The new chairman of the Securities & Exchange Board of India (SEBI), Ajay Tyagi, is a man in a hurry. Almost every day, you have a major order, decision or committee being announced, whether it is the Reliance Industries insider trading case decided after nine years, setting up yet another corporate governance committee, seeking amendment to the Companies Act to mandate a special resolution to sack independent directors (even before the corporate governance committee deliberates on the issue), making participatory notes more expensive, permitting the launch of options in commodity futures, and so on.
But maybe it is time to pause and clean up the big mess in how SEBI deals with legal matters and investors. This extraordinary tale spanning two decades will explain the urgent need for deep-cleaning at SEBI.
In May 1995, Griesheim GMbH (Griesheim) of Germany signed a share purchase agreement with Goyal MG Gases Limited (GMG), under which the latter would be invited to participate in any new gas-based business it undertook in India. Two years later, in June 1997, Griesheim purchased 30% of Bombay Oxygen Corporation Limited (BOCL) from
SM Ruia, the promoter group. This triggered an open offer to the public under SEBI’s takeover rules.
Griesheim also signed another agreement with GMG in November 1997 to jointly wrest management control of BOCL by acquiring more shares (Griesheim was to acquire 25,001 shares and GMG 50,000 shares).
Meanwhile, the open offer triggered in June 1997 was finally made in August 1998 and Griesheim acquired another 20% stake in BOCL. But Griesheim’s offer document dubiously failed to mention its deal with GMG, which was BOCL’s rival in the gas market. GMG did not officially participate in the open offer. Meanwhile, the Ruias discovered Griesheim’s double-dealing and a fight broke out.
Two years later, in February 2000, Griesheim sold its entire holding of BOCL shares (75,001 shares representing a 50% stake) to a shadowy Cayman Islands entity, called Messer Holdings Limited (MHL), and received payment for them in August 2000. This time, too, there was no open offer to minority shareholders by MHL. No action from SEBI.
In September 2000, Jagdish Vora, a minority shareholder, filed a complaint with SEBI about Griesheim, GMG and MHL having violated the takeover rules when Griesheim first acquired BOCL (did not disclose GMG connection) and again, when it sold its entire holding to MHL. If these twists were not enough, Griesheim did another about-turn in 2002 and sold its entire holding of 75,001 shares back to the Ruias, sparking a legal battle for ownership between GMG and the Ruias.
After firing innumerable letters to SEBI in 2000, and a few in the intervening years, Mr Vora got active again in 2016, with some other minority investors supporting him. He sent a legal letter to the regulator in May 2016 and October 2016. SEBI did not bother to respond. He then filed an RTI (Right to Information) application asking what was done about his four letters between September and December 2000 on the BOCL case. He asked for file notings and copy of any action or order passed by the regulator on the issue. He followed up with a request for a personal hearing (23 November 2016). No answer.
On 24 November 2016, Jagdish Vora was shocked to receive an RTI response saying that none of his letters “are available with SEBI” as per its records.
Mr Vora filed a first appeal (in December 2016), where he attached notarised copies of his letters with a stamped acknowledgement from SEBI; he also offered to submit originals if he was granted a personal meeting. SEBI’s reaction to this was stunning. It simply dismissed Mr Vora’s appeal in January 2017. It is important to note that the appellate authority under RTI then was whole-time member (WTM) S Raman, whose portfolio included the takeover code under which Mr Vora was seeking action. In effect, Mr Raman chose to dismiss both issues in one stroke, but not without another shady twist.
On 30 November 2016, before the RTI appeal was dismissed, SEBI wrote to Mr Vora saying that his complaint had been unilaterally converted into a ‘grievance redress’ matter under SCORES (SEBI Complaints Redress System) and sent to BOCL. This was nonsensical, since SEBI needed to investigate violation of the takeover code and not deflect the issue. By December 2016, Mr Vora was fed up and approached the Securities Appellate Tribunal (SAT). On 9 January 2017, he was asked by SAT to submit a consolidated complaint to SEBI and the regulator was directed to decide it on merit and pass appropriate orders in accordance with the law in 12 weeks (which would end on 11 April 2017). By 18 January 2017, Mr Vora had filed a comprehensive complaint regarding the violation of takeover rules with legal help from someone who is fully conversant with SEBI rules and regulations. He also asked for a personal hearing, but it was not granted.
Now SEBI had no option but to respond. So, it first approached SAT, seeking a modification of its order. SAT granted a modification, but the operative part requiring SEBI to pass an order remained intact. As the 11th April deadline approached, SEBI sought an extension until 12 June 2017 to pass an order. It had now found another excuse not to act. SEBI told SAT that there was a Bombay High Court order, dated March 2017, in the BOCL takeover matter and it needed time to study its implications before responding to Mr Vora’s complaint. Since it was not clear if the Bombay High Court order had any bearing on this issue, Mr Vora again sought inspection of documents from SEBI. He also wrote to remind SEBI to pass an order, as directed by SAT.
So, did the story finally end on 12th June? No. There was a new surprise. After being given a run-around for over a decade, SEBI disposed of Mr Vora’s complaint with its letter dated 9th June (SEBI/HO/CFD/DCR/1/2017/1326), in complete defiance of SAT’s directions to issue a formal order.
Let us examine how and why this action reeks of arrogance and capriciousness. Just over a year ago, on 6 May 2016, SEBI had received a severe battering from SAT in a case pertaining to Adventz Finance Private Ltd. The details of that case are not relevant to this story, except that in the Adventz case too SAT had ordered SEBI’s WTM to “pass appropriate orders in the case in 7 weeks.” Instead of doing so, that WTM had dismissed the issue with a letter from the chief general manager (like in the case of Mr Vora’s complaint) and tried to pass it off as a formal order.
When the issue came up for hearing, an enraged SAT imposed a penalty of Rs1 lakh on the WTM and asked for the case to be re-assigned to a responsible member. SEBI was also ordered to forward its order to the finance ministry and central vigilance commission. That blow had the desired effect. SEBI jumped into damage control and, after an abject apology, persuaded SAT to withdraw the strictures. Part of the grovelling included an internal SEBI memo being issued on 18 August 2016, saying, “in all quasi-judicial proceedings, formal orders will be passed by Whole Time Members or Adjudication Officers or any other authority as the case may be and not merely by approval of file note.”
And yet, SEBI has done it again in Mr Vora’s case, having learnt no lessons from that humiliating episode. What is shocking about this saga is that the preamble to the SEBI Act says that investor protection is its first responsibility. But the situation on the ground is that SEBI will respond only if an investor is able to harangue it with the persistence of Mr Vora and is able to take the fight to the appellate tribunal. Even when that happens, there is no justice in sight. How is the regulator able to get away with such arrogance and callousness? The answer is simple. Neither the finance minister nor members of parliament care about middle-class issues which are the domain of all financial regulators; secondly, very few investors have the resources for a bruising legal battle that may be dragged to the Supreme Court. This can be fixed only if the SAT and courts start imposing heavy personal fines on SEBI officials. Until then, investors can forget about achhe din in terms of grievance redress.