Slow arm of the law

The Securities and Exchange Board of India’s decision to bar real estate giant DLF and its top management from transacting in stocks and raising funds from the stock market is significant for who it took on. When the regulator takes on heavyweights, it helps reinforce the trust of small investors in the market’s supervisory mechanism. That said, it must be noted that the order has come seven years after a complaint was filed in 2007, which was before the company’s initial public offer that raised ₹9,187 crore. Thanks to a cumbersome process that involved a sequence of appeals, stays and rulings, we have been left with an order that a company was guilty of suppressing material information during its IPO, well after the event is over. Had such an order been issued even a year after the public offer, it might have enabled investors to sell the stock at more than double the price at which it is trading now. The legal process took longer in the even more recent case of the employee of Tata Finance who was found guilty of executing illegal transactions in various stocks. It was 12 years before SEBI could close the case.

Is the punishment meted out to DLF and its owners inadequate considering the magnitude of the offence? While preventing fundraising for three years will hurt any company severely, particularly one that has accumulated a mountain of debt, the question is whether it is enough to deter others from similar misdoings. Around ₹4,600 crore of public money is currently locked in the shares of DLF. By allegedly suppressing vital information, the company is regarded as having led those who invested in the company astray. It is to be noted that the Tata Finance employee — whose offence was of a much smaller magnitude — was slapped with a similar ban.

Although SEBI has been silent about the role of the investment bankers in the DLF issue, the order underlines the importance of vetting public issues with the utmost diligence; after all, it is the responsibility of the lead manager to ensure that all material facts are disclosed in the prospectus. While hauling up a number of companies in 2010 for IPO-related offences, SEBI had banned investment bankers involved with the issues from capital market-related activities. The investor community has only the information disclosed in the prospectus to base its decisions upon. It would be a start to demand that companies write at least a section of the prospectus in a manner that the lay investor can understand — in prose that is direct, comprehensible and stripped of legalese.

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