SEBI’s Inaction And SAT’s Bad Decisions Are Costing Investors Their Hard Earned Money; What About Preserving Investor Rights?

SEBI’s Inaction And SAT’s Bad Decisions, What About Investors?

Madhabi Puri Buch, being the first woman from the private sector to head the influential market regulator SEBI, has, in the interim, been receiving much-increased scrutiny. Known for her hard work, data-driven approach, and outspokenness, Buch aims to be perceived as tough yet fair; still, questions are being raised (and rightly so) examining her performance so far and the challenges faced by SEBI and the need for SEBI to take decisive action to protect the interest of investors.
At the same time, much is expected from SAT as well; however, there seems to be a disconnect between the two regulatory bodies leaving the investors out in the cold!

Mixed Results and Neglected Plight of Investors –
While Buch’s tenure has shown some positive developments, there is a significant issue that remains unaddressed—the plight of investors who have lost their savings!

Even without considering the high-profile Adani-Hindenburg case, SEBI had substantial cleaning up to do before her tenure began. Nevertheless, the regulator has been in the media spotlight for three impactful orders.

These orders, although they have sent a strong message to corporate houses and non-compliant market intermediaries, accustomed to settling serious offences for minimal amounts; however, despite SEBI’s efforts to strengthen regulations, it has often failed to take decisive action against corporate entities responsible for causing financial harm to investors. This inaction has led to a lack of accountability and an erosion of investor confidence in the market.

The Importance of SEBI’s Orders –
The effectiveness of SEBI’s signal of strict compliance enforcement can be gauged by exploring three cases in point and hinges on the outcome of these orders at the securities appellate tribunal (SAT) and eventually the Supreme Court (SC).
These orders have already shaken those under SEBI’s regulatory ambit and reinvigorated long-suffering investors. Each of the entities reprimanded by SEBI has appealed to SAT. While two have obtained a stay order, the third has not; therefore, exploring these cases and understanding their significance is crucial.

1. Brickwork Ratings Case – SEBI issued a winding-up order against Brickwork Ratings, citing repeated lapses and failure to uphold its duties as a credit rating agency.
The order emphasised instances where investors suffered significant losses due to top rating agencies’ failure in their fiduciary responsibilities and collusion with companies to maintain high credit ratings until defaults occurred.

However, this is what happened – SAT set aside SEBI’s order, stating that the violations were not deliberate or malicious, leading to a reconsideration of the punishment’s magnitude.

2. IIFL Securities Case – SEBI banned IIFL Securities from onboarding new clients for two years due to various offences, including the misuse of funds and incorrect classification of client accounts.

Despite being a repeat offender, IIFL Securities secured a stay order from SAT. SEBI’s repeat punishments for the same offence have raised questions about the effectiveness of its actions. The SC will make the final decision on all three cases against IIFL Securities.

3. ZEE Group Case – SEBI took an unprecedented step by barring Subhash Chandra, the founder and Chairman Emeritus of the Zee-Essel group, and his son Punit Goenka from holding directorships or key managerial positions in any listed entity.
This move, aimed at sending a strong deterrent signal, poses significant consequences for the individuals involved. Although the Zee promoters appealed to SAT, the tribunal denied a stay and instructed them to present their defence to SEBI within two weeks.

Therefore, the question that comes to mind is this – Is SEBI doing enough, or are these insufficient deterrence measures?

SEBI’s recent orders against entities involved in fraudulent practices have been a step in the right direction. However, the punishments and penalties imposed by the regulator have often been perceived as inadequate.

Investors who have suffered substantial losses, such as those affected by the IL&FS, Altico Capital, DHFL, Cox & Kings, and RCom crises, have not received full compensation for their investments. This lack of substantial deterrence against corporate malpractices perpetuates a culture of impunity and leaves investors without recourse.

Taking the highlighted cases above has SEBI’s response been weak towards rating agency lapses?

One of the critical areas where SEBI’s inaction is evident is in its response to credit rating agencies’ failures. Rating agencies entrusted with assessing the creditworthiness of companies have been found colluding with entities to maintain artificially high credit ratings. When these companies defaulted, investors suffered severe losses. SEBI’s penalties and actions against rating agencies have been insufficient to deter such malpractices, leaving investors at a disadvantage and undermining the credibility of credit ratings.

Another question is about broker Default and SEBI’s Leniency; SEBI’s response to broker defaults and misappropriation of client funds has also been lacking.
The market has witnessed several instances of brokers misusing client funds or misleading investors, leading to substantial financial losses. Despite assurances from Buch and SEBI about stringent action, penalties imposed on defaulting brokers have been mild, often allowing them to continue operating with minimal consequences. This leniency further undermines investor trust in the regulatory framework.

Thirdly, what about the lack of compensation and justice?
The failure to provide adequate compensation to investors who have suffered losses is a glaring issue. Many individuals, including retired individuals who relied on their savings, have been left in financial distress due to fraudulent activities in the market. SEBI’s inability to hold wrongdoers accountable and ensure fair compensation for victims compounds the injustice these individuals face.

So what do we expect from SEBI?
To address the concerns surrounding the Securities and Exchange Board of India (SEBI)’s performance and its inaction in protecting investors, it is essential to explore the actions that SEBI can and must take. By implementing comprehensive measures, SEBI can strengthen its regulatory framework, enhance investor protection, and rebuild trust in the market.

Strengthening Regulatory Measures – SEBI should focus on enhancing its regulatory measures to prevent corporate malpractices and safeguard investor interests. This can be achieved through stricter enforcement of existing regulations and the formulation of new rules where necessary. By conducting thorough inspections, audits, and investigations, SEBI can proactively identify potential irregularities and take prompt action to mitigate risks.

Robust Oversight of Rating Agencies – Given the critical role of credit rating agencies, SEBI must establish stronger oversight mechanisms to ensure their independence, transparency, and accountability. This includes conducting regular audits, imposing stricter penalties for collusion or negligence, and enhancing the evaluation criteria for rating agencies.

SEBI should also promote the development of alternative credit rating mechanisms to reduce reliance on traditional agencies and provide investors with more comprehensive risk assessments.

Imposing Meaningful Penalties – SEBI should revise its penalty framework to ensure that financial consequences for corporate wrongdoings are truly deterrent. The current system often results in minor penalties that fail to reflect the gravity of offenses.

By imposing substantial fines and disgorgement of ill-gotten gains, SEBI can send a clear message that misconduct will not be tolerated. Additionally, SEBI should explore mechanisms to compensate investors who have suffered significant losses due to corporate fraud or malpractice.

Strengthening Investor Education and Awareness – SEBI must prioritize investor education initiatives to enhance awareness and understanding of financial markets. By providing accessible resources, organizing workshops, and leveraging digital platforms, SEBI can empower investors to make informed decisions and navigate the complexities of the market.

Moreover, SEBI should collaborate with educational institutions and industry experts to develop comprehensive curricula incorporating financial literacy early on.

Collaboration and Information Sharing – SEBI should strengthen its collaboration with other domestic and international regulatory bodies to foster a cohesive and coordinated approach to market oversight.

SEBI can stay ahead of emerging risks and potential market manipulations by sharing information, best practices, and intelligence. This collaborative effort will enable the regulator to detect systemic issues early on and take preemptive measures to protect investors.

The Role Of SAT
At the same time, the Securities Appellate Tribunal (SAT) plays a vital role in the Indian financial market by serving as an appellate authority for appeals against orders and decisions made by regulatory bodies like SEBI.

SAT holds the power to review and potentially overturn decisions made by SEBI, ensuring a fair and impartial process.

To effectively fulfill its role, there is much that is expected from SAT –

Thorough Review of Cases – SAT should conduct a comprehensive review of cases brought before it, taking into account all relevant facts, evidence, and legal arguments. It should ensure a thorough examination of the merits of the case to arrive at well-founded and just decisions.

Timely Resolutions – SAT should strive for timely resolutions of appeals to provide certainty to the parties involved. Delays can lead to prolonged uncertainty, impacting investors, companies, and market stability. Adhering to strict timelines and expediting the appeal process will contribute to a more efficient and effective regulatory system.

Independent Decision-Making – SAT should maintain its independence and exercise its discretionary powers judiciously. It should make decisions based on the merits of each case and the applicable laws and regulations. By acting independently, SAT can uphold the principles of justice and fairness, ensuring that its decisions are not influenced by external factors.

Consistency and Precedence – SAT should establish consistent precedents and guidelines to guide its decision-making process. Consistency in rulings helps create a predictable regulatory environment and provides clarity to market participants. It is essential for SAT to consider past decisions, legal principles, and industry practices while adjudicating cases.

Collaboration with SEBI – SAT should maintain a constructive and collaborative relationship with SEBI. Regular communication, sharing of information, and mutual respect between the two entities can facilitate a more effective regulatory system. Collaboration can also contribute to a better understanding of complex market issues and promote alignment in decision-making.

Transparent and Reasoned Decisions – SAT should provide clear and well-reasoned decisions, outlining the rationale behind its conclusions. Transparent decision-making processes help build trust in the judicial system and provide valuable guidance for market participants. Publishing decisions promptly and making them accessible to the public can contribute to greater transparency and accountability.

By following these principles, SAT can ensure fair and efficient appellate proceedings, contributing to a robust and credible regulatory framework in the Indian financial market.

The Last Bit, SEBI has a crucial role in safeguarding investor interests and maintaining the integrity of India’s financial markets. To fulfill this mandate effectively, SEBI must take decisive actions to strengthen its regulatory framework.

By enhancing oversight, imposing meaningful penalties, promoting investor education, and fostering collaboration, SEBI can build a stronger market regulator that instills trust, protects investors, and promotes a fair and transparent marketplace.

While Madhabi Puri Buch has made efforts to strengthen SEBI’s regulatory framework, there are concerns about the regulator’s inaction in addressing the plight of investors who have lost their savings due to corporate malpractices. SEBI’s weak response to rating agency lapses, broker defaults, and insufficient penalties have perpetuated a culture of impunity and eroded investor confidence.

SAT, on its part, must ensure fair and efficient appellate proceedings, contributing to a robust and credible regulatory framework in the Indian financial market.