Government of India has established Securities Exchange Board of India (SEBI) in the year 1988 through an executive resolution to prevent malpractices and regulate the functions of the securities market. The regulation of capital markets and its constituents were initially under Central Government Ministries like Law, Finance and Company Affairs.
SEBI was bought into existence as a statutory body in the year 1992. SEBI was formulated on the lines of Securities Exchange Commission of USA. Securities Exchange Board of India (SEBI) acts as a sole regulator of capital market in India
SEBI works within the ambit of three statues:
- The Companies Act, 2013
- Securities Contract Regulations Act, 1956 (SCRA)
- The Depositories Act, 1996.
SEBI – As a Regulator
SEBI being a regulator: -
- Is responsible for regulation and control of securities market. To promote healthy and organised growth of the market. It provides a fair platform to the issuers to raise capital for the business activities.
- Safeguards investor’s interest and frame rules and regulations for the financial intermediaries like brokers, portfolio managers, underwriters or Mutual Funds. SEBI provides guidance and education to the investors and redresses investor’s grievances.
- Takes appropriate measures when needed in order to deal with the manipulative and deceptive methods used by the intermediaries.
- Prohibits Insider Trading in the securities and regulates Takeovers and Acquisitions.
- Made credit rating mandatory for the Indian Companies in order to make system more helpful and protected for the investors. Credit Rating Agencies (CRAs) are accountable to assess the relative credit risks of the public companies raising deposits or huge capital. Indian credit rating industry consist of CRISIL, ICRA, CARE, ONICRA, SMERA and Duff and Phelps Credit Rating India Pvt. Ltd. for the purpose of providing a reasonable financial condition of the organisation.
- Is responsible to conduct inspection and compulsory audit of stock exchanges.
The crux is, SEBI deals with the requirements of I3 i.e. Issuers, Investors and Intermediaries.
- Listed companies
- Unlisted companies
- Infrastructure companies (includes transportation, agriculture, water management, telecommunication, domestic satellite service, power, petroleum and natural gas etc.)
- Promoters Group
- Qualified Institutional Investor Including Foreign Institutional Investors (FIIs)
- Multinational Company Investors
- Retail Investors (investment up to 1 lakh in a public offer)
- Small Investors (shareholder holding shares of 25,000 or less in a public company)
- Stock Brokers
- Share Transfer Agents
- Bankers To An Issue
- Merchant Bankers
- Portfolio Managers
- Investment Advisers
- Credit Rating Agencies (an authorised authority to provide fair view on financial strength of any organisation) or any other intermediary associated with the securities market.
SEBI has made it mandatory for the brokers to maintain separate accounts for their clients and for themselves to improve level of transparency in the transactions.
Measures for Protection of Investors
It is a well - known fact that for a healthy growth of capital markets, investor’s rights must be fully protected, so, Securities Exchange Board of India (SEBI) being a regulatory agency is responsible to frame safety standards to provide protection to its investors. For the same purpose SEBI has issued The Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 under Section 11 of SEBI Act, 1992.The companies willing to raise finance from the market, are strictly bound to follow the Guidelines, 2000. SEBI issues timely clarifications for these guidelines to streamline the public issue process.
But, the question arises at some points is that who are the: -
Priorities of SEBI – THE VIOLATORS or THE VICTIMS??
SEBI’s role as the sole regulator has been to ensure authentic disclosures to the market which helps the investors to learn about the menace of the securities market and to invest wisely. The stock exchanges hold a weapon of Delisting which actually does not benefits the small investors. In order to deal with the violators, SEBI may suspend trading of a security in a stock exchange or can restrain persons from dealing in securities market or may issue orders like impounding the sale proceeds of shares effected in violation of securities laws etc. but the element which seems missing here, is the compensation to the small investors who might have suffered losses in the whole process. Simply put, the focus is on dealing with the violators which actually should be dealing with the victims (investors).
There exista number of agencies in the market that are involved in the process of raising finance from the public like public listed companies or Non-Banking Financial Companies or other corporate bodies which includes SEBI (capital market regulator), RBI (the Banking Regulator) and Department of Company Affairs (DCA, regulator of unlisted companies). In spite of having many legal measures, multiple fraudulent agencies exist in the capital market and scams happen that gave rise to a debate of having a separate legislation for protecting the interest of small investors. Such an idea of having separate legislation, to protect small investor’s interest has also been recommended by Mr. Mitra (former Director of the National Law School, Bangalore) in his report (N.K Mitra Committee on Investor Protection). SEBI has been in favour of the same and is trying to channelize its efforts by submitting the proposal to the Finance Ministry, outlining the necessity of a new act for the protection measures for small investors. Similarly, the existing Investment Protection Fund which exist today and is maintained to compensate aggrieved investors was also recommended by Mr. Mitra. National Law School has also supported the same view point to ensure speedy compensation for investors because generally cheating cases are treated as of secondary importance. Mr. Mitra Committee also advocated for the shifting of Investor Education and Protection Fund from the Companies Act to the SEBI Act and advocated for the same to be administered by SEBI. In short, SEBI has been taking steps to establish a more focused approach to protect the investors.
Different Aspects Covered under Guidelines, 2000
Securities and Exchange Board of India (DIP) Guidelines, 2000 covers all the legal as well as the commercial aspects of the issue with the aim to protect the investors and keep them fully informed in all the cases of under-subscription or over- subscription of the issue. Few prominent directions from the Guidelines, 2000 are:-
- Eligibility norms for the company issuing different types of securities.
- Clearance and approval of listing by the issuer of securities.
- Legal formalities to be complied by any existing company issuing securities or by a company issuing securities for the first time.
- Exemptions provided to the fast track companies.
- Credit rating formalities in case it is applicable for the issue.
- Pricing of the issue of an existing company.
- Pricing of Initial Public Offer (IPO) by the unlisted company.
- Pre-issue obligations of the issue.
- Guidelines for the format and content of the offer document
- Post issue obligations of the issue.
- Promotor’s contribution in the share capital of the company and the lock-in period applicability during which promoters are not allowed to sale or transfer securities held by them.
- Appointment and eligibility criteria of the intermediaries in the securities market.
Purpose of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000
An investor’s decision is greatly influenced by the information released by the company in the form of offer document or advertisements, so, it is imperative that they should contain genuine material facts about the company. In absence of any authority, it is quite possible that the companies can hide important or crucial information from the investors and it can also lead securities market to many irregularities and scams and will definitely erode investor’s confidence in the market. Thus, to protect the interest of domestic investors and outsider investors like NRIs or FIIs, who are interested to invest in Indian capital market, SEBI has issued (Disclosure and Investor Protection) Guidelines, 2000.
Investor Protection Fund (IPF)
Ministry of finance has issued guidelines for Investor Protection Fund (IPF). This fund is maintained in order to compensate the legitimate claims of aggrieved investors against the brokers of Bombay Stock Exchange or National Stock Exchange or any other stock exchange. Investors can claim under IPF in case, the broker is failed to pay the due money on the investments made. IPF collects its money by charging 1% turnover fee charged by the stock exchange from its members or brokers or 10 lakhs, whichever is higher in the financial year and through the penalties collected by the exchange. The IPF may utilized funds to compensate the investors or for promotion of investor education and awareness programmes through seminars, lectures, workshops etc. as per the guidelines issued by the SEBI.
Investor Education and Protection Fund (IEPF)
Investor Education and Protection Fund (IEPF) is meant for theprotection of the investor’s interest and increasing awareness of the investor. This fund was brought by Ministry of Corporate Affairs in the year 2016 and is constituted under Section 125 of the Companies Act, 2013 where sub sections (5), (6) and (7) deals with constituting an authority for administration of Fund and appointment of Chairperson and other members. The amounts which can be part of IEPF are:
- Amount transferred to the Unpaid Dividend Account of the company which remains unclaimed for the period of seven years.
- Application money received by the companies for allotment of securities and remains unclaimed for a period of seven years from the due date.
- Matured deposits and matured debentures with the companies which remained unpaid for a period of seven years from their due date.
- Donations and contributions given by the Central Government, State Governments or by any other institutions.
- The interest or any other income received out of investments made from the fund.
- Redemption amount of preference shares which remained unpaid for seven or more than seven years.
- Amount of any sale proceed of fractional shares like issuance of bonus shares, merger and amalgamation unclaimed for seven years or more.
- Amount received under sub sec 4 of sec 38 (disgorgement or disposal of securities).
The Fund amount is utilised for the refund of unclaimed dividends, matured debentures/deposits to eligible investors, for distribution of disgorged amount to the identifiable applicants for shares/debenture holders/depositors and to compensate investors who have suffered losses because of the fraudulent activities prevalent in the capital market.
Securities and Exchange Board of India issued a notification dated 19th May 2009, providing further amendments in Schedule regarding SEBI (Investor Protection and Protection Fund) Regulations, 2009
Amendments to other Regulation
Amendment of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
- In regulation 28,
- in sub-regulation (12) , for clause (e) , the following shall be substituted, namely:-
“(e) the entire amount to the merchant banker, in the event of forfeiture for nonfulfillment of any of the obligations under the Regulations, for distribution in the following manner, after deduction of expenses, if any, of the merchant banker and the registrars to the offer,
(i) one third of the amount to the target company;
(ii) one third of the amount to the Investor Protection and Education Fund established by the Board;
(iii) one third of the amount to be distributed pro-rata among the shareholders who have accepted the offer.”
(b) in sub-regulation (13), for the words “to the regional stock exchange of the target company, for the credit of the Investor Protection Fund or any other similar fund” appearing after the words “proceeds thereof” the words “to the Investor Protection and Education Fund established by the Board” shall be substituted.
IEPF also sanction grants for the educational activities to the registered entities for investor’s awareness seminars, programmes, scheduled workshops or research activities and monitors the same for achievement of objectives planned.
SEBI and MUTUAL FUNDS
On the close observation of SEBI’s recent decisions, it is quite apparent that the first and foremost duty of SEBI is to protect the interest of investors and the same goes with the case of Mutual Funds.The mutual fund market is under SEBI’s regulation since 1991. SEBI has announced guidelines for Mutual Funds in the year 1994 and approved Regulations, 1996 for the Mutual Funds in December 1996. The revised guidelines lay emphasis on the protection of investor’s interest and made trustees more liable for the investors. Revised regulations require the Asset Management Company (AMC) to exercise due diligence while dealingin mutual fund schemes.
Association of Mutual Funds of India (AMFI)
SEBI is regulating mutual funds to define the securities market in a better way. AMFI is an association registered under SEBI. It is a non- profit organisation incorporated on 22nd August 1995, with the aim to maintain ethical standards in the mutual fund industry, to undertake nationwide investor awareness programmes to educate investors about the correct concept and working of mutual funds and ultimately to protect the interest of investors/unit holders in the capital markets and financial services. AMFI sets out the Code of Ethics to be followed by the Asset Management Companies while dealing with the intermediaries, investors and public.
Investor Awareness Campaign - SMAC
Financial markets being very unpredictable needs a lot of research before making any investment of hard earned money. Nobody wants to be the victim of any fraud or investment scam, so, it is a good option to get well versed with the securities market before making any investment and avoid falling for the dubious sources or fraud schemes. For the same purpose, SEBI has initiated a comprehensive education campaign, Securities Market Awareness Campaign (SMAC) in the year 2003, which used workshops, media- prints etc. aimed to alert inexperienced investors about the hazards of the capital market and to prevent investors from manipulators. Such awareness campaigns are conducted in order to empower investors to take informed decisions.
Investor Protection Measure
Office of Investor Assistance and Education (OIAE) provides single window interface to the investors to file their complaints. The office forwards the investor’s complaints to the concerned departments and respond to the investors for the same.
SCORES - Online Portal
SCORES (SEBI complaints redress system) is another initiative by the SEBI in order to ease investor’s problems. SCORES is a web based system which enables intermediaries and listed companies to receive investor’s complaints online. Aggrieved investor can track the status of redressal of his complaint online. SCORES portal handle complaints related to listed companies, transfer agents, brokers, exchanges, depository participants, mutual funds, portfolio managers etc.
Although, Sec 11 and 11 B of the SEBI Act clarifies that, the SEBI has power to order disgorgement of profits earned by fraudulent means or by indulging in any transaction in contravention of the provision, but, the scenario for the treatment of the disgorged money is little vague and there is no statutory obligation on the SEBI as a regulator to distribute the wrongful gains or disgorged money to the aggrieved investors, so, the amount received in the form of penalty or disgorgement shall be deposited into the Consolidated Fund of India. In the Roopalben Panchal Scam Casewhere six entities found guilty of cornering shares and in the Karvey Case, Securities Appellate Tribunal (SAT) upheld SEBI’s disgorgement order and added that the disgorgement remedy is equitable and not penal and it absolutely differs from actions like forfeiture and impounding of assets or money. Disgorgement aims at stripping the defendant of wrongful gains by which he/she enriched themselves unjustly. SEBI comprehended the need to restore the confidence of the investors in the securities market and recognised the importance of disgorgement and compensation to the aggrieved investors of the IPO scams. SEBI has passed disgorgement order against depositories and depository participants (DPs) in Karvey case including Karvey, HDFC Bank, Khandwala Securities, IDBI Bank, Jhavei Securities, ING Vysya Bank, PR Stock Broking and Pratik Stock Vision in the IPO scam to return Rs. 115.81 crore in six months. Recently, SEBI has passed most stringent disgorgement order of over Rs. 13.09 crore along with 12% interest a year since January 2009 against a Big Four auditor on finding Pricewaterhouse-Coopers (PwC) guilty in the Satyam Scam and barred it’s entities in India for two years. These scams exposed weak links in the system but also gave way to various revisions which are sensed positivelyoperational from the investor’s point of view.
A committee formed under the chairmanship of Justice D P Wadhwa (Wadhwa Committee) recommended the procedure of identification of aggrieved investors in the IPO scam and the procedure through which reallocation of shares should take place for such investors. Simply put, Securities and Exchange Board of India is making every endeavour to protect the interest of investors in securities market along with the responsibility of increasing the level of financial literacy among the investors. SEBI has arranged many conferences, exhibitions, seminars, public meetings and encourages market participants for the same. It is using print and electronic media to keep the investors alert and informed about the various fictitious schemes prevailed in the securities market and trying to keep the investors updated about every aspect related to the securities market. It is therefore, now, depends on the investors to follow some Dos and DON’Ts while dealing in the securities market for having a safe trading.
The bottom-line is,
“An educated investor is a protected investor.”
KumkumTripathi, (ed) (2015) Corporate Finance Law,
Symbiosis Centre for Distance Learning, Pune.
(Disclaimer: The information provided in this article is given only to provide helpful information and understanding on the subject/topic of law discussed. The contents of this article are not the views of Amie Legal and Amie Legal does not take any responsibility or liability for the opinions expressed by the Author herein.)