THE INVESTMENT RESTRICTIONS imposed by the Securities and Exchange Board of India on UBS Securities appear to be justified, coming as they do as a reaction to the latter's refusal to part with information on its operations during last year's stock market crash. It is doubtful if UBS would have stonewalled a similar investigation by the US Securities and Exchange Commission. UBS may not have been satisfied with the reasons for the investigation, and justifiably so. But once the investigation process started, it should have complied completely with the regulator's requirements. To force SEBI to obtain from the SEC routine information that could have been disclosed by the company smacks of a certain smugness that it could get away with minimal disclosures.

In the light of this SEBI order — and irrespective of its fate in the appeals process — FIIs can be expected to adhere to the letter and spirit of the regulatory framework with greater rigour. This order is perhaps the first case involving a prominent institution where SEBI has put together its case in a logical manner that could stand it in good stead in any appellate forum. It is one thing to penalise a market participant for defying the regulator's request for information but the regulator seems to have erred in linking UBS' investment action to the market meltdown of May 17 last year. Its argument that UBS deliberately sold in the cash market to profit from its short positions in the futures market, and that this triggered the meltdown, is weak. Given the prevailing political environment and its implications on government policy, UBS' trading stance was what one could reasonably expect from a knowledgeable investor. Taking sizeable short positions in the futures and options market ahead of election results, with the prospect of an unstable ruling arrangement, was the least that UBS' clients would have expected of the fund manager. By selling in the cash market, too, UBS would have further cut its losses. It may have done so to re-enter stocks once the political uncertainty cleared and the market stabilised. UBS' trades on May 17 were also too small a proportion of the turnover on the NSE and the BSE to drive the market direction in the absence of similar sentiments driving the behaviour of other investors. There is no evidence to suggest that it had acted in collusion with other investors to drive equity prices lower in the cash market to profit on its position in the futures and options market.

There is no reason why UBS should be faulted for having made tidy profits even on a day such as May 17, when equities were battered. If the market impounds emerging risks in one swift strike, it is but indicative of the sophistication of market players. This is all to the good. The Government may be justified in worrying about steep declines in equity prices as they suggest a certain nervousness in the market about its ability to steer the economy. But that should not concern SEBI as long as the market can settle the trades smoothly.

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