Why are SEBI officials letting off habitual offenders with paltry fines?
The Securities and Exchange Board of India’s (SEBI) website says that consent orders give it the flexibility to “achieve the twin goals of an appropriate sanction, remedy and deterrence without resorting to litigation, lengthy proceedings and consequent delays” (emphasis added). In fact, the exact opposite is true. The consent order regime, although technically overseen by a high power committee (HPC), is conducted in the most shockingly capricious manner, with minimal disclosures or correlation between the nature of offence, repeated violations and size of penalty.
Statistics compiled by www.watchoutinvestors.com, financed by the Investor Education & Protection Fund, reveal 92 instances of two or more consent filings by the same entity. A couple of firms have been allowed to file consent applications a whopping seven times each. In fact, the details only magnify the whimsicality and the deep rot.
SEBI’s website claims that consent proceedings take into account factors like ‘history of non-compliance’, ‘track record of the violator’ (whether guilty of similar or serious past violations), and conditions necessary ‘to deter future non-compliance’. These rules have been ignored in the most wanton application of consent regulations to let off serious and multiple offenders.
SMC Global Securities and Action Financial Services (India) Ltd have been allowed to file consent terms a phenomenal seven times each while Systematix Shares & Stocks Pvt Ltd has escaped by filing consent six times. The Chennai-based Shriram group had six group entities (including Pioneer Overseas and SR Real Estate Finance) and its chairman filing a total of 14 consent applications for violating takeover regulations in Shriram Overseas. Again, unlike Manmohan Shetty, whose offer to pay Rs1 lakh under consent terms was rejected (he has been slapped with a Rs1 crore penalty), each of these entities paid just Rs50,000. Why was SEBI so benevolent to the Shriram group? Top Media Entertainment was caught manipulating its own shares, but didn’t pay a penny; all it did was to voluntarily promise to stay away from the market for three years.
Let’s look at the special two, which SEBI officials decided would get seven chances to escape with a penalty. The first is SMC Global Securities which, in April 2008, paid Rs5 lakh for dealing with unregistered sub-brokers, not segregating client accounts from its own and other violations. In August, it paid Rs15 lakh for a whole laundry list of unauthorised trading and irregular activity in almost every aspect of its brokerage business. Did it straighten up? No. In February 2009, it paid Rs6 lakh for an issue that has been under investigation since 2007 for fictitious and synchronised trading in the derivatives segment. In June 2009, it paid Rs7.5 lakh on two consecutive days under two separate consent orders for more irregularities in derivatives trading. Then, in July 2009, it coughed up Rs7.75 lakh for failure to redress investor grievances and for dealing with unauthorised sub-brokers. And it paid up another Rs10.25 lakh in September 2009 for dubious dealing in Jubilant Organosys. The total penalty? Rs51 lakh—half of what is demanded from Manmohan Shetty for the relatively minor transgression of selling his shares in a hurry. Doesn’t this only undermine the consent order regulation? Is the HPC, that is supposedly clearing and approving consent applications, napping? Who does the process work for? If there is public interest litigation, will SEBI be able to defend itself?
Now let’s look at Action Financial Services which also got away with seven consent applications. It paid Rs7 lakh in April 2009 for irregular trading in Database Finance shares, Rs15 lakh on 10 November 2009 for manipulative transactions in GG Automotive India shares and Rs20 lakh on 16 November 2009 for price manipulation in the shares of Highland Industries. On 9 December 2009, its payoff to SEBI was halved to Rs10 lakh for manipulation of Suryadeep Salt Refinery & Chemical Works. On 22 December 2009, it paid Rs20 lakh for manipulating G-Tech Info Training scrips. In 2010, it has already paid twice—in January and in April 2010—just Rs2.58 lakh for price and volume manipulation of Fast Track Entertainment shares and Rs1.65 lakh only for synchronised trading and other mischief in Malvica Engineering shares. The total payment for this long series of dubious trading is a mere Rs75.35 lakh. No ban, nor cancellation of registration, and a total penalty that is less than that of Manmohan Shetty.
Systematix Shares & Stock Brokers has paid just Rs16.5 lakh over six consent orders over 2008 and 2009—Rs4 lakh for manipulating derivatives trades, Rs2 lakh for synchronised and fictitious trades in Granules India, Rs2 lakh for manipulating Today’s Writing Products and KRBL Ltd, Rs5 lakh for manipulating the Jindal Polyester share price and another Rs2.5 lakh for the same offence in the case of Gravity India Ltd.
Next, we come to the Ketan Parekh crony, called Mangal Keshav Securities, whose consent applications were also acceptable to SEBI for paltry sums of Rs10 lakh (for circular trading and volume ramp-up in Database Finance in September 2008), Rs7 lakh (irregular transactions in Jindal Stainless in May 2009), Rs3.5 lakh (for synchronised trades in Adani Exports in June 2009) and Rs7 lakh (for price and volume ramp up in the shares of BSEL Infrastructure Realty and Maharashtra Seamless in February 2010). Total payment was just Rs27.50 lakh, despite its long, dubious history and association with Ketan Parekh, who is identified as the architect of the 2000-01 securities scam.
Now, consider Shrikant G Mantri. There are four consent applications listed in his individual name and another four under M/s Shrikant G Mantri. Similarly, Mansukhlal Manilal Upadhyay and the firm by the same name, as well as Pawankumar Parmeshwarlal and a firm by the same name, have six consent orders each. Panther Fincap, which the joint parliamentary committee (JPC) report lists as a Ketan Parekh group company, has also escaped by the consent route. Keynote Corporate Services has two consent orders for violating investment banking norms (fine: Rs6.25 lakh) and two more, through Keynote Capital, for synchronised trading in Himachal Futuristic and manipulation of Coromandel Fertiliser shares and cornering of Dagger Forst shares (the bill: Rs25.42 lakh).
At least 15 entities, including Kotak Securities and First Custodian Fund (India) Ltd, have been allowed to file three consent orders. Even Rajesh Jhaveri, notorious for manipulating ‘several’ IPOs, got away with three consent applications and a mere Rs7.3 lakh fine and voluntary suspension of registration for a year, ending on 14th July. Classic Credit and Adani Properties have two consent orders each.
Finally, Parklight Investments, which made benami applications for grabbing a bigger allotment in the IPO of Nissan Copper and for ramping its share price, paid the maximum ever penalty—of just over Rs14 crore. SEBI doesn’t tell us why it wasn’t barred if its transgressions were so huge or why its three other consent orders attracted relatively lower penalties, although it involved manipulation of many more scrips. Parklight Securities was allowed to escape with a Rs25,000 payment and a three-month suspension of registration through two consent applications, despite its involvement in 15 of the worst cases of price manipulation. Why did the Parklight companies get six consent applications instead of being permanently barred? Did someone pull strings? Clearly, SEBI has a lot of explaining to do if someone bothers to question which offender it is letting off for how much and why. — Sucheta Dalal