SHARE INVESTORS:
An
individual, group of individuals, corporation, government agency or any other
entity who commits its capital and funds to an endeavour with an expectation of
earning profit is an investor.
In
the share market an individual, group of individuals, corporation, government
agencies or any other entity who commits capital and funds to be allocated in
stocks, shares, scripts, bonds, debentures, mutual funds and the like with an
expectation of earning a profit is a share investor. Share market allocates
funds in “investment vehicles” such as shares, bonds, scripts, debentures,
stocks, mutual funds etc.
The
share investor is aware of the risks involved as the outcome of his investment
if often uncertain; as a result it is necessary to perform market analysis to
understand the viability and profit incurring capacity of the proposed
investment. Thus only if there is an adequate and reasonable expectation of
incurring profit, will the investment take place.
NEED FOR SHARE
INVESTOR PROTECTION:
Share
investors whether small, medium or large scale are the driving force of the
economy, thus it becomes pertinent to protect their interests. The Indian
financial market is very prone to fraudulent and unfair practises, scams,
insider trading, low liquidity, poor communication systems, price distortion
etc. These weaknesses of the market have led to its exploitation on a large
scale, some of them are:- [1]
1. Harshad
Mehta Scam: 4,000 crore scam, 1992
2. CRB
Scam: 1200 crore scam, 1996
3. Ketan
Parekh Scam: 800 crore scam, 2001
4. Satyam
Scam: 14,162 crore scam, 2009
5. Sahara
Housing Bonds: 24,029 crores scam, 2010
6. Speak
Asia Scam: 2,200 crore scam, 2012
7. Saradha
Chit Fund Scam: 10,000 crore scam, 2013
8. NSEL
Scam: 5,600 cores scam, 2013
These
misappropriations make the shareholder, creditors and any other minority group
extremely vulnerable to exploitations. There have been legislations, provisions
and guidelines to safeguard and protect such interest, so that they may
confidently invest and keep the market running. Investor protection legislations
were recommended by the N.K.Mitra Committee, headed by N.K.Mitra himself, after
the Harshad Mehta and UTI scams came to light. The committee gave the following
suggestion in 2001[2]:-
1. Establishment
of a judicial forum for investor grievances
2. Award
of compensation to aggrieved investors
3. The
shifting of the Investor Protection and Education Fund (IPEF) from the
Companies Act, 1957 to the Securities Exchange Board of India (SEBI)
4. Appointment
of only one market regulator, namely SEBI, having the powers of investigation
5. SEBI
Act, 992 to be amended to include committees on investor protection
6. SCR
Act, 1956, be amended to provide for the corporatisation of the stock exchanges
in the economy
INVESTOR
PROTECTION REGULATIONS:
An
investor may have a grievance relating to bank deposits and banking, matters
pertaining to Non-Banking Financial Companies (NBFC), primary dealers, unlisted
companies, mismanagement by companies, financial performance of companies,
annual reports, minority interest shareholders, corporate actions and monopoly
and anti-competitive practices. In order to repose the trust and confidence of
investors in the share market, the following legislations provide protection to
share investors:-
On
May 19th, 2009 the SEBI by notification published the Securities
Exchange Board of India Investor Protection and Education Fund (IPEF)
Regulations. The publication was made in pursuance of section 30 of the SEBI
Act, 1992, which confers powers to SEBI to make regulations. The Regulations
provide for the establishment of an Investor Protection and Education Fund
(IEPF).
The fund has been established with the objective of furthering the
protection and promotion of share investors, share investor education and share
investors investment awareness. The fund obtains its capital from companies
having unclaimed dividend and capital, such companies transfer the same to the
fund for utilization in investment promotion and protection. Section 205C of
the Companies Act, 1956 states that the following kinds of amounts can be
credited to the funds, namely[3]:-
1. Unpaid
dividends
2. Application
money refunded on allotment
3. Matured
fixed deposits
4. Debentures
5. Interests
accrued
Provided that the aforementioned amounts have remained unclaimed for a
period of 7 plus 30 days from the date of its knowledge.
SEBI published the Securities Exchange Board of India, Aid for Legal
Proceedings Guidelines 2009. The guidelines provided that any investor having a
grievance and requesting legal aid to initiate proceedings for such grievance,
can make an application to the SEBI for the same. On the satisfaction of SEBI,
the application for legal aid may be granted. SEBI will reimburse for an amount
not exceeding INR 20 lakhs if matter before Securities Commission, and for an
amount not exceeding INR 10 lakhs if matter before any other judicial forum.
The Act also provides for the establishment of the Securities Appellate
Tribunal (SAT) under section 15K. The SAT is given the power to hear appeals
against the decision of SEBI, provided that the appeal is filed within 45 days
on obtaining order from SEBI. Thus the SAT gives aggrieved investors a second
chance at availing justice.
The
NSE provides for the Investor Service Cell, it provides for investor query
resolution, investor complaint resolution and arbitration through
quasi-judicial mechanism. The aggrieved investors, dissatisfied with complaint
mechanism of the broker or sub-broker, may lodge a formal complaint against its
broker, sub-broker or company (only listed companies and listed members of the
exchange) with ISC. The complainant must attach all necessary documents such as
the contract notes, purchase-sale agreement, bills, statements of accounts
etc., with the complaint. The NSE allows dissatisfied share investors to take
their grievance to SEBI, Arbitration, Consumer Forum and the Court of Law. The
ISC provide that complaints unresolved within 15 days of being lodged will be
referred to the Investor Grievance Service Panel.
The NSE also maintains an Investor Protection Fund, to settle claims. The
maximum amount payable by the Fund is INR 10 lakh.
The
BSE established the Department of Investor Services (DIS) in 1986 to look into,
take up and solve any investor grievance or complaint against any of the listed
companies or the trading members of the BSE. Investor’s complaints against
listed companies are first to be dealt by the companies itself, if unsolved
after 30 days and thereafter on a reminder from BSE for another 45 days then a
follow up is undertaken by BSE. If the number of complaints against a trading
company exceeds 25 in number and unsolved for more than 45 days, BSE then
suspends trading in securities of such a company. The BSE may add such a
company’s name in the Z category of companies, thereby indicating and informing
all that such a company has not solved investor grievances, further investments
in such a company must be taken up with due care and caution.
The
Government of India, legislated the Competition Act in 2002, (subsequently
amended in 2007), thereby repealing the Monopolies and Restrictive Trade
Practices Act. The Competition Act strives to encourage, promote and protect
the competition in the economy. The main objectives of the Act are:-
1. Establishment
of the Competition Commission of India (CCI) to prohibit and prevent any acts
having adverse effect on the economy.
2. To
promote competition in the Indian
markets
3. To
protect the interest of the consumers
4. To
ensure freedom of trade
To enforce the provisions of the Competition Act the Competition
Commission has been set up as per section 7 and been granted certain powers and
duties as entailed under chapter IV of the Competition Act[4].
The CCI is a regulatory body having quasi-judicial powers, its
jurisdiction extends to the following:-
1. To
enquire into anti-competitive agreements, as provided under section 3 of the
Act
2. To
enquire into abuse of dominant position, as provide under section 4 of the Act
3. To
enquire into combinations, amalgamations, mergers and acquisitions to determine
if the same has had adverse effect on the economy. Provided for under section 5
of the Act
4. To
undertake competition advocacy as per Chapter VII, section 49 of the Act
5. To
create public awareness and training on competition issues
The
new Companies Act of 2013 is an improvement over the old Act of 1957. The Act
of 2013 provides stricter sanctions for non-compliance, approval of the board
for actions that are not in the ordinary course of business, defines related
parties, provides for Corporate Social Responsibility (CSR), mandates approval of shareholders by a
special resolution in case any transaction exceeds the provided threshold
limits, prohibits insider trading, establishment of the National Company Law
Tribunal (NCLT), includes new concepts such as one-man company, small company,
dormant company, e-governance and the like. For the protection of investors,
the following provisions have been provided[6]:-
1. Criminal
and civil liability for misleading investors through misstatements in
prospectus under section 34 , section 35 and section 447
2. Punishment
under section 36 for fraudulently inducing people to invest money
3. Under
section 125 of the Act, the establishment of the IPEF same as that of SEBI,
wherein unclaimed interests and debenture amounts are credited to the Fund to
be utilized for investor protection and promotion. The definition of funds
included donations from central and state governments and as laid down under
section 205C of the old Act of 1956
4. Introduction
of class action suits under section 37 and section 245, by persons aggrieved under section 34,
35 and 36
5. Prohibition
of forward dealings and making the same punishable, under section 194
6. Prohibition
of insider trading and defining the term “insider trading” under section 195
7. Power
of investors to call for account and audit of books, to inspect books and
conduct inquiries under section 206
8. Establishment
of the Serious Fraud Investigation Office (SFIO) under section 211, having the
powers to investigate the affairs of the company on receipt of a request for
the same under section 212.
9. Chapter
XVI of the Act, dealing with oppression and mismanagement of minority
shareholders. Under section 241 an application to the tribunal can be made for
relief of oppression and mismanagement by anyone complaining against the same,
subject to certain conditions
10. Under
section 448 punishment for making false statements to investors
The
Depositories Act of 1996 was legislated with the objective of providing the
depository market with a legal and regulatory framework. The Act aimed at
providing the depository with time efficient transactions, accuracy, security
and free transferability. The following provisions of the Act, protect
shareholder interests[8]:-
1. Mandating
the certificate of commencement of business to depositories under section 3.
2. Registration
of transfer of securities with depository under section 7
3. Making
it optional to receive or hold securities with depository under section 8
4. Mandating
securities to be in dematerialised form under section 9
5. Furnishing
of information and records by depository to issuer under section 13
6. The
option to opt out of any security as under section 14
7. Indemnification
of loss caused by depository in case loss due to negligence under section 16
8. Enquiry
and investigation into the affairs of the depository on receipt of a complaint
by SEBI, as it is satisfied that such call for information is in the interest
of the public, as provided under section 18
9. Power
of SEBI to give directions in the interest of the shareholder and/or to prevent
the affairs of the depository to be conducted in a detrimental manner, as under
section 19
10. Section
19 provides for penalties for:-
1. Failure
to furnish information, return or the like under 19A
2. Failure
of entering into an agreement with required depository, depository participant,
intermediary or investor under 19B
3. Failure
to redress investor grievances as prescribed by SEBI within required time
period under 19C
4. Delay
in dematerialisation and issue of share certificate of securities under 19D
5. Failure
to reconcile records under 19E
6. Failure
to comply with directions issued by SEBI under section 19F
11. Section
23C provides for the right to legal representation of the aggrieved before the
SAT
12. Section
23F provides for appeals to the Supreme Court, within 60 days from the date of
the order of SAT
13. Section
26 gives powers to the depository to make bye-laws for the protection and in
the interest of the participants and investors
The
Central Government enacted the Securities Contract Regulation Act in 1956, it
came into force in 1957. The objective of legislating the said Act was to
regulate the Stock Exchanges in the country and prohibit undesirable
transactions having adverse effect on the economy. The Act regulates working of
the secondary market. It protects the interest of the shareholders through the
following provisions[9]:-
1.
Mandating corporatisation and
demutualisation of all stock exchanges under section 4A
2. Power
of the Central Government to call for information and audits of accounts, and
direct inquiries under section 6
3. Furnishing
of annual reports to the Central Government under section 7
4.
Power of the Central Government to make
or direct rules as it deems fit, if
necessary and in the interest of the shareholder under section 8 and publish
the same in the Official Gazette of India.
5. Power
of the stock exchange to make bye-laws under section 9
relating to:-
1. Prohibition
of budlas or carry over facilities
2. Prohibition of blank transfers
3. Regulation
of contacts entered into
4. Listing
of securities
5. Method
and procedure of settlement of claims including arbitration of matters
6. Levying
of fees and fine
7. Fixing
scale of brokerage and other charges
8. Regulation
of members and their accounts
9. Separating
the functions of jobbers and brokers
10. Limiting
the volume of trade done by an individual
11. Making
a contravening member liable for fine, expulsion, suspension or any other
penalty
6. Power
of SEBI to make laws if expedient and in the interest of shareholders under
section 10 and publish the same in the Official Gazette of India.
7. Power
of the Central Government to suspend business of the stock exchange if
expedient for a period not exceeding 7 days under section 12
8. Power
of SEBI to issue directions if in the interest of the market and expedient to
do so under section 12A
9. Prohibition
of stock exchanges other than those recognised under section 19
10. Listing
of securities, mandating compliance by parties to such a listing agreement under section 21
11. Right
of appeal against the stock exchanges refusal to list securities in public
companies to the Central government under section 22
12. Right
of appeal against the stock exchanges refusal to list securities in public
companies to the SAT under section 22A
13. Appeal
to Supreme Court against the order of the SAT within 60 days of obtaining such
an order under section 22F
14. Penalties
provided under section 23 for:-
1. failure
to comply with any requisition or enters into any contract in contravention of
any of the provisions contained in the Act
2. manages, controls, or assists in keeping any
place other than that of a recognised stock exchange
3. not
being a member of a recognised stock exchange and wilfully induces any person
or advertises himself
4. making
bids or offers or for entering into or performing any contracts in
contravention of any of the provisions of this Act
5. failure
to comply with the orders of the Securities Appellate Tribunal
6. Penalty
for failure to furnish information, return, etc.
7. Penalty
for failure by any person to enter into an agreement with clients
8. Penalty
for failure to redress investors’ grievances
9. failure
to segregate securities or moneys of the client or clients or uses the
securities or moneys of a client
10. Penalty
for failure to comply with provision of listing conditions or delisting
11. Penalty
for excess dematerialisation or delivery of unlisted securities
12. Penalty
for failure to furnish periodical returns
Thus from the above
provisions it can be concluded that the laws relating to investor protection
are detailed, prevalent and stringent in nature, the only loophole is its
enforcement in the Indian Markets.
[1]
A.C. Fernando, Business Ethics and Corporate Governance, Pearsons, 2010, Pg
7-25
[2]
Business Ethics: An Indian Perspretive by A.C.Fernando; Pearson Education; Pg
204
[3]
Section 205 C, Companies Act, 1956
[5]
The Companies Act, 2013
[6]Ibid
[7]
The Depositories Act, 1996
[8]
Supra 28
[9]
Securities Contract Regulation Act, 1956
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