The imposition of orders of Securities and Exchange Board of India (Sebi) have begun to hurt where it should. This is great and is just what the securities market in India needed. The change of gear in the market regulator has taken time to happen; in fact, almost two decades from the time Sebi got punitive powers. Thursday?s orders on two Sahara firms are a clear endorsement of this line of action at Sebi. The reason why Sebi is able to impose these orders is the amount of investigation and research skills it has built up over the past couple of years. The first indication of this became evident when a far higher percentage of its orders began to be upheld by the Securities Appellate Tribunal. The orders now pass two tests, that of clarity in the narration of offense (something that the few thousand page charge-sheets of agencies like CBI lack) and in marshalling of evidence to uphold the charges. This is the reason why Sebi has been able to move away from inflicting token punishments to damages that make the companies take corrective action.
An impressive use of the Sebi Act in this context is the use of the consent route. Since it does not put any bar on the amount or type of associated damages that can be imposed on an offending entity, UK Sinha?s team has used it actively. In the case of Reliance Infra and Reliance Power, as well as the HDFC AMC front running, the regulator used this route. The Sahara order is, of course, a clear penal order. But here too Sebi creatively used the draft red herring prospectus filed by Sahara Prime City to go after two unlisted entities and bring them to book. The two companies had floated recurring deposit schemes for the public but clothed them as optional fully convertible debentures. So, every time a depositor paid, say a hundred rupees, to these companies, the company treated it as a debenture while the investor was given a passbook. Sebi held this is a parabanking activity for which the Sahara group had no permission. The Optionally Fully Convertible Debentures term used was just a disguise to pass regulatory tripwires. The order to refund the money to the investors with interest, therefore, follows from this analysis. The group has presumably learnt a hard lesson. What makes the order more significant is that it was passed in less than 45 days after the Supreme Court asked Sebi to clear the case expeditiously. The case will now travel to the Court, which will take cognisance of the order. For the investors, it leaves behind the comfort that the markets are safer?the desideratum of a good regulator.