Time for a rethink

Overturning the orders of the market regulator, or substantially altering them, appears to have become a habit with the Securities Appellate Tribunal (SAT).

Many of the major orders of the Securities and Exchange Board of India such as the Videocon, BPL and Sterlite stock rigging cases, the case against Nirmal Bang, the order against Reliance in the L&T case and the one against Anand Rathi have all been reversed by the appellate authority.

The conclusion is inescapable: Sebi does not seem to be learning any lessons from past rebuffs and putting more diligence into its investigations. As a result, it is in danger of losing its credibility as a regulator.

The Samir Arora case, in which Sebi has received its latest comeuppance from SAT, was a high-profile one, involving one of the mutual fund industry's poster boys.

In taking on the former Alliance Capital chief investment officer, Sebi wanted to send a strong signal that it was cleaning up the mutual fund industry, and that insider trading would not be tolerated. Surely the market regulator knew the risks of failure, and the difficulties in proving insider trading?

It, therefore, had every reason to proceed with more than abundant caution. Yet, the Tribunal pointed out that Sebi had not even attempted to prove the substance of some of its charges. Most damningly, it says that the appellant's replies to Sebi's allegations "could have been considered with a more open mind".

From what SAT seems to be saying, Sebi not only failed to do its homework well, but seemed over-eager to rush to judgment. Even at the time of Arora's initial indictment by Sebi, there was much scepticism about whether Sebi would be able to make the charges stick since most of the case was built on circumstantial evidence.

Sebi had taken the extraordinary step of arguing before the tribunal that it is very difficult to gather adequate evidence in respect of charges relating to conflicts of interest, market manipulation, and insider trading.

In response, the Tribunal has said that while they appreciated the difficulty, "it is not possible for us to let mere suspicions, conjectures and hypothesis take the place of evidence as described in the Evidence Act".

That's rather obvious, and by now it should be clear to Sebi that it badly needs to strengthen its oversight and investigation teams.

Instead of prematurely rushing to impose disciplinary action, Sebi should note instances of suspicious behaviour, keep a close watch on the suspects, collect evidence, build a cast-iron case and only then try to punish the offender.

If it needs more investigators or better-trained ones, it should hire them from wherever they are available""one presumes that it is not short on resources. It already briefs well-known lawyers to fight its cases, so presumably the lacuna lies not in the legal preparations, but in the quality of the evidence gathered.

If Sebi wants to improve its credibility, it must in future make sure that it builds up a water-tight case so that even the aggrieved party will think twice about going in appeal.

And one of the first steps towards ensuring that the disciplinary process is effective will be to staff the regulator as well as the appellate body with people who know the markets, so that they are in a position to make the right judgments.