Sucheta Dalal :Interesting Precedent
Sucheta Dalal

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Interesting Precedent  

June 17, 2008

Exclusive news, the stories behind the headlines and the truth between the lines


Interesting Precedent


Within a few months of a new chairman taking charge of the Securities and Exchange Board of India (SEBI), there is an important breakthrough in the messy process of bringing offenders to book in the IPO scam, also called the multiple-application scam. Twelve accused, mainly connected to the Dadia family, have filed consent terms and without admission or denial of guilt paid up the highest penalties under the consent provisions.


They remitted a total of Rs71.75 lakh, of which Rs59.75 lakh is a disgorgement of ill-gotten gains and Rs12 lakh is a settlement charge. This is in addition to the taxes that have already been paid to the income tax on the ill-gotten profits booked by the accused. They had also been banned from the capital market under SEBI’s original IPO order of April 2006 when it found that a set of operators had opened nearly 60,000 demat accounts in fictitious names to file multiple applications for initial public offerings (IPOs) and corner a big chunk of the retail allocation.


SEBI’s disgorgement order of Rs116 crore covered the two depositories, Registrar & Transfer Agents (RTA) and bank depository participants such as HDFC Bank, IDBI Bank and ING Vysya Bank (interestingly M Damodaran, former SEBI chairman, has now joined ING Vysya as an advisor). The Securities Appellate Tribunal (SAT) has overturned several of these, because SEBI could not make a case of unjust enrichment against certain entities. One implication of the current consent orders is that they have raised the bar for pay-ments to be made for settling financial offences -- until now, most offenders got away without admitting guilt and making paltry payments. The regulator naturally expects that the first set of consent orders will encourage all 82 financiers and 24 key entities identified in SEBI’s April 2006 order to come forward and settle their cases. Will this happen? There could be one catch. There is nothing to stop the Central Bureau of Investigation (CBI) from going after those who have filed consent terms and launching criminal prosecution against them. After all, it was filing charge-sheets in the 1992 financial scam until almost a decade after it was unearthed.


Disclose FII Details


Several people have tried to get the finance ministry to reveal more data on the trades of sub-accounts and derivative instruments issued by foreign institutional investors (FIIs) but they have all failed. Now, the formidable AIDMK leader and P Chidambaram’s bete noir J Jayalalithaa has charged that participatory notes (PNs) issued by FIIs cause stock market volatility and wants more information on their activity. The finance ministry’s response has been to dismiss her charges as baseless. That is no surprise; after all, it had similarly ignored a headline-grabbing claim by National Security Advisor, MK Narayanan, at a global security meet, that terror funds were finding their way into the Indian market. Jayalalithaa is now making the same allegation and she is hardly the kind to let go. She has accused the FM of obfuscating and beating around the bush instead of revealing the names of PN-holders. She wants the complete list of PN-holders along with details of their investment to be posted on SEBI’s website. And why not? In a disclosure-based regime, the best way to flush out bad money is through openness -- legitimate investors should have no objection and it creates the possibility of the regulator gathering crucial market intelligence. Meanwhile Abhishek Chowdhury, a Right to Information (RTI) activist, has also been demanding data on FII investments. In response to one query, the Central Information Commission has asked SEBI to decide within two months whether this information can be disclosed, after consulting the government. Otherwise, SEBI must say how the disclosure of FII investment data will hurt the Indian economy. Under the present chairman, SEBI may not have a problem disclosing this information but there is work to be done on FII regulation. The order of the Securities Appellate Tribunal (SAT) in the Goldman Sachs case shows that SEBI has never put in place clear rules for regulating the issuance of PNs by FIIs to Indian nationals or non-resident Indians. The case also suggests that the reporting requirements currently in place are rather meaningless. We may need more salvos from Jayalalithaa to bring about greater transparency in FII reporting. 



 P Chidambaram is considered the most capital-market-obsessed finance minister (FM) we have had, and his son, although unconnected with the financial world, is well known to all bankers, fund managers and financial intermediaries that matter. Yet, the FM has endeared himself to nobody. The latest round of aggravation is the decision on 9th June to hike his direct tax target by a whopping 25%, when the country is reeling from an economic slowdown, near double-digit inflation, shortages of fuel and fertilisers, crumbling infrastructure and rapidly tumbling stocks. The sharp increase in direct tax targets in this situation will immediately translate to more harassment by tax authorities and greater corruption. “Does he live in the same world as the rest of us,” asks a wag.


Be-Sahara This Time?


The Reserve Bank of India’s (RBI) 4th June decision to stop Sahara India Financial Corporation (SIFC) from accepting deposits is intriguing. RBI had done a detailed investigation into Sahara’s finance business way back in 2005. This was followed by an independent audit commissioned through KPMG, which has a forensic investigation cell. The report was expected to lead to stringent action; instead, in April 2006, RBI gave both the major residual non-banking finance companies - Sahara India and Peerless -- more time to “comply with prudential norms.” Indeed, the Sahara group has been allowed to take over a mutual fund and also enter the insurance business. RBI’s investigation occurred at a time when Subroto Roy, the self-styled Saharashri had vanished from the public eye, setting off a spate of wild rumours about his health and whereabouts. Mr Roy reappeared as suddenly as he had disappeared and the threat of RBI action suddenly went away. The only perceivable difference was that Amar Singh -- of the Samajwadi Party -- was no longer seen in the company of Mr Roy and, of course, Sahara Airlines was sold off to Jet Airways. Did the severance of that friendship help the group ward off RBI action? That was, indeed, the buzz in political circles.


Although RBI appears to have let off Sahara in 2006, one assumes that it kept a watchful eye on its activities. How then did things degenerate under RBI’s watch? An informed source says that RBI had previously given SIFC until 2010 to wind up its activities and has only hastened the process. Why? We don’t have an answer, except to observe that we are heading into a year of general elections and the group, based in UP, depends on political patronage.


Sahara’s aggressive challenge of the RBI order suggests that it has no intention to wind up in a hurry; it also throws up some questions. For instance, if Sahara India is in trouble, should investors/consumers worry about the insurance and mutual fund business as well? Those businesses have separate regulators who interact with each other in the High Level Committee that includes the finance ministry, but none of them had been briefed at the time of writing this piece. Instead, Sahara insurance has launched an aggressive and brilliant advertising campaign that is putting a lot of revenue into media coffers and is a disincentive to asking inconvenient questions.


SIFC apparently has deposits worth Rs18,000 crore; logically, the RBI order to stop accepting fresh deposits and lodge securities with a designated bank ought to have sent its depositors into a panic-stricken frenzy. Isn’t it curious that not a single SIFC depositor is worried about her deposits in a company that is charged with violating Know Your Customer rules?

-Sucheta Dalal

-- Sucheta Dalal