Test case

The Securities and Exchange Board of India's (Sebi's) final order against Samir Arora, former chief investment officer of Alliance Capital Management Fund, bars him from dealing in securities for five years.

Sebi needs to be commended for the speed with which it has arrived at its decision, a speed which also benefits Mr Arora, who can now approach the Securities Appellate Tribunal.

The charges levelled against Mr Arora include: insider trading in the stock of Digital Equipment, prior to the announcement of a swap ratio for its merger; causing losses to investors as a result of the conflict of interest between Mr Arora's proposal to shift to Henderson, which was trying to take over Alliance's assets in India; and, taking positions in stocks on the basis of price-sensitive information obtained from company sources. These are serious charges, and deserve exemplary punishment if established.

The problem is that Sebi's track record in upholding its orders is not very good, and much depends on whether Sebi's view on Mr Arora's guilt is indeed the right one.

Insider trading is difficult to prove in the best of circumstances, and the case has been built on circumstantial evidence.

Additional reasons for weakness have been cited by critics: these say that Alliance Capital's funds had an average performance during the period when Mr Arora was allegedly trying to push down their value; that if Arora did indeed exit from Alliance, as Sebi says he should have done, the redemptions from Alliance may have increased; and that the charge that Mr Arora violated the takeover code by not informing Sebi when investment limits in companies were crossed shouldn't be laid at his door, because he wasn't the compliance officer.

And while the timing of his sale of Digital shares is indeed tell-tale, it may be difficult for Sebi to get hold of definitive proof. More importantly, questions have been raised why Sebi has seen it fit to absolve the Alliance management from the charges.

Eyebrows have also been raised about Mr Arora being the sole person charged with insider trading. Doubtless, the appellate tribunal and, if the case gets to them, the higher courts, will look into all these aspects.

From the point of view of the markets and the mutual fund industry, Sebi's attempt to clean up is welcome.

The cosy relationships between mutual funds and company managements have been the staple of market gossip for years, as have stories about fortunes earned by fund managers by front-running.

In Wall Street, a clean-up campaign on differential treatment for large investors has so far resulted in nine fund groups being sued for fraud, with criminal charges filed against half a dozen individuals.

Fines on account of settlements already total $ 1.65 billion, and investors have been benefited by the fee reductions that have been wrung from companies that have settled.

Back home, despite the case against Mr Arora, things are very different "" while the recent tightening of regulations is welcome, there remains a reluctance to investigate whether indeed large companies have benefited from late trades and other malpractices, and to compensate small investors.

The least that should be done is to appoint professional trustees in mutual funds immediately, as the Asian Development Bank has proposed.

As for the Samir Arora case, it is to be hoped that the market regulator has its facts correct, as it could well prove to be a touchstone for the market regulator's credibility.