Accountability and information sharing If the JPC can ensure these among regulators, it’d have done a good job (28 May, 2001)
Every regulator summoned by the Joint Parliamentary Committee (JPC) investigating the payment crisis on the stock markets is bound to whine about the multiplicity of regulatory agencies and the absence of adequate supervisory and punitive powers.
Improving co-ordination and co-operating between various regulatory agencies is a key issue that the JPC will have to address if it wants to accelerate the process of detecting securities fraud and the initiation stringent punitive action in order to protect investors.
Interestingly enough, investor protection has remained woefully inadequate, even though the structure of the Indian capital market has changed dramatically over the last decade – and the issues that this JPC will have to address will be very different from those in 1992. In form, the Indian market is now on par with leading global markets, except for the restrictions on cross-border trades and the slow adoption of electronic funds transfer by the banking system.
The Scam of 2001 shows that automation, transparency and paperless trading has eliminated paper related fraud such as theft and signature mismatch, but has failed to prevent rampant price manipulation and investors also continue to be cheated by companies and market intermediaries.
The Securities and Exchange Board of India (SEBI) which is usually the target of investors’ ire has long argued for better supervisory powers. However, though SEBI has a strong case in demanding more powers, it has usually spoilt its own case by seeming reluctance to use those that is already has. A good example of SEBI dragging its feet is its recent action against BPL, Videocon and Sterlite for ramping their stock prices in collusion with scamster Harshad Mehta in 1998.
SEBI’s investigation was completed in mid 1999, but some of the punitive action was held back until a few weeks ago. A few cases under the Takeover code have been delayed for several years – the most stunning example of such inaction is the delay in deciding the Herberstons' case involving a bitter struggle for control between Vijay Mallya and Kishore Chabbria.
However, SEBI’s demand for more increased powers is well-recognised inspite of these lapses –especially it’s demand for a drastic increase in the maximum penalty that can be levied against market intermediaries.
SEBI’s demands have now found an echo in the otherwise bland report of the Advisory Group on Securities Market Regulation, headed by Deepak Parekh. The endorsement of this group is significant, only because it has been set up by the Reserve Bank of India (RBI) which has long been involved in a low key tussle with SEBI over supervisory domains.
The RBI group was to review the extent to which Indian securities markets adhere to the three objectives set out by the International Organisation of Securities Commission (IOSCO). These are: protection of investors; ensuring fair, transparent and efficient market and reduction of systemic risk, which securities regulations need to address.
The group seems to have endorsed SEBI’s plea that the absence of powers to supervise listed companies is a problem and that penalties that SEBI can impose are completely out of line with the gravity of market violations. For a long time now, SEBI has been using the omnibus provisions under Section 11 B, to punish market violators, in order to sidestep the piffling penalty of Rs five lakhs that it is allowed to impose under the SEBI Act.
Having said that and having suggested improved co-ordination among regulators, the group is unable to offer specific solutions to sticky issues such as dealing with Vanishing Companies, where several co-ordination and monitoring committees have made little progress. It is the one area where IOSCO’s first objective of protecting investors has completely failed.
The group suggests that cumbersome and time-consuming procedures need to be streamlined in order to avoid delays “arising from the obligation to follow due process” and to “show cause why action cannot be taken”. It says that dealing with cases of suspected fraud often requires freezing the situation where legal process is being pursued. The committee believes that the decision to freeze the situation often takes time in India.
This is indeed ironical, because SEBI is today facing the wrath of several brokerage outfits, precisely because it “froze” their brokerage operations without showing cause. Almost all the brokers approached the high court, which fortunately has not reversed the SEBI order freezing the trades.
Another issue that has been touched upon is to improve co-ordination between regulators by taking it beyond the High Level Group of Capital Markets (HLGCM) comprising SEBI, RBI and IRDA and the finance ministry. It is suggested that the HLGCM should be given legal status, but it is not clear why the Department of Company Affairs is not included in the group, even though it acknowledges that inadequate powers over listed companies is a terribly weak link in the supervision system.
The RBI advisory group has repeated several general suggestions about information sharing and co-ordination, which have been routinely trotted out over the last decade but have never worked. The Indian regulatory and enforcement agencies, including the police, the CBI, the Income Tax department, RBI and SEBI cannot seem to co-operate with each other nor are encouraged to do so, even if leads to duplication of investigation. This happened in 1992 and is happening again in 2001.
For instance, RBI could have detected the problems of Nedungadi Bank a couple of years ago, if it has shared information with SEBI about the operations of stockbroker Rajendra Bhantia. Similarly, the CBI could have reduced its work by sharing information on Global Trust Bank. Also, the repatriation of a whopping Rs 2900 crore over the past 18 months by five Overseas corporate bodies (OCBs) allegedly operating for Ketan Parekh, clearly calls for investigation by the Enforcement Directorate, but it has not happened so far. Not even when SEBI is severely handicapped by the absence of adequate staff in its surveillance department. As for the CBI and Income Tax department, only the formation of a multi-regulatory group such as the Janakiraman Committee set up by the RBI in 1992, would allow them to share information in a systematic manner.
These are issues that can never be pushed through on the basis of suggestions and reports emanating from one of the regulators, but if the JPC recommends ways in which to structure information sharing between regulators and makes them accountable for failure to do so, it would have made a serious contribution to the supervisory process and towards better investor protection.
-- Sucheta Dalal