Role of SEBI in Protection of the Investors- A Brief Insight

Introduction:

Investors and Shareholders are the stanchions of today’s financial and securities market. They are the key factor to determine the level of the market. They put the money in funds and stocks to help the market to grow and consequently, lifts the economy. Thus, the protection of the interests of the investors stands in priority. The Securities and Exchange Board of India (SEBI) is responsible to preserve the interests of the investors. SEBI has been established almost 18 years back with the prime mandate to protect the interest of investors in securities[1]. It also made a considerable dent in the development and regulation of the securities market. Investor protection measures by SEBI are in place to safeguard the investors from the malpractices in shares, the stock market, Mutual Fund, etc.[2]  The basic role of SEBI includes Training and Development of Market Intermediaries, protecting the Interest of Financial Intermediaries, Inspection of books and regulation, Prohibition of insider trading, managing investors education and training and Vetting Role and imposing penalties regarding the violation of norms of stock exchanges.[3] It promotes and controls self-regulatory companies, keep a check on frauds and unfair trade activities in the securities market, observe and regulate major transactions and take-over the companies and assess fees and other charges. Investor protection is the most significant elements of all in the thriving securities market and financial investment institutions.

Adjudication Mechanism

Investor protection is basically a set of rules that make sure that investors are fully informed about their purchases, transactions, affairs of the company of their business and be protected from the malpractices. Investor protection legislation is implemented under Section 11(2) of the SEBI Act. The basic measures in the legislation involve the regulation of stock exchange and securities market business, registration and regulation of the intermediaries of the business like brokers, transfer agents, bankers, trustees, registrars, portfolio managers, consultants, merchant bankers, etc., recording and monitoring, registration in investment schemes and regulation of their functions. SEBI generally safeguards the investor by, building the capacity of investors through education and awareness to enable an investor to make informed investment decisions. It has a disclosure-based regulatory regime so that the investors can make informed investment decisions. It ensures that the market has systems and practices which make transactions safe. It took various measures such as a screen-based trading system, dematerialization of securities, and framed certain regulations to regulate the intermediaries to protect the interests of investors in securities. It also makes sure that only the fit and proper investors are allowed to operate in the market and every participant has an incentive to comply with the prescribed standards and given exemplary punishment for any mishap. SEBI has a comprehensive mechanism to facilitate redressal of investor grievances against intermediaries and listed companies[4]. It takes appropriate enforcement actions as provided under the law. It has set up a comprehensive arbitration mechanism in stock exchanges and depositories for resolving disputes of the investors.

Calamitous Regulation

Ironically, the rules designed to protect the investors are paradoxically destroying investor sentiment[5]. Somehow, SEBI is unable to punish the guilty though the economy has only seen them tightening the rules. Also, the judicial system is too slow and too kindly towards frauds and scamsters[6].

In the recent case of Punjab and Maharashtra Co-Operative bank ltd. vs Puri International (P) Ltd.[7], Supreme Court stay the order of the Bombay High Court’s, which ordered the bankrupt Housing Development and Infrastructure Ltd (HDIL) to repay dues of Punjab and Maharashtra Bank Co-operative (PMC) Bank by the sale of assets. PMC Banks is one of the largest urban cooperative banks. Two-thirds of the loans by PMC Bank were given to an HDIL based real estate developer whose creditworthiness was already under a cloud. The emerging crisis at PMC Bank is the tip of the iceberg in the series of cases where the banks are willing to settle for part of the dues and deterring the investors’ protection. The judicial system seems to lose its soul through endless delays and hence, denying justice. The origin of the crisis of the banking sector traces back to the unresolved issue of non-performing assets (NPAs), in which the cooperative banks are magnified due to lack of governance and a questionable business model. PMC Bank allegedly issued a personal loan to the previously indebted real estate company Housing Development and Infrastructure (HDIL) developer, who already defaulted on a previously sanctioned heavy loan from the lender. Throwing all the laws into the wind the PMC Bank approved the personal loan and it was larger than the previous one that HDIL had ceased to repay and that the cooperative bank didn’t recognize as a bad loan. Alarmingly, even when it was facing insolvency proceedings in the National Company Law Tribunal, PMC Bank continued to work with them. Despite the controversy, on the face of it, the courts refuse to acknowledge the obvious.  Furthermore, there are too many regulations. SEBI, RBI, IRDA, and PFRDA aim for varied objectives and hence the debt market suffers[8].

Blend of Probable Propositions

India might be one of the best-regulated markets in the world in terms of investor protection, but the problem lies with the number of investors. India has become a model market in terms of laws but nothing is happening in terms of their execution. The government doesn’t make a move if the investors don’t come into the market, but at all costs, it doesn’t want any mishap in the market which would require it bring order to the chaos. The most immediate would be providing adequate, and swift, punishment for wrongdoing. It is not the size of regulations that make a market healthy and strong but the speed at which the guilty is punished. The focus of broad economic policies and their implementation will need to be integral with the capital market performance[9]. Too many regulations will only lead to too little compliance and high cost with limited benefits. Most importantly, retaining confidence with the intermediaries and investors equally and the introduction of a more innovative and sophisticated product into the market is the need of the hour. An abundance of regulation and compliances moves away the capital and ideas, hence investors. Investors are discerning and no possible know-how to value the business. All this could lead to a big challenge and soon develop into a catastrophe, unless a genuine examination and responsibility is relayed in the markets and its assorted participants.

References:

[1] “Office of Investor Assistance and Education” (https://investor.sebi.gov.in/ipms.html)

[2] “Investment protection measures by SEBI” (www.fincash.com/l/investor-protection-measures-sebi)

[3] Murali, S Mohana, “The role of SEBI in protecting the interests of investors and regulation of financial intermediaries” (July, 2017)Volume 3, Issue 7, International Journal of Commerce and Management Research.

[4] Nayak, Mahesh, “Fatal Regulation”, August 3, 2014, Business Today

[5] Id.

[6] Mulraj, J, “No investor protection in India”, December 20, 2019, The Business Line- the Hindu.

[7] Arbitration Petition no. 1076 OF 2011

[8] Id. At 3

[9] Id.