Sucheta Dalal :Clearing the backlog: Financial Express
Sucheta Dalal

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Clearing the backlog: Financial Express  

June 23, 2004

SEBI has decided to focus on its weakest link -- the handling of investigations relating to stock market fraud.


Clearing the backlog


 The Securities and Exchange Board of India must be congratulated for its decision to focus on its weakest link — notably, the backlog of pending investigation cases. That SEBI has been sitting on investigations dating back to the Scam of 2000, which occurred four years ago, has been a matter of concern and has attracted criticism from capital market intermediaries as well as investors. Whether SEBI is able to meet its ambitious target of ensuring zero backlog by July remains to be seen. But even if it completes the task within the next three months, it would have moved fast enough to satisfy its many market constituents. Clearing the backlog must, however, mean completing investigations, analysing data and issuing final orders. The target of completing all investigations within 12 months and getting weekly reports from investigation officers is also laudable. One must remember that SEBI had, in the past, set up similar time line benchmarks for all its activities involving a public interface without any visible success. In order to speed up the investigation process, it is important that the initial segregation of cases into those that lead to adjudication or inquiry is correct. The former is a shorter process that allows the regulator to impose severe deterrent penalties against law-breakers while the latter usually leads to suspension and cancellation of registration/licences of market intermediaries. In most cases, the recurrence of financial crime can be effectively curbed through crippling deterrent penalties, rather than the permanent cancellation of licences. Hence, the decision to impose a heavy Rs 2.89 crore fine on Alliance Capital for not reporting various violations to the regulator is a step in the right direction. This is among the first instances after the amendment to the SEBI Act in December 2002, when the regulator has used its punitive powers to good effect

Having said that, SEBI would do well not to harp on numbers to justify effective investigation. Top SEBI officials may have passed 300 orders during the year, which is significantly higher than the previous year; but few high profile cases are distinguished by the regulator’s speed of action or brilliant investigation. In fact, barring the case of Samir Arora, an international fund manager who was barred from the market, few others have been decided in less than a year. SEBI also claims to have levied penalties adding up to Rs 20 crore against market intermediaries. This figure is indeed a revelation. The regulator must know that public exposure of wrongdoing and punishment is an important part of the regulator’s arsenal. Cases where harsh, deterrent penalties have been imposed clearly need to be publicised for maximum impact. The regulator must now petition the government to be allowed to use penalties constructively to finance the office on an investor ombudsman. The SEBI (Ombudsman) Regulations were notified before November 2003. It is time that this office too got off the ground and accelerated the process of investor protection through quick grievance redressal.

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-- Sucheta Dalal