Sucheta Dalal :SEBI Guided by Stock Exchanges?
Sucheta Dalal

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SEBI Guided by Stock Exchanges?  

April 8, 2008

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

SEBI Guided by Stock Exchanges?

On 31 March 2008, the Securities and Exchange Board of India (SEBI) put out a four-page discussion paper apparently based on suggestions by stock exchanges. The intent of these recommendations may be to clean up the sales tactics of brokerage firms but almost each one of the suggestions - good as well as bad - is marred by impracticality. Every investor depends on tips from brokers, even institutional investors demand ‘research reports’, although it is well accepted that a broker is not an investment advisor. SEBI is now changing the definition.

According to the SEBI proposal, brokers “owe their clients a duty to provide suitable investment advice in the best interest of the clients” and must have reasonable grounds for believing that the “recommendation is suitable for the client,” based on his/her financial position, past investment experience, investment needs and investment pattern. Further, brokers have to “establish and maintain procedures and keep records of their business and clients to justify their risk profiling of their clients and the suitability of advice given.” This will burden brokers with so much red tape and regulatory responsibility that it will increase their costs and, consequently, create entry barriers to capital market participation. If SEBI has decided that brokers are obliged to provide investment advice, what happens to its move to regulate investment advisors?

SEBI wants brokers to assign exposure limits to individual clients, based on their financial capability, which is good. But it also wants them to ensure a Rs five lakh net-worth criterion for trading in derivatives and to impart “adequate training” regarding risks, before permitting clients to trade in derivatives. Asking brokers to train clients seems rather excessive. A similar problem arises in connection with SEBI’s proposal that only persons of ‘commensurate’ financial standing can introduce new customers to brokers. Why is an introduction necessary when a person can only open a trading account if he has a valid bank account, a PAN card, proof of residence, photograph and probably tax returns as well?

A positive feature is to ask brokers to disclose their background and work-history when signing new clients. Also, ‘actions’ (regulatory actions?) against brokers in connection with grievance redressal, breach of regulatory requirements and pending arbitration cases “may also be disclosed”, says the paper. Hopefully, the final regulations will require that such details ‘MUST’ be disclosed but, before that, SEBI must ensure that the orders posted on its website for compounding of offences are comprehensive and that the charges are comprehensible to ordinary investors.
Other aspects of the proposal include motherhood statements such as not permitting the establishment of fictitious accounts or misuse of customer funds or securities, unauthorised trades, front-running, fraudulent activity including forgery, etc. Since this proposal is apparently based on ‘suggestions from stock exchanges’, shouldn’t it have included a set of steps that exchanges would take to ensure that their staff is accessible and works at resolving investor issues without necessarily pushing them into arbitration?

Not that Drastic

The Reserve Bank of India (RBI) has put out for public comment its draft guidelines for regulating recovery agents of banks. Among other things, the guidelines want lending entities to record the calls made by their recovery agents, post the list of recovery agents on their website, ask them to carry proper authorisation papers when they go for physical recovery, ensure police verification to check the antecedents of these agents as well as training for the agents and a qualifying exam in arrangement with the Indian Institute of Banking and Finance. It is not clear how well the certification will work, because the nature of recovery agents is very different from insurance agents (where the insurance regulator has mandated 100 hours of training).

A positive for the lenders is that the RBI permits them to continue recovery proceeding if the borrower makes “frivolous/vexatious complaints”; however, it expects sympathetic consideration and credit counselling where necessary. The rules also specify that where the consumer has lodged a grievance, the case cannot be handed to a recovery agent until the grievance is redressed. All these are important measures and will help bring some discipline and order into recovery proceedings.

A second aspect that the RBI needs to tackle urgently is the increasing number of complaints about consumers being wrongly reported to credit bureaus such as CIBIL (Credit Information Bureau of India Limited) or the unregulated Satyam list. Wrong or malicious reporting to such credit lists is especially nerve-racking for consumers because their loan/credit card applications keep getting rejected and the lender is not obliged to provide any reason for doing so. One way to correct this is to follow the international practice of sending an annual statement to every consumer who is reported as a defaulter to the credit bureau.

Zee Escapes with a Warning

Ironically, while SEBI is seeking to impose such crushing responsibilities on brokerage firms, it ended an eight-year investigation into Zee Telefilms with a warning to the company after concluding that it found no nexus with Ketan Parekh to manipulate prices. While passing this astonishing order, SEBI’s whole-time member, TC Nair, concluded that “the promoters of Zee Telefilms had by their conduct and actions given an impression that they aided and abetted Ketan Parekh (KP) entities in large-scale market manipulation of various scrips, including Zee, during 1999-2001 period.” Yet, he easily concluded that the Zee group was “not directly involved” in manipulating the shares. So he let off the group with a mere warning!
What did the SEBI member look at? He saw that the price of Zee Telefilms had risen from Rs476 on 1 October 1999, to Rs1,555 on 24 February 2000, mainly because of the manipulations of Ketan Parekh-related entities, and that it had crashed to Rs121 as on 30 March 2001. He also noted that the Essel group (promoters of Zee Telefilms) had advanced Rs706.40 crore to Ketan Parekh (a part of it was later returned). While superficially examining the facts and noting that the Zee promoters themselves did not buy their own stock (why should they when Ketan Parekh was doing it for them?) Dr Nair, who was formerly with the RBI, apparently ignored the confluence of bank account at Global Trust Bank which was at the centre of the manipulations and evidently forgot about how money was moved through several bank accounts in a single day to be made available to Ketan Parekh.
Instead of examining the role of overseas investment company Delgrada, which is documented at length by SEBI’s own investigation reports (available with this writer), he was satisfied to accept the group’s claim that it sold 1,16,75,000 Zee Tele shares between September and December 2000.  Consequently, he concluded that there was “no direct evidence of the involvement of Zee and its promoter companies in manipulation of the scrip of Zee” and that they were mere social workers trying to help Ketan Parekh out of financial difficulty “for reasons best known to them only, but apparently for purchasing media shares.”

The order not only lets off Zee group’s promoters but also sets the stage to let off every other corporate entity involved in the scam of 2000. So the Joint Parliamentary Committee first refused to investigate the role of a set of corporates in the Ketan Parekh scam and asked SEBI to do the job and now we will have a string of them let off with mere warning. Meanwhile, broker circles confirm that Ketan Parekh, who was banished from the market for 14 years, remains an active player in the market.


-- Sucheta Dalal