The Hindu : Market regulation: Lack of transparency

Online edition of India's National Newspaper
Sunday, May 11, 2003

Business

Business

Market regulation: Lack of transparency

By Oommen A. Ninan

MUMBAI MAY 10. Despite several attempts and a whole lot of regulatory powers available to it, transparency is one important factor which is conspicuous by its absence in the operations of the capital market regulator, Securities and Exchange Board of India (SEBI). Even a change of guard at the top could have not made any qualitative difference to it. These are basic issues of transparency which investors have come to expect from the market regulator and have been expecting from it for a long time.

Two issues which unravelled recently throw light to the regulator's prevarication: First, SEBI's inability to disclose details of its investigations into whether Gujarat Ambuja had any control in ACC (after acquiring shares from the Tata group) and second SEBI's move to allow Grasim to go ahead with its open offer for a 20 per cent stake in L&T before completing its own investigations into allegations of insider trading against Reliance Industries from whom Grasim had bought 10.5 per cent stake in L&T.

It is reported that the SEBI chairman refused to give details of investigation report on Gujarat Ambuja's control on ACC and also reportedly stated that SEBI's investigation report has been sent to the Securities Appellate Tribunal (SAT). However, according to reliable sources, the SAT has not received any investigation report as stated by the SEBI chairman. The regulator casually wrote to SAT that the board has not found any violation of Regulation 12 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 by the acquirer. Gujarat Ambuja acquired little less than 15 per cent stake in ACC from Tata group companies. The issue was whether Gujarat Ambuja was exercising control of the company after acquiring the Tata stake in ACC as it was known as a Tata concern for a long time.

Grasim-L&T case

In the Grasim-L&T case, the facts were quite simple. Grasim had acquired a substantial chunk of shares from Reliance in L&T at a phenomenal premium (Rs. 306 per share) to the market price on the date of the purchase. Media reports and even the press releases that were put out by the seller and the buyer made it clear that the premium that was being paid was justified on the basis of strategic interest and benefit that was accruing to Grasim (read cement business) and the cessation of strategic interest for Reliance (read engineering business). The number of shares acquired was below 15 per cent, which triggers the Takeover Code under one set of provisions. However, under another set of provisions, irrespective of shares changing hands, if control passes, the Takeover Code would be triggered.

It appears that instead of issuing a reasoned order, the SEBI merely cleared the Letter of Offer. The SEBI had first issued a one-line direction to Grasim's merchant bankers asking them not to act on the open offer pending investigations. Grasim challenged such stay order on the ground that SEBI did not have powers. The SAT found that SEBI had powers and approved the stay. However, the SEBI has not now given any order with reasons for suspecting foul play and containing reasons for coming to the belief that there was no foul play. Without a reasoned order, both actions of SEBI — staying the offer and permitting the offer, smack of utter lack of accountability and transparency.

It is also important to note that there is also another investigation relating to insider trading that has to be completed by SEBI against Reliance. Reliance acquired shares from the market to increase its stake just prior to the sale to Grasim. It was in the know of the transaction with Grasim. Grasim was in the know of the level of shares held by Reliance. The board of L&T was in the know of the transaction and kindly obliged both by effecting a change in directorship. These are compelling circumstances that have to be thoroughly investigated for a transparent, fair and objective decision to be taken.

Worst is the track record of SEBI in meting out punishment. Several small brokers and small-sized market intermediaries are handed out severe punishment for routine clerical errors in the back office. Issues such as clerical errors in the maintenance of some registers meet with punishment of several months suspension of registration. As against that securities law violations of such severe magnitude as the Grasim-L&T story go unresolved. Even more disturbing is the trend of merely filing affidavits during appeal and thereby getting out of the legal and moral obligation owed to the capital market investors to pass reasoned orders. Since SEBI publishes all its orders on the website and there is no order on the web on the subject of the open offer made by Grasim for acquisition of shares of L&T, it is assumed that there is indeed no reasoned order in respect of the open offer. It is assumed that there is no order that has clandestinely passed and kept unpublished because SEBI had itself put out a press release that it would be publishing all the orders passed by its chairman.

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