Sucheta Dalal :DCA Sebi turf battle proves a boon for investors (19 May 2003)
Sucheta Dalal

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DCA, Sebi turf battle proves a boon for investors (19 May 2003)  

At least on paper, it has been an extremely good two weeks for investors. A flurry of regulatory changes and legislative amendments from the Department of Company Affairs (DCA) and the Securities and Exchange Board of India (Sebi) promise to make the capital market safer for investors.

Some actions announced in the last couple of weeks are: Several important changes through the Companies Act (Amendment) Bill, 2003, to protect investors. These include, amendment to Section 372 of the Companies Act in order to permit only one investment vehicle per company and consolidation of accounts to be made mandatory. Insertion of Section 77A into the Act putting the onus of proving proper utilisation of funds on promoters. Proposed amendments to Section 397 and 398 to help investors get back their money from unscrupulous companies. Litigation filed against 149 vanishing companies by the DCA after seven years of inaction.

Amendment to the listing rule of stock exchanges to prevent misuse of Section 391 of the Companies Act, in order to bypass Sebi regulations aimed at protecting investors. Setting up the Serious Frauds Office, with powers to investigate and penalise companies. Legislation proposed to overhaul the disciplinary mechanism for chartered accountants, company secretaries and cost and work accountants, and setting up a framework on related-party transactions. It is indeed true that the mere tabling a bill to amend the Companies Act, or acquiring the power to punish wrongdoers means nothing—our regulators, notoriously reluctant to punish powerful companies—have still to prove that they are willing to act of these powers.

But a remarkable dimension to the flurry of recent actions is increased competition between two key regulators. For the first time, the turf battle between Sebi and DCA promises to work in favour of investors; they are competing to improve regulation instead of merely obstructing each other’s proposals.

The most appealing aspect of the recent announcements is that much of the reform initiative has come from the DCA. While corporate India has been quibbling about the recommendations of the Narayana Murthy Committee on corporate governance, the DCA’s Companies Act (Amendment) Bill, 2003, is the real surprise package. Many of the proposed amendments are far more stringent than envisaged by the Naresh Chandra Committee Report, and make a serious attempt to stop companies from siphoning off funds or diverting money to stock brokers for dirty deals to manipulate share prices.

What is more, a second set of amendments is to be introduced in the monsoon session of Parliament. It is possible that the recent spate of actions were motivated by the harsh strictures passed by the Joint Parliamentary Committee against the DCA, and the need to show substantial action with regard to supervision and inspection of companies. But the DCA’s proposals have gone beyond the need to appease Parliament.

Clearly, the change in DCA’s attitude is driven by its Secretary Vinod Dhall. One the one hand, Dhall made no bones about the fact, that he did not like Sebi stepping into what was essentially DCA’s regulatory turf—which, according to him included the right to frame corporate governance regulations.

On the other hand, he is bound to have discovered that his views had few sympathisers because of the DCA’s abysmal track record of acting against companies and protecting investors over the last five decades. In fact, the more the DCA protested, or objected to Sebi getting more powers (for instance the tussle over search and seizure powers for Sebi), the more obstructionist it seemed. Finally, the DCA was permanently absorbed into the Finance Ministry in an effort to reduce the dissonance between the Companies Act and regulations dealing with the capital market. Is DCA’s burst of activism the result or this merger, or is the merger merely incidental? What ever the reason, the Companies Act (Amendment) Bill, 2003 has, for the first time, put the investor and the need for better corporate governance at the Centre of its policy making. This is indeed a welcome development.

Investors and the capital market both need help from the regulators. Information collated by Prime Database demonstrates the capital market’s growing irrelevance in financial intermediation. Prithvi Haldea of Prime Database says that the year 2002-03 had just six initial public offerings (IPOs), as against the extraordinary peak of 1,350 in 1995-96, and of these, three were bank IPOs. Also, the money mobilised from the capital market in the last six years, at Rs 8,451 crore, was lower than the Rs 9,919 crore mobilised in a single year in 1994-95.

Although comparison with abnormal numbers when the market was in the grip of a mania is unfair, they provide an interesting contrast and illustrate the extent of investor disenchantment. The recent actions by the two regulators and the proposed amendments are all very welcome, but they are not enough to rebuild shattered investor confidence.

The obvious comparison is with the manner in which the Americans have dealt with their corporate scandals. While American regulators are also formulating new laws and tinkering with existing ones, the biggest confidence booster for their investors is their willingness to punish the biggest investment banks, analysts, companies and auditors. The mightiest of companies and audit firms have suffered an ignominious fall; Arthur Andersen has shut down; several high profile executives from Enron, WorldCom etc. are in jail, the most famous analysts of the dotcom book have lost their job and face penal action; and leading investment banks and brokerage firms have paid up hundreds of million dollars each in settlements with the Securities Exchange Commission. They also continue to face lawsuits filed by irate investors.

Our regulators have still to demonstrate that they have the courage and the gumption to put their jobs on the line and do what is right in punishing companies that have indulged in price manipulation, insider trading, diversion of funds and shady deals with brokers. Will the competition between the regulators go beyond framing regulation to acting against wrong doers? Wouldn’t it be nice if they fought to win investors’ confidence?

-- Sucheta Dalal