Insider trading charges haunt India
By Indrajit Basu

KOLKATA - Just two weeks after outlaw trading arrests rocked Indian equity markets, the Securities and Exchange Board of India (SEBI) has charged Singapore-based Samir Arora, one of India's most prominent fund managers, with insider trading. Arora, a poster boy among Indian mutual-fund investors, had just announced on August 5 that he was quitting Alliance Capital to join a private equity fund.

Arora is barred from buying, selling or dealing in the Indian stock market until the matter is cleared up. Besides indicting him for non-transparent fund management and insider trading, the regulator also charged that he had not disclosed many of his deals in several companies with SEBI that were mandatory, and thwarted Alliance Capital from selling its Indian mutual fund business, hence defrauding investors of more than US$280 million. Alliance Capital, with five fund schemes, manages over $510 million of Indian investors' money.

Both Alliance Capital and Arora are defending themselves vehemently. "I have not done anything against the interest of the unit-holders [investors] or any other capital market player," Arora said. His former employer has defended him as well. "We have no reason to believe that Samir Arora is guilty of insider trading," said Ajai Kaul, head of retail sales at Alliance, adding: "There was no breach of fiduciary trust and no investor was disadvantaged."

Kaul also termed Alliance's 175 percent increase in redemptions in its India funds, which touched $2.2 million on Monday, normal. "On a fund base of $185 million in equities, $2.2 million of redemption is not abnormal," Kaul said. According to mutual-fund distributor sources, Alliance's debt schemes ($326 million corpus) saw redemptions of $5.4 million on the day.

Nonetheless, SEBI charged Arora with stunning manipulation of his position. More unsettling is that despite strong words by SEBI (and India), and years of effort, insider trading still rules rampant in the country's bourses.

"SEBI insider-trading rules, although stringent apparently, are full of loopholes," said Jayant Thakur, a market analyst. Small wonder, therefore, that Arora and his team allegedly managed to gain personally by maintaining "close rapport with such companies and their senior management for extracting crucial unpublished price sensitive information and used such information for making investment decisions".

Arora regularly appeared in the electronic media and made discretionary comments on the investment potential or otherwise of these companies where he had invested in large proportions, SEBI charged. The charges cover a number of issues ranging from unfair trade practice regulation to possible violation of the country's takeover code. "However," said Jayant Thakur, "this incident also reveals that SEBI's efforts to strengthen the legal setup sufficiently to check the practice of insider trading apparent just took a huge step backwards."

Or did it? While Indian markets have reeled downward over the past three years, the market regulator was quietly strengthening its legal provisions. Several regulations and guidelines have been amended. The SEBI Act, which governs its operations, itself was amended drastically to give sweeping powers and provided exemplary punishment for insider trading that can run to penalties of more than $5 million if proven.

"Yet," said Thakur, "the SEBI Act leaves enough scope for ambiguity." He said the basic problem lies in the new framework and drafting. While the amended act provides for prohibition and punishment for price manipulation, each of these groups of provisions has been crafted in a manner that leads one to derive different meanings. "Working against each other, they may create contradiction and cause confusion as to which would operate and how the terms stated therein would be interpreted," said Thakur.

Insider-trading regulations have also been extensively amended and SEBI has introduced an elaborate system to deter companies as well as established insiders from indulging in insider trading. "But here too," Thakur added, "the problem is, there are far too many procedures that eventually prove extensive and unrealistic. These regulations, therefore, are breached more often than observed."

The SEBI indictment goes beyond insider trading and malpractice of influential fund managers. "It doesn't start and end with Samir Arora," said Sucheta Dalal, an analyst who often doubles as a market sleuth. "It has to go back to Alliance Capital and all foreign funds. The problems start there, because Alliance is just one of the foreign funds and we would like to know how good are the corporate practices of other mutual funds, specially foreign funds operating in India."

"But most importantly," added Dalal, "his links with others need to be investigated as well." Scores of analysts and big-ticket investors, including other fund managers, closely observed Arora's moves, many of them investing in the funds he managed, while others directly picked up the stocks that featured in Alliance's portfolios.

Alliance Capital, a wholly owned subsidiary of US-based AXA Financial Inc, is one of the largest global financial-services organizations, managing $426 billion in 19 countries, with more than 7.3 million individual investors and 2,100 institutional investors globally. The fund house is now faced with the most disturbing question: "What kind of processes does Alliance Capital have that allowed its fund manager do what he wanted to do?" asked a correspondent of CNBC TV18, India's most popular business channel.

Not content with banning Arora, SEBI has decided to widen the scope of its investigations and also scrutinize Alliance Mutual Fund's operations, as well as companies that were close to Arora and Alliance's investment radar. Investigations will include Digital Global, Mastek, Balaji Telefilms, and Hinduja TMT, all of which were Arora's favorites and tumbled on the bourses on Monday.

The Indian mutual-funds fraternity is trying to put up a brave face even as the ban ripples across the mutual-fund and stock-market community. "There is a mechanism in this country, a regulator who is doing its job," said Association of Mutual Fund in India chairman A P Kurien. "There should be little impact of this episode on Indian mutual funds."

For the average investor on the street, however, "the disease called insider trading is alive and kicking and there are plenty of stock-market virus carriers roaming around with heads held high, and bank balances held deep", Kurien said.

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