Trigger-happy

The Securities and Exchange Board of India's ruling prohibiting UBS Securities Asia from issuing participatory notes for a year is the latest order by the market regulator to be struck down by the Securities Appellate Tribunal (SAT).

Sebi's order had attracted much scepticism in the market when it was passed, partly because it was announced on the anniversary of Black Friday, and it was widely believed that the aim of the inquiry was not so much to unearth the facts as to find scapegoats for what amounted to a loss of face for the government.

It's also noteworthy that Sebi found no evidence of market manipulation by UBS, and its order banning UBS from issuing participatory notes for a year was the result of the foreign investor allegedly not following the "Know Your Customer" norms, for not exercising due diligence, and for not furnishing timely information to the market regulator.

Sebi further elaborated in its order that there was a serious regulatory concern because participatory notes were being issued without proper due diligence on the part of the FII. It also said that UBS "was biding time to avoid furnishing of the information, lest the same should be inconvenient."

Unfortunately, however, Sebi did not prove that the information finally furnished by UBS was, in fact, "inconvenient". SAT's order has highlighted two important points""first, that the "Know Your customer" norms are vague and ill-defined, and second, it is unclear whether it was mandatory for UBS to disclose the information required by Sebi in respect of the beneficiaries of the participatory notes issued.

It could be argued that this calls for tightening the law to eliminate these loopholes. But such an attempt to find out the ultimate source of funds is, in any case, doomed to failure. Even if the beneficiary of a participatory note is traced, how will one ensure he is not acting on behalf of another group?

Another problem could be that of jurisdiction""UBS had contended that in some of the cases about which it had been queried by Sebi, it was already following the "Know-your-customer" requirements of the UK's Financial Services Authority. So far as the issue of participatory notes is concerned, Sebi's approach must be a practical one.

The more important point that emerges from the UBS case, however, is the issue of the credibility of the market regulator. The number of Sebi orders overturned on appeal are now too numerous to recount, and many of these have been high-profile cases""such as those against Anand Rathi and Samir Arora and against well-established companies such as Hindustan Lever, Videocon, Sterlite and many others.

Clearly, Sebi has been trigger-happy, and its failure to prepare watertight cases has severely sullied its image. After its earlier debacles, there has been no lack of advice given to the market regulator by concerned observers.

This includes toning up Sebi's investigative mechanism so that a clear case is established, with the concomitant caveat that cases where it is unable to find compelling evidence should be dropped, however unpalatable that may be to the investigators.

In the UBS case, SAT has also pointed out that Sebi was proceeding under the wrong sections of the Sebi Act""this indicates that the quality of legal advice that Sebi gets should be improved.

The market regulator's image has already taken a severe battering, and it's time it did something about it.