'Insider trading' acquires a new meaning in Sebi

If the Satyam-Maytas imbroglio had the entire investor community question the very concept of corporate governance, the latest one involving the Securities and Exchange Board of India has shaken the very confidence of the investor community in the Indian capital markets.

In a bizarre turn of events -- straight from Ripley's Believe It or Not -- that would stun the entire world of finance, Indian market regulator Sebi finds itself in the eye of an unprecedented storm.

What is interesting as well as appalling to note is that the needle of suspicion at this time points out that manipulations seem to have taken place right inside Sebi's office in Mumbai.

Consider the sequence: The chairman and managing director of Pyramid Saimira, P S Saminathan, announces his intention to acquire approximately 25 per cent stake in the company from two other co-promoters. (See: Letter forged, says Sebi)

Technically called as inter-se transfer of shares, this application was pending with the Sebi since the first week of October 2008.

On the evening of December 20, the company in question is inundated with calls about a Sebi order on the above-mentioned application by the media. Without a copy of the order the company refuses to comment on the same.

The purported Sebi order directs Saminathan to make an open offer for acquiring 20 per cent shares within 14 days for a price not less than Rs 250 per share. This order is to be seen in the light of the fact that the prevailing market price of the company's share is about Rs 70 per share.

One morning, the company gets a courier containing a Sebi order. It is indeed strange that Sebi, that usually faxes its communications, chose to courier the same on the evening of December 19.

But what follows is even weirder.

Apparently, it seems that the courier company in question has produced documentary evidence to suggest that the consignor, i.e. Sebi itself, had specifically instructed the courier company to deliver the notice on December 22 morning instead of on December 20.

Meanwhile, having been in receipt of the information and completely oblivious of the fraud played on it, the media takes up this story in right earnest. Consequently, Sebi order becomes the lead story on December 21 and 22. In fact, trades were carried out in the stock markets of the country on the entire 22nd based on this spurious order.

On 23rd morning, ostensibly disturbed by the press reports and noticing market gyrations in the Pyramid counter on a non-existent order, Sebi calls up Pyramid and seeks clarification as to whether Pyramid had indeed received such orders.

Subsequently, Sebi announces through the press that it has not issued any advisory either to the company or to its director.

This is where the fraud comes to light. The entire financial market is astounded to know as to how a well-orchestrated fraud has been committed on the market players using the (forged?) stationery of the market regulator.

Intriguingly, the original application to acquire shares from his co-promoters is pending with Sebi even as on date.

In the entire process the confidence on the market regulator by market players has been dented like never before.

Some inconvenient questions

The reader by now would be completely flummoxed by the turn of events. How could someone forge a letter using Sebi's letterhead, forge a Sebi's official signature and possibly use the Sebi administrative machinery to send a courier with appropriate instructions?

It is suspected that someone within Sebi was involved in this fraud.

What makes this fraud more sinister is the fact that all the documents were forged. In the process it lent an air of credibility to the advisory, albeit only for a day. The net consequence was that the share price of Pyramid gyrated for the entire day, i.e. on December 22.

Yet Sebi, which expects corporates to act within minutes of taking key decisions that could possibly impact its share prices, chose to act in such casual manner and remained silent for a whole day.

No wonder, those who compare various regulations postulated by Sebi, (not the least being the one on insider trading) and the contrasting lackadaisical manner in which it itself has acted in this episode, has left most observers befuddled.

This delay of over 24 hours by Sebi is the most intriguing portion of the drama.

In contrast, let us assume that the boot is on the other foot. If only a resentful employee of a company had sent some bogus information to Sebi, the manner in which Sebi would have proceeded against the company and its management needs no elaboration here. Yet when it comes to itself, Sebi has a different yardstick.

By now, it should be obvious that those who had certain positions leading to these events were the ultimate beneficiaries of the entire mischief. That someone within Sebi played ball is disquieting. And that the entire Sebi machinery possibly could have been abused in the process is bewildering to say the least.

Equally baffling is the fact that while the letter was being couriered, 'someone' was actively passing on the forged copy of the advisory through some agency to the media.

Whatever it may be, that the office of Sebi has such lax controls and could be easily penetrated is indeed making many sleepless. If the advisory was indeed couriered from within Sebi's premises (as is alleged in some quarters), the fraud would be akin to, say, the Reserve Bank of India allowing its own offices to distribute fake currency.

Forget the origins of the courier for a moment; the delay of well over 24 hours by Sebi in intervening and responding in the matter is creating consternation amongst observers, analysts and market watchers. In the test of alacrity, so crucial in the working of markets, the market regulator has definitely failed.

But who is accountable?

Needless to emphasise, one crucial question remains: who in Sebi is responsible for this? It takes no seer to predict that finally a junior temporary dispatch clerk in Sebi might get the stick. That is, if the courier had been sent through Sebi. Perhaps, the courier company may also have its contract terminated.

Further, with much fanfare, a few brokers may get show cause notices. But given Sebi's track record of being unable to tackle errant players in the markets, brokers may well ignore these notices and continue with their machinations.

Readers may recall that in certain high profile cases it has been our experience that Sebi was able to do precious little, even when it came to enforcing its own regulations.

The recent judgment on Goldman Sachs pertaining to the May 2004 market crash is a classic case in point where Sebi could not walk its own talk

Even if it did on rare occasions (as it did in UBS case or in another case involving Goldman Sachs, both relating to the power of Sebi to call for information and explanations) higher courts -- especially the Securities Appellate Tribunal (SAT) -- had struck down such decisions by Sebi. This has happened much too often, especially on high profile cases.

No wonder then that Sebi plans to introduce a Samadhan scheme (and thereby willingly lose its deterrent powers) with such errant players. By seeking to smoke the peace pipe, it at least hopes to fill its coffers by collecting fines rather than eternally ending up second best in its fight with market players.

In the worst of cases, one can literally commit murder in the future and Sebi could at best be negotiating imposition of fines with the errant players. Consequently, Sebi is seen today more as an irritant than a powerful regulator.

As events bear out, Sebi might have become bureaucratic and thus insensitive over the years. And it is ineffective while dealing with the constantly evolving market situations, especially when the market players are highly dexterous, powerful and have deep pockets.

The entire Pyramid Saimira episode reveals another important fact -- corporate battles are now spinning out of control. Interestingly, regulators instead of controlling them are innocently or otherwise becoming part of these corporate wars. What a fall!

Surely, the time for introspection for Sebi is right now. The lessons from l'affaire Pyramid are compelling for Sebi. It comprehensively exposes the workings within Sebi and its organisational weakness. It quickly needs to puts its house in order.

Obviously, a thorough probe is required, a few heads need to roll, appropriate lessons learnt and order quickly restored. Crucially, the culprits need to be nabbed and punished. Otherwise, Sebi could lose its relevance. And if that happens, it would be the proverbial last straw on the already beleaguered Indian capital market's back.