What is Sebi thinking?

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SummaryOrder says Tayals were funding others to buy benami shares and then allows them to trade again!

Proving former Sebi member KM Abraham’s charges that he was under pressure to go easy on the Bank of Rajasthan’s promoter Pravin Kumar Tayal and his group of companies was always going to be an uphill climb, but Sebi has just come out with an order that tends to lend credence to what Abraham is saying. You have to read the order in its entirety (http://goo.gl/Cfe9F) to see just how outlandish the arguments in it are.

The facts, as recounted in the order: Bank of Rajasthan, which was controlled by Tayal and his group of companies, gave out wrong facts about the holdings of its promoters. Instead of the shareholdings falling to comply with RBI directives, from 44.18% in the quarter ending June 2007 to 28.61% by the December 2009 quarter, according to an RBI complaint to Sebi, they were actually rising. This was done by the Tayal group giving funds to other companies to buy Bank of Rajasthan shares. In other words, the shares were held in a benami fashion, and no disclosures were made about this either to the stock exchanges or to shareholders.

Since all of this is punishable by various regulatory authorities, Sebi passed an interim order when Abraham was still there, banning 100 individuals/companies involved in this fraudulent exercise from accessing the capital markets. Sebi’s new order doesn’t challenge any of the facts, indeed it reinforces them when it says “there is substantive material on record to suggest that the entity was involved in similar manipulative activities in the past” and talks of “continuous non-adherence to the law and the repeated nature of violations by the entity.”

Those interested in what the ‘similar manipulative activities in the past’ were should read Harshad won’t ever really die (http://www.indianexpress.com/oldStory/2457/)—the story is so old, even the url says ‘old story’! The short point is that an investigative agency, the Central Economic Intelligence Bureau (CEIB), found evidence of various Tayal group firms transferring R300 crore to related firms to buy shares of the Bank of Rajasthan in order to get control—at that time, RBI had limits on individual shareholdings in banks. This report was passed on to all concerned agencies and, believe it or not, the Department of Company Affairs fined the group R58,000 (yup, that’s rupees fifty eight thousand!) for lending excessive money to associates while not taking the shareholders permission first. Since DCA compounded the offence, the case got closed and even RBI found no reason to stop Tayal from being chairman, a decision RBI probably rued later since it got Bank of Rajasthan to amalgamate with ICICI Bank.

But let’s get back to the Sebi order, which lists, in the ‘factors to be considered for continuation of directions’, not just “continuous non-adherence to the law and the repeated nature of violations by the entity” but also says “investigation report reveals that the aforesaid entities (Sr. No. 1 to 92) evolved an elaborate scheme by which their actual holding in a bank could be camouflaged and the banking sector regulator could be placated by conveying an impression that there is a continued effort on their part to reduce their holding to the desired level even while actually increasing their holding.”

Having put it that way, the order says that, based on the RBI complaint, it does appear the offence is very serious. But was it really serious, the order then goes on to ask. This is a beauty, so the full quote here: “It would also be safe to presume that if the RBI itself had considered the conduct of the promoters extremely serious then either it would not have allowed the merger or would have done so with required caveats for the promoters.” RBI, by the nature of its job, doesn’t want to shake public confidence in the banking system, so generally arranges bank mergers instead of forcing a bank to close down—this is something Sebi is presumably aware of, but it chose to use RBI’s diplomatic-speak to trump it. After all, if RBI didn’t think the matter was serious, why would it write to Sebi on the matter? One wonders if this matter was taken up at the High Level Coordination Committee on Financial and Capital Markets (HLCC) which has been set up to discuss precisely such matters that can fall in-between the cracks in the regulatory system.

It gets better. Having taken note of RBI’s concerns and dismissed them as mere posturing on RBI’s part, the order asks what the chances are the group it says is a serial offender will indulge in such activities again. Not much, it concludes, since the Tayal shareholdings in ICICI Bank are very limited … And were the offences really that serious? As a baseline, the order says, “the securities regulations are disclosure-based and the securities market regulator does expect that all disclosures should be true and fair.” But, and this is the fun part, “I am of the opinion that such an offence would have been considered as very serious or fatal if the wrongful disclosures would have led genuine investors into trades that would eventually expose them to much greater risk.” So, “purely from a securities market point of view, the severity of the offence could be considered not very grave.”

In the event, the ban on the entities has been lifted while adjudication proceedings are to be initiated against them. In other words, a financial penalty perhaps, and the companies are free to trade again. This is something the HLCC needs to take up seriously—also read the story of Home Trade in the Harshad column mentioned earlier—since this undermines the very reason why it was set up.

sunil.jain@expressindia.com

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