Somasekhar Sundaresan: Contrasting regulators lead to contrasts

WITHOUT CONTEMPT

Two settlements of class action disputes settled in the US last fortnight are noteworthy. Ten out of 12 non-executive directors of Worldcom Inc agreed to dip into their pockets to pay $18 million out of a $54 million settlement of a dispute with shareholders and bondholders.

A few days later, 19 former non-executive directors of Enron Corporation dipped into their pockets to pay $13 million, out of a $168 million settlement.

Many would tout this as the epitome of how effectively the US capital market system works in the investor interest. But scratch the surface, and you will find that this was not a direction or an order passed by the Securities Exchange Commission (SEC).

It was court action that resulted in an out-of-court settlement between investors and directors, who were being sued for damages for alleged negligence in their role as directors.

In such litigation, at times, the SEC only files briefs supporting the claimants. At other times, the SEC raises serious objections to people like Eliot Spitzer (the attorney-general of New York) and the Department of Justice chasing corporate boards and market participants over alleged violations of securities laws administered by the SEC, and forcing them to make hefty settlement payments. Private attorneys often boast about how keeping the SEC out is the best shot at getting quality settlements.

Enron and Worldcom went bankrupt recently after accounting fudges scandalised their financial statements. Shareholders went after the boards of directors demanding compensation for not overseeing the functioning of the companies properly.

It happens ever so often that when one asks the simple stupid questions, these frauds get prevented. The shareholders end up asking the stupid questions in court, and without having to answer them, disputes get settled, and negotiated compensation amounts get paid.

Cut to India. In several cases, where investors appeal decisions of the Securities and Exchange Board of India (Sebi) for not being stringent enough, Sebi argues extensively in the Securities Appellate Tribunal defending its decision, thereby helping the beneficiary of its orders.

But years after the spate of public issues that hit the market in the early 1990s, summary directions have been issued by Sebi to many directors including non-executive directors, asking them not to deal in securities for periods as high as five years.

It is impossible for a non-executive director to defend such action for sheer want of documentary evidence critical for a defence.

Years after sections of the media shouted themselves hoarse about illegalities in allotment of shares companies have been issued directions to deposit lumpsum amounts of several hundreds of crores, pending completion of investigations.

The company affairs ministry issues notices to allegedly "vanishing companies" more than a decade after their share issues hit the market. Some of these notices are issued to directors in respect of whom Sebi would have corrected itself and withdrawn its directions.

The media publicity to such directions has always proven to be inversely proportional to the quality of probes and seriousness of facts.

Such directions tend to get far more local media coverage than a multi-million dollar settlement in the US. And when such directions get set aside, there are always the courts to blame.

The US non-executive directors who pay from their pocket can still deal in securities. They are not faced with prohibitory orders hurting their future earning. And yet, the US investors who sued them are happy with having made them pay. It is time for introspection in India.

TAILPIECE: If the SEC and Sebi show up in contrast, within India, the two financial markets regulators are another study in contrast.

The RBI, which is more circumspect about going to the media, has now decided that penalties imposed on banks would be placed in the public domain by issuing a press release, giving details of the circumstances under which penalties were imposed. Banks would also have to publish the penalties in their Notes to Accounts.

But in a recent circular that lays down the new policy, it has shed some wonderful pearls of wisdom on public disclosure.

"Circumspection in disclosures by the supervisors arises from the potential market reaction that it might trigger, which may not be desirable. Thus, in any policy of transparency, there is a need to build processes, which ensure that the benefits of supervisory disclosure are appropriately weighed against the risk to all stakeholders of non-disclosure in each instance."

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal)