Home >Companies >News >Sebi skips nine directors in BoR show-cause proceedings
Sebi headquarters in Mumbai. The regulator had penalized 118 entities around `30 crore in the case in February. Photo: Abhijit Bhatlekar/Mint (Abhijit Bhatlekar/Mint)
Sebi headquarters in Mumbai. The regulator had penalized 118 entities around `30 crore in the case in February. Photo: Abhijit Bhatlekar/Mint
(Abhijit Bhatlekar/Mint)

Sebi skips nine directors in BoR show-cause proceedings

The directors had formerly held powerful positions in govt companies, bodies such as LIC, SAT and Sebi

Mumbai: The watchdog, it seems, didn’t bark in this case.

India’s capital market regulator, the Securities and Exchange Board of India (Sebi), did not serve show-cause notices on nine high-profile independent directors in the alleged capital market fraud case at Tayal group-promoted companies in 2010 despite none of them enjoying any sort of immunity.

The regulator penalized 118 entities around 30 crore in the case in February. Many of them were also barred from dealing in the securities market.

Sebi slapped show-cause notices on around 100 entities connected to the Tayal group-promoted Bank of Rajasthan (BoR) for alleged fraud, but chose to skip nine directors who had formerly held powerful positions in various government companies and bodies such as Life Insurance Corp. of India (LIC), the Securities Appellate Tribunal (SAT) and Sebi itself. These people do not enjoy any immunity from being questioned or being served show-cause notices.

A show-cause notice is not an indictment; an entity or individual getting one needs to provide an explanation for certain activities under investigation, typically within a month.

Four people with direct knowledge of the matter confirmed the development. One of them is involved in investigations in the case. None of them wanted to be identified.

The nine people include S.A. Dave, former chairman, Sebi; V.K. Chopra, former whole-time member, Sebi; B. Samal, former member, SAT; T.M. Nagarajan, former whole-time member, Sebi.; S.B. Mathur, former chairman of LIC; P.N. Bhandari, former chief secretary of Rajasthan; and B.R. Gupta, a retired LIC executive.

An email sent to Sebi remained unanswered and the Sebi spokesman declined to comment.

According to an official at the Tayal group, nobody was exempt from investigation by Sebi. “All these persons were called by Sebi and they subsequently gave their views on the matter to the regulator," the official said, requesting anonymity. “These persons had retired before the entire episode at BoR happened."

However, some of the directors confirmed that Sebi never questioned them on the case.

Sebi’s ex-chief Dave, LIC’s ex-chief Mathur and two others among the nine, who declined to be named, said Sebi neither sent any show-cause notice to them nor questioned them regarding the case.

“I, along with a few others, were indeed appointed as directors in some Tayal group firms, but some of us chose to resign when we got hints that something wrong was going on," said Dave. “I was not served any show-cause notice by Sebi."

“There is a debate on responsibilities of independent directors. It’s time to ask them to do something realistic rather than attending meetings," said Amit Tandon, founder, managing director of Institutional Investor Advisory Services India Ltd, a Mumbai-based proxy advisory firm.

“Currently, independent directors are rarely held responsible when something goes wrong. There is an attempt to ringfence them from certain liabilities. But they must understand that a large part of their responsibility is to ensure that controlling shareholders of a company do not take minority shareholders for a ride. They must question the management when they figure out something wrong," he added, expecting things will change when the new Companies Bill is passed in Parliament.

Sebi issued show-cause notices to the directors of all Tayal group firms, except the nine, independent directors on boards of various group firms during the period in which the fraud was committed.

Under the Sebi Act, the regulator has powers to issue a show-cause notice and summon any person in relation to an alleged fraud, irrespective of social stature, unless the person is a serving government official or has been conferred special immunity by the government before the appointment, said corporate law experts.

“There is no special immunity for any director even if one is a retired government official," said another securities law expert who heads a legal consulting firm in Mumbai and did not want to be identified. “It is strange that Sebi did not call them for a hearing."

“Typically, independent directors are not aware of several technical things that may have larger implications, like a fraud unless some board decisions alert them. They often don’t even attend meetings. These directors must understand that they have a larger role to play. They should not only attend board meetings but also make efforts to know more about their companies’ actions," said Vivek Kulkarni, chairman, Brickwork India, a Bangalore-based rating agency. He blamed the system for the problem. “The current norms allow independent directors to be on boards of too many firms and their fees are low. The number of firms a director can represent should be reduced and the incentives should be increased to improve the situation," added Kulkarni.

Incidentally, three other directors who joined some Tayal group firms much after the period when the alleged fraud was committed were served show-cause notices and called for hearings by Sebi before being exonerated.

They are T.S. Narayanasami, retired chairman and managing director of Bank of India; M.P. Mehrotra, founder partner of Delhi-based chartered accountancy firm Mehrotra and Mehrotra; and U.A. Mukhopadhyay, a retired Indian Administrative Service officer.

In an order on 8 March 2010, Sebi said it examined the shareholding of promoters of Bank of Rajasthan from June 2007 to December 2009 and found that the actual shareholding of the promoters and their connected entities at various points of time was much higher than was disclosed by BoR publicly.

Apart from false public disclosures, the increase in promoter holding, too, was in violation of the limits set by Sebi norms.

A Sebi investigation found that while the Bank of Rajasthan promoters announced their stake would be reduced from 44.18% in June 2007 to 28.61% in December 2009, in reality, the holdings of the promoters (controlled by the Tayal group) along with their front entities, actually increased from 44.71% in June 2007 to 60% in March 2008 and stood at 55.01% in December 2009.

The Tayal group, registered as the Krishna Group of companies with the ministry of corporate affairs, as cited by Sebi in its 2010 order, has nine companies, including BoR (since taken over by ICICI Bank Ltd), Jaybharat Textile and Real Estate Ltd, Eskay K‘n’IT India Ltd, KSL and Industries Ltd (KSLIL), Krishna Lifestyle Technologies Ltd, Asahi Fibers Ltd, Krishna Knitwear Technology Ltd, Rajasthan Bank Financial Services Ltd and Single Point Security Solutions Pvt. Ltd.

Dinesh Unnikrishnan contributed to this story.

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