It used to be said in the Middle Ages that the Holy Roman Empire was neither Holy nor Roman nor an Empire any longer. The same can be said about the impugned transactions in the context of Regulation 4.

There was nothing artificial or unfair or misleading about them. There is a perfectly rational and plausible explanation underlying each of them.

The Sebi Saga: Complete Coverage
Insider Trading: Samir Arora cleared

The Securities Appellate Tribunal order exonerating Samir Arora, former chief investment officer of Alliance Capital Mutual Fund, is a major blow for the regulator.

It was one case where the Securities and Exchange Board of India chairman was really confident of getting a conviction. As things turned out, the SAT has set aside every charge against Arora.

Some charges were demolished on the premise that there was no violation of law, or for that matter, nothing questionable on ethical or moral grounds.

Certain other charges were dismissed for want of evidence. Obviously, this raises a number of doubts about Sebi's investigative abilities. Not just that, by taking an isolated view on Arora on various issues, Sebi has invited SAT's wrath.

Curiously, in Arora's case Sebi has taken a hit-and-miss approach and, in the process, has not worked hard enough to substantiate any of the charges.

For the uninitiated, Sebi banned Arora from capital markets for five years, underlining three main charges in its final order that was passed in March this year. One, he played a pivotal role in thwarting ACM's efforts to sell its India operations by resorting to unethical means.

Two, apart from indulging in price manipulation of certain scrips, he did not make disclosures and sometimes even made wrong ones when some of ACM's holdings in certain stocks breached limits that required intimating the respective companies.

Three, Arora disposed off his entire holding in Digital GlobalSoft based on unpublished, price-sensitive information.

Why only Arora?

Sebi had contended that Arora should have resigned before bidding for ACM because there was a conflict of interest in his capacity as a bidder and the manager of unit holders' funds.

However, according to Sebi's own regulations, the responsibility for avoiding conflicts of interests rests with the trustees and the asset management companies.

The SAT thus maintained that if Sebi's case is that the conflict of interest situation was created because of Arora bidding for the mutual fund and still continuing to manage its equity investments, the liability should be fixed on the trustees and the asset management company, not on Arora.

Further, the SAT maintained that there was nothing wrong legally, morally or ethically in Arora bidding for ACM since he had submitted his bid ahead of the others in a transparent manner.

Similarly, in the case of the insider trading charges relating to Digital GlobalSoft, Sebi's accusations were restricted only to Arora.

However, no questions were raised against Digital's chief executive officer Som Mittal. Sebi also completely believed Bansi Mehta's (the auditor who was given the mandate to suggest the merger ratio) version that he alone was privy to the information, ruling out the possibility of any leak.

Not just that, other mutual funds were also spared. Apparently, Tata Mutual Fund and SBI Mutual Fund also sold their entire holdings in May, ahead of the announcement of the merger ratio. Other fund managers that sold part of their holdings include HDFC, Franklin and Deutsche.

In fact, one of Alliance's defence points was that CLSA analyst Aniruddha Dange had downgraded the stock to "sell", which was one of the bases for Arora's sale. Curiously, Sebi did not pull up these entities for the same deed, especially if it considered the reasoning logical.

The Reliance case and Sebi's double standards

Interestingly, Sebi had investigated price manipulation and insider trading by Reliance Industries with respect to L&T shares (in 2001, when the company had bought shares from the market and eventually sold them to Grasim at a significant premium), but gave a clean chit to the management on the grounds that the information (unpublished, price-sensitive information that Grasim would buy Reliance's stake in L&T) did not emanate from L&T and further that the Ambanis were not directing the mind and will of L&T.

The SAT has been critical of Sebi's double standards. "We would like Sebi to apply the same ratio to all other cases handled by it in respect of insider trading," the order noted.

The burden of proof

Out of four cases -- Balaji Telefilms, Mastek, United Phosphorous and Hinduja TMT -- of price manipulation and mala fide intention (that Arora traded in a manner that benefited the foreign institutional investors' sub-accounts at the cost of the domestic funds), Sebi has not been able to establish even one of the cases.

Instead, the regulator chose to call these instances "illustrative" without establishing the same with credible data. If Sebi's contention is that Arora was a chronic price manipulator, it should have been easy to establish price manipulation at least in a single scrip, if not in all.

Similarly, even in the charges related to insider trading, Sebi did not go beyond saying that Arora sold shares ahead of Digital's board meeting (even though the merger ratio was announced only a month later, after it was vetted by a third party -- Deloitte & Haskins), and since he qualifies as an insider by definition, he is guilty of insider trading.

Sebi provided little evidence to establish how and from whom Arora could have got insider information or reason out the case based on the circumstances.

"Thus, while not suspecting the source where the information was generated or the channel of transmission of the information to the final destination and at the same time accusing some third party, though technically an insider as per Sebi's interpretation of the Regulation, of being in receipt of that information is, according to us, something in total defiance of elementary logic..." the SAT order noted.

It further noted: "While we appreciate the difficulty it is not possible for us to let mere suspicions, conjectures and hypothesis take the place of evidence as described in the Indian Evidence Act.