Ajit Karn
SEBI Has Been Embarrassed Several Times by Overturned Decisions
The market regulator has had a difficult couple of weeks as a result of the close examination of its sluggish investigations, inadequate oversight, and legally questionable or improperly justified directives from the previous decade or more.
Mahua Moitra, a Trinamool Congress member of parliament (MP), shouted in the chamber, “Why has SEBI been a quiet operator?” The Securities and Exchange Board of India (SEBI) appears to have studiously ignored Moitra’s germane queries concerning the Adani group and the astounding rise in the stock prices of all its firms over the previous two years. The Trinamool MP correctly questioned how the regulator permitted Adani Enterprises Ltd. to make a massive follow-on public offer (FPO) of Rs 20,000 crore despite the fact that an investigation was ongoing (the Adani group withdrew the issue the day after a “managed” subscription) and how the group could assert that there was no active investigation against it.
The government stated in a written response to a question in the parliament in July 2021 that SEBI was looking into whether or not any Adani group firms were complying with SEBI standards. In addition, the DRI (department of revenue intelligence) is looking into some Adani Group firms under the legislation it oversees.
This important topic is not addressed in SEBI’s lacklustre press release from last Saturday, which came after all Adani group equities suffered precipitous declines as a result of the publication of a negative report by US-based Hindenburg Research. In actuality, SEBI has steadfastly disregarded the price run-up in Adani Enterprises since 2004, when the stock first started to skyrocket and soared 3,000% over the next four years!
Keep in mind that SEBI is one of the most powerful regulators in existence today, having the ability to conduct searches, seizures, raids, and arrests. For real-time detection of shady trading behaviour and price manipulation, it also includes an expensive surveillance system. What justifies the regulator’s apathy throughout various political systems?
There is an easy solution. In the last two decades, SEBI has either followed the financial ministry’s directives (particularly during the United Progressive Alliance’s second term) or its operations have escaped political or public scrutiny. Aside from the Adani controversy, let’s examine how SEBI handled the Satyam incident and the co-location (colo) problem at the National Stock Exchange (NSE), two of the largest scandals in the previous 20 years.
The NSE’s colo fraud
The SEBI’s shameful failure to defend its conclusions in such a serious incident casts India in a negative image given that NSE is the largest derivatives exchange in the world. Here is what the Securities Appellate Tribunal (SAT), which essentially overturned SEBI’s earlier ruling requiring NSE to forfeit Rs. 625 crore with interest on January 23, 2023, said (and slashed the payment down to Rs 100 crore).
In line 255 of the order, it states:
“Before we draw a conclusion, we must note that SEBI should have been proactive and should have handled the inquiry properly when substantial complaints were made against a first level regulator, namely the NSE. We discover that SEBI had taken a cautious stance and was really covering up the alleged wrongdoings of NSE. Only after inquiries were made on the parliament’s floor did SEBI become alert and launch a probe. The investigation’s scope was constrained, and it was carried out by another agency under Section 11C rather than under Section 11(4). In our opinion, SEBI should have launched an investigation or inquiry itself given the seriousness of the alleged accusations rather than handing it off to NSE. The manner in which SEBI instructed NSE to undertake an inquiry against itself is peculiar and illogical. It is obvious that a careless strategy was used.
SAT also brought out the fact that the whole-time member (WTM), the second-highest ranking official at SEBI, reached two completely different conclusions on the identical matter on the very same day! One order involved NSE, and the WTM determined that early log-in, which was at the centre of the colo controversy, did not benefit any brokers, hence assisting the Exchange. The WTM came to the conclusion that an advantage was gained by the company through an early log-in in the second order against brokerage OPG Securities that same day. According to SAT, which is right, “It is not profitable to weed out all the inconsistencies but it is sufficient to indicate that the same Officer who has granted the orders on the same day cannot make different analyses on the same subject or problem.”
Is this an instance of bad judgement, carelessness, or lack of mental effort? Or even worse, an effort to give NSE “a protective cover” and make sure the entire decision is overturned on appeal? If the answer is yes, the goal has been successfully met.
Did the WTM, who received harsh criticism from SAT, suffer any repercussions? Definitely none! He was assigned to lead a group on bettering market infrastructure institutions (MIIs) after serving his SEBI term in its whole, and more recently, the government named him to the board of the troubled Infrastructure Leasing & Financial Services (IL&FS)!
Ironic, isn’t it, that while allegations against a corporate group can shake up the government (and rightfully so), bad regulatory orders that are routinely overturned on appeal go unnoticed, not even by the standing committee of parliament, which includes representatives from all opposition parties.
Media sources state that SEBI intends to challenge the unfairly watered-down SAT ruling in the NSE colo case. Why would the appeal result in a different judgement given SEBI’s own findings were insufficient and the original order was badly written with a broad exoneration and no discernible justification? Legal professionals predict that SEBI will most likely lose the appeal or that the ruling will be further watered down. It may be the appeal’s intended purpose, one could speculate.
Satyam Order
Let’s examine a second surprising decision that humiliated SEBI in an appeal. Recall the January 2009 Satyam Computer scam, which cost Rs 9,000 crore? What case could be more clear-cut than one in which B. Ramalinga Raju, the chairman of Satyam, admits to manipulating the business’s finances for years? But the punishment portion has continued for fifteen years. SAT disregarded two SEBI “revised instructions” from October and November 2018 earlier this week and instructed the WTM to reexamine the situation!
It requested that the WTM take the intrinsic worth into account while determining the illegal gain. “The WTM will determine the illegal gain, if any, separately for each appellant. The WTM will take the matter under consideration. The WTM will reexamine the question of the period of restraining order for each appellant. The WTM will reevaluate the share pledge problem.
Here, the situation was as follows. In 2014, SEBI banned ten firms from the market and demanded that they repay more than Rs. 1,800 crore. SEBI was requested to rethink its decision after being criticised. SEBI issued two orders in 2018 against Satyam Computers’ promoters and top executives. In essence, the Satyam promoter family members B. Suryanarayana Raju, B. Rama Raju, and B. Ramalinga Raju had been barred from entering the securities market for 14 years by SEBI’s WTM. In addition, SEBI increased the amount of the disgorgement to Rs 813 crore and demanded that the individuals and entities listed above as well as SRSR Holdings pay the amount along with 12% annual interest (calculated as of January 2009) for accusations of insider trading and manipulation.
Also read:- Adani Shares End in the Red as MSCI Examines Group Stocks’ Free Float
In returning the matter to SEBI, SAT found that its officer had taken an incorrect approach to it and that the order does not justify using the magic number of 14 years for the implementation of punitive limitations. The disgorgement order and the interest levied were likewise annulled by SAT.
The SAT rulings in the Satyam and NSE colo cases appear to indicate a feeble inquiry, a lack of legal knowledge, or an inability to provide speaking instructions that withstand the scrutiny of several appeals. When a regulator performs so poorly in huge scandals that are broadcast to the entire world, it frequently embarrasses SEBI and casts a very negative light on a nation that is trying to become a superpower. Strangely, though, nobody believes that this harms the country or constitutes an assault on India’s pride. This situation at one of our top regulatory agencies makes us delighted.
