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 href="http://www.sebi.gov.in/consentorders/relinfraconsent.pdf">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.