Regulation: When will the regulator be held accountable?
June 8, 2011
A recent case illustrates that nothing happens to SEBI officials even after shoddy investigation and false accusations
In an astonishing case, decided on 28 April 2011 by SAT, it appears that SEBI needlessly harassed and penalised a company by falsely accusing it of unfair trade practices. SEBI accused Vijay Textiles, a Secunderabad-based company of making two false/misleading corporate announcements in February 2005 about an export order of Rs20 crore it had received from Simran Enterprises of Europe. SEBI alleged that the announcement led to a spurt in the stock price allowing one of the promoters to sell a substantial chunk of his shareholding at a huge profit. SEBI also alleged that the company had failed to inform stock exchanges that the export order had failed to materialise and slapped a penalty of Rs25 lakh under two identical, but separate, show-cause notices under its Fraudulent and Unfair Trade Practices regulation.
An appeal to SAT brought to light the following facts. Vijay Textiles had, indeed, informed stock exchanges that the export order had failed to fructify. In fact, it had even mentioned it in a newspaper advertisement on 28 October 2006 along with its unaudited financial results.
As for the allegation that it was trying to ramp up its share price (to allow a promoter to exit at a profit), the company pointed out that its share price had been on the rise since October 2004 due to a series of positive announcements.
It set up a design studio, split its shares (announced in November 2004), announced a 40% interim dividend in January 2005, a 2:1 bonus in February 2005 on improved financial performance, and it also announced plans to set up a 12,000 sq ft retail showroom in Hyderabad.
SAT agreed that Vijay Textiles had not made any false announcement. “We wonder what kind of an investigation was carried out when a public announcement in this regard was made by the company which not only appeared on the website of the BSE (Bombay Stock Exchange) but had also been published in a financial newspaper Business Standard,” asks the order. It also agreed with the company that a bonus announcement and improved profitability was more likely to have caused the stock price to soar than the Rs20-crore export order. The SAT order wonders about SEBI’s false charge that the stock exchange had not been informed about the failure of the export order. It is important to note that SEBI lawyers ‘strenuously’ argued their case, even when ‘confronted’ with evidence. SEBI’s claim that the promoter profited from the price rise was also struck down with proof that he had been selling off small chunks of his holding long before the export order announcement.
While the SEBI order was set aside with such harsh observations about the regulator’s ‘investigation’, SAT again failed to impose any costs on SEBI. SEBI’s action against Vijay Textiles has us wondering whether it is a case of gross incompetence or deliberate harassment. Either way, those responsible for poor investigation and adjudication will pay no price for damaging the company’s credibility with its false charges.
The action seems more sinister when seen in the context of issues raised by former SEBI board member Dr Mohan Gopal in a letter to the prime minister. He says, “major violations” established through investigation “are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers—in such cases review by SAT would never be sought” because neither SEBI nor the wrongdoer wants it. He specifically points out to how a company guilty of “criminal market manipulation” was let off by a whole-time member asking it to “be more careful in future”. (We believe this refers to the Zee group’s role in the Ketan Parekh scam).
Such unbridled power, without any supervision or consequences, to harass intermediaries through false allegations or let them off with a warning or a slap on the wrist based on ‘other considerations’ can unleash terror among market intermediaries. Is it any surprise then that hardly anybody is ever willing to speak against regulatory policies or decisions? These two shameful SEBI orders, which were struck down by SAT, illustrate why investors are losing faith in the capital market.
(This article was first published in the Moneylife magazine edition dated 2 June 2011 that was available on the stands from 19 May 2011.)