Crime and punishment in the capital market

THE SEBI'S ORDER on a 1998 price-rigging case involving three market savvy companies and Mr. Harshad Mehta though belated is welcome. Most certainly, the current crisis in the market and the specific accusations of regulatory laxity and inaction have spurred the SEBI to decide on a three-year-old matter, which apparently has no direct connection to the happenings now. However, there are certain aspects to the Indian stock market behaviour which do not seem to change. According to the SEBI, the share-rigging was carried out by Mr. Harshad Mehta and his cohorts acting at the behest of the three companies. That a once high profile broker has been held responsible a full six years after his own brand of shenanigans was exposed says it all. By any conventional - and ethical - measure he ought to have been prevented from operating in the share market. Yet it is to him that the three companies, BPL Limited , Videocon International and Sterlite Industries, turned to manipulate their share prices. Being frequent users of the capital market, these companies could not have been ignorant of its practices. Again, it is not as though the three companies alone continued to repose faith in a disgraced broker. Obviously the rigging was possible because Mr. Harshad Mehta had a large number of cohorts - and admirers - who were only too eager to play follow-the- leader. That of course is as reminiscent of the early 1990s as it is of the Ketan Parekh-lead crisis a decade later. The SEBI order on the 1998 case, although it does not say so, is really an indictment of a system that remains flawed. There are numerous other cases of rigging, of promoters and insiders teaming up with unscrupulous capital market intermediaries, waiting to be investigated. Clearly the regulator does not have the wherewithal and is out of depth in a scenario where not just the cynics see a wide preference for and acceptance of sharp, questionable practices. Even the 1998 episode would probably have not been proceeded against if it had not caused a serious payments crisis on the Bombay Stock Exchange. It is a matter of concern that a bail-out package put through then outside the market system in these stocks remains opaque till today. Still, with all its general and specific shortcomings, there is a strong case to persist with and improve upon the existing form of regulation. Adding to the rule book a frequently-heard suggestion to give more teeth to the SEBI will not by itself be useful. One inherent limitation of the capital market regulation that has come into sharp focus has to do with the way SEBI has evolved. A late entrant to the capital market scene, the regulator could extend sway only through licensing intermediaries - merchant bankers, brokers and others. To a large extent, outside elements not bound by any kind of rules or ethics have perpetuated scams. Identifying a crime and awarding a punishment are both restricted by the fact that the principal perpetuators are technically outside the licensed regime. Although it appears daunting now, the only way to uphold the rule book is to rework the flawed value system. Deterrent punishments, if at all possible, will work only upto a point. All three companies in the latest case and Mr. Harshad Mehta are appealing and the related criminal and civil cases against them will also drag on. Denying the three companies access to the market might harm all their shareholders indiscriminately. A more potent form of ostracism will help. A crime is a crime even if it is committed in the lax capital market environs of the day. The JPC now being set up for the recent crisis must address the ethical issues.