Disgorgement is Sebi's answer to financial fraud

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS IPO scam: Sebi slaps disgorgement order on NSDL, CDSL, DPs BSE | NSE 01/01/70 Are Mutual Funds betting on ?

Sebi passed a disgorgement order in the IPO manipulation case yesterday. In the first of is kind ruling, the market regulator has directed NSDL, CDSL and eight DPs to disgorge Rs 115.81 crore in six months.

Prithvi Haldea of Prime Database and Somasekhar Sundaresan of J Sagar Associates express their thoughts on this precedent-setting move from the regulator.

Haldea believes that this is a historic order since it sets the trend in future - not only for the regulators to take out the money which was made wrongly by the fraudsters, but also give that money back to the investors who lost the money.

Somasekhar Sundaresan feels that this order raises serious questions about what disgorgement is in the mind of the regulator - who is the person who has the benefits and what is the means of getting the money out of him.

Excerpts of CNBC-TV18's exclusive interview with Prithvi Haldea:

Q: What do you make of this Sebi move and do you think it is warranted that a punishment of this magnitude is handed out?

A: First of all, let me tell you that I am probably one of the happiest persons to see this order. I can use any number of adjectives to this order - this is historic and path-breaking.

For 50 years, we have seen many people committing frauds on  small investors and they can only complain. At best, we have seen punishments being meted out to fraudsters but what has never happened in the Indian market is disgorgement and compensation to the investors.

So I think, in a sense, this is a historic order because this sets the trend in future - not only for the regulators to take out the money, which was made wrongly by the fraudsters, but also give that money back to the investors who lost the money. So, it is a very historic order.

In terms of penalties, it is not a question of penalty, this is basically a disgorgement order. It is not penalizing an intermediary or a depository for their wrong doing, if any.

It says that the fraud has been established and it is beyond doubt that certain entities made huge amounts of money by acquiring shares in the name of small investors. The last order of Sebi clearly establishes that fact so we are not debating whether the fraud took place or not.

Now, the second step is that having decided that the fraud took place, and that the total money made was Rs 115 crore, it is not a penalty. It basically says that 'we want to restore back to where you were before you committed this fraud, bring this money out and give it back to the small investors', so it is not penalty at all, it is basically disgorgement.

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