Sucheta Dalal :Disgorgement or extraction?
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Indian Express - Different Strokes » Disgorgement or extraction?
                       Previous           Next

Disgorgement or extraction?  

Nov 26, 2006

Oops, it has done it again! The Securities and Exchange Board of India (Sebi) has again issued a path-breaking order asking wrongdoers to disgorge Rs 116 crore of ill-gotten gains in the demat scam, which is likely to fizzle out due to implementation problems. Sebi’s ‘interim’ order of April 2006, which first exposed the multiple-application scam, was similarly full of holes and it subsequently let off some entities who were initially indicted or stepped back to follow procedure. Both ‘interim’ orders are tall on intent but short on execution and accuracy. This time, Sebi’s laudable aim is to force disgorgement of unjust enrichment through multiple IPO applications; but those who have been asked to cough up the moolah were not enriched in the first place - justly or otherwise. The regulator wants large intermediaries such as depositories, banks and Depository Participants to pay up first and recover the money from petty scamsters down the line including Roopalben Panchal, Purshottam Budhwani and others. Sebi blithely advises them to file lawsuits to apportion liability among smaller intermediaries. Sebi found irregularities in 21 IPOs and passed orders against 105 entities including 24 key operators, 82 financiers, 14 DPs, two depositories and one registrar. Apportioning liability among all of them will be a complicated mess. Sebi’s disgorgement order against the two Depositories needlessly distracts attention from the need for systemic changes to make them safer and more affordable. It is also unfair to expect them to take on the regulator’s recovery function and get embroiled in lawsuits on that account. Further, it is an open secret that Panchal, Budhwani and others were controlled by a large market intermediary with known expertise in the multiple applications racket; Sebi officials are aware of this, but the second interim suggests that it is abandoning this line of investigation altogether.

Recovery uncertain

Another problem with Sebi’s commendable but flawed move to disgorge ill-gotten wealth is its multiple ‘interim’ orders. In a country where courts are niggardly about granting compensation even when a decade of litigation leads to a final order, the Rs 116 crore ‘disgorgement’ without a clear plan for its distribution is hasty and bound to be challenged. Sebi further says that the disgorgement order will lapse if any intermediary is "held to be not guilty in the final order"; this suggests that it does not expect to collect or distribute the disgorged money in the foreseeable future. Also, contrary to some expert views, returning the money to rightful claimants is extremely difficult. When the basis of allotment is drawn afresh after eliminating multiple applications, there will be complete confusion at the ‘minimum allotment’ level, since this is not on proportionate basis; in fact a completely different set of successful applicants could emerge. Sebi would then have to go for an equitable, rather than a fair redistribution of disgorged wealth; but that would only happen after a lot of time and money has been spent on avoidable litigation and when the disgorgement has little meaning left.

Drumming up subscription

Last week, Reliance Mutual Fund (RMF) sent out text messages pointing to the fact that its schemes figured among the world’s best performing funds. This is praiseworthy, but not surprising; after all India has been among the best performing markets on a global basis. But RMF wasn’t writing to boast. Its marketing team told distributors that although the Fund House collected over Rs 5,000 crore during its last new fund offering (NFO), it planned to cut off subscriptions at Rs 1,000 crore for the Reliance Long Term Equity Fund which is now open for subscription. Naturally, this has distributors in a tizzy trying to get high networth investors to write their cheques; they are also pleading with the fund to accept more money. The situation is reminiscent of the Morgan Stanley issue of 1994, which saw an astonishing grey market and snaking queues to subscribe. Then too, the capital market was similarly on fire and gripped by an IPO mania. The performance of Reliance’s existing schemes was bound to attract investors to its NFO, so one wonders about the marketing over-drive that is whipping up a needless frenzy.

Targeting phishers

After going after software piracy in the 1990s, Microsoft Corporation has turned its attention to another scourge of the new century - cyber criminals who dupe people into providing electronic access to their bank accounts through what is known as ‘phising’. Phising is the term for creating official-looking websites of banks, credit cards and finance companies to get people to part with access details such as account numbers and passwords. Microsoft has launched a Global Phishing Enforcement Initiative, which is working with law enforcers in several countries to counter phishing and has already initiated 129 lawsuits in Europe and the Middle East. Statistics on phishing attacks are extremely worrying. Gartner, a research group, estimates that damages from phishing could be $2.8 billion in 2006. The number of attempts to trick people into passing bank details had doubled in the first half of 2006 to a whopping 157,000, according to Symantec, a security software vendor.



-- Sucheta Dalal