Sucheta Dalal :Is SEBI Being Selective In Regulation? (26 Jan)
Sucheta Dalal

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Is SEBI Being Selective In Regulation? (26 Jan)  

The application of insider trading regulations in India have been flawed from the very beginning, and the long delayed order in the Larsen & Toubro (L&T) case has further eroded their credibility. This case was treated differently. A high-powered, board-appointed committee of the Securities and Exchange Board of India decided it, probably because it dealt with Reliance — India’s most powerful industry group. After dragging its feet over the investigation since November 2001, last week SEBI exonerated Reliance and the Ambani brothers of all wrongdoing in the strange transaction.

A reading of the order indicates that Reliance’s aggressive arguments were all accepted by SEBI without contest. And the brazen display of financial muscle and premeditated buying was condoned without reprimand or criticism. Let’s do a recap. Reliance Industries, which held 4.38 per cent of L&T’s capital on November 5, 2001, steadily hiked its stake to 10.05 per cent over the next 10 days until November 16. Consequently, the scrip rose sharply from Rs 167 to Rs 209. Coincidentally, on November 6, Reliance was approached for a possible sale of a block of shares to Grasim. SEBI’s order does not worry about the size of the stake that Grasim had sought, although it is important information.

In fact, the Grasim board recorded the deal as being an offer from Reliance rather than the other way around. Also, it went about arranging funds for a 10 per cent of the L&T shares at a substantial premium, suggesting premeditated buying by Reliance based on specific information. On November 16, Grasim allegedly made a firm offer of a 47 percent premium (Rs 306 per share) to the ruling market price for a block of 10.05 per cent of Reliance’s holding; and the deal was finalised on November 18. The investment banker is close to both parties, but Reliance claims that it had no idea that a deal would materialise.

Why then did it double its holding in a great hurry? The committee decided that the answer was not relevant.

The L&T management, which fought hard to keep the Birla’s out, also didn’t bother about the soaring price. And SEBI quickly accepted Reliance’s contention that since L&T was completely out of the picture there was no inside dealing. Several questions, asked by ordinary investors about the deal, apparently did not occur to SEBI’s powerful committee.

For instance, Reliance says that there was increase in the stock price after the deal became public. Since the Birla’s had made it clear that there would be no open offer to retail investors, only foolish investors would buy more shares above Rs 208.5. The order says nothing about the price manipulation angle.

Similarly, SEBI is unconcerned that Reliance wasn’t an outsider in L&T. It had two board positions, a ‘substantial holding’ (by SEBI’s own definition) and at one time even controlled the management. So much so, that Grasim was willing to buy L&T only if Reliance signed a deal specifically promising to keep away from L&T for a long time. SEBI does not discuss the sanctity or purpose of its “Substantial” shareholding rules, which require investors to report any holding of over five per cent in a publicly listed company. Isn’t this because this threshold is considered a significant indicator of a possible change in management? Yet, Reliance’s 10-day circus on the bourses was not discussed by SEBI in this context, even though the sale of its holding triggered a nasty two-year battle for control.

SEBI’s exoneration of Reliance proves that there is no uniformity in the application of insider trading rules. For instance, contrast the L&T case with the SEBI’s allegations against Hindustan Lever (HLL). In 1997, two Unilever group companies (HLL and Brooke Bond, both with a 51 per cent stake by the parent) had merged. Just prior to the merger, HLL bought additional shares from Unit Trust of India (UTI) at a premium to market and extinguished them during the merger. This was done to keep Unilever’s stake in the merged company also at 51 per cent. It was a transparent deal, openly reported to shareholders. There was no monetary benefit to Unilever; if anything, the value of all shareholders increased when HLL extinguished the shares.

Yet, SEBI accused two HLL chairmen and several top directors of insider trading and ordered HLL to compensate UTI for a notional loss that UTI had not even claimed. SEBI turned livid when the Securities Appellate Tribunal (SAT), then comprising two top secretaries of the finance ministry, overturned its order. It filed an appeal in the civil court, which is still pending. Just a year ago, it revived the case by filing a criminal writ petition against HLL for ostensibly delaying the hearings — a charge that is hotly contested by the company. The case is languishing again.

If SEBI’s munificence towards Reliance and harshness towards HLL are two extreme examples of the application of Insider Trading Rules, then take a look at SEBI’s attitude to public sector banks, which dumped units of UTI before its dramatic collapse in May-June 2001.

Although the banks dumped units at a high Rs 14.75 on the specific knowledge of UTI’s financial problems (UTI had borrowed from those very banks to fund its redemption), it wasn’t even considered insider trading or investigated. When JE Talaulicar, a Tata Finance director, was indicted for insider trading, SEBI even punished a senior executive of the group for Talaulicar’s actions. Yet, it holds Reliance blameless in L&T.

SEBI’s only clear indictment for insider trading was that of Rakesh Agrawal, Managing director of Bayer ABS Ltd in 2001. But that order too was set aside by SAT on the strange premise that although he (in fact a close relative) traded on unpublished, price sensitive information about the merger between Bayer and ABS Industries, SEBI had not proved that he derived an unfair advantage. Then there is the case of Samir Arora, the best-known fund manager in India. SEBI barred Arora from the capital market without even a hearing. And although many of us supported its quick action, the L&T-Reliance matter has us wondering if the regulator is even-handed especially since it continues to go soft on Alliance Capital Mutual Fund, which employed Arora and benefited from his actions.

Meanwhile, the flare up in stock prices of companies, preceding every major announcement by them, indicates that insider traders in India are seldom caught and are selectively persecuted.

-- Sucheta Dalal