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Transcript of A Project Report in Business Law
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A PROJECT REPORT IN
BUSINESS LAW
PROJECT TITLE: “Investors Protection Guidelines By
SEBI.”
Submitted On: 1ST MARCH 2013
UNDER THE AEGIS OF
Submitted To: Submitted By:
Mr. F.M.A. KHAN Dilip Kumar
PGDFS - 2011-13
Roll No. : FT-(FS)-11-319
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CONTENTS
Sr. No. Particulars Page No.
1. Introduction of Investors Protection Guidelines BY SEBI 3
2. Objectives Of SEBI 4
3. Investors Protections Measures By SEBI 5
4. SEBI Reforms On Stock Exchanges 65. Critical Appraisal Of Investors Protections Measures By
SEBI
12
6. Bibliography 13
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Investors Protection Guidelines By SEBI
Introduction: 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 finalization 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 yieldingpositive 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.
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
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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 of
redressing the grievances of the investors so that their confidence is restored?
T he 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.
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 purchases
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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.
Investors 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.
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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.
Conducting research.
Performing such other functions as may be prescribed.
SEBI Reforms on Stock Exchanges :
The reforms are 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 (PMS): 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.
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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 authorization 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 finalization 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 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 rating: 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' contributionand 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
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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 Insider 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
information 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 Fairness andtransparency 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
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was campaigned and representations made to ensure that such cases
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 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 Lacs
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 themedium of radio, SEBI Officials regularly participate in
programmes aired by All India Radio.
Website Dedicated To Investor Education:
http://investor.sebi.gov.in
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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 film let,
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 scripts or schemes. With the result they
are not able to make informed 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
dematerlization charges being very high as compared to keeping
securities in physical form. This was limiting many investors in
getting their securities converted to D-mat 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 theassured return. Sponsored bank also tried to raise their hands e.g.
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
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investors. Due to the intervention SEBI gave directive to sponsor bank
to honor 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 lacs / 10 lacs
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 clients of a sub broker were getting benefit of Rs.10 /
Rs.5 lacs 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 e.g. Canara Bank,
Indbank, State Bank of India etc. SEBI gave directive to sponsor bank to
honor 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
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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. Chandrasekhar 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 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.
Bibliography:
The Indian Financial System Markets, Institution & Services 3rd Edition
By Bharati V. Pathak
www.sebi.gov.in/guide
http://www.bseindia.com
http://www.nseindia.com
www.wikipedia.com