Sucheta Dalal :SEBI now needs a change of leadership (18 November 2001)
Sucheta Dalal

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SEBI now needs a change of leadership (18 November 2001)  

At last some good news. The stock markets kicked off the new Samvat year with a small rise in stock indices and have been basking in the good cheer of a continued rally on Thursday. Several stock gurus are forecasting the beginning of a bull run and this seems vindicated by the fact that every teeny-weeny bit of good news is lapped up as reason for a further rise in prices.

But hang on. Things are not that rosy on close inspection. Serious investors are worried that apart from a few blue chips, the market leaders of this rally are the same old second rate speculative stocks favoured by discredited stockbroker Ketan Parekh and a few others.

The same old software, media and entertainment stocks have shot up way beyond their intrinsic values, although their respective industry sectors remain in the doldrums, in what seems to be another orchestrated attempt to lure gullible retail speculators. Interestingly, this time many newspapers (with some curious exceptions) are not gushing about the rally. The Express Group of newspapers has highlighted the brazen manipulation in several stocks as well as the return of Participatory Notes and other manipulative strategies; but market operators are apparently unfazed.

Most speculative favourites have continued their relentless rally and have gained nearly 80-100 per cent in the last month or two. Given the extent of UTI’s troubles, it appears as if the government too wants a rally, even if it means that the same operators indulge in the same old dirty tricks. What is more worrying is that speculators’ are confident that reluctance, inefficiency or incompetence would keep the regulator from acting against them.

A series of recent decisions and debacles have drastically eroded the credibility of Securities and Exchange Board of India (SEBI) and only a complete revamp of the organisation, with the induction of truly credible leadership, would salvage its reputation. The problem began with SEBI resolutely turning a blind-eye to rampant market manipulation in 1999-2000 and was compounded by its desperate attempts to deflect responsibility through ham-handed action against several brokers without either direction or insight.

What is more perturbing is that SEBI’s investigators seem hard pressed to back up its initial rush of actions with any concrete evidence of wrong-doing. Things have degenerated to the point where opinion about the regulator is divided between those who question SEBI’s competence to investigate and adjudicate capital market related issues, and others who go so far as to allege that SEBI’s constant bumbling may even be deliberate.

The dismissal of SEBI’s action against Sterlite Industries in the 1998 case involving Harshad Mehta’s comeback attempt is the first cause of unease. Despite clear patterns of collusion established between the Damayanti Group that was allegedly fronting for Harshad Mehta and the three corporate houses—BPL, Videocon and Sterlite—SEBI was unable to establish a comprehensive single case before the Securities Appellate Tribunal. This failure was probably linked to SEBI’s stubborn refusal to complete action against Rajendra Bhantia.

Bhantia, a former Vice President of the Bombay Stock Exchange (BSE) and a crony of Harshad Mehta who was known to be very close to SEBI’s top brass. This is all the more glaring because all three companies involved in the infamous 1998 incident are on record saying that they bailed out the brokers only at the request of the BSE office bearers. Last week’s decision in the Anand Rathi case marks another low for the regulatory watchdog. Action against two firms of the former BSE President was carried by a majority vote with the SEBI chairman writing a dissent note against the enquiry officers’ order. The details of the SEBI chairman’s dissent are not known. Its orders were not posted on SEBI’s website until the end of last week.

And despite repeated requests SEBI, a quasi-judicial body, has persistently refused to issue speaking orders that comprehensively explain its actions against intermediaries. What is publicly known of the Rathi order is that two senior SEBI board members— the Secretary, Department of Company Affairs and a Deputy Governor of the Reserve Bank of India, concurred with the enquiry officer while the SEBI chairman disagreed with him. It may be recalled that Mr.Rathi had transgressed his powers by seeking extremely price sensitive trade data from the bourses surveillance department – that too in the presence of other broker directors. The enquiry officer recommended a two-year ban on Rathi’s two main firms for his actions, though SEBI found no evidence of the broker-President having misused the information or having traded on it through any of his firms. The chairman’s dissent it is believed may be limited to the order banning one of these firms.

Since Mr.Rathi has threatened to appeal against the judgment the matter will probably end up before the Securities Appellate Tribunal (SAT), but the issue is the signal that the Chairman’s action sends through the organisation. One could interpret it in two ways. The charitable interpretation would be that SEBI enquiry officers have complete freedom and their orders could go against the Chairman’s individual opinion. On checking with SEBI officials and market intermediaries, however, a different picture emerges. SEBI officials are demoralised that other board members were more supportive of their actions than their own chairman. Market intermediaries snigger and say that the dissent note was in line with general expectation, given the Chairman’s closeness to the former BSE chief. The distressful part is that this case is only the beginning.

Over the next few months SEBI will have to defend its actions against a variety of market intermediaries who are known to have indulged in rampant price manipulation and circular trades. Unless SEBI officials act with conviction, present strong legal cases and follow up on their preliminary findings, much of the litigation in connection with its actions could go against the regulator due to sheer incompetence or lethargy. Is the government prepared to allow the watchdog to become an object of scorn and contempt?

-- Sucheta Dalal