Sebi needs more powers if it has to cleanse the stock markets of manipulators

The Reserve Bank of India and the finance ministry often lament the fact that retail investors are not investing enough in financial instruments, and are instead locking up precious capital in dead assets like gold and real estate. Take the capital markets, for instance. Retail investment in the stock market has been steadily declining since the market crash of 2008, and the apathy persisted even as the Sensex and Nifty made new highs a couple of months back.

Ask some of the veteran brokers and they say that one of the main reasons why retail investors are staying away from the market is loss of faith in the system, besides poor returns on investments. Plenty of promoters have brazenly flouted norms, rigged their stock prices and made a fortune at the expense of small investors over the last few years. It is impossible for Sebi to bring every one of them to book, though the regulator is learnt to be investigating charges of insider trading and market manipulations against quite a few promoters of mid-cap companies.

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[caption id=“attachment_75621” align=“alignleft” width=“380”]  Without these powers, Sebi’s fight against promoters manipulating shares will remain ineffective Image: ibnlive.in.com[/caption]

And that’s why Sebi could do with more help from the government, to be able to clamp down on market manipulation. And while the government has been making all the right noises, one is yet to see the intent being backed with action.

According to a report in The Indian Express last week, the ministry of law has supported the ministry of corporate affairs’ view that Sebi did not have to make changes to rules relating to share buyback (Section 77A of the Companies Act) by companies. This appears to be a case of turf war more than anything else when the common objective should be to protect investors from insincere share buyback announcements by companies. The move is certainly a setback to Sebi’s attempt to thwart promoters from using buyback as a tool to manipulate their stock price.

According to the rules notified by Sebi in August last year, companies have to complete their share buyback programmes within six months, and buy at least 50 percent of the targeted shares. To show seriousness about the buyback plan, companies had to put 25 percent of the amount in an escrow account, and would be fined for not meeting the buyback target. For buybacks involving 15 percent or more of the equity capital, companies had to follow a tender method wherein the company had to buy the shares from the shareholders directly at a fixed price, instead of buying through the stock market.

Sebi had formed the new rules as it found that many companies in the past announced grandiose buyback plans, but ended up buying only a fraction of the shares, or in some cases, none at all. Yet, the mere announcement of the buyback helped achieve the promoter’s actual objective: to support the stock price.

The other area where Sebi needs the backing of the government is the ordinance giving it sweeping powers to regulate collective investment schemes, for search and seizure, attach properties and gain access to call records and e-mail details in the course of investigations. The ordinance was first announced in July last year and then renewed in September, but is yet to get Parliament approval.

When the ordinance lapsed in January this year, Sebi chief UK Sinha made no secret of his dismay. “It is up to the government and the Parliament to decide what powers it wants to give Sebi,” Sinha had said somewhat cryptically on the sidelines of a public event when asked for his reaction to the ordinance lapsing.

According to a report in The Economic Times, Sebi has passed over 300 attachment orders in 64 cases for recovering around Rs 1,700 crore from defaulters and entities who had raised money through collective investment schemes, from the time the ordinance was issued.

As much as improving the business climate in the country, empowering Sebi too should be on the new government’s 100-day agenda if it wants to revive investor confidence in the capital markets.

And even as there is no clarity on how much power Sebi will eventually be able to wield, the regulator seems to have improvised on its strategy in dealing with offenders, over the last few months.

Hefty penalty rather than debarment is a more effective way to deter market manipulation - or so seems to be the new thinking of the regulator. That could perhaps explain the steep increase in penalties of late. A few days back, Sebi imposed a fine of Rs 17.92 crore on the promoters and senior management of Sumeet Industries for allegedly manipulating the stock price. In January, the regulator fined one Dave Harihar Kirtibhai for allegedly being party to the manipulation in the initial public offering of RDB Rasayans.

In December, Sebi slapped a cumulative fine of Rs 53 crore on 25 promoter entities for allegedly rigging the initial public offering of Brooks Laboratories. A stringent monetary penalty is any day a better course of action as debarment still gives room for the offenders to play the market using other entities as fronts. Till some months back, the quantum of penalty rarely made headlines. And for those held guilty of the violations, the fine was chicken feed.

Yet slapping huge fines is only half the battle won; the regulator still has to recover the fines. Data released by Sebi last week showed that close to 1,400 entities who have been fined amounts ranging between Rs 10,000-Rs 1 crore are yet to pay. Some of the cases are more than three years old. Some of the high profile defaulters include ex-Ranbaxy independent director VK Kaul and his wife Bala Kaul who were fined Rs 50 lakh and Rs 10 lakh respectively for trading in Orchid Chemicals shares based on confidential information. Also on that list is Rupalben Panchal, the mastermind of the IPO scam of 2005, in which shares reserved for retail investors were cornered by a group of manipulators using multiple demat accounts. Recovery of these fines itself would add between Rs 136 crore to Sebi’s coffers, a chunk of which could be invested in technology and man power to strengthen market surveillance. And that itself is a good reason why Sebi could do with more powers.