As far as regulation and supervision of the secondary market is concerned, we seem to be taking one step forward and two behind. For many years the Securities and Exchange Board of India (Sebi) was hamstrung by weak powers of investigation and punishment. It took several years of lobbying, frequent scandals and an amendment to the Sebi Act to adequately empower the regulator. The amendment also upgraded the Securities Appellate Tribunal (SAT) to a larger three-member body, which would be presided over by someone who is the level of a High Court Judge. Also, appeals to a SAT order were only to the Supreme Court (no longer to the High Court) and that too only on points of law.
But two stunning orders by the SAT last week has investor groups wondering whether the amendment to the Sebi Act was really a bad move.
In the first case, SAT asked Sebi to return the Rs 4.8 lakh penalty paid by Reliance Industries in the 2001 case pertaining to its massive sale and repurchase of Larsen & Toubro (L&T) shares in a space of two weeks, causing huge fluctuation in the price. Sebi had found Reliance guilty of violating the disclosure norms of its Takeover Code when its holding fell from 5.5 per cent to 3.9 per cent in early 2001 and again rose from 3.9 per cent to over 10 per cent around November 2001, before it sold its entire stake to Grasim at a hefty premium.
SAT apparently ruled that the breach was not deliberate and the non-disclosure was due to lack of understanding of the law. But aren’t we always told that ignorance of the law is no excuse? SAT has found grey areas here.
We now have a situation where Reliance had voluntarily paid Rs 5 lakh for possibly violations during its deal with Grasim for the sale of its L&T holding. Sebi studied the issue and reduced the penalty to Rs 4.8 lakh and now SAT has ordered the money to be returned entirely. In the meanwhile, SEBI separately investigated the price manipulation and insider trading by Reliance and exonerated its management in an extremely curious order.
The second SAT decision is equally strange. In this case, SAT has drastically reduced a total penalty of Rs 6.25 crore against six companies for failing to furnish details demanded by Sebi. These include notorious names such as Roofit Industries and Sunearth Ceramics, which raised crores of rupees through fixed deposits and duped investors.
SAT ruled that penalty imposed on any entity should be commensurate to the misconduct and financial position of the company. This order is surprising on several counts. Capital market regulation operates on disclosure and fair play, and when companies defy the regulator and stall investigation it endangers the investment of all stakeholders. Companies often ignore Sebi demand for information and hope to get away with it. When slapped with a hefty penalty (sometimes Rs 1 crore) the go into appeal before SAT, but still do not fulfil disclosure requirements. If SAT supports this attitude by reducing penalties to a few paltry thousand rupees (in Alkan Projects SAT reduced the penalty from Rs 1 crore to Rs 15,000), it will ensure that every order of the regulator is appealed against, and will also jeopardise investor interest by rendering the regulator toothless.
The mortification of the capital market regulator is causing much amusement among capital market intermediaries queuing up to protest Sebi orders. They report instances where the presiding officers of SAT have openly pulled up Sebi officers and snigger at the fact that SAT officials is often confused about capital market disputes. They allege that SAT is often unable distinguish between white-collar crime (where there is often no obvious victim) and civil disputes with bilateral solutions. All this works to the advantage of wrongdoers and their lawyers, while killing the confidence and initiative of the watchdog.
The SAT orders have especially perturbed investor groups. Investors have been fighting a 12-year battle to get some action against vanishing companies; but all it has resulted in is 96 FIRs and no real action. Companies who have brazenly flouted disclosure rules, siphoned off money of clandestinely sold corporate assets have similarly been let off by the Ministry of Company Affairs. These include notorious names like the DSQ group.
Investors lobbied with the government to give more punitive powers to SEBI and the ability to levy stiff deterrent penalties. In fact, the Sebi Act was amended only after several successive commissions headed by senior judges recommended stiffer penalties for economic offences. The Justice Malimath Committee, which looked at revamping the Criminal Justice System had recommended that the ‘‘burden of proof in economic offences should not be limited to an explanation of an accused’’. Importantly, it says that while fines in these cases ‘‘should be partly based on the seriousness of offence, partly on the ability of the individual/corporation to pay, but ensuring that its deterrence is not lost’’.
In the SAT order, the fines have been reduced to the level of meaninglessness. Para 20.5 of the Malimath Committee quotes the Mitra Committee report which called for containment of ‘‘financial fraud’’, failing which the situation could become explosive and can lead to anarchy at any time. It recommended a preventive as well as punitive approach to dealing with Scams, including ‘‘increased powers to the investigating agency of search, seizure and attachment of illegally obtained funds and properties’’. The Mitra Committee also suggested the setting up of a Serious Fraud Office, which was subsequently set up under the Ministry of Company Affairs. But its effectiveness is apparent from the fact that most people don’t know of its existence.
Later the Dhanuka Committee set up by Sebi also endorsed the need to give SEBI more teeth as well as the powers of search and seizure.
The recent SAT order covering notorious cases such as Roofit and SunEarth Ceramics, whose promoters were arrested on the complaint of fixed deposit holders, reduces penalty to the ability to pay. What happens then to all the investors and depositors whose money has been squandered by these companies? Who will make good their losses? If SAT wants to overturn conventional jurisprudence, it must at least ensure that its orders are open to the public as they were until the appellate body was upgraded.