SEBI must bite now

S. Vaidya Nathan

THE SECURITIES and Exchange Board of India (SEBI) has come to a stage where it needs to shift its focus from mere regulation-making to implementation.

And unless it does so quickly, all the good work done in putting together an acceptable regulatory framework for most sections of the securities market may fall apart.

For much of the past decade SEBI was active framing regulations, some of them even twice over (for instance, those on IPOs, mutual funds and takeovers).

Indeed, SEBI should be proud of its report card in this area. And as far as regulations go, it is now more a matter of fine-tuning them to the requirements of the day. SEBI has set up several small committees covering various areas such as the primary, mutual funds and secondary markets and based on their recommendations announces changes every now and then.

But it is a completely different story when it comes to the implementation of regulations. While it has taken some decisions of note, the overall track record is nothing to write home about. This has to change.

So far, SEBI's implementation has been ad hocism. There is no due process. There is no proper system to announce major decisions. And there is a distinct lack of empirical evidence to support some of the changes in the regulatory framework. One cannot help feel that at times even extraneous factors may be an overriding concern in the decision-making process.

*The first thing that strikes one about SEBI as an implementing agency is that it has done precious little to tackle price manipulation, informed trading and insider trading. The malaise cannot be eliminated or even reduced to a manageable level. But that is no reason for not initiating action at least in cases where there is evidence of price manipulation. Not a single major corporate announcement in the last two years has gone without a significant price action in the run-up to the announcement. This phenomenon is not confined to the stocks of small- and medium-sized companies, but also covers major players whose scrips are actively traded and widely held.

*Be it GESCO Corp, Zee Telefilms or Bombay Dyeing, the price trends have been a giveaway. Sometimes there are indications that SEBI has called for the trading details from the stock exchanges, but little is heard after that. The process of initiating action in such cases can at least be systematised irrespective of the final outcome of the SEBI investigations. Unless SEBI bites sharply, baring its teeth may have little effect. Even a few success stories in disgorging profits of price manipulation, informed trading and insider trading could act as a deterrent. At the very least, it would make investors aware of the price excesses in some stocks.

*Over the past two-three years, SEBI's lack of action over companies disclosure of information to select analysts stands out starkly. Many a research report has contained information that reached the public at a much later stage. There are indications that in many cases -- in New and Old Economy stocks -- select institutional investors managed entry considerably ahead of a major corporate move and cut exposures subsequently.

*If earlier the market was tilted heavily in favour of the brokers who were offered price sensitive information almost routinely, now institutional investors and some operators are the favoured ones. Efforts to correct this creeping distortion has to come quickly or else it could undermine the objective of capital market development. The US' Securities and Exchange Commission has come up with the Regulation Fair Disclosure which requires price-sensitive information to be made public at the same time and not to select analysts and investors ahead of the rest. Regulation FD, which was implemented on October 23, may not stamp out the malaise of selective disclosure, but at least it would make the companies wary.

*The lack of a due process in any major investigation has tended to detract from the credibility of implementation by SEBI. This was very evident in the ACC-Gujarat Ambuja case. SEBI had decided that Gujarat Ambuja would not be required to make an open offer, as its stake was not adequate to change the board composition in its favour, and hence the `change in control' clause was not triggered. But nowhere has SEBI clearly put down this decision. The first time something in writing was put was when the regulator had to a file an affidavit following a court directive.

*Even the fact that it was looking into the issue became known only through media statements made by the SEBI top brass. Even the SEBI website contained nothing on the final decision, which does not speak well of the quality of process followed by the regulator in such cases. So also in the Sri Vishnu Cements' investigation, where neither the report nor the decision was made public. Whether in these cases extraneous factors played a part becomes a matter of concern if one considers the manner in which SEBI handled the issues. There have been other such instances.

It is time SEBI moved on to some high quality and timely implementation of its key regulations. Something has been done on this front, but not enough to inspire confidence in, and awe of, the regulator. If the move to an effective implementation mode requires the improvement of infrastructure, including personnel, then SEBI should address these aspects expeditiously.