Sebi becomes more proactive for investors

The stock market regulator the Securities and Exchange Board of India (Sebi), whose job is to ensure transparency and curb insiders taking advantage of price-sensitive information, has of late become even more proactive in its endeavour to protect investors interest, mainly retail investors. 

Latest initiative on this front is a Sebi notification which made it mandatory for listed companies to have a functional website from April1, 2011 containing all investor-sensitive information about the company. Companies will face the threat of getting de-listed from the stock market if they do not comply with the Sebi stipulation on website, now a part of the listing agreement.

Effectively, Sebi wants all listed firms to have an website with up-to-date information at any given point of time — without any leeway — so that investors can have easy access to information enabling them to take ‘informed-decisions’ on investment as and when necessary. Accordingly, the websites would need to have updated information about the company’s basic business and financial details, shareholding pattern, corporate governance, contact details, as also information about any agreements with media companies. “In short, Sebi is telling companies it is time they stopped using their website as an accessory to project what they want and not what actually is,” says Vantage Corporate Services, Director Rajesh Jejurikar.

Hide more than disclose

Though there are many companies like Infosys, Wipro etc, have been providing wealth of information to investors/shareholders on their website in a user-friendly manner, most listed companies in the country use their website only to magnify their product/ service promotions and own vision-plans without providing sufficient and suitable information on company’s basic business and financial details. 

Nor do they (listed companies) provide shareholding pattern, compliance governance and contact information of designated officials responsible for assisting and handling investor grievances, details of agreements entered into with the media companies and/or their associates, etc. 

Sebi’s message is loud and clear: make company websites informative and suitable to all investors or face the dire consequences of de-listing. The commendable effort, hopefully, will help everyone - the shareholders, potential investors, mutual funds and foreign investors. The diktat that websites will have to disclose any arrangement with a media house dealing in print, electronic or internet media, is extremely useful because investors will be able to distinguish between ‘planted news’ in a media and the genuine news in other.

Since changes have been brought forward by Sebi by amending Equity Listing Agreement, needed by a company to list its shares in a stock exchange before getting listed, Sebi said these amendments were aimed to “ensure/enhance public dissemination of all basic information about the listed entity.” It is unlikely that any company will oppose Sebi’s move as no one would like to be branded as ‘investors unfriendly.

Plugging the ‘Tips’ machine

Another major initiative of the market regulator is to deactivate the ‘rumour machine’ in stock markets that regularly churns out ‘tips’ for buying and selling shares based on unconfirmed and mostly fabricated information.

In line with its stated task of protecting investors’ interest, Sebi ordered restriction on transmitting ‘unauthenticated news’ by market intermediaries like brokers, wealth managers, research analysts on blogs, chat forums, emails an sms. The primary objective is to prevent stock price manipulation through rumours.

To achieve this objective Sebi gave more teeth to its new guidelines on dissemination of news by market intermediaries (brokers) by holding compliance officers of such firms liable for breach of duty in case of a failure to check contents forwarded by employees. “Employees should be directed that any market-related news received by them either in their official mail/personal mail/blog or in any other manner should be forwarded only after the same has been seen and approved by its concerned compliance officer... who shall also be held liable for breach of duty in this regard,” Sebi said in an addendum. This comes at a time, when chat forums/groups have become the hotbed of market talk and anyone who is a member is allowed to contribute stock-specific buzz without proper due diligence. Many established sites have sections on their portals wherein visitors can just login and upload any bit of info — pertaining to potential mergers, takeovers, dividend, delisting and private equity investment — that can be accessed by any one.

Although the regulator’s intentions for such action are viewed as noble, there are not enough technology manpower to monitor. “The move is in the right direction, but the implementation part is going to be a big challenge for large broking firms that have thousands of employees,” says Angel Broking’s Executive Director (Operations) Santanu Syam. “Monitoring personal emails, mobile phone conversations, chats and sms will not be an easy task .....in its entirety.”

Need for strict code

For one, many intermediaries have to put in place a proper internal code of conduct and controls for employees, while logs for any usage of blogs and chat forums will be treated as records and will have to be maintained by intermediaries. Sebi is of the view, and correctly so, that market rumours can do considerable damage to the normal functioning and behaviour of the market and distort the price discovery mechanisms. Usually, broking firms send bulk SMSes and emails to their clients on information related to short-term trading calls, positional trades and technical trades. These are not necessarily backed by reseach but just rumours.  They also actively use social networking sites like Twitters and Facebook to reach out to people. 

And investors who constantly look for information on which stock to buy or sell gets easily lured by these tips which are not necessarily from registered brokers or wealth advisors. “Due to lack of proper internal controls and poor training, employees of such intermediaries are sometimes not aware of the damage which can be caused by circulation of unauthenticated news or rumours,” says Sebi circular posted on its website.
For instance, ICICI Bank had complained to Sebi during the winding up of Lehman Brothers in 2008 that bear operators were hammering the stock prices down through rumours, but a regulatory probe did not find such manipulation. In this context, law firm Majumdar & Co’s managing partner Akil Hirani says at best “It (Sebi move) will help reduce fire sale of shares based on speculative rumours and also bring about best practices across broking houses of all sizes.”

Kotak Securities’ MD D Kannan feels that the move will ensure that loose communication is curtailed if not eliminated altogether and “the investor will not be misled by hearsay.” A former executive at the BSE’s surveillance department pointed out there have been growing instances of small, gullible investors being enticed by stock market intermediaries into buying stocks without any justification or background information supporting the recommendation.

Implementation difficulties

Industry critics say Sebi is trying to do the unfeasible. Monitoring and preventing communications through internet and mobiles by all employees is virtually impossible, they say. Holding the compliance officer liable for any lapses will also make his job risky. HP Agarwal, partner of JSA, Advocates & Solicitors says if an employee does something wrong, the compliance officer in the broking outfit would be regarded as having been negligent.  It is only apparent that “SEBI hopes to ensure that misuse of the internet never takes place simply by placing the compliance officer under a perpetual guillotine.”  
Such far-reaching draconian policy stipulation can only hurt SEBI, says Agarwal as a law that is incapable of being adhered to, can never be regarded as being enforceable. He suggest that Sebi should pause to consider if such rules are implementable at all in reality.