Credibility test

BS Compass

Sebi's handling of the insider trading case will be critical to its image.

It's a good thing, overall, for the Securities and Exchange Board of India (Sebi) to be looking to penalise market players who indulge in activities of insider trading and price manipulation.

But using sweeping provisions in the Sebi Act like Section 11B and Section 11(4)(b) to get to this objective is hardly desirable. Essentially, these provisions allow the regulator to give orders on almost anything concerning the capital markets.

The way in which Sebi has dealt with Samir Arora is a case in point. Experts point out that in terms of transparency there is a lot left to be desired. To start with, it's not a "reasoned order", in the sense that there is not enough evidence provided for the charges.

Chartered accountant Jayant Thakur points out that according to schedule 2 of the insider trading regulations (in clause 6, to be precise), companies are allowed to share only public information with analysts and institutional investors.

Alternatively, the information given to analysts or institutional investors must be made public at the earliest. If, according to Sebi's charges, Samir Arora acted on information given to him by insiders in Digital GlobalSoft, then it's clear that even the company is in the wrong, as it has gone against the code of conduct given in the insider trading regulations.

In that case, even the company needs to be penalised. Also, it's surprising to see that Sebi has not named the mutual fund company in its charges, and has restricted itself to only the head of the company.

Having said all that, how does one deal with the issue of insider trading, which is so rampant in the Indian equity markets? The fact that it is one of the most difficult offences to prove obviously makes it complicated for Sebi to penalise wrongdoers, unless, of course, sections like 11B and 11(4)(b) are used more often.

One suggestion doing the rounds is to allow insider trading, since it will lead to better price discovery. Many economists have argued that instead of spending money on tracking insider trading what may be needed is a transparent system that will involve more disclosure of such deals.

But on the other hand, insider trading defeats the very idea of a fair market place. The critical fact, of course, is whether Sebi will be able to carry through what it has started and prove the allegations. If it doesn't, that may do more harm than good.

SAIL

Steel stocks have been very bullish of late with Sail's stock one of the main gainers. The scrip has appreciated 240 per cent over the last couple of months and 432 per cent since the steel rally began over a year ago. Is such a huge rally justified?

There are a few reasons for the appreciation. First, There is no doubt that SAIL's turnaround in the fourth quarter in spite of falling prices in the quarter has boosted investor confidence.

Secondly, there has been a steady decline in interest costs over the last year.

Thirdly, analysts expect a reduction in capital by Rs 700 crore on its huge equity of Rs 4130 crore. Finally, markets widely expect a price hike across products in September.

Fundamentally, Sail has reported five successive quarters of lower losses with a 5 per cent increase in net profits in the June 2003 quarter over the March quarter (net profit of Rs 254 crore). Of its seven plants, Rourkela steel plant, which contributes around 15 per cent to revenue, is a loss-making unit.

But with the current price scenario, analysts expect it to turn around in the second-half of the current year, which will further add to profits. Interest costs have steadily been declining and have added around Rs 100 crore to profits since the June 2002 quarter.

With a reduction in debt by Rs 1000 crore in FY03 and refinancing at lower rates, the lower interest outgo in the second-half will improve profitability.

According to the company, a positive outlook for steel is also emerging because of increasing demand from the ship-building sector. With new ships being built, Sail is witnessing greater demand from Korea and Japan.

Apart from this, China continues to be the main demand driver for the time being with annual imports of around 25-30 million tonne. Also, the downward impact of the inventory pile-up in March quarter is dissipating and prices are expected to remain stable in the near-term. The rally in steel stocks therefore, appears to a sustained one.

With contributions by Mobis Philipose and Sameer Ranade