Now that the Saradha scam has seized the attention of the country’s political class, it seems pretty certain markets regulator Sebi will get more powers by broadening the definition of what are called Collective Investment Schemes which, by law, Sebi is allowed to regulate. It may even get powers to do searches and seize documents and even attach properties, though the power to tap phones—something the SEC in the US has the power to do—is unlikely to be allowed and Sebi may just have to make do with call records of persons who are suspects in an ongoing investigation. Once Sebi has been adequately armed, and West Bengal chief minister Mamata Banerjee has been able to get her R500 crore rescue fund going, the political class will most likely rest assured that it won’t be due to lack of trying on its part that the next Saradha will escape.
The problem, however, is that the next Saradha will happen, and it won’t just be under Sebi’s nose, because fixing the rot will take a lot more than just passing a law. From the time the SEC formally charged Raj Rajaratnam to the time it got a conviction took just 18 months. And by the time Rajat Gupta had been convicted, 62 of the 68 persons accused on insider trading by the SEC had either confessed or had been convicted. In the Saradha case, in contrast, Sebi was aware of the group’s activities way back in 2010 but the arrests have just taken place—the trial and the ultimate conviction are a long way off. The problem is on account of many issues, all of which need addressing simultaneously. Take Sebi’s investigative capacity, the very first link of the chain. Three years after it began investigating Saradha, it still has no idea of how much money the group has collected—as FE has reported, even the Serious Frauds Investigation Office has not been given sufficient cooperation by the West Bengal police. Since comparisons are always made with SEC, keep in mind Sebi has under 600 employees versus around 4,000 for the SEC. How does a regulator with just a handful of investigators get information on various Saradhas? Or prove the real estate scheme the group is running is actually a Ponzi scheme when the company is under no obligation to cooperate? Nor will just adding to Sebi’s staff capacity help if records are not digitised—look at the junk Sahara and Saradha have been submitting to Sebi to know this. At the time of the Rajaratnam conviction, the UK’s FSA launched its Zen transaction reporting and market surveillance system which would throw up suspicious trades around corporate events like M&As or news stories for instance. The SEC wants an even more advanced system to look at equity and derivatives markets in real time at a cost of over $1 billion.
There is then the issue of the huge regulatory cracks—in the Sahara case, the department of company affairs knew about the fund raising and it was only by chance that Sebi got to know about it. None of this is to say Sebi functions to full capacity either. Its order lifting the trading ban on entities it recognised to be engaged in repeated violations in the Bank of Rajasthan case makes for interesting reading—it acknowledged the attempt was to disguise share purchases among promoters so as to fool the central bank, but said this didn’t involve genuine investors and so was, from a securities market point of view, not very grave. The important point, however, is that merely giving Sebi more powers, or coming up with a single regulator the way the FSLRC recommends, isn’t going to help until more structural solutions are carried out.