The Hindu Business Line : Betting growth of market by soft-pedalling follies

IF YOU'RE looking for some good entertainment, do not watch one more of those `dragon' movies with chases and fights, but read about the punch-ups that happen in the world of securities. Which is what I did by accessing the recent orders of the Securities Appellate Tribunal (SAT) posted on www.sebi.gov.in.

One of the cases that the Securities and Exchange Board of India (SEBI) has on its site is about Cameo Corporate Services Ltd, decided by SAT in the first week of December. The company that caters to "about 250 companies with more than 15 lakh investors" was upset that SEBI had imposed a penalty of Rs 7 lakh for the alleged bungling of the Indian Overseas Bank public issue in 2003. SEBI's enquiry found that Cameo was responsible for allotment of shares in the physical form to 16 applicants (among the top 100 allottees) though they had opted for the demat mode; these included banks, financial institutions, mutual funds and other institutions. For them, this caused `undue hardship' because they were prevented from selling the shares immediately after listing. SEBI's inspection also found 149 applicants allotted shares in the physical form although they had preferred to receive shares in demat mode.

What weighed against Cameo was that SEBI felt errors of this type "at a time when the primary markets are witnessing the revival of the interest of retail investors" would erode investor confidence in the infrastructure of the capital market.

Cameo, which has been in the business of handling of public issues of companies and share transfer work as registrar and share transfer agent (STA) for the last about 12 years, submitted that errors were due to `unprecedented response' to the public issue. While IOB's first public issue in 2000 received 1.47 lakh applications, there were 7.5 lakh applications for the 2003 issue, surpassing the expectations of many. Professional fees that the bank paid to Cameo for acting as Registrar in each of these cases was Rs 8 lakh.

Cameo received from 174 branches of the bank, 4.76 lakh applications, way beyond the three lakh that the company's `logistic arrangements' were prepared to handle. With stringent deadlines `relating to post-issue activities' breathing down its neck, the company said it came under `tremendous pressure to complete the assignment' within about 15 days.

The company was "constrained to outsource some part of data entry work to outside agencies"; there were `data entry errors' or `punching' mistakes, "mostly due to investors' mistakes" such as `illegible handwriting', Cameo claimed. However, on the illegibility issue, SEBI's inspection found that the handwriting in those applications was in fact legible.

At the tribunal, Cameo laid out its `excellent track record' — of having handled "185 public/rights issues", and of familiarity with "regulators, intermediaries and investors of the capital market". For Henkel Spic's public issue, Cameo said it had handled "nearly 12 lakh share applications'; and in the right issue of Essar Steel, it had processed about 5 lakh application forms. Thus, its work as Registrar had "an unblemished reputation and performance record" and it had at no time committed "any breach or contravention for violation of any rules, regulations and provisions of SEBI Act and/or of any Stock Exchange".

SAT couldn't disagree that Cameo had committed `minor errors', and that SEBI was right in imposing the penalty. Yet, since Cameo had attended to complaints speedily, SAT reduced the penalty from Rs 7 lakh to Rs 50,000. Another sop came in the last line of the Tribunal's order, considering the `unblemished reputation' of Cameo: "That this penalty ought not be treated as a stigma by the respondent for the future growth of the securities market."

When one finds that arguments that cannot stand ultimately manage to sit, the question that refuses to go away is whether the price of growth includes condoning of follies.

For an absolutely clean record

MOST recent SAT orders on SEBI's site are dated January 12, and Indsec Securities and Finance comes on top. In September 2004, SEBI had enquired into the allegations of synchronised deals by Indsec with ICICI Brokerage Services Ltd to buy shares of Global Trust Bank Ltd.

An enquiry officer probed the matter and recommended a four-month suspension of registration. Yet, a few months ago, SEBI `exonerated' Indsec.

But the very next day it passed an order against Indsec warning it "to be more careful in future while undertaking transactions in securities on behalf of their clients," and that any future lapse on its part in complying with the requirements of the Code of Conduct for stock brokers would invite stringent action. SEBI reasoned that Indsec had a duty, as a market intermediary, "to refrain from facilitating manipulative activities in the market". SEBI added that the manner and pricing of the transactions should have alerted Indsec about the possibility of market manipulation; in turn, Indsec should have advised its clients "against continuing the said transactions in the said manner", SEBI felt.

Well, that was what was said, but Indsec did not like the manner in which `manner' was used. Therefore, it argued at the tribunal that the word `manner' could refer only to "the alleged synchronisation of trades", but on that SEBI had not found Indsec guilty. Therefore, there was no question of any lack of due skill, care or diligence, contended Indsec.

SAT observed that it was a `mere warning' so there was no necessity to interfere with SEBI's order. You should note, however, that `warning' is a formal penalty under Regulation 13(1)(a) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.

But things took a different turn in SAT. Indsec filed an affidavit stating that the warning would result in cancellation of 90 per cent of its business because "institutional clients insist on dealing with brokers who have an absolutely clean record." SAT also noticed that the charges of synchronisation and price manipulation were not proved. To add to SEBI's woes, ICICI Brokerage had been separately exonerated by SEBI, inviting SAT to comment: "On a charge of synchronisation, it is not possible to punish one side while exonerating the other."

Ultimately, SAT set aside the warning, thus restoring the Indsec record to its clean shape, though apparently blemishing SEBI's record in sorting out things. Or, is it the other way about?

AccountSpeak@TheHindu.co.in

D. Murali

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