Editorial

Satyam, Sahara, SEBI

| Updated on July 23, 2014 Published on July 23, 2014

What’s the point of disgorgement orders if you cannot distribute the proceeds to investors?

Financial crime doesn’t pay. This is obviously the message the Securities and Exchange Board of India wants to send out through its mammoth disgorgement orders. In the Satyam case, SEBI has directed Ramalinga Raju and four others to deposit with it a sum of ₹2,350 crore with interest for insider trading and unfair manipulation of the company’s financials and stock prices. Prior to this, SEBI had directed Sahara’s Subroto Roy to refund ₹24,000 crore raised through illegal debentures. With monetary penalties and securities market bans failing to deter financial frauds, it may seem in order for SEBI to force big-ticket offenders to disgorge their unlawful gains. But if such refunds are to serve their purpose of restoring battered investor confidence, they must be followed up by identifying the affected investors and distributing the proceeds among them. Without such reparation, the demands for money are meaningless and don’t help to restore faith in the Indian financial system.

If making such refunds is likely to prove a difficult task in the Satyam case, it is well nigh impossible in the Sahara case. In the latter, we already know that SEBI’s efforts to track down the alleged three crore ‘retail investors’ have proved quite fruitless, the reason being they simply do not exist. When it has been able to refund only a small fraction of the ₹5,120 crore deposited by Sahara, one wonders what it will do with the additional money that has been recently deposited with it. As for Satyam Computers, it is no longer a listed entity and any number of its past investors can claim to have suffered losses due to the fraud. Apart from investors who actually bought or borrowed shares at inflated prices, all those who transacted in the Satyam stock between 2003 and 2009 are likely to have been taken in by its inflated numbers. Even if SEBI does manage to home in on the right investors, deciding on individual compensation will be an extremely tricky task.

Given the unprecedented sums at stake, the utilisation of disgorgement proceeds must be clearly addressed. Presently, while the concept of disgorgement is rubber-stamped by the Securities Law Amendment Ordinance 2013 and the new Companies Act, the issue of refunds to affected investors is left quite hazy. All the law requires is that disgorged sums be pooled into an Investor Education and Protection Fund, which may be used to create investor awareness, develop the markets and various other vague purposes. Compensating investors affected by fraud is just one of the many objectives of this fund. This is quite unlike laws in the US, where victims of financial fraud have the first right to any disgorgement proceeds. Greater accountability from the regulators on how they plan to account for and re-distribute the unlawful gains collected from fraudsters is the need of the hour.

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Published on July 23, 2014
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