Did SEBI Go Easy On SpiceJet, Mallya & NSE? UK Sinha Disagrees

The 2015 takeover of low-cost airline SpiceJet Ltd was unique for two reasons. It marked the return of Ajay Singh, the carrier’s co-founder who had exited the business some years ago. It was also the first time in India that a takeover did neither result in the mandatory open offer to shareholders nor was the purchase price revealed. It’s been two years since and it is still not known what price Singh paid to acquire the airline.

UK Sinha, chairman of the Securities and Exchange Board of India (SEBI) at the time, said in an interview to BloombergQuint on the day his term ended that the open offer exemption was valid. Edited excerpts below.

Q. How did SEBI allow a takeover without an open offer or disclosure of price?

A.

I can’t comment on this specific case, but you may be aware that in our Takeover Regulations there are provisions that if any scheme has the approval of a ‘competent authority’ under any Act of Parliament, then the Takeover Code obligations will not be applied. So SEBI does apply this exemption whenever there are approvals from various competent authorities. On the question whether in a particular case the share price has been discloses or not, I am sure if it has not been disclosed and it is in violation of rules, SEBI will take action; or maybe, it has already initiated an action.

Q. This happened in 2015. We are now in 2017...

A.

I can’t discuss with you a particular case... I am only informing you that if you think that there is a violation and SEBI also thinks there is a violation, then it will be taken to its logical end.

Q. Was that the first time the ‘competent authority’ was interpreted to be a department of a ministry? Because often SEBI has accepted decisions by international courts when it comes to international merger schemes, but to accept a ministry department as a competent authority to approve the scheme and grant it an exemption has not been the tradition at SEBI.

A.

This is not a correct understanding. Various ministries, various departments in the country have the power of competent authority under various Acts that they regulate or they administer. For example, in this case, it could be that the ministry would have passed the orders under the Aviation Act. So, it’s incorrect to presume that only judicial authorities are competent authorities. Fortunately or unfortunately, there are situations where government departments also can take the decision.

Interestingly at the time of the acquisition, January 2015, SpiceJet was trading at about Rs 18 per share. On March 3, 2017, it closed at Rs 72.50 per share. (Photo: Bloomberg Quint)

SEBI Versus Vijay Mallya

While SEBI may have taken two years to wake up to the SpiceJet acquisition peculiarity, it took even longer in the case of another acquisition.

In November 2012, global spirits giant Diageo Plc. announced the takeover of Indian alcoholic beverage major United Spirits Ltd (USL) from Vijay Mallya. Barely a year later, USL delayed reporting earnings and, soon after, its auditor flagged several accounting irregularities pertaining to transactions with Mallya-owned entities. Eventually, USL took an over Rs 3,000-crore write-down and ordered an internal investigation into the suspicious transactions. The company refused to share the investigation report with the National Stock Exchange (NSE), but its board of directors expressed a loss of confidence in Mallya, who till then had continued to be chairman. They asked him to step down. Mallya refused but changed his mind in 2016 when Diageo offered him $75 million to step down.

In January 2017 SEBI barred Vijay Mallya from serving as a key managerial personnel or a board member in any listed company.

Q. What took SEBI so long to take action in this case?

A.

At least SEBI has taken action, that you agree? The right way to understand it is if any information is coming out in public domain, may be an allegation, there are stages provided of who is going to act on it. And in the first stage, the rules provide stock exchanges to ask for it and then further developments take place. We also have to follow a process rather than acting immediately on anything which is coming out in the media, unless it is something affecting the larger market, a large number of investors.

So SEBI has taken action in the particular case. I must also tell you the matter is not yet over and if you look at our order very clearly, you will discover that further investigations are going on involving other players in this whole episode; that is also mentioned in this order.

Q. But it has been two years. 2015 is when USL’s board asked Vijay Mallya to step down because the internal investigation cast suspicion on him.

A.

We are now trying, and we are reaching a stage where nothing (no case) will be (pending) for more than two years. But in this particular case, it has taken two years... I am not particularly perturbed, especially because all the stakeholders in the drama are being covered more by us.

Why SEBI Ordered NSE To Self-Audit An Alleged Violation?

The National Stock Exchange Ltd matter is probably the messiest of the lot. After a whistleblower complained that NSE, India’s largest stock exchange, was offering preferential treatment to certain brokers when co-locating their servers, SEBI got involved. A technical advisory committee examined the allegations and thereafter SEBI asked NSE’s board to conduct a self-audit. The decision raised several eyebrows.

Q. Why did the regulator ask a potentially offending party to self-audit?

A.

I am surprised that intelligent people continuously don’t verify the facts. What gives you the impression that SEBI asked the board to have an audit and then take the action. Why are you not taking note of the fact that SEBI conducted its own investigation. I am surprised nobody is talking about it and we have some of the best technical brains in the country. So, the technical advisory committee of the SEBI did get into this issue for an extended period of time and then they came out with certain findings and, after those findings, certain directions were given to the company and those directions have been substantially implemented.

What was asked to the board or to the audit firm led by the board was to fix the accountability and responsibility that who was responsible, was there any manner of cover up? Please don’t forget that the whole thing started because of SEBI taking up this matter very very seriously. I am amazed that you were not talking about it.

Q. NSE is not any regular company, it is the country’s largest stock exchange. I am curious to know why you asked the board to do its own investigation? If you thought there was a violation, why didn’t SEBI do the investigation?

A

. Because it’s a new board. SEBI has inducted new public interest directors. It is an entirely new set of public directors, who had nothing to do with that particular moment with the exchange. They are new people, they are very very honourable people, so it has been well thought out.

So first of all, SEBI assured the public interest directors are changed. New public interest directors who had nothing to do with what happened at the particular moment or history and then they were asked to do the verification and about fixing the accountability. What gives you the impression that SEBI can’t even do it now. If we are not satisfied with whatever findings are given, we reserve the right and can go into it. Please don’t forget that the exchange you are talking about is a very large exchange. SEBI cannot be playing to the gallery and playing to the media. SEBI has to do something which ensures that the larger trust in the market is maintained. We have to do it in a cautious way and this is what we have done. And I am sure five years from now, or even two years from now, all of you will appreciate.

I am surprised that consistently intelligent people who should be knowledgeable ignore a set of facts and get carried away by what somebody has written somewhere; all of you get carried away by this. The technical advisory committee of SEBI did a marvellous job and against very serious odds, and then SEBI came to the finding and then things followed up.

Q. If there was an insider trading offence within a company, then would you ask the board to take action or would SEBI investigate the offence? Departure from that practice is what raised eyebrows.

A

. You are not getting my point. It is not a departure in the sense that you are presuming that this was the only action taken by SEBI. You are refusing to believe that what action was taken through the technical advisory committee, which had very eminent people, and those people pointed out very specific deficiencies, and then action was taken. So, to believe that somebody, and I would say in a very ignorant way, started by thinking that only the board was given and SEBI...

Q. If SEBI has investigated this it would come to some conclusion as to whether preferential treatment was meted out to certain brokers and if that was the case who was responsible for that preferential treatment and whether that person should be punished in any fashion. But that hasn’t been the case. That’s what SEBI has asked the board to do...

A.

Both are engaged in policy audit, so that the responsibilities could be fixed, and that exercise is ongoing. And if SEBI is not satisfied with the findings, nothing can stop SEBI from getting that directly. SEBI has to ensure that it doesn’t destabilise the larger market. And yet the rules have to be followed and we are working towards that direction.

(This story is based on an exclusive interview by BloombergQuint with former SEBI chairman UK Sinha.)