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SEBI, over-ruled!

S. Vaidya Nathan

The rate of conviction is a key indicator of the regulator's effectiveness. SEBI comes off poorly here and if it does not learn from its experiences, it may find its effectiveness as a regulator weakening especially when major offences happen.

THE number of major decisions of the Securities and Exchange Board of India against companies and market players getting overturned is a cause for alarm. This shows up gaps in SEBI's decisions, leading to their dismissal in the appeals stage.

If this continues, it could impair SEBI's credibility with respect to the interests of investors and the market. The regulator needs to take notice. It also needs to examine whether extraneous influences, if any, in the decision process are impairing their quality.

The SAT blow: In the past week, the Securities Appellate Tribunal (SAT) — the appellate authority for SEBI decisions — overturned the SEBI orders in the BPL and Videocon cases. SEBI had prevented these two companies from accessing the capital market for two and four years respectively, for their role in the 1998 stock market crisis that led to the Bombay Stock Exchange's closure for a few days.

Price manipulation was at the core of the SEBI decisions. It had also ordered prosecution of the officials of these companies in a court of law. But the SAT set aside the order disallowing capital market access for BPL and Videocon.

A comprehensive rejection: The SAT order rested on the following points:

  • The orders were not in the interest of investors.

  • The orders have no legal backing and cannot, therefore, be sustained.

  • There is not enough material evidence to establish that the two companies directly or indirectly indulged in market manipulation.

  • So, the order pronouncing BPL and Videocon guilty cannot be sustained.

  • The legal backing used by SEBI is focussed on investor protection and does not allow SEBI to impose penalties.

  • The order of prosecution of some officials is not covered by SAT because it does not have the jurisdiction to deal with such issues.

    This is a comprehensive indictment of the original order; the order was not even set aside on some technicalities.

    Not the first instance: Sample the number of SEBI orders that have been overthrown by the SAT or other appellate authorities:

  • Sterlite Industries was barred from accessing the market on the same charge as BPL and Videocon.

  • When the SEBI order was in force, Sterlite Industries came up with a buyback proposal. This was barred by SEBI on the ground that Sterlite had been barred from accessing capital market. The buyback ban order again met the same fate.

  • The SEBI order charging Hindustan Lever and some of its officials with insider trading met with much the same fate. SEBI has gone in appeal to the Mumbai High Court. But the fact that the appeals process overturned the SEBI ruling cannot be ignored.

  • As part of its actions post-Ketan Parekh stock market crisis in 2000, SEBI had initiated action against Anand Rathi and associates (Mr Anand Rathi was then the BSE president) for misusing the position and obtaining trading patterns information and acting on them. Mr Anand Rathi and associates were barred from participating in stock broking activities. This too has wilted in the appeals process.

  • An order against Escorts Mutual Fund for non-compliance of regulations relating to routine matters, such as timely filing of annual accounts, was overruled by the SAT on the ground that SEBI found public disclosure more important than disclosure.

  • There have been other decisions covering companies of lower profile where SEBI's orders have come a cropper.

    Lack of spadework: From a routine annual accounts case to a complicated insider trading case, SEBI orders have been over-turned.

    This clearly suggests that there is something seriously amiss with SEBI. A few areas where there may be gaps:

    Lack of thorough preparation required in such cases.

    Inability to act in time to nail possible deviations and market manipulations.

    If actions are initiated in belatedly (as happened with BPL, Sterlite and Videocon), SEBI would increasingly find it difficult to nail down offences.

    The lack of legal backing points to the absence of sound legal interpretation of the do's and don'ts for SEBI under various provisions.

    It also points to the need for bolstering the quality of legal advice SEBI gets. Companies hire top-notch talent and, therefore, SEBI too should spare no expense in this regard. Only then can it take on the companies.

    SEBI needs to ensure that it exercises its penal powers on proper grounds and leaves no room for reversals, a la BPL, Videocon.

    SEBI must also ensure that major violations of markets and investors' interests are handled by skilled staff to make its case and decisions stronger than has been the case so far.

    Last, but not least, SEBI must be on perpetual guard to ensure that extraneous influences have absolutely no room in its decisions, timing of actions and the manner it handles cases.

    Poor conviction rate: The SAT dismissals of major SEBI orders show a poor rate of conviction.

    The rate of conviction is a key indicator of the regulator's effectiveness. SEBI comes off poorly here and if it does not learn from these experiences, it may find its effectiveness as a regulator weakening especially when major offences happen.

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