The case of the reluctant regutor (28 October 2001)  

When Sebi stunned the capital market by winning its case on payment of registration fees by stockbrokers, there were sniggers in the capital market about how the Sebi chief was probably as disappointed as the brokers. This was a case that Sebi would have loved to lose, they said. This time it is exactly the opposite. Sebi’s action against Sterlite Industries and its plans to prosecute one of its directors have been thrown out by the Securities Appellate Tribunal (SAT). Yet, instead of being embarrassed, word on Dalal Street is that the Sebi chief is gleeful. Firstly, it vindicates his demand for more powers and secondly because it suggests that is almost impossible to conclusively prove market-manipulation and insider trading.

Even if the Sebi chairman’s reactions are dismissed as mere bazaar gossip, the fact remains that in the last few years, Sebi has earned itself the reputation of being a very reluctant regulator. Worse still, its disciplinary actions are seen as arbitrary and ill-conceived; and despite repeated requests from investor groups, it has refused to issue reasoned speaking orders which would help build well-defined case law with regard to its quasi-judicial functions.

Despite some of the best legal help at its disposal, the SAT order in the Sterlite case suggests that the outcome would have been different if the case were handled rather differently. Let us start at the beginning. The story begins with Harshad Mehta who decided to make a splashy comeback in 1997-98. His chosen vehicles were the scrips of Sterlite, Videocon and BPL. These companies were also simultaneously involved in other price-sensitive actions such as a bold takeover or a buyback of shares which also contributed to exciting punters on the market. However, the speculative bubble went spectacularly bust in June 1998 threatening to send at least a score of brokers into the defaulter list. More importantly, the size of the default threatened to gobble up the trade guarantee fund of the Bombay Stock Exchange.

The BSE chose an even more scandalous cover up by arm-twisting the three corporate houses to bail out brokers who were in danger of going belly-up. It organised for their bailout to be routed through market intermediaries and even opened up the trading system to insert fake and synchronised transactions into the system in the dead of night. Sebi first allowed this cover up to happen and then began to investigate. Several small brokers were punished in the first round of actions and the then BSE President and Executive Director were given their marching orders. But almost all the key players remained unpunished. For two years, Sebi’s investigation remained in suspended animation, until the stock price collapse of 2001 galvanised it into some quick action.

The SAT order further noted that MALCO (an associate of Sterlite industries) provided Rs 11.75 crores to an intermediary called Dil Vikas to purchase Sterlite shares and that the money was made available at the ‘request made by some members of the governing board of the BSE to avoid a payment crisis and save the market as well’. It further noted that the involvement of the ‘BSE higher ups is evident from the fact that the trading system was opened at midnight to put through the transactions’. Isn’t it strange then that even the heat turned on after March this year, did not lead to super-speed action in some cases. For instance, Rajendra Bhantia, the broker who is under Reserve Bank scrutiny for his involvement in Nedungadi Cooperative bank was the main negotiator of the 1998 bailout at the BSE. Bhantia was a close buddy of Harshad Mehta in 1992 and went on to become Vice President of the BSE. Curiously, enough, this central player has not even been issued final punitive orders by Sebi.

Another worrying factor in all of Sebi’s investigations is how the same old issues continue to crop up which need to be settled satisfactorily. For instance, Harshad Mehta, Rajendra Bhantia, Sterlite and all the other intermediaries involved in the 1998 debacle and the 2001 investigations have demanded cross-examination of witnesses and Sebi officials. Sebi has persistently resisted such cross-examination, but this issue needs to be settled urgently? In the Sterlite case, a key witness Bimal Gandhi (owner of Dil Vikas and El Dorado, the intermediaries who facilitated the bailout of brokers) is no more. Sterlite’s counsel attempted to discredit Gandhi’s statements and submissions on the grounds that he was not subject to cross-examination.

The same issue will crop up in the future with regard to the late Nirmal Bang. In fact, disregarding Bang’s statements or submissions may have a huge impact on the 2001 investigations because his companies were central to the transactions of the largest brokerage firms in the country. Almost all of them traded through Bang’s books even when they had their own cards. Unless the regulator is forced into the discipline of issuing reasoned, speaking orders which are publicised on its website, this perception will not change. Sebi cannot at the same time whine for more powers, but refuse to support the process of creating clear case law relating to new developments and regulations in the capital market.