As part of a settlement between the Securities and Exchange Board of India (Sebi) and the Anil Dhirubhai Ambani Group, relating to an investigation into the alleged use of money borrowed overseas in the local stock market, Anil Ambani and four top executives of two companies promoted by him will not be able to invest in listed stocks until the end of 2011. Further, two companies, Reliance Infrastructure and Reliance Natural Resources Ltd (RNRL), must stay away from the secondary market till December 2012, according to a Sebi order issued on January 14, 2010. As part of the consent order, Ambani and the four executives have paid a settlement charge of Rs 50 crore, ?without admitting or denying the charges?.

When the case first came to light sometime in August last year, it was probably the first time that Sebi had asked an industrialist of the stature of Anil Ambani to appear before it for a personal hearing. Even if corporate India didn?t quite say so, it sat up and took notice of the regulator?s move. Though purists wouldn?t have liked the matter being resolved through a consent order, Rs 50 crore is a record amount for Sebi, which has probably recovered about Rs 100 crore between end-2007 (when the practice of consent orders was first initiated) and now. Before that, between 1995 and 2007, the regulator must not have managed to extract more than Rs 15 crore. Indeed, a closer look at the case reveals that Sebi has done the right thing. If a company has violated Reserve Bank of India?s regulations relating to borrowings via the ECB route, it is not a breach of rules that falls under Sebi?s jurisdiction; that should be investigated by those responsible for looking into FEMA violations. Sebi?s job is to ensure that promoters don?t play in their own shares and that if money is invested in stocks it has to be in other stocks, and a proper mention of this is made in the published accounts of the companies. To that extent, Sebi has done well to wrap up the case quickly and extract the penalty.

The idea, after all, is not to hurt or destroy a listed company, in which there are minority shareholders. So, by asking the individuals concerned to cough up Rs 50 crore, and also allowing the companies involved to access the primary market, the regulator has attempted to protect minority shareholders. At the same time, Sebi has made sure that the message is not lost on those involved. The fact that Anil Ambani found it necessary to hold a special press conference on a Sunday afternoon, after officials repeatedly clarified their stand on the two preceding days, is proof that the message has gone home. In a country where industrialists often attempt to use their political connections to pressure regulators to get their way, it?s important though that Sebi doesn?t give in.

The Securities and Exchange Commission (SEC) too often enters into plea bargains, sometimes for what would seem to be fairly serious offences. In a recent case, the SEC charged NutraCea, three former executives and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate sales revenues at the Arizona-based company. NutraCea and four of the five individuals agreed to settle the SEC?s charges against them, and the SEC?s litigation continues against the fifth individual. Typically, Sebi entrusts cases where those alleged to have violated a rule, approach it to reach a settlement, to an independent committee headed by a retired high court judge. In about a third of the cases, the committee has concluded that the terms offered by the offender aren?t good enough and Sebi has either renegotiated the terms or taken the matter to the court. For sure, consent orders have helped reduce litigation, which is a good thing, and the use of an independent committee is a great initiative. However, if too many cases are settled through the consent route, the law itself may not evolve, leaving the market bereft of an understanding of what the regulator?s or the court?s interpretation of a certain issue is. Also, if the government is serious about bringing offenders to book, it needs to ensure that Sebi has the finances to hire the best lawyers. That would give the regulator the confidence to take on even the biggest industrialists.

shobhana.subramanian@expressindia.com