Sebi@25: Greater powers after the Harshad Mehta scam

The names of Harshad Mehta and Ketan Parekh will live on in memory not only because of the havoc they wreaked on investor wealth, but because they revealed gaping holes in India's financial systems. In the second part of the special series Sebi@ 25, CNBC-TV18's Ashmit Kumar reveals details how the market regulator learnt from these lapses and emerged keener and stronger.

Also Read: Sebi@25 : Sebi's journey to becoming a powerful regulator
The adage, ‘what doesn't kill you, only makes you stronger’ rung true for market regulator Sebi more than once. In 1988, Sebi began to mature as a statutory authority and in 1992 it was forced to speed up the process and embark on a steep learning curve, thanks to Harshad Mehta (HM) and his associates.
The multi-million dollar scam swindled hundreds of crores from unsuspecting banks and by artificially pumping up stock prices, the flamboyant Harshad Mehta also lured unsuspecting investors into investments that would ultimately end in heavy losses. The exposure of the scam left Sebi with a lot of ground to cover.
Ashishkumar Chauhan, MD and CEO, BSE, says, “Though there was no direct co-relation between the HM scam and the formation of the regulator, the scam became a catalyst for policy-makers to think hard. It set in motion a chain reaction which lead to developments like the listing agreement.
The first boost to Sebi's arsenal was the Securities Laws (Amendments) Act 1995.  This widened Sebi's jurisdiction and allowied it to regulate depositories, FIIs, venture capital funds and credit-rating agencies. To secure investor interest, Sebi could also make it mandatory for disclosures by companies issuing securities.
Sebi was also empowered to penalise capital-market violations with a fine of Rs 10 lakhs. And allowed its investigative arm could summon persons, enforce production of books of accounts, and conduct enquiries, audits and inspections of MFs, stock exchanges and other intermediaries.

Greater autonomy ensued when Sebi was given immunity from civil action. The Securities Appellate Tribunal was established to give Sebi greater credibility. But it would take the ketan parekh scam to give the regulator a more ferocious bite.
Somasekhar Sundaresan, partner, J Sagar Associates, says, "With this scam, people wanted a quick fix - which is what happened. The mood was to empower the regulator. This indeed played a role in its evolution. Sebi was empowered to inflict grievous financial injury."
So seven years later, with Ketan Parekh's famous K-10 stocks being hammered down and coating many investors their lives savings, came the Sebi (Amendment) Act of 2002. This gave Sebi the power to call for records from any bank, authority or board. It also empowered the regulator to inspect books of any listed public company.
Sebi could now, suspend trading of a security, bar persons and companies from accessing markets and suspend any office bearer in a stock exchange. It was also granted powers to attach, impound, and retain the proceeds of any transaction that was not by the book. Sebi could also specify requirements for listing and transfer of securities.
Also, offences like insider trading and unfair trade practices were spelt out better, and expressly forbidden. More power also came in the own of higher punitive powers. So fines of upto Rs 25 cr or three times the unlawful gains, whichever is higher, were allowed and were jail terms from 1 to 10 years were introduced.
The Securities Laws (Amendment) Act of 2004 followed. As per the recommendations of the Joint Parliamentary Committee on the stock market scam, a law was enacted for the de-mutualisation of exchanges. This put an end to exchanges being incorporated as ‘mutual’ organisations where the traders and brokers owned, controlled an managed the exchange. So exchanges were corporatized, putting public interest first.
These wholesale changes contributed towards arming the regulator better. But Sebi’s keenness to stay ahead of the curve does not stop there. Acting in concert with other stakeholders, Sebi sought to move from a merit-based regime to a disclosure-based regime. In the next part of the series, explore how Sebi sought to usher in greater transparency and efficiency.