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S. Vadiya Nathan

SEBI has decided to examine the role of Alliance Capital of India, after initially charging just its Chief Investment Officer, Mr Samir Arora, with violation of rules and regulations. SEBI has belatedly recognised that the fund's accountability cannot be ignored.

THE Securities and Exchange Board of India has made a belated and half-hearted, but still welcome, move by deciding to examine the accountability of Alliance Capital of India.

The change in SEBI's stance fills a crucial gap in its case against Mr Samir Arora, former Chief Investment Officer of Alliance Capital Asset Management (India).

The case relates to charges of insider trading and other moves by Mr Arora that, according to SEBI, harmed the interest of investors in the fund.

The step is welcome as it lends credence to SEBI's efforts in this case, and is not in any way a comment on the tenability of the charges that have been pressed by the regulator.

In its earlier order, SEBI had pressed charges only against Mr Arora and banned him from capital market activity.

However, no action was initiated against the fund, the directors of the trustee company and the asset management company.

This may change now. In its latest offer (full text in http://www.sebi.gov.in/cmorder/ordersamir.jsp), SEBI has also provided more details to back up its charges of insider trading against Mr Arora.

It has also provided a detailed account of its view on how Mr. Arora, by his actions, dragged the assets under management and NAV, to acquire the company at a lower price.

However, even the detailed information does not provide the confidence that SEBI has a strong case on either score, especially the charge relating to assets under management.

Driven by submission: The regulator appears to have recognised, rather late in the day, the ground realities of fund's role. The SEBI order suggests that its changed stance follows the submission made by Mr Arora at the personal hearing.

One of the points in the submission was that the trustees and the board of directors were kept regularly updated and informed on the strategy, and that they could at will seek details of the stocks purchased by the fund.

Only now has SEBI taken the position that relieving Mr Arora from his CIO position does not take away the accountability of board of directors and trustees. But it has come up with a response that can, at best, be termed half-hearted.

It has indicated the intent to pursue action against them for any violation of the SEBI Act, rules and regulations, once the ongoing investigation is complete.

But even this response appears to be only a response to the submission by Mr Arora. The order does not contain cogent arguments as to why the charges pressed by SEBI against Mr Arora do not apply, even at this juncture, to the sponsor company, the trustee company and the asset management company.

Given the structure of mutual funds, the insider trading charges against Mr Arora apply equally to the fund management company, if not the trustee company.

If the CIO of a fund is charged with violating regulations, it is strange that the organisation should itself be untouched.

Though this could still be the outcome, if the investigations do not support the need for action against the organisation.

In its latest order, SEBI has detailed why its actions against Mr Arora are justified. It has, however, refrained from giving any such detail when it comes to the accountability of the players in the fund management structure.

Ducking disclosures: This is relevant to SEBI's charge that the disclosure norms under the Takeover Code were violated by Mr Arora. Compliance with such norms is a larger organisational issue that ought to be taken care of by good systems with appropriate checks and balances.

Only the absence of these systems, and/or a deliberate turning of a blind eye to the actions of its fund manager, could have led to such non-compliance.

Even if the fund manager had kept the directors and trustees in the dark, it only points to a lack of attention to detail on their part, and improper discharge of fiduciary responsibility.

On these counts, there appears to be little reason for SEBI to wait for its investigations to be completed before pressing charges against the fund. Its hesitation appears inexplicable. The sooner it changes tack, the better.

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