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SEBI: Gaps in oversight…

Today, we are able to attract marquee investors to the trading floors. Thanks to the framework created by SEBI. There is an urgent need to fill up some of the gaps in disclosures and enforcement. Otherwise, SEBI will be like the cops in the Indian movies showing up after the story is over.

1992 marked a turning point in India’s capital markets, for the better. The Securities & Exchange Board of India was set up to regulate the lawless capital markets, which were mostly governed by stock brokers and we had nearly twenty regional self-regulated stock exchanges. Thanks to SEBI there is now some order in the market.

However, there are gaps, which SEBI needs to address. The essential things that SEBI has to do are in the areas of ‘disclosure’ and ‘enforcement’ of the letter of the law in the capital markets.

Disclosures are opaque

In the battle between the companies and the regulators, the regulator has lost. Since SEBI came in, I am seeing disclosure of company accounts getting LESSER rather than more. While the text where companies talk about themselves, schedules that used to show production and sales of different products the companies made are missing. Now we have ‘consolidation’ of accounts as a rule, but detailed accounts of the subsidiaries and associates are missing. Even the websites of the companies do not carry these. Thus, financial disclosures have become opaque. The balance sheets have become high on pages and low on content.

Similarly, take the case of ‘IPO’s. There are ‘offer documents’ that run to a few hundred pages. However, few investors read these as these are only uploaded online. There is a ‘statutory’ advertisement in the newspapers, which gives so many details. However, the details miss out on significant things like, what does the company do to make money? What is its business? How long has it been around? What is the valuation of the company going to be after the issue is over? What were the sale and profit numbers in the last couple of years? Who are the individuals behind the holding companies that are shown as ‘promoters’?

For Whom does the regulator work?

SEBI is over-active when it comes to things like ‘independent’ directors’, ‘women’ directors’ etc.. However, these are good-sounding things rather than useful information. Firstly, no promoter will ever appoint anyone who is not known to him as a member of the board. And unless one is a full-time director, the person’s information would be limited to what he or she is told by the CEO/promoter. And, if for instance, a company pays an ‘independent’ director, who is a professional, a crore of rupees plus five-star perquisites, is the person ‘independent’?

Less than ideal prosecution…

SEBI can help governance through a system of deterrent punishment rather than ask someone to follow a set of rules that are riddled with ‘escape’ clauses. It is unfortunate that the legal help of SEBI is poor when it comes to prosecution. They are unable to pay for the best available legal counsel. And the private sector legal counsels do not seem interested because of fear of losing more lucrative corporate business. So we see less than ideal prosecution, a lot of overturning of decisions by the Securities Appellate Tribunal (SAT), which can be demoralising. Will SEBI get smart talent by paying market-related fees?

The exchange goes for volumes, not tradability

When it comes to regulating the orderly market where price discovery is free, there are obstacles. Instead of narrowing the options (like limiting the number of stocks in the F&O to a handful) the regulator has thrown open the door for a free-for-all. Of the 2000 listed companies, not even 200 are ‘liquid’ regarding tradability at low impact cost. The exchanges want volumes. SEBI should be blind to that and enforce what is right rather than focus an expanding the market.

(Author is an Investment Analyst)

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