SEBI To Act on an FSA Tip-off. Really?

The market watchdog has announced an investigation but its track-record does not give us much hope about the outcome

Although SEBI has been collecting kudos for getting the Anil Ambani-led, ADAG group to sign the biggest consent order of Rs50 crore in 2011, Moneylife has always held that the regulator, under CB Bhave, allowed the group to get away easily. It did not admit guilt and claimed to have no knowledge about the round-tripping of a massive $250 million into Reliance Communications. Yet, the consent order was conveniently vague and did document the group’s shady transactions through UBS and a host of overseas entities. In fact, the Financial Services Authority (FSA) of the UK shared plenty of information with SEBI on that case and eventually acted more stringently against UBS officials.

On 12th August, The Economic Times reported that SEBI is conducting a wide-ranging investigation into the use of funds parked in undisclosed overseas bank accounts allegedly owned by several prominent promoters and CEOs, based on a tip-off from overseas regulators. Apparently, the investigation covers three European banks—two from Switzerland and one from the UK, which, with the help of portfolio managers, have been helping Indian industrialists round-trip money and manipulate share prices. Will SEBI get serious or simply go through the motions of investigation?

Also, while the regulator is checking round-tripping, the bigger issue probably ought to be terror funding in the Indian stock markets. Dr SV Raghavan and V Balasubramaniyan, in an article on 12th August, have documented growing evidence of this menace. This was first mentioned by then Intelligence Bureau chief MK Narayanan in 2007, but met with great scepticism. Since then, in 2011, minister of state for finance, Namo Narain Meena told parliament that “10 suspected cases of terror funding in the stock markets have been reported in the previous three fiscal years from 2009-2011.” In November 2012, home minister Sushil Kumar Shinde told an Interpol conference that “credible intelligence suggests terrorist outfits are investing in stock markets through spurious companies, setting up fictitious businesses and laundering money.” The authors say that the Financial Intelligence Unit received several suspicious transaction reports (STR) between 2009 and 2011 that ‘may be linked to terrorist financing’. They further point out that SEBI’s 2011-12 annual report says that it initiated an enquiry against 35 brokers for non-compliance with anti-money laundering (AML) regulations and combating financing of terror (CFT) regimes.
Given the seriousness of the issues involved—terror funding, money-laundering and stock manipulation—will the newly-empowered market regulator be under pressure to come up with some answers?

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