After a delay of almost nine months, and after some vigorous pursuing by business newspapers, Sebi has made public orders of the Securities Appellate Tribunal.

What has been found is that SAT has passed a record 75-plus orders in just the last three months. Editorials and reports in newspapers and magazines have focused on a couple of high profile orders such as Samir Arora, Reliance, Roofit, etc. However, these 75-plus orders running into thousands of pages give a more detailed picture.

The Sebi Saga: Complete Coverage

Interestingly, in most of the cases, Sebi's orders have been reversed or the penalty reduced. Severe criticism is made of Sebi's approach in the matter by SAT. The questions that come to mind for all concerned are many.

s Sebi only to be blamed? It is difficult to believe, and the SAT orders confirm this, that Sebi can only be blamed for sloppy investigation and fancy penalties. There are other angles to this also.

An important issue is the quality of investigation and evidence gathering by Sebi. A few years back, in three leading cases -- BPL, Sterlite and Videocon -- SAT criticised, inter alia, the poor quality of evidence gathered.

In the latest cases of Samir Arora and others, the same criticism has been continued. Serious allegations of price manipulation, insider trading and even conflict of interest were levied without being able to substantiate any of them by credible evidence.

However, for proving such serious offences, SAT demanded quality of evidence of the highest standards, in accordance with the Indian Evidence Act and this Sebi was unable to furnish.

Another aspect was that offences of price manipulation by their nature require mens rea or a guilty intent to be proven by Sebi and here too, SAT found Sebi falling short.

Having said that, the fact also is that offences relating to securities are notoriously difficult to prove, as in the case of insider trading. Demanding the highest level of proof rather than drawing conclusions from circumstantial evidence makes enforcing the law very difficult.

Changes perhaps are required on at least two fronts. One is a change in law itself where explicit and realistic standards of proof are laid down and where required, after a certain stage, the onus be shifted to explain the evidence.

Secondly, change is also required in the persons adjudging the allegations. Persons having practical experience and expertise in the markets would be able to grasp the situation much easier and decide on the allegation.

Then, several of the appeals related to hefty penalties -- often touching crores of rupees -- levied for simple offences of late filing of documents or non-furnishing of information. The most glaring aspect was that no attempt was made to ascribe, either in the original orders or even in the appeal, any malafides on the party.

Undue reliance appears to have been placed on a recent decision of the Bombay high court in Cabot International's case where it was held that mens rea is not required to be established in such cases. However, a closer reading of this case shows that this does not mean that a mere technical contravention will attract huge penalties.

Other factors such as loss caused, undue profits made, etc have to be considered and this was not done consistently in most cases. Thus, penalties of as high as Rs 75 lakh (Rs 7.5 million) were reduced to a few thousand.

Having said that, it is also submitted that when laws are contravened, a lenient approach may reduce the respect for the law. The Sebi Act was amended in 2002 by parliament and the penalties were consciously raised up to Rs 25 crore (Rs 250 million).

The Bombay high court has also held that such contraventions are civil offences and malafides need not be proved. To ensure fear of the law, penalties levied should be upheld though of course sky high penalties for minor contraventions deserve to be set aside.

Then there are several cases against brokers for various contraventions in paper work. Typically, some client forms were found not to have been filled up fully or some document not collected from clients, or certain minor details not printed on forms.

Sebi has prescribed numerous and detailed requirements for brokers and one could expect a minor contravention. In most of the cases, Sebi had suspended the broker for several months for not fully complying with such paper requirements.

Suspending the broker is clearly a serious affair. His source of livelihood is lost, often permanently. But the impact on his reputation in a market that notoriously relies on integrity of brokers is much more.

It appears that no attempt whatsoever was made to establish the malafides or even establish any serious consequence of the contravention. No evidence was typically brought forward of the concerned broker as having been a repetitive offender.

In many cases, it could be shown that the missing information could be easily gathered from other supporting information already on record. SAT also noted that there were no investor complaints.

Not much credence was given to the personal judgement of the broker in relation to his own affairs and clients. SAT thus rightly quashed many of such judgements.

SAT also found that Sebi's approach was inconsistent and while some brokers were suspended, others with identical contraventions let off with a warning. SAT was thus obliged to drop or reduce the suspension.

The review of the decisions shows some patterns and one can make some conclusions and suggestions.

At the outset, technical offences should not be forthwith met with stringent punishment particularly without establishing at least some adverse consequences. Perhaps a system of graded punishment may be put in place, starting with a simple warning.

It is also necessary for Sebi to establish some malafides or serious consequence of any contravention rather than taking an approach of penalising for a mere technical contravention. In particular, if surrounding facts clearly show that other acts have not shown any malafides, no punishment should be awarded.

Above all, there is a need for a far stronger case for serious offences such as price manipulation and insider trading. This is an area where, however, changes are required not only at Sebi but even in the law and in the nature of courts.

It is necessary that such cases be handled by impartial persons who are experts in securities laws and markets. If such persons opine prima facie that an offence has taken place, the onus should be shifted on the person so alleged to prove otherwise.

Thus, not only the law but even the system of adjudication and approach would need to be changed. But perhaps the strongest of efforts need to be made in evidence gathering.

It is quite easy to ascribe the blame wholly to Sebi for the reversal of so many of its decisions by saying that Sebi is over-zealous. If this is the conclusion, the inevitable absurd conclusion also is that the Indian stock markets are squeaky clean.

A holistic and co-coordinated approach and change is needed. Otherwise, in a market where the most sophisticated of crooks are attracted, they would have a field day knowing that the system will allow them to escape unscathed.

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