The Hindu Business Line : Gaps in SEBI's case

THE BAN IMPOSED by SEBI on Mr Samir Arora, Chief Investment Officer of Alliance Capital Mutual Fund, preventing him from participating in any domestic stock market activity on charges of insider trading is a watershed in market regulation, reflecting as it does the regulator's commitment to ensuring orderly market conditions. It is another matter that SEBI's prosecution record has not always inspired confidence. Its success on this score has been limited, the convictions often being overturned on appeal. Even in the US, the eventual conviction of market participants on grounds of insider trading happens only in a few cases — though the Securities and Exchange Commission has tried to pursue such offences actively in several instances over the years, making insider trading a costly proposition. If the latest SEBI effort leads to a similar outcome in the Indian market, it would be a welcome development.

But the key issues that SEBI has left unaddressed detract from the quality of its investigative actions. Foremost is the absence of charges against directors of the asset management company as well as the board of trustees of the trustee company. If Mr Arora did indeed, as charged by SEBI, indulge in stock market-related malpractices, SEBI ought really to explain why it does not find those overseeing his actions guilty of misdeed, even of a secondary nature. Funds are expected to have internal control systems to prevent precisely the kind of actions that Mr Arora stands accused of. A charge against the trustees as well as its key employees would have put SEBI's case on a solid footing. Also striking is the absence of charges against the companies that have been named as aiding Mr Arora in insider trading. They may or may not have benefited in pecuniary terms. But sharing unpublished price-sensitive information with a select fund is a serious issue by any yardstick, and such actions must come under the ambit of insider trading.

SEBI's other charge against Mr Arora — that he scuttled the sale of stake of Alliance Capital in its Indian operations and, in the process, caused an erosion in net assets and NAVs of the fund's schemes — is tenuous. Whenever funds are confronted with changes in ownership structure in the asset management company it is common for key management personnel to disclose their future course of action. Viewed thus, Mr Arora only did what any person in a similar position could be expected to do. In any case, the flight of capital is again a common feature as no investor likes uncertainty. So erosion in the fund's corpus might have happened even had Mr Arora not revealed his mind. His act of bidding for a stake in the asset management business cannot also be regarded as out of place. There have been other instances of employee groups buying out promoters' stake in the asset management business. The vacillation and opacity shown by the US principal, Alliance Capital, in disclosing to the market its intentions could have been more responsible for the fall in net assets than Mr Arora's speaking `out of turn'.

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