Judiciary needs some tips on functioning of the capital market
Apr 9, 2007
Over the last decade, one of the biggest challenges of securities regulators has been to sensitise the judiciary to the nuances of capital market regulation. We have seen strange judicial orders from appellate tribunals, the higher judiciary, and sometimes even the capital market regulator. The Securities Appellate Tribunal (SAT) had even taken upon itself to decide whether the stigma for wrongdoing should attach to a person indicted for insider trading. There have been innumerable cases where SAT has slashed monetary penalties to meaninglessness without understanding that punitive financial damages are the only real deterrent to financial crime.
And there have been cases when the Securities and Exchange Board of India (Sebi) thoughtlessly ordered the suspension of Depository Participants (DPs) without worrying about the enormous cost and hardship to investors to switch DP accounts — Sebi did not even think it was its job to facilitate the process. The most recent of such orders comes from the Bureau of Industrial and Financial Reconstruction (BIFR), which provided sweeping freedom for the shares of Dunlop India to be listed. What is worse, BIFR actually ordered Sebi as well as every market intermediary with a regulatory function to facilitate the listing without question, giving a go by to disclosure rules and processes that form the basis of a functioning capital market and proper investor protection.
Consider this: BIFR has allowed the company to make a rights issue of Rs 27 crore in the ratio of six shares for every 10 held, without bothering to seek shareholder approval in a general body meeting. The order permits Dunlop to issue 2.7 crore additional shares and also to enhance its authorised capital to Rs 75 crore from Rs 70 crore. It ‘directs’ stock exchanges of Mumbai, Kolkata, Delhi and Chennai to lift the suspension on trading of Dunlop shares immediately (without going into the basis of their suspension since 2003). It also directs the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) to allot an international securities identification number (ISIN) for the company’s entire share capital to enable trading of the newly allotted shares also in dematerialised form.
Armed with the BIFR orders, Dunlop has gone ahead and announced plans to open its rights issue without reference to the market regulator or intimation to the stock exchanges on which the shares will be listed. Many investors say that they have not even received intimation of the Rights Offer, which opened for subscription on 2 April and was set to close on 6 April, which is a bank holiday. Clearly, the company’s new management headed by Pawan Kumar Ruia does not really want existing shareholders to infuse funds for its revival. But since the new shares are being issued at par, the company has a good chance of revival and a well-known brand name, the rights offer is probably attractive to many investors. Why then should the BIFR exempt it from all listing processes?
Meanwhile, Sebi has responded to the investor complaint and asked Dunlop to “consider” extending its offer period by at least 15 days, in order to give shareholders a chance to participate in the issue. We also learn that the regulator plans to file an appeal against the BIFR order. If the order is not stayed, will Dunlop be able to bypass stock exchange and depository rules? Indeed it will; except that bourses and depositories may go-slow on listing processes in order to give the regulator a chance to file an appeal.
It is anybody’s guess which way this case will go and whether Dunlop will actually manage to cut through the rules with the help of a statutory order. But this is neither the first nor the last time that India’s judicial system will fail to understand the financial markets and issue orders based on the petition of only one section of the stakeholders.
For instance, a few years ago, C R Bhansali, whose financial conglomerate had collapsed like a pack of cards in the mid-1990s, had attempted to make a comeback through a similar court order. At that time, a Delhi court had ordered the Reserve Bank of India to waive its regulatory requirements to facilitate the revival of CRB. Naturally, this had the support of CRB’s many stakeholders since it was their only hope of getting their money back. The court issued its orders based on the support of these stakeholders without considering the damage to the financial system. RBI had filed an appeal against the order and, although one does not know what happened to the case, the CRB group has certainly not managed to resurrect itself.
The Haryana-based Vikas WSP is another notorious company that could be in line to follow the Dunlop route. The company has been severely indicted by the Company Law Board on several counts of mismanagement and worse, and its shares are delisted by the bourses since 2001. Yet, a large group of investors headed by a senior army officer (retired) is lobbying hard for its revival and re-listing since the company is making money and they are the only losers in the de-listing process.
The company makes edible gum used in ice creams and the commodity attracts suspiciously high trading volumes on India’s commodity futures bourses. In this case, investors’ anxiety is completely understandable; but is the re-listing of a company, with the same questionable family-owner management the answer? One of these days, this issue too could lead to another strange judicial order.