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Decade of SEBI regulations — When will they start biting?

S. Vaidya Nathan

IT IS ten years since the Securities and Exchange Board of India (SEBI) started to put in place the regulatory framework for the capital market. And investors have certainly benefited from the availability of more information and a contemporary secondary market structure.

SEBI began to put in place regulations a decade ago, starting with its Guidelines for Disclosure and Investor Protection (primary markets) in 1992. A fairly broad-based regulatory framework is now in place, though, going forward, SEBI has to make the market a friendlier place for investors by plugging the gaps in its performance, especially in the following areas:

Enhancing disclosures

Despite a plethora of disclosure requirements, there are still key areas where investors get precious little information of value. This mainly relates to big-ticket corporate action, such as mergers, de-mergers, acquisitions, asset sell-offs, takeovers and inter-corporate investments. In each of these areas, no doubt, the minimum information requiredunder the Companies Act is made available.

The disclosure level varies from one instance to another, though a lot of information is made available on the financials and the synergies of a merger. But the manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted.

The valuation of the two companies and the swap ratio are key aspects in any merger. No doubt, valuation reports are made available for inspection, but access is not easy for all investors. A comprehensive and mandated list of disclosures, like the one that accompanies an IPO or a rights offer, should be made available to all shareholders.

Aspects such as risks from these actions, mode of deployment of resources, the benefits, reasons for such action and management perception of the issues involved, can form part of such a disclosure list.

SEBI has much to do to make its existing disclosure requirements work better. This can be done only by making all disclosures available freely to every one. Take, for instance, mutual funds. Trustee and asset management companies are required to file monthly/quarterly reports with SEBI. These must be available on the Internet.

Only public scrutiny and comment can improve the level of disclosures mandated by SEBI. While this is not a job that SEBI can do on its own, due partly to resource constraints and also because of the varying types of expertise needed, it has made a small beginning with its Web site and must make sure as much information as possible is pumped in through this Web site.

Quality of decisions

The effectiveness of any regulatory body is judged by the quality of implementation, in general, and the rate of convictions achieved in cases where there are violations.

What is worrying is the poor rate of conviction in major cases. Virtually every SEBI decision involving major cases — such as Sterlite, BPL, Videocon, Anand Rathi and Associates and Hindustan Lever — has been overturned by the appeals process (or the Securities Appellate Tribunal).

This hardly sends the right signals about SEBI's penal actions when regulations are violated. There is clearly something seriously amiss if the SAT can overturn SEBI orders by pointing to lacunae on almost every possible ground — ranging from the merely technical aspects to substantive issues involving the regulator's subjective judgment.

This is what happened in the Sterlite, BPL and Videocon cases (they were barred from capital market access for their role in price manipulation in 1998). . Quite clearly, the quality of SEBI's investigative work has to improve considerably so that penal actions stick.

Take a larger view

There are quite a few instances where shareholders have suffered due to specific corporate actions. Whenever an issue of this kind has come up, , SEBI has generally shied away from taking up the cudgels (unless nudged by some extraneous pressure) on behalf of the investors to ensure that they get a fair deal.

In some of the global development-triggered `changes in control', SEBI's actions have been mixed . In some cases, such as Castrol, it has acted with alacrity and ordered open offers. But in quite a few others, its stance has virtually enabled elaborate structures to be created that helped avoid open offers or its actions have come rather late in the day — Color Chem-Clariant, for example — imposing unfair costs on acquirers and shareholders.

There have been a quite a few decisions on whether open offers are triggered by global developments or not, both by SEBI and/or by SAT. But no parameters have been laid down so far and eachissue is handled on a case-by-case basis.

When it comes todomestic acquisitions, SEBI's interpretation of `change in control' is questionable. When Gujarat Ambuja picked up the entire 14.4 per cent of the Tatas in ACC, it was clear that effective control had passed. But SEBI offered no view and, only when directed by the court, took the stance that there was `no change in control' on technical grounds. In such situations, SEBI has to come out and clearly say why it thinks there is change in control or not. The absence of a convincing rationale only creates precedents that can be used by others, as happened with Grasim-L & T.

Every time there is a major corporate action, SEBI should proactively examine if there are issues of a contentious nature. In most major cases SEBI has tended to take up matters only when there is a referral from a court or investor forum or the government (like in the UTI's assured return schemes).

Accounting, audit quality

SEBI can now act proactively on the issue of accounting and auditing quality. In several recent instances in the US, such as Enron, WorldCom, Global Crossing, Merck, to name a few, companies put out blatantly false numbers and auditors went along with this charade.

In India, hundreds of companies came out with IPOs and vanished subsequently, and in many companies, accounting and audit information has proved to be of poor quality and unreliable. This is where SEBI can step in and work with the government to have special audits done of the top 100 or 200 firms that account for more than 90 per cent of market capitalisation and trading.

There is no reason to assume that everything is hunky-dory on the accounting-auditing front in Indian companies. Just look at the problems in the finance sector — the likes of IFCI, IDBI, UTI and Centurion Bank, to name a few — and one cannot help feeling there may be problems elsewhere too.

The plethora of inter-corporate investments, intra-company and intra-group transactions, guarantees and contingent liabilities are areas where there is room for considerable concern.

A one-time special audit, efforts to ensure that audit assignments are rotated at three- or five-year intervals and fast-tracking the process of accounting standards with relevant authorities are actions that SEBI can pursue before a crisis breaks out on this front.

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