Is there a point to the huge fines being announced by the regulator?
On 22nd September, the capital market regulator set a record by levying the biggest ever penalty—of Rs7,269.5 crore—on PACL Ltd (formerly Pearl Agrotech Corporation Limited) and its four directors for illegal and fraudulent mobilisation of funds from the public.
Does this large amount serve any meaningful purpose? Remember, PACL has raised an astonishing Rs49,000 crore from the public, over a 15-year period, that must be repaid first. Many nervous investors have posted queries on Moneylife’s website about the process to get back their money. Unlike the strangely silent investors of the Sahara group, PACL appears to have genuine investors who were lured with the promise of high returns and investment in land.
While SEBI is correct in saying that a strong signal should be sent to those who indulge in ‘illegal money mobilisation’ to dupe the common man, the regulator’s priorities ought to be different. The preamble to the SEBI Act makes it clear that investor protection is its first duty. The regulator ought to focus on putting in place a simple mechanism to ensure that genuine investors get back their hard-earned money and then worry about imposing a stiff penalty to act as a deterrent.
The bigger problem in PACL, Sahara and the many large money circulation schemes that SEBI has correctly cracked down on (Rose Valley, MPS Greenery and Alchemist) is their long misuse of legal processes with investors’ funds. The real deterrence against such illegal schemes would be swift legal action that prevents the misuse of courts. Unfortunately, the setting up an independent market regulator and a securities appellate tribunal (SAT) has only created two more forums to abuse through pointless legal processes and delays. PACL is the best example of this. It obtained a stay against SEBI action from various courts, allowing it to raise another Rs25,000 crore, over the years.
Are PACL or its promoters in a position to pay SEBI’s steep penalty in 45 days after repaying investors? Should SEBI be focused on collecting penalties instead of insisting on investors getting back their money first? SEBI’s recovery action will be contested, but may ultimately land the promoters in the same predicament as Subrata Roy (of the Sahara group) who has been languishing in jail for well over a year. A SEBI order asking Ramalinga Raju and his family (of Satyam Computers) to return Rs1,850 crore of unlawful gains and cough up interest to the tune of Rs1,500 crore has already been stayed by SAT on 8th September. The legal battle will continue and, eventually, land up in the Supreme Court. The only ones benefiting from this pointless system are members of the legal community whose fees have been galloping every year.