The funny thing about the Securities and Exchange Board of India’s (Sebi) detailed report on the demat scam is the Finance Ministry’s apparent desperation to take credit for the actions of its ‘independent regulator’. Even before journalists could open links to Sebi’s website and read the investigation order, unidentified ‘sources’ in the Finance Ministry had ‘welcomed the SEBI action’. One TV channel even said that the Finance Ministry had instructed Sebi to get the ‘monkeys out of the market’. When a goof-up was identified in Sebi’s report, the babus rushed to distance themselves. Then, when Sebi pragmatically decided insulate investors of banned brokerages, the Ministry took credit for having directed that action too. Since all of this is conveyed through unsourced media leaks, the Ministry denies the leaks and blames it on the media. Maybe it is time the Finance Ministry got itself an official spokesperson to comment on sensitive market issues that have huge monetary implications. Or, concentrate its energies on tackling systemic deficiencies identified by the regulator, and ensuring action against those outside Sebi’s regulatory jurisdiction.
Does one mistake, albeit one with serious consequences, kill a detailed and meticulous report? In fact, it is the opposite. But market intermediaries who have been severely indicted by the regulator are busy clutching at straws in the hope of finding similar mistakes that would take the heat off them. While speculation rages that Sebi was pressured to back off in the Indiabulls case, in fact it required both courage and conviction about the quality of the report that allowed G. Ananthraman, Member in charge of investigations, to concede the need for holding the Indiabulls matter in abeyance. Importantly, it still does not eliminate the pressure on Indiabulls to settle a series of complaints from its own customers across the country, which are currently being examined by Sebi and the stock exchanges. In fact, the regulator could have stuck by its findings and allowed the issue to be decided by the Securities Appellate Tribunal (SAT). Sebi has done exactly this in the past when it barred a south-based Depository Participant (DP) from the market and allowed SAT to resolve the problem. If anything, market intermediaries were clearly worried about seriousness and accuracy of indictments contained in the Sebi report, even though the investigation was restricted to a tiny group. It also explains the concerted effort to undermine the credibility of a key official associated with the investigation (as reported here last week) through a barrage of false charges conveyed through letters and emails to the government, the media and the government vigilance agencies.
In the very week that the capital market regulator was struggling to complete its report on the demat scam, regional stock exchange issues, which has been allowed to drag for over a decade without clear resolution, were also giving grief to Ananthraman. For instance, the Coimbatore Stock Exchange (CSX) came up with a unique strategy to dump Sebi’s oversight and its ‘recognition’ by passing a resolution changing its Memorandum and Articles of Association and ejecting the Sebi nominee director as well as public representatives out of the board. The exchange owns valuable real-estate and its members want to dispose it off and share the profits among members. When Sebi prevented CSX from ‘surrendering’ recognition, it moved the Madras High Court which began hearings last week. Meanwhile Sebi’s action against the Magadh Stock Exchange and Bhoruka Financial Services came up for hearing before the SAT. This was the case where a dormant Bhoruka Financial, which was listed on the Bangalore Stock Exchange 17 years ago, was suddenly ‘permitted’ to trade on the Magadh exchange. This allowed 98.7 per cent of the company’s paid up base to be sold to Delhi real estate company DLF Commercial Developers at Rs 4,490 per share. DLF is on the verge of making an Initial Public Offering.
Just Rs 72 crore
As scams go, the profit opportunity lost through the wide-spread IPO allotment scam or ‘demat scam’ is remarkably insignificant. The Sebi investigation report suggests that the financiers of Roopalben Panchal’s IPO (Initial Public Offerings) made just around Rs 45.82 crore in two years. The notorious Sugandh gave its financiers a profit of Rs 14.90 crore; financiers of Purshottam Budhwani earned a modest Rs 1.6 crore and the rest added up to profits of Rs 10.06 crore. All told, the illegal gains work out to a mere Rs 72.38 crore, but the weakness in the financial system exposed by the scam is enormous. There have been demands in recent times that Sebi must re-distribute these illegal profits to investors who were deprived of their rightful allotment. Frankly, the exercise involved will be so expensive and tedious that the Rs 72 crore would be more sensibly utilised on an investor education campaign.