Sebi grapples with early settlement of market scams

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Early this year, when the dirt on the initial public offerings, IPO scam spilled out into the open after a probe by the capital markets regulator, Sebi, hardly anyone would have forseen the consequences that would follow. The disgorgement order may well have a powerful signalling impact, which may not be quite obvious, reports The Economic Times.

In the advanced markets of the West, like say the United States, there are adequate provisions to deter securities market violations or white-collar crimes in the form of disgorgement of profits or gains fairly swiftly.

Back home, the choice for the regulator may well have been to take the civil proceedings route to distribute the ill-gotten gains of those involved in the IPO scam. But one gets the sense that the regulator may have fallen back on the option of going through the administrative order route given the torturous process of civil proceedings in the country, the weight of expectations on the issue of compensating investors fuelled by the government.

Finance minister P Chidambaram, based on his own experience as a counsel for Sebi in a case in the Gujarat High Court a few years ago, had argued strongly for disgorging orders.

Given its direct regulatory powers relating to intermediaries, Sebi seems to have reckoned that a far more facile task would have to put the onus of recovering money from the IPO scamsters on the depositories and depository participants.

These entities have control over the thousands of demat accounts of those found to be the perpetrators of the scam. Considering that these accounts have been identified as those without any clear claimants to ownership and therefore on course to be closed, the logic seems to have been that the depositories and the depository participants would be in a better position to proceed against the scamsters to recover money from those who had gained in the IPO scam.

In the US, the Securities Exchange Commission started out with being granted the powers to disgorge profits and later the Securities Enforcement Remedies Act and the Penny Stock Reform Act bolstered the regulator's abilities to pitch for civil penalties. It was further enhanced by the passage of the Sarbanes-Oxley Act, which armed SEC with powers to impose civil penalties.

The Fair Fund provisions under Sarbannes-Oxley provide for distribution of the penalties recovered through civil proceedings by the regulator to the duped investors.