The Telegraph
Since 1st March, 1999
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Sebi flip-flop in Herbertsons case
Market regulator backtracks on Chhabria offer

Mumbai, Aug. 5: The Securities and Exchange Board of India (Sebi) had made up its mind on asking only Kishore Chhabria to make an open offer for Herbertsons, but changed course abruptly towards a ruling that required him and Vijay Mallya to sell their stakes. The final call, tossed aside by a tribunal last week, has left a trail of questions on the regulator’s credibility.

Sebi, it is learnt, had initially directed Chhabria to make an open offer, but asked the warring partners of Herbertsons to offload a massive volume of shares in a move that would have savaged the stock and small investors. Both factions were ordered to sell at Rs 10 apiece, at a time when the share was quoting around Rs 40.

Had Sebi stuck to its original decision to ask Chhabria to make an open offer in 1998, it would have settled the festering feud for Herbertons’ control. The decision was vindicated by the Securities Appellate Tribunal, the forum hearing appeals against Sebi, last week.

Why Sebi flipped from its initial stance is not known, and the protagonists of the episode have gone. They include former chairman D. R. Mehta, executive director in charge of investigations, L. K. Singhvi, and executive director overseeing legal affairs, Dharmista Raval

But the events went like this. On January 20, 1998, Singhvi recorded the decision directing Chhabria to make the offer on a Sebi file. “This was discussed. Shri K. Chhabria took chairman’s appointment and met him in presence of ED (Pratip Kar) and myself. He was informed that he must comply with the regulation and make the required offer. He met me again and I told him the same. Prosecution can be considered later. First let the offer aspect be complete, as discussed by us.”

The file was sent to the Sebi chairman, who recorded his decision on January 21, 1998: “We may ask the acquirer (Chhabrias) to file the offer immediately. The issue of prosecution will be decided later.”

The papers went to Kar, who sent Chhabria a letter asking him to file the offer document. “Please issue a letter as instructed asking the offeror (Chhabria) to file the offer document. The draft letter to the offeror may be shown to ED (law) because of legal issues involved”.

The events at Sebi alarmed the Mallya camp, which would have to see Herbertsons slip away from its grasp if Chhabria would make the offer Sebi deemed appropriate.

The Balaji-Reddy group, a Mallya associate, then wrote to the Sebi chairman asking him to pause before a final conclusion. It indicated that the “opinion of an eminent jurist” on the matter would be forwarded soon.

The legal eagle alluded to in the letter was former chief justice P. . Bhagwati, who wrote to Sebi executive director (law) on January 21, 1998. He requested her to go through a note on the acquisition of Herbertsons shares “very carefully so that it would give her an idea of the issues involved”. He even said he would “contact her” the next day. What happened after that is not clear, but this appears to be the turning point in the shenanigans of a wavering watchdog.

SAT presiding officer C. Achuthan said as much on Friday last. He said Sebi had the right to change its verdict in the light of fresh information, but was critical of its role in this case. “Sebi cannot escape its obligation to explain the reason for having taken a different view since the earlier stand was reportedly made known to the appellants verbally,” Achuthan said.

“Transparency is the hallmark of credibility. Credibility brings acceptability. Acceptability provides strength to the regulator. If Sebi had reasons to take a different view, it should have spelt them out,” he added.

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