The decision by capital market regulator, Securities and Exchange Board of India (Sebi), to suspend trading of stocks of 331 companies is being keenly watched. While the regulator is duty bound to weed out bad companies from the capital market’s eco system, any action needs two careful considerations. First, all actions should be able to stand judicial scrutiny. Second, every action should lead to creation of systems and processes so that in the future, such companies don’t come up and their activities are curtailed forever. Or else in the next Bull Run, there would be another set of companies, which would end up getting the same treatment.
Whether the Sebi move will stand judicial scrutiny, which is bound to take place, would be clear over a period of time. What is important, however, is that the regulator creates systems and processes so that companies, that may have evaded scrutiny this time, are also taken to task. It is no state secret that many companies were able to get themselves listed on the stock exchange between 1994 and 1996 by coming out with public issues of anywhere between Rs 3-5 crore. Later, promoters of these firms vanished with public money, leaving no traces behind. Over the years, many of these companies changed hands and in many cases, were bought by chartered accountants who specialise in so-called tax consultancy. After acquiring these companies, the new owners paid small money as fine for non-compliance, got those stocks re-listed on the exchange and have been in the thick of malpractices in every Bull Run, which has taken place in the last 17 years.
Will Sebi’s shock treatment hurt the so-called promoters? The answer is yes. But, crucially, does the role of the Sebi end just with suspending trading of stocks, triggering off a judicial skirmish? The answer is no. When a stock price is rigged with a view to evade taxes, there is a whole chain that works to deceive both government of its revenue and retail investor of his hard earned money. That chain not just involves so- called promoters, but also stock brokers, a certain set of retail investors, whose accounts are used to create artificial liquidity and even some institutional investors who act in tandem with promoters and provide them with a safe haven when markets are volatile. Until now, Sebi has not taken any action against these so-called investors, who rent their demat and trading accounts. They need to be charged with criminal breach of trust and should be handed exemplary financial punishment. Only when everyone involved in the chain is punished and their illegitimate gains snatched away from them, would Sebi get rid of this scourge. In India, there is law for everything, but there is no fear of the law because they are hardly implemented.
The good part is that in the financial market, it is not very difficult to identify all the players in that chain. Every transaction has a trail, which can be traced even after years have passed. What is required is the will to take action to cleanse the system permanently. It is very likely that a thorough investigation would reveal many unlisted entities, which have been used as instrument to evade taxes. Both Sebi and the revenue department need to work in tandem so that the menace of misusing the provisions of tax laws, which were essentially brought in to promote saving in financial assets, are not take for a ride by a select few.