Sucheta Dalal :Call in the board (1 June 2003)
Sucheta Dalal

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Call in the board (1 June 2003)  

During his last few days in office, D.R.Mehta, former chairman of the Securities and Exchange Board of India (Sebi) told a newspaper that companies tend to ‘jump on regulators’ who attempt to punish them.

Nothing much seems to have changed at the better empowered Sebi. Over a year ago, Sebi began to investigate the rampant price manipulation and suspected insider trading of Larsen & Toubro (L&T) shares before the sale of a 10 per cent stake to Grasim Industries.

Although most of the investigation was completed within two months and submitted to government as part of an interim report, Sebi has dragged its feet over initiating any action for well over a year.

We now learn that even without an initial ruling, the independent regulator tossed the burden of deciding the issue on to the Finance Ministry. The ministry correctly tossed it right back and asked the Sebi board to decide. But the board said it had no authority to take up one-off cases or those that are probably too hot to handle. According to our sources, the board said that it had to be suitably empowered to decide on certain issues or order direct action/investigation in certain cases bypassing the chairman.

At the Chennai board meeting last week, the board was empowered to order action against market participants without obtaining the consent of the chairman in certain cases. News reports have suggested that this could happen when Sebi officials are an interested party. It is not clear if this applies to the L&T issue but it is worth watching to see if it leads to a decision on the L&T case.

Dangerous derivatives

It is generally agreed that an active market in fixed income derivatives is essential for making the bond market liquid and efficient. But trading in interest rate derivatives, which was to have kicked off last month remains indefinitely postponed because the Reserve Bank of India (RBI) is adamant that it will only permit banks to trade the derivatives for hedging purposes.

The RBI is more comfortable with banks trading on the completely non-transparent telephone based Over The Counter (OTC) market, and so the exchange traded system remains stalled. But there is a more dangerous catch. The State Bank of India and HDFC Bank have obtained legal opinion that under current OTC regulations of the RBI, contracts for interest derivative are simply not enforceable in Indian courts. This means that if there is a legal dispute between two banks over any of their swap trades, they may not have a case in court. Does the Reserve Bank know this? Of course it does; but it hopes that if banks quarrel, it can intervene and force them to settle the dispute. The RBI’s refusal to move to a transparent, order based, exchange traded derivatives markets shows that it has learnt no lessons from the 1992 scam. At that time, its primitive Public Debt Office enabled such a large scam. Until individual officials are held responsible for regulatory failure, this attitude is unlikely to change.

A full circle

Life has a way of coming a full circle. Over a week ago, the Bombay stock exchange (BSE) suspended a senior executive called G.L. Gera for financial mismanagement, tapping the telephone lines of key surveillance officials and the executive director.

On Friday, the BSE filed an official complaint with the Economic Offences wing of the Enforcement Directorate. Our sources say that the BSE executives who filed the complaint included Atul Tirodkar, Director of its Investor Services cell.

Readers would recall, that Tirodkar was the whistleblower, who was suspended for exposing former BSE president Anand Rathi’s penchant for seeking market sensitive information from surveillance officials. Tirodkar fought a long and hard battle against the BSE management and its so-called independent directors before being reinstated.

Ironically, when Tirodkar was being hounded and persecuted by the BSE, it was Gera who was asked to do some of the dirty work. Life surely has a way of turning a full circle!

Hyping up an IPO

The presence of the charismatic Minister for Disinvestment as Maruti Udyog’s IPO launch was probably the biggest endorsement any public issue has received in recent times. So much so, that even Shourie’s electrified the already bullish market by saying that Maruti would pave the way for other disinvestment IPOs such as BPCL and Nalco.

But one wag wasn’t quite taken in by all the hoopla. He said: “If it weren’t for Shourie’s reputation, the incongruity of a dominant exiting shareholder —in this case the government of India—hyping up the IPO to attract investment would have made headline news, but of the negative kind”.

-- Sucheta Dalal