WorkingPaper2014/001
The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India UmakanthVAROTTIL
vmumakanth@nus.edu.sg [February2014]
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1
The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India UmakanthVAROTTIL
ABSTRACT:
Any legal system may potentially deploy two separate but related models to ensure the
accuracy of disclosure in the capital markets. First, it may possess legal institutions in the
form of regulatory bodies with power to make regulations regarding disclosures and to
enforcethoseregulationsthroughpowersofsanctionconferreduponthem.Second,itmay
adoptthemodelthatreliesuponthecourtstograntremediestoinvestorswhoarevictimsof
inaccurateormisleadingdisclosurestherebysufferinglosses.
ThispaperteststheefficacyofthetwomodelsintheirapplicationtoIndia.Theexploration
of India is interesting and helpful because India’s capital markets have witnessed
exponentialgrowthinthelasttwodecades.Atfirstblush,itmightbesimpletoattributethis
to India’s legal system through civil liability and its enforcement through the judiciary.
Counterintuitively,though,India’scommonlawlegalsystemoperatingthroughthejudiciary
hasnotplayedavitalroleinthedevelopmentofthecapitalmarketsthrougharigorouscivil
liability regime. Delays in proceedings due to alarming pendency levels in litigation before
Indiancourtsandskyrocketingcostsininitiatinglitigationaresomeofthefactorsthathave
disincentivized investors from relying upon the civil liability regime for enforcing their
compensationclaims.
At the same time, other factors have been at play. India’s capital markets regulator, the
SecuritiesandExchangeBoardofIndia(SEBI)hasbeeninstrumentalinformulatingpolicies
andregulationsgoverningcapitalmarkets,anditsactionshavebeenrapidanddynamicto
suit the needs of the changing markets, by operating through the power of sanctioning
variousmarketplayers.
Thepaperconcludeswiththefindingthatwhilethegeneralapproachinmostcommonlaw
markets is for courts to play a significant role in the development of the capital markets
through the process of compensating investors for losses, the success of India’s capital
marketsgrowthhashingedupontheregulatoryprocessratherthanthecourts.
Keywords:minorityinvestors,shareholderlitigation,securitiesregulation,
compensationoflosses,India
2
I.INTRODUCTION
Thereexistsastrongcorrelationbetweenthelevelofprotectionconferredupon
minorityinvestorsthroughtheinstrumentalityofthelawandthestateoftheequity
capitalmarketsinagiveneconomy.1Morespecifically,theroleofthelawandthelegal
systemistoensureparityofinformationthroughdisclosuressothatinvestorspaythe
rightpricetoacquiresecurities,whetherintheprimarymarketorthesecondary
market.2Viewedinthislight,lawacquiresthestatusofan“informationforcing”
mechanism3thatcompelsissuercompaniestomakeappropriatedisclosures.Greater
robustnessinthelegalsystemthereforeleadstobetterqualityofdisclosureenabling
issuerstoraisecapitalfrominvestorsatafairprice.
Thelegalsystemmaypotentiallydeploytwoseparatebutrelatedmodelsto
ensuretheaccuracyofdisclosuresinthecapitalmarkets.4First,thelegalsystemmay
possesslegalinstitutionsintheformofregulatorybodieswithpowerstomake
regulationsregardingdisclosuresandalsotoenforcethoseregulationsthroughpowers
ofsanctionconferreduponthem.Incaseofnon‐compliancewiththedisclosure
regulations,theappropriateregulatorybodywouldhavethepowertoimposesanctions
ontheperpetratorssoastoactasapreventivemeasureagainstnon‐compliance.5Such
aregulatorymechanismprovidesflexibilityandadaptabilityasitisimplementedbya
country’ssecuritiesmarketregulator,whichisnotonlyintendedtobeindependentbut
alsopossessessomelevelofdomainexpertise.Moreover,thefocusofsucharegulatory
approachtendstotargetissuercompaniesandintermediariesinvolvedinthecapital
1
RafaelLaPorta,Lopez‐de‐Silanes&AndreiShleifer,LawandFinance,106J.POL.ECON1113
(1998)[Law&Finance];JohnC.Coffee,Jr.,TheRiseofDispersedOwnership:TheRoleofLawinthe
SeparationofOwnershipandControl,111YALEL.J.1(2001);BrianR.Cheffins,DoesLawMatter?The
SeparationofOwnershipandControlintheUnitedKingdom,30J.LEGALSTUD.459(2001).
2
BernardBlack,TheCoreInstitutionsthatSupportStrongSecuritiesMarkets,55BUS.LAW.1565,
1567‐68(2000).
3
Information‐forcingrulesaredefaultrulesthatcompelpartieswithsuperiorinformationto
divulgethatinformationtootherpartiestheydealwithsothattheproblemofinformationasymmetryis
obviated,oratleastreduced.SeeYairListokin,LearningThroughPolicyVariation,118YALEL.J.480,501‐
02(2008).
4
Althoughthesetwomodelsaretreatedseparately,theremaypotentiallybesomeamountof
overlapbetweenthetwointheirimpactonsecuritiesmarkets.Inotherwords,thetwomodelsmayeven
complementeachother.
5
Black,supranote2at1576‐77.
3
marketssoastodeterwrongdoing.Theregulatorymechanismisaimedmuchless,ifat
all,atcompensatinginvestorlosses,althoughdeterringerrantissuersand
intermediarieswillinanyeventindirectlybenefittheinvestingcommunityaswell.
Second,thelegalsystemmayadoptamodelthatreliesuponthecourtstogrant
remediestoinvestorswhoarevictimsofinaccurateormisleadingdisclosuresthereby
sufferinglosses.6Thispresupposestheexistenceofrobustsubstantivelawstodealwith
misstatementsbyissuercompanies,andalsostrongenforcementofthelawsbythe
courts.The“legalorigins”strainofliteraturepositsthatincommonlawcountriesthe
judiciaryplaysanimportantroleinenforcinginvestorrights,therebyenhancingthe
valueofcapitalmarkets.7Ontheotherhand,civillawcountriestendtorelyheavilyon
governmentalinterventioninregulatingthecapitalmarkets.Asthearbiterofdisputes
betweeninvestorsandissuercompanies,thecourtsperformtheroleofremedyingthe
grievancesofinvestors.Moreimportantly,courtsmay(anddo)imposecivilliabilityon
issuers,theirdirectorsandcapitalmarketintermediariesandawardcompensationto
redressinvestorlosses.Insomecountries,especiallyindevelopedmarketsinthe
commonlawworld,thestrongroleofthejudiciaryisseenaskeyinensuringliquidand
vibrantcapitalmarkets.
Inthispaper,Itesttheefficacyofthetwomodelsdiscussedaboveintheir
applicationtooneemergingeconomy,viz.India.TheexplorationoftheIndiancapital
marketsisbothinterestingandhelpfulbecausetheyhavewitnessedexponential
growthinthelasttwodecadessincetheliberalizationofIndia’seconomyin1991.The
Indiancapitalmarketshavenotonlygrownsubstantiallyincomparisonwiththeprior
periodbutthegrowthrateshavebeenremarkableevenrelativetoseveraldeveloped
6
Id.at1577‐78.
7
RafaelLaPorta,FlorencioLopez‐de‐Silanes,AndreiShleifer&RobertVishny,LegalDeterminants
ofExternalFinance,42J.FIN.1131(1997);RafaelLaPorta,FlorencioLopez‐de‐Silanes,AndreiShleifer&
RobertVishny,InvestorProtectionandCorporateGovernance,58J.FIN.ECON.3(2000);LaPorta,etal,Law
&Finance,supranote1.
4
economies.8Bywayofanexample,in2013India’sNationalStockExchangeranked
highestintermsofnumberofequitytrades.9
MovingontothelegaltoolsthatmayhavefacilitatedsuchgrowthinIndia’s
capitalmarkets,itissimpleatfirstblushtoattributethegrowthtoIndia’slegalsystem
throughcivilliabilityanditsenforcementthroughthejudiciary.Thiswouldbe
consistentwiththe“legalorigins”notionofinvestorprotectionbecauseIndia’slegal
systemissteepedinthecommonlawheritageitobtainedthroughcenturiesofBritish
colonialrule.10Indianotonlyhasasufficientlyrobustsubstantivelawoninvestor
protection,buttheindependentjudicialsystemdrawnfromthecommonlawtradition
allowsforjudgestomoldthelawtosuitspecificcircumstances.Inotherwords,the
systempermitsjudge‐madelawasamethodofreformingthelegalsystemtoadaptto
thedynamiccapitalmarkets.
However,asIargueinthispaper,theefficacyofIndia’slegalsystemasatoolfor
investorprotectionnecessitatesamorenuancedtreatment.Counter‐intuitively,India’s
commonlawlegalsystemoperatingthroughthejudiciaryhasnotplayedavitalrolein
thedevelopmentofthecapitalmarketsthroughtheimpositionofcivilliabilityupon
issuercompaniesorthecompensationofinvestorsforlossesduetomisstatements.
Despitetheexistenceofsubstantialrulesforcivilliabilityandcompensationandthe
presenceofanelaboratecourtsystem,theassociatedconditionsforthejudiciaryto
createanimpactoninvestorprotectionareconspicuousbytheirabsence.11TheIndian
courtsystemisplaguedbydelays,costs,andotherinefficiencies.Nearly32million
casesarependingbeforedifferentlevelswithintheIndianjudiciarytherebycausinga
significantstrainonthesystem.12Casescanonaveragetake15yearstoachievefinal
8
SeeFranklinAllen,RajeshChakrabarti&SankarDe,India’sFinancialSystem,WorkingPaper
availableathttp://ssrn.com/abstract=1261244.
9
NSEtop‐rankedgloballyforequitytradesfor2ndyearin2013,TheEconomicTimes(Jan.19,
2014).However,thetwoleadingIndianstockexchangedonotrankveryhighlywhenmeasuredagainst
marketcapitalization.
10
JohnArmour&PriyaLele,Law,FinanceandPolitics:TheCaseofIndia,43LAW&SOC’YREV.491,
499(2009);AfraAfsharipour,RisingMultinationals:LawandtheEvolutionofOutboundAcquisitionsby
IndianCompanies,44U.C.DAVISL.REV.1029,1047‐49(2011).
11
Armour&Lele,supranote10at508‐11.
12
M.J.Antony,Onlythebadnews,TheBusinessStandard(Jan.14,2014).Seealso,JayanthKrishnan,
GlobetrottingLawFirms,23GEO.J.LEGALETHICS57.
5
outcomes.13Itisaclassicscenarioinwhichtheconsiderablystrong(andprogressively
strengthening)substantivelawsoncivilliabilityforsecuritieslawviolationsare
overshadowedbyinefficienciesintheenforcementofthelaws.Forthisreason,civil
liabilityandcompensationofinvestors’losseshavealmostneverbeenutilizedtoany
meaningfulextentintheIndianmarketsasatooltostrengtheningthecapitalmarkets.
Tomyknowledge,thereisnosingleinstanceinrecentdecadesofanissuer
companyhavingbeenorderedbyanIndiancourttopayasignificantamountin
compensationtoinvestorsforincorrectormisleadingdisclosures.Thiscanbeamply
illustratedbycontrastingresultsthatensuedinahigh‐profilecorporategovernanceand
disclosurefailurethatoccurredin2009inSatyamComputerServicesLimited,aleading
playerintheinformationtechnologysector.ThechairmanofSatyamconfessedto
havingfalsifiedthefinancialstatementsofthecompany,includingbyshowingfictitious
cashassetsofoverUS$1billiononitsbooks.14Consequently,thestockpriceofthe
companyfellsharply,therebycausingsignificantlossestoitsinvestors.Thecompany
wasdual‐listed,withitsequitysharesbeinglistedonIndianstockexchangesandits
Americandepositoryreceipts(ADRs)ontheNYSE.Classactionswerepromptly
initiatedintheUnitedStates(U.S.)courtsagainstSatyamaswellasitsauditors
Pricewaterhouse‐Coopers(PwC)onbehalfofaffectedADR‐holders.In2011,Satyam
settledtheactionagainstitbyagreeingtopayU.S.$125milliontotheplaintiffs,while
PwCsettledtheactionagainstitbyagreeingtopayU.S.$25.5million.15Instarkcontrast
tothesesettlementswhereplaintiffshareholdersweresuccessfulinrecoveringsomeof
theirlosses,therewasnopayoutwhatsoevertoIndianshareholderswhosuffered
similarlosses.AlthoughanIndianinvestorassociationinitiatedaclaimbeforethe
SupremeCourtofIndiaonbehalfofaffectedIndianshareholders,theclaimwasnot
sustainedinthecourt.16Thisanecdotalevidencepresentstheglaringdifferencesinthe
useofthejudicialsystemforinvestorprotectionintheU.S.andinIndia.
13
PressInformationBureau,GovernmentofIndia,NationalLegalMissiontoReduceAverage
PendencyTimefrom15Yearsto3Years(2010)availableat
http://pib.nic.in/release/rel_print_page1.asp?relid=62745.
14
Forabriefdiscussionofthisepisode,see,UmakanthVarottil,ACautionaryTaleoftheTransplant
EffectonIndianCorporateGovernance,21(1)NAT.L.SCH.IND.REV.1,32‐34(2009)
15 StanfordLawSchoolSecuritiesClassActionClearinghouse,CompanyandCaseInformation:
SatyamComputerServicesLtd.,availableathttp://securities.stanford.edu/1042/SAY_01/.
16
P.S.Patnaik,SCrejectspleabySatyaminvestorsforcompensation,THEMINT(Aug.10,2009).
6
Thissituationpresentsanimportantpuzzle.IftheIndiancourtsystemishardly
attunedtotheuseofthecustomarycommonlawmethodofimposingcivilliabilityon
errantcompaniesandcompensatinglossesofaffectedinvestors,howhavetheIndian
capitalmarketswitnessedsignificantgrowthinrecentyears?Thisraisesgravedoubts
abouttheapplicabilityofthe“legalorigins”thesistotheIndiancapitalmarkets.Surely,
theremaybeotherfactorsatplay.Thisleavesuswithoneexplanationthatthegrowth
ofthecapitalmarketshasbeenattributabletotheroleofthesecuritiesregulatorand
subsidiarylegislationpromulgatedbyitintheformofregulationsthatgovernthe
capitalmarkets.TheSecuritiesandExchangeBoardofIndia(SEBI),whichformally
receivedstatutoryrecognitionin1992,hasbeeninstrumentalinformulatingpolicies
andregulationsgoverningthecapitalmarkets.17Itsactionshavebeenrapidand
dynamictosuitthechangingneedsofthemarkets.Ithasoperatedthroughthepowerof
sanctioningvariousmarketplayersbyapplyingtheprincipleofdeterrence.
Whilethegeneralapproachinmostcommonlawmarketsisforcourtstoplaya
significantroleinthedevelopmentofcapitalmarketsthroughtheprocessof
compensatinginvestorsforlosses,thesuccessofIndia’scapitalmarketsgrowthhas
hingedupontheregulatoryprocessratherthanthecourts,therebydeviatingfromthe
generalapproachadoptedbycommonlawsystems.18Atthesametime,asIdetaillater
inthispaper,recentlegislativedevelopmentsinIndiaseektoemboldentheabilityof
investorstoinitiateclassactionstorecouptheirlosses.19Althoughitisreasonableto
predictthatthebalanceinthefuturewilltiltsomewhattowardsgreaterimpactofthe
courtsystemonthestateofthecapitalmarkets,thereisnocauseforgreatoptimismon
thiscountunlessdeeperissuesrelatingtoIndia’sjusticedeliverysystemareaddressed
inamoreoverarchingfashion.
17 SEBIderivesitsstatutorypowersfromtheSecuritiesandExchangeBoardofIndiaAct,1992.
Underthatlegislation,SEBIisempoweredtopromulgatevariousregulationspertainingtothecapital
marketsandalsototakeappropriateactionintheinterestsofinvestorsandthecapitalmarkets.
18
Thesefindingsarebroadlyconsistentwithanearlierworkthatexaminedthegrowthoffinancial
marketsinIndiaingeneral(includingbothequityanddebt).Armour&Lele,supranote10.
19
TherecentlyenactedCompaniesAct,2013(whichsubstitutesthepre‐existingCompaniesAct,
1956)isexpectedtocomeintoforceinphases,withafewprovisionsalreadyhavingtakeneffect.Among
otherthings,thislegislationincludesastatutoryclassactionmechanismforshareholders.
7
PartIIofthispapertrackstherecentevolutionandgrowthofIndia’scapital
marketsandthecapitalstructureofpubliclylistedIndiancompanies.PartIIIdiscusses
theroleofsecuritiesregulationinthemarketsandcommentsupontherole,powersand
functionsofSEBI,whichhasbeeninstrumentalinthedevelopmentofthecapital
markets.PartIVanalyzesthenatureandextentofshareholderlitigationinIndia,and
identifiesfactorsduetowhichthereisacompleteabsenceofmechanismstomotivate
shareholderstosuccessfullyclaimcompensationforlossesduetomisstatementsand
wrongfuldisclosuresbyissuercompanies.Italsofocusesonrecentlegislative
developmentsthatmayfavorshareholderlitigationasatoolforinvestorprotection,
moresothaninthepast.PartVconcludes.
II.INDIA’SCAPITALMARKETS
A.
PhasesinCapitalMarketDevelopment
Sinceitsindependencein1947,India’scapitalmarketshavewitnessedtwoeras.
Thefirstisthepre‐1991era,duringwhichthefocuswaspredominantlyonthe
manufacturingsector.Thethenprevalentlicense‐rajandindustrialcapacityquota
systemensuredthatonlyafewbusinessesthrived.20Thisledtothegrowthofcertain
businessfamiliesandindustrialgroups(largelytotheexclusionofothers)thatheld
largechunksofcapitalinevenpubliclylistedcompanies.Financewasessentially
availableonlythroughbankingchannels(asopposedtothecapitalmarkets).Thebanks
anddevelopmentfinancialinstitutionstookuplargeshareholdingsincompaniesand
alsonominateddirectorsonboardsofsuchcompanies.Duringthisera,dueto
concentratedownershipofshares,thecontrollingshareholders,whichwereprimarily
businessfamiliesorthestate,continuedtoexertgreatinfluenceovercompaniesatthe
costofminorityshareholders.Governancestructureswereopaqueasfinancial
disclosurenormswerepoor.
20
See,RajeshChakrabarti,WilliamL.Megginson&PradeepK.Yadav,CorporateGovernancein
India,20(1)J.APP.CORP.FIN.59,62(2008).
8
Signsofchange,however,rapidlyemergedwiththe1991reformsthrough
economicliberalization21thatledtoaneweraintheIndiancapitalmarkets.Afterits
establishmentin1992,SEBIrapidlybeganusheringinsecuritiesmarketreformsthat
graduallyledtotheexponentialgrowthofthecapitalmarkets.22Thepost‐liberalization
eraalsowitnessedtheemergenceoftheinformationtechnologyandknowledge‐based
sectorinIndiathatdependsheavily(andsometimessolely)ontheequitycapital
marketsforexternalfinanceascomparedtothemanufacturingsectorthatrelies
substantiallyondebtfinance.23ThesedevelopmentscatapultedIndiaontotheglobal
arenainthelastcoupleofdecades,therebyearningitaplaceinanelitegroupof
emergingeconomies.24
B.
CurrentStateoftheCapitalMarketsinIndia
India’scapitalmarketshavedirectlybenefitedfromIndia’sexplosiveeconomicgrowth
sinceliberalization.Thishasbeenaidedbytheinflowofforeigninvestmentasvarious
sectorsoftheeconomywereopenedup.25AsofMarch2013,thetotalmarket
capitalizationofIndiancompanieswasaroundIndianRupees63,878billion(U.S.$
1,174billion).26ThiscomparestoamarketcapitalizationofU.S.$15.22billiononthe
21 Radicalreformswereoccasionedin1991duetotheexceptionallyseverebalanceofpayments
crisisanddismalgrowth.See,MontekS.Ahluwalia,EconomicReformsinIndiaSince1991:HasGradualism
Worked?InRAHULMUKHERJI(ED.),INDIA’SECONOMICTRANSITION:THEPOLITICSOFREFORMS87(2007);AnneO.
Krueger&SajjidChinoy,TheIndianEconomyinGlobalContextinANNEO.KRUEGER(ED.),ECONOMICPOLICY
REFORMSANDTHEINDIANECONOMY21(2003).
22 Thiswasalsofuelledbytheintroductionofthederivatives(futuresandoptions)segment.Allen,
Chakrabarti&De,supranote8.
23
Armour&Lele,supranote10,at506;TarunKhanna&KrishnaPalepu,Globalizationand
ConvergenceinCorporateGovernance:EvidencefromInfosysandtheIndianSoftwareIndustry,35J.INT’L
BUS.STUDIES484(2004),NirmalyaKumar,IndiaUnleashed,20BUS.STRATEGYREV.4(2009).
24
Brazil,Russia,IndiaandChina(BRICs)areleadingemergingeconomiesastheirpresentgrowth
trajectoryisexpectedtoputthemamongsttheworldlargesteconomieswithinafewyears.Goldman
Sachs,GlobalEconomicsPaperNo.99,DreamingWithBRICs:ThePathto2050(2003),availableat
http://www2.goldmansachs.com/ideas/brics/book/99‐dreaming.pdf.Thisgrouphassincebeenjoined
bySouthAfrica,tomakeitthe“BRICS”.
25 Inflowoffundsintothestockmarketshasbeenprimarilythroughforeigninstitutionalinvestors
(FIIs),whichhavebeenrecognisedasaseparatecategoryofportfolioinvestorsundertherelevantIndian
lawsandregulations.
26
ThisisbasedonthemarketcapitalizationontheBombayStockExchange(whichcanbetakenas
aproxyfortheall‐Indiamarketcapitalization).NationalStockExchangeofIndiaLimited,Macroeconomic
DevelopmentandSecuritiesMarkets19,availableat
9
NYSEEuronextfortherelevanttime.27Overtheyears,therehasalsobeenasignificant
increaseintradingvolumesinIndianstocks.TheywentupfromIndianRupees9,689
billion(U.S.$203billion)inFY2003toIndianRupees32,571billioninFY2013.28
Theintensityofactivityonastockexchangeismeasuredbythenumberof
tradesontheexchange,wheretheNationalStockExchangeofIndiaLimited(NSE)has
beentheworldleaderforthelasttwoyears.Itsperformancerelativetoitspeersonthis
countissetoutbelow:29
Table1:TotalNumberofTradesinEquityShares(yeartodate,inthousands)
Exchange
NSE
NYSEEuronext(US)
KoreaExchange
ShanghaiStock
Exchange
ShenzhenSE
EndDecember2011
1,384,112
1,994,898
1,191,124
1,273,277
1,030,324
EndDecember2012
1,406,498
1,374,539
1,218,992
925,550
935,565
EndSeptember2013
1,102,896
894,235
800,713
860,876
949,662
Thedepthofthecapitalmarketsismeasuredasaratioofthemarketcapitalization
comparedtothegrossdomesticproduct(GDP)ofthecountry.InIndia’scase,thisratio
stoodat68.6%attheendof2012,whichiscomparablewithotheremergingmarkets,
butlowerthanleadingdevelopedmarkets.30ThenumberofcompanieslistedonIndia
stockexchangesisquitehigh.AsofDecember2013,5,294companieswerelistedonthe
BSEwhile1,638companieswerelistedontheNSE.31
http://www.nseindia.com/research/dynaContent/ismr.htm[MacroeconomicDevelopmentandSecurities
Markets].
27 WorldFederationofExchanges,LatestStatistics(March2013),availableathttp://www.world‐
exchanges.org/statistics/monthly‐reports.
28
NationalStockExchangeofIndiaLimited,MacroeconomicDevelopmentandSecuritiesMarkets,
supranote26at19.
29 ThisdatahasbeenextractedfromNationalStockExchangeofIndiaLimited,CapitalMarket61,
availableathttp://www.nseindia.com/research/dynaContent/ismr.htm[CapitalMarket].
30
NationalStockExchangeofIndiaLimited,MacroeconomicDevelopmentandSecuritiesMarkets,
supranote26,at16.
31
Thesenumbersforthetwoexchangesarenottobeconsideredcumulativelyassomecompanies
maybelistedonboth,therebycausingsomeoverlap.
10
Itisalsothecasethatthecapitalmarketsareskewedheavilyinfavourofequity
ratherthandebt.Whileinthedevelopedeconomiesthemarketforcorporatebondsis
closerinsizetotheequitymarket,inIndiathecorporatebondmarketlagssubstantially
behindtheequitymarkets.32Forexample,theratioofthecorporatebondmarketto
GDPisaminiscule4%.33WhiletheregulatorsinIndiahavesoughttointroducea
numberofreformstoboostthecorporatebondmarkets,theireffortshavenotbeen
successful,largelyduetovariousunderlyingfactorsincludingdifficultiesinenforcing
contractsandthelackofarobustframeworkforcorporateinsolvencyinIndia.34
C.
CorporateOwnershipPattern&ConcentrationofShareholdings
Thedataavailableacrossvariousparameterspresenttheexistenceofsignificantcapital
marketsactivityinIndia,primarilyontheequitiesside,whichhasbeenprogressively
increasing.TheIndianstockexchangesareamongtheleadingonesintheworld.
However,thestockmarketsinIndiaarerepresentativeofaphenomenonthatis
commontomostoftheworld(apartfromtheU.S.andtheUnitedKingdom(U.K.)),
whichistheconcentrationofshareholdingseveninpubliclylistedcompanies.Most
publiccompaniesarecontrolled(byvirtueofdominantshareholding)byeither
businessfamiliesorthestate.35Businessfamiliespredominantlyownandcontrol
companies(eventhosethatarelistedonstockexchanges).Inaddition,itisquite
commontofindstate‐ownedfirmsaswell.Severallistedcompaniesarealsomajority
ownedbymultinationalcompanies.However,diffusedownership(inthesenseofthe
BerleandMeanscorporation)canbefoundonlyinahandfulofIndianlistedcompanies,
wheresuchstructuresexistmoreasamatterofexceptionratherthantherule.
32
VikramadityaKhanna&UmakanthVarottil,DevelopingtheMarketforCorporateBondsinIndia,
NSEWorkingPaperWP/6/2012,availableat
http://www.nseindia.com/research/content/WP_6_Mar2012.pdf[CorporateBonds].
33 AshimaGoyal,DeepeningIndia’sBondMarkets,THEHINDUBUSINESSLINE(Feb.11,2013);
RajeswariSengupta,IndianCorporateDebtMarket:CurrentStatus,IFMRBLOG(Aug.8,2012),availableat
http://www.ifmr.co.in/blog/2012/08/08/indian‐corporate‐debt‐market‐current‐status/.
34
Khanna&Varottil,CorporateBonds,supranote32,at2.
35
ForananalysisofIndia’sshareholdingstructureandcontrollingshareholderdominance,see,
RajeshChakrabarti,CorporateGovernanceinIndia–EvolutionandChallenges(2005),availableat
http://ssrn.com/abstract=649857.
11
Examiningtheownershipaspectempirically,itwasfoundin2002that“the
averageshareholdingofpromotersinallIndiancompanieswasashighas48.1%.”36A
laterstudyconfirmsthisposition,eveninthecaseoflistedcompanies.37Amorerecent
study“tracksthemovementsincorporateownershipinIndiaamongitstopcompanies
inthefirstdecadeofthenewmillenniumandmovingforwardintothesecond”.38It
findsthatovertheperiodofthestudyfrom2001to2011,controllingshareholdershave
furtherentrenchedthemselvesincompaniesbysubstantiallyincreasingtheir
shareholdings,especiallyinlargercompanieswhilestrengtheningtheiralready
significantholdingsinsmallercompanies.39Moreover,retailnon‐institutional
shareholdinghasbeengivingwaytogreaterinstitutionalshareholding.40
Thereismoretoitthanabsoluteownershippercentages.Thepowerof
concentratedownershipisbolsteredbycontrollingshareholdersthroughother
mechanismssuchascross‐holdings,pyramidstructuresandtunneling.41These
phenomena“marktheIndiancorporatelandscape.”42Theyoftenleadtogreater
benefitstothecontrollingshareholdersatthecostoftheminorityshareholders.43Such
practicescanalsohaveanadverseeffectonthedevelopmentofcapitalmarketsas
minorityshareholdersareconsiderablyexposedtotheactionsofcontrolling
shareholders.AlltheseareevidenceofownershipconcentrationinIndianlisted
companies,withsignificantpowerstothecontrollingshareholders.Thegeneral
assumptionisthatthegrowthofthecapitalmarketsandgreaterliquiditywillgiverise
36
Chakrabarti,supranote35,at11[emphasissupplied].Inthiscontext,theexpression“promoter”
isusedinIndiatomeanacontrollingshareholder.
37 ShaunJ.Mathew,HostileTakeoversinIndia:NewProspects,Challenges,andRegulatory
Opportunities,2007(3)COLUM.BUS.L.REV.800.
38
N.Balasubramanian&R.V.Anand,OwnershipTrendsinCorporateIndia2001–2011:Evidence
andImplications,IndianInstituteofManagement,Bangalore,WorkingPaperNo:419,availableat
http://ssrn.com/abstract=2303684.
39
Id.at31.
40
Id.at32.
41
Foranintroductorydiscussionoftheseconcepts,see,See,LaPorta,Rafael,FlorencioLopez‐de‐
Silanes&AndreiShleifer,CorporateOwnershipAroundtheWorld,54J.FIN.471,474(1999).
42 Chakrabarti,supranote35,at1.Seealso,Bertrand,P.Mehta&S.Mullainathan,FerretingOut
Tunneling:AnApplicationtoIndianBusinessGroups,117(1)QUARTERLYJOURNALOFECONOMICS121,126
(2002),observingtheconceptofcross‐holdingsinIndianfamilybusinessgroups.
43
Chakrabarti,supranote35,at12.
12
todiffusioninshareholdinginlistedcompanies.44But,thatassumptionhasnotreceived
anysupportthroughempiricalevidenceintheIndiancontext,asdiscussedabove.45
Inessence,Indiarepresentsthestoryofrapidlygrowingcapitalmarketswith
twoworld‐classstockexchanges.Theexpansion,however,hasbeenlargelyonthe
equitiesside,withthecorporatebondmarketlaggingconsiderablybehind(leaving
scopeformuchimprovement).Despitetheexpansionofthecapitalmarkets,
concentrationofshareholdinginpubliclistedcompaniescontinuestobetheorderof
theday(withsomehonorableexceptions),therebyprovidingsubstantialpowertothe
controllingshareholders,arguablyputtingtheminorityshareholderinterestsatsome
risk.
Withthisbackground,Inowproceedtodealwiththevariouslegaland
regulatorytoolsavailableinIndiatoprotectminorityinvestors,particularlyagainst
issuerscompaniesandcontrollingshareholdersformisstatementsinprospectusesor
otherdisclosuresmadebythemtothemarkets,whichmayhaveaffectedtheinterests
ofminorityinvestors.
III.
SECURITIESREGULATIONANDINDIA’SCAPITALMARKETS
TherapidadvancementofsecuritiesregulationinIndiaasalsotheconstantly
expandingroleandpowersofSEBIasthesecuritiesregulatorhavebothcontributed
substantiallytothedevelopmentofIndia’scapitalmarkets.MygoalinthisPartisto
analyzethesecuritiesregulationanditsenforcementbySEBIwithaviewto
determiningitsimpactonthecapitalmarkets.
A.
SecuritiesRegulation;DisclosureNorms
Priorto1992,Indiafollowedthemerit‐basedregulationofsecuritiesofferings.46
Companiesintendingtooffersecuritiestothepublicwererequiredtoobtainthe
44
Hansmann,Henry&ReinierKraakman,TheEndofHistoryforCorporateLaw”89GEO.L.J.439
(2001).
45
See,supranotes38‐40,andaccompanyingtext.
13
approvaloftheControllerofCapitalIssues,agovernmentbody,whichwould
specificallyapproveeachpublicofferinganditsterms,includingthepriceatwhich
sharesweretobeoffered.47Therewascompletegovernmentaloversightofthecapital
markets.Duetothesomewhatexcessivestringencyinaccessingthecapitalmarkets,
publicofferingofsharesbyIndiancompanieswasnotthatprevalent.
SincetheassumptionofregulatoryresponsibilitiesbySEBIin1992,therewasa
movetowardsamoredisclosure‐basedregulationofpublicofferingsofsecuritiesby
Indiancompanies.48SEBI’sroleastheregulatorhasbeentoensureaccurateandtimely
disclosurestothemarkets,onthebasisofwhichinvestorsarefreetoinvestin
securitiesofIndiancompanies.Theregulatoryoversightoverthetermsoftheofferings
diminishedovertimewheninthemid‐to‐late1990stherewasacompleteshiftfrom
fixed‐priceofferingstobook‐builtofferings.49Underthisregime,companiesarefreeto
invitebidsfrominvestorswithincertainindicativelimitsonthebasisofadraft
prospectusthatcontainsallthenecessarydisclosures.50Pricingthroughregulatory
interventiongavewaytoamarket‐basedpricediscoveryprocess.Thisenabled
companiessincethemid‐to‐late1990storaisesbillionsofdollarsincapitalthrough
publicofferingofsharesandaccompaniedlistingsthroughadisclosure‐basedregime
wherepricingwasbasedpurelyuponfactorsofdemandandsupply.51Thesefactors
46
Meritregulationinvolvesareviewbyasecuritiesregulatorofthequalityandsuitabilityofthe
offeringofsecuritiesbyacompanywithinthejurisdictionoftheregulator.See,RonaldJ.Colombo,Merit
RegulationViatheSuitabilityRules,12J.INT’LBUS.&L.1,7(2013).
47
G.Sabarinathan,SecuritiesandExchangeBoardofIndiaandtheIndianCapitalMarkets–ASurvey
oftheRegulatoryProvisions,IIMBangaloreResearchPaperNo.228at10‐11,availableat
http://ssrn.com/abstract=2152909.
48 UpontheestablishmentofSEBI,theofficeoftheControllerofCapitalIssueswasabolished.
ARVINDPANAGARIYA,INDIA:THEEMERGINGGIANT242(2008).
49
NitishRanjan&T.P.Madhusoodhanan,IPOUnderpricing,IssueMechanisms,andSize3‐4,
availableathttp://ssrn.com/abstract=520744.
50
Forabriefdescriptionofthemannerinwhichthebookbuildingprocesswastobecarriedoutfor
thepurposeofpricediscovery,see,S.S.S.Kumar,ShortandLong‐runPerformanceofBookbuiltIPOsin
India20‐21,availableathttp://dspace.iimk.ac.in/bitstream/2259/523/1/sssk.pdf.
51Itisalsothecasethat“theIndianbookbuildingprocessisthemosttransparentintheworldinthat
thebookbuildingactivityisshownliveonstockexchangewebsitewithupdatesevery30minutes”.Arif
Khurshed,StefanoPaleari,AlokPande&SilvioVismara,IPOCertification:TheRoleofGradingand
TransparentBooks3,availableat
http://www.cass.city.ac.uk/__data/assets/pdf_file/0006/86640/Khurshed.pdf.Thisallowsretail
investorstomaketheirbidswithfullknowledgeofthenatureofbidsmadebythebetter‐informed
institutionalinvestors.Id.at3‐4.
14
triggeredadramaticshiftintheIndiancapitalmarkets,particularlyontheprimary‐
marketsfront.52
SEBI’semphasisondisclosure‐basedregulationhaswitnessedaproliferationof
disclosurenormsforvarioustypesofcapitalraisingactivitiesbyIndiancompanies.
Overthelasttwodecades,SEBIhasgraduallyexpandedthedisclosurenormsand
prospectusrequirements,53culminatinginthepresentlyapplicableSEBI(Issueof
CapitalandDisclosureRequirements)Regulations,2009(theICDRRegulations).The
ICDRRegulationscontaindetaileddisclosurerequirementstobecompliedwithby
companiesundertakingvarioustypesofsecuritiesoffering.Whilethedisclosure
requirementspertainingtopublicofferingsarequiteextensive,theyaresomewhat
limitedinthecaseofrightsofferingsandthemoretargetedqualifiedinstitutional
placements(QIPs).TheICDRRegulationsareprescriptiveandencompassdisclosures
pertainingtothebusiness,risks,legalmatters,capitalstructureandeventhe
controllingshareholdersandotherentitieswithinthegroupinwhichtheyhold
shares.54Moreover,theusesfortheproceedsoftheofferingmustbeenumeratedtothe
minutestdetail.TherequirementsintheICDRRegulationsaresoonerousthatthe
disclosuresrequiredtogiveeffecttoapublicofferingintheIndianmarketsare
comparable(orpossiblyevenfarexceed)thoserequiredinmostdevelopedmarkets.
ThetrajectoryfollowedbySEBIinthelasttwodecadesdemonstratesthepivotalnature
ofdisclosureasatoolforsecuritiesregulationintheprimarymarkets.
Atthesametime,theexistenceofastarkdisparitybetweenthedisclosure
regimesgoverningtheprimaryandsecondarymarketsissomewhatpuzzling.Whilea
strongdisclosureregimehasbeenaboontotheprimarymarkets,anequallyweak
disclosureregimeinthesecondarymarketshasbeenamalaisewithfarlesscontinuing
52 PrimarymarketsofferingsbyIndiancompaniesgrewfromRs.130280millionin1993‐94toRs.
576670millionin2010‐11.JayantaKumarSeal&JasbirSinghMataru,LongRunPerformanceofInitial
PublicOfferingsandSeasonedEquityOfferingsinIndia,IndianInstituteofForeignTradeWorkingPaper
No.FI‐13‐19(May2012)at2,availableathttp://cc.iift.ac.in/research/Docs/WP/19.pdf.
53
SEBIissuedasetofDisclosureandInvestorProtectionGuidelinesin1992,whichwasfollowed
throughwithanumberofclarificationsissuedovertheyears.In2000,thesewereconsolidatedinthe
SEBI(DisclosureandInvestorProtection)Guidelines,2000.
54
Justtoobtainaflavoroftheextensive(andpossiblyintrusive)natureofthedisclosures,itmay
benotedthattheICDRRegulationsevenrequirethephotographandpassportnumberofthecontrolling
shareholders(incasetheyareindividuals)tobeincludedintheofferingdocument!
15
disclosureobligationsoncompaniesthatarealreadylistedonastockexchange.The
secondarymarketdisclosuresaregovernedthroughthelistingagreementthatlisted
companiesarerequiredtoenterintowiththestockexchangeswheretheirsecurities
arelisted.55Whileepisodicdisclosuresarerequiredtobemadebycompaniesuponthe
occurrenceofmaterialeventsthataffectthepriceoftheirsecuritiesandperiodic
disclosuresaretobemadesuchastheannouncementofquarterlyresultsanddecisions
atboardmeetings,theserequirementsareconsiderablylighterthanthoseprescribed
forprimarymarkettransactions.Moreover,theregulationsandliabilityregimefor
misstatementsinsecondarymarketdisclosuresarefarfromclear.Duetothisdisparity,
therehavebeencallsfortheintroductionofanintegrateddisclosureregimeinIndia
throughstandardizingandstreamliningthecorporatedisclosuresbyintegratinginitial
disclosuresmadeunderaprimarymarketofferingdocumentwithcontinuous
disclosurerequirementsthereafter.56AlthoughSEBIhasconsideredthisissuebasedon
therecommendationsofaSub‐Committeeappointedbyitforthepurpose,57thereis
stillalongwaytogobeforetheintegrationoftheprimaryandsecondarymarket
disclosuresinIndia.Thelateststeptowardsimprovingtheenforcementofsecondary
marketdisclosuresisbyempoweringthestockexchangestotakeactionagainsterrant
issuers.58
B.
TheRegulatorySet‐up:SEBIandtheStockExchanges
TheprimarymarketdisclosurerequirementsareenforcedbySEBI,asthecapital
marketsregulator.SEBIismanagedbyaboard,whichispresidedoverbyachairperson.
Overtheyears,theGovernmenthasenhancedSEBI’sfunctionalautonomyandalso
equippeditwithgreaterpowers.AlthoughSEBI’sregulatorysetuphasaideditin
55
SEBIhasprescribedastandardformatofthelistingagreement.
56 SandeepParekh,IntegratedDisclosure–StreamliningtheDisclosureNormsintheIndianSecurities
Market,IndianInstituteofManagement,AhmedabadWorkingPaper2005‐01‐04(2005),availableat
http://ssrn.com/abstract=653703.
57
SecuritiesandExchangeBoardofIndia,ReportoftheSub‐CommitteeonIntegratedDisclosures
(Jan.21,2008),availableathttp://www.sebi.gov.in/commreport/IntegratedDisclosures.pdf.
58
SecuritiesandExchangeBoardofIndia,CompliancewiththeprovisionsofEquityListing
Agreementbylistedcompanies–MonitoringbyStockExchanges,CircularCIR/CFD/POLICYCELL/13/2013
(Nov.18,2013).Theimpactofthismeasureisyettobeknown,asitisafairlyrecentone.
16
spearheadingcapitalmarketreformsinIndia,someconcernsstillremainaboutits
autonomy,askeyappointmentsarestillsubjecttogovernmentcontrol,59andoften
overlapswiththejurisdictionofrelatedregulatorshaverequiredremedialactiononthe
partoftheGovernment.60Despitesomeminorinefficienciesinitsregulatorysetup,
SEBI’sroleinenhancingIndia’scapitalmarketsisnotsubjecttoanysignificantdoubt.
AsofMarch2013,SEBIhadatotalof666employees,with553ofthembeing
officersinvariousgrades.61Whilethenumberofemployeesappearshighinabsolute
terms,SEBIisunderstaffedgiventhevastnatureofIndia’scapitalmarketandits
players.Theenforcementofsecuritiesregulationcontinuestobeachallengeduetothe
inadequacyofresourceswithintheregulator.However,SEBIhasbeentakingstepsto
meetwiththeneedsofadynamicstockmarketenvironment.Morerecently,it
appointedamanagementconsultanttorevisitthestructuralandorganizationalissues,
tore‐prioritizeareasoffocusandtoconcentrateonbuildinguptherequiredexpertise
andhumanresourcestomeetwiththemodernchallenges.62Basedonthe
recommendationsoftheconsultant,SEBIisintheprocessofestablishingamore
focusedapproachtowardsenforcementofitsregulations.63
Assecondarymarketdisclosuresareregulatedthroughthelistingagreement,
thestockexchangesareresponsiblefortheirenforcement.Thebenefitofthis
arrangementistheflexibilityitprovidesasthebasisforenforcementisthroughself‐or‐
marketregulation.However,stockexchangesarenotvestedwithsignificantpowersof
enforcementagainsterrantissuersinthesamewaythatSEBIhasbeenasaregulator.
Stockexchangesholdtheweaponofdelisting,whichtheyareusuallyhesitanttodeploy
asthismeasurehurtsminorityinvestorsmorethanitbenefitsthem.Hence,notonlyare
thesecondarymarketdisclosuresdissimilarandmuchlessextensivethanprimary
59 G.Sabarinathan,SecuritiesandExchangeBoardofIndiaandtheRegulationoftheIndianSecurities
Markets19‐20,availableat
http://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20309.pdf.
60
MonikaHalan,SEBI‐IRDAtiff:whowinswholoses,THEMINT(Jun.23,2010).
61 SecuritiesandExchangeBoardofIndia,AnnualReport2012‐13,availableat
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1378192045802.pdf,at181[SEBIAnnualReport].
62
Id.at180.
63
SamieModak,Specialunittoaidstricterregulatoryenforcement,BUSINESSSTANDARD(Jan.23,
2014).
17
marketdisclosuresintermsofsubstantiveregulation,buttheirenforcementbythe
stockexchangesisfarlesseffectivecomparedtotheenforcementofprimarymarket
disclosuresbySEBIthroughextensivemeasuresavailabletoit,asIdetailinthenext
sub‐part.
C.
SEBI’sEnforcementPowersandActivities
TheprimaryroleofSEBIistoprotecttheinterestsofinvestorsinsecuritiesandto
promotethedevelopmentof(andtoregulate)thesecuritiesmarkets.64Indoingso,it
hasbeenconferredverywidepowerstotake“measuresasitthinksfit”.65More
specifically,SEBIisempoweredtoregulatethemannerinwhichcompaniesaccessthe
capitalmarkets,includingthenatureandextentofdisclosuresrequired.66Inenforcing
theserequirements,SEBIcanevenprohibitanycompanyfrom“issuingprospectus,any
offerdocument,oradvertisementsolicitingmoneyfromthepublicfortheissueof
securities”.67Thisspecificremedyforviolationofdisclosurenormsinprimarymarket
transactionsisthereforepreventiveinnature.
1.
GeneralEnforcementMeasures
Apartfromthespecificremedysetoutabove,SEBIpossessesseveralotherpowersand
sanctionstodealwithsecuritieslawviolations.68First,SEBImaysuspendthetradingof
asecurityonastockexchange,althoughasaninvestorunfriendlymeasureitisrarely
exercised.Second,SEBImayrestrainpersonsfromaccessingthesecuritiesmarketsand
prohibitthemfromdealinginsecurities.Sucharestraintorderisusuallyimposedfora
definedperiodoftime.Thispowerhasbeenexercisedquitefrequentlyandeffectively
bySEBItodealwithsecuritieslawviolations.Therestraintordersarebindingoneither
64
SecuritiesandExchangeBoardofIndiaAct,1992,§11(1).
65
Id.
66
See,CompaniesAct,2013,§24;SecuritiesandExchangeBoardofIndiaAct,1992,§11A(1)(a).
67
SecuritiesandExchangeBoardofIndiaAct,1992,§11A(1)(b).
68
ThesepowersemanatefromtheSecuritiesandExchangeBoardofIndiaAct,1992,§11readwith
§11B.
18
theissuercompanies,theirdirectorsorpromotersorallofthem.69Forinstance,in
SecuritiesandExchangeBoardofIndiav.AjayAgarwal,70basedonacomplaintreceived
regardingallegednon‐disclosuresinaprospectus,SEBIconductedaninvestigationand
passedanorderagainstthejointmanagingdirectoroftheissuercompanyrestraining
himfromassociatingwithanycorporatebodyinaccessingthesecuritiesmarket.On
appeal,theSupremeCourtofIndiaupheldSEBI’sorder.71Third,SEBImaysuspendthe
officebearersofastockexchangeorotherself‐regulatoryorganization.Fourth,SEBI
mayimposeothertypesofordersincludingimpoundingtheproceedsofthesaleof
shareseffectedinviolationofsecuritieslaws,attachpropertysuchasbankaccounts
andalsoissuearestraintagainstalienationofproperty.Thecommonthreadthatruns
throughthesemeasuresisthattheyaretargetedatwrongdoers.Morespecifically,
SEBI’saiminimposingthesemeasuresittoacttopreventthecommissionor
continuationofviolationsbytheerrantparties.Theelementmissinginthisschemeof
thingsisthecompensationofinvestorswhomayhavesufferedlosses.SEBI’sregulatory
focusisontheviolatorsratherthanthevictims.
2.
DisgorgementofProfits
ThequestionofwhetherSEBIcanorderadisgorgementofprofitshasbeenthesubject
matterofsomecontentionbeforetheIndiancourts.Suchanorderdeservesgreater
attentionbecauseitappearssimilartocompensationofinvestorlosses.Theanalysisof
disgorgementbeginswiththeneedtodeterminewhether“itiscompensatoryinnature
oramount[s]tomeredeprivationofthewrongdoerfromitsunjustenrichment”.72In
certainearliercases,theappellateauthorityhearingappealsoverSEBI’sordersrefused
tograntordersofdisgorgementofprofitsastheywerefoundtobeeither
compensatory73orpenal74innature.However,subsequentlythepowersofSEBIto
69 Theseordersareupheldonappealiftheyarefoundtobepreventiveinnatureandnotiftheyare
punitiveinnature.Foradiscussionoftherelevantcaselaw,seeSUMITAGRAWAL&ROBINJOSEPHBABY,
AGRAWAL&BABYONSEBIACT164‐65(2011).
70
(2010)3SCC765.
71 Inanothercase,theDelhiHighCourtrecognisedSEBI’spowertoinvestigateintoalleged
misstatementsornon‐disclosuresinaprospectus,andtopassappropriateordersbasedthereon.Kimsuk
KrishnaSinhav.SecuritiesandExchangeBoardofIndia,[2010]155Comp.Cas.295(Del).
72
AGRAWAL&BABY,supranote69at207.
73
HindustanLeverv.SEBI,[1998]18SCL311(AppellateAuthority).
19
imposeordersofdisgorgementofprofitswererecognisedonthegroundthattheyare
neithercompensatorynorpenalinnature.Itwasfoundthatdisgorgementofprofits
amountedtodeprivingthewrongdoersoftheirill‐gottengainsandtopreventingthem
fromunjustlyenrichingthemselves.75Inotherwords,theneedfordisgorgementof
profitsandthecomputationoftheamountsarebasedonthewrongfulprofitsmadeby
theviolatorsofsecuritiesregulationsratherthanthelossescausedtotheinvestors.The
presentpositionregardingdisgorgementofprofitshasbeenaptlysummarizedas
follows:
Asnotedabove,initiallythedisgorgementwassoughttobecharacterizedas
compensatoryinnatureinHindustanLever,thenasequitableremedyinRakesh
Agarwal,andin…someIPOscamcasesasaninherentpower.Difficultyin
characterizingthedisgorgementascompensatoryinnatureisthatlossofa
personcannotdirectlyberelatedtothepersonfromwhomdisgorgementis
madeinallcircumstances.Alsofordisgorgementitisnotnecessarytohavean
identifiableinvestororpersonandtheamountoflosssufferedbyhim.Difficulty
arisesessentiallyinestablishingacausalrelationship.Orderofdisgorgement
whichmerelyseekstoappropriateillegalprofitsessentiallylessenstheintensity
ofthewrongandthereforeisapttobedescribedasaremedialmeasurewhichis
permissibletobetakenunderSection11B.…76
AnyambiguityinSEBI’spowerstoorderdisgorgementofprofitshasbeenputtorest
througharecentlegislativeeffortthathasexpresslyrecognizedthepower.77The
SecuritiesLaws(Amendment)SecondOrdinance,2013(the2013Ordinance)78
expresslyconfersSEBIwiththepowertoorderadisgorgementof“anamount
equivalenttothewrongfulgainmadeorlossavertedbysuchcontravention”.79This
suggeststhatthemeasuresofdisgorgementhavealinktothelossessufferedbythe
74
RakeshAgarwalv.SEBI,[2004]49SCL351(SAT).
75 KarvyStockBrokingLtd.v.SEBI,[2008]84SCL31(SAT).Severalothercasesarediscussedin
AGARWAL&BABY,supranote69at208‐211.
76
AGARWAL&BABY,supranote69at211‐12.
77 Previously,thecourtsandappellateauthoritieshadtoderivethispowerthroughnecessary
implication.
78
AnOrdinanceispromulgatedbythePresidentasatemporarylegislativemeasureduringthe
periodwhentheParliamentisnotinsession.AnOrdinanceisvalidforaperiodof6months.The2013
OrdinancelapsedonJanuary15,2014,andvariousoptionsarebeingconsideredtoprolongthe
applicabilityofitsprovisions.ShishirSinha,PoliticalStalemateDefangsSEBI,HINDUBUSINESSLINE(Jan.15,
2014).Thispaperassumesthevalidityofthe2013Ordinance.
79
TheSecuritiesLaws(Amendment)SecondOrdinance,2013,§4.TheOrdinancehasbeendrafted
soastoclarifythatSEBIwasalwaysintendedtohavethepowerofdisgorgement.
20
investors.Moreover,the2013Ordinancealsostatesthattheamountsrecoveredfrom
wrongdoersthroughdisgorgementshallbedepositedintotheInvestorEducationand
ProtectionFund(IEPF)80tobeutilizedinaccordancewithappropriateregulations
prescribedforthepurpose.Oneoftheobjectivesoftheutilizationoffundsfromthe
IEPFistowardscompensationoflossestoinvestors.
Inthisemergingscenario,thereisagreaternexusbetweentheabilityofSEBIto
orderdisgorgementofprofitsanditsobjectiveofmakinggoodinvestorlosses.
However,itisunclearwhetherthemeasureofdisgorgementcanbetreatedasa
compensatoryeffort.Significantdifferencescontinuetoexist.Forinstance,whilethe
natureandextentofinvestorlossesisanimportantdeterminativefactorwhileordering
adisgorgementofprofits,theamountsrecoveredcannotbedirectlyappliedtowards
investors’lossesasifitisanorderforcompensation.Thisisbecausetheamountsareto
becreditedintotheIEPF.Compensationofinvestorlossesrequiresthedischargeofa
judicialoradjudicatorypowerswhicharetobespecificallyauthorizedandcannotbe
merelyinferredfromstatute.81Suchpowersaregenerallyconferreduponthecivil
courtsthatperformthatadjudicatoryrole.GiventhatSEBIisonlyaregulatoryauthority
andcannotperformallthefunctionsofanadjudicatorybodysuchasacivilcourt,its
abilitytoordercompensatoryorderscontinuestocarrysomedoubt.
Despitethefactthatthegapbetweendisgorgementandcompensationhasbeen
graduallyreducingunderIndianlaw,thedistinctioncontinuestocarrysignificantlegal
importinthatSEBIcontinuestolargelyperformanadministrativeorregulatoryrole
thatispreventiveinnature,whilecompensationofinvestorlossesisinherentlyan
adjudicatorymechanismthatcanonlybecarriedoutbythenormalcivilcourts.82The
experienceoverthenextfewyearswilldictatewhetherSEBIiswillingtoutilizethe
newfounddisgorgementpowerstomeetinvestorlossessoastoconstituteaneffective
substitutetocompensatorymechanismsimplementedthroughthenormalcivilcourts.
80 TheIEPFhasbeenestablishedbytheCentralGovernmentundercompanylaw.See,Companies
Act,2013,§125.Underthisprovision,severalamountsrecoveredbytheGovernmentortheregulatorare
tobecreditedintothefund,whichwillbeutilizedmainlyforinvestorprotectionpurposes.Oneofthe
typesofamountstobecreditedistheproceedsofanorderofdisgorgementofprofits.
81
AGARWAL&BABY,supranote69,at216.
82
Id.
21
3.
OtherMeasures
Whilethesubstantivelawsrelatingtosecuritiesregulationhavebecomeprogressively
extensiveandsophisticatedinIndia,oneprincipalconcernhasoftenbeenthelackof
effectiveenforcementoftheselawsbySEBI.83Robustsubstantivelawslackthedesired
effectunlesstheyareeffectivelyenforcedbytheregulator.
Thisperceptibleregulatorygaphasmorerecentlybeenaddressedthroughthe
2013Ordinance.SeveralamendmentstothelegislationareaimedatbolsteringSEBI’s
investigativeandenforcementpowers.Forexample,SEBIisempoweredtoexercisethe
powersofsearchandseizure,recordingofstatementsunderoathandtocallfor
informationandrecords,includingtelephonecalldatarecords(whichwillbecome
usefulincasessuchasinsidertradingwherecircumstantialevidenceiscrucial).In
termsofenforcement,violatorsofsecuritiesregulationsmaybesubjecttoattachment
oftheirproperty,bankaccountsandalsothearrestanddetentionofviolatorsinprison.
AllofthesesubstantiallyenhanceSEBI’spowerstodealwithsecuritieslawviolations,
includingmisstatementsinprospectusesinprimarymarketofferings.
Inadditiontothepreventivemeasuresdiscussedearlier,SEBIalsopossessesthe
powersofimposingpenaltiesthroughanadjudicatoryprocessandalsothepowerto
initiatecriminalprosecutionofsecuritieslawoffenders.Asforadjudication,SEBIis
entitledtoappointoneofitsownofficersofasuitableranktoactasanadjudicating
officertoimposepenaltiesforvarioustypesofoffences.84Inadditiontothepenalties
imposedthroughadjudication,securitieslawviolatorsmaybesubjecttocriminal
prosecutionthatSEBImayinitiatebeforetheregularcriminalcourts.85Althoughboth
83 V.Umakanth,SecuritiesLawAmendmentOrdinance:AnOverview,INDIACORPLAWBLOG(Jul.22,
2013),availableathttp://indiacorplaw.blogspot.sg/2013/07/securities‐laws‐amendment‐
ordinance.html.
84 Whilethepreciseamountofthepenaltywoulddependuponthenatureofviolation,the
maximumamountcanextenduptoRs.250millionincertaincases.Inadjudicatingthequantumof
penaltytobeimposed,theadjudicatingofficermayconsider,amongotherthings,theamountoflosses
causedtoaninvestororgroupofinvestorsasaresultoftheviolation.SecuritiesandExchangeBoardof
IndiaAct,1992,§15J(b).
85
SecuritiesandExchangeBoardofIndiaAct,1992,§24.Punishmentcanextendtoimprisonment
uptoatermof10yearsorwithfine,whichmayextenduptoRs.250million,orboth.SEBIdoesnothave
thepowerstohanddownpunishmentthatiscriminalorpenalinnature,andhencemustpursuecharges
beforetheregularcriminalcourts.
22
adjudicationandcriminalprosecutionpowersareavailabletoSEBI,itisonlythe
adjudicatorymechanismthathasbeenextensivelyandsuccessfullyutilizedbySEBIin
varioussecuritieslawviolationstohanddownpenalties.86Asforcriminalprosecution,
SEBI’strackrecordhasbeenfarfromsuccessful.Tomyknowledge,ithasnotmanaged
tosecurecriminalconvictioninanyhigh‐profilecaseinvolvingsecuritieslawviolations.
Thereasonsforthisoutcomerangefromtheonerousnatureofevidentiaryburdenin
criminalprosecutionstothedelaysandinefficienciesinthecriminaljusticesystemin
India.However,theneedforbetterdeterrentmeasuresthroughcriminalprosecutions
hasbeenrecognisedandthe2013Ordinanceenvisagestheestablishmentofspecial
courtstotrysecuritieslawoffencessothatsuchcasescanbedecidedinafast‐track
mannerwithoutbeingsubjectedtothedelaysintheregularcourtsystem.While
criminalprosecutionshaveneverbeensuccessfullyemployedasanenforcement
mechanismforsecuritieslaws,thismightchangeinthefuture,albeitgradually.
4.
SettlementsandConsentOrders
Itispossibleforallegedsecuritieslawviolatorstoinitiatetheprocessofobtaining
consentordersbywayofsettlement.SEBIhasintroducedaspecificschemeforthe
purpose.87SEBIpassesconsentordersbasedontherecommendationsofaHigh
PoweredAdvisoryCommitteecomprisingaretiredjudgeofaHighCourtandtwoother
externalexperts.AlthoughSEBIhasissuedseveralconsentorders,therehasbeensome
levelofcriticismthattheconsentordermechanismwasoperatedinanadhocmanner
andthatitlackedtransparency.88Inresponsetothisandbasedonitsexperienceof
implementingtheconsentmechanismintheinitialyears,SEBIin2012modified
86 Itisalsothecasethattheadjudicatingofficer’sordersaresubjecttoappealbeforetheSecurities
AppellateTribunal(SAT).Inseveralcases,theadjudicatingofficers’ordershavebeenoverturnedbythe
SAT.
87
SecuritiesandExchangeBoardofIndia,GuidelinesforConsentOrdersandForConsidering
RequestsforCompositionofOffences,CircularNo.EFD/ED/Cir‐1/2007(Apr.20,2007).
88
V.Umakanth,SEBITightensConsentOrderNorms,INDIACORPLAWBLOG(May27,2012),availableat
http://indiacorplaw.blogspot.sg/2012/05/sebi‐tightens‐consent‐order‐norms.html.
23
processtostreamlineitfurther.89Amongthesignificantchangestothescheme,the
consentorderwasmadeinapplicableattheoutsettoviolationsunderspecific
categoriessuchasinsidertrading,seriousfraudulentandunfairtradepracticeand
failuretomakedisclosuresinofferdocumentsthatmateriallyaffecttherightsof
investors,exceptincertainspecificcircumstancesafterconsideringthefactsofthecase.
ItappearsthatSEBI’sobjectiveistoexcludeserioustypesofviolationslistedaboveat
theoutsetratherthantoleavethediscretiontothevariousauthoritiesmanagingthe
consentprocess.Thisintroducedobjectivityandtransparencyintheprocess,which
werearguablymissingintheerstwhileguidelines.However,thisalsohastheeffectof
substantiallylimitingthescopeoftheconsentordermechanismtominorviolationsthat
aretechnicalinnatureanddonotsubstantiallyaffectinvestorrights.
WhiletheconsentmechanismisavailabletopartiestoinitiatebeforeSEBI,itis
unlikelytobeavailableincaseofseriousoffences,particularlygiventhemorestringent
measuresannouncedintheprocessimplementedsince2012.
5.
SEBIEnforcementMeasuresinPractice
InthebackgroundofthevariouspowersexercisablebySEBI,itwouldbehelpfulto
brieflyexploretheextenttowhichSEBIhasinfactexercisedtheminpractice.
Reviewingrecentdata,SEBIhasinitiatedinvestigationinrespectofallegedviolationsof
securitieslaws.Theseinclude“pricemanipulation,capitalissuerelatedirregularities,
takeoverrelatedviolations,non‐complianceofdisclosurerequirementsandanyother
misconductinthesecuritiesmarkets”.90Intermsofthespreadofthetypesofcases,the
positionisasfollows:91
Table2:
NatureofinvestigationstakenupandcompletedbySEBI
89 SecuritiesandExchangeBoardofIndia,AmendmenttotheConsentCirculardated20thApril2007,
CircularNo.CIR/EFD/1/2012(May25,2012).
90
SEBIAnnualReport,supranote61,at130.
91
Id.at133.
24
Particulars
InvestigationsTakenup
2011‐12
2
73
35
24
2
20
154
1
Marketmanipulationandpricerigging
“Issue”relatedmanipulation
Insidertrading
Takeovers
Miscellaneous
Total
2012‐13
3
86
43
11
3
12
155
Investigations
Completed
2011‐12
2012‐13
4
5
37
41
52
4
21
14
2
2
10
10
74
119
Whilemarketmanipulationandpricingrigging,whichemanatesinthesecondary
markets,constituteSEBI’sprimaryfocusintermsofnumberofinvestigations,securities
offeringrelatedmattersconcerningtheprimarymarketsfollowsecond.Althoughnot
evidentfromthedataavailablefromSEBI,notalloftheseinvestigationsmaypertainto
thelackofdisclosuresortomisstatementsinprospectusesrelatedtopublicofferingsof
securities.
IntermsofregulatoryactionstakenormeasuresadoptedbySEBI,thespreadis
asfollows:
Table3:
Typesofregulatoryactionstakenduring2012‐13
Particulars
1
Suspension
Warningissued
ProhibitivedirectionsissuedunderSection11of
SEBIAct(otherthanconsentorders)
Cancellation
Adjudicationorderspassed
Administrativewarning/warningletterissues
Deficiencyobservationsissued
Adviceletterissued
Total
Numberof
Entities
2
31
9
168
3
485
31
14
23
764
ThestatisticspaintaclearpicturedisplayingSEBI’sapproach.SEBIdeploys
adjudicationasasubstantialmeasureinordertoimposepenalties(eithermonetaryor
non‐monetary)onsecuritieslawviolators,followingbyprohibitiveorders.Allofthese
aretargetedattheviolatorsandintendtobeeitherpreventiveordeterrentinnature.
25
Curiouslyenough,noneofthemeasuresadoptedintheyearinreviewwasfocusedon
thevictims.Theinformationdoesnotdiscloseanydisgorgementorderpassedduring
theperiod,anditispossibletherewasnone.
InconcludingthisPart,IfindthatSEBIhasacquiredthestatusofanimportant
regulatorwithinIndia’sregulatoryapparatus.Ithasactedduringthelasttwodecades
tosubstantiallyenhancethedisclosureandothernormsgoverningboththeprimary
andsecondarymarkets.Ithasalsoemboldeneditselfwithincreasingenforcement
powers,whichithasinfactexercisedinpracticeasthedatademonstrate.Although
thereisroomtoaddingtoSEBI’scapacityandfunctionstomeetwiththedynamic
demandsoftheIndianmarkets,itdifficulttoargueagainstthecrucialrolethatSEBIhas
playedintheexplosionofIndia’scapitalmarketsoverthelasttwodecades.
However,asthediscussioninthisPartseekstodemonstrate,SEBIrolehasbeen
primarilyregulatoryinnature,actingswiftlytodealwithdevelopmentsinthecapital
marketsandinafairlyindependentmanner.Ithasachievedthisthroughitswidemenu
ofsanctionsandmeasurestargetedatsecuritieslawviolators.Inthisarrangement,
however,thefocushashardlybeenoninvestorswhohavesufferedlosses.
CompensationofsuchinvestorshasnotformedthemainstayofSEBI’sregulatory
approach,atleastnotthusfar.
IV.
SHAREHOLDERLITIGATIONININDIA
ThisPartexplorestheremediesavailabletoinvestorswhomayhavesufferedlosses
duetomisstatementsinprospectusesissuedbycompanies.Whilesignificantremedies
havehistoricallybeenavailableundercompanylawaswellascontractlawtoaffected
shareholders,theyhavenotbeeneffectivelyusedasameansofenforcingsecurities
regulation.Despitetheexistenceofarobustsetofsubstantivelaws(whichhavebeen
furtherstrengthened),theIndianlegalsystemdoesnotprovidetherequisiteincentives
togenerateahigherlevelofshareholderlitigationbyaffectedinvestors.Consideringthe
sizeandextentofIndia’scapitalmarkets,thenumberofshareholdersactionsthathave
reachedthehighercourtsinIndiaisminiscule,therebysuggestingthatcivilliabilityand
26
shareholderactionsforcompensationtoaffectedinvestorshavenotplayedasignificant
roleinthedevelopmentofIndia’scapitalmarkets.92
Beforedealingwiththesubstantivelawaswellasenforcementmechanisms,itis
necessarytonotethatIndiancompanies’legislationisinastateoftransition.The
erstwhileCompaniesAct,1956(the1956Act)hasbeentheprincipalcompanies’
legislationforover5decades.ThisisintheprocessofbeingreplacedbytheCompanies
Act,2013(the2013Act).The2013ActhasbeenpassedbyParliamentandhasreceived
theassentofthePresidentofIndia,butonly98outofits470sectionshavebeen
notifiedsoastocomeintoeffect.93Theremainingprovisionsareexpectedtocomeinto
effectinduecourseoncetheGovernmentofIndiapromulgatestherelevantrulesunder
thoseprovisions.Interestingly,someoftheprincipalprovisionsrelatingtoprospectus
andliabilityformisstatementunderthe2013Acthavealreadybeenbroughtintoforce.
However,theprovisionsrelatingtoenforcementmechanisms,suchasclassactionsand
afasttrackdisputeresolutionprocedurethereforareyettobecomeeffective.
A.
SubstantiveLawforCivilLiability
Investorswhoarevictimsofmisstatementsinprospectusareentitledtotwodifferent
(butrelated)causesofactionunderIndianlaw.Theymayeitherinitiateanaction
seekingcompensationundercompanylawforlossesordamagecausedasaresultofthe
misstatement,ortheymayinitiateaclaimundercontractlawfortreatingthecontract
ofissuanceofsharesasvoidorforrescindingthecontract.Whilerestitutionofthe
investorsistheprimaryaimofeitherofthesemethods,therecouldbesometechnical
differencesinthenatureandresultoftheseactionsundercompanylawandcontract
law.94
92 Asweshallsee,asubstantialportionoftheshareholderactionsrelatetothefirsthalfofthe20th
century.Eventhoughtherehasbeenanexponentialgrowthofthecapitalmarketsinthelasttwodecades,
thereisnoevidenceofrelatableincreaseinshareholderactions.
93
MinistryofCorporateAffairs,GovernmentofIndia,NotificationintheOfficeGazette(Sep.12,
2013);KPMG,MinistryofCorporateAffairsissuesNotificationforCommencementof98Sectionsofthe
CompaniesAct,2013(Sep.13,2013),availableat
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/i
ndia‐sept20‐2013no0companies.pdf.
94
Thegoalinthispaperistodealwiththebroadprinciplesratherthantheminortechnicaldetails
ofthedifferencesbetweencompanylawclaimsandcontractualclaimsfromadoctrinalperspective.
27
Undercompanylaw,Section35ofthe2013Act95providesthatwhereaperson
hassubscribedforsecuritiesofacompanyactingonanystatementinaprospectusor
theomissionofanymatterwhichismisleading,andhastherebysustainedanylossor
damageasaconsequence,thensuchpersonmaybeentitledtoclaimcompensationfor
suchlossordamage.96Theaffectedinvestormaybringaclaimagainsttheissuer
companyandseveralotherpersons,includingthedirectors,personswhohave
authorisedthemselvestobenamedintheprospectus,thepromotersandexperts.97
Someofthequestionsthatariseinthisbehalfrelatetowhocanbringandaction
andonwhatbasis.Attheoutset,onlyinvestorswhohavesubscribedtosharesissued
undertheprospectusareentitledtobringanaction.Apersonwhoisnotashareholder
ofthecompanycannotbringanactiononthefootingofanapprehensionthatmembers
ofthepublicmaysubscribetosharesofacompanyonthebasisofstatements
incorrectlymadeintheprospectus,98althoughthe2013Actexpresslyrecognizesthe
rightsofinvestorassociationstobringanaction.99Itisunlikelythatinvestorswho
purchasedsharesinthesecondarymarketsbyrelyingontheprospectuswillbeableto
bringanactionformisstatement,astheremayinsufficientproximitytoenablesuch
actionevenifthestatementscontainedintheprospectusinfluencedtheshareholder.100
The2013Actappearstobringinclarityoncertaincounts.First,theomissionofany
matterintheprospectusthatmakesitmisleadingwouldbesufficienttoinvokethecivil
liabilityprovisionsundersection34.Second,therequirementthatthesubscribertothe
securitiesmusthavebeen“actingonanystatement”wouldsuggestanelementof
95
Thissectionhasbeennotifiedandiseffective.
96
Section35ofthe2013Actreplacessection62ofthe1956,whichimposedcivilliabilityfor
misstatementsinprospectus.Whilethenewlegislationrepresentsanimprovementovertheoldonein
certainrespects,someofthecaselawundertheoldlegislationcontinuetoberelevant,whichIrefertoin
thisPart.
97
Inadditiontoaclaimforcivilliability,thesepersonsmayalsobesubjecttocriminalliabilityfor
“fraud”inaccordancewiththeCompaniesAct,§447.
98
KisanMehtav.UniversalLuggageManufacturingCo.Ltd.,[1988]63Comp.Cas.398(Bom).
99
CompaniesAct,2013,§37,whichprovidesthatthesuitmaybefiled“byanyperson,groupof
personsoranyassociationofpersonsaffectedbyanymisleadingstatementortheinclusionoromission
ofanymatterintheprospectus”.
100
A.RAMAIYA,GUIDETOTHECOMPANIESACT981‐82(17thed.,2010).
28
reliance,whichmustbeestablishedbeforeanactionmaysucceed.101Tomyknowledge,
theIndiancourtshavenotadoptedthe“fraud‐on‐the‐market”presumption,102andit
wouldbenecessaryforindividualinvestorstoestablishreliance.Apartfromthe
materialityofthemisstatement,itisnotnecessaryfortheplaintiffinvestortoprove
thatthecompanyorthedirectorsknewthatthestatementwasuntrue.103Theinvestor
onlyneedstoprovethatthestatementwasamaterialoneandthattheinvestorsuffered
lossesbyrelyinguponthesame.
Investoractionsmaybebroughtagainsttheissuercompany,itsdirectors,
personswhohaveauthorizedtheissueoftheprospectusorthepromoters.Whilethe
actionsagainsttheissuercompanyarenatural,thecompany’sdirectorscould
potentiallybefacedwithcivilliabilitytocompensateinvestorlosses,whichmight
requirethemtotakenecessaryprecautionsbeforeprovidingtheirconsenttotheissue
ofaprospectus.InIndia,promotersconstituteanimportantconstituencythatissubject
tothecivilliabilityregimeformisstatementsinprospectus.The2013Actcontainsa
widedefinitionoftheexpression“promoter”thatincludesanypersonwhoisnamedas
suchintheprospectusandalsoanycontrollingshareholder.104Giventheprevalenceof
concentratedshareholdinginIndiancompaniesandthesomewhatextensiverole
playedbycontrollingshareholders,105theexpressrecognitionoftheirliabilitywould
augurforthebenefitoftheaffectedinvestorsincaseofmisstatements.Giventhat
controllingshareholdersmaythemselvesbecorporateentitieswithfinancialresources,
101
Seealso,S.Chatterjeev.Dr.K.L.Bhave,AIR1960MP323[Chatterjeev.Bhave];ShiromaniSugar
MillsLtd.v.DebiPrasad,AIR1950All508at¶7[ShiromaniSugar](findingthatthemisrepresentation
musthavebeenofamaterialfactandthattheinvestormusthavebeeninducedbyit).
102 Basicv.Levinson,485U.S.224(1988).BrianT.Frawley,et.al.,SupremeCourttoConsider
Overruling“Fraud‐on‐the‐Market”Presumption,TheHarvardLawSchoolForumonCorporateGovernance
andFinancialRegulation(Dec.4,2013)availableat
https://blogs.law.harvard.edu/corpgov/2013/12/04/supreme‐court‐to‐consider‐overruling‐fraud‐on‐
the‐market‐presumption/(noting:“Underthispresumption,whichmayberebuttedbyadefendant,an
investorbringingasecuritiesfraudclaimmayprovereliancewithoutashowingthatitactuallywas
awareofandconsideredanallegedlymaterialmisrepresentationinmakingitspurchaseorsaleofa
securityifthatrepresentationwasmadepubliclyandifthesecurityitrelatedtoistradedinanefficient
market.”).
103
RAMIAYA,supranote100,at976.
104
CompaniesAct,2013,§2(69).
105
See,supraPartIIC.
29
itconfersabetterchanceofrecoveryforsuinginvestors(inadditiontowhattheymay
obtainfromthecompanyanditsdirectors).
Defendantsininvestoractionsmayavailofcertainsafeharborprovisions.Ifa
directorwithdrawsconsentbeforetheissueoftheprospectus,thensuchdirectormay
avoidliability.106Iftheprospectusisissuedwithouttheknowledgeorconsentofany
person(directororpromoter)andsuchpersongavereasonablepublicnoticeofthefact
immediatelyuponbecomingawaretherefore,liabilitymaybeavoided.107Although
thereisnostatutoryduediligencedefenceagainstmisstatementclaimssimilarto
certainotherjurisdictions,directorshaveageneraldutytoactwithskill,careand
diligence.108Uponestablishingthatthedirectors’conductmeetwiththesegeneral
diligencestandards,itmaybepossiblefordirectorstosetupadefenceagainst
misstatementclaims,althoughthisareaofthelawisyetuntestedinIndia.109
CourtsinIndiawouldawardcompensationforactuallosssufferedbythe
investors.Althoughthereisnostatutoryguidanceonthemeasureofdamages,
principlescanbedrawnfromgenerallawrelatingtocontractualortortliability.The
measureofdamagesforsuchlossarisingfromanuntruestatementoromissionwould
bethe“differencebetweenthevaluewhichtheshareswouldhavehadbutforsuch
statementoromissionandthetruevalueofthesharesatthetimeofallotment”.110The
measureofdamageswouldbecomputedasthedifferenceinthepricepaidbythe
affectedinvestorsandtherealvalueofthesharesatthedateofpurchase.111In
Chatterjeev.Bhave,112thecourtheldthatincomputingthemarketvalueofthesharesof
thecompanycaremustbetakentoensurethatsuchvalueitselfisnottheresultofthe
fraudulentmisrepresentationcomplainedof.Instead,itisnecessarytodeterminethe
106
CompaniesAct,§35(2)(a).
107
CompaniesAct,§35(2)(b).
108
CompaniesAct,§166(3).
109
Itislikelythatcourtswillberequiredtorelyondevelopmentsincommonlawinthisbehalf.
110
RAMAIYA,supranote100,at979.
111
Id.
112
Supranote101,at¶22.
30
“intrinsicvalue”ofthesharesasameasureofitsvalue.113Thecourtshavenotclearly
ruledonhowbestonemaydeterminetheintrinsicvalueoftheshares.Asforthetiming
inrelationtowhichthelossesmustbecomputed,itwouldnotbethetimeofpurchase
oftheaffectedsecurities,butratherthetimewhenthefraudormisstatementwas
discovered,114atwhichtimethemarketisexpectedtosettleorcorrectitself.
Theremedyformisstatementinprospectusdoesnotliesolelyincompanylaw,
whichprovidesforaclaimindamages.Remediesmaybeinvokedundercontractortort
lawaswell.115Forexample,aninvestorwhosufferslossesduetoamaterial
misstatementoromissioninaprospectusmaybringacontractualclaimforrescission
ofcontract,andclaimforrepaymentofthemoniesinvestedinacompany’ssecurities
thatwasinfluencedbysuchmisstatementoromission.116Thisisbecauseacontract
basedonmisrepresentationisvoidableunderIndiancontractlaw.117
Returningtocompanylaw,the2013Actprovidesaffectedinvestorswithan
additionalremedy,whichissimilartoanappraisalright.Forexample,whentheissuer
companywishestoutilizemoniesraisedthroughaprospectusforanyobjectsother
thanthatforwhichthemonieswereraised,itshallnotdosowithoutobtainingaspecial
resolution118oftheshareholders.119Moreover,thedissentingshareholdersshallbe
givenanopportunitytoexitfromthecompanybysellingtheirshareseithertothe
companyorthecontrollingshareholdersinaccordancewithregulationstobe
prescribedbySEBI.120Similarly,anyvariationoftermsofacontractreferredtointhe
113
Id.
114
Id.,at¶23.
115 The1956ActexpresslyprovidedthattheliabilityprovisionsinthatActshallnot“limitor
diminishanyliabilitywhichanypersonmayincurunderthegenerallaw…”CompaniesAct,1956,§56(6).
Seealso,ShanmugamSundaramChettiarv.RangaramaNaicker,(1934)4Comp.Cas.367;AmichandDoss
v.ManavedanTirumalpad,AIR1945Mad5.Althoughthe2013Actdoesnotcontainanexpressprovision
thatpreservesliabilityundergenerallaw,itdoesnotexcludethepossibilityofsuchliabilityeitherand
henceitwouldbeopentoaffectedinvestorstoinitiatelegalactionsbasedoncontractortortlawaswell.
116
Ramaiya,supranote100,at981.
117
IndianContractAct,1872,§18.Seealso,ShiromaniSugar,supranote101,at¶14.
118 Aspecialresolutionrequiresa75%majorityofshareholders(or,asthecasemaybe,valueof
shares)amongthosepresentandvotingatashareholders’meeting.CompaniesAct,2013,§114(2).
119
CompaniesAct,2013,§13(8).
120
Id.Inthisbehalf,thecrucialissuepertainstothemannerinwhichthefairvaluefortheexitby
theminoritywillbedeterminedbySEBI.
31
prospectuswouldrequiretheauthorityoftheshareholdersbywayofaspecial
resolutionwithsimilarexitrightsgiventothedissentingshareholders.121Although
theseappraisal‐typerightsdonotdirectlyrelatetomisstatementsoromissionsinthe
prospectus,butrathertothevariationoftheterms(particularlytheutilizationof
proceedsoftheoffering),theydoprovidesignificantrightstominorityshareholders.
Finally,intermsoftimingofaninvestoraction,itmustbebroughtwithinthe
statutorylimitationperiod.Aclaimforcompensationundercompanylaw122oronefor
rescissionundercontractlaw123wouldhavetobebroughtwithin3yearsfromthetime
thecauseofactionarises.Thelimitationperiodwouldusuallyrunfromthetimeat
whichthemisrepresentationoromissioncomestotheknowledgeoftheclaimant.In
caseofsignificantdelays,thecourtmayrefusetoentertainaclaim,therebydepriving
theaffectedinvestorsoftheirremedy.124
Indianlawthereforeprovidesasufficientlyrobustremedyforinvestorswho
mayhavesufferedlossesduetomisstatementsoromissionsinaprospectusbywhicha
companyraisesfunds.Thesubstantivelawiscomparabletolegalsystemsinthe
commonlawworld.However,therehaveonlybeenahandfulofreportcasesinIndia
wherebyinvestorshaveinitiatedlegalactions.This,asweshallseeinthenextsub‐
section,isbecauseofthelackofeffectiveenforcementmechanismsandthenecessary
incentivestoinitiatelegalactionsratherthanthequalityofthesubstantivelawrelating
toinvestorrights.
B.
Enforcement125
121
CompaniesAct,2013,§27(2).
122
LimitationAct,1963,Schedule,Art.113.
123
LimitationAct,1963,Schedule,Art.59.
124
Oneofthegroundsduetowhichacourtrefusedtointervenetogranttheremedysoughtbythe
affectedinvestorswasthattheinvestorshad“losttheirrighttorescindthecontractbytheirlaches.”
ShiromaniSugar,supranote101,at¶19.
125 Partsofthissectionhavebeenderivedfromthebroaderdiscussiononshareholderderivative
actionsinIndiacontainedinVikramadityaKhanna&UmakanthVarottil,Therarityofderivativeactionsin
India:reasonsandconsequences,inDAN.W.PUCHNIAK,HARALDBAUM&MICHAELEWING‐CHOW,THEDERIVATIVE
ACTIONINASIA:ACOMPARATIVEANDFUNCTIONALAPPROACH(2012)[DerivativeActions].
32
Thesubstantivelawoncivilliabilityformisstatementsinprospectusiseffectiveonlyif
itisproperlyenforced.Theenforcementmechanismdependsuponvariousfactors,
includingtheabilitytoaggregateactionsbysmallinvestors,atimelyresolutionof
disputesbythecourtsystem,cost‐effectivenatureoftheremedyandtheexistenceof
otherfactorsincludingaplaintiffbarthatissufficientlyincentivizedtopursueactions.
MostofthesefactorsthatapplyindevelopedcommonlawsystemareabsentinIndia.
1.
AggregationofSecuritiesActions
Usually,inthecaseofmisstatementsoromissioninprospectusthatgiveriseto
shareholderclaims,thesameeventcangiverisetonumerouscausesofactionto
variousinvestors.Ifso,anymechanismthatpermitseffectiveaggregationofsecurities
claimssoastomaketheactionsworthwhilewilloperatetoensureproperenforcement
ofsubstantivesecuritieslaws.IntheU.S.context,theclassactionmechanismhas
performedthisroleeffectively.However,althoughIndianlawdoesrecognizethe
conceptofaggregationofclaims,theclassactionmechanismhasnotbeenutilized
effectivelyinthecontextofsecuritiesregulation.
InIndia,theconceptofrepresentativeactionsundertheCivilProcedureCode,
1908(CPC)comesclosesttotheclassactionmechanism.UnderOrder1Rule8ofthe
CPC,wherenumerouspersonshavethesameinterestinasuit,oneormoresuch
personsmaybringordefendanactiononbehalfof,orforthebenefit,ofallpersonsso
interested.However,suchanactionrequiresthepermissionofthecourtbeforeitcan
proceed.Uponreceivingthecourt’spermission,126theplaintiff(atitsexpense)must
givenoticetoallinterestedpartiesregardingtheinstitutionofthesuit,andthe
interestedpartiesmayseektobeincludedaspartiestothesuit.Insuchcase,theparties
includedwithintheclasswouldbeentitledtothebenefitofthesuitifitsucceeds.
Althoughclassactionsarepossibleasrepresentativesuits,theyhavenotbeenpopular
inthecorporateandsecuritieslawfields.127Forexample,eventhoughshareholder
derivativeactionsinIndiaarebroughtasrepresentativeactionsunderOrder1Rule8of
126
Thecourtdecidesattheinterlocutorystage.
127
Seealso,PrithaChatterjee,SecuritiesfraudandclassactionsuitsinIndia:needforlegislativeriders
inclause216oftheCompaniesAmendmentBill2009,32(9)Comp.Law.284,284(2011).
33
theCPC,anearlierstudyfoundthat“[o]verthelastsixtyyearsonlyabouttenderivative
actionshavereachedthehighcourtsortheSupremeCourt.Ofthese,onlythreewere
allowedtobepursuedbyshareholders,andothersweredismissedonvarious
grounds.”128
Recognizingtheneedforaspecificclassactionmechanismforshareholder
actions,the2013Actincludesaprovisionforthesame.Section245ofthatAct129
enablesanyshareholderorclassofshareholderstofileanapplicationbeforethe
NationalCompanyLawTribunal(NCLT)130onbehalfofallshareholdersiftheyareof
theopinionthatthemanagementorconductofaffairsofthecompanyarebeing
conductedinamannerprejudicialtotheinterestsofthecompanyoritsshareholders.
Thescopeofsection245isverywidetherebyenablingtheclassofshareholderstoseek
varioustypesofremediesagainstthecompanyandpersonsassociatedwithit.Among
theseremedies,theclassofshareholdersmayclaimdamagesorcompensationfrom(i)
thecompanyoritsdirectorsforanyfraudulent,unlawfulorwrongfulactionor
omission;(ii)theauditororauditfirmofthecompanyforanyimproperormisleading
statementofparticularsintheauditreport;or(iii)anyexpertadvisororconsultantfor
anyincorrectormisleadingstatementmadetothecompany.131Theclassaction
mechanismisthereforeavailableforcompensatinginvestorsforlossescauseddueto
misstatementsoromissionsintheprospectussolongasitfallswithinoneofthe
situationsdescribedabove.
Thespecificprovisionforclassactionsalsocontainssomedetailsregardingthe
procedureforaggregation.Forexample,onceamemberoftheclassfilesanapplication,
apublicnoticeistobeservedforadmissionoftheapplicationtoallmembersofthe
class.132Moreover,similarapplicationsmadeinseveraljurisdictionsmaybe
consolidatedintoasingleaction.133TheNCLTmaytakeintoaccountseveralfactors
128
Khanna&Varottil,DerivativeAction,supranote125at380.
129
Thisprovisionisyettobenotifiedandhenceisnoteffectiveforthetimebeing.
130
SuchclassactionsaretobefiledbeforetheNCLT,whichisaspecializedtribunal,ratherthanthe
regularcourts,amatterthatisdiscussedindetaillaterinthisPaper.See,infraPartIVB2.
131
CompaniesAct,2013,§245(1)(g).
132
CompaniesAct,2013,§245(5)(a).
133
CompaniesAct,2013,§245(5)(b).
34
suchaswhetherthesuingshareholdersareactingingoodfaith,whethertheaction
couldbepursuedbytheshareholderindividuallythanaspartoftheclass,andwhether
thedisinterestedmembersoftheclassareinfavorofcontinuingtopursuetheaction.134
Incasetheshareholderactionisfoundtobefrivolousorvexatiousinnature,theNCLT
mayrejecttheapplicationandmakeanorderrequiringthesuingshareholdertomeeta
portionofthecosts.135
Theclassactionmechanismalsocarrieswithinitcertainchecksandbalancesto
preventtheopeningupofthefloodgatesresultingintoomuchlitigationagainst
companies.Accordingly,aclassactioncanbebroughtonlyifitcarriesaminimumlevel
ofsupport,i.e.100shareholdersor10%ofthetotalnumberofshareholdersinthe
company.136ThisprovisionwasnotcontainedintheinitialdraftsoftheCompaniesBill
andwasintroducedsubsequentlyduetoconcernsfromtheindustryasaresultofthe
potentialrisksthatcompanieswouldfacenumerouslawsuitsfromshareholders,many
ofwhichmaynotcarrymerit.137Giventhisrequirementofasubstantialnumberof
shareholdersforinitiatingclassactions,itseemsunlikelythattherewillbeaspateof
investorclassactionsagainstIndiancompaniesevenafterthismechanismunderthe
2013Actbecomeseffective.138
2.
ForumforAdjudication
Investorsuitsformisstatementsarebroughtbeforetheregularcivilcourts.Oncethe
trialisconductedandverdictpassed,partieshavetheoptionofpreferringanappealto
theHighCourtandthereaftertotheSupremeCourtofIndia,ifleaveisgranted.139The
134
CompaniesAct,2013,§245(4).
135
CompaniesAct,2013,§245(8).
136
CompaniesAct,2013,§245(3).
137
See,V.Umakanth,CompaniesBill,2011:ClassActions,INDIACORPLAWBLOG(Dec.18,2011),
availableathttp://indiacorplaw.blogspot.sg/2011/12/companies‐bill‐2011‐class‐actions.html.
138 Anumberofotherspecificoperationalconcernshavebeenraisedregardingtheeffectivenessof
theclassactionmechanism,whicharebeyondthescopeofthispaper.Fordetails,see,Mihir
Naniwadekar,ClassActionsintheCompaniesAct,2013:ARecipeforConfusion?,INDIACORPLAWBLOG(Sep.6,
2013),availableathttp://indiacorplaw.blogspot.sg/2013/09/class‐actions‐in‐companies‐act‐2013.html;
PrithaChatterjee,supranote127,at288;Khanna&Varottil,DerivativeActions,supranote125,at394‐96.
139 InthecitiesofMumbai,ChennaiandKolkata,theHighCourthastheoriginaljurisdictionto
conductthetrialattheoutsetiftheamountclaimedinthesuitisbeyondtheminimumamountrequired
35
strikingfeatureoftheIndianjudicialsystematdifferentlevelsistheinordinatedelays
inthedisposalpendingmatters.Ittakesmorethan15yearsonaveragefordisputesto
befinallydeterminedbytheIndiancourts,duetowhichnearlyawhopping32million
casesarependingbeforeIndiancourtsatdifferentlevels.140Whiledesperatemeasures
arebeingtakenbytheexecutiveandthejudiciarytoreducependencylevels,itwould
belongbeforethesystemsachievestherequiredlevelsofefficiency.Thedelaysin
recoveryresultinsubstantiallyreducingtheincentivesofaffectedinvestorstomakethe
claims.Eveniftheinvestorsareultimatelysuccessful,thevalueoftheamounts
recoveredallowingforthedelayswouldbeinsubstantialinthatwhilethelossesare
computedwithrespecttothevalueofmoneyatthetimethelossesaresufferedorthe
suitisinitiated,successfulpartiesareabletoreapthebenefitthereofonlyaftera
prolongedgap,bywhichtimetheamountrecoveredwouldonlyrepresentafractionof
thevaluecomputedasofthedateofrecovery.Thismaymakethesuitcost‐
ineffective.141
The2013Actseekstosidestepjudicialdelaysbypermittingaffectedinvestorsto
initiateclassactionsbeforetheNCLT,anewbodytobeestablishedoncetherelevant
provisionsofthelegislationaremadeeffective.142TheNCLTisaquasi‐judicialbodythat
willassumetherolethatcourtsandcertaintribunalscurrentlyperformundercompany
law.143TheadvantageoftheNCLTisthatitwillbeaspecializedbodydealingsolelywith
toinvoketheHighCourt’soriginaljurisdiction.Thisthereforebecomesavailablewhentheamounts
claimedaresubstantial,butnototherwise.
140
Supranotes3‐4,andaccompanyingtext.
141
Thefollowingexampleexemplifiestheproblem:
Forexample,letusassumethatthenon‐reimbursablecostsoflegalactionare$5,000
andthebenefitsofasuccessfulclaimare$11,000.Ifthejudgmentcomeswithinoneyear
thenthepresentvalueofthebenefitsis$10,000andthepresentvalueofthecostsis
(say)$5,000;thisprovidesanexpectedgainof$5,000andthesuitisworthbringing.If
thejudgmentgrantingthe$11,000recoveryoccurstenyearsfromnow,however,thenit
mayhaveapresentvalueofonly$4,000,butthelegalcostsmaystillhaveapresent
valuecloserto$5,000(becausemuchofthelegalexpenseisincurredatthestartofthe
process).Nowthesuitisnotworthbringing.
Khanna&Varottil,DerivativeActions,supranote125,at375‐76.
142
CompaniesAct,2013,ChapterXXVII.NotalloftheprovisionofthisChapterareeffectiveyet.
143 Apartfrominvestorclassactions,theNCLTwillassumethejurisdictioncurrentlyexercisedby
theHighCourtsforschemesofarrangementandamalgamationaswellaswindingupofcompanies,and
thejurisdictioncurrentlyexercisedbytheCompanyLawBoardformattersinvolvingoppressionand
mismanagement.
36
disputesrelatingtocorporatelaw,andwillnotbesubjecttothedelaysandother
concernsafflictingtheregularcourtsystem.Atthesametime,somequestionsremain
regardingtheexerciseofpowersbytheNCLT.Forexample,itisdoubtfulwhethera
quasi‐judicialbodyiscapableofadjudicatingcivildisputesbetweenaffectedinvestors
ontheonehandandissuercompanies,directorsorintermediariesontheotherhand
withaviewtoawardingcompensation.Moreover,giventheindependenceofthe
judiciaryandotherconstitutionalprotections,theestablishmentoftheNCLThasbeen
subjecttojudicialchallengeinthepast.AlthoughtheconstitutionalvalidityoftheNCLT
wasupheldbytheSupremeCourtofIndiasubjecttocertainconditions,144itspotential
establishmentunderthe2013Acthasagainbeenchallengedbeforecourts,145which
makesitlikelythattherewouldbefurtherdelaysbeforetheNCLTcanseethelightof
day.
Giventhedelaysandinefficienciesinthecourtsystem,itisdifficulttobe
optimisticregardinginvestorsuitsconstitutinganimportantmechanismfor
compensatinginvestorsandtherebyenablingtheenhancementofthesecurities
marketsinIndia.WhiletheNCLTispotentiallyasolutiontotheproblem,thefactthat
itsestablishmenthasbeen(andwouldcontinuetobe)miredinlegalcontroversycastsa
pallofgloomoveritsfuture.
3.
Costs
IndiafollowstheEnglishruleoncosts,wherebytheloserpaysthereasonablecostsof
theopponentasorderedbythecourts.146AlthoughIndiancourtsarelikelytoaward
reasonable(butnotsignificantlyhigh)coststothesuccessfulpartyincivillitigation,the
costsarelikelytobesubstantialforindividualretailinvestorstobringactionsagainst
largecompaniesiftheshareholdersarelikelytofailinsuchlitigation.Therefore,the
144
UnionofIndiav.R.Gandhi,(2010)11SCC1.
145
InduBhan,What’stheroleoftribunals?,THEFINANCIALEXPRESS(Jan.22,2014).
146 CivilProcedureCode,1908,§35(2).Furthermore,courtshavethepowertoawardcompensatory
costsinrespectoffalseorvexatiousclaimsordefences,CivilProcedureCode,1908,§35‐A.However,the
maximumawardofcompensatorycostsisRs.3,000,whichisinsubstantialincorporateorsecurities
litigation.
37
ruleoncostsactsasadisincentivetoaffectedinvestorseveniftheyhaveastrongcase
onthemerits.
Moreover,inIndiathecostsarenotlimitedtoattorneys’fees.Becauseinvestor
actionsarebroughtbeforetheregularcivilcourts,plaintiffsusuallyhavetopaystamp
dutyandcourtfees.Althoughtheincidenceofstampdutyandcourtfeesisnot
significantissomestates,inothersitisdeterminedonanadvalorembasisasa
percentageoftheclaim.147Sinceoneoftheobjectivesofinvestoractionistosecure
compensationfromthewrongdoers,anadvaloremdeterminationcouldsendthelegal
costsskyrocketing.148
Despitethehighcosts,investorlitigationmightstillbepossibleifthereare
strongincentivestootherconstituenciessuchastheplaintiffbartobringactions
againsterrantissuercompaniesandtheirdirectors.Contingencyfeesareonewayto
motivateentrepreneuriallymindedattorneystotakeonriskiersuitswiththelikelihood
thattheywouldpartakeaportionoftheproceedsifthesuitweresuccessful.Inother
words,theriskofsuccessorfailureisshiftedfromtheaffectedinvestorstotheplaintiff
attorneys.Thisevenincentivizesattorneystoidentifyinstancesofpossible
misstatementsandtotakeupactionsonbehalfofpotentialplaintiffswherebyitisthe
attorneyswhospearheadthelegalactionandbearitscosts.Althoughthissystemhas
workedintheU.S.andanumberofotherjurisdictions,contingencyfeesareprohibited
inIndia149therebydisincentivizingplaintiffattorneysfromtakingonriskiersuits.Due
tothecompleteabsenceofaplaintiffbar,affectedinvestorsthemselves(especiallythe
smallerones)donotfinditworthwhiletoinitiateclassactionsasthereisneithera
certaintyofrecoverynorofobtaininganetbenefitfromthesuit(aftertakinginto
accountthecostsincurred).
147 See,forexample,KarnatakaCourtFeesandSuitsValuationAct,1958,§21,whichprovidesthat,in
suitsformoney(includingsuitsfordamages,orcompensationorarrearsofmaintenance,ofannuitiesor
ofothersumspayableperiodically),courtfeesshallbepayableontheamountclaimed–thatis,onanad
valorembasiswithoutanylimit.Thisissimilartothecentrallegislation,theCourtFeesAct,1870,§7,
whichisapplicableinstatesthathavenotenactedtheirownlegislationoncourtfees.
148
ThisconcernwillbeaddressedoncetheNCLTisinplacebecausesuchheftystampdutyand
courtfeesarenotpayableinactionsbeforeit,foritisnotaregularcivilcourtbutratheraspecial
tribunal.
149
BarCouncilofIndiaRules,PartVI,ChapterII,§II,Rule20.
38
Overthelastfewyears,however,SEBIhasdecidedtoutilizeamountsinits
InvestorProtectionandEducationFundtoaidinvestorassociationsrecognizedbyitto
undertakelegalproceedingsintheinterestofinvestorsinsecuritiesthatarelistedor
proposedtobelisted.150Thisrelatestoproceedingsinvolvingabreachofsecurities
regulation,whichincludemisstatementsandnon‐disclosuresinconnectionwiththe
issue,saleorpurchaseofsecurities.151Thefundingmechanismistightlycontrolledby
SEBI,asapplicantsmustdemonstratethattheyhaveaprimafaciecaseandthatthe
actionisinthegreaterinterestofshareholders.152Fundingwillbeprovidedfornot
morethan75%oftheexpensesincurred,153withabsolutecapsofRs.2millionfor
actionsbeforetheSupremeCourtandRs.1millionbeforeothercourts.154Theamounts
willonlybereimbursementsofcostsincurredandnotupfrontpayments.TheSEBI
fundingmechanismsignalstheintentionoftheregulatortopromoterinvestoractivism
throughshareholdersuits,anditsreadinesstoassistbyaddressingthecostfactor,at
leastpartiallyifnotfully.
4.
AvailabilityofAlternateRemedies
TherearepracticaladvantagestobringingalternateremediesthroughSEBI,which
mightevenresultinprecludingshareholdersuitsforcompensationclaims.Aswehave
seen,155SEBIhasbroadremedialpowersforsecuritieslawviolations,includingtopass
prohibitoryorders,imposepenalties,andinitiatecriminalprosecution.Theobjectives
ofactionsbeforeSEBIarethesameasinvestorsuitsformisstatementsasbothtendto
focusoninvestorprotectionasthegoal.Curiouslyenough,whereSEBIisempoweredto
act,theavailabilityoftheregularcivilcourtsisexcluded.Thisisbecausesections15Y
and20AoftheSEBIActbarthejurisdictionofcivilcourtstoentertainasuitor
proceedingsonmattersinwhichSEBIisempoweredtotakeaction(e.g.securitieslaw
150
SEBI(InvestorProtectionandEducationFund)Regulations,2009,§5(2)(d).
151
SEBI(InvestorProtectionandEducationFund)Regulations,2009,§2(1)(g).
152
SEBI(AidforLegalProceedings)Guidelines,2009,§5(1).
153
SEBI(AidforLegalProceedings)Guidelines,2009,§6(5).
154
SEBI(AidforLegalProceedings)Guidelines,2009,§6(1).
155
SeesupraPartIII.
39
violations).Thisexclusionofciviljurisdictionhasbeeninterpretedwidelywithrespect
toSEBI.156ItisonlyifSEBIisnotempoweredtoactinaparticularmannerthatthecivil
court’sjurisdictionbecomespotentiallyavailable.157
Giventhissituation,theabsenceofinvestoractionsagainsterrantissuer
companiesformisstatementsmaybeattributabletoavarietyofreasons:(i)theregular
civilcourtslackaspeedyandeffectiveremedyforinvestoractionsformisstatements;
(ii)thecostsinvolvedinbringingsuchactionsisprohibitiveand,giventheabsenceof
plaintiffbar,therearenoincentivestobringsuchactions;(iii)smallinvestorsmaybe
moreinclinedlikelytoapproachSEBIbecauseSEBI’sactionsarelikelytobespeedier
andlesscostly;(iv)thegradualenhancementofSEBI’spowersinrecentyearsinorder
tofashionvarioustypesofremediesmakesthatapproachmoreattractive;and(v)
investors’handsmayalsobetiedbecauseoftheexclusionofthecivilcourts’jurisdiction
undersections15Yand20AoftheSEBIActformatterspertainingtosecurities
regulation.
C.
ConflictofLaws
Incaseofcross‐listedcompanies,aquestionmayariseastowhichlawwouldapplyto
determineinvestor‐relateddisputes.Inthepasttwodecades,severalIndiancompanies
havebeenlistedonoverseasstockexchangesthroughofferingsofAmericandepository
receipts(ADRs),whicharelistedontheprincipalU.S.stockexchanges,158orglobal
depositoryreceipts(GDRs),whicharelistedinLondon,LuxembourgorSingapore.
TherehasnotbeenmuchoftheconversewherebyforeigncompaniesmaylistonIndian
stockexchangesthroughIndiandepositoryreceipts(IDRs).Thusfar,therehasbeen
onlyoneforeigncompanythathaslisteditsIDRsinIndia.159Hence,itismorelikelythat
IndiancompaniesmaybesuedbyinvestorslocatedinotherjurisdictionsholdingADRs
156
KeshaAppliancesP.Ltd.v.RoyalHoldingsServicesLtd.,[2006]130Comp.Cas.227(Bom).
157 Thereisanargument,though,thatsincetheSEBIActonlyprovidesforSEBIasaregulator
withoutamechanismforredressingthegrievancesofindividualinvestors,civilcourtswillcontinueto
havejurisdictionoveractionsforcompensationundersecuritieslaw,contractortort.AGARWAL&BABY,
supranote69,at510.Thescopeofexclusionofthecivilcourt’sjurisdictionisnotbeyondcontroversy.
158
NearlyadozenIndiancompaniesarelistedontheNYSEorNASDAQintheformofADRs.
159
ThatisStandardCharteredBank.
40
orGDRsofIndiancompanies.Itismuchlesslikelyforaforeigncompanytobesuedin
IndiabyinvestorsholdingIDRsbecausethereisonlyonecompanythathaseverissued
them.
GiventhedifficultiesofbringalegalactionforcompensationinIndia,itwould
notbesurprisingtofindthatADR/GDRholdersmayconsiderthemselvesbetteroffto
sueintheirrespectivejurisdictions(asthesecuritiesarelistedthere).Insuchcase,a
questionwouldariseastowhetherthosecourtordersareenforceableinIndia,
particularlywhenmostoftheassetsoftheissuercompanyarelocatedwithinIndian
territory.TheprovisionsoftheCivilProcedureCode,1908(CPC)determinethe
enforcementofforeignjudgmentsinIndia.Themannerinwhichforeignjudgmentsare
enforcedinIndiadependsuponthecountryinwhichthejudgmenthasbeenpassed.If
thecourtthathaspassedthejudgmentisinacountrywithwhichIndiahasenteredinto
reciprocalarrangementsforjudgmentenforcement,thenthejudgmentmaybeenforced
asifitwerepassedbyanappropriateIndiancivilcourt.160Indiahasenteredinto
reciprocalarrangementswithafewcountries,primarilyintheCommonwealth,
includingtheU.K,HongKong,Singapore,NewZealandandMalaysia.Judgments
obtainedfromthesecountriesmaybedirectlyenforcedinIndia.
Incaseofothercountries,whichincludetheU.S.aswellasmostcivillaw
countries,ajudgmentobtainedthereinisnotdirectlyenforceableinIndia.Underthe
CPC,161theholderofajudgmentmustbringasuitinIndiainwhichtheforeign
judgmentwillbeconclusiveastoanymatteradjudicatedupon.Thisisnotadirect
enforcementproceedingbutratherafreshsuit,whichisanadditionalstepcomparedto
judgmentsfromcountrieswithreciprocatingarrangements.Moreover,theforeign
judgmentwouldnotbeconclusiveincertainexceptionalcircumstanceslistedinthe
CPC,includingwhereithasnotbeenpronouncedbyacourtofcompetentjurisdiction,
whereithasnotbeengivenonthemeritsofthecase,orevenwhereitsustainsaclaim
foundedonabreachofanylawinforceinIndia.162Fornon‐reciprocatingterritories,
160
CivilProcedureCode,1908,§44‐A.
161
CivilProcedureCode,1908,§13.
162
Id.
41
therefore,therecouldbemultiplicityoflitigationbeforejudgmentobtainedfromsuch
territoriescanbesuccessfullyenforcedagainstanIndianparty.
Giventheincreasingincidenceofcross‐listingsbyIndiancompanies,theissues
ofconflictoflawcometothefore.163Whileitmaybetemptingforaffectedinvestorto
initiatelegalactionoutsideIndia(e.g.inthejurisdictionwherethesecuritiesarelisted),
theycouldfacesignificantobstacleswhileattemptingtoenforcethejudgmentobtained,
particularlyifitisfromanon‐reciprocatingterritory.
V.
CONCLUSION
Thispaperbeganwiththehypothesisthatshareholderlitigationseekingcompensation
forlossesduetomisstatementswouldconstituteanimportanttoolforprotectionof
minorityinvestorstherebyresultingintheenhancementofcapitalmarkets.This
hypothesisisentirelyreasonableintheIndiancontextgivenitscommonlawheritage,
robustsubstantivesecuritieslawforprotectionofinvestorsandanextensiveand
independentjudicialsystem.However,thispaperconcludeswithoutfindingadequate
supportforthehypothesis.Thisisattributabletoapotentcocktailoffactors,including
inefficienciesintheenforcementmechanismssuchasdelaysandhighrateofpendency
beforetheIndiancourts,prohibitivecostsinbringingcivilsuitswhicharenotmetwith
counterincentivessuchasarobustplaintiffbarandalsothepresenceofalternate
remediesthatpotentiallybarcivilsuitsfrombeinginitiated.
Despitethepessimismastoshareholderlitigation,Indiancapitalmarketshavenotonly
thrived,buthavewitnessedadramaticexplosioninthelasttwodecades.Asthispaper
seekstodemonstrate,thebasisforsuchgrowthisattributabletosecuritiesregulation
implementedthroughSEBIthatisfocusedonthewrongdoersratherthanon
compensatingthevictims.ThespecializedcapabilitiespossessedbySEBIcoupledwith
163 Forexample,theissueofwhethertheADRinvestorsinSatyamoughttobepermittedtosuein
theU.S.orinIndiacameupforconsiderationinthetrialbeforeaU.S.court.See,supranote15,and
accompanyingtext.ThreedifferentexpertwitnessesonIndianlawsubmittedtheirreports,amongother
issues,onthequestionoftheappropriateforumandtheenforceabilityofforeignjudgmentsinIndia.See,
KianGanz,Satyam’ssettledUSclassactionhadnohopeinIndia?,LEGALLYINDIA(Feb.18,2011).However,
thecourtdidnothavetheopportunitytodecideonthisquestionasthematterwassettled.
42
isrelativeindependence,flexibilityanddynamismhavehadamuchdeeperimpacton
thedevelopmentofIndia’scapitalmarkets.
Thepaperthereforeconcludeswiththefindingthatwhilethegeneralapproachinmost
commonlawmarketsisforcourtstoplayasignificantroleinthedevelopmentofthe
capitalmarketsthroughtheprocessofcompensatinginvestorsforlosses,thesuccessof
India’scapitalmarketsgrowthhashingedupontheregulatoryprocessratherthanthe
courts.
43