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Framework for protection of investors in securities market

December 06, 2021
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This article is written by Rahul Kumar, from the Central University of South Bihar and the article is edited by Khushi Sharma (Trainee Associate, Blog iPleaders).

Introduction

The concept of Joint Stock Companies had its origin in the middle of the nineteenth century. This concept helped to pull small savings from the general public into the company’s treasury and to issue shares to the investors in lieu of that. The investors control the management group through their representatives at the Board meetings and other company meetings where the affairs of the company are managed by professionals. The close contact and association which are present in a partnership firm amongst the investing partners do not exist in a Joint Stock Company between the management and the investors. It is often said that after the invention of the railroad engine, the most important innovation of the nineteenth century was the Joint Stock company with limited liability for the investors also with separation of ownership from the management in the conduct of the business of the company. 

Need for protection the investors

However, the nature of company management requires establishing some mechanisms for the protection of the investors. The need for investors protection arises due to the following reasons:

To instil confidence in the investor’s mind

An investor’s confidence is very essential for the smooth and success of the capital market. When their confidence is shaken or when they lose their confidence in the market there will be a severe jolt in the capital market. Generally, most investors invest their money with an expectation of marketing out of their market. If it does not happen then they generally come away from the market. Such a situation is not at all desirable so it is most important to build up investor confidence by creating a conducive environment for investment through investment protection measures.

To create a conducive measure for investment 

A proper and sound investment climate is very essential for industrial development. The corporate customers will find it easy to raise capital at affordable minimum cost only when there is a sufficient and secured investment climate. In fact, a strong investment protection measure will create a healthy investment climate.

To ensure transparency in dealing 

The investors would be able to secure their prospective investment only when there is transparency in dealings of companies and all the intermediaries connected with the stock market. The investment decision will be taken on the basis of full disclosures made by companies in various areas. Investor’s protection measures will help in bringing transparency in various important areas.

To create a vibrant capital market 

Investors will freely enter into the capital market in large numbers only when their interest is fully protected from all angles. This increased participation would develop the market and once the market gets developed, it would again attract more and more investors. So, investor protection would indirectly promote a vibrant capital market.

To regulate the market on sound lines 

Investors’ protection measures in the form of regulations would make all market players work within the ambit of regulations. It would lead to the smooth and stable functioning of the capital market on desired lines.

To create discipline in the market 

All investors’ protection measures aim at minimising unhealthy practices, undue speculation, unnecessary malpractices in the market. It would go a long way in creating a good discipline among market players.

To create accountability among market players 

A sense of accountability is created among all players in the market by means of laying down strict disclosure norms and taking stringent investors protection measures. This accountability makes them comply with all requirements failing which they’re answerable to the regulatory bodies.

To create awareness among investors 

Above all investors must be aware of their own rights and liabilities, grey areas of frauds, the type of frauds that can take place, etc. So investor protection measures also aim at educating the prospective and present investors on these aspects this would enable them to protect themselves from all unhealthy and fraudulent practices by becoming saviours of their own protection

Factors affecting investor’s interest

There are many factors that affect investors’ interest and thereby cause dissatisfaction among them. The prominent causes are as below:

Price rigging

It is nothing but the artificial manipulation of prices of securities by forming cartels by bulls and bears. They don’t allow the market forces of demand and supply to play their due role. These artificial prices create a market wind in either direction to which innocent investors become victims.

Insider trading 

It refers to the purchase and sale of securities by persons who hold sensitive information about the company due to their fiduciary relationship with that company. In other words, insiders get regular profits at the expense of the majority of uninformed investors.

Excessive speculation

Speculation, if it exceeds its limit, would affect the interest of investors to a greater extent. If brokers, in order to earn more and more profits due to a probable rise in price may engage themselves in a buying spree that is beyond their capacity. It would result in the non-fulfillment of their settlement promises which may lead to a market crash. Finally, the innocent investor suffers as a result of that.

Lack of transparency 

In order to attract investors, some companies may present a rosy picture of their financial position by manipulating their system of accounting. The accounts are not at all transparent in their disclosures again the stock market dealings are also not transparent.

Short selling 

Short selling refers to selling scripts without owning them by bear cartels with the anticipation that these shares could be purchased at a much lesser price in the future when delivery would be actually made. It leads to extreme volatility in the market.

Restricted trading 

One of the serious grievances of the investors is restricted trading in stock exchanges. Though there is an increase in the turnover of stock exchanges it is restricted to a few shares only with the top ten shares accounting for about eighty percent of the turn-over and top hundred shares ninety percent of the turnover.

The dominance of few stock exchanges 

Though many stock exchanges are functioning in the Indian alliance, shares of the dealings are held in the Bombay Stock exchange and National stock exchange only. The regional stock exchanges gradually lost their importance.

The dominance of institutional and foreign institutional investors

The institutional investors particularly the foreign institutional investor dominance is greater in the Indian capital market. They dictate the terms in the market. They account for nearly eighty percent of the new issues. The ownership of equities by individuals and households is gradually coming down.

Grievances against listed companies 

Moreover, the investor’s complaint against listed companies in various ways. Some of these are as below: 

  1. Non receipt of share certificates,
  2. Non receipt of refund orders,
  3. Non receipt of duplicate securities,
  4. Non receipt of certificates after,
  5. Non receipt of certificates after splitting,
  6. Non receipt of interest on listed debentures etc.
  7. Grievances against members of stock exchanges 

Investors have many grievances against the members of stock exchanges. Some of these are given below: 

  1. Non receipt of delivery of shares,
  2. Non receipt of dividend,
  3. Non receipt of right shares,
  4. Non receipt of bonus shares,
  5. Non receipt of sell proceeds,
  6. Disputes relating to non-settlement of accounts.

Investor’s protection measures

Many measures have been taken by different agencies. They can be studied under the following heads:

  1. Measures taken by stock exchanges,
  2. Measures taken by Company Law Board (Now NCLT),
  3. Measures Taken by SEBI,
  4. Measures taken by the Court,
  5. Measures taken by the Central Government,
  6. Measures taken by the Department of Company Affairs.

Measures taken by stock exchanges

  1. An investor service sale has been established in Bombay stock exchange to deal with all matters involving complaints against listed companies and also against the members of the exchange. A similar cell investor’s grievances has been set up in the NSE.
  2. An investors protection fund has been set up in the national stock exchange as a trust to compensate investors’ claims which may arise due to non-settlement of obligations by the defaulting trading members. In Bombay Stock Exchange also a stock exchange customers protection fund has been created in the interest of the investors.
  3. A trade guarantee fund has been introduced in the BSE to guarantee the settlement of trades so that there may not be any default by members in payment. This will protect the interest of the investors.
  4. To remove the existence of excessive speculation many reform measures have been taken and strictly implemented. For example, Introduction of Strict Transparency and disclosure norms, abolition of Badla system, carry forward of schemes, and adoption of rolling settlement etc.
  5. SEBI has taken many positive steps to remove the various unhealthy practices that are commonly found in stock exchanges. The common unhealthy practices are insider trading, price rigging, circular trading and trading in fake shares etc. The SEBI has laid down various rules and regulations to curb such practices and these rules and regulations are subject to review and revision from time to time.

Measures taken by the Company Law Board (Now NCLT)

Wide powers have been given to the Company Law Board of NCLT to protect the interest of investors as well as depositors under the Companies Act. However, some of the important steps are as below:

  1. Under the Company Act, Every Investor has a right to get any extract or copy of the documents of the company or inspect any documents of the Company. This right should be exercised through the company law board and tribunal only. It facilitates complete transparency of all documents of the company.
  2. Company At has also given the right to any person to inspect minutes books of all general meetings and the Company Law Board or Tribunal may direct that a copy of such minutes shall be sent to that person.
  3. To prevent oppression and mismanagement, the Central Government may appoint such a number of persons as the Board specifies on the basis of a written order of the Company Law Board or Tribunal to safeguard the interest of the shareholders under Section 408 of the old Companies Act.
  4. To safeguard the interest of shareholders and also in public interest the Company Law Board may prevent any change in the Board of Directors which might affect the company prejudicially as per Section 409 of the Old Companies Act.

Measures taken by SEBI

A company comes into existence only out of the shareholder’s willingness to invest a part of its resources at risk. A shareholder cannot leave the company unless some other investor steps into his shoes. So, investors’ confidence is very essential for capital formation. However, SEBI has taken a number of steps to safeguard the number of investors by framing many rules and regulations. However, some of the important measures by SEBI are as below:

  1. The SEBI has issued and published detailed guidelines on rights and responsibilities of investors and also various aspects of capital market dealings and operations. It enables the investors to be aware of their rights and responsibilities.
  2. SEBI has also formed a separate investors grievances and guidance division at its head office.
  3. An automated complaint handling system has been introduced to deal with all types of investors’ complaints.
  4. The disclosure norms for public issues have been made more stringent and to simply the issue process and abridged prospectus has been permitted.
  5. The promoter’s contribution for each public issue has been fixed by SEBI. The minimum contribution should be 20% of the total issue of the shares.
  6. All risk factors involved in an issue should be disclosed prominently in the prospectus so that an investor can evaluate that issue before taking any investment decision.
  7. To avoid all malpractices connected with allotment of shares a representative of the SEBI supervises the allotment process. He must be present at the time of finalisation of the basis of allotment.
  8. It has been made mandatory for the brokers to disclose the transaction price as well as their brokerage in the contract notes issued by them to their clients.
  9. To prevent the fraudulent practices in physical handling of shares, dematerialisation has been introduced. Separate guidelines have been issued with regard to the depository services and also for various intermediaries associated with it.

Measures taken by the Court

Generally, all regulatory bodies like SEBI, RBI, and DCA have an inbuilt system to redress the grievances of investors. In case the investors are not satisfied with the orders of the regulators, an appeal can be made to the security’s appellate tribunals against those orders. If the appellate tribunals also fail to satisfy aggrieved investors, then the judiciary is resorted to as the last destination. So, the court will interfere only as a last resort to redress the grievances of investors.

Measures taken by the Central Government

To protect the interest of investors and to promote investors’ education and awareness the Central Government has established a fund called Investor Education and Protection Fund. All amounts that remain unclaimed or unpaid at the hands of the Companies must be transferred to this fund. This Fund will be utilised to protect investors’ interest and to promote investors’ awareness through multimedia, publicity, seminars, and conferences. This fund is administered by a trust.

Measures taken by Department of Corporate affairs

The investor’s interest is protected by MCA in the following ways:

  1. One investor grievance officer has been appointed to handle all complaints from investors.
  2. As soon as the complaints are received from investors, they are acknowledged by giving a specific number for each complaint.
  3. The complaint is taken to the company concerned for necessary adjustments.
  4. The status of the complaint is also displayed on the DCA.

Guidelines to investors

  1. Deal with the registered number of stock exchange. If you are dealing with a sub-broker, make sure that all bills and contracts are made in the name of a registered broker and sub-broker.
  2. Insist that all your deals are done in the trading ring or through the exchange.
  3. Give specific orders to buy or sell within the fixed price limits or within the time periods within which orders have to be executed.
  4. Insist on Contract notes to be passed on to you at the right time when orders are executed. Make sure that your deal is registered with the stock exchange and on his computer.
  5. In the case of a dispute this will help to trace the details of the deal very easily.
  6. Collect a settlement table from the stock exchange mentioning the pay in/ pay out days. Each stock exchange has its own trading periods which are called settlements. All transactions done within this period are settled at the end of it. All payments for shares bought a share delivery take place on the pay in debt.
  7. Keep separate records of dealings in specified shares and non-specified shares.
  8. Execute periodic settlement of dues and delivery of shares to avoid accumulations of transactions.
  9. Insist on delivery. If the company returns your papers and shares with objections, contact your broker immediately.
  10. Ensure that shares bought are transferred in your name before the company book closure debt. This is necessary to make sure that you receive benefits like dividends, interest and bonus shares.
  11. Complain if the broker does not deliver the shares bought in your name. Proceed to contact another broker with the bill or contract given to you by the earlier broker and the later broker will purchase the share on your behalf. In such an event the first broker will have to pay the difference in price.
  12. Do not sell shares that are not transferred in your name after the book closure as these are not valid in the market.
  13. Do not sell or deal in shares where even one of the holders has passed away. In cases where the holder has died, a succession certificate is necessary. In cases where one of the joint shareholders passes away, the surviving holder should send the shares along with the debt certificate to the company.
  14. Do not expect the money for shares to come immediately. It will take at least seven to fifteen days from the date of transaction which is now made quicker in Demat form.

Do not take delays or harassment lying down. You have to complain to the grievance redressal forum or SEBI in case of delay or harassment.

Conclusion

Investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future and be sold at a higher price and protect investors. Various guidelines have been framed accordingly by the virtue of laws.


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