The start of a new year seems the right time to take stock of the past and to look for markers of things to come
Transparency & Accountability: The Indian judiciary gave us savers a reason to cheer and also to wring our hands in despair, in 2015. In December, a landmark judgement of the Supreme Court (SC) has forced the Reserve Bank of India (RBI) to share information with regard to RBI’s audit reports, action taken against banks, list of defaulters, classification of banks, fines imposed on banks and so on. In doing so, the judgement made it clear that there was no ‘fiduciary relationship’ between RBI and the banks and this could not be a reason for denying information. It demolished RBI’s excuse that providing information would endanger India’s ‘economic interest’ by terming it “not only absurd but is equally misconceived and baseless.” I expect this judgement to change the attitude of the capital market, insurance and pension regulators to queries under the RTI (Right to Information) Act and to re-ignite activism and help ferret out information on matters of public interest.
Gaming the Judiciary: In contrast, investors of PACL Limited (Pearl Agrotech) were holding their breath, at the end of December, to see if the Delhi High Court would, again, admit an appeal by the company against an order of Securities & Exchange Board of India (SEBI), asking it to refund a stupendous Rs49,100 crore raised under an illegal money circulation scheme over decades. This is a case where action against dubious fund mobilisation began in 1999 (the scheme was launched in 1997); but the company managed to obtain repeated stay orders from various courts. The matter went all the way to the SC, before being remanded to SEBI and challenged before the Securities Appellate Tribunal (SAT). Meanwhile, the company continued to raise huge sums of money without any accountability, transparency or disclosure. Thousands of angry investors from very poor backgrounds are running from pillar to post trying to get the company to return their money. The responsibility for allowing the shady PACL to vacuum-suck such massive sums of money also lies at the doors of the judiciary.
Retail Investors Lose Again: In another perplexing order, the Delhi High Court dismissed a PIL (public interest litigation) by the Midas Touch Investors’ Association with regard to 5,152 companies listed only on India’s 22 regional stock exchanges (RSEs) which are being shut down one by one by SEBI. With neither of the two big national exchanges being interested in granting listing to these companies, their shares would immediately turn worthless. One could argue that most of these shares are already in limbo, since the exchanges are virtually defunct. But Virendra Jain, the veteran investor activist with many successes to his credit, was arguing precisely for those investors. His contention is that SEBI’s de-listing process was flawed and its action usurped the fundamental right of the shareholders of affected companies to seek a judicial review of the regulator’s decision.
What has disappointed Mr Jain most is that the PIL was not dismissed on merit, but on the ground that it is similar to an earlier PIL that was dismissed. He says that this view is erroneous and the facts placed before the court, as well as the relief claimed by Midas Touch, are distinctly different. This is a blow to investors, because it is tough for individual activists to navigate the higher judiciary without adequate resources or the help of senior counsel willing to appear pro bono.
Orders & Appeals: While on regulators and judgements, SEBI has claimed that its overall success rate with appeals filed before SAT was 90% in
2014-15. This, it says, is better than in the previous two years. Yet, it may not be as wonderful as it sounds. Firstly, it is not clear whether the 90% includes cases where the appeal is upheld but the penalty slashed to a meaningless figure. More importantly, it excludes two of SEBI’s most significant consent orders which, by the quantum of penalty imposed, would probably account for a large chunk of its action, if one excludes the PACL order passed in August 2014.
On 8th December, SAT set aside the Rs11-crore penalty imposed in 2013 on Reliance Petroinvestments (RPIL), a subsidiary of Reliance Industries, for alleged insider trading and illicit gains through information about IPCL (Indian Petrochemicals Corporation Limited). SEBI has been asked by SAT to examine the matter afresh since its order was apparently passed merely on the basis of presumption, without considering the arguments of the company. Then, on 16th December, SAT set aside a Rs13 crore penalty imposed on Reliance Industries for insufficient disclosures in violation of the listing agreement of stock exchanges. In this case, too, it has been asked to consider the order afresh.
The DLF (earlier Delhi Land and Finance) matter is worse. SEBI barred DLF and its promoters from the capital market after a seven-year investigation. The order was overturned by a majority order of SAT, which pulled up the regulator for “jumbling up of rules, regulations and various provisions occurring and operating in different fields…” which has meant “grave miscarriage of justice to investors,” when the stock price crashed the day after the order. SEBI had also imposed a Rs86-crore penalty against DLF in the same case. The issue is now before the SC.
The one area where SEBI has done extremely well in 2015 is to continue its relentless action against money circulation schemes. Apart from the headline-grabbing action against PACL Ltd, Rose Valley, Alchemist, MPS Greenery, Agri Gold Farm Estates, Royal Twinkle Club, Citrus Check Inns, etc, SEBI has been steadily issuing orders against hundreds of lesser-known companies that have raised funds through financial instruments that appear to have passed regulatory scrutiny, like optionally convertible debentures, redeemable preference shares, etc. Most of these companies have been barred from raising fresh funds and asked to wind up operations. Sometime in November, the regulator also issued a list of 95 companies that had been barred from raising funds and cautioned investors to stay away from them. But this is only a tip of the proverbial iceberg. There are thousands of collective investment schemes that continue to operate in each state—many are able to raise thousands of crores of rupees. For instance, in December 2015, the economic offences wing (EOW) of the Mumbai Police declared that two unknown companies—Sai Prasad Properties Ltd (Goa) and Sai Prasad Foods Ltd (Pune) which it raided across India—had raised over Rs2,000 crore from two million investors.
Interestingly, SEBI, which took over the commodity markets regulator in 2015, remains a reluctant regulator of collective investment schemes. This was revealed by the October 2015 report of the parliamentary standing committee on finance, on collective investment schemes. The report accepts SEBI’s suggestion to create a new regulator for all money collection schemes. This committee came up with the startling revelation that money is transferred out of Ponzi schemes to multi-state cooperatives, which are subject to a weak regulatory regime and have become “some kind of a shelter for illegitimate funds.” The parliamentary committee has recommended a special audit of these cooperative banks and wants the department of economic affairs under finance ministry to monitor the activities of independent regulators, as well as investigating agencies. Will the ministry of finance focus on these useful suggestions in 2016 to make life safer for savers?