In 2001, C Achuthan who was presiding officer at the Securities Appellate Tribunal (SAT) had decided in the case against First Global Securities that a prolonged ban on undertaking fresh business, pending the completion of investigations by the Securities and Exchange Board of India (SEBI) would be unfair. He gave the regulator 10 weeks to complete the inquiry and said that if the inquiry was not completed in that period, the ban would cease to apply.
A decade later, the biggest fear among capital market intermediaries and companies is a SEBI ban on undertaking fresh business using the emergency provisions of Section 11 (B) of the SEBI Act that allow the regulator to initiate action without notice or prior hearing. And, with good reason. SEBI can issue orders under this Section and keep an entity in limbo, thereby destroying the business even before an investigation is complete. This is typical of regulators and government agencies in India, who neither have to prove their charges nor are held accountable.
October 2010 saw two different developments in the Pyramid Saimira Theatre Ltd (PSTL) investigation. The company was docked in 2009 on charges of manipulating its prices and planting what was then alleged to be a forged SEBI letter. PSTL went into liquidation at the end of October after failing to pay a supplier. In 2009, Moneylife was all praise for SEBI’s PSTL investigation and the manner in which it nailed Nirmal Kotecha and his journalist cohorts in misleading the market. However, while that part of the investigation remains in limbo, the listed entity—PSTL—has been destroyed without any concern over shareholders’ interest or changing its management by establishing guilt. The liquidation of PSTL has consequences for its 35,000 retail shareholders, 2,000 employees and around 12,000 indirect employees of vendors and service providers. And to a dozen bankers who it owes Rs152 crore in loans and corporate guarantees and Rs378 crore to foreign currency convertible bond-holders. Is this how regulation and investigation is supposed to work? Can a regulator destroy a business and put several thousand livelihoods at risk because of a fraud, allegedly committed by its promoters?
That is not all. Moneylife is the only medium that reported the sensational discovery that the ‘forged’ SEBI letter sent to PSTL was the handiwork of a SEBI manager called JD Souza, who was probably on the payroll of stock broker Nirmal Kotecha, who is also under investigation. This fact was unearthed by SEBI while trying to nail the stockbroker, but it is yet to initiate any action against him. Interestingly, neither the finance ministry, nor the government vigilance agencies seem concerned at this clear case of corruption and collusion inside SEBI. Many think this case is just the tip of a bigger iceberg.
SEBI’s never-ending investigation into the PSTL case makes one wonder if the initial excellent investigation is fizzling out and whether SEBI is using its powers to ban market intermediaries to subjugate and silence them. Consider this. On 22nd October, the Securities Appellate Tribunal (SAT) set aside an ex-parte SEBI order of 2009, re-confirmed in 2010, barring Keynote Capital from issuing research recommendations on the charge of having valued PSTL shares exorbitantly. SAT said SEBI could continue the investigation but lifted the 18-month ban on Keynote Capital. Clearly, scores of people accused in this case and others will soon walk through this door opened by SAT. — Sucheta Dalal