Lessons for SEBI

The Securities Appellate Tribunal’s order rejecting Reliance Industries’ appeal to settle a case of alleged illegal trading with the Securities and Exchange Board of India through consent proceedings exposes the inability of the regulatory system to expeditiously deal with stock market-related misdoings. In this case, the dispute relates to the sale of some 20 crore shares of a subsidiary by Reliance. According to SEBI, the latter, along with related entities, had already taken short positions in the futures market with the intention of profiting from the subsequent sale of the subsidiary’s shares in the cash market. Reliance allegedly booked “illegal trading gains” of over ₹500 crore. The important point is that all this happened in November 2007.

But the issue is not just how long back the original transaction took place, as the way SEBI has handled the case. The regulator first issued a show-cause notice to Reliance in April 2009, wherein it accused the company of engaging in insider trading — the subsidiary whose shares had been sold was soon to be merged with the parent. Reliance, on its part, filed a consent application seeking to settle the dispute by paying a penalty without admission of guilt. SEBI not only rejected the application, but towards end-2010, began a re-investigation and issued a fresh show cause notice that did not mention insider trading while only retaining the charge of “illegal trading gains”. Besides, it seemed to have acted in a whimsical manner in stonewalling Reliance’s request to inspect certain documents relating to the case with SEBI. It allowed inspection only towards end-2012, but without giving much time to peruse the 1,300-odd pages before a meeting with SEBI’s internal committee. In early 2013, it rejected the fresh consent request that Reliance had sought. The SAT has now basically upheld SEBI’s position by dismissing the company’s appeal seeking an opportunity for settlement through consent proceedings.

The regulator may have justifiable reasons for refusing Reliance’s appeal; the charges could be far too serious to be settled through the consent route. But then, SEBI should have acted consistently, rather than changing its position and the nature of charges from time to time. While the SAT may have dismissed Reliance’s appeal, it has rightfully also come down hard on the manner in which SEBI has dealt with the case. Ordinary investors would certainly not have benefited from the sheer time lapse since the alleged wrongdoing was reported. Thankfully, SEBI’s more recent record points to some improvement. Its order early last month, for instance, prohibiting an offshore hedge fund found guilty of insider trading from dealing in Indian securities was commendable; the entire investigation was completed in less than three months. While technology and availability of software to zero in on abnormal trades would have helped, SEBI’s own learning from past regulatory experience may also go some way in enhancing its market surveillance capacity.

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