How grave does an offence have to be before Sebi, the market regulator, considers it worthy of strong penalties?
Two whole-time members of Sebi - one past and one current - have come to quite the opposite conclusion on the same offence, resulting in an easing of the strictures on the Tayals who formerly controlled the Bank of Rajasthan. The bank was merged with ICICI Bank two years ago.
In an order issued on Tuesday, Prashant Saran, currently a whole-time Sebi member with adjudication powers, withdrew the interim ban on 100 Tayal Group entities, which were restricted from accessing or dealing in securities two years ago.
The interim ban was imposed by former Sebi whole-time member KM Abraham in the second week of March 2010 after discovering violations of various Sebi rules in 92 of the 100 companies.
Among other things, Abraham claimed that the promoters, after indicating that they were reducing their stake in Bank of Rajasthan from 44.71 percent to 28.61 percent to comply with a Reserve Bank directive to do so, actually did the opposite. They raised their stake to 55 percent.
According to a newspaper report from that time, the “regulator, during the investigation, had identified four distinct groups operating in the shares of Bank of Rajasthan. They included promoters of the company, other Tayal group companies and two entities known as the Yadav group and the Silvassa group.”
Saran, who authored the latest order that ends the ban, has downgraded the same offence to not so serious. He says that the "offence would have been considered as very serious or fatal if the wrongful disclosure would have led genuine investors into trades that would eventually expose them to much greater risk. I have noted that there is no allegation as to any price or volume manipulation by the promoters. Therefore, I am of the opinion that purely from a securities market point of view, the severity of the offence could be considered not very grave."
The logic seems to be this: a robber, if he fails to rob the intended victim for whatever reason, should be treated as less of a criminal than if he had succeeded. Since the Tayals' wrong disclosure did not roil investors or the markets, it is less of a crime.
However, the Saran order will be controversial not only for its logic, but also for the fact that the previous Sebi incumbent, Abraham, had levelled serious charges against the finance ministry for trying to influence the final decision in the Tayal case.
In June 2011, Abraham, who was denied an extension, had complained to the Prime Minister’s Office (PMO), as reported in Firstpost, that pressure was being mounted on him by the finance ministry under Pranab Mukherjee to influence cases involving powerful corporate interests. Apart from Reliance and the Sahara group, the Tayal group was alleged to be one such corporate seeking the FM’s intervention to influence Sebi's orders (Read the full text of Abraham's complaint here).
Abraham's order on the Tayals followed closely on the heels of the Reserve Bank ordering a special audit of the Bank of Rajasthan’s accounts and lending policies by Deloitte.
The audit revealed irregularities and violations by the Tayals involving property transactions, anti-money laundering norms, irregularities in the conduct of accounts of a corporate group and failure to provide certain documents sought by RBI. Among other things, the central bank suspected that SK Tayal, a relative of the promoter PK Tayal, was influencing credit decisions.
Apart from the fact that the Tayals increased their stake in the company despite telling the RBI that they will reduce it, it seems to be a case of front-running (buying shares ahead of an important event) to take advantage of the impending merger with ICICI Bank. As Abraham pointed out, the stake increase was also a violation of the takeover code which restricts promoter groups from raising their stakes by more than 5 percent in any year.
Despite the clear case of front running and 92 cases of other violations, Sebi has now lifted the ban.
DNA, reporting on the issue, says that Sebi has used the RBI's decision to allow the merger as reason enough to thinks the Tayals are kosher. It said: ..."If the RBI itself had considered the conduct of the promoters extremely serious, then either it would not have allowed the merger or would have done so with required caveats for the promoters."
Clearly, Sebi is seeking to hide behind the RBI's petticoat when the fact remains that the central bank found many problems with the way the Tayals were running the bank and had ordered an audit on its operations. It is because the RBI was uncomfortable with the Tayals that the merger with ICICI Bank was okayed.
Now, however, Sebi seems to have decided that since shareholders were not affected by the Tayals' share capers, nothing much needs to be done. The Tayals will, however, face adjudication proceedings.
Abraham, in his complaint letter to the PMO, had warned that pressure from the finance ministry thus: “Whether the pressure exerted on Shri Sinha (UK Sinha, Chairman of Sebi) by the above-mentioned interests (by this Abraham meant all the cases and not merely that of the Tayals) yield the obviously execrable and illegal outcomes intended by the vested interests behind the same no doubt depends on whether the whole-time member and officers succumb under such pressure, requests, demands or suggestions that get conveyed to them through the chairman. This clearly is a matter that will have to largely do with the personal integrity of the officers themselves….”
We leave readers to judge whether Abraham's warning has come true or not.