APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 INVESTOR PROTECTION MEASURES BY SEBI
DR. KVSN JAWAHAR BABU*; S. DAMODAHR NAIDU**
*Professor,
KMM Colleges,
Ramireddipalli,
Tirupati.
**Professor,
KMM Institute of Postgraduate Studies,
Tirupati.
Pinnacle Research Journals 72 http://www.pinnaclejournals.com ABSTRACT
Investor protection is one of the most important elements of a thriving securities market or other
financial investment institution. Investor protection focuses on making sure that investors are
fully informed about their purchases, transactions, affairs of the company that they have invested
in and the like. SEBI had issued guidelines for the protection of the investors through the
Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
The measures in practice gave mixed results. On the positive front, many banks sponsored
mutual fund had launched assured return schemes and lured the investor's huge contribution.
When they failed to deliver the promise, SEBI gave directive to sponsor bank to honour the
commitment made by the mutual funds, which cost the sponsor banks over Rs 2000 crore. SEBI
has introduced a supplementary process of applying in public issues, viz. ASBA process. The
application money shall remain blocked in the bank account till finalisation of the basis of
allotment in the issue or till withdrawal / failure of the issue or till withdrawal / rejection of the
application, an initiate that safeguards the interests of both issuing company and the investor.
Investor education campaigns have been yielding positive results to some extent, still lot more
needs to be done. Indian investors have been steadily fleeing the market, despite the apparent
spread of ‘equity cult’, which calls for immediate attention of the apex body to frame and
effectively implement the measures to protect the interests of small investors, and restore their
confidence in the stock market.
______________________________________________________________________________
INTRODUCTION
The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years
1995, 1999 and 2002 to meet the requirements of changing needs of the securities market and
responding to the development in the securities market. The Primary function of Securities and
Exchange Board of India under the SEBI Act, 1992 is the protection of the investors’ interest and
the healthy development of Indian financial markets. No doubt, it is very difficult and herculean
task for the regulators to prevent the scams in the markets considering the great difficulty in
regulating and monitoring each and every segment of the financial markets and the same is true
for the Indian regulator also. But what are the responsibilities of the regulators to set the system
right once the scam has taken place, especially the responsibility of redressing the grievances of
the investors so that their confidence is restored? The redressal of investors’ grievances, after the
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 scam, is the most challenging task before the regulators all over the world and the Indian
regulator is not an exception. SEBI had issued guidelines for the protection of the investors
through the Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000.
METHODOLOGY OF PAPER: The paper is conceptual in nature primarily, largely based on
secondary source of information, and focuses on various investor protection measures taken by
SEBI from time to time. Though the guidelines issued by SEBI are not covered exhaustively,
attempt is being made to evaluate the directives of the apex body pertaining to disclosure norms,
prohibition of insider trading, issued in the year 2000 and later on. The impact of Investor
education campaign, grievance reddressal mechanism, compensation from Investor Protection
Fund and the like are being studied towards restoring investor confidence in the stock markets.
OBJECTIVES OF SEBI
Pinnacle Research Journals 73 http://www.pinnaclejournals.com The SEBI has been entrusted with both the regulatory and developmental functions. The
objectives of SEBI are as follows:
•
Investor protection, so that there is a steady flow of savings into the Capital Market.
•
Ensuring the fair practices by the issuers of securities, namely, companies so that they
can raise resources at least cost.
•
Promotion of efficient services by brokers, merchant bankers and other intermediaries so
that they become competitive and professional.
Investor protection is one of the most important elements of a thriving securities market or other
financial investment institution. Simply put, investor protection is the effort to make sure that
those who invest their money in regulated financial products are not defrauded by brokers or
other parties. It’s important to note that unlike government insurance for monetary
deposits, investor and customer protection does not extend to covering losses when the securities
or products decrease in value. Investors have to assume the existence of risk as part of their
opportunity for gains. Investor protection focuses on making sure that investors are fully
informed about their purchases that insider activity does not threaten the worth of some
portfolios for the enrichment of others, and those holdings are not simply “lost” in instances
of brokerage failure.
INVESTOR PROTECTION MEASURES BY SEBI
Section 11(2) of the SEBI Act contains measures available with SEBI to implement the
legislated desire of investor protection. The measures available with SEBI include the following:
•
regulating the business in Stock Exchanges (SEs) and any other securities markets
•
registering and regulating the working of intermediaries like stock brokers, sub-brokers,
share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 Pinnacle Research Journals 74 http://www.pinnaclejournals.com merchant bankers, underwriters, portfolio managers, investment advisers etc. associated
with securities markets
•
registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies and other intermediaries
•
registering and regulating the working of venture capital funds and collective investment
schemes, including mutual funds
•
promoting and regulating self-regulatory organizations
•
prohibiting fraudulent and unfair trade practices relating to securities markets
•
prohibiting insider trading in securities
•
regulating substantial acquisition of shares and takeover of companies
•
promoting investors’ education and training of intermediaries of securities markets
•
Carry out inspection/ audits of the SEs / intermediaries etc.
•
call for information from any bank / any authority / corporation / agencies in respect of
any transaction in securities which is under investigation or inquiry by SEBI
•
performing such functions and exercising such powers under the Securities Contracts
(Regulation) Act, 1956 (SCRA)
•
levying fees or other charges
•
conducting research
•
performing such other functions as may be prescribed
SEBI REFORMS ON STOCK EXCHANGES
The reforms are briefly summarized below:
1. Compulsory audit and inspection of stock exchanges and their member brokers and their
accounts.
2. Transparency in the prices and brokerage charged by brokers by showing them in their
contract notes.
3. Board of Directors of stock exchanges has to be reconstituted so as to include non-brokers,
public representative, and Govt. representatives to the extent of 50% of the total number of
members.
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 4. Regulation of Portfolio management Schemes (PMS1): SEBI has already tightened PMS
norms by making it mandatory for portfolio managers to keep separate accounts of clients rather
than keeping their investments in pool account. Earlier, PMS providers used to open 'pool PMS'
as a common account under one head, put money received from a set of clients in it and then
invest the same on behalf of the whole group. This move is aimed at ensuring that portfolio
managers handled clients’ money in a transparent manner.
5. Capital adequacy norms have been laid down for members of various stock exchanges
separately and depending on their turnover of trade and other factors.
6. Applications Supported by Blocked Amount (ASBA) in case of IPO: SEBI has introduced a
supplementary process of applying in public issues, viz. ASBA process. ASBA is an application
for subscribing to an issue, containing an authorisation to block the application money in a bank
account with a bank which offers the facility of applying through the ASBA process. The bank
shall then block the application money in the bank account specified in the ASBA, on the basis
of an authorization given by the account holder. The application money shall remain blocked in
the bank account till finalisation of the basis of allotment in the issue or till withdrawal / failure
of the issue or till withdrawal / rejection of the application.
7. Contents of Offer Document: In addition to the disclosures specified in Schedule II of the
Companies Act, 1956, the prospectus shall also contain all material information which shall be
true and adequate so as to enable the investors to make informed decision on the investments in
the issue.
Pinnacle Research Journals 75 http://www.pinnaclejournals.com 8. IPO grading/credit rating2: Grading of all IPO of equity shares or other securities convertible
into equity shares is mandatory. Grading shall be obtained from at least one credit rating agency
registered with SEBI and shall be disclosed in the Prospectus or Red Herring Prospectus.
9. Promoters' contribution and the lock in requirements: SEBI has also plugged loop holes in the
computation of promoters' contribution and the lock in requirements thereof. Henceforth,
securities pledged by the promoters with banks and financial institutions as collaterals, will not
be eligible in the computation of promoters' contribution, thus upholding the spirit of the
legislation. Further, the promoters' locked in securities can now be pledged with banks or
1
However, investors don’t find this move to be sufficient. That is why many investor representatives have
approached SEBI, saying that only separate accounts won’t help and that they should be able to see transactions in
their accounts. Lots of complaints have also come from NRI investors. In view of these complaints, SEBI is now
contemplating linking investor accounts in PMS to depositories, so that PMS investors can see transactions taking
place in their accounts run by portfolio managers.
2
IPO grading is a relative assessment of the fundamentals of the company comprising primarily the management
quality, business prospects, corporate governance, financial performance and compliance track record. However, it
is not a comment on the pricing of the equity. Thus a company with the highest grade could turn out to be a poor
investment if the issue is overpriced. The investor could in fact, become all the more vulnerable if he were to blindly
go by grades and hence the need to caution him on the constraints of the grading exercise.
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 financial institutions only if the purpose of the loan is to finance one or more objects specified in
the issue thereby preventing misapplication of pledging for any other purposes.
10. Prohibition of Insider3 Trading: SEBI (Prohibition of Insider Trading) Regulations, 1992
[Insider Trading Regulations] deals with prohibition on dealing, communicating or counselling
on matters relating to insider trading based on unpublished Price sensitive information4 etc. The
following shall be deemed to be price sensitive information
o
periodical financial results of the company;
o
intended declaration of dividends (both interim and final);
o
issue of securities or buy-back of securities;
o
any major expansion plans or execution of new projects;
o
amalgamation, mergers or takeovers;
o
disposal of the whole or substantial part of the undertaking; and
o
significant changes in policies, plans or operations of the company
Pinnacle Research Journals 76 http://www.pinnaclejournals.com 11. SEBI Code of Ethics for Directors: The securities and Exchange Board of India (SEBI) has
formulated a code of ethics for directors and functionaries of stock exchanges aimed at
establishing professional and ethical standards for creating a fair and transparent market place.
The silent features of this code of ethics includes Fair ness and transparency in dealing with the
matters relating to the exchange and investors
•
Prohibition on dealing in securities in proprietary accounts by elected off ice bearers such
as President, Vice President, Treasurer etc.
•
Disclosure of dealing in securities by functionaries and directors of exchange,
•
Avoidance of conflict of interest in decision-making
•
Compliance with the regulatory laws exercising due diligence in the performance of
duties.
3
4
"Insider" means any person who,
o is/was connected/deemed to have been connected with the company, and who is reasonably expected to
have access to unpublished price sensitive information in respect of securities of the company, or
o has received or has had access to such unpublished price sensitive information.
"Price sensitive information" has been defined to mean any information which is directly or indirectly related to a
company and which if published is likely to materially affect the price of securities of company.
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 12. Investors Grievances Redressal Cell: SEBI also takes up grievances against the various
intermediaries registered with it and related issues.
GIVEN BELOW ARE TYPES OF GRIEVANCES FOR WHICH INVESTORS COULD
APPROACH SEBI
Type-I : Refund Order/ Allotment Advise
Type-II: Non-receipt of dividend.
Type-III: Non-receipt of share certificates after transfer.
Type-IV: Debentures.
Type-V: Non-receipt of letter of offer for rights.
Type VI: Collective Investment Schemes
Type VII: Mutual Funds/ Venture Capital Funds/ Foreign Venture
Capital Investors/ Foreign Institutional Investors/ Portfolio Managers, Custodians.
Type VIII: Brokers/ Securities Lending Intermediaries/ Merchant
Bankers/ Registrars and Transfer Agents/ Debenture Trustees/ Bankers to Issue/ Underwriters/
Credit Rating Agencies/ Depository Participants
Type IX: Securities Exchanges/ Clearing and Settlement Organizations/ Depositories
Pinnacle Research Journals 77 http://www.pinnaclejournals.com Type X: Derivative Trading
Type XI: Corporate Governance/ Corporate Restructuring/ Substantial Acquisition and
Takeovers/ Buyback / Delisting / Compliance with Listing Conditions.
13. ACTION AGAINST DIRECTORS OF VANISHING COMPANIES
Emergence of Vanishing companies has shaken investors’ faith to the core. Matter was
campaigned and representations made to ensure that such cases do not occur in future, resulting
in SEBI forming a committee examining and exploring various courses of action such as
including authenticated photographs, passport numbers, PAN number etc. of the promoters /
directors at the time of incorporation and in the prospectus along with monitoring the end use of
funds.
14. INVESTOR AWARENESS CAMPAIGN
The major thrust has been on educating and informing the small investors which is clearly
evident from the motto that 'An informed investor is a safe investor'. Keeping complete faith on
the above all endeavors have been made in this direction including announcing the year 2003 as
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 Pinnacle Research Journals 78 http://www.pinnaclejournals.com the 'Jaagte Raho' year and and awareness and organized more than 1000 investor conference,
exhibitions, mela, seminars, Union Budget meetings and public meetings for small investors all
over India. More than 5 Lacs investors took part in various programmes. Till date, more than
2188 workshops have been conducted in around 500 cities/towns across the country.
•
ADVERTISEMENT- SEBI has prepared simple “dos and don’ts” for investors relating
to various aspects of the securities market. Till date, over 700 advertisements relating to
various aspects of Securities Market have appeared in 48 different newspapers/
magazines, covering approximately 111 cities and 9 regional languages, apart from
English and Hindi.
•
EDUCATIVE MATERIALS-SEBI has prepared a standardized reading material and
presentation material for the workshops
•
ALL INDIA RADIO- With regard to educating investors through the medium of radio,
SEBI Officials regularly participate in programmes aired by All India Radio.
•
WEBSITE DEDICATED TO INVESTOR EDUCATION: http://investor.sebi.gov.in)
•
CAUTIONARY MESSAGE ON TELEVISION- With a view to use the electronic
media to reach out to a larger number of investors, a short cautionary message, in the
form of a 40 seconds filmlet, has been prepared and the same is being aired on television
•
PROTECTION OF RETAIL INVESTOR: Retail investors are not in a position to
identify and /or appreciate the risk factors associated with certain scrips or schemes. With
the result they are not able to make informed investment decisions. SEBI has strongly
requested small investors to take adequate precaution before investing in any forthcoming
IPO issues. It is observed that 8 out of 37 companies have dubious promoters and
merchant bankers. Investors also cautioned not to invest in certain B2 & Z category listed
companies who are declaring excellent quarterly results as its authenticity is doubtful.
15. REDUCTION IN D-MAT CHARGES
One of the major grievances in this Information Technology environment affecting the investors
was dematerlisation charges being very high as compared to keeping securities in physical form.
This was limiting many investors in getting their securities converted to D-mat form. Matter was
taken up and resulted in reduction of D-mat charges benefiting lakhs of investors where 90% of
the securities in India are traded through NSDL.
16. TACKLING FALSE PROMISE OF ASSURED RETURNS BY BANKS SPONSORED
MUTUAL FUNDS
Many banks sponsored mutual fund had launched assured return schemes and lured the investor's
huge contribution. However at the time of maturity could not match the assured return.
Sponsored bank also tried to raise their hands eg. Canara Bank, Indbank, State Bank etc.
Campaigned and fought heavily the matter with the SEBI / mutual fund / finance ministry and
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 insisted that all the assured returns should be paid to the investors. Due to the intervention SEBI
gave directive to sponsor bank to honour the commitment made by the mutual funds. Shortfall of
more than Rs. 2000 crores was met by sponsor banks for benefit of small investors.
17. COMPENSATION FROM INVESTOR PROTECTION FUND
Investor protection fund of stock exchange provided for Rs.5 lacs / 10 lacs compensation per
client in case of default by the broker. The same was interpreted by stock exchange as applicable
per sub broker. Thereby all the clients of a sub broker were getting benefit of Rs.10 / Rs.5 lacs in
aggregate only. Took up the issue with the stock exchanges and insisted upon applicability of the
limit vis-à-vis client of a sub broker and not per sub broker. In case of Century consultants
defaults at least 100 clients took benefit of this and avoided losses of more than 10 crores.
CRITICAL APPRAISAL OF INVESTOR PROTECTION MEASURES BY SEBI
Pinnacle Research Journals 79 http://www.pinnaclejournals.com SEBI being a premiere institution for dealing with the problems relating to securities has
advanced a long way towards protecting the investors from the hazards of the predators existing
in the market. On the positive front, many banks sponsored mutual fund had launched assured
return schemes and lured the investor's huge contribution. However at the time of maturity could
not match the assured return. Sponsored bank also tried to raise their hands eg. Canara Bank,
Indbank, State Bank of India etc. SEBI gave directive to sponsor bank to honour the
commitment made by the mutual funds. Shortfall of more than Rs.,2000 crores was met by
sponsor banks for benefit of small investors.
By beginning of the new millennium in 2000, SEBI has strengthened and established itself as an
all powerful regulatory body for the capital market, all intermediaries in it, SROs, stock
Exchanges, listed companies, Venture Funds, Mutual Funds etc. These measures include
permission for e-broking, share trading via net with orders to be routed through the websites of
brokers, acceptance of Kumarmangalan Birla Report on Corporate Governance and of K.B.
Chandeashekhar Panel Report on Venture Funds. The SEBI has given directives to the listed
companies and to the top 150 companies in particular to observe the code of corporate
governance by March end 2001. The contrary scenario was that only the big fishes could escape
the net and the small ones were still striving to uphold their existence.
It is also pointed that SEBI watchdog is a dog without teeth. It only wears dentures to fight
against manipulators and finally those people get away with murder. A recent case study is the
Essar Steel delisting story. SEBI watched silently when the promoters came to the market, didn’t
share profits and left the investors high and dry and took the cool delisting option. SEBI just said
- its as per GOI laws. Do investors need a SEBI to tell that? Aggrieved investors comment that
Investor Protection is a big joke and money making exercise. SEBI came with finger printing and
collected close to 100 crores .The scheme was scrapped; then why money was not returned by
SEBI ? Had it been by other market players SEBI would have demanded them to pay .There is
one yard stick for the Ruler and the other for the Ruled.
APJEM Arth Prabandh: A Journal of Economics and Management Vol.1 Issue 8, November 2012, ISSN 2278‐0629 Another area of concern for SEBI is the practice of clients signing PoAs while opening accounts
with brokers. Account opening requires clients to sign several documents, one of which is the
PoA. In a hurry to get over the task of signing, they often fail to read each and every line of the
huge bunch of papers. In that case, PoAs are always open to misuse. For instance, a broker may
include in the PoA a clause for debit of shares from the client’s DEMAT account without
delivery instruction slip, and an unsuspecting client may sign it.
CONCLUSION
It may be concluded that SEBI surmounted several obstacles on the way to development of
capital market with due care for investors’ interests and greater transparency in the affairs of
organizations and stock exchanges, though not to the extent of hundred percent. As we have seen
that via different guidelines it had made it sure that no stone remains unturned in the path of the
mission of protecting the investors. Investor education campaigns have been yielding positive
results to some extent, still lot more needs to be done. Indian investors have been steadily fleeing
the market, despite the apparent spread of ‘equity cult’, which calls for immediate attention of
the apex body to frame and effectively implement the measures to protect the interests of
investors, and restore their confidence in the stock market..
REFERENCES
1. Investor Alert, Apr-Jun 2008, Issue No:2/2008
2. “Is investor protection a myth? Why is SEBI dragging its feet on the ombudsman after
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accessed on 29th Aug 2011
Pinnacle Research Journals 80 http://www.pinnaclejournals.com 3. Protection Of The Investors By SEBI - Expanding The Horizon Of The Investors,
http://www.legalserviceindia.com/article/l334-Protection-Of-The-Investors-BySebi.html, accessed on 10th Sep 2011
4. Report Of The Expert Group Headed By Mr.Justice M. H. Kania (Former Chief Justice
of India) For Suggesting Amendments To Securities And Exchange Board Of India Act,
1992
5. Rajesh Bhayani, Investor protection tops SEBI agenda, www.oppapers.com, accessed on
10th Sep 2011
6. SEBI Guidelines (Disclosures and Investor Protection) 2000
7. http://www.bseindia.com/invdesk/services.asp
8. www.sebi.gov.in
9. www.wikipedia.com