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UNIVERSITY OF LUCKNOW DEPARTMENT OF BUSINESS ADMINISTRATION
TERM PAPER – ‘SEBI AND INVERTOR PROTECTION’
SUBMITTED TO – Dr. AJAI PRAKASH SUBJECT – FINANCIAL DECISION ANALYSIS SUBMITTED BY – SHIV BHAJAN YADAV MBA – IV (FINANCE): 2011-2013
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Table of contents!
S.NO
TOPIC
PG.NO.
1
ACKNOWLEDGEMENT
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2 3 4 5 6 7
ABSTRACT
INTRODUCTION
METHODOLOGY OF PAPER OBJECTIVES OF SEBI
INVESTOR PROTECTION MEASURES BY SEBI SEBI REFORMS ON STOCK EXCHANGES
4 4 5 5 6-7 7-9
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TYPES OF GRIEVANCES FOR WHICH INVESTORS COULD APPROACH SEBI
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CRITICAL APPRAISAL OF INVESTOR PROTECTION MEASURES BY SEBI
12-13
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CONCLUSION
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BIBLIOGRAPHY
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ACKNOWLEDGEMENT! My Term Paper on „SEBI AND INVERTOR PROTECTION‟ has been an enriching experience for me. As an Amateur in the corporate environment with no prior work experience, this assignment has been a very insightful and a great learning experience. It would have been impossible to gain this experience without the help, guidance and encouragement that we have received from Dr. Ajai Prakash. I extend our heart-felt gratitude to Dr. Ajai Prakash for giving us this opportunity to carry out our assignment & for extending all necessary cooperation for the successful completion of the Assignment Paper. The topic of my assignment is „SEBI AND INVERTOR PROTECTION‟ and it has been an interesting journey while working on my Term paper. Not only is the topic extremely interesting but also extremely relevant and important for our future career pursuits. Regards, SHIV BHAJAN YADAV MBA-Finance (2011-2013) Department of Business Administration University of Lucknow
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ABSTRACT Investor protection is one of the most important elements of a thriving securities market or other financial investment institution. Investor protection focuses on making sure that investors are fully informed about their purchases, transactions, affairs of the company that they have invested in and the like. SEBI had issued guidelines for the protection of the investors through the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000. The measures in practice gave mixed results. On the positive front, many banks sponsored mutual fund had launched assured return schemes and lured the investor's huge contribution. When they failed to deliver the promise, SEBI gave directive to sponsor bank to honor the commitment made by the mutual funds, which cost the sponsor banks over Rs 2000 crore. SEBI has introduced a supplementary process of applying in public issues, viz. ASBA process. The application money shall remain blocked in the bank account till finalisation of the basis of allotment in the issue or till withdrawal / failure of the issue or till withdrawal / rejection of the application, an initiate that safeguards the interests of both issuing company and the investor. Investor education campaigns have been yielding positive results to some extent, still lot more needs to be done. Indian investors have been steadily fleeing the market, despite the apparent spread of „equity cult‟, which calls for immediate attention of the apex body to frame and effectively implement the measures to protect the interests of small investors, and restore their confidence in the stock market.
INTRODUCTION The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years 1995, 1999 and 2002 to meet the requirements of changing needs of the securities market and responding to the development in the securities market. The Primary function of Securities and Exchange Board of India under the SEBI Act, 1992 is the protection of the investors‟ interest and the healthy development of Indian financial markets. No doubt, it is very difficult and herculean task for the regulators to prevent the scams in the markets considering the great difficulty in regulating and monitoring each and every segment of the financial markets and the same is true for the Indian regulator also. But what are the responsibilities of the regulators to set the system right once the scam has taken place, especially the responsibility
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of redressing the grievances of the investors so that their confidence is restored? The redressal of investors‟ grievances, after the scam, is the most challenging task before the regulators all over the world and the Indian regulator is not an exception. SEBI had issued guidelines for the protection of the investors through the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
METHODOLOGY OF PAPER: The paper is conceptual in nature primarily, largely based on secondary source of information, and focuses on various investor protection measures taken by SEBI from time to time. Though the guidelines issued by SEBI are not covered exhaustively, attempt is being made to evaluate the directives of the apex body pertaining to disclosure norms, prohibition of insider trading, issued in the year 2000 and later on. The impact of Investor education campaign, grievance reddressal mechanism, compensation from Investor Protection Fund and the like are being studied towards restoring investor confidence in the stock markets.
OBJECTIVES OF SEBI The SEBI has been entrusted with both the regulatory and developmental functions. The objectives of SEBI are as follows: • Investor protection, so that there is a steady flow of savings into the Capital Market. • Ensuring the fair practices by the issuers of securities, namely, companies so that they can raise resources at least cost. • Promotion of efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional. Investor protection is one of the most important elements of a thriving securities market or other financial investment institution. Simply put, investor protection is the effort to make sure that those who invest their money in regulated financial products are not defrauded by brokers or other parties. It‟s important to note that unlike government insurance for monetary deposits, investor and customer protection does not extend to covering losses when the securities or products decrease in value. Investors have to assume the existence of risk as part of their opportunity for gains. Investor protection focuses on making sure that investors are fully informed about their
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purchases that insider activity does not threaten the worth of some portfolios for the enrichment of others, and those holdings are not simply “lost” in instances of brokerage failure.
INVESTOR PROTECTION MEASURES BY SEBI Section 11(2) of the SEBI Act contains measures available with SEBI to implement the legislated desire of investor protection. The measures available with SEBI include the following: • regulating the business in Stock Exchanges (SEs) and any other securities markets • registering and regulating the working of intermediaries like stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers etc. associated with securities markets • registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and other intermediaries • registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds • promoting and regulating self-regulatory organizations • prohibiting fraudulent and unfair trade practices relating to securities markets • prohibiting insider trading in securities • regulating substantial acquisition of shares and takeover of companies • promoting investors‟ education and training of intermediaries of securities markets • Carry out inspection/ audits of the SEs / intermediaries etc. • call for information from any bank / any authority / corporation / agencies in respect of any transaction in securities which is under investigation or inquiry by SEBI • performing such functions and exercising such powers under the Securities Contracts (Regulation) Act, 1956 (SCRA) • levying fees or other charges
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• conducting research • performing such other functions as may be prescribed
SEBI REFORMS ON STOCK EXCHANGES The reforms are briefly summarized below: 1. Compulsory audit and inspection of stock exchanges and their member brokers and their accounts. 2. Transparency in the prices and brokerage charged by brokers by showing them in their contract notes. 3. Board of Directors of stock exchanges has to be reconstituted so as to include non-brokers, public representative, and Govt. representatives to the extent of 50% of the total number of members. 4. Regulation of Portfolio management Schemes (PMS1): SEBI has already tightened PMS norms by making it mandatory for portfolio managers to keep separate accounts of clients rather than keeping their investments in pool account. Earlier, PMS providers used to open 'pool PMS' as a common account under one head, put money received from a set of clients in it and then invest the same on behalf of the whole group. This move is aimed at ensuring that portfolio managers handled clients‟ money in a transparent manner. 5. Capital adequacy norms have been laid down for members of various stock exchanges separately and depending on their turnover of trade and other factors. 6. Applications Supported by Blocked Amount (ASBA) in case of IPO: SEBI has introduced a supplementary process of applying in public issues, viz. ASBA process. ASBA is an application for subscribing to an issue, containing an authorisation to block the application money in a bank account with a bank which offers the facility of applying through the ASBA process. The bank shall then block the application money in the bank account specified in the ASBA, on the basis of an authorization given by the account holder. The application money shall remain blocked in the bank account till finalisation of the basis of allotment in the issue or till withdrawal / failure of the issue or till withdrawal / rejection of the application. 7. Contents of Offer Document: In addition to the disclosures specified in Schedule II of the
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Companies Act, 1956, the prospectus shall also contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investments in the issue. 8. IPO grading/credit rating2: Grading of all IPO of equity shares or other securities convertible into equity shares is mandatory. Grading shall be obtained from at least one credit rating agency registered with SEBI and shall be disclosed in the Prospectus or Red Herring Prospectus. 9. Promoters' contribution and the lock in requirements: SEBI has also plugged loop holes in the computation of promoters' contribution and the lock in requirements thereof. Henceforth, securities pledged by the promoters with banks and financial institutions as collaterals, will not be eligible in the computation of promoters' contribution, thus upholding the spirit of the legislation. Further, the promoters' locked in securities can now be pledged with banks or financial institutions only if the purpose of the loan is to finance one or more objects specified in the issue thereby preventing misapplication of pledging for any other purposes. 10. Prohibition of Insider3 Trading: SEBI (Prohibition of Insider Trading) Regulations, 1992 [Insider Trading Regulations] deals with prohibition on dealing, communicating or counseling on matters relating to insider trading based on unpublished Price sensitive information4 etc. The following shall be deemed to be price sensitive information periodical financial results of the company; intended declaration of dividends (both interim and final); issue of securities or buy-back of securities; any major expansion plans or execution of new projects; amalgamation, mergers or takeovers; disposal of the whole or substantial part of the undertaking; and significant changes in policies, plans or operations of the company 11. SEBI Code of Ethics for Directors: The securities and Exchange Board of India (SEBI) has formulated a code of ethics for directors and functionaries of stock exchanges aimed at establishing professional and ethical standards for creating a fair and transparent market place. The silent features of this code of ethics includes Fair ness and transparency in dealing with the matters relating to the exchange and investors • Prohibition on dealing in securities in proprietary accounts by elected office bearers such as President, Vice President, Treasurer etc.
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• Disclosure of dealing in securities by functionaries and directors of exchange, • Avoidance of conflict of interest in decision-making • Compliance with the regulatory laws exercising due diligence in the performance of duties. 12. Investors Grievances Redressal Cell: SEBI also takes up grievances against the various intermediaries registered with it and related issues.
GIVEN BELOW ARE TYPES OF GRIEVANCES FOR WHICH INVESTORS COULD APPROACH SEBI Type-I : Refund Order/ Allotment Advise Type-II: Non-receipt of dividend. Type-III: Non-receipt of share certificates after transfer. Type-IV: Debentures. Type-V: Non-receipt of letter of offer for rights. Type VI: Collective Investment Schemes Type VII: Mutual Funds/ Venture Capital Funds/ Foreign Venture Capital Investors/ Foreign Institutional Investors/ Portfolio Managers, Custodians. Type VIII: Brokers/ Securities Lending Intermediaries/ Merchant Bankers/ Registrars and Transfer Agents/ Debenture Trustees/ Bankers to Issue/ Underwriters/ Credit Rating Agencies/ Depository Participants Type IX: Securities Exchanges/ Clearing and Settlement Organizations/ Depositories Type X: Derivative Trading Type XI: Corporate Governance/ Corporate Restructuring/ Substantial Acquisition and Takeovers/ Buyback / Delisting / Compliance with Listing Conditions.
13. ACTION AGAINST DIRECTORS OF VANISHING COMPANIES Emergence of Vanishing companies has shaken investors‟ faith to the core. Matter was campaigned and representations made to ensure that such cases
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do not occur in future, resulting in SEBI forming a committee examining and exploring various courses of action such as including authenticated photographs, passport numbers, PAN number etc. of the promoters / directors at the time of incorporation and in the prospectus along with monitoring the end use of funds.
14. INVESTOR AWARENESS CAMPAIGN The major thrust has been on educating and informing the small investors which is clearly evident from the motto that 'An informed investor is a safe investor'. Keeping complete faith on the above all endeavors have been made in this direction including announcing the year 2003 as the 'Jaagte Raho' year and awareness and organized more than 1000 investor conference, exhibitions, mela, seminars, Union Budget meetings and public meetings for small investors all over India. More than 5 Lakhs investors took part in various programmes. Till date, more than 2188 workshops have been conducted in around 500 cities/towns across the country. • ADVERTISEMENT- SEBI has prepared simple “dos and don‟ts” for investors relating to various aspects of the securities market. Till date, over 700 advertisements relating to various aspects of Securities Market have appeared in 48 different newspapers/ magazines, covering approximately 111 cities and 9 regional languages, apart from English and Hindi. • EDUCATIVE MATERIALS-SEBI has prepared a standardized reading material and presentation material for the workshops • ALL INDIA RADIO- With regard to educating investors through the medium of radio, SEBI Officials regularly participate in programmes aired by All India Radio. • WEBSITE DEDICATED TO INVESTOR EDUCATION: http://investor.sebi.gov.in) • CAUTIONARY MESSAGE ON TELEVISION- With a view to use the electronic media to reach out to a larger number of investors, a short cautionary message, in the form of a 40 seconds filmlet, has been prepared and the same is being aired on television • PROTECTION OF RETAIL INVESTOR: Retail investors are not in a position to identify and /or appreciate the risk factors associated with certain scrips or schemes. With the result they are not able to make informed
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investment decisions. SEBI has strongly requested small investors to take adequate precaution before investing in any forthcoming IPO issues. It is observed that 8 out of 37 companies have dubious promoters and merchant bankers. Investors also cautioned not to invest in certain B2 & Z category listed companies who are declaring excellent quarterly results as its authenticity is doubtful.
15. REDUCTION IN D-MAT CHARGES One of the major grievances in this Information Technology environment affecting the investors was dematerlisation charges being very high as compared to keeping securities in physical form. This was limiting many investors in getting their securities converted to Dmat form. Matter was taken up and resulted in reduction of D-mat charges benefiting lakhs of investors where 90% of the securities in India are traded through NSDL.
16. TACKLING FALSE PROMISE OF ASSURED RETURNS BY BANKS SPONSORED MUTUAL FUNDS Many banks sponsored mutual fund had launched assured return schemes and lured the investor's huge contribution. However at the time of maturity could not match the assured return. Sponsored bank also tried to raise their hands eg. Canara Bank, Indbank, State Bank etc. Campaigned and fought heavily the matter with the SEBI / mutual fund / finance ministry and insisted that all the assured returns should be paid to the investors. Due to the intervention SEBI gave directive to sponsor bank to honour the commitment made by the mutual funds. Shortfall of more than Rs. 2000 crores was met by sponsor banks for benefit of small investors.
17. COMPENSATION FROM INVESTOR PROTECTION FUND Investor protection fund of stock exchange provided for Rs.5 lakhs / 10 lakhs compensation per client in case of default by the broker. The same was interpreted by stock exchange as applicable per sub broker. Thereby all the
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clients of a sub broker were getting benefit of Rs.10 / Rs.5 lakhs in aggregate only. Took up the issue with the stock exchanges and insisted upon applicability of the limit vis-à-vis client of a sub broker and not per sub broker. In case of Century consultants defaults at least 100 clients took benefit of this and avoided losses of more than 10 crores.
CRITICAL APPRAISAL OF INVESTOR PROTECTION MEASURES BY SEBI SEBI being a premiere institution for dealing with the problems relating to securities has advanced a long way towards protecting the investors from the hazards of the predators existing in the market. On the positive front, many banks sponsored mutual fund had launched assured return schemes and lured the investor's huge contribution. However at the time of maturity could not match the assured return. Sponsored bank also tried to raise their hands eg. Canara Bank, Indbank, State Bank of India etc. SEBI gave directive to sponsor bank to honour the commitment made by the mutual funds. Shortfall of more than Rs.,2000 crores was met by sponsor banks for benefit of small investors. By beginning of the new millennium in 2000, SEBI has strengthened and established itself as an all powerful regulatory body for the capital market, all intermediaries in it, SROs, stock Exchanges, listed companies, Venture Funds, Mutual Funds etc. These measures include permission for e-broking, share trading via net with orders to be routed through the websites of brokers, acceptance of Kumarmangalan Birla Report on Corporate Governance and of K.B. Chandeashekhar Panel Report on Venture Funds. The SEBI has given directives to the listed companies and to the top 150 companies in particular to observe the code of corporate governance by March end 2001. The contrary scenario was that only the big fishes could escape the net and the small ones were still striving to uphold their existence. It is also pointed that SEBI watchdog is a dog without teeth. It only wears dentures to fight against manipulators and finally those people get away with murder. A recent case study is the Essar Steel delisting story. SEBI watched silently when the promoters came to the market, didn‟t share profits and left the investors high and dry and took the cool delisting option. SEBI just said its as per GOI laws. Do investors need a SEBI to tell that? Aggrieved investors comment that Investor Protection is a big joke and money making
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exercise. SEBI came with finger printing and collected close to 100 crores .The scheme was scrapped; then why money was not returned by SEBI ? Had it been by other market players SEBI would have demanded them to pay .There is one yard stick for the Ruler and the other for the Ruled. Another area of concern for SEBI is the practice of clients signing PoAs while opening accounts with brokers. Account opening requires clients to sign several documents, one of which is the PoA. In a hurry to get over the task of signing, they often fail to read each and every line of the huge bunch of papers. In that case, PoAs are always open to misuse. For instance, a broker may include in the PoA a clause for debit of shares from the client‟s DEMAT account without delivery instruction slip, and an unsuspecting client may sign it.
CONCLUSION It may be concluded that SEBI surmounted several obstacles on the way to development of capital market with due care for investors‟ interests and greater transparency in the affairs of organizations and stock exchanges, though not to the extent of hundred percent. As we have seen that via different guidelines it had made it sure that no stone remains unturned in the path of the mission of protecting the investors. Investor education campaigns have been yielding positive results to some extent, still lot more needs to be done. Indian investors have been steadily fleeing the market, despite the apparent spread of „equity cult‟, which calls for immediate attention of the apex body to frame and effectively implement the measures to protect the interests of investors, and restore their confidence in the stock market..
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BIBLIOGRAPHY 1. Investor Alert, Apr-Jun 2008, Issue No:2/2008 2. “Is investor protection a myth? Why is SEBI dragging its feet on the ombudsman after notifying it in 2003” http://www.moneylife.in/article/is-investor-protection-amyth-whyis-sebi-dragging-its-feet-on-the-ombudsman-after-notifying-it-in 2003/19323.html,accessed on 29th Aug 2011 3. Protection Of The Investors By SEBI - Expanding The Horizon Of The Investors, http://www.legalserviceindia.com/article/l334-Protection-Of-The-Investors-By Sebi.html, accessed on 10th Sep 2011 4. Report Of The Expert Group Headed By Mr.Justice M. H. Kania (Former Chief Justice of India) For Suggesting Amendments To Securities And Exchange Board Of India Act, 1992 5. Rajesh Bhayani, Investor protection tops SEBI agenda, www.oppapers.com, accessed on 10th Sep 2011 6. SEBI Guidelines (Disclosures and Investor Protection) 2000 7. http://www.bseindia.com/invdesk/services.asp 8. www.sebi.gov.in 9. www.wikipedia.com
