MARKET PERSPECTIVE

JM blog

(sent Saturday Oct 10, 2020).

SEBI must genuinely protect investors

By J Mulraj —  Oct 4-10, 2020 — @jawahirmulraj

The preamble to the SEBI Act that created stock market regulator, SEBI, states its aim is “to protect the interests of investors in securities and to promote the development of, and to regulate the securities market”. There are several examples of how it has badly let down investors who reposed faith in it, and in the stated objective in the Act which birthed it. This betrayal of trust of individual investors is also visible in the case of other regulators like RBI, the banking regulator, and others.

Ancient Greek playwright, Sophocles, stated ‘Trust dies, but mistrust blossoms’. Heeding this, SEBI, RBI, and other regulators, plus the judiciary, should introspect and course correct so that investor trust in them is rebuilt.

Covid has shattered the economy; to rebuild it will require investment which comes mainly from household savings. Treat small investors well, and you get their savings. Treat them badly, as is being done, and you won’t. It’s that simple!

Take the case of money raised by Sahara India Parivar by issuing, despite SEBI objections, Optionally Fully Convertible Debentures without SEBI permission to do so, to more than 50 investors.

The head of Sahara was in prison for contempt of court over this. Whilst there, according to Sucheta Dalal’s video on Moneylife “Sahara’s Mysterious Riches”, the group managed to raise a whopping Rs 110,000 crores  over 10 years!  The amount of Rs 110,000 crores would be about 10 times the amount collected by the PM Cares Fund!

This was money collected by several Co operative societies of the Sahara group, and most of the money collected went into a private project, Aamby Valley, a luxurious gated community in Lonavala. The Joint Secretary of the Central Registrar of Cooperative Societies, responsible for multi state cooperative societies, has sought an SFIO investigation into this.

That is like locking the stable door after the horse has bolted. It seems that for regulators, all animals are not equal.

Contrast the laxity in the Sahara case with the improper over-zealousness in the Neesa Technologies case, where one N C Biswal was harassed for six years. He was one of 9 directors, and his acceptance letter was, apparently, misused to show him as the Managing Director. On finding this out, Biswal resigned as Director, but was, nonetheless, made the victim of several suits, as the ‘official records’ showed him to be the MD. This, despite court judgements that he wasn’t. SEBI, in response to complaints from holders of Neesa’s debentures, issued notices to directors, including Biswal, ignoring his resignation and court orders, until the Appellate Tribunal exonerated him after 6 years.

SEBI has done nothing about several Ponzi schemes whose victims are still suffering. Enforcement agencies ‘seize’ assets but then sit on these assets, doing little to liquidate them and distribute proceeds to the victims, as they ought to. In the NSEL scam, the Enforcement Directorate (ED) has seized assets of defaulting members of the exchange, and has even liquidated some of the assets (not all) but is sitting on the proceeds at the behest of the fraudster!

RBI, the banking regulator, also needs to introspect on its role to protect bank customers. The plight of the PMC Bank depositors is the latest in a series of tragedies. PMC Bank collected their money and lent an unbelievable 73% of it to just one group, HDIL.

What was the role of RBI? Are co operative banks like PMC under it? If not, is there not a need to introspect and course correct? Are savers merely slaves to the crony capitalist system, to be abused at will? Is there no protection? What if they rebel and create a run on banks? Is anyone considering this outcome? The latest news is that IOB had written off Rs 41000 crores in the past 8 years, and recovered only 17%. So, are depositors slaves to a system that allows Government owned banks to lend profligately to crony capitalists with no responsibility to repay? Can RBI introspect?

Under international norms, banks are supposed to flag and file a Suspicious Activity  Report, if they consider requests for transferring large sums of money to be linked to suspicious activities like terror funding or narcotics. Yet, as per an investigation by the International Consortium of Investigative Journalists (ICIJ), called the FinCen files, 406 suspicious transactions have been flagged in 28 Indian banks totalling $ 888 million ($ 462m  incoming and $ 402 m. outgoing transactions).

FinCen is asking whether SARs were filed for these and if so, whether RBI took any action on them.

Yet individual depositors have to submit several compliances, repeatedly.

Last week the sensex rose 4.7% to end at 40,509. All eyes will now be on the US elections. A Biden victory may see the introduction of a capital gains tax rate increase, which would bring down the market. That would be a buying opportunity. The Indian economy is showing signs of recovery, and RBI is expecting a good bounce in India’s GDP. Now, if the Government and the regulators, start caring about the sorry plight of individual investors and start genuinely protecting them, and seriously punishing culprits, investors, too, will rise to the occasion and aid the recovery.

SEBI, live up to your reason for being!