Cheques amp; Balances

The judges were satisfied at the general statements of intent from SEBI and the DCA. The court order outlined recent actions such as the setting up of a co-ordination and monitoring committee assisted by seven task forces to identify vanished companies; instructions to the Department of Economic Affairs to look into the feasibility of a legislative framework for investor protection and instructions issued by the DCA for the Registrar ofCompanies to collate information on vanished companies. The judges concluded that they are satisfied that as soon as the seven task forces identify defaulting companies, action will be taken.

Coming as it does, three years after the death of the primary market, the Allahabad High Court order is bitterly disappointing for investors. They are left without even an assurance that action will be initiated even against a few offenders within a specified time-frame. Investors certainly do not share the court8217;s optimism. Had the DCA and SEBI been doing their job, the joint monitoring mechanism would have been set up without pressure from the prime ministers office and the filing of litigation by Midas Touch.

Fortunately, the anger against unscrupulous promoters is so high, that the issue refuses to die. Within days of the Allahabad order, the Investor Grievances Forum IGF filed a writ petition in the Mumbai High Court demanding an inquiry into more than 3500 bogus companies, which have misappropriatedinvestors money to the tune of Rs 25,000 crores8217;. The IGF case is very similar to the Midas Touch case. The petitioners are furious at the stock exchanges practice of delisting companies, which do not pay listing fees. This hurts the investors and allows companies to get away scot free, says the Forum. It points out that BSE has delisted 700 companies and another 600 have changed their names. The Midas Touch petition had also charged that delisting of companies by stock exchanges is illegal and helps the promoters vanish with investor8217;s money.

The question is, will the second petition be more successful than the now-disposed Midas Touch petition? Unlikely. I think that the Midas Touch petition has served the purposed of drawing attention to the magnitude of the primary market problem and demanding action. It has also exposed the attitude of the regulators. For instance, a counter affidavit filed by under-secretary R.N.Vaswani, on behalf of the DCA in the Midas Touch case categorically says that it is forstock exchanges to ensure that companies comply with listing agreements and that the companies act does not require the DCA to follow-up companies to see that funds raised by them from the public are utilised for the purpose for which they were intended. Nor does the act require the DCA/ ROC to keep a watch on such companies so as to ensure that they do not vanish after collecting public money8217;.

In practice however, the stock exchange have no punitive powers against delinquent companies except to delist them, and that hurts investors. SEBI too has no real powers. They are not even required to file their financial statements with it, and action by SEBI alone is not feasible.

Interestingly, SEBI has traced and submitted a list of 79 vanished companies to the DCA. There is, however, no sign of vanished companies being tracked in the peak years of the primary market scam 1995-96 and 1996-97. Instead of waiting to define and then trace all vanished companies, the joint co-ordination committee should begin toact. The petition filed by the IGF would serve a useful purpose if it asks the courts to examine whether the DCA, SEBI and regulators have acted to protect investors. Whether they have initiated action against vanished companies that have already been identified. Action against promoters, including imprisonment is of little use to investors if their own money is not returned.

The role and regulatory powers of the DCA, SEBI and stock exchanges is so confused and muddled that the only possible breakthrough will be if a dozen specific examples are taken up for exemplary action by the authorities. It would be far more helpful to investors if the IGF petition can get the courts to force the regulators to act within a specific time-frame against specific companies. The petition should also demand legal changes allowing SEBI to grant legal costs and damages to investors, rather than simply punish the promoters.

The joint co-ordination mechanism, will otherwise be a perpetual wild goose chase to create anexhaustive database of vanished companies and will serve no useful purpose.

Author8217;s e-mail: suchetadalalyahoo.com