Sucheta Dalal :Why SEBI avoids penalties
Sucheta Dalal

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Why SEBI avoids penalties  

Jun 7, 2004


Ever wondered why the Securities and Exchange Board of India (SEBI) fights shy of levying stiff monetary penalties even after an amendment to the SEBI Act has hugely enhanced its punitive powers? After all, monetary penalties cause real hurt, while suspensions are invariably contested and only enrich lawyers. The reason, we learn, is this: at the beginning of an investigation, SEBI decides whether the offence requires ‘inquiry’ proceedings or ‘adjudication’. Inquiries are apparently meant for serious offences and scams, while adjudicating proceedings are followed for smaller misdemeanours, infringements and violations. The classification also pre-decides the nature of punishment. If the ‘inquiry’ confirms wrongdoing it leads to a reprimand, suspension or a cancellation of registration. An indictment after adjudication leads to censure and/or monetary penalty depending on the gravity of the offence. But the very fact that an adjudication was chosen means the misdemeanour had been pre-judged as minor so no stiff penalties. Consequently, although SEBI has the power to impose severe penalties going up to Rs 25 crore, it has tied itself in knots by its own rules and cannot use its powers effectively. Considering that SEBI bleated for more powers for over five years under a previous chairman, shouldn’t it have changed its rules to make the penal powers work?

Suspended freedom

There is a serious consequence to SEBI’s inability to hand out appropriate punishment. The regulator, quite correctly, cannot cancel registration and licenses of all offenders, so it hands out meaningless suspensions. But the most notorious brokers, sentenced to long periods of suspension are freely operating in the market and manipulating stocks through a host of front companies, without any fear. They no longer report to the regulator, and if they maintain a low profile, SEBI leaves them alone. Some of the biggest scamsters of 2000 are back in the market, albeit with depleted financial muscle. In most cases, the same mid-size corporate houses are allowing them to run their investment portfolios or are funding their ramping operations. When stock prices collapsed after Finance Minister P.Chidambaram’s speech in Mumbai last Thursday, one of these big brokers is believed to have been a significant seller in the derivatives market.

The front companies

An interesting aspect of Scam 2000 was that the Joint Parliamentary Committee (JPC) report merely took note of the shenanigans of several big and small brokers, but carefully ensured that there was no criticism or indictment. Instead, it ended the report with a general instruction to regulators to continue their investigations and take appropriate action. Since then, SEBI has been conducting a slow investigation, which has not even touched several of these entities; they in turn claim to have been ‘‘exonerated’’ by the JPC. The truth is that nobody investigated their activities, either then or since. Having got away in Scam 2000, they are boldly fronting for various scamsters. They execute their transactions and even help route the funds of their corporate clients through Participatory Notes issued overseas by Foreign Institutional Investors (FIIs). These are the same corporate and political clients who colluded with them in 2000. A leading broker indicted in the scam operates from a first floor office in Nariman Point these days, while another trades through the business centre of a five-star hotel in Mumbai’s suburbs.

Forced automation

Getting Indians to embrace technology and automation to improve transaction efficiency is an extremely laudable effort. But the ICFAI University of Hyderabad seems set to force it on students. From July this year, it has decreed that students can only pay examination fees and service charges through credit cards and an Internet Payment Gateway. No cash, cheques, debit cards or pay orders will be accepted. Students will thus have to acquire credit cards or use those of their parents or guardians to make payments. Considering that many people, including this writer, remain chary about technology fraud and the security of online payments, the action has provoked predictable complaints from students. So far, ICFAI is sticking to its guns and claims that ‘‘online payments allow for precision, time saving and faster process’’.

Companies beware

These days, companies hire Public Relations (PR) Agencies on the basis of guaranteed positive coverage in a certain number of publications and pay them on performance delivered. While this has increased pressure on PR agencies to ‘‘persuade’’ journalists to provide positive coverage, the companies themselves are being taken for a ride by agencies who stick them with fake expenses on account of journalists. Automobile columnist, Veeresh Malik caught a PR agency happily palming off air-tickets in his name to a south-based client. He caught the fraud due to a chance conversation with the CEO, but many journalists remain clueless about such trickery. On the other hand, inducement to the media is such a sensitive subject that companies don’t dare to cross check expenses, especially since plenty of journalists also accept and demand such goodies. One way to stop this trickery is for industry associations to figure a way to expose such expense padding.

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-- Sucheta Dalal