Sucheta Dalal :In search of judicious pragmatism
Sucheta Dalal

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In search of judicious pragmatism  

Apr 16, 2007

 In the US, the Securities and Exchange Commission (Sec) settles almost 95% of its cases through a settlement process. This allows market intermediaries to close inquiries by paying a fat fine, but without admitting or denying specific wrongdoings, although the details of Sec’s investigation and charges are publicised on its website.

In India, the Securities and Exchange Board of India (Sebi) will hopefully reduce the large pool of pending cases by allowing people to opt for a settlement process where they agree to pay a fine without admitting guilt. The rules specify that anyone who opts for such a settlement cannot subsequently claim he is not guilty; otherwise the enforcement process is liable to be reopened.

Such a settlement system was long overdue in India. As things stand, the number of pending cases is large enough to warrant setting up of special courts for faster resolution. Whether the settlement system will drastically reduce the backlog will depend on the quality of Sebi’s investigation and supervision. So far, its record is patchy, to say the least.

Often the quality of investigation itself is shoddy, leading to incorrect action. Worse, there is confusion about the role of Enquiry and Adjudication officials, as well as the standard of proof that can be expected in cases relating to manipulation of stock prices or insider trading. This is evident from many of its orders. Consider this interesting example of divergent views at the regulatory body and its implications. In the last few weeks, Sebi’s wholetime members have been clearing dozens of cases pertaining to the price manipulation that occurred during the Ketan Parekh scam and the subsequent investigations in 2000-01.

G Anantharaman, a wholetime member, heard the case against PDC Securities Pvt Ltd, a Calcutta Stock Exchange Member, for ramping up the shares of Globe Stocks and Securities in 2002 from Rs 3.70 to Rs 28.80 through large volumes of buy and sell orders executed from the same terminal. In 2005, Sebi’s enquiry officer recommended ‘no action’ against the broker on the grounds that the charges could not be established.

‘Settlements’ will work if the process is fair, strict and adequately punitive. Otherwise, it will turn into an escape route
In an order on 5 April, the member ruled that the broker had violated the Code of Conduct stipulated by Broker Regulations and ordered a six-month suspension, based on his reading of the evidence. The order has an excellent and detailed analysis on why the member differed with the view of the enquiry officer and saw fit to impose a major penalty of suspension. He had earlier passed a similar order against another stockbroker for manipulating the same scrip.

In a set of similar cases pertaining to the manipulation of Ranbaxy shares—also during the Ketan Parekh scam period—most brokers involved were exonerated. In those, another Sebi Member, VK Chopra said he found no reason to disagree with the enquiry officer’s findings that no case of price manipulation could be made out against the brokers. Incidentally, many of these brokers—Sanjay Khemani, Khandwala Securities and Mukesh Babu—have had fairly serious charges levelled against them. Babu was even a big beneficiary of the Madhavpura Merchantile Cooperative Bank largesse, along with Parekh.

If this divergence of views is not bad enough, Ananthraman makes a curious observation in Para 3.7 of the PDC order. He says, “In terms of the provisions of the Enquiry Regulations, the report of the enquiry officer is only recommendatory in nature and he may only recommend for the imposition of either minor or major penalties as mentioned thereof”. A simple reading of the sentence suggests that an enquiry officer cannot recommend exoneration—he or she can only say whether a major or minor penalty is warranted.

Such a wide divergence of views within Sebi suggests that an intermediary would only be tempted to opt for the ‘settlement’ process if his case is likely to get a stricter hearing or lands up before officials who take a sterner view of market mischief. ‘Settlements’ will work if the process is fair, strict and adequately punitive. Otherwise, it will turn into an lovely escape route, end up encouraging market manipulation and ruin the regulator’s credibility.

-- Sucheta Dalal