SEBI Has Been Repeatedly Embarrassed by Overturned Orders in Major Scams

Over the past two decades, SEBI has either operated on the directions of the finance ministry or its activities have flown below the radar of any public or political scrutiny.

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. 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 Rs 20,000 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.”

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 Research, 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 3,000% 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 January 23, 2023, when it all but threw out SEBI’s initial order asking NSE to disgorge Rs 625 crore with interest (and slashed the payment down to Rs 100 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 Rs 9,000 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 R s1,800 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 Rs 813 crore and asked those mentioned above and SRSR Holdings to pay the sum with 12% 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.

This article was originally published on Moneylife.