INVESTOR PROTECTION

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This article is written by Harpreet Kaur of 7^th Semester of University Institute of Legal Studies, Panjab University, Chandigarh

Abstract

Investors play an instrumental role in the securities market. They constitute a major factor in deciding not only the behaviour of the securities market but also the activity of the economy as a whole. The rising engagement numbers of investors in the securities market are a telling factor of the gradual economic rise. There has been an upward shift in FIIs and institutional investments in recent years, showing seemingly, a stock market revival, after investor confidence was significantly shaken following several stock market scams. This is a streak of light at the end of the dark tunnel that ensued after those scams, resulting in almost the stagnation of economic activities in the securities market.

‘Investor Protection’ is a phrase used widely in relation to the stock market, be it in relation to the Securities and Exchange Board of India, Regional Stock Exchanges, various Investor associations, and the companies themselves. It is a term directly relating to the regulation of the capital market. It, in general terms, means the protection of the investors from the malpractices of banks, misuse of power by the companies, and even the exploitative activities of participants and intermediaries. Some of the investors, mainly the small investors, may not possess adequate knowledge as to be able to combat or beware of some of these derogatory factors which exist in the market and as a result, may get caught up in this web. This is where the investor protection framework comes into play.

Objectives

This article is aimed to look into the concept of Investor Protection, along with the legal framework that facilitates it in India. Further, the work illustrates the powers and functions of SEBI to ensure Investor Protection, the Investor Education and Protection Fund (IEPF), how the fund is used, and the Office of Investor Education and Assistance. It also looks into the case of Sahara v. SEBI and how it changed and strengthened the investor protection scenario in the Indian Securities Market.

Keywords

Investor, Investor Protection, Securities and Exchange Board of India (SEBI), Investor Education and Protection Fund (IEPF), Investor Education, Investor Assistance, The Companies Act, 2013, The SEBI Act, 1992, The Depositories Act, 1996.

‘Investor Protection’ Meaning

In layman’s terms, investor protection can simply be defined, as it is, by the Cambridge Dictionary, “Protection to the investors, so that they do not lose money, if money is taken from them dishonestly, or if their investments fail.”

However, more comprehensively, the term ‘Investor Protection’ is defined under The Securities and Exchange Board of India Act, 1992 as follows.

‘Protecting the interest of the investors in securities and promoting the development of and to regulate the securities market and for matters connected therewith or incidental thereto.’

Thus, the term may be understood to mean and include legislative measures to protect and safeguards investors from the exploitative activities of intermediaries, banks, and participants, among other actors. Investor Protection is a term of concrete significance as it is a major instrument to tackle the slew of unscrupulous behaviours at various stages concerning investment. Various legislations, guidelines, rules, and regulations laid down by the regulatory authorities, therefore, are the architects of the framework of investor protection in the capital market.

Investor Protection and SEBI

‘Powers and Functions of the Board’

Listed under Chapter IV titled ‘Powers and Functions of the Board’ are some of the measures which are to be undertaken by the board, in order to ensure investor protection in the capital market.

“11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.”

-Thus, Sub-section (1) creates space for the board to lay out rules, regulations, and guidelines to ‘protect’ the interests of investors in securities, and to ‘promote’ the development of, and for the regulation of the securities market, by ‘such measures as it thinks fit.’

Specific Provisions set out in the act:

The section further lays down certain specific provisions relating to investor protection and defines the scope of the measures that may be provided for, by the board.

“(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for—

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of 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, and such other intermediaries who may be associated with securities markets in any manner;

(ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies, and such other intermediaries as the Board may, by notification, specify in this behalf;

(c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investor education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

(h) regulating the substantial acquisition of shares and take-over of companies;

(i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries, and self-regulatory organisations in the securities market;

(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities;

(ib) calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard:

Provided that the Board, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government;

(j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government;

(k) levying fees or other charges for carrying out the purposes of this section;

(l) conducting research for the above purposes;

(la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions;

(m) performing such other functions as may be prescribed.”

–Thus, sub-section (2) gives further definition to the general provisions of sub-section (1). It enumerates the specific provisions laying down a framework for streamlining the type of measures that can be introduced by the board to facilitate investor protection.

SEBI’s power to inspect

(2A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, register, or other document or record of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to the securities market.

‘The Board shall have the same powers as are vested in a civil court’

Sub-section (3) lays down the fact that that board shall be vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, and also lays down the matters in which these powers may be exercised.

“(3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section (2A), the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:

(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board;

(ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers, and other documents of any person referred to in section 12, at any place;

(iv) inspection of any book, or register, or other document or record of the company referred to in sub-section (2A);

(v) issuing commissions for the examination of witnesses or documents.”

Expansion of the powers of the board

(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A), and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely: —

(a) suspend the trading of any security in a recognised stock exchange;

(b) restrain persons from accessing the securities market and prohibit any person associated with the securities market to buy, sell, or deal in securities;

(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation;

(e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first-class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder:

Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached;

(f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation:

Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e), or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market:

Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.

Investor Protection and Education Fund

(5) The amount disgorged, pursuant to a direction issued, under section 11B of this Act or section 12A of the Securities Contracts (Regulation) Act, 1956 or section 19 of the Depositories Act, 1996, as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act.

The Investor Education and Protection Fund (IEPF)

The Central Government (GOI) has established a fund known as the ‘Investor Education and Protection Fund (IEPF) in order to protect the interests of the investors in securities and to promote and regulate the securities market and all related and incidental matters.

Utilisation of the Fund

The Companies Act, 2013 enumerates the purposes for which the fund can be used. These are as follows.

To refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon;
Promotion of investors’ education, awareness, and protection; By Vinay Babbar
Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders, or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which has ordered disgorgement;
Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by members, debenture-holders, or depositors as may be sanctioned by the Tribunal; and
Any other purpose incidental thereto.
Office of Investor Education and Assistance

The Securities and Exchange Board of India (SEBI) has been established with several objectives concerning the capital market. It aims to ensure the protection of investors and their activities in the stock market and related fields.

The official website of SEBI lists out four broad objectives with which the board is entrusted. These are as follows:

The investor knows how to invest,
The investor has complete knowledge of the market,
The market is free and there are no miscreants, and
There are arrangements in case of grievances.[1]
Sahara v. SEBI[2]

The aforementioned case brought light to the issue of investor protection to the center stage. It was not only marked by large-scale protests but also a stringent application of the provisions of the SEBI Act, followed by a well-researched judgment, whereby the offenders were put behind bars.

In a nutshell, when two companies of the Sahara Group were questioned for alleged violations of the SEBI Act. In response to these allegations, the Sahara group contended that the companies in question did not fall under SEBI’s regulations. SEBI, in turn, argued that the companies had all the attributes which made them the subject matter of SEBI.

The Apex Court ruled that the companies were well within the working scope of SEBI, and ordered a full refund of the deposits submitted to it. The companies disregarded the order, following which, non-bailable warrants were issued for the arrest of Sahara India Pariwar Chairman and other members for not complying with the order.

Conclusion

The Capital Market is a major component of the economic framework of any economy and further, activity in the capital market is effectuated, in large, by the activities of the investors. Investors, thus, become the catalysts of economic progress in a country. The presence of unscrupulous elements like exploitative intermediaries, banks, participants, and companies acts as a deterrent to economic activity in society and leads to capital stagnation. In order to combat this issue, measures and steps and necessary to be taken to ensure investor protection, education, and assistance.