Sucheta Dalal :Sebi: More rules lesser enforcement
Sucheta Dalal

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Sebi: More rules, lesser enforcement  

Feb 28, 2005


By postponing the deadline for getting a MAPIN (Unique identification number) for individual investors, the new market regulator has doused the anger of one set of market participants — the individual investor. But come April 2005, when the new disclosure and reporting requirements under Clause 49 of the Listing Agreement of stock exchanges become applicable, there is bound to be another storm of protest from corporate India.


The new listing requirements were born out of the Narayana Murthy Committee’s recommendations and have been widely discussed, debated and even diluted already. But, as some leading companies are pointing out, some of the provisions under Clause 49 are more onerous than the Sarbanes Oxley Act of the US. They restrict operational flexibility, impose higher compliance costs on companies and sometimes act as a disincentive to remain listed (especially for companies that don’t need funding).


On their own, these complaints are not unexpected. But like the anger of individual investors against MAPIN, there is a valid edge to the corporate resentment. The issue that is agitating individual investors and the better managed listed companies is simple: the regulator seems to be under the illusion that more red tape, onerous disclosure norms and compliance requirements would somehow offset its pathetic record of enforcement. This only means that the better companies are weighed down by more and time-consuming new rules while dubious companies seem to break the laws with impunity.


New corporate governance rules would make sense, if the regulator demonstrates its ability to book and punish powerful companies that break the laws. New registration requirements make sense if they help the regulator nail fraudsters and market manipulators. And complex disclosure norms for Initial Public Offerings (IPOs) would work if they actually weed out dubious issues. But the last few years have again demonstrated that when it comes to effective enforcement and punishment, regulators develop cold feet.


For instance, the dirt on Reliance Infocomm spewing out to the media from company insiders has been met by thundering silence by all government agencies whose job it is to investigate these charges. The minister of company affairs has repeatedly asserted that he does not want to ‘destabilise’ the group by starting an investigation! Similarly, the JPC report of 2002 specifically mentions 15 companies suspected of colluding with Ketan Parekh and other scamsters. Sebi did not even bother to investigate them. Well then, why trouble other listed companies with increased disclosures starting April 2005?


It is the same with investors. All the identification and finger-printing applies only to those who want to do legitimate trading. Yes, scores of brokers, operating for regional stock exchanges have converted their business into all-cash bucket shops and the regulator does not even know. Many of them funnel all the trades of a diverse set of investors through a single dummy entity on the official bourses. I know of at least one instance where the regional stock exchange office bearers are fully aware of the nature of business conducted by their brokers. Yet, 13 years after the Securities and Exchange Board of India (Sebi) got its statutory teeth, not a single regional exchange has been shut down because of some farcical or imaginary compulsions. So, much for the Sebi’s tough regulation.


One of the biggest weaknesses in Sebi’s investigation process is its failure to ‘follow the money’ to get to the root of market-related fraud. For this, the regulator would need to have access to all the bank accounts where proceeds of market related transactions are deposited and to follow the trail of money when it moves out of those accounts. If the Tax Information Network were able to chip in with income information, it would eliminate the brazen trades through dummy entities as is rampant in regional exchanges.


It would also hae to take into account the Reserve Bank of India’s ill-timed concern about Foreign Institutional Investment (FIIs) — not in terms of discouraging it or taxing it, but to be able hunt down FIIs who are acting as fronts for domestic investors and providing a cover for the manipulation of stock prices. The JPC report had caught two FII sub-accounts lending name to Ketan Parekh’s activities. Anecdotal evidence suggests that the use of FIIs as a front by shady politicians, industrialists and businessmen is fairly rampant. Some of the most reputed FIIs have happily provided a cover for overseas acquisitions by Indian industrialists by turning into strategic investors themselves. Market circles openly talk about a recently notorious BJP politician’s interest in an aviation company as well as a software firm. The Economic Survey advocates an expanded role for FIIs, but it must be accompanied by a crackdown on those who merely front for domestic businessmen.


In order to track these shenanigans or to stop them, Sebi needs to enlist RBI’s cooperation in its surveillance effort. An insider says that despite repeated requests from Sebi, the RBI has ‘steadfastly refused’ to nominate a person to the Sebi constituted surveillance committee that meets every Monday and assesses market developments.


Hopefully, Chairman M. Damodaran will be able to use his diplomatic skills to change that. Sources say he has already had a long interaction with the Presiding Officer of the Securities Appellate Tribunal (SAT) to understand why it has lost so many of its cases or had its penalties slashed by the tribunal.


Or whether, as the Chartered Accountants’ World, has alleged in a recent editorial, the flaw lies in the manner in which Sebi conducts its inquiries and adjudication proceedings and the lack of proper separation between the administrative and judicial cadres within regulatory body. This, it says, leads to harassment of market participants and miscarriage of justice. All these complaints have a common thread. Sebi needs to prove that there is a purpose to the extensive disclosures and costly compliance that it increasingly mandates. This will only happen if it is able to send out a powerful deterrent signal by punishing a few of the biggest price manipulators or violators of good governance rules.


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-- Sucheta Dalal