Reactive Regulators

The title of this post may sound ambiguous.

I like to comment on the way Regulatory Authorities work esp. in India and in the Financial World.
What is the role of a regulator? Is it just to set right any wrong-doing or is it to prevent any wrong doing?

I feel a regulator must emphasis on Prevention rather than cleaning up the mess. SEBI is a classic example of how a regulator must not function. Slow and reactive, SEBI’s functioning has been instrumental in many culprits go unpunished and a large mass of small retail investor affected.

Typical example is the way it dealt with the Satyam Fiasco. Trading must have been immediately stopped to prevent speculative trading of shares, but in the name of providing an exit option for investors who want to exit, SEBI has just allowed biggies to make money by speculating and short-selling, this has just added to the downward pressures on the price and Satyam’s shares fell to rock-bottom price.
Had the trading been stopped the panic reaction, when the clear picture on the gravity of the situation was no clear yet, would not have happened. Investors would have got more information and time to analyse the situation and then decide.
Further, this incidence also lays bare the situation of having no circuit-breaker for shares in the derivative segment. The reasoning that the derivatives provide a hedge for the equity is false. How many retail investors in equity actually invest in derivatives, esp. of the same stock? In India, derivatives are still cash-settled, so justifying that derivatives provide a hedge to equity investments is wrong. With cash settlement, derivatives are used for with more vigour for increased speculation.
Had there been a circuit breaker for Satyam – price would have stopped at 20% (max.) lower limit, and people would have had more time to think and act.

But this is not done, Regulator are more favourable for Speculators & Traders rather than for Investors, which is ironical to the fundamentals of stock exchanges.

Another point to display the reactive nature of SEBI is how they react to volatile scripts – They just watch from sidelines and wait for somebody big to make a loss and complain. Then they act.

Even in the case of IPO applications, SEBI has made it cumbersome for retail investors – I need to submit a copy of my PAN Card with the application. When allotment is done only to investors having valid functional Demat A/c and to have a valid functional Demat A/c the PAN has to be registered with the DP, why do I need to submit a copy of the PAN Card with the application?

SEBI is also not proactive (in this case it has also not been reactive) in tackling the errors in IPO allotment. Many retail investors had not received the shares in their demat a/c even by the listing date for Reliance Power IPO last year (2008). What action SEBI took against the company and the registrar? Why was listing not delayed?
Companies price IPO at such exhobirant rates (Reliance Power) and subsequently give bonus shares to please investors. Why such practices have been allowed? Should SEBI not have penalised the merchant banker and the company for over-pricing the IPO? Even in case of issuing bonus shares, original investors who subscribed to the IPO must have been issued the shares.

I have personnally seen the slow and inefficient functioning of SEBI. I had applied for Rural Electrification Ltd. IPO last year. I got allotment but shares were not credited since the Demat details on the form were incorrect. The registrar took al most 2 months after the listing of the shares for me to get the alloted shares. This is in spite of my complaining to every possible responsible person and authority.

No action was been initiated by SEBI for this.

My questions for this:
a. In prospectus, it states that if invalid demat details are provided, application will be rejected. Why then was shares alloted to me? This just means the check is not done before allotment, in gross violation to SEBI’s norms. Did SEBI take notice of this? Karvy has been previously indicted in IPO Fraud.

b. The shares were finally credited about al most 2 months of listing.  Neither Karvy nor REC paid me any compensation in spite of rules laid down by SEBI. (even the refund amount was late). The price of the shares by then fell to below IPO price. Who is to compensate for my losses? SEBI?

SEBI’s actions as a regulator have been grossly inadequate w.r.t. to it’s duties.