Let us consider the facts. Sebi acted quickly to hold its own order against India Bulls in abeyance after giving it an urgent hearing. Later, a Gujarat-based investor obtained interim relief from the high court. But Justice KS Jhaveris order only says, It shall be open to the respondent board (Sebi) to take appropriate action against the petitioner pending this petition, but only after hearing the petitioner. This is hardly a major victory to the petitioner, who had reportedly bought shares prior to their listing from Roopalben Panchal. As for the Andhra high courts stay order, we only have Karvys version of the nature of relief granted so far.
Will there be more instances where Sebi changes its mind after an interim hearing It is quite possible. After all, any sensible regulator would focus on cleaning the system and ought to be willing to reconsider an outright ban if the indicted intermediaries are willing to affect a demonstrable clean-up of operations and make amends for earlier mischief. The regulator also ought to do this for two other reasons. First, to avoid hardship to innocent investors who have nothing to do with the scam but will be put to the cost and hassle of moving their accounts. This amounts to a penalty to unconnected parties, since they are bound to pay fresh account opening charges. Sebi needs to find a long-term policy of compensating investors who suffer collateral damage following its disciplinary action against intermediaries.
The charge that Sebi ought to have given each intermediary a hearing before passing an order will always be open to debate. The fact is that the lack of data integrity at the depositories, their lackadaisical inspection of DPs and the shortage of intermediaries due to unbalanced fee structures were slowly eating the system from within and could seriously embarrass the country if comprehensive action is not initiated immediately. Even today, the market seems to underestimate the seriousness of data integrity issues and deficient supervision systems at the depositories (as proved by the systems audit of the National Securities Depository); so far the promoter organisations of the depository have maintained a studied silence, although they have been directed to initiate remedial action.
Another charge is that Sebis action (especially without a hearing) has permanently damaged the reputation of intermediaries indicted by it. Well, one only needs to look at the website of the Securities and Exchange Commission (SEC) of the US. The bluest of blue chip international names in investment banking, fund management and even bourses themselves (New York Stock Exchange and Nasdaq included) have faced major scandals and gone through a complete revamp of operations and management without any lasting damage to their image or credibility. In fact, the Indian media continues to hold them in high esteem, fete them and unquestioningly publish their research reports with nary a question or a doubt.
The key concern now is the need to reassess supervision of despositories
As also the necessity to fix the fee-structure to make DPs viable
The Union finance ministry also needs to get involved in the clean-up
The key concern arising out of Sebis findings is the need to reassess regulation and supervision of depositories and to fix the fee-structure to make the DP business viable. This can be done by asking companies to bear a part of the costs, since they are the biggest beneficiaries of the depository system. Most leading companies are willing to share the cost burden, but for some strange reason, the depositories have refused to evolve equitable fee structures.
The finance ministry also needs to get involved in the clean-up. The ministry is responsible for entrusting the Tax Information Network to the depository without examining issues of regulation and supervision. The ministry needs to decide if a separate depository statute is warranted and ensure adequate supervision of depository activities that are outside Sebis regulatory jurisdiction. There is no way that the repository of a wide range of peoples investments and financial information can operate under a vague supervisory structure.
Sebi also needs a policy to mitigate the collateral damage to innocent investors due to its orders. This should include a mechanism to smoothly transfer accounts from one intermediary to another, with the financial burden of such transfers being paid out of the fat investor protection funds that are lying utilised with stock exchanges or the ministry of company affairs.