Providing teeth to the tiger

Updated: Jan 15 2002, 05:30am hrs
The Securities and Exchange Board of India is entrusted with investigating into and prohibiting various types of market (mal)practices and price manipulations. After the 1992 scam shattered the complacency of the governments conscience, several market regulations were hurriedly introduced to protect the interests of investors and regulate the securities market.

These included regulations and guidelines to contain and end fraudulent and unfair trade practices, insider trading etc. The proof of the pudding is in eating, and the deficiencies in the existing legislation are being manifested in the loopholes as evidenced in rulings such as the Sterlite case by the Appellate Tribunal. Very recently, amendments were formally proposed to provide Sebi with proper teeth; probably as the Sterlite case had rendered it virtually toothless.

Sterlite Industries had in mid-1998 made a public offer for acquisition of INDAL shares, an offer which ultimately failed, even through the price was higher than that of the other, ultimately successful, bidder. Sterlites own share prices at that time had peaked to an all time high of Rs 350 per share. On the failure of the INDAL bid, the prices plummeted within a month to Rs 175.

Sebi carried out an investigation into the allegations of price manipulation and concluded on the basis of the materials before it that Sterlite had indulged in such manipulations by cornering a large chunk of its shares and providing loans through affiliates to the front jobber for that purpose. Sebi, in exercise of its powers under Sections 11 and 11B of the Act, prohibited Sterlite from accessing the capital market for two years and directed prosecution to be initiated against its directors.

In the Sterlite appeal, the scope of and effect of Regulation 4(a) and (d) of the Prohibition of Fraudulent and Unfair Trade Practices and the consequent exercise of powers under Sections 11 and 11B of the Sebi Act were dealt with. Briefly, the relevant regulations prohibited participation in transactions in securities with the intention of artificially raising or depressing the prices to induce the sale or purchase of the same or enter into purchase or sale with the purpose of causing fluctuations in the market price of securities. Sebi had arrived at the finding that these two charges of market manipulation were applicable to Sterlite.

The Tribunal did not question the finding of fact by Sebi that MALCO, an affiliate of Sterlite had provided funds to the tune of Rs 11.75 lakhs to purchase the shares of Sterlite to Dil Vikas Finance. It was further an admitted position that this was done at the request of some members of the governing board of Bombay Stock Exchange. The Appellate Tribunal, therefore, while not disagreeing with the facts on the basis of which Sebi arrived at its decision, came to the view that the transactions had to have the underlying intent of distortion of the share price and had to be made with an intention of artificially raising or depressing prices of securities to induce any other person to sell or purchase the same.

In spite of acknowledging the documentary basis on which the interlink between the jobber groups and Sterlite was established, the Tribunal shied away by holding that such evidence could not be held as conclusive as having been made at the companys behest. The Tribunal further held that price manipulation being a very serious offence, evidence relying on the basis of preponderance of probability is not sufficient to establish an offence of market manipulation. The Tribunal has compared the effect of such adverse finding to those of guilt in departmental enquiries and disciplinary action against practising advocates.

From this finding, the Tribunal has proceeded to deal with Sebis directions debarring Sterlite from accessing the capital market in pursuance of Sections 11 and 11B. Section 11 enumerates the functions of Sebi including adoption of such measures for the purpose of protecting investor interests and regulating market by prohibiting fraudulent and unfair trade practices. Section 11B is the enabling section which empowers it to issue directions to any company in respect of the matters enumerated in Section 11A. The Tribunal in the matter of Bank of Baroda vs Sebi had deliberated on the purpose and scope of these Sections and held that Section 11B is one of the executive measures available to Sebi to enforce its prime objective of investor protection.

The Tribunal has played on the words that Section 11B is limited to issuing appropriate directions and relying on cases unrelated to securities transactions has held that it does not empower Sebi to impose penalties since penalties have already been dealt with in Sections 12 and 24 of the Act. Section 11B, therefore, could at best be a preventative and remedial measure; therefore, Sebi had no authority to debar Sterlite from accessing the capital market.

Obviously, the powers of a body like Sebi should be spelt out and not be left to inference. The dangers of interpretation can operate to nullify the purpose of legislation, which can never be the intent.

Kumkum Sen is a corporate lawyer and a partner in Khaitan & Khaitan, a Delhi law firm