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Stratagem
 
SEBI
Has SEBI failed to fulfill its purpose?
The infamous securities scam, which triggered the formation of the market watchdog SEBI, completes 20 years this April. Although extensive reforms have been set in motion by SEBI since then, there remain significant lapses in its implementation and enforcement
Issue Date - 30/04/2012
 
It was April 1992 when the first media report appeared indicating that there was a shortfall in the government securities held by the country’s leading lender State Bank of India (SBI). A little over a month, and the investigations revealed that this was the just the tip of the iceberg. What came to be called the “Securities Scam” was about thousands of crores of rupees (over Rs.3,500 crores) belonging to banks and cash-rich PSUs being made available to half a dozen brokers for their stock market operations between April 1991 and May 1992. India’s most infamous stock market scam had seen the light of day.

Ravi Srinivasan, currently Associate Editor with the Hindu Business Line, clearly remembers how he accidentally stumbled upon this scam as a correspondent with Times of India (ToI) in 1992 during a visit to Bombay (now Mumbai). “It was completely accidental,” recalls Srinivasan who along with noted journalist Sucheta Dalal cracked this stock market scam engineered by Harshad Mehta after an initial tip from a source in SBI. The source had come to meet Kiran Kasbekar (then with The Economic Times), Srinivasn’s former boss at ToI, and little did Srinivasn know that next day he and Sucheta were going to create jitters in the financial world through there shocking revelations.

There has been no dearth of scams at the Dalal Street, but this infamous securities scam of 1992 still remains the one that comes most readily to mind. After all, it was about a banking system that happily flouted all rules to make it happen and about a regulatory system that either failed to detect the irregularities or, more often, looked the other way even when they were detected in routine checks. The one which forced the government to establish the Securities and Exchange Board of India (SEBI; on April 12, 1992) to not only “protect the interests of investors in securities, but also to regulate the securities market and the matters connected therewith.” But has it?

While the Harshad Mehta scam triggered the formation of SEBI to more effectively regulate the markets, it took many more scams and alleged scamsters like C. R. Bhansali, Ketan Parekh, and others to find out ways to ensure that markets operate more transparently and efficiently. While Bhansali (in 1995) managed to trap the public and collected money from them in the form of fixed deposits, bonds and debentures, Parekh (in 2001) followed Harshad Mehta’s footsteps to swindle crores of rupees from banks. Both scams resulted in a blood bath on Dalal Street. If this wasn’t enough, in January 2009 the Satyam fiasco (Satyam Computers’ Founder Ramalinga Raju admitted that the company’s balance sheet had bank balance and inflated cash of Rs.50.40 billion) once again revealed the dark underbelly of Indian capitalism. It not only questioned the integrity of promoters but also the levels of corporate governance in India. So are regulators simply incompetent or is the lack of intention on their part?

 
Although extensive reforms have been set in motion by corporate watchdogs like SEBI, Company Law Board (CLB), et al, in the last few years, there remain significant lapses in its implementation and enforcement. For instance, since 2006 more than 20 companies have been blacklisted by SEBI for violating corporate governance norms. But leave aside convictions, no one knows about the progress of these cases as of now. In fact, India has one of the poorest conviction rates when it comes to corporate frauds (just 5%). More than 50,000 cases related to corporate frauds are still pending in courts. In comparison, a corporate fraud task force set up in US in 2002 (post Enron fiasco) secured 1,236 convictions in the next five years. Interestingly, as on March 31, 2011, there were 1,50,711 complaints pending for resolution with SEBI.

Another case in point is the SEBI’s failure to untangle the corruption web of insider trading in Indian stock markets. With increasing capital market operations, one would have expected insider trading cases to have gone up. But the recent data is depressing. While SEBI took up just 28 insider trading cases in 2010-11, only 15 investigations were completed during the period. Further, taking up or completing an investigation has nothing to do with actual conviction. When one analysed the list of cases that resulted in convictions in the total prosecutions filed by SEBI till date, there were zero cases that pertained to insider trading. “The mechanism in the United States is much more stringent as compared to Indian regulations, which are often being castigated as paper tiger for their lack of efficacy in curbing insider trading,” reasons Vinod Nair, Partner – Business Risk Services, Grant Thornton.

Further, it’s not the SEC alone, their counterparts at other busy global markets, with the exception of India of course, too have sharpened their focus on insider trading. Talking about the UK’s Financial Services Authority (FSA), it has filed over half-dozen criminal cases based on insider trading in the past couple of years as compared to ‘none’ prior to 2008. In fact, in 2010, FSA levied a $1.5 million fine (largest ever by FSA) on the Chief Executive of Genel Enerji A.S for insider trading in shares of company partner Heritage Oil.

Today, when trading is going on virtually round the clock across the globe, every single piece of information gets converted to millions and billions of dollars very easily. In such circumstances, the need to protect the sanctity at the market place has increased more than ever. And perhaps, now it’s time for the Indian market regulators also to take some clues from these global counterparts. Else the ghosts from the past will continue haunting the Indian bourses!

Mona Mehta           

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