Cheques amp; Balances

The preamble to the SEBI Act places investor protection ahead of its developmental function and if protection and grievance redressal is the yardstick then SEBI8217;s performance does not look half as good. Almost half the complaints received by the Consumer Education and Research Centre CERC of Ahmedabad, which is the largest investor body in the country today are from investors. CERC8217;s experience shows that so far as consumer complaints are concerned, it has a high success rate in getting compensation, repair or replacement of goods, but when it comes to investor complaints it has all but drawn a blank. A few cases of lost share certificates or unpaid dividends may have been resolved but they are insignificant and depend more on cooperation by companies.

There have been fourmajor channels of large-scale misappropriation of funds in the last eight years which have caused huge losses to investors. These are vanishing companies, fixed deposits, plantation companies and mutual funds. Of these, fixed deposits and plantation company defaults are being blamed entirely on investors8217; greed and their foolish investment in unsecured instruments. No attempt was made to regulate these companies or to check into their activities until the CRB group simply collapsed and the panic triggered by its collapse caused the plantation and finance company bubble to burst.

A few promoters have jailed under the provisions of the Indian Penal Code this is cold comfort to investors who have yet to see the colour of their money. In fact, both the RBI and SEBI have been most reluctant to take on the responsibility of regulating both fixed deposits and plantation companies. In contrast, the Securities and Exchange Commission of the US fought a long and hard battle to bring plantation-type companies underits regulatory purview.

Then there are the quot;vanishing companiesquot; who have collectively caused more damage to individual investors than the securities scandal of 1992. Thousands of companies raised several thousand crores of rupees of public money and simply vanished, leading to a four year collapse of the primary market. None of the promoters of these companies have been caught, punished or prosecuted as yet. Initially, SEBI and the Department of Company Affairs DCA blamed each other for inaction, later when the Midas Touch Investors Association and the Investor Grievances Forum filed litigation, they set up a co-ordination committee and five task forces which were conducting a leisurely inquiry. They even assured the courts that DCA-SEBI co-ordination would lead to concrete action against vanished companies. Not only has this failed to happen, but last week, SEBI dropped a bombshell.

It now wants the entire business handed over to the police for action under the criminal procedure code. Did it takeSEBI five years to come to this conclusion or is this another example of the indifference with which it views investors problems?

So far, SEBI has sent show-cause notices to the directors of 80 companies identified by it as having quot;vanishedquot;. The names of these directors have not yet been put up even on SEBI8217;s website, so there is no way of knowing who they are and if they are associated with any other companies. Top SEBI officials have claimed in internal meetings that none of these 80 companies have any false statements in their prospectus. This is rather strange, because so many investors who have lost money in vanished companies can reel of details of the personal wealth amassed by promoters after the public issues. SEBI8217;s declaration that economic offences should be tried under the IPC after five years is too late for investors. It also does not provide for investors getting back their money.

If SEBI wants to transfer responsibility of vanishing companies, then its investigation department would haveto be scaled down and the economic offences cell of the police strengthened dramatically. This is absurd when there is already an established market regulator in place. SEBI simply cannot be allowed to shirk responsibility. Investor protection begins to make sense only if the money misappropriated by industrialists is confiscated and returned to investors and penalties imposed on wrong-doers include cost and damages to investors. This is not the job of the police, it has to be done by the capital market regulator.

SEBI8217;s punitive action in the Jaltarang Motels case last week is another instance of needless delay. The action comes five years after the company went public, that too in a fairly open-and-shut case. The promoters were accused of price-rigging and there was a demand to refund investors money. More importantly, the two banks, Bank of Baroda and Union Bank of India, had illegally transferred money to the promoters even before it granted listing by the stock exchanges. Collusion betweenbanks/investment bankers and promoters was a common factor in vanishing companies too. What is unknown to the public is that SEBI8217;s punishment of Jaltarang has only been the result of a persistent campaign by the CERC against Jaltarang.

The same attitude prevails with regard to book-building rules which SEBI is reviewing after a litany of complaints from investors and market intermediaries. Instead of discussing the problems with the complainants SEBI chose to review the norms with merchant bankers themselves. Since they are the biggest beneficiaries of discretion granted by the rules, they naturally worked hard to block any change.

Finally, there is still the case of BPL, Videocon and Sterlite. The three companies were caught conniving with Harshad Mehta and other brokers leading to the payment crises of June 1998. The brazen collusion between brokers and promoters continues even today because of inaction in the previous cases. SEBI8217;s reluctance to punish these promoters because of their political cloutwill remain a blot on its image as an effective regulator.

Author8217;s email: suchetadalalyahoo.com