On Saturday, Hindenburg Research, a US-based short-seller, made strong allegations about the chairperson of the Securities and Exchange Board of India (SEBI)
Madhabi Puri Buch (MPB), and her husband, Dhaval Buch. While Ms Buch and her husband have argued that there was no wrongdoing, the disclosures and subsequent confirmations raise several questions about probity, disclosure and compliance standards that SEBI demands from market participants and what its own officers are willing to live up to. Over the years, SEBI has tightened the operational norms for all market participants in every area—whether broking, mutual funds, portfolio management, investment advisory, depositories and insider trading to the point that compliance has become a major headache for all but the largest players. Yet, it strikes one as odd that the SEBI chairperson herself would fall short of the standards that the regulator is demanding from the regulated entities and investors.
In the past few years, SEBI has passed some extraordinary orders which seemed to stretch the regulations in amusing (except for those accused) new directions. Besides, Ms Buch has often made comments that showed a strong desire to impose the letter of the law and even beyond, even as regulations on disclosure and transparency have been tightened, imposing onerous burdens on market participants.
On 15 June 2020, bang in the middle of raging COVID-19 when the whole world was practically shut down, SEBI accused Udayant Malhoutra of trading based on unpublished inside information (UPSI) in an ex-parte order. SEBI alleged that he avoided a loss of Rs3.83 crore by selling 51,000 shares before the company announced its results. SEBI said that the money be impounded and deposited in an escrow account immediately. Mr Malhoutra is the CEO (chief executive officer) and (MD) managing director of Dynamatic Technologies (DTL).
SEBI's charges were preposterous. Mr Malhoutra's decision to sell was forced and not voluntary. It was in line with an agreement he had with a consortium of lenders to reduce (to 7.5%) the shares pledged by the promoter group with IL&FS (Infrastructure Leasing and Financial Services) as part of a 'facility agreement' dated 29 June 2016. The promoter group had a Rs50-crore loan against pledged shares, and Mr Malhoutra sold the shares to pre-pay the loan and bring down his holding which was in line with that agreement.
The matter duly went to the securities appellate tribunal (SAT), which quashed SEBI's order, pointing out that "There is no real urgency in the matter to pass an ex-parte interim order, especially during the pandemic period." It also said that, even if it (SEBI) has the powers to do so, it ought to use them sparingly and not cause irreparable injury. SEBI went to the Supreme Court with an appeal, but the apex court held that SAT was correct in setting aside the order.
Clearly, this is not a simple matter of insider trading that required such harsh action during a raging pandemic. It is not clear whether any whole-time member (WTM) of SEBI has ever paid any price for passing such callous orders.
When the Malhoutra case happened, Ajay Tyagi was the chairman, under whom SEBI was issuing a flurry of circulars and even overhauling entire sets of regulations. Regulated entities dreaded these circulars which perversely used to be usually issued on Fridays, spoiling their weekends.
In a second example of setting extremely high standards for market participants to establish whether two sets of persons were connected for insider trading in Deep Industries Ltd (DIL) shares, SEBI depended on their Facebook profiles. SEBI found that DIL's managing director, Rupeshbhai Kantilal Savla and his wife, Sheetal Rupesh Savla—also one of the promoters—were acquainted with the two directors of V Techweb—Ajay Ajitkumar Hamlai and Sujay Ajitkumar Hamlai—through Facebook. The Savla couple were also friends with Radhika Hamlai, wife of Ajay Hamlai, through the platform. They had 'liked' the photos posted on Facebook of each other and/or their respective wives.
Based only on this connection, SEBI alleged they were co-conspirators in insider trading. Under SEBI norms, a person or an entity is considered an insider based on various aspects, including by way of their association in any capacity with the company concerned and access to UPSI.
Mr Savla, Mr Hamlai and V Techweb India Pvt Ltd had traded in DIL shares. SEBI charged them as "connected entities" because "... they had a social relationship which also can confer access to UPSI as envisaged in SEBI's PIT (Prohibition of Insider Trading) regulations," the order said.
The SEBI order said that even those who are involved in frequent communication with officers, including through 'likes on social media', of the company concerned can also be considered as insiders. This precedent-setting order, demanding such high standards of probity from investors, was signed by Ms Buch on 16 April 2018, when she was a WTM.
In an order dated 4 February 2016, SEBI had similarly used such information to determine connections. In that case, there were allegedly other suspicious factors, too. In the case of Mr Hamlai, though, the Facebook connection is the only 'connection' found after over two-and-half-years of investigation as proof of collusion.
In a recent amendment to market regulations, SEBI has ordered all employees of market-regulated entities to procure advance clearance for buying and selling of securities. This is applicable to transactions that are totally at arm's length, done by a third party such as a portfolio management service (PMS) that an employee has invested in.
Another recent example of high probity demanded from market participants is Ms Buch's warning to influencers and educators: "You open your mouth and utter a single name (of securities), you stop being an educator and start being an advisor."
While increasing compliance and disclosure may be in the interest of investors, it would only be fair for the top SEBI officials, including the chairperson, to be subject to the same—if not even higher—standards.
SEBI's PIT Order states that even those who ae involved in frequent communication with officers can also be considered as insiders.
It is reported that during the investigations in the Adani Stock Prices, MPB met Mr. Gautam Adani twice. Those were definitely not investigation summons. Who constitute the insiders in this case?
From what I know about Ms. Buch, we are lucky to have a person of her skill sets and ability as SEBI chief. Her integrity is impeccable. We should celebrate some things sometimes rather than constantly find problems and pick holes even where none exist.
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