Implement investor protection schemes (12 May 2001)  

In India, the protection of investors’ rights and their money is only felt in its absence. Yet, all those angry investors who have seen their savings vanish once again in the last few months, would be happy to know that there are as many as three investor protection bills pending with the government. One bill has been proposed by the wanna-be messiah of investors and BJP MP, Kirit Somiaya, another has been submitted by SEBI and finally there is the draft bill which was prepared by Dr. N.L.Mitra of the National Law School.

Last week, newspapers reported that the finance ministry has dropped plans for a separate investor protection bill. One presumes this sensible decision would apply to all three bills. Since the preamble to the SEBI Act makes it one of SEBI’s primary responsibilities to protect investors, a separate legislation would do nothing that cannot be incorporated into the SEBI Act. Dr. Mitra’s draft bill confirms this view. It makes several sensible suggestions, and many that are better dropped.

For starters, the bill wants to create three standing committees. The most important of these is the Standing Committee on Investor Protection which is to have three members nominated from recognised investor protection organisations, by rotation. The problem starts right there. India has barely five investor protection organisations and most of these have just about one person capable of playing a sensible and constructive role as envisaged by such a committee. Investor associations are just as helpless and ineffectual as individual investors. Since investor associations are as defeated by the slow legal system and the run-around given to them by multiple regulators, they are unable to grow or attract members. It also recommends setting up two others on capital market operations — these committees are only likely to duplicate actions and issues that are already continuously debated by SEBI’s many committees.

The draft bill also recommends the appointment of ‘market referees’ by both SEBI and stock exchanges. These are supposed to be ‘independent’ persons who are expected to monitor and take actions relating to the recording of contracts and preparation of documents and settlement and clearing systems. They will also have the power to warn or suspend market players, cancel a transaction and submit reports to SEBI and stock exchanges for further action. This is clearly a problem. Supervision and surveillance are extremely sensitive operations, which will have to be under the direct supervision and jurisdiction of SEBI or respective stock exchanges.

The most sensible suggestions contained in the bill pertain to redressal of investor grievances. Firstly, it recommends that consumer courts be granted the jurisdiction to hear investor complaints by individuals and through investor protection groups. This is a long pending demand of investor groups, ever since a Supreme Court judgement in connection with the Morgan Stanley case in the early 1990s has virtually barred investors from approaching consumer courts. Secondly, it asks that the Central government constitute a Special Court to try cases of financial fraud and offences under the Investor Protection Act. And finally, it recommends that investors can directly approach the Securities Tribunal for relief and redressal instead of first approaching SEBI.

But even here, the difficult part is to find ways to fund these courts and given them the infrastructure to function efficiently in dispensing justice — instead of the three to 6 months in which these courts were expected to dispose off complaints, there are reports of cases pending for as much as nine years.

Interestingly, the draft bill recommends that SEBI be given powers of search, seizure and attachment. SEBI has been demanding these powers for a long time, but has recently dropped them. Similarly it seeks to give SEBI funds for investor protection, but SEBI does not particularly want these either, say informed sources. It also wants to empower SEBI to direct the non-alienation of assets. This is an important and much-needed power, which ought to be swiftly incorporated under the SEBI Act. In cases such as vanishing companies, such a directive would go a long way towards protecting a company’s assets from rapacious promoters.

Finally, the last potentially dangerous recommendation by Dr. Mitra is that SEBI be given the power to take temporary measures such as suspending the business of a stock exchange, or trading in a security or disqualify a promoter/director. Suspending the business of a stock exchange is hardly a temporary measure and can only done in the most rare and extreme cases. The bill probably means suspension of business of a broker. It is exactly such a temporary action which is now before the courts in the case of former BSE President Anand Rathi and others. The fear is that the power to take temporary action, unless restricted to a very limited period may lead to indiscriminate and knee-jerk action. The government has already wasted a lot of time in debating and discarding an investor protection act, it is time it dropped the debate and initiated some action by adopting the best of Dr. Mitra’s recommendations and implementing them under the SEBI Act.