In the midst of the ongoing stock-market boom, SEBI's 'disgorgement' directive (interim) went by, relatively unnoticed.
This is a pity, because it is the first time that the interests of small investors have not been totally bypassed.
Yes, the directive is interim in nature and can be challenged, and clearly, the modalities of how the retail investors in IPOs who have been short-changed will be identified and compensated remains to be determined.
However, the very nature of the judgement suggests that M Damodaran and his team have their priorities right. The finance minister's being market-savvy has been a plus here, given his reported insistence that justice be done to retail investors, who had been significantly short-changed by the abuse of the system.
For the record, the SEBI report indicates that that 24 key operatives opened as many 59,000 demat accounts and unfairly cornered the shares reserved for retail investors in IPOs.
SEBI has asked the two depositories - NSDL and CDSL - and eight other depository participants (DPs), including the likes of Karvy, HDFC Bank, ING Vysya and IDBI Bank, to pay up around Rs 116 crore as compensation to retail investors who suffered an opportunity loss in the IPO scam that came to light last year.
So, what exactly is this 'Disgorgement' directive? Simply put, disgorgement means recovering money from the perpetrators of a financial fraud to compensate investors who had as a result lost out, in terms of actual losses or even opportunity.
Interestingly, in law, disgorgement is considered to be 'remedial civil action', rather than 'punitive civil action'.
Now, the moot question is, despite its good intentions, has SEBI got the equation wrong by penalising the depositories and its errant participants?
Given that unless SEBI can prove otherwise, the worst offence committed by the depositories and their participants can at best be described as 'gross negligence'. The act of 'disgorging' them may seem disproportionate.
So, seemingly here, we have a scenario where what they can be disgorged of are the fees they charged for opening and operating the malafide accounts.
Does that weaken SEBI's case? In the United States, 'disgorgement' payments are not only demanded of those who violate securities regulations. There anyone profiting from illegal or unethical activities may be required to disgorge their profits.
The money disgorged from the violating parties is used to create a "fair fund" for the benefits of investors who were harmed by the violation.
Notably, according to American Securities law, no person can challenge an order of disgorgement or creation of a "fair fund".
Now, assuming SEBI succeeds in enforcing the disgorgement directive, it does seem that this will set a new precedent, whereby SEBI cracks the whip on those on the 'fault line' and transfers the onus of subsequent recovery on those who receive its lashings.
Well, these are interesting times, and for all the arguments likely to be put forth by legal luminaries who will be appointed to defend the 'disgorged', the retail investor is not complaining, and that should make Damodaran and Co smile.
(Ashok Kumar heads Lotus Knowlwealth, a knowledge based consulting firm)