The recent judgment in the Price Waterhouse case once again brings to the fore the question of how to harmonise the functioning of different regulators, especially in the case of an overlap.

A fresh chapter was added to the debate over regulatory powers last week when the Bombay High Court threw out a writ petition from tainted audit firm, Price Waterhouse, challenging the jurisdiction of the securities market regulator, SEBI, over accounting and audit professionals.

The disgraced audit firm had challenged SEBI's powers to investigate its role in the Satyam scam where several investors lost their shirts.

The judgment has once again brought to the fore important questions. How do you draw regulatory boundaries, especially when the primary mandate of a regulator willy-nilly leads to oversight over professionals regulated by other bodies? How do you harmonise the functions of different regulators in case of such overlap?

SEBI's mandate

Investor protection is the primary mandate of SEBI. In the Satyam case, the regulator had issued notice to Price Waterhouse under its Fraudulent and Unfair Trade Practices Regulations for falsification of accounts.

Shareholders of Satyam suffered a 90 per cent fall in the value of their investments within a week of the fraud coming to light. SEBI, vested with the duty of protecting investors, had no choice but to investigate the case. And the investigations inevitably led to the role of the auditors.

Having established their role whether it was collusion or negligence, we still don't know which what was SEBI supposed to do? Approach the regulator for auditors, the Institute of Chartered Accountants of India (ICAI), with a complaint seeking action? Or should it exercise its own powers to pass an order on Price Waterhouse? SEBI chose the latter option, which resulted in Price Waterhouse going to Court.

Regulatory overreach?

There are those who believe that SEBI overreached itself, as it has no jurisdiction over auditors and should have preferred a formal complaint to the ICAI instead of acting on its own accord.

Maybe, yes, SEBI is guilty of over-zealousness but look at the track record of the ICAI. More than 18 months after the Satyam scandal surfaced and the sordid role of Price Waterhouse was exposed, ICAI's disciplinary process still grinds on, with punishment of the guilty nowhere in sight.

There is no denying that there is a regulatory vacuum here; it is this vacuum that SEBI has stepped into. Can you blame the securities market regulator for being proactive?

SEBI's action here is reminiscent of what another regulator, the Reserve Bank of India (RBI), did in the case of another infamous scam, that of Global Trust Bank (GTB), in 2005. Sometimes, a coincidence can also tell a story. And so it was that the audit firm and auditor responsible in the GTB case also were Price Waterhouse and Mr S. Gopalakrishnan! Both now stand accused in the Satyam scam.

The RBI promptly blacklisted Price Waterhouse, preventing it from auditing any bank in the country. The firm went on appeal to the Court, though it subsequently withdrew it. The RBI commendably stuck to its decision and the ban was lifted only in 2008. Predictably, Price Waterhouse has not been appointed auditor of any bank after that.

And what did the ICAI do in the GTB case? It set in motion its disciplinary process and, after five long years, in February 2010, Mr Gopalakrishnan and two other partners of Price Waterhouse, were found guilty of professional misconduct. One cannot help but wonder whether the Satyam scam could have been avoided had the ICAI acted with alacrity in the GTB case and hauled up Mr Gopalakrishnan and company earlier.

When the Enron scandal broke in 2002, Arthur Andersen, then one of the Big Five audit firms in the world, was found guilty of negligence. Yet, even before the regulators could step in, the firm voluntarily surrendered its professional licence, and its practice was taken over by other audit firms. In India, though, despite being involved in the Satyam and Global Trust Bank scams, Price Waterhouse and its associate firms still strut about as if nothing has happened and their partners continue to be represented in different Councils of the ICAI.

Regulatory overlap

But we have digressed. The central issue of this piece was whether regulatory overlap can be avoided and what should be the best practice when such an overlap occurs. In today's financial world, it may be impossible to avoid regulatory overlap.

However, when it does happen there are two choices: the regulators concerned can coordinate their actions, which presupposes that both of them are equally active and desirous of punishing the guilty expeditiously. Without the latter, any co-ordination will fail.

The other choice is for the primary regulator in this case, SEBI to proceed to act against the guilty within its own boundaries. For example, in the Price Waterhouse case, SEBI would be well within its powers to tell listed companies not to appoint the tainted firm as auditor.

It is somewhat like whacking your neighbour's errant kid for stealing mangoes from the tree in your garden, never mind his indulgent parents. It is not the same as disciplining him or counselling him that stealing is a bad practice. It is plain and simple punishment for transgressing into your territory. As for the indulgent parent, well, he deserves the slight from his neighbour for not controlling his child better.