The Hindu Business Line : `Judicial scrutiny of disgorgement order may be inevitable'

The Securities and Exchange Board of India has recently issued a `disgorgement' order after probing into the IPO (initial public offering) scam. "For the first time in the history of Indian capital market, SEBI or any regulator has used the disgorgement tool to extract the unjustly enriched amount," says Dr Sanjiv Agarwal, a Jaipur-based chartered accountant. Here, he takes on a few questions from Business Line.

Disgorgement is a new word for most investors.

`Disgorge' is from a French word that means to pour out something (funds in this case) or extract from the throat. Advanced Law Lexicon defines disgorgement as an act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. Unjust enrichment indicates that somebody has enriched unjustifiably, a benefit obtained from another, not intended as a gift and not legally justifiable, for which the beneficiary must make restitution or recompense, according to Black's Law Dictionary.

Your comments about the disgorgement order.

SEBI has so far issued two interims orders in the IPO scam, one in April 2006 and the present one, a few days ago. The earlier order restrained the parties from doing business, and the recent one seeks to disgorge the amounts that these parties apparently never got. The order may be good so far as its intent is concerned, but an order with grave financial implications, as the one in limelight, has to be final, not merely interim.

Have we zeroed in on the `unjust' beneficiaries?

Unjust enrichment has been to beneficiaries who were the investors to whom shares were allotted and who sold the same to enjoy the fruits. One cannot say that the depositories or the depository participants (DPs) are the real or ultimate beneficiaries. The only benefit, which could be, if at all, attributed to them is the fee charged by DPs and depositories on such accounts, or interest earned by financing banks for such IPOs.

Is the order legally sustainable?

The order itself states that it is not intended to impose any demand on the defendants under the law (will a demand under the law come separately?) but is only intended to deprive them of the fruits of their alleged illegal behaviour. The order comes as one-in-all order where in it has been ordered that the disgorgement amount has to be paid jointly and severally by all the entities. What happens if a few do not pay or comply with the order? Since the liability is joint and several, it will fall back on the others. The order does not talk of fine, penalty or punishment, but of disgorgement.

Aren't there enough powers under the SEBI Act?

The order has been issued under Sections 11 and 11B of the SEBI Act, 1992, which do not allow SEBI to issue an order of `disgorgement'. The powers include impounding and retaining proceeds or securities in respect of any transaction under investigation, or directing not to dispose of assets under investigation. A judicial scrutiny of the order seems, therefore, inevitable.

What can be the likely fallout?

The order states that all parties are at liberty to seek contribution/ indemnity from any party, which they believe (SEBI does not want to be a party) is liable to a greater extent than quantified therein, as also from individuals and companies that have been involved in the IPO scam but not named in the order. This is likely to open a Pandora's box of further disputes and cross-cases by various parties against one another.

How to avert such scams in the future?

The system broke at three levels. One, at the banks' level; a large number of accounts were opened with common address, and loans too were given flouting KYC (know your customer) norms. Two, at the DPs' level, where a large number of demat accounts were opened with common address. And three, at the registrars' level, where multiple applications could have been detected. The scam highlights the need for a stricter surveillance. More important than the disgorgement order is that the confidence of investors in market intermediaries and the system isn't dislodged.

More Stories on : Interview | Economic Offences | IPOs | Regulatory Bodies & Rulings

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
`Demat accounts help in smooth functioning of market'

Funds of funds yet to achieve mass appeal

Dena Bank to distribute ING MF products

Metal stocks regain lustre

Assam Co raises $46 m

Hexaware Tech: PeopleSoft hopes

Man Industries: Betting on performance

Jupiter Bio plans to raise Rs 95 cr

Volatile movement

New York Life's PE picks up 10.7% in S P Apparels

SEBI curbs on Cyberspace

Rates in India, China may nudge up: Morgan Stanley

`Judicial scrutiny of disgorgement order may be inevitable'

Advancing stocks outnumber declines in dull market