PS Reddy by not recusing himself from the discussions of the agenda items involving a conflict of interest not only led to non-compliance of SEBI provisions but also failed to perform his duty as compliance officer too.”
SEBI also says that Reddy also failed at another of his duty with regard to initiating a procedure for appointment of CDSL chairman after the incumbent chairman passed his retirement age.
“It was ex-MD, CEO’s (Reddy’s) responsibility to obey the directions of the governing board (of CDSL) to seek SEBI directions for necessary action on public interest director age limit,” SEBI says.
The question that begs an answer is that despite such corporate governance issues, why was Reddy in the first place even approved for the top job at MCX by SEBI? Were there no other names? Usually, when an MII submits just one name, SEBI seeks few more names. Some clarity is required on this as MCX is passing through its own severe governance-related issues as highlighted by PGurus. The commodity exchange required someone at the helm with a clean track on at least governance-related matters and SEBI and MCX board both clearly forgot this key criterion at a crucial time. Reddy and CDSL did not respond to an email query.
SEBI and its vague criteria
SEBI norms, on the appointment of key managerial persons mainly MD and CEO at exchanges and depositories, says that their appointment can be for a “maximum of two terms up to five years each.” Interestingly, while SEBI has mandated that public interest directors on board of exchanges and depositories cannot be appointed on the board of other MIIs, the norms are silent on any such requirement for MD and CEO. The norms also don’t explicitly specify that if MD and CEO can be appointed at another MII if he has completed his two terms at one MII. Clearly, Reddy has been a beneficiary of such an obscure norm by SEBI as he had completed his two terms at CDSL, a key MII and still got appointed at MCX another MII.
Even more intriguing is the fact that while SEBI wants public interest directors at one MII to not be appointed at another MII unless, at least, there is a cooling-off period, there is no such requirement of a ‘cooling period for an MD or CEO coming from another MII.’ Again, it proved benevolent for Reddy as he was the most recent to get appointed after the MIIs appointment-related norms were formed.
Reddy was first appointed as MD and CEO at CDSL in April 2012 for three years. He was re-appointed for another three years from April 2015 to March 2018 and was “lucky” to have got one more year extension as the CDSL boss. Reddy got “double lucky” when the post of MD and CEO fell vacant at MCX as his term ended at CDSL. His name was approved at MCX without any cooling-off period or we say “without much ado” even when there were pending corporate governance issues against him at CDSL. So, kind of SEBI that it giveth more to Reddy than it taketh away? Why?
P.S. PGurus will be writing more in the coming days on the big story of how the MCX and NSE merger is quietly taking shape… block by block building of a monopoly structure.