The Hindu Business Line : Tenuous action

THE FIVE-YEAR BAN that the Securities and Exchange Board of India has imposed on Mr Samir Arora, former Chief Investment Officer of Alliance Capital Mutual Fund, rests on tenuous grounds. SEBI's final order does not provide adequate reasons to justify the extension of the ban from one year to five years. If the 2003 interim order failed to back up the findings and penalty, the final one is no different. The ban has been extended on the grounds of insider trading, unfair trade practices and lack of compliance with disclosure norms under the Takeover Code, the basis for the penalty imposed earlier.

Even if one assumes that SEBI has a strong case, the grounds on which the action has been taken against Mr Arora are equally sufficient to haul up the fund manager, Alliance Capital. But this has not been done. The board of the asset management company and the trustees of the mutual fund have access to regular reports on how the fund is managed and as such they cannot escape their fiduciary responsibility. The view that Mr Arora had acquired a larger-than-organisation aura does not take away from the essential principle of accountability of the fund manager for the actions of its employees. In any case SEBI had indicated several months ago that it was examining the role of the organisation. In the event, the regulator's reluctance to follow through on the logic of its own action is surprising.

As for the charges of insider trading in the Digital GlobalSoft stock by Mr Arora, SEBI has relied on the evidence of interaction between the fund manager and top company officials and the fact that Alliance Capital was the second largest shareholder. It is routine for fund houses to be in touch with companies in which they are invested or intend to invest. No doubt Alliance Capital sold its holdings in Digital GlobalSoft a few days after Mr Arora expressed a positive view on its merger with Hewlett Packard's IT services affiliate in India. But that in itself is not adequate ground to allege insider trading though ethically the action may have been questionable. SEBI has alluded to Mr Arora having access to the swap ratio for the merger (this was announced a month after Alliance exited the stock). But it has not pinned the responsibility either on the company officials and/or the audit firm that fixed the swap ratio; it has, however, maintained that the swap ratio was in a sealed envelope. SEBI providing a mere chronology of events in support of its charge against Mr Arora may not stand scrutiny in a higher legal forum. This would also be true of SEBI's charge against Mr Arora's non-compliance with the Takeover Code disclosure requirement and his alleged role in causing a fall in assets under management.

SEBI could have built a stronger case vis-a-vis investment decisions that may have placed the interest of FII sub-accounts ahead of domestic investors in the mutual fund (both were managed by Mr Arora). It could have also hauled up the fund for not discharging Mr Arora from his fund management responsibility when he decided to bid for Alliance's India operations. Having missed these and made out a weak case, SEBI now runs the risk of yet another of its orders in a high-profile case being overturned, eroding its credibility in tackling capital market crimes.

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