What about National Pride When SEBI Is Repeatedly Embarrassed by Overturned Orders in Major Scams?
It has been a bad fortnight for the market regulator as its tardy investigations, poor supervision and legally weak or poorly justified orders of the past decade or more have come up for scrutiny in this short period.
“Why has SEBI been a silent operator?” thundered Mahua Moitra, member of Parliament (MP) from the Trinamool Congress in parliament. Ms Moitra had raised pertinent questions about the Adani group and the astonishing run-up in the stock prices of all its companies over the past two years, but the Securities and Exchange Board of India (SEBI) appears to have studiously looked away. The Trinamool MP  correctly asked how a massive follow-on public offer (FPO) of Rs20,000 crore by Adani Enterprises Ltd was allowed by the regulator, despite the ongoing investigation (the issue was pulled out by the Adani group a day after a ‘managed’ subscription) and how could the group claim that there was no pending investigation against it.
In July 2021, the government, in a written reply in parliament, had said, "SEBI is investigating some Adani group companies about compliance with SEBI regulations. Further, the DRI (department of revenue intelligence) is investigating certain entities belonging to the Adani group of companies under laws administered by it." (Read: SEBI, DRI Investigating Some Adani Group Companies: Govt)
SEBI’s bland press release last Saturday, after all Adani group stocks tumbled badly following the release of a damaging report by US-based Hindenburg, does not bother to answer this key question. In fact, SEBI has been strenuously ignoring the price run-up in Adani Enterprises from as far back as 2004 when the stock began to soar and rose 3000% over the next four years!
Remember, SEBI is among the most empowered regulators in the world today, with powers of search, seizure, raids and arrest. It also has an expensive surveillance system to catch suspicious trading activity and price manipulation on a real-time basis. What explains the regulator’s silence through different political regimes?
The answer is simple. Over the past two decades, SEBI has either operated on the directions of the finance ministry (especially during the second term of the United Progressive Alliance) or its activities have flown below the radar of any public or political scrutiny. Apart from the Adani issue, let’s take a look at how SEBI has dealt with two of the biggest controversies in the past two decades –the co-location (Colo) scam at the National Stock Exchange (NSE) and the Satyam scandal.
NSE’s Colo Scam
NSE is the largest derivatives exchange in the world; so, SEBI’s embarrassing inability to justify its findings in such a major scandal shows India in a poor light. Here is what the securities appellate tribunal (SAT) said on 23 January 2023, when it all but threw out SEBI’s initial order asking NSE to disgorge Rs625 crore with interest (and slashed the payment down to Rs100 crore).
In paragraph 255, the order says: “Before we conclude, we must observe that when serious allegations were made against a first level regulator, namely, NSE, SEBI should have been proactive and should have conducted the investigation seriously. We find that SEBI had adopted a slow approach and, in fact, was placing a protective cover over NSE's alleged misdeeds. It is only when questions were placed on the floor of the parliament that SEBI woke up and instituted an investigation. The scope of investigation was limited and not made under Section 11(4) but was conducted by another agency under Section 11C. In our opinion, considering the gravity of the alleged charges, SEBI should have itself conducted an investigation / enquiry instead of delegating it to NSE to conduct an investigation. It is strange and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted."
SAT further pointed out that the whole-time member (WTM), who is the second senior-most official at SEBI, arrived at exactly opposite findings on the same issue, in two separate orders, on the very same date! One order was in connection with NSE, where the WTM ruled that early log-in (central to the Colo scandal) did not give any broker an advantage, thus helping the Exchange. In the second order against stockbroker OPG Securities that very day, the WTM concluded that early log-in did give the firm an advantage. SAT, correctly, says, “It is not worthwhile to cull out all the contradictions but it is suffice (sic) to state that the same Officer who has passed the orders on the same date cannot make different analysis on the same subject/issue.”
Is this a case of poor judgement, lack of diligence and non-application of mind? Or worse, an attempt to provide ‘a protective cover’ to NSE and ensure that the entire order gets thrown out on appeal? If yes, the objective has been clearly achieved.
Did the WTM, who was badly castigated by SAT, face any consequence? Absolutely none! Having completed his term at SEBI, he was appointed to head a committee on improving market infrastructure institutions (MIIs) and, more recently, was appointed by the government to the board of the beleaguered Infrastructure Leasing & Financial Services (IL&FS)!
Isn’t it ironic that allegations against a corporate group can rock parliament (correctly so), but poor regulatory orders, routinely dismissed in appeal, do not even attract any attention, not even of the standing committee of parliament which includes MPs from all Opposition parties?
According to media reports, SEBI plans to appeal the badly diluted SAT order in the NSE Colo case. The question is: Why would the appeal lead to a different outcome when SEBI’s own findings were weak and the initial order was poorly worded with a sweeping exoneration, without clear basis? Legal experts believe that SEBI is most likely to lose in appeal or the order could be further diluted. One could surmise that it may, indeed, be the desired intent of the appeal.
Satyam Order
Let us look at another shocking order that embarrassed SEBI in appeal. Remember the Rs9,000 crore Satyam Computer fraud of January 2009? What could be a more open and shut case than one where B Ramalinga Raju, the chairman of Satyam, confesses to having doctored the company’s books for years? Yet, the punitive part has dragged on for a decade and a half. Earlier this week, SAT set aside two of SEBI’s ‘revised orders’ dating back to October and November 2018 and directed the WTM to look at the issue afresh!
It asked the WTM to consider the intrinsic value while calculating the unlawful gain. "The unlawful gain, if any, will be calculated individually for all the appellants by the WTM. The WTM will consider the issue on interest. The WTM will reconsider the issue on period of restraint afresh for all the appellants. The WTM will reconsider the issue on pledge of shares."
The case here was as follows. In 2014, SEBI had asked 10 entities to return over Rs1,800 crore and barred them from the market. When challenged, SEBI was asked to reconsider its order. In 2018, SEBI issued two orders against the promoters and senior officials of Satyam Computers. Essentially, SEBI’s WTM had restrained B Suryanarayana Raju, B Rama Raju, and B Ramalinga Raju of the Satyam promoter family from accessing the securities market for 14 years. SEBI also revised the disgorgement amount to Rs813 crore and asked those mentioned above and SRSR Holdings to pay the sum with 12%pa (per annum) interest (calculated from January 2009) on charges of insider trading and manipulation.
SAT, in reverting the issue to SEBI, held that its officer’s approach to the issue was erroneous and the order provides no reason for coming up with the magic period of 14 years for the application of punitive restrictions. SAT also set aside the disgorgement order and interest charged.
The SAT orders in Satyam as well as NSE Colo case seem to suggest a weak investigation and also poor legal understanding or inability to deliver speaking orders that stand up to the scrutiny of multiple appeals. This leads to frequent embarrassment for SEBI and reflects very poorly on an aspiring superpower when a regulator does such a shoddy job in major scandals that are watched by the world. Strangely, though, nobody thinks this hurts the nation or as attacks on India’s pride. We are happy with this state of affairs at one of our premier regulatory bodies.
1 year ago
SEBI's problem, like may other regulators in similar position, is that it is a regulator, prosecutor and judge, rolled into one. When one wing of SEBI, after thorough and detailed investigation, finds strong evidence/case for prosecuting an entity, you can't expect other wing of same body to reject it outright. Secondly, for all the powers given to it, SEBI cannot act like CBI or police to gather evidence.
1 year ago
"Remember, SEBI is among the most empowered regulators in the world today, with powers of search, seizure, raids and arrest. It also has an expensive surveillance system to catch suspicious trading activity and price manipulation on a real-time basis. What explains the regulator’s silence through different political regimes?" Simple. Slave-Master relationship!
1 year ago
1. She meant silent spectator. 2. SEBI seems to have been more than silent spectator - it has been partner in crime - most likely under direct orders from the PMO.
1 year ago
The famous question again arises: "Who will regulate the regulators?"
Kamal Garg
1 year ago
SEBI has definitely failed on many counts of successful prosecution only because of the fact that the investigation and fool proof case file with all the required documents are not on record to prove an accused in the court of law. So much so that most such cases are even reversed at SAT level, leave at the higher level.
I think one of the culprit is when you appoint a retired bureaucrat to such post and that too, an accommodative and pliable bureaucrat, then you would have a poor record of prosecution.
1 year ago
Nothing has changed for DRI SEBI RBI ED since CONg rule to Modi's. one step forward 2 step back.
Kamal Garg
Replied to ashokaprasanna comment 1 year ago
Or rather, two steps forward, one step backward.
1 year ago
Factual, incisive and scathing. That SEBI is lax and does job perfunctorily is known. From the facts given, it is clear SEBI is manageable, and those who get dictated by invisible hand get post retirement sinecure! This is bad for the country ????
1 year ago
SEBI is definitely at fault and it is very clear that in the Colo Scam ,two orders being passed and contradictory stance exposes the WTM. It is time that SEBI has to appoint members and officers which are above board and take the matters seriously, especially when India is growing at super speed and needs to be believed internationally for their governance. Financial governance has to be at the uppermost when you expect foreign funds to come in for investments.
Meenal Mamdani
1 year ago
Excellent article as expected from MoneyLife.
Amazing that India has managed to attract as much foreign investment as it has over the last several years while the regulator has been incompetent and shown up publicly. Or do the FII hope to have their wrongdoings too brushed under the carpet!!
Financial Times, London has excellent articles on the Adani affair. I have asked their readers to subscribe to MLF newsletter if they want to find out information about Indian companies.
1 year ago
moitra shd be asked what she has to say in tmc rules kolkata being hub of child trafficiking.we would love to have her reply to that.
Meenal Mamdani
Replied to suketu comment 1 year ago
This is irrelevant. You think gross incompetence at SEBI should be ignored because the parliamentary member has not questioned the Trinamool govt to your satisfaction.
Are you a chamcha of SEBI?
1 year ago
It is pertinent to mention,what is regulator, commissions,quasi judicial appointments made for.It was discussed that work load on judiciary can be reduced by such appointments.But it is seen by public that none of aim is reached by these bodies.In fact these have added to delay in justice dispensation to common public.It is seen that these appointments are for retiring judges and or beuracrates where there is no liability only earnings
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