Sucheta Dalal :Needed: more action than words
Sucheta Dalal

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Needed: more action than words  

Jan 20, 2003

CIRCA 1998: Prime Minister Atal Behari Vajpayee announced that vanishing companies which had made off with investors money would be tracked down in three months.


He said, unscrupulous businessmen had destroyed investor confidence and punishing them would do a lot to restore faith in the market. The PM was reacting to the fact that of around 4,000 public issues made between 1992-1996 raising over Rs 40,000 crore, less than a fourth were traded and a few hundred crore rupees had simply vanished into thin air.


Circa 2003: On January 17, PM Vajpayee launched a nationwide securities awareness campaign seeking to restore small investors’ confidence and to channel more savings into the capital market.


The PM was concerned at the frequent scams and ‘pained to say that standards of corporate governance’ had not kept pace with changing times.


In the five intervening years, investors went on to lose a lot more money.


Not only have vanishing companies never been sued or their promoters forced to disgorge their ill-gotten wealth, but seemingly rock solid institutions such as the Unit Trust of India (UTI) have collapsed, causing huge losses to investors in addition to a Rs 14,500 crore blow to the exchequer.


The period also saw the rise and fall of the Ketan Parekh phenomenon causing more losses to investors. The government set up a Joint Parliamentary Committee (JPC), which was blatantly packed with supporters of market operators such as Ketan Parekh and the corporate houses that colluded with him.


The JPC came up with a damp squib of a report full of vague generalisations. Even after the report, industrialists such as Dinesh Dalmia of DSQ Software have tried to flee the country, and old scamsters such as C.R. Bhansali are attempting a comeback through a court-ordered revival.


In a nutshell, nothing changed for the investor after PM first expressed concern about vanishing companies. If anything, they went on to lose more money and saw their trusted institutions destroyed. Worse, the rumour and innuendo about the UTI and Cyberspace scams came dangerously close to the PMO itself.


Is it any wonder that investigative agencies are yet to launch prosecution against top UTI officials who were held accountable by the JPC for the disastrous decisions that caused huge losses to the institution.


Was the government not aware of this when it launched the investor awareness drive? Did the PM not realise that investors who have repeatedly had a hole burnt into their pockets have long memories? And although investor awareness is important, is it not obvious that awareness cannot be a substitute for punitive action against wrong doers?


Finance Minister Jaswant Singh answered some of these questions. Speaking at the same programme, Singh said that amendments to the Sebi Act to empower the regulator and enhance penalties would “deter evaders and improve confidence of investors in the capital market”.


It is true that the Sebi Act has only recently been amended; but what about all those sticky decisions that were well within Sebi’s regulatory powers but haven’t been made?


The government and the regulator have to realise that swift and stringent punitive action is worth several expensive investor awareness campaigns. The mere existence of a strong and impartial regulator will foster good corporate behaviour faster than a dozen seminars, good governance codes or corporate governance ratings. It is almost a year since G.N. Bajpai took over as Sebi chairman and it is time we saw some tough decisions from Sebi.


In fact, Sebi’s handling of the Larsen and Toubro (L&T) episode will be a litmus test for Sebi. To recap, the facts are as follows: Over a year ago, the L&T scrip saw a massive churning of its price. It was later discovered that Reliance Industries was behind the turmoil, having first reduced its holding from 6.2 per cent to a little over 4 per cent, and then buying the stock back and shoring up its stake to 10.5 per cent.


Within a couple of days after it bought the shares, the entire block was sold to Kumarmanagalam Birla’s Grasim Industries at a hefty 45 per cent premium to the already inflated market price. This was followed by the exit of the two Ambani brothers from the L&T board and the induction of Kumar Birla and his mother as directors. So far, despite obvious evidence of price manipulation based on inside information, Sebi has failed to punish anybody. It has only delivered a little slap on Reliance’s wrist on the peripheral charge of having failed to inform the regulator when its stake fell below 5 per cent and was hiked beyond that level again. Reliance paid up the fine of Rs 4.75 lakh and has appealed that order.


But what about the far more serious charge of manipulation and insider trading? Sebi officials have failed to complete their investigation, despite clear information pointing to insider knowledge (this paper has a copy of its preliminary investigation report which is over a year old).


That is not all. Grasim Industries which acquired 10 per cent of L&T at an inflated price of Rs 306 is now attempting to take over L&T by offering retail investors just Rs 190 per share, again on the basis of a technical loophole.


In the last few days, the Ambanis and the Birlas have met Sebi executives in an attempt to avoid punitive action in both cases. But Sebi officials have been much too busy improving investor awareness, to bother with punishing wrong doers.


Similarly, Sebi’s investigation department has all but let off companies which colluded with Ketan Parekh in the scam of 2000 because it has failed to find any nexus between the rampant price manipulation and hundreds of crore of rupees that were diverted by them to Parekh for his market operations.


The irony is that Sebi’s first Securities Awareness Investor Campaign was kicked off by an advertisement whose space was donated by a Birla insurance company. Wouldn’t it have been better by far for Sebi to fund its advertisements through fines and penalties levied on errant companies?


Here is a thought for the PM too lack of investor awareness may not be the problem with Indian capital markets, maybe investors stay away because they are only too aware that the crooks invariably get away with a little help from politicians and reluctant regulators.


-- Sucheta Dalal