Sucheta Dalal

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Sebi's charges against Alliance Capital raise questions about its own supervision standards

Last week's action against Samir Arora, the high-profile fund manager of Alliance Mutual Fund, did not have the same index-breaking impact as the scams of Harshad Mehta and Ketan Parekh. The event is, however, extremely significant. In using its emergency powers to bar Samir Arora from the capital market until further notice, the Securities and Exchange Board of India (Sebi) showed that it is no longer like the police in Bollywood movies -always arriving at the end of the story.

Instead, it's signalling that it's willing to act instantly and won't be fazed by marquee name foreign institutions. But even as this step is to be commended, it's clear that Sebi will have to follow up with a broader crackdown on the Alliance group to ensure a creditable clean-up.

Samir Arora is undoubtedly among the brightest fund managers in India, but he was always notorious for his close links with market operators and industrialists. The rumour mills have always whispered that Alliance Mutual Fund called off the sale of its Indian asset management company after he engineered large-scale redemptions by his favourite investors. Or take his curious, large exit from Digital GlobalSoft shares a few days before an unfavourable merger announcement, leading to a 30% crash in its price.

Can Sebi make its charges of insider trading stick? For instance, Arora avoided a loss of Rs 24 crore by selling Digital GlobalSoft allegedly based on inside information, but did he make a personal gain? If not, aren't Digital and Alliance equally culpable? But the Sebi order makes no mention of their role. Of course, Arora, Alliance and Digital have all denied any wrongdoing. Similarly, it is very curious that the business about Alliance Mutual Fund's sale plan being scuttled because Rs 1,300 crore went out of the fund, should come up for scrutiny within weeks of Arora announcing his plans to join Sabre Capital. Did Alliance Mutual Fund rat on its own star fund manager? Despite Alliance's denials, market watchers firmly believe that this is entirely possible.

Investors are fortunate that the action against Arora has not led to a steep fall in prices or large-scale redemptions from private and foreign mutual funds. But Sebi's charges against Alliance do raise questions about its own supervision standards. Why was it unaware that Arora wore three hats - he decided Alliance's asset allocations for Asia, he managed the investment of its Indian mutual fund, and managed Alliance's overseas investments in India?

It was this concentration of power and lack of Chinese walls between funds that contributed to the UTI debacle. Yet, a couple of years after the UTI crisis, we have Sebi indirectly admitting that the same conflict situation could exist in other mutual funds too.

Clearly, Sebi's own supervision of the mutual fund industry needs tightening. And contrary to recent assertions by the Association of Mutual Funds of India (AMFI), the industry itself has a long way to go before it wins investors' trust.

Coming back to Arora, another charge made by Sebi is he didn't comply with its takeover regulations and declare that Alliance holdings had crossed the 5% mark in several scrips. Surely, Arora's multifarious roles at Alliance did not include the job of compliance officer? It is curious that this lapse, too, has been laid at Arora's door and not at the asset management company (AMC) and its trustees. In 2000-01 too, many funds had crossed the 5% threshold in many software stocks but Sebi did nothing. Clearly, it needs to tell investors whether its compliance rules work or if they can be ignored at will by mutual funds.

Also, while indicting Arora, Sebi would do well to recall Alliance's US record. In the market bust of 2001, it attained international notoriety when it was discovered that it was the only mutual fund that continued to buy 2.7 million shares of Enron as it slid all the way down from $82 to $9 - that too for a Florida retirement fund. And then it sold its entire holding of a hefty 7.6 million shares for a paltry 28 cents just two days before Enron was declared bankrupt.

So let's not assume, without investigation, that Arora's actions were frowned upon by Alliance. In fact, it would be safer to assume that Alliance, like foreign banks in the 1992 scam, has no choice but to stand by Arora even after he quit.

But so far, Sebi has made no move to implicate either Alliance or any of its other officials, not even the two equity analysts who were to leave with Arora when he allegedly threatened to defect to Hendersen Global Investors this January. Instead, it is the Enforcement Directorate that is left wondering if Alliance and Arora are guilty of any foreign exchange violations.

Although the investor community has welcomed Sebi's bold action, let's hope that the investigation does not slide away to other investigative agencies while Sebi dithers and whimpers.

-- Sucheta Dalal