Mani Shankar Aiyar, a member of Parliament and member of the Joint Parliamentary Committee (JPC) on the stock market scam of 2001, has made a strong pitch for inclusion of a special chapter on the Securities and Exchange Board of India's (Sebi) investigation into the scam itself in the JPC report.
Aiyar has also sent a draft chapter on the subject to the JPC chairman on July 22 in which he lambasted Sebi for the manner in which it has conducted its investigation and the reasons attributed by the regulator for the market crash. Aiyar, however, refused to comment on the subject.
The proposed draft, written by Aiyar, said that Sebi has not been able to establish to the satisfaction of the committee that there was "unusually volatile behaviour around the end of February and the beginning of March 2001." The volatility in at least four months of 2000 (April, May, August and September) was higher than that of February and March 2001.
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It added that Sebi's assessment that the fall was unusual since it took place in the immediately after a "well received" budget cannot hold good since "it was not for Sebi to launch investigations on the basis of such personal assessments of the budget".
Aiyar goes on to say that the market has fallen the day after the budget was presented on most occasions in the '90s, with the biggest fall of 520 points the day after the budget was presented in 2000.
"Sebi has failed to establish to the satisfaction of the committee that the decision to launch the investigation. was a decision well founded in market behaviour or prima facie evidence of manipulation. The decision seems to have been influenced by extraneous considerations," said Aiyar.
"As the investigation was launched without any specific indications of market manipulation, it left out of its ambit the possible problems of the bulls. In fact it was the collapse of a big bull, nearly a month after the Sebi investigation began that brought about the crash," he said.
According to the draft "the committee is unable to appreciate the reason for Sebi activism on March 2 which, in fact, should have been in evidence much earlier. Indeed had Sebi done so and taken rectificatory action, both the decline of the first two days of March and the subsequent crash might have been obviated."
The draft also suggests "that it seemed there was no criteria for determining the entities to be investigated. An arbitrary list of names of entities to be investigated was obtained from the BSE chairman, who was himself caught in an act of moral turpitude a few days later. The committee deplores Sebi's failure to establish clear criteria or identifying entities to be investigated or itself undertaking such investigations."
Further lambasting Sebi, the draft says the credibility of the regulator has not been enhanced by their having primarily relied on the advice tendered by the BSE chairman Anand Rathi, "when it turns out that the Anand Rathi Group were among the biggest sellers at the time". It further adds: "Sebi clearly was not functioning as a regulator ought to, in having in-house knowledge and expertise on what and where to look for in the investigation it started on March 2."
The draft has also raised question on the objectives of the investigation. "What is worse is the absence of convincing objective reasons for the commencement of the investigation, combined with the need to subsequently extend the investigation when initially non-investigated entities fell like nine-pins, point to the pre-occupation with political considerations which may be the legitimate concerns of governments but which no self-respecting independent regulator ought to entertain. This suspicion is aggravated by discrimination in action taken by Sebi."
Even as First Global was indicted for dealings with Credit Suisse First Boston, Ajan Kayan or Khandwala Securities were not. Also while many of the entities were held culpable only three were barred from further business.
Aiyar has also said that Sebi has not done anything particularly substantive in several areas of concerns including the source of funds for the massive increase in turnover from Rs 300 crore a day to Rs 15,000 crore, failing to recruit adequate staff for surveillance purposes or putting into place any system of real time surveillance and immediate rectificatory action based thereon, foot-dragging on demutualisation, turning a Nelson's eye on off-exchange internal badla practice.