Sucheta Dalal :SEBI's Disclosure
Sucheta Dalal

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SEBI's Disclosure  

April 7, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL


Regulator’s Disclosure


The capital market regulator, the Securities and Exchange Board of India (SEBI), is a good user of the Internet. If it cannot reach market participants, it simply puts out ‘unserved summons/notices’ on its website and has given itself the power to pass ex-parte orders if these are not responded to. It puts out discussion papers on the Internet before framing regulations; issues press releases by email and also puts up Draft Red Herring Prospectuses on its website. All this sounds wonderfully sophisticated and investor-friendly until you actually try to use the SEBI website. For instance, you do a ‘search’ for ‘unserved summons/notices’ and you get zero results, although a tab with that head sits right on the home page



New Rabbit


Media reports suggest that SEBI plans to pull another rabbit out of the hat - an auction-based pricing of initial public offerings (IPOs). This is something that has long been advocated by data aggregators on behalf of companies. The move is being packaged as one that will bring ‘more transparency and efficiency’ to the sale of shares. But, in fact, companies will extract the highest possible price from investors in a ferocious bull market by getting their lead managers to have a few institutional investors create a frenzy by bidding at absurd prices. Retail investors end up paying the highest price since they will be made a fixed-price offer at the discovered price. The situation is similar to that of 1992-94 period when control over capital issues was abolished in the euphoria of economic reforms. The ensuing frenzy of new issues attracted thousands of junk companies and the market remained dead for a decade



Essar Steel Delisting


The stupendous wealth of the Essar group is created out of public money. It is the story of two brothers who turned into major industrialists by repeatedly raising public money, using existing listed companies to spawn new ones, spinning them off and raising money again or getting listed entities to provide guarantees to raise funds in their unlisted private companies. A combination of overarching ambition and an economic downturn hit the group badly and every group company sank into the red or struggled to complete projects. The share prices dropped to abysmal lows. Finally, generous loan write-offs by financial institutions, a commodity boom and economic growth helped the group drag itself out of the morass. Was Essar finally ready to reward minority investors who had held on to their shares for over a decade with no returns? Not a chance. Instead, it began to plot how to get rid of them at the lowest possible price and delist all its shares from the domestic bourses. It now wants to list them globally and become an international business house. We learn that Essar was betting on an amendment to the reverse-delisting rules that would take away minority investors’ power to dictate the exit price. SEBI also showed great alacrity in trying to amend the rules; fortunately, its board has shot down the amendment.

So Essar Steel now has an alternative plan. According to Business Standard, the promoters have converted the global depository receipts (GDRs), which were being mopped up when the company was in the doldrums. This would take the promoters’ holding to over 90%, thus allowing them to delist without an open offer. SEBI referred the matter to a ‘special panel’ which is the standard way of distancing itself from responsibility.


A Small Story


Who are the investors that Essar Steel is dumping and why do they feel short-changed? Well, listen to this story. Hemendra Shah (name changed) bought Essar Steel shares in 1992 at Rs150. As its fortunes slid, the company made two rights issues at Rs60. Two years ago, as part of capital restructuring, it reduced every 100 shares owned by an investor to 60. This means that investors actually paid Rs100 per share for the rights issues. Now that Essar Steel has converted its GDRs, it plans to dump its retail investors by offering them a pathetic Rs48 per share, when all steel companies are quoting at record highs and its integrated steel plant is doing well. The Ruias of Essar who were openly accused of diverting institutional money to their other companies are today at their wealthiest ever. Angry small investors have been writing about how the company is trampling on their rights, but who is listening? In fact, many investors complain that they have not even been receiving annual reports from group companies.



Statistics & Statistics


Last week, SEBI triumphantly announced to the world that the Securities Appellate Tribunal (SAT) has, in fact, been fairly supportive of its decisions. The announcement was backed by an internal research paper that “tabulated the result of appeals preferred before SAT” from the year 2000 to 2006. The conclusion: 80% of SEBI’s orders have been upheld even if the penalty has been reduced in the biggest chunk of cases. In 2006, 90% of appeals were upheld, says the report. As they say, there are lies, damned lies and statistics. Look at it another way. We are talking about the orders of a self-regulatory body. These orders have to be passed after a proper show cause, hearing and even an adjudication process. In fact, if 80% or more of SEBI’s orders were not upheld by the appellate authority, one would have to seriously re-examine the concept of ‘independent regulators’. The relevant analysis would be to find out how many of SEBI’s major orders have been upheld. How many times has SEBI been able to justify the issue of ex-parte orders without a hearing? And isn’t it a fact that SAT has recently imposed a fine on the regulator for failing to issue final orders in one case, despite several warnings? (SAT had not signed the order at the time of going to press, but had announced a penalty of Rs100,000 in open court.)

Also, since SEBI is putting out statistics about its orders, how about sharing information with investors on the fate of consent orders and compounding of offences that started in June 2007? We have nothing from SEBI, except the circular. Those who have gone through the new process say that nearly 70 cases have been heard by the recommendatory committee set up under the chairmanship of Justice Hosbet Suresh. About half these recommendations pertain to compounding and the other half to consent terms, but no information on the recommendations is available to the public. The reason could be that cases pertaining to compounding of offences have to be ratified by the courts and, where consent orders are concerned, a whole-time SEBI member has to pass the order based on the recommendations of the committee. Can we expect SEBI to post these orders on its website? Consent terms and compounding of offences will work only if SEBI ensures transparency in the recommendations. The investing public has a right to know what has been recommended by the committee and, later, they need to know the final orders passed by the court or by SEBI’s whole-time members




One question that nags us is: why should the Securities Appellate Tribunal (SAT) be dependent on SEBI’s largesse for everything? It operates out of office space provided by the regulator; and its orders are put up on the SEBI website. Today, all courts in the country have excellent websites that publish the cause list, case status, daily orders (Supreme Court) and judgements. Given the growing importance of the capital market, why shouldn’t SAT have its own website with all these details? Such a website would be absolutely in investors’ interest and there is over Rs1,000 crore of money available for investor education and information with the Ministry of Corporate Affairs and the two national bourses put together. Will the Finance Ministry take the initiative to create such a website?


-- Sucheta Dalal