Isn’t Sebi missing the point this time too? (9 September 2001)
People have lost confidence in Sebi,’ says a survey by Ficci, one of India’s oldest Industry associations. The survey indicated that an overwhelming majority of companies polled had little or no confidence in Sebi as a market regulator. They also blamed the recent financial crisis on the nexus between brokers and banks (typically, the industry body ignored the large role of their fellow industrialists) and poor vigilance on the part of the regulator.
Why so? Sebi’s second ‘preliminary’ investigation report, which has been in the headlines over the last couple of days show why. The report is split into an impressive four volumes and runs into 1,500 pages, but has precious little value addition over its first ‘preliminary’ investigation. Sure, there are details about DSQ Software’s shenanigans and Tata Finance’s role in funding Ketan Parekh’s crony at Global Telesystems and Adani Exports’ links with the big bull, but all this was already well known. Sebi has now identified 14 overseas corporate bodies (OCBs) as having colluded with Parekh, but this is only an elaboration of its earlier findings. Isn’t Sebi missing the point? Six months after the scam we do not need the regulator to tell us the scam story. As scam stories go, this basic plot has remained constant since 1956 and the Haridas Mundhra scandal. It is Sebi that failed to react to the obvious nexus and initiate action to stanch the diversion of funds.
Sebi’s first report, had already documented this nexus and backed it up with statistics. After two years of studiously ignoring market manipulation, it was the least that was expected in its 15-day discovery mission. But the second report has to move on—it cannot merely embellish the earlier findings. This report should have framed precise charges, refined its definitions and prepared a framework for initiating action against those involved or recommend a follow up by other investigation agencies. For instance, OCBs have been caught colluding with Ketan Parekh (also Ajay Kayan) to enable him to rig prices with impunity. Sebi’s response is to call for a ban on investments through OCBs. Does this serve the purpose? Unless Sebi can establish that every OCB misused the system and it is impossible to detect or regulate their actions, it cannot recommend a ban. As for Ketan’s operations through the OCBs, he would first have to transfer his money abroad in order to route it back into India. Can’t Sebi tell us exactly how much money was transferred overseas and how much of it was brought back through OCBs? And what about foreign institutional investor’s (FII) sub-accounts? Sebi had reported the misuse of these too. Will it also recommend a ban on some FII investments and sub-accounts because it failed to detect the problem? Even a layman understands that Ketan could not have misused OCBs without gross violation of the Foreign Exchange Regulation Act. Six months after investigations have begun none of the regulators—RBI, Enforcement Directorate, the Directorate of Revenue Intelligence or Sebi—have quantified the violations or filed any charges. This easily allows Ketan’s lawyer to tell us through media that there is only one real case against his client—the one filed by the Bank of India.
But it is the gossip columns that give us cause for more outrage. We are told that Ketan Parekh, the man who is at the centre of the market mayhem has been spotted at all the expensive ‘hotspots’ of Mumbai dancing away his blues, attending movie premiers or drowning his sorrows over five-star dinners with his pals. Sebi tells us that Rs 2,800 crore was transferred by Ketan to Kolkata brokers, almost all of who are declared defaulters. Was all this money lost in the stock crash? Was an audit trail established after it reached Kolkata? And is the declaration as defaulters the only punishment against these broking entities? Surely, diversion of money into unofficial trading requires harsher punitive action including confiscation of personal assets.
As for companies, Sebi has documented the manner in which they diverted funds to KP for his price ramping operations and allowed their investment subsidiaries to be used as parking vehicles for his stocks. Yet, the Department of Company Affairs, which has draconian powers against companies on paper, has not bothered to frame charges against these companies. Instead, Global Trust Bank is taking over a worthless 13 per cent stake in Triumph International and trying to adjust it against Parekh’s dues. Why would a bank want shares of a firm that is barred from stockbroking and merchant banking activities by the regulator? Are GTB investors foolish to accept such a deal without protest? In comparison, Zee Telefilms and the Essel Group at least seems a little more serious about recovering its money and has filed a recovery suit against Ketan Parekh.
Finally, the bear operators. Sebi’s second report tells us that these are mainly Nirmal Bang, First Global and Radhakishan Damani. But we knew that already, didn’t we? What are the specific charges that Sebi can frame against them? Circular trading and concentrated selling at specific time intervals is what Sebi has charged. And First Global has countered it by questioning the very definition of circular trading, and the precise impact of concentrated selling. Does the second report have a clear definition and suggested course of action rather than a reiteration of the earlier charges?
No wonder, the Ficci survey said, Sebi is losing credibility. Six months after the second largest scam in the financial sector, we do not need ‘preliminary’ investigations. It is about time the market regulator framed specific charges and initiated action that goes beyond of debarring several entities from market operations. But it is not enough to accuse the regulator of inefficiency. It is for the Prime Minister too to pay attention to what investors and now industry is saying about loss of confidence in the market regulator. After all, restoring confidence in the capital market is as much a part of reviving the economy as spending on infrastructure projects.