Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

July 23, 2000

Investor protection remains just a sham

As DR P L Sanjeeva Reddy, Secretary, Department of Company Affairs (DCA), said last week that the Securities and Exchange Board of India (SEBI) was barking up the wrong tree in seeking more powers to protect investors. He declared that powers transferred to SEBI under Sections 62, 63, 68 and 108 of the Companies Act were adequate to effectively handle erring companies and protect investors.

Dr Reddy is wrong. The powers under these sections mainly provide civil and criminal liabilities for misstatements in the prospectus. But the imprisonment of promoters is no comfort to investors who have lost money. A regulator has to be empowered to seize the personal assets of promoters and force them to disgorge unlawful gains. Also, the maximum penalty prescribed under the SEBI Act as well as the Companies Act is so low (maximum of Rs five lakh by SEBI) that it serves as an incentive for fraud rather than a deterrent. SEBI has been waging a long battle for increased powers. It set up the Dhanuka Committee which recommended a whole range of search, seizure and interrogation powers for SEBI.

It also suggested an increase in the maximum penalty for violations but continued the old practice of fixing limits rather than providing for hefty exemplary damages to work as a serious deterrent. Soon after, SEBI came up with a separate Investor Protection Act, saying that it was the only way to provide effective investor protection. That too was shot down. Chairman D R Mehta has since used every public platform and media interview to make his case. He insists that SEBI would be a far more effective if it was adequately empowered. The latest attempt to lobby for such powers comes from Kirit Somaiya. The BJP MP recently rounded up a couple of investor associations, claimed to form a Federation of Investor Groups and met the Finance Minister, the Law Minister and senior Secretaries with a large memorandum which included a demand for a separate Investor Protection Act.

SEBI’s campaign seems to have few sympathisers in Delhi, probably because of its serious lack of credibility. Exactly two years ago, the Bombay Stock Exchange (BSE) had scandalously allowed its trading system to be opened in the middle of the night to put through a set of pre-decided transactions in order to bail out certain speculators. SEBI’s investigation has been completed over a year ago, but it refuses to initiate decisive action against Harshad Mehta and the three companies — BPL, Videocon and Sterlite — which colluded with him to rig up their share prices and finally caused a serious payment crisis. There are several other cases too where SEBI has kept investigations in limbo and to avoid tough penal action. Unless SEBI demonstrates that it is willing to use existing powers more effectively, it can hardly stake a claim for more powers.

At the same time, the constant wrangling between SEBI, the DCA and often the Reserve Bank of India is bad for the investors who continue to be duped by a variety of capital market swindlers. The saga of the several hundred vanishing companies which ran away with public money is a good example of how investors suffer. Both SEBI and the DCA are toothless watchdogs but they are more concerned with barking at each other and fighting turf battles, while investors are left licking their wounds. In fact, the two had to be hounded into investigating these companies by the Midas Touch Investors’ Association through litigation filed in the Lucknow High Court. An investigation by Business World published in its July 24 issue completely exposes the reluctance of regulators to probe the vanishing companies whose promoters have decamped with over Rs 5,000 crore of public money. After sustained pressure, SEBI and the DCA agreed that a majority of the 80 companies listed by the Midas Touch Association in its Writ Petition No 760(MB) had indeed disappeared with public funds.

In just two months, a Business World team investigated this list, traced the promoters, interviewed several of them and published the list along with their merchant bankers and the project status. In contrast, the DCA in a reply to question posed in Parliament by Lok Sabha MP Shriprakash Jaiswal offered the following response. It claimed to have launched prosecution in almost all cases, for their failure to file balance sheets and annual reports. SEBI has debarred some of these company directors for five years — again an action which has no significance for investors. In three cases, the DCA lists the companies as being under liquidation. They are Efcon Securities, Lympha Laboratories and Unicorn Pharmaceuticals. In ten others, it says that the companies have been regular in filing annual reports. These are Suckchain Cement, Auroma Coke, Acme Spinners, Alps Motor Finance, Grivs Hotels, Patliputra Credit & Securities, Simplex Holdings, Ishaan Infrastructure & Shelters, Ankush Finstock, Charms Ceramics and Orient Trade Link.

Here is what the Business World investigation reports. It says that the promoters of Acme have fled from the address in the prospectus, the promoter of Alps Motor Finance claims that he has sold the company; Ankush’s promoter refused to talk; Patliputra Credit has provided a fake registered office address. The other names in the two lists do not match. The comparison suggests incompetence or worse on the part of the DCA. The information regarding ICP Securities is even more bizarre. This is a company floated by Naresh Aggarwala, a broker involved in the Securities scam of 1992, and his wife Preeti. They reside at 80 Sainik Farms in New Delhi and continue to be connected with the capital market. Yet the DCA lists the company as ‘not available’ and says that a police complaint has been lodged against it.

Lakshya Securities is also ‘not available’ according to the DCA, but it claims to be inspecting its books under Section 209 A. Business World quotes Lakshya’s promoter as saying that he has sold his company but remains resident at State Bank colony in Delhi. It also lists his telephone numbers. In a majority of cases, Business World points out that the promoters have simply fled from their listed addresses. In effect, unless SEBI/DCA maintain a continuously updated database and debar these promoters permanently, they could well reappear with fresh ideas.

What is most peculiar is the DCA’s claim that it has launched prosecution for failing to file annual reports and balance sheets against most of these vanished companies. Is this nothing but a pointless waste of public money? Unless the regulators get serious about their investigations and find ways to compensate investors, the concept of investor protection will remain just a sham. The DCA’s reply shows that government departments are not even worried about providing accurate replies to Parliament anymore.