The crackdown by the US Securities and Exchange Commission acting in concert with other regulatory bodies and the NYSE and Nasdaq is on business practices that hurt investors. Their effect well felt in 2000-2002, when stock prices tanked. In has been the price declines ranging from 50 per cent to 99 per cent in technology/telecom/media stocks. This regulatory action, christened `global settlement', imposes penalties that may be small for the global financial majors, but it does provide some relevant pointers in the Indian context. The complete details of the `global settlement' are available on the SEC Web site http://www.sec.gov/news/press/2003-54.htm.

The following aspects are worth a close look:

Disgorgement of profits: In any market violation, this is perhaps the most effective deterrent. It also ensures that equity is restored to some extent between the transgressors and those who take the knock. But even here, the damage cannot be completely undone. It would be difficult to restore every investor to the pre-violation situation. But disgorgement ensures that the transgressors do not get away with their illegal acts. The ten firms are to pay $388 million. The appropriateness of the amount in such cases vis-à-vis the damage done is an issue that can be debated. But, in principle, the concept is notable for its absence in the Indian milieu.

There have been so many cases of IPOs, insider trading and brokerage actions, which have led to ill-gotten gains. Even in the numerous finance companies that went bust, little of note has been achieved. Or, take the share-switch case involving the Reliance group. The interests of the Unit Trust of India were placed in serious jeopardy. At the end of it all, there was nothing done to undo the damage.

Rarely do owners of such entities have to cough up what ought not to be theirs in the first place. As SEBI is now adequately empowered to tackle investigations and enforcement, hopefully disgorgement of ill-gotten gains will be used as a deterrent against malpractices.

Research separation: The need to rope in business for investment banking activities — mergers, acquisitions, capital offerings, restructuring among others — has been at the core of problems that have troubled investors. Recommendations by research teams have been tailored to suit investment-banking business. Just one facet of the recommendations will provide an insight into how the system worked. At the peak levels of the market, in 2000, hardly any research recommendation was for `sell'. Even these tend to be couched in company friendly terms such as `underweight', buy at a substantially lower price level, without suggesting a sell at higher prices; market underperformer and neutral, to cite a few. Now, the SEC requires a clear separation of the two. As Chinese walls have seldom worked effectively, the issue of whether the proposed changes will deliver the goods will be open to question. The investment banking-research recommendation problem is also a live factor in the Indian context, which cannot be wished away. It is also an untouched area in terms of regulatory action.

Independent research: Each firm would have to engage at least three independent research firms to offer their research to customers. This is to ensure that customers get independent advice — not one but at least three — to reduce the scope for interested recommendations. This arrangement has to be in place for a five-year period. On paper, this does look as a reasonable way out of the problems of research driven by vested interests. Unless firms and their customers are willing to pay an attractive price, the viability and sustainability of research as an exclusive stream of activity will be a closely watched issue.

Research track record: One proposal from the US case that SEBI should examine for immediate implementation is the requirement to disclose the track record of analysts. The SEC arrangement would require research analysts' historical ratings and price targets to be made available to the public. This is to enable investors evaluate and compare the performance of analysts. This may mean tough times for analysts but it may worth the while.

Allotment: Over the years, SEBI has improved disclosures on allotments made to promoter groups/associates in the period preceding the capital offer. But taking a lead from the global settlement proposal of restrictions on allotment to such persons in the capital offer itself may be a step forward.

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