Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

July 30, 2000

The committee trick to justify inaction

The vast amounts of money lost by investors through vanishing companies, fixed deposits, plantation schemes and sundry other scams has turned the heat on the government. Yet, all it does is find new ways to pretend concern and avoid simple actions which will empower investors and allow them to recover their money. Money lost by small investors run into several thousand crores of rupees (if you go by the Bharatiya Janata Party MP, Kirit Somiaya’s estimate it is a colossal Rs one lakh crore), but there are only two visible reactions from the concerned departments and ministries.

The first is to squabble over regulatory powers that none of them have used effectively to protect investors; and the second is to set up serial committees to discuss issues relating to investor protection. Just over a week ago, the government hit another delaying tactic whose laudable objective is to empower investors. After a meeting between representatives of the Securities and Exchange Board of India (SEBI), the Department of Company Affairs (DCA) and the Reserve Bank of India (RBI), the Ministry of Finance has commissioned an exhaustive study by the National Law School which would, among other issues, look at the need for a separate Investor Protection Act, ways of empowering individual investors by permitting them to approach the Tribunal set up under the SEBI Act, and enabling the filing of class action suits.

A study by an independent body is always welcome, so long as it is time-bound and with a commitment that its findings will be accepted or rejected in a specific time-frame. For instance, it seems to me that the Law School Committee has been set up only because other regulators find the Justice Dhanuka Committee unacceptable merely because it is a SEBI committee. The Dhanuka Committee had looked at areas where the SEBI Act needs to be amended and has recommended an increase in its punitive and investigation powers. If all the time and effort of a well qualified committee, headed by a Judge are to be dismissed so easily, only because the regulators are busy ‘barking at each other’ rather than at the wrongdoers, then future committees ought to be set up by the MoF and strictly as joint efforts. Experience shows that even joint committees do not necessarily work even when there is a commitment made in a court.

The best example is of course the vanishing companies case. Following litigation filed by the Midas Touch Investors Association, the DCA and SEBI formed two joint committees and seven task forces. Yet, a two-month investigation by Business World’s journalists came up with more than the two regulators had found in two years. As for investors, they continue to wait, hope and lobby for action.

It may be interesting to look at some other committees which have been set up by SEBI in the past and the fate of their recommendations.

The Ministry of Finance (MoF) and the Reserve Bank of India set up another committee on corporate governance, headed by Dr R H Patil of the National Stock Exchange just a week ago. Sources say that this committee will look harder at banks and unlisted companies — probably because the government thinks that different businesses need to have different standards of good governance and ethical practices. Or is it the MoF and RBI’s way of saying that it is not satisfied with SEBI’s Kumar Mangalam Birla Committee on the same subject? In any case, corporate governance or high ethical standards cannot be imposed through a rulebook. They have to be voluntary, as they are in most sensible countries.

SEBI’s attempt to codify corporate governance standards has already met with mixed reactions, while the MoF/RBI committee is apparently part of a broader international discussion. Does this mean that the Patil Committee’s recommendations will not be converted into a rulebook? Remember also that the Kumar Mangalam Birla committee was itself set up in spite of a long national debate on the issue which followed exhaustive work done by a high profile committee of the Confederation of Indian Industries.

Remember the M R Mayya Committee on uniform settlements and trading systems? The committee is in limbo mainly because none of the bourses were in favour of uniform settlements.

Then there was the B D Shah committee to look at the contentious issue of naked short sales and other secondary market issues. The committee was obviously qualified to go into the ALBM v/s Badla trading debate, but it was forgotten and even its recommendations on short sales were implemented only over a year later.

Similarly SEBI has separate Primary and Secondary Market Advisory committees which have not met in a long time even when issues relating to these areas are being debated. The Secondary market committee had no role in the ALBM v/s Badla debate. Similarly, the Primary Market Committee is not being consulted on the continuous dilution of Initial Public Offering (IPO) norms. IPO norms were first diluted for IT companies by disregarding strong dissent from three key members of the committee. Later it has been extended to entertainment and media companies and now SEBI plans to unwrap new IPO guidelines, without either consulting or disbanding the primary market committee.

The IPO norms were initially formulated following the first Malegam Committee report, a small part of whose recommendations were accepted. Another committee whose recommendations have not been discussed nor accepted is the CB Bhave committee on continuing secondary market disclosures. In fact, secondary market disclosures is key to cracking down on insider trading by company managements. So far, companies have been getting away with planting news reports which are unsourced and quietly denied when questioned by the regulators. Unless this is effectively stopped, companies themselves can engineer price rigging and fluctuations. SEBI has now forced companies to appoint compliance officers, but this has to be strengthened by fixing responsibility and penalties on corporate management for making false statements.

Then there are half a dozen other committees quietly set up by the Reserve Bank of India, which SEBI sources claim impinge on issues which are directly under its jurisdiction. One does not even know the purpose of these committees.

Clearly it is time to stop talking and discussing and setting up committees and simply empower the regulators to award exemplary damages which really hurt fraudsters. Only when illegal gains are forced to be quickly disgorged can we have effective investor protection — the rest of the debate is immaterial.