Things couldn’t get any worse for the market regulator. Although much of the embarrassment it has faced in recent times is due to legacy issues, it may be time for a serious overhaul of how the Securities and Exchange Board of India (SEBI) is handling its functions of investigation and enforcement. A series of changes, culminating in the 2013 ordinance, made SEBI one of the most powerful market regulators in the world. Although its powers were slightly diluted in 2015, SEBI continues to have enormous powers of market regulation and supervision, probably more than any regulator in the world. Why isn’t it using them?
To be effective, a regulator needs to know how to prioritise issues and investigations that have a market-wide impact. While reporting requirements and disclosure rules have their place, only effective enforcement in the form of tactical deployment of investigation resources will lead to well-argued and timely orders that can stand up to appeals. The regulator derives its power and reputation from the deterrent impact of such orders.
Instead of effective enforcement, SEBI seems to mistake endless red-tape for enforcement. Often, it is also out of sync with fast-paced developments. After a series of humiliating setbacks in the past few weeks, the regulator needs to hit the reset button and reorder its priorities. Consider these instances:
On 20th March, the Supreme Court (SC) not only refused to stay an order in the co-location (Colo) scam of 2015, which we broke, but also asked SEBI to refund Rs300 crore to the National Stock Exchange (NSE) out of the sum it had impounded as disgorgement. (Read: NSE Colo Case: Apex Court Refuses To Stay SAT Order). But this was no surprise, given that the securities appellate tribunal (SAT) had all but thrown out SEBI’s order against the NSE on 23rd January with this stinging remark: “Before we conclude, we must observe that when serious allegations were made against a first level regulator, namely, NSE, SEBI should have been proactive and should have conducted the investigation seriously. We find that SEBI had adopted a slow approach and, in fact was placing a protective cover over NSE's alleged misdeeds. It is only when questions were placed on the floor of the Parliament that SEBI woke up and instituted an investigation…In our opinion, considering the gravity of the alleged charges, SEBI should have itself conducted an investigation / enquiry instead of delegating it to NSE to conduct an investigation. It is strange and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted.”
On 2nd March, the SC appointed a committee to investigate whether SEBI had done enough to protect investors from market volatility. As I wrote earlier (Read: Will SC Experiment Provide Answers to the Adani Share Saga?), the committee is also asked to “investigate whether there has been regulatory failure in dealing with the alleged contravention of laws pertaining to the securities market in relation to the Adani group or other companies.” For the first time, an expert committee will investigate the regulator. This is unprecedented.
Passing the Parcel?
SEBI’s reluctance to conduct its own investigation, castigated by SAT’s order in the Colo scam, needs to be checked before it becomes a regular tactic to avoid responsibility. Our columnist V Ranganathan had excoriated SEBI’s 24th January order on Coffee Day Enterprises Ltd (CDEL) for having shirked its responsibility in appointing a law firm to recover the money diverted by the promoter VG Siddhartha.
Mr Ranganathan pointed out (Read: Cafe Coffee Day Order: SEBI’s Silly Stunt?) that this was a fairly simple case where Mr Siddhartha, who died by suicide in July 2019, had admitted to large-scale diversion of funds, in a note to the board of directors. After his death, the board commissioned an investigation by a senior police officer (retired) and a law firm. The investigation uncovered diversion of Rs3,535 crore from seven subsidiaries of CDEL to entities belonging to the promoter group.
CDEL’s board had also sought advice from a retired judge on recovering money diverted to the seven subsidiaries. He advised them to file commercial suits for recovery. This process was initiated by CDEL under the supervision of the same judge, but a paltry Rs110 crore has been recovered so far. All this was available to SEBI’s investigation team which issued a show-cause notice (SCN) to CDEL and to the whole-time member (WTM) who issued the order.
The SEBI order records these facts and is packed with copious detail about trail of money to various subsidiaries, embellished with charts, graphics and outlines various violations, transgressions and omissions by CDEL and its board.
For instance, it notes that the board had allowed VG Siddhartha to ‘collect signed blank cheques’ for fund transfers done by him. This, it says, amounted to an admission that CDEL was “run like a personal fiefdom with no checks and balances in place,” and holds the directors guilty of ‘wilful dereliction of duty’.
Yet, after these detailed findings, the order ends in a whimper. A penalty of Rs26 crore imposed on CDEL has already been stayed by SAT on 3rd March. SEBI also ordered CDEL, which is now headed by Siddhartha’s wife Malavika Hegde (CEO and director) to appoint an independent law firm in consultation with NSE to recover the money diverted by her husband to promoter group entities. It is almost as though SEBI has no idea that such litigation could drag on for decades and there would be nothing left to recover. Perhaps anticipating this, the order asks CDEL to place a detailed report on the recovery process ‘in every annual general meeting’.
Where does that leave CDEL investors who lost badly, once the fraud was revealed? SEBI’s first duty is towards investors; but they are completely forgotten in the order. SEBI also refuses to supervise the law firm’s actions and orders the NSE to do so. This shirking of responsibility seems to be a pattern.
CG Power Order
The CDEL order may have taken its cue from another order passed by G Mahalingam, WTM, in the CG Power and Industrial Solutions Case (CG Power) in September 2019. That order delegated responsibility to CG Power itself to ‘take all steps necessary’ to recover funds siphoned or diverted by misrepresentation and manipulating of books. It asked the Bombay Stock Exchange (BSE) to appoint an audit firm to conduct a forensic audit and submit a report to the regulator in six months.
Securities law experts and former regulators say that outsourcing a forensic investigation in some cases may be fine, but not in high-profile corporate controversies such as CDEL, CG Power and NSE Colo scam. SEBI is large enough to have a cadre of trained forensic auditors and technology experts to conduct and supervise detailed investigations. Under Section 11C (1) b of the SEBI Act, the regulator can directly appoint any person/intermediary as an ‘Investigating Authority’. Instead of making such appointments, SEBI delegated this power to the entity under investigation (NSE, CDEL and CG Power) and further delegated the power to supervise their investigation to stock exchanges which are significantly less empowered.
Such actions make the regulator appear weak and ineffectual. Advocate PR Ramesh, who did a long stint with the regulator and is now a securities law expert, says: “SEBI has more powers than it is believed to be the case. Staff levels have also increased over time, but much needs to be done to address the perception of being ineffective or slow in big matters.”
Priority and Tactics
Like the US Securities Exchange Commission (SEC), SEBI also has the power to settle disputes without admitting or denying guilt. SEC uses these powers to avoid long-drawn litigation, even while keeping stakeholders and investors informed about the precise charges that were settled with a payment. High-profile cases that involve serious violations, fraud and wrongdoing are prioritised and pursued seriously.
In contrast, SEBI’s search & seizure actions seem concentrated on smaller market intermediaries and brokers. Investigations drag on for years until they lose relevance. I have written about the time, resources and manpower wasted on adjudication and investigation of investor complaints against companies that had been compulsorily delisted, only to dispose them (Read: Needed a Powerful SEBI Chief, To Stop Markets from Regressing to the 1990s).
I have also written about SEBI taking a different stand on similar issues, or making charges without adequate investigation or thought (Read: SEBI’s Insider Trading Orders: Is There Any Method in the Madness?). At the same time, SEBI spews out settlement orders which provide no indication of whether the amount paid is proportionate to the wrongdoing or not.
If SEBI officials are reluctant to take full responsibility for investigation and action, the finance ministry may want to revisit a 2003-04 proposal to set up an independent investigation, surveillance and enforcement authority, while SEBI continues to focus on endless policies, regulations and disclosure rules which its officers seem to prefer.
Few years back, wasn't it known to SEBI that offshore companies (kind of Foreign Portfolio investors) have invested 90% of their funds in Adani group? If it was not aware of the stock rigging, then things are in wrong hand, isn't it? The problem is with the educated middle class who do not put enough pressure on regulators and conversely, they promote the Nationalist theory for the infra based group as India's development. Educated folks needs to be independent in their views. If it was any other era, the same masses could have raised hue and cry. What is happening to the entire finance industry, where is the intelligence gone? Lets even ignore mainstream media.
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