If, indeed, investment decisions was based on unpublished, price-sensitive information, the system must have reined in such actions. Even if this aspect was not known, the sheer size of exposures in such mid-cap stocks — where price swings on buying and selling can be sharp — should have attracted scrutiny.

These exposures, coupled with a few others such as SSI and Zee Telefilms, considerably increased the risk profile of Alliance schemes.

Birla Mutual and Alliance Capital were known to allocate a large portion of assets to a small number of stocks. This track record should have alerted the directors of the AMC and the trustees and forced them to keep a close tab on the operations. But the trustees seem to have failed in this.

Mutual funds are also expected to have internal control systems — in the dealing room and for key personnel — to check any transgression. A fund such as Alliance Capital has been around on the US mutual fund scene long enough to have such systems, and to also pass them on to its Indian affiliate.

Even if one leaves aside the insider trading charge, the failure of the system to detect violation of routine, day-to-day disclosure norms relating to the Takeover Code does not show up the fund in good light.

Companies left untouched: SEBI has, in its order, indicated Mr Arora obtained unpublished, price-sensitive information. Disclosure of such information is as serious as is profiting by trading on it.

This being the case, it is a surprise that SEBI has, at least so far, refrained from pursuing any action against the companies in question. Predictably, Digital Equipment and Mastek have issued statements that there is nothing amiss at their end and that they would co-operate with the regulator.

A progressive move: There are gaping holes in SEBI's case. But one change for the better is its move to rely on circumstantial evidence to take up cases of price manipulation/insider trading. The charge of insider trading in Digital Equipment against Mr Arora is based on circumstantial evidence. This makes SEBI's task of proving the charge much more difficult.

But only if SEBI pursues this line will it be able to investigate, and bring to the fore possible cases of price manipulation. Tackling price manipulation, driven by insider and informed trading, is one area where SEBI's track record has been indifferent. Just one proven charge of insider trading in Bayer ABS and an as-yet unsettled charge against Hindustan Lever make up the numbers.

This is insignificant in an environment where price manipulation, ahead of key corporate actions, is still rampant. Taking up a sizeable number of cases, and slapping charges where the circumstantial evidence is fairly strong, is one way by which SEBI can bring such instances to the fore. Where the charges stick, penalties should be so stiff as to serve as a deterrent and disgorgement of profits (recovering ill-gotten gains) must be ensured. This is an approach that the US Securities and Exchange Commission has followed with some effect.

SEBI should also move to a system of investigating every key corporate announcement for potential price manipulation. Only this will preventsuch activities. Insider trading can never be eliminated, as the US experience shows.

Not an isolated case: The issues that have been raised in the Samir Arora case are not, by any means, isolated instances. Especially during the bullish phase of 1999-2000, there were indications that fund managers could be acting in tandem with operators and promoters.

Perhaps, in a slightly less prominent way, such practices prevail now as well. The difference is that the others involved in this process do not have a high-profile, public face, as does Mr Arora. All mutual funds need to be monitored to ensure that such instances are not repeated, and that they are on the right side of the law. This is important for the credibility of the fund industry as a whole.

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