Reliance ADAG consent order

I have long had a complaint that the fines imposed in India for violations of law are too tiny. In SEBI's entire history, big fines - of more than Rs.10 million - have seldom arisen. The economic reasoning suggests that fines have to be way bigger than mere disgorgement, in order to reflect the imperfect probability of getting caught. Fines have to be big enough to really hurt the key decision makers. Only then will they exert an influence on the behaviour of the entire market.

SEBI recently came out with a consent order on certain irregularities in the trading of shares of Reliance Communications. Some of the penalties imposed are eye-popping. Applicant companies shall not make investments in listed securities for calendar 2011 and 2012. Individual applicants shall not trade in the market in calendar 2011. The individuals involved -- Anil Ambani, Satish Seth, S. C. Gupta, Lalit Jalan, J. P. Chalasani -- have paid a settlement amount of Rs.0.5 billion.

Are these penalties big enough to hurt? The corporate treasuries have been shut off from the secondary market for 2 years, the individuals from trading on the market for one year, and a payment of Rs.0.5 billion: I think this is big enough to hurt.

I applaud this development, of moving towards bigger penalties that are big enough to pinch the immense resources commanded by individuals and firms in modern India. At the same time, consent orders require immense regulatory capacity in government. It would have been all too easy for Dr. Abraham and others at SEBI to agree to a penalty which was one-tenth as large, in the negotiation that leads up to the consent order. Nobody in India would have criticised the SEBI leadership if the size of the settlement amount had been Rs.0.05 billion. But that would have made all the difference in shifting from a penalty that hurts, to a mere minor cost of business. It requires immense resources of integrity and toughness to do what SEBI has done.

We must move in this direction, of tough orders. These developments underline the criticality of the appointments process for SEBI and for other financial regulators. In an environment of unprecedented gloom about corruption in India, SEBI's progress on being a tough regulator with the highest ethical standards is noteworthy. It shows us something about the human energies that continue to be found in the Indian State, where some teams and individuals stubbornly stand up against the malpractice and corruption which is increasingly becoming the norm, despite the considerable firepower that crooks are able to command.

This order is one more pillar in the body of case law of C. B. Bhave's SEBI. I think of Bhave's achievement at SEBI as being a series of remarkable orders. SEBI is a quasi-judicial organisation and the technical quality of this organisation is all about the quality of orders that they are able to come up with. Alongside other famous orders -- Sahara, MCX-SX, HDFC AMC front running, ULIPs, Bank of Rajasthan, Pyramid Saimira -- this is a major achievement of SEBI in nailing wrong-doing and (more importantly) scaring off other would-be wrongdoers. For each firm that is visible as having been caught trying to violate rules, there are ten other entrepreneurs who have been dissuaded from similar business strategies by watching these events unfold.