As chairman of the Securities and Exchange Board of India (Sebi) in 1992, GV Ramakrishna had managed to turn the organisation into a feared watchdog, even without its statutory teeth. Since his tenure, the regulator’s reputation has gone slowly downhill due to weak supervision, weaker orders that were often thrown out at the appellate level and a refusal to get tough with powerful corporate houses.
The perception was that inquiries were often tailored to let off powerful business houses indulging in the most brazen price manipulation, insider trading or flouting of takeover regulations. In the process, we heard of files vanishing, multiple orders on the same issues and deliberate delays that have put scamsters back in the market.
Sebi still has a long way to go in terms of regaining lost credibility and it certainly needs to shore up its cadres with competent officials in some key positions. Yet, it is safe to say that its regulatory and supervisory actions in the past couple of months are slowly putting the fear of the regulator back into the minds of market intermediaries.
It probably started with the much debated move to introduce proportionate allotment and nominal margins for Qualified Institutional Buyers applying for Indian IPOs. This regulation is a global first and the move continues to irritate the investment banking community, especially their foreign institutional clients. But there is dawning realisation that doing business in India will require adherence to Indian regulations that are tailored to meet the exigencies of our market.
Sebi’s refusal to capitulate to intense corporate pressure and extend the Clause 49 deadline was another signal. Companies had to scamper to ensure that half their board comprised independent directors and their fond hope of having Clause 49 rolled back through the new Companies Act is suddenly tinged with some doubt.
On the supervision front, Sebi’s investigation into the IPO application scam and the Jermyn Capital issue has gone a long way in restoring its credibility as a market watchdog.
Once tipped off by market sources and in-come tax findings, Sebi moved with un-characteristic swiftness to pull together various dimensions of the con and initiated interim action. The latest revelations into the IDFC IPO allotment has only confirmed the role of various players in the conspiracy and the systemic flaws that allowed such large-scale perversion of a fully automated system. The scam has shattered the perception that a high level of automation is all that is needed to ensure transparency. In fact, a conceptually flawed system is a swindler’s delight, because it breeds complac-ency among regulators, while it is in fact more opaque.
In the past decade, Sebi’s weak supervision was more than covered up by the rapid pace of development and automation in the Indian capital market. The setting up of the National Stock Exchange, the transformation of the Bombay Stock Exchange into a national bourse, the move to paperless trading, trade guarantees, rolling settlements and, finally, the introduction of trading in derivative products have all turned India into one of the hottest emerging market destinations in the world.
• Sebi has introduced proportionate allotment, nominal margins for QIBs
• It has refused to give in to pressure and extend Clause 49 deadline
• It is also busy probing the IPO application scam and Jermyn Capital issue
The global interest in Indian markets has its pros and cons. While on the one hand it brings into the country a high level of trading and investment strategies and expertise, it also brings those who are adept at exploiting weak links and loopholes to make fat profits. The IPO allotment scam shows how fraud can remain hidden even when it is happening right under the noses of several layers of regulators. Sebi’s job in the coming years will be to re-evaluate systems, correct conceptual flaws in their design and overhaul supervisory structures. For instance, it may have to ask depositories to assume more regulatory and supervisory responsibility or decide whether to do the job by itself.
Another interesting development last week was Sebi’s comprehensive order in the Jermyn Capital LLC case. On November 20, 2005, I had first reported that Dharmesh Doshi, a former associate of Ketan Parekh who had a ‘red corner’ notice against him and was absconding from India, was operating out of an FSA registered entity called Jermyn Capital Partners in London. Sometime in December, Sebi issued an interim order barring Jermyn Capital LLC, a foreign corporate sub-account of Tiab Bank E.C. (a Sebi-registered foreign institutional investor) from dealing in the Indian market. Jermyn challenged the Sebi order before the Securities Appellate Tribunal (Sat) and Sebi was asked to issue a final order on or before January 13.
The interesting aspect of Sebi’s final order, issued by member G Anantharaman, is that it dug up Sebi’s own internal investigations that lay buried in its files, but also collaborated with the Central Bureau of Investigation and the Enforcement Director-ate to piece together a comprehensive set of reasons why Jermyn is not “fit and proper” to operate in India as required under FII registration rules. These findings include the fact that Dharmesh Doshi’s passport has been revoked by the Indian government, that he has been fined Rs 10 lakh by the Enforcement Directorate along with Ketan Parekh and other former colleagues and that Sebi itself had filed a criminal complaint again Triumph International (Finance) and its senior officials, including Dharmesh Doshi, in 2004.
This is probably another first, and it shows that the watchdog has the potential to strike faster and harder if it continues to collaborate with other investigation arms of the government to keep the capital market safe.