Sucheta Dalal :It's a lose-lose situation for ordinary investors
Sucheta Dalal

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It's a lose-lose situation for ordinary investors  

Oct 18, 2004


Trying to make sense of various regulatory actions and orders of the Securities and Exchange Board of India (Sebi) and the Securities Appellate Tribunal (SAT) is like reading a series of adventures in blunderland.

Sebi lost yet another high-profile case last week causing further damage to its reputation. Those who have followed the case are stunned at the sweeping dismissal of all Sebi charges against Fund Manager Samir Arora, that too for lack of evidence. Indeed, Sebi is now developing quite a track record of bungling investigations despite all the powers at its command.  

Market watchers would recall that a powerful Sebi committee had surprisingly exonerated Reliance Industries of all charges of insider trading and price manipulation in the shares of Larsen & Toubro (L&T). The company had relentlessly bought L&T shares over a two-week period from the open market, leading to a big increase in its share price and then sold the block of 10.5 per cent to Grasim Industries as a 45 per cent premium in 2001. Sebi’s order in January this year held that there was no wrongdoing whatsoever.

Ironically, SAT has relied on Sebi’s own order in the L&T case to let off Samir Arora, who was charged on evidence that was certainly less blatant than was available in the L&T case.

If the L&T case becomes the benchmark for what does not constitute insider trading and price manipulation, it is fairly certain that nobody will ever be indicted under these provisions. And Sebi would do well not to waste taxpayers’ money by charging anybody with insider trading. Of course, SAT also advised Sebi to redefine insider trading, calling the existing definition vague.

Even that is unlikely to help, when the entire system seems determined to protect wrongdoing by the big and powerful. What is responsible for Sebi’s lousy track in prosecuting capital market crime? Is it mis-directed actions, poor investigation, bad presentation of cases, arbitrary or inconsistent regulatory orders? It is a combination of all these factors plus a complete lack of accountability on the part of those in charge.

As a consequence, we have failed to develop a system that hands out exemplary punishments or forces unscrupulous corporate criminal to disgorge dubious earnings. Instead, our regulatory and legal system works overtime to reduce penalties, let off those guilty of violating disclosure rules and even works at erasing the stigma attached to those accused of wrongdoing!

Recently posted orders of the appellate tribunal reveal that companies have escaped monetary penalties by citing curious orders of the past. At least two major companies have been let off on the basis of a SAT order of 2000 in connection with Cabot International Capital Corporation.

In that case, Sebi’s adjudication officer had imposed a penalty of Rs 1 lakh against the company for failure to submit a post-acquisition report to Sebi under the Takeover Code. The company was let off by SAT on the grounds that the failure to report was not deliberate! Using this novel defence, two others avoided a penalty of Rs 90,000 and Rs 5 lakh respectively. SAT relied on the precedent set by the Cabot International case to say, ‘‘We hold that the breach cannot be called as deliberate and the non-disclosure was due to lack of understanding of the law.’’

What does this mean to an ordinary person? If you forget to wear a seat belt while driving and are caught by the cops, can you argue that your mistake was not deliberate and you didn’t intend to break the law. You will still end up paying a hefty fine or a small bribe. When large corporate house is slapped with a penalty for what amounts to a corporate traffic offence, it makes it a matter of honour and hires legal experts to fight the penalty, even if it costs far more than the penalty itself.

Why are they encouraged to go to such lengths to avoid the ‘‘stigma’’ of wrongdoing? There may be an answer in the case of former Tata Finance Director J.E. Talaulicar, who was accused of insider trading in the company shares. In an appeal before SAT, his counsel agreed that Talaulicar would not access the capital market or deal in securities for five years (up to October 2008) in conformity with Sebi’s orders. The appeal was withdrawn, without arguing it on merit after pointing to Talaulicar’s age, ‘‘unblemished career’’ and loss of reputation and employment already suffered by him. Here is what the SAT order says: ‘‘Taking into account the peculiar facts and circumstances of the case and in order to rehabilitate the appellant this Tribunal desires that the impugned order should not be treated as a stigma.’’ It further says, ‘‘(T) his order is passed in the facts and circumstances of this case in order to rehabilitate the appellant.’’ What are investors supposed to understand from this order — that the charge of insider trading is accepted but no ‘stigma’ will attach because SAT says so?

Sebi has brought this situation on itself. After the appellate tribunal threw out several cases in the late 1990s, the regulator began to lobby for the single member tribunal to be enlarged and expanded and to be headed by a high court judge. It also wanted appeals against SAT orders to be made only to the Supreme Court.

Sebi got its wish and ironically ended up making it worse for itself. All Sebi orders are routinely appealed. The three-member SAT, while concurring with many of Sebi’s decisions, has still embarrassed the regulator by drastically slashing penalties imposed by it, taking it to ridiculous levels. Worse, appeals against SAT orders to the Supreme Court can only be on issue of law and this limits the regulators’ options.

In this situation, Sebi needs to be super-strong on facts and evidence. Instead, it continues to lose so many key cases due to shoddy investigation or bad presentation that one wonders about its commitment to provide effective supervision. A weak regulator is not only a lose-lose proposition for investors but it is dangerous for the system. Sooner or later its bumbling may lead to a debacle that may prove politically expensive for the government in charge.


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-- Sucheta Dalal