Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Tue, 04 Oct 2005

Is a fraud an offence only if there is a foreign listing?

The Securities and Exchange Board of India (SEBI) has issued an order against Pentamedia Graphics Limited in respect of an issue of fake shares by the company. The order makes the perfectly valid statement that:

“Issuing fake shares is a major offence”

Since the days when Jay Gould and Vanderbilt fought for the control of the Eire Railroad in the United States in the nineteenth century, issuance of fake shares has been rightly seen as one of the worst capital market offences that a company can commit. A speedy and effective response from the regulator is therefore most welcome.

However, at the fag end of a perfectly unexceptionable order, SEBI goes on to make a very disturbing statement:

“the GDRs issued by the company are listed and traded in foreign countries. In case of such companies, it is all the more essential for companies to adhere to the highest standards of corporate governance in keeping with global benchmarks.”

This statement is disturbing in two ways. First it seems to put a fraud (issuance of fake shares) on par with a mere lapse from the highest standards of corporate governance. Second, it raises the distressing thought that SEBI might not have acted with equal alacrity if the company did not have a foreign listing.

Posted at 10:38 on Tue, 04 Oct 2005     1 comments     permanent link


Aroop wrote on Tue, 11 Oct 2005 16:07

Re: Is a fraud an offence only if there is a foreign listing?

A fraud is acceptable as long as it is not caught. And its better to be caught at home than outside. Perhaps the creators of the SEBI order had this in their mind when they framed the rules while addressing their concern for adhering to the ‘highest global standards’.

But the alacrity with which SEBI acted against Pentamedia Graphics is commendable. But there might be companies issuing securities wherein such frauds are not detected. Penny stocks might even escape SEBI’s attention!!