Vedanta’s Failed Bid Reinforces The Need To Step Up Sebi’s Digital Prowess

Vedanta’s mysterious failed bid at delisting its shares from the Indian stock exchange has led to a demand for a probe by the Securities and Exchange Board of India (Sebi).

The concern is that the metals and mining giant received many share bids that remained unconfirmed at the closing stages, though crossing a 90 per cent threshold for a successful delisting that appeared like a done deal.

On October 5, Vedanta commenced its reverse book building process for public shareholders to tender their shares. The company needed 1,340 million shares for a successful delisting. At 3.30 pm on October 9, as many as 1377.8 million shares were tendered by the public shareholders.

However, by the time the five-day Reverse Book Building (RBB) process ended in the evening of the same day, bids were confirmed for only 1254.7 million shares, and 123 million shares offered were deemed invalid by the custodian.

Initial reports from officials suggested that this gap could have been due to a technical glitch. However, it is not unusual to have a small number of shares unconfirmed, but not so many as in Vedanta’s case.

The impact is likely to be felt beyond Vedanta, as several other players are lined up for delisting. These are Adani Power, Allcargo Logistics and Hexaware Technologies, among others.

Typically in reverse book building, a shareholder instructs a broker to offer a certain number of shares at a specific price, which is then transferred to an account on the exchange platform. Subsequently, it requires approval from the custodian, which requires corroboration from the client company.

It appears that in Vedanta’s case, either those promised shares were never transferred to an exchange platform or a corroboration did not come from the client, either due to technical glitches or a mismatch between shares tendered and the number transferred.

In either case, it would require exhaustive scrutiny of data relating to the bids and their acceptance before any firm conclusion can be drawn. A successful delisting would have enabled Vedanta Group to acquire control of its cash-rich subsidiary, Hindustan Zinc, at an opportune time when industrial metals are still recovering from a pandemic-induced demand slowdown.

If the process had been successful, the reverse book building might have also resulted in a three-and-half fold increase in the floor price and consolidated book value as Life Insurance Corporation of India (LIC), which holds a 6.4 per cent stake in the company, had reportedly offered Rs 320 per share in the process.  

By undertaking a probe in such a prominent firm, Sebi can use this opportunity for broader scrutiny of the process failures – setting an example for future delistings. It will act as a deterrent to companies and instill confidence among investors in the regulator.  

Again, this case highlights the need for the market regulator to expedite its proposal to boost its digital prowess. At the beginning of the year, Sebi had promised to arm itself with Artificial Intelligence (AI) and Machine Learning (ML) tools to counter market manipulation.

Need Of The Hour: Digital Detection

In the last two decades, Sebi has consistently and severely dealt with market manipulation, even as the middle class increased stock market exposure. The deterrent effect has often been diluted due to a long time between opening an investigation and the final orders.

The introduction of AI and ML has scope to considerably reduce the time taken even as broader stock market participation will open up the need for greater surveillance.

Data collection must go hand in hand with Sebi and its considerable powers under the law. It was way back in 2003 that Sebi notified the Prohibition of Fraudulent and Unfair Trade Practices Regulations (PFUTP Regulations), penalising a wide variety of practices that could compromise the integrity and efficiency of the market.

These included all kinds of market abuse, such as manipulative, fraudulent, and unfair trade practices. Despite these precautions, flagrant price manipulation in securities continued.

In 2009, stockbroker Sunil Mehta and his associates were severely punished and penalised after they were found to be involved in synchronised and circular trading that created artificial volumes in the script of 12 companies and influenced their share price.

Rather than interpreting the provisions literally, authorities have, in the recent past, examined whether there is scope for market manipulation that may not prima facie appear to be covered by the regulations.

Mandate for change

Apart from the regulatory body, stock exchanges are also enforcing their disciplinary actions against instances of abnormal trade.

Supporting this strict approach undertaken by Sebi, the Supreme Court has also interpreted securities fraud in a broad, expansive manner and defined market manipulation as the unwarranted interference in the operation of ordinary market forces of supply and demand, which undermines the integrity and efficiency of the market.

During the 2018-19 financial year, Sebi investigated 84 new market manipulation cases and price rigging.

In October 2020, the market regulator mandated listed companies to disclose forensic audits to stock exchanges. This will bring about greater transparency and address gaps in the availability of information relating to a company’s financial matters.

Despite the expansive investigative powers, hefty penalties, and surveillance, preventing securities market manipulation will remain a tough challenge. While there can be no water-tight regulation, Sebi needs to move swiftly in this digital era to be always one step ahead.

The author is Partner at The Law Point (TLP)