26. Investor Protection – Business Environment

26

INVESTOR PROTECTION

Investors/shareholders are important stakeholders in public limited companies. In this chapter, we study shareholders’ rights and responsibilities, SEBI’s guide for investors and shareholders, depository and dematerialization, grievance redressal process and system and investor protection. We also examine the various problems faced by investors, law enforcement for investor protection and the role of SEBI.

The phenomenal growth of modern corporations, especially those which have been immensely successful so as to span space to become multinationals, has brought about the kind and order of material wealth to the international community that was never imagined a few years ago. Some of them produce goods and services for most part of the world. Some of them make profits that are bigger than the gross domestic products of several countries put together. But this kind of almost exponential growth would not have been possible, but for the evolution and growth of the organizational structure called public limited or joint stock companies. A joint stock company is a business unit that requires a large amount of capital that is obtained by the promoters by dividing it into equal shares of small denominations so that investors can invest small or large sums according to their capability and desire, the profit of the company being distributed in proportion to the number of shares held. The most important feature of such a form of business organization that makes it most attractive to investors is that the financial liability of the shareholders is limited to the extent of the shares held by them. Although the limited liability clause of this type of investment is an attraction, the investor (generally defined as one who makes financial investment in bonds, stocks or shares) faces a serious problem. He being a part-owner, normally located far away from the place where the company’s business takes place and with little or no knowledge of the type of business it is engaged in, has to delegate the work of running it to managers who may do their job in a manner different from what he would have done it himself. This “agency” problem causes the investor the “agency costs” that can be minimized if the management follows certain ethical and corporate governance practices such as integrity, transparency, full disclosure of financial and non-financial information, accountability and compliance with the law of the land. If the corporate managements fulfil these obligations, it will result in long-term shareholder value.

Apart from these, the investor needs to be protected in a myriad of ways. He should be allowed to participate in the decision-making process to the extent possible; appointments to the board of directors, auditors etc., apart from decisions that involve heavy investments should have his concurrence; his rights are to be protected and privileges zealously safeguarded. He should have his grievances amicably and adequately redressed. He should be paid his dividends in full and on time. In sum, he should be treated for what he is—a shareholder, who has a material stake in the corporation.

To realize such an investor protection, countries have evolved rules, regulations, systems and mechanisms, both internal (to the company) and external. All these internal features are covered if companies follow universally accepted ethical and corporate governance standards, while the external ones are taken care of by public authorities of the countries concerned. It should be stressed here that corporate governance is a major instrument of investor protection. In the following pages, we will go through the various facets of responsibilities, problems and the protection available to investors both internally and externally.

SHAREHOLDERS’ RIGHTS AND RESPONSIBILITIES

The members of a company enjoy various rights in relation to the company. These rights are conferred on the members of the company either by the Indian Companies Act of 1956 or by the Memorandum and Articles of Association of the company or by the general law, especially those relating to contracts under the Indian Contract Act, 1872.

The following sections discuss some of the more important rights of shareholders as stressed by the above Acts

A Shareholder

Being a part-owner of a joint-stock company, a shareholder enjoys certain rights as listed here.

  • Has the right to obtain copies of the Memorandum of Association, Articles of Association and certain resolutions and agreements on request on payment of prescribed fees (Section 39)
  • Has the right to have the certificate of shares held by him within 3 months of the allotment
  • Has the right to transfer his shares or other interests in the company subject to the manner provided by the articles of the company
  • Has the right to appeal to the Company Law Board (CLB) if the company refuses or fails to register the transfer of shares
  • Has the preferential right to purchase shares on a pro-rota basis in case of a further issue of shares by the company. Moreover, he/she also has the right of renouncing all or any of the shares in favour of any other person
  • Has the right to apply to the CLB for the rectification of the register of members
  • Has the right to apply to the Court to have any variation or abrogation to his/her rights set aside by the Court
  • Has the right to inspect the register and the index of members, annual returns, register of charges, and register of investments not held by the company in its own name without any charge. He/she can also take extracts from any of them
  • Is entitled to receive notices of general meetings and to attend such meetings and vote thereat either in person or by proxy
  • Is entitled to receive a copy of the statutory report
  • Is entitled to receive copies of the annual report of the directors, annual accounts and auditors’ report
  • Has the right to participate in the appointment of auditors and the election of directors at the annual general meeting of the company
  • Has the right to make an application to the Company Law Board for calling annual general meeting if the company fails to call such a meeting within the prescribed time limits
  • Can require the directors to convene an extraordinary general meeting by presenting a proper requisition as per the provisions of the Act and hold such a meeting on refusal
  • Can make an application to the CLB for convening an extraordinary general meeting of the company where it is impracticable to call such a meeting either by the directors or by the members themselves
  • Is entitled to inspect and obtain copies of minutes of proceedings of general meetings
  • Has the right to participate in declaration of dividends and receive his/her dividends duly
  • Has the right to demand poll
  • Has the right to apply to the CLB for investigation of the affairs of the company
  • Has the right to remove a director before the expiry of the term of his office
  • Has the right to make an application to the CLB for relief in case of oppression and mismanagement
  • Can make a petition to the High Court for the winding up of the company under certain circumstances
  • Has the right to participate in passing of a special resolution that the company be wound up by the Court or voluntarily
  • Has the right to participate in the surplus assets of the company, if any, on its winding up

However, whether the shareholder has these rights in reality or if he is even aware of his rights is a moot question that leads invariably to unscrupulous managements taking the unwary investors for a ride.

Rights and Postal Ballots

The Narayana Murthy committee (2003), that studied the problems of investors in public limited companies, asserted shareholders’ rights to receive half-yearly declaration of financial performance including summary of the significant events during the past 6 months from the company.

The committee recommended the facility of Postal Ballot to those shareholders who cannot participate in AGM of the company they have invested in, so that they can effectively participate in corporate democracy and in the decision-making process. Key issues that may be decided by postal ballots could include

  1. Alteration in the memorandum of association
  2. Sale of whole or substantially the whole of the undertaking
  3. Sale of substantial investments in the company
  4. Making a further issue of shares through preferential allotment or private placement basis
  5. Corporate restructuring
  6. Entering into a new business not germane to the existing business of the company
  7. Variations in rights attached to class of securities
  8. Matters relating to change in management

The various committees that studied the problems of investors and the ways and means by which their interests can be protected, believed that the General Body Meetings provide an opportunity to shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. It is important that shareholders use the forum of general body meetings for ensuring that the company is being stewarded for maximizing the interests of shareholders. This is important especially in the Indian context. It follows from the above, that for effective participation, shareholders must maintain alertness and decorum during the General Body Meeting, so that it constitutes the forum in which they can get their doubts clarified, apart from airing their grievances, if any.

The effectiveness of the board is determined by the quality of the directors and the quality of the financial information is dependent to an extent on the efficiency with which the auditors carry on their duties. Shareholders must, therefore, show a greater degree of interest and involvement in the appointment of directors and auditors. They should indeed demand complete information about directors before approving their directorship.

The J. J. Irani committee which studied several issues relating to investor protection and submitted its recommendations to the Government of India in 2005 felt the need to give full liberty to the shareholders and owners of the company to operate in a transparent manner. The committee calls for a significant shift from a government approval regime to a “shareholder approval and disclosures” regime. The report, thus, gives more power to shareholders, allowing them rather than the company law administration to decide on certain crucial matters. Mergers between willing companies will be quicker. They will not be subject to the vagaries of the legal system and more. Ratification by shareholders will be enough. They protect the rights of minority shareholders and also to ensure investor protection, the committee has aptly suggested that the new company law should recognize principles such as “class actions” and “derivative action”. The capital market got plenty of attention from the committee. There are proposals to devise an exit option for shareholders who have stayed with a company and not participated in a buyback scheme implemented earlier.

A GUIDE FOR INVESTORS AND SHAREHOLDERS

The Securities and Exchange Board of India (SEBI), the Indian capital market regulator, in its recently published guidelines to investors/shareholders, titled “A Quick Reference Guide for Investors”, makes it known that a shareholder of a company enjoys the following rights:

Rights of a Shareholder as an Individual

  • To receive the share certificates on allotment or transfer as the case may be in due time
  • To receive copies of the abridged Annual Report, the Balance Sheet and the Profit and Loss Account and the Auditors’ Report
  • To participate and vote in general meetings either personally or through proxies
  • To receive dividends in due time once approved in general meetings
  • To receive corporate benefits such as rights, bonus etc., once approved
  • To apply to CLB to call or direct the Annual General Meeting
  • To inspect the minute books of the general meetings and to receive copies thereof
  • To proceed against the company by way of civil or criminal proceedings
  • To apply for the winding up of the company
  • To receive the residual proceeds

Besides the above rights one enjoys as an individual shareholder, one also enjoys the following rights as a group of shareholders:

  • To requisition an Extra-ordinary General Meeting
  • To demand a poll on any resolution
  • To apply to the CLB to investigate the affairs of the company
  • To apply to the CLB for relief in cases of oppression and/or mismanagement

Rights of a Debenture Holder

As a debenture holder, one has the right

  • To receive interest/redemption in due time
  • To receive a copy of the trust deed on request
  • To apply for winding up of the company if the company fails to pay its debt
  • To approach the debenture trustee with the debenture holder’s grievance

However, one should note that the above-mentioned rights may not necessarily be absolute. For example, the right to transfer securities is subject to the company’s right to refuse transfer as per statutory provisions.

Shareholders’ Responsibilities

Although a shareholder may be happy to note that he has so many rights as a stakeholder in the company, he should not be complacent as he also has certain responsibilities to discharge:

  • To remain informed
  • To be vigilant
  • To participate and vote in general meetings
  • To exercise one’s rights on one’s own, or as a group

Trading of Securities

A shareholder has the right to sell securities that he holds at a price and time that he may choose. He can do so personally with another person or through a recognized stock exchange. Similarly, he has the right to buy securities from anyone or through a recognized stock exchange at a mutually acceptable price and time.

Whether it is a sale or purchase of securities, affected directly by him or through an exchange, all trades should be executed by a valid, duly completed and stamped transfer deed.

If he chooses to deal (buy or sell) directly with another person, he is exposed to counterparty risk, i.e., the risk of non-performance by that party. However, if he deals through a stock exchange, this counterparty risk is reduced due to trade/settlement guarantee offered by the stock exchange mechanism. Further, he also has certain protections against defaults by his broker.

When one operates through an exchange, one has the right to receive the best price prevailing at that time for the trade and the right to receive the money or the shares on time. He also has the right to receive a contract note from the broker confirming the trade and indicating the time of execution of the order and necessary details of the trade, he also has the right to receive good rectification of bad delivery. If he has a dispute with his broker, he can resolve it through arbitration under the auspices of the exchange.

If an investor decides to operate through an exchange, he has to avail the services of a SEBI-registered broker/sub-broker. He has to enter into a broker-client agreement and file a client registration form. Since the contract note is a legally enforceable document, he should insist on receiving it. He has the obligation to deliver the shares in case of sale or pay the money in case of purchase within the time prescribed. In case of bad delivery of securities by the shareholder, he has the responsibility to rectify them or replace them with good ones.

Transfer of Securities

Transfer of securities means that the company has recorded in its books a change in the title of ownership of the securities effected either privately or through an exchange transaction. To effect a transfer, the securities should be sent to the company along with a valid, duly executed and stamped transfer deed duly signed by or on behalf of the transferrer (seller) and transferee (buyer). It would be proper to retain photocopies of the securities and the transfer deed when they are sent to the company for transfer. It is essential that one sends them by registered post with acknowledgement due and watch out for the receipt of the acknowledgement card. If one does not receive the confirmation of receipt within a reasonable period, one should immediately approach the postal authorities for confirmation.

Sometimes, for a shareholder’s own convenience, he may choose not to transfer the securities immediately. This may facilitate easy and quick selling of the securities. In that case, he should take care that the transfer deed remains valid. However, to avail the corporate benefits such as dividends, bonus or rights from the company, it is essential that he gets the securities transferred in his name.

On receipt of the shareholder’s request for transfer, the company proceeds to transfer the securities as per the provisions of the law. In case it cannot effect the transfer, the company returns the securities giving details as to why the transfer could not be effected. This is known as company objection.

When a shareholder happens to receive a company objection for transfer, he should proceed to get the errors/discrepancies corrected. He may have to contact the transferrer (the seller) either directly or through his broker for rectification or replacement with good securities. Then he can resubmit the securities and the transfer deed to the company for effecting the transfer. In case he is unable to get the errors rectified or get them replaced, he has recourse to the seller and his broker through the stock exchange to get back his money. However, if one had transacted directly with the seller initially, he has to settle the matter with the seller directly.

Sometimes, one’s securities may be lost or misplaced. One should immediately request the company to record a “stop transfer” of the securities and simultaneously apply for issue of duplicate securities. For effecting stop transfer, the company may ask the share holder to produce a court order or the copy of the FIR filed by him with the police. Further, to issue duplicate securities to him, the company may ask him to submit indemnity bonds, affidavit, sureties etc. besides a issue of the public notice. The share holder has to comply with these requirements to protect his own interests.

Sometimes, it may so happen that the securities are lost in transit, either from the shareholder to the company or from the company to him. In such a case, he has to be on his guard and write to the company within a month of his sending the securities to the company. The moment it comes to his notice that either the company has not received the securities that he sent or he did not receive the securities that the company claims to have sent to him, he should immediately request the company to record stop transfer and proceed to apply for the duplicate securities.

DEPOSITORY AND DEMATERIALIZATION

Shares are traditionally held in physical or paper form. This method has its own inherent weaknesses such as loss/theft of certificates, forged/fake certificates, cumbersome and time-consuming procedure for transfer of shares etc. Therefore, to eliminate these weaknesses, a new system called depository system has been established.

A depository is a system which holds shares in the form of electronic accounts in the same way a bank holds one’s money in a savings account.

Depository System provides the following advantages to an investor:

  • His shares cannot be lost or stolen or mutilated
  • He never needs to doubt the genuineness of his shares, i.e., whether they are forged or fake
  • Share transactions such as transfer, transmission etc. can be effected immediately
  • Transaction costs are usually lower than on the physical segment
  • There is no risk of bad delivery
  • Bonus/Rights shares allotted to the investor will be immediately credited to his account
  • He will receive the statement of accounts of his transactions/holdings periodically

When a shareholder decides to have his shares in the electronic form, he should approach a Depository Participant (DP) who is an agent of depository and open an account. He should surrender his share certificates in physical form and his DP will arrange to get them sent to and verified by the company and on confirmation credit his account with an equivalent number of shares. This process is known as de-materialization. One can always reverse this process if one so desires and get his shares reconverted into paper form. This reverse process is known as re-materialization.

Share transactions (such as sale or purchase, transfer/transmission etc.) in the electronic form can be effected in a much simpler and faster way. All one needs to do is that after confirmation of sales/purchase transaction by one’s broker, one should approach his DP with a request to debit/credit his account for the transaction. The depository will immediately arrange to complete the transaction by updating his account. There is no need for separate communication to the company to register the transfer.

GRIEVANCE REDRESSAL

There will be occasions when an investor has a grievance against the company in which they are stakeholders. It may be that they have not received the share certificates on allotment or on transfer; it may be that they did not receive the dividend/interest warrant or refund order; perhaps they did not receive the annual accounts, etc. While they would first approach the company in that regard, they may not be satisfied with the company’s response thereto and would like to know whom they should turn to get his grievance redressed. One may refer to Table 26.1 for the guidance in this regard.

Inventory Information Centres have been set up in every recognized stock exchange which in addition to the complaints related to the securities traded/listed with them, will take up all other complaints regarding the trades effected in the exchange and the relevant member of the exchange.

Moreover, the following are the two other avenues always available to the investor to seek redressal of his complaints:

  1. Complaints with Consumers Disputes Redressal Forums
  2. Suits in the Court of Law

Implementation of steps that will ensure lasting shareholder value will vary among companies depending to a large extent of top management support, the nature and diversity of the business portfolio, the degree of decentralization, and on its size, global reach, employee mix, culture, management style and the sense of urgency. However, bringing about long-term shareholder value is the right thing to do and competitive pressures, greater awareness among shareholders, government regulations and institutional shareholders seeking maximum returns will ensure that it is here to stay.

INVESTOR PROTECTION

Strong investor protection is associated with effective corporate governance. In fact, corporate governance has been advocated by everyone interested in the long-term shareholder value, which in turn promotes orderly development of economies. When an investor places his hard-earned money in the securities of a corporation, he does so with certain expectations of its performance, the corporate benefits that may accrue to him, and above all, the prospects of income from, and the possibilities of capital growth of the securities he holds in the firm. At the same time, while making an investment decision, the investor would have obviously taken note of and evaluated the attendant risks that go with such expectations, especially the possibility of the risk that the income and/or capital growth may not materialize. This mismatch between the expectations of the investors and the unexpected final outcome in terms of income and/or capital growth arises mainly because their hard earned money is entrusted to managers in a corporation whose investment decisions, apart from carrying certain risks of their own, may not match those of the investors.

 

Table 26.1 Grievance Redressal Mechanism

Nature of grievance Can be taken up with
In case of any Public Issue, non-receipt of  
  Refund order SEBI
  Interest on delayed refund Dept. of Company Affairs
  Allotment advice Dept. of Company Affairs
  Share certificates Stock Exchange
  Duplicates for all of the above Registrars to the Issue
  Re-validations Registrars to the Issue
In case of a listed security, non-receipt of the certificates after  
  Transfer SEBI
  Transmission SEBI
  Conversion SEBI
  Endorsement Dept. of Company Affairs
  Splitting Dept. of Company Affairs
  Duplicates of securities Dept. of Company Affairs
Regarding listed Debentures, non-receipt of  
  Interest due SEBI
  Redemption proceeds Dept. of Company Affairs
  Interest on delayed payment Debenture Trustees
Regarding bad delivery of shares Bad Delivery Cell of the Stock Exchange
Regarding shares or debentures in unlisted companies Dept. of Company Affairs
Deposits in collective investment—schemes such as plantations etc. SEBI
Units of mutual funds SEBI
Fixed deposits in banks and finance companies Reserve Bank of India
Fixed deposits in manufacturing companies Dept. of Company Affairs

 

Source: SEBI’s “A Quick Reference Guide for Investors”, 2003

Definition

Investors, by virtue of their investments in securities of corporations, obtain certain rights and powers that are expected to be protected by the state which gave the charter or legal entity to the corporate bodies or the regulators designated by the state to do so. Their basic rights include disclosure and accounting rules that will enable them to obtain proper, precise and accurate information to exercise other rights such as approval of executive decisions on substantial sale or investments, voting out incompetent or otherwise ineligible directors and appointment of auditors. There are also laws that mainly deal with bankruptcy and reorganization procedures that outline measures and procedures that enable creditors to repossess collateral to protect their seniority and to make it difficult for firms to seek court protection in reorganization. In many countries, laws and legal regulations are enforced in part by market regulators such as SEBI, in part by courts or government agencies such as the Department of Company Affairs in India and in part by markets themselves. If the investors’ rights are effectively enforced by one or all of these agencies, “It would force insiders to repay creditors and distribute profits to shareholders and thereby protect external financing mechanism form breaking down.” 1 Thus, investor protection can be defined as both (i) the extent of the laws that protect investors’ rights, and (ii) the strength of the legal institutions that facilitate law enforcement.

The Need

An appropriate definition of investor protection relates it to corporate governance and establishes the correlation between these two. As stated earlier, when investors finance companies, they take a risk that could land them in a situation in which the returns on their investments would not be forthcoming because the managers or those whom they appoint to represent them on the board may keep them or expropriate them either covertly or overtly. This kind of betrayal of the investors by the “insiders”, as the managers or Board of Directors of the company are called, may shake their confidence, which in the long run would have a deleterious impact on the overall investment climate with serious repercussions on the economic development of the country. The economic parameters of a nation such as output, employment, income, expenditure, and above all, overall economic growth will be badly jeopardizsed due to declining investment. Therefore, there is a very strong reason to maintain the investors’ morale, protect their interests and restore their confidence as and when there is a tendency for investors to lose confidence in the system or when their investments are at a stake. Research findings also reveal that when the law and its agencies fail to protect investors, corporate governance and external finance do not fare well. If there is no investor protection, the insiders can easily steal the firm’s profits, while when it is good, they will find it very difficult to do it.

The insiders, both managers and controlling shareholders, can expropriate the investors in a variety of ways. Rafael La Porta describe several means by which the insiders siphon off the investor’s funds.2 In some countries, the insiders of the firm simply steal the earnings. “In some other countries, the arrangements they go through to divert the profits are more elaborate. Sometimes, the insiders sell the output or the assets of the firm they control, but which outside investors have financed, to another entity they own at below market prices. Such transfer pricing and asset stripping have largely the same effect as theft. In still other instances, expropriation takes the form of installing possibly under-qualified family members in managerial positions, or excessive executive pay.” 3 In all these instances, it is clear that the insiders use the profits of the firm to benefit themselves (either as excessive executive salaries or in the form unjustifiable perquisites) instead of returning the money to outside investors to whom it legitimately belongs. In this context, minority shareholders and creditors are far more vulnerable. Expropriation also is done by insiders selling additional securities in the firm they control to another firm or subsidiaries they own at below market prices, with assistance from obliging interlocking directorates, and also by diverting corporate opportunities to subsidiaries and so on. Such practices, though often legal, have the same effect as theft. However, it must be stressed that these sharp practices of insiders vary from country to country depending on the existence or non-existence of democratic and corporate values, maturity or otherwise of the securities market, financial systems, pace of new security issues, corporate ownership structures, dividend policies, efficiency of investment allocation, the legal system and the competence of the securities market regulator.

RIGHTS TO INFORMATION AND OTHER RIGHTS

Investor protection is not possible without adequate and reliable corporate information. All outside investors, be it shareholders or investors, have an inalienable right to have certain corporate information. In fact, several other rights provided to them under the law cannot be exercised by shareholders unless companies in which they have invested in share with them such information. For instance, “Without accounting data, a creditor cannot know whether a debt covenant had been violated. Absence of these rights, the insider does not have much of a reason to repay the creditors or to distribute profits to shareholders.” Apart from the rights to information, creditors have also certain other rights, and these are to be protected. Minority shareholders have the same rights as majority shareholders in dividend policies and in access to new security issues. The significant but non-controlling shareholders need the right to have their votes counted and respected. This is the reason why the SEBI-appointed Kumar Mangalam Birla Committee recommended postal ballot for the benefit of those who could not attend the AGMs held by corporations in cities where their corporate offices are located. The committee recommended that in case of shareholders, who are unable to attend the meeting, there should be a requirement which would enable them to vote by postal ballot on important key issues such as corporate restructuring, sale of assets, new issues on preferential allotment and matters relating to change in management. Likewise, even the large creditors such as institutional investors who are powerful enough by virtue of their large stakes and need relatively few formal rights, should be able to “seize and liquidate collateral, or to reorganize the firm”. Investors would be unable to protect their turfs even if they have a chunk of the share, if they are not able to enforce their rights.

There are, however, rules and regulations that are designed to protect investors. Some of the important regulations are with regard to disclosure and accounting standards, which provide investors with the information they need to exercise other rights of investors such as the “ability to receive dividends on pro-rata terms, to vote for directors, to participate in shareholders’ meeting, to subscribe to new issues of securities on the same terms as the insiders, to sue directors for suspected wrongdoing including expropriation, to call extraordinary shareholders meeting etc. Laws protecting creditors largely deal with bankruptcy procedures and include measures which enable creditors to repossess collateral, protect their seniority and make it harder for firms to seek court protection in reorganization. “In different jurisdictions, rules protecting investors come differently from various sources, including company, security, bankruptcy, takeover and competition laws but also stock exchange regulations and accounting standards”. In India, for instance, rules protecting investors emanate from the Department of Company Affairs of the Ministry of Finance, the SEBI, the Listing Agreements of Stock Exchanges, Accounting Standards of the Institute of Chartered Accountants of India, and sometimes decisions of the Superior Courts of the country. It should be stressed though that the enforcement of laws by these agencies are as crucial as their content and in most emerging economies these are lax, delayed and dilatory, resulting in poor corporate governance.

THE IMPACT OF INVESTOR PROTECTION

It is imperative that the investors are protected by public authorities, market regulators and the judiciary from the insiders of corporations who may play foul with the monies of the former, as has happened in cases of Enron and Satyam. The insiders such as promoters may siphon off the resources that legitimately belong to the shareholders through devious means though they may have only a small stake in terms of shareholding. In the following sections, we discuss these and other related matters:

Ownership and Control of Firms

In many countries, firms are owned and controlled by promoter families and in such closely held firms, insiders use every opportunity to abuse the rights of other shareholders and steal their profits through devious means. In such cases where there is poor investor protection, large-scale expropriation is feasible. Control through ownership acquires enormous value because it gives such owners opportunities to expropriate efficiently. Entrepreneurs who promote companies would not like to lose control and thereby give up the chances of expropriation by diffusing control rights when investor protection is poor. Promoter families in countries with poor investor protection would wish to have concentrated control of the enterprises they have floated. However, expropriation can be limited considerably in these family owned firms, by dissipating control among several large investors none of whom can control the decision of the firm without agreeing with others. But then this is a situation well-entrenched, closely held firms’ promoters would wish to avoid. The evidence from a number of individual countries and the seven OECD countries with poor investor protection shows more concentrated control of firms than countries with good investor protection. In the East, except Japan where there is a fairly good investor protection, there is a predominance of family control and family management of corporations. The evidence available in many countries is in consonance with the proposition that legal environment shapes the value of the private benefits of control and thereby determines the ownership structures.

Therefore, the available evidence on corporate ownership patterns around the world supports strongly the importance of investor protection. Evidence also shows that countries with poor investor protection have more concentrated control of firms than countries with good investor protection.

Studies made by various researchers testify to the fact that in countries where there is a concentration of ownership in the hands of few families, there may be stiff opposition to legal reforms that are likely to reduce their control over firms and promote investor protection. Rafael La Porta et al. assert: “From the point of view of these families, an improvement in the rights of outside investors is first and foremost a reduction in the value of control as expropriation opportunities deteriorate. The total value of firms may increase as a result of legal reform, as expropriation declines and investors finance new projects on more attractive terms. Still, the first order effect on the insiders is a massive redistribution of wealth from them to outside investors. No wonder, then that in all countries from Latin America, to Asia to Western and Eastern Europe—the families are opposed to legal reform.” According to these authors, there is also another reason why the insiders in such firms are opposed to reforms and the expansion of capital markets. Under the existing conditions, these firms can finance their own investment projects internally or through captive banks or subsidiary financial institutions. Studies show that a chunk of credit goes to the few largest firms in countries with poor investor protection. This was also the case in India as R. K. Hazari and his researchers found out in early 1960s. Even recently as late as in 2001, it was found out that there has been a rapid expansion of assets and turnover of industrial houses owned by families and there is a massive concentration at the top. The assets of Ambanis of Reliance, the Munjals of the Hero group, Shiv Nadar of HCL Technologies, Tatas, Birlas, Jindals, R. P. Goenka, Azim Premji of Wipro, TVS, Chidambaram and Murugappa groups have grown tremendously mostly due to insider domination and poor investor protection in the country. As a consequence of this fertile situation, the large firms obtain not only the finance they need but also political clout that comes with the access to such finance in a corruption- ridden society, as well as the security from competition of smaller firms that require external capital. Thus, poor corporate governance provides large family owned firms not only secure finance but also easy access to politics and markets. The dominant families have thus abiding interest in keeping the status quo lest the reforms take away their privileges and confer outside investors’ protection.

Development of Financial Markets

Investor protection provides an impetus for the growth of capital markets. When investors are protected from the expropriation of insiders, they pay more for securities which makes it attractive for entrepreneurs to issue securities. Through investor protection, financial markets can develop with ease and perfection, which in turn can accelerate economic growth by (i) enhancing savings and capital information; (ii) channelling these into real investment and (iii) improving the efficiency of capital allocation, since capital flows into more productive uses. Further, financial development improves efficient resource allocation and through this investor protection brings about growth in productivity and output, the two basic ingredients needed to speed up economic development.

Research studies point out that countries with well-developed financial markets regulated by laws allocate investment across industries more in line with growth opportunities in these industries than countries with weak financial markets or poor regulatory mechanism. These studies also reveal that

  1. Most developed financial markets are the ones that are protected by regulation and laws while unregulated markets do not work well, may be due to the fact they allow too much of expropriation of outside investors by corporate insiders.
  2. Improving the functioning of financial markets confers real benefits both in terms of overall economic growth and the allocation of resources across sectors.
  3. One broad strategy of effective regulation and of encouragement of financial markets begins with protection of outside investors, whether shareholders or creditors.
  4. Enforced outside shareholders’ rights, experience in many countries reveal, encourage the development of equity markets as measured by valuation of firms, the number of listed companies and the rate at which firms go for public issues.

However, investor protection does not necessarily mean rights just included in the laws and regulations alone, but the effectiveness with which they are enforced. In countries with poor investor protection, the insiders may treat outside investors fairly well as long as the firms’ future prospects are bright and they need the continued external financing by outsiders. But when the future prospects tend to deteriorate, insiders may step up expropriation. In such a scenario, unless there are effective laws against such malpractices and they are effectively enforced, outside investors will not be able to do anything but to withdraw their investments. Therefore, investor protection is absolutely essential for the orderly development and continued proper functioning of capital markets.

INVESTOR PROTECTION IN INDIA

Small investors are the backbone of the Indian capital market and yet a systematic study of their concerns and attempts to protect them has been relatively of recent origin. Due to lack of proper investor protection, the capital market in the country has experienced a stream of market irregularities and scandals in the 1990s. SEBI itself, though formed with the primary objective of investor protection, took notice of the issue seriously only after the Ketan Parikh Scam (2001) and the UTI crisis (1998 and 2001) and has developed sophisticated institutional mechanism and harnessed computer technology to serve the purpose. Yet, there are still continuing concerns about the speed and effectiveness with which fraudulent activities are detected and punished, which after all should be the major focus of the capital market reforms in the country.

The SEBI-NCAER study (1999) estimated that the investor population in India was 12.8 million or nearly 8 per cent of all Indian households. The bulk of the increase in the number of shareholders had taken place during the boom years 1990 to 1994 and tapered off thereafter. By 1997 the capital market bubble had burst. The Household Investors Survey of SCMRD (1997) revealed the following: (i) A majority of investors reported unsatisfactory experience of equity-investing; (ii) 80 per cent of the investors said that they had little or no confidence in company managements; (iii) 55 per cent respondents showed little or no confidence on the market regulator, SEBI; and (iv) Most preferred saving instruments and government saving schemes and banks’ fixed depositors. This reflected a considerable erosion of investor confidence in securities and corporates. Many subsequent investor surveys also found broadly the same investor reactions.

All these surveys underlined the need for restoring the investor’s confidence in private corporates, which enjoy little credibility with investors who have badly burnt their fingers in a series of scams. This calls for a credible programme of corporate governance reform, focusing on outside minority shareholder protection. The situation does not seem to have changed much today notwithstanding the CII’s code and SEBI’s guidelines and is the reason why investors prefer government securities rather than corporate securities. The sooner this trend is reversed, the better it will be for the development of the capital market in the country.

SHAREHOLDER PROTECTION IN INDIA

Though the above detailed analysis of shareholders’ rights as stressed by the Companies Act, other statues and various committees give any investor or the general readers the impression that there are enough provisions in the laws of the land, there has hardly been any conviction under them all these years. Since 1991, the liberalization of the Indian economy seems to have opened the floodgates of scams and provided vast opportunities to fly-by-night operators to destroy the shareholder values. As the result of some scams such as the UTI’, non-banking finance companies’, plantations’ and vanishing companies’, millions of small investors lost their savings and investments. The plight of millions of such small shareholders was indeed pitiable and heart-rending. Most of them, especially those who invested in NBFCs, lost their life-earnings and were driven to the street penniless. In spite of such misery caused to the poor investors and the high dent in their confidence, the government and regulatory authorities were grinding too slowly and did nothing to trace and penalize the scamsters or retrieve the money and return it to the poor investors.

Since 1990, more than INR 60,000 billion was collected from prospective shareholders by several companies that did the vanishing trick. Though their names are posted on the Web, none of the Directors or promoters has been prosecuted either by the Registrar of Companies or the SEBI who can file criminal complaints against them under Section 621 of the Companies Act. Directors and promoters can be made personally liable for damages for false statements found in the Prospectus. Apart from civil liability, Section 63 of the Companies Act stipulates that persons issuing false or untrue statements will be punishable with imprisonment for 2 years. Section 68 stipulates that any person who dishonestly induces other persons to subscribe for shares or debentures can be imprisoned for 5 years. But neither the government nor the SEBI have thought it fit to prosecute these scamsters for more than a decade. 4 However, it is heartening to note that recently, after a decade of inactivity, the ministry has now cracked the whip on vanishing companies.

Prioritizing investor protection, particularly small investors, the Ministry of Company Affairs (MCA) has initiated prosecutions against vanishing companies under the Companies Act as well as other legislations. 5 According to a spokesman of the Ministry of Corporate Affairs: “On review of the ongoing actions against the vanishing companies, those companies who came up with public issues during 1993-94 and 1994-95 and vanished with public money, focus has been laid on taking timely and effective action against such companies, their promoters and directors.” Besides, launching prosecutions under the Companies Act, action has been taken against such entities by way of registering first information report (FIRs) under Indian Penal Code, and vigorously pursuing the prosecutions already launched.

In its report, the Special Cell on Vanishing Companies in the Ministry has stated that out of the 52 vanishing companies’ cases in the western region, prosecutions have been filed against 48 companies, while the remaining 4 are under liquidation. “In fact, in the case of Maa Leafin & Capital Ltd, the accused has been convicted for, non-filing of statutory return,” a Ministry official said. Further, FIRs have been launched against 40 companies, of which 28 have been registered. In the case of Trith Plastic Ltd of Gujarat, chargesheet has been filed in the Court and directors of the company have been arrested.

Of the 36 cases in the southern region, prosecutions have been filed against 32. For non-filing statutory returns, 21 prosecutions have been filed while FIRs have been filed against 19 companies. Of the 19 FIRs launched, 9 have been registered. In case of one company Global Property Ltd, public issue money has been refunded.

In the northern region, prosecutions have been filed against all 20 vanishing companies. In the case of Simplex Holdings, the accused have been convicted. For non-filing of statutory returns, 19 prosecutions have been filed. In case of Dee Kartvya Finance Ltd, the accused has been convicted and fined. FIRs have been filed against 15 companies of which 4 have been registered.

In the eastern region, of the 14 vanishing companies, prosecutions have been filed against 11 companies. The remaining three are under liquidation. FIRs have been filed in all 14 cases of which 13 have been registered. Further, 11 prosecutions have been filed for non-filing of statutory returns. In case of Cilson Organics Ltd, the managing director of the company has been convicted and a fine of INR 14,000 has been imposed.

However, it should be remembered that it has taken more than a decade for the government to initiate legal action against the scamsters. Besides, it should be kept in mind that the slow-grinding judicial processes will take its own time and if past experience is any guidance, it will take another decade or more at the earliest, to get the judgement. Even then, there is no guarantee that the guilty will be convicted and the poor investors’ money returned. This is the state of affairs that has caused untold misery to the poor Indian shareholder/investor.

The N. K. Mitra Committee on Investor Protection

This Committee chaired by N. K Mitra submitted its report on investor protection, in April 2001, with the following recommendations:

  1. There is a need for a specific Act to protect investor interest. The Act should codify, amend and consolidate laws and practices for the purpose of protecting investors interest in corporate investment.
  2. Establishment of a judicial forum and award of compensation for aggrieved investors.
  3. Investor Education and Protection Fund which is under the Companies Act should be shifted to the SEBI Act and be administered by SEBI.
  4. SEBI should be the only capital market regulator, clothed with the powers of investigation.
  5. The regulator, SEBI should require all IPOs to be insured under third party insurance with differential premium based on the risk study by the insurance company.
  6. SEBI Act 1992, to be amended to provide for statutory standing committees on investors protection, market operation and standard setting.
  7. The Securities Contracts (Regulation) Act, 1956 be amended to provide for corporatization and good governance of stock exchanges.

Problems of Investors in India

Investor protection is a wide term that covers various measures to protect the investors from malpractices of companies, brokers, merchant bankers, issue managers, registrar of new issues and so on. It is also incumbent on the investor to take necessary and appropriate precautions to protect their own interest, since all investments have some risk elements. But when they find that their interests are adversely impacted because of malpractice by companies, brokers or any other capital market intermediaries, they can seek redressal of their grievances from appropriate designated authorities. Most of the investor complaints can be divided into three broad categories:

  1. Against member-brokers of stock exchanges: Complaints of this category generally focus on the price, quantity etc at which transactions are put through defective delivery, delayed payments or non-payments from brokers.
  2. Against companies listed for trading on stock exchanges: Complaints against companies generally focus on non-receipt of allotment letters, refund orders, non-receipts of dividends, interest etc.
  3. Complaints against financial intermediaries: These complaints may be against sub-brokers, agents, merchant bankers, issue managers and generally focus on non-delivery of securities and nonsettlement of payment due to investors. However, these complaints cannot be entertained by the stock exchanges, as per their rules.

Law Enforcement for Investor Protection

There are several agencies in India that are expected to protect investors. In fact, there are so many with overlapping functions that they cause confusion to the investors as to whom they should go for redressal of their grievances. The stated primary objective of the country’s sole capital market regulator, the SEBI is protection of investors’ interests. But, investor protection is a multi-dimensional function, requiring checks at various levels, as shown below:

  • Company Level: Disclosure and corporate governance norms
  • Stock Brokers Level: Self regulating organization of brokers
  • Stock Exchanges: Every stock exchange has to have a grievance redressal mechanism in place as well as an Investor Protection Fund
  • Regulatory Agencies
    • Investors’ Grievances and Guidance Division of SEBI
    • Department of Company Affairs
    • Department of Economic Affairs
    • Reserve Bank of India
    • Consumer Courts and Courts of Law

Grievance Redressal Mechanisms

When an investor has a complaint and feels that his interest as an investor has not been protected, he should approach the company concerned, mutual fund or the DP as the case may be. If he is not satisfied with their response, the investor can approach SEBI. SEBI has instituted a Redressal Mechanism as detailed in Table 26.2.

It is likely that there may be complaints that may be sometimes beyond the purview and jurisdiction of SEBI. There may be many problems arising due to corporate misgovernance. Table 26.3 provides a comprehensive mechanism of legal protection to investors.

Lacunae in Investor Protection

Though there is a redressal mechanism in place in the country, investors could not get their complaints adequately addressed to, much less solved to their satisfaction by these public authorities. A multiplicity of authorities, overlapping functions, lack of knowledge and understandingly the common investor about these agencies and lack of enforcement have all acted against investor protection. Notwithstanding the existence of this seemingly comprehensive network of public institutions established for investor protection in India, a series of scams has taken place that has shaken the confidence of investors since 1991, the year of economic liberalization.

Loss of investor confidence due to these scandals that conveyed an image of fraud and manipulation was so great that even after several years of moribund stock market, things have not improved.

The series of scams has cast a shadow over the credibility of SEBI, and its capacity to create a safe and sound equity market.

SEBI’S PERFORMANCE: A REPORT CARD

The SEBI, the designated capital market regulator has a sort of mixed record in fostering and nurturing corporate governance in the Indian corporate sector. Since its inception in 1992, SEBI has registered substantial growth in its stature and reach. Presently its regulatory framework is robust. It has also played a significant role in creating the country’s capital market infrastructure that is recognized as one of the more advanced in the world. If SEBI’s growth and reach over the past 5 years have been significant, its failure too has been spectacular. S. Vaidya Nathan in his column “Eye on the Market” lists the following failures.6

 

Table 26.2 Redressal Mechanism of SEBI

Type Nature of grievance Can be taken up with
I Issue related, i.e., non-receipt of refund order allotment advice, cancelled stock invests Investors Grievances and Guidance Division (IGG)
II Non-receipt of dividend Investors Grievances and Guidance Division (IGG)
III Shares-related, i.e., non-receipt of share certificates. Investors Grievances and Guidance Division (IGG)
IV Debenture related, i.e., non-receipt of debt certificates, non-receipt of warrants Investors Grievances and Guidance Division (IGG)
V Non-receipt of letter offer of rights and interest on delayed payments of refund orders Investors Grievances and Guidance Division (IGG)
VI Complaints relating to collective investment scheme Investors Grievances and Guidance Division (IGG)
VII Complaints relating to mutual funds Mutual Funds Dept., SEBI
VIII Complaints relating to Dematerialization or DPs Depositories and Custodian Cell, SEBI

 

Table 26.3 Nature of Complaints Against Companies Under Various Acts and Relief Provided

 

Source: Sanjiv Agarwal, A Manual of Indian Capital Markets, 198, New Delhi, India: Bharat Law House Pvt. Ltd., 2005.

 

  1. Poor tackling of price manipulation and insider trading issues: Insider trading and price manipulation ahead of key corporate actions still continue to be rampant. SEBI has not effectively tackled, unlike its American counterpart SEC, issues such as price manipulation and insider trading. It has to strengthen enforcement and surveillance and impose deterrent penalties to stop these wrong doings.
  2. Poor conviction rate: A regulator’s credibility hinges on its ability to achieve a fairly high conviction rate against errant market players. SEBI’s record is poor as without exception, the Securities and Appellate Tribunal has overturned its decisions and penal measures in cases against prominent market players. To achieve more convictions, a focus on building a case that passes the test of stringent scrutiny is very much necessary.
  3. Need to enhance its manpower skills: If SEBI is to make progress in its designated function, there has to be a vast improvement in the quality of its manpower skills at its disposal. Regulatory bodies always find it tough to move in lockstep with the market. It has to invest in developing skill-sets in areas such as finance, accounting, tax and law by attracting professionals of quality and integrity. This would mean making its compensation and working culture attractive.
  4. It should simplify and trim regulations: There is a need to simplify and trim the regulations, so that they are compact, easy to follow and comprehensible. A plethora of reports is filed by a variety of market participants, institutions and companies to comply with regulations. These should be placed in the public domain in a timely manner, so that analysts can record a history of trends in several areas. This would complement SEBI’s efforts and enhance its effectiveness as a regulator.
  5. It should tone up quality of disclosures: There is also a need to tone up the quality of disclosures in areas such as earnings announcements, mergers/acquisitions and FII flows to make them more meaningful for investors. There is an urgent need to streamline SEBI’s Web site www.sebi.gov.in so as to make it a valuable source of information for investors, which it is not presently.
  6. It should solve issues of IPOs and mutual funds: There are a host of other issues it has to tackle such as confusion over the clearance of IPOs in the INR 200 million range; ensuring that SEBI files and maintains its own internal databases accurately and efficiently; and to formally shelve the move to convert the Association of Mutual Funds of India into a Self Regulatory Organization, as the time for it has not come and such a move could lead to conflicts of interest with SEBI itself.

The foregoing analysis clearly shows that though SEBI has emerged as the one and the only capital market regulator in the country, its functioning has been ineffective because of its failure to demonstrate its authority and prosecute effectively and in time the violators and the wrong doers. It has also been seen often that it could be unduly and unjustifiably influenced by some big corporate owner-promoters. Therefore, if SEBI has to restore its credibility as an effective capital market regulator, it is imperative that it has to tone up its administration and accountability.

An objective analysis of the problems faced by investors in countries like India, leading to an erosion of their confidence in the capital market with the attendant adverse impact on the economic growth. shows that the major problems arise due to corporate misgovernance and not due to minor aberrations in following the procedures set by SEBI. To rectify such a situation, actions that lead to corporate misgovernance should be codified and small investors be provided statuary rights to enforce civil liability against the directors to recover the losses to the company and its shareholders due to their misdeeds and non-application of their minds in investment or other decisions that have adversely impacted the shareholders. Some of the misdeeds would include: (i) breach of fiduciary duty; (ii) siphoning off corporate funds; (iii) misapplication of company’s funds; (iv) price manipulation or insider trading; (v) manipulation of accounts; (vi) failure to disclose conflicts of interests; (vii) fraud or cheating; (viii) misappropriation of corporate assets and (ix) losses caused due to mismanagement or negligence.

In this context, it is pertinent to note that already law courts have started imposing exemplary punishments to directors who violated codes and guidelines on corporate governance provided by competent authorities. In May 2004, Citigroup agreed for a USD 2.0 billion settlement, and more than a dozen other banks including JP Morgan Chase and Deutsche Bank are likely to fall in line. In January 2005, at the insistence of a U. S. Court, former directors of WorldCom (now known as MCI) have agreed to pay USD 18 million out of their pockets as part of a shareholder law suit. Likewise, 18 former directors of the collapsed energy conglomerate Enron, agreed to pay USD 13 million as part of a settlement in another shareholder lawsuit. Though these settlements are subject to confirmation by the concerned U. S. District Court, corporate governance experts had hailed these settlements for setting a new standard in accountability of directors when companies they oversee go astray. In India too, as per the dictates of a lower court, recently the directors of a non-banking finance company have agreed to pay back to the company a large sum of money it lost, due to their indiscretion in an investment decision.

Another important protection to the investor would be by the strengthening the enforceability of accounting standards in India, as has been done in the United States through the Sarbanes–Oxley Act. In India, though all the accounting standards have been made mandatory as a result of forceful pleas by various committees on corporate governance, they have not still acquired the legal status, in practice. This lack of legal sanction enables violators and wrongdoers go scot free. Therefore, it is absolutely necessary if the investor is to be protected and corporate governance ensured for the larger benefit of the economy and nation, all the accounting standards should be legally enforced and exemplary punishments meted out to violators.

SUMMARY
  • The phenomenal growth of modern corporations has brought about the kind and order of material wealth to the international community that was never possible a few years ago. But this growth was possible, due to the evolution of public limited or joint stock companies, which are most attractive to investors. In such organizations, financial liability of the shareholders is limited to the extent of the shares held by them.
  • The investor needs to be protected from insiders as he is not involved in the day-to-day management of the company. To realize such an investor protection, countries have evolved rules, regulations, systems and mechanisms—both internal (to the company) and external.
  • Investors by virtue of their investments in securities of corporations obtain certain rights and powers that are expected to be protected by the state which gave the legal entity to the corporate bodies or the regulators designated by the state to do so. Their basic rights include disclosure and accounting rules that will enable them to obtain proper, precise and accurate information to exercise other rights such as approval of executive decisions on substantial sale or investments, voting out of incompetent or otherwise ineligible directors and appointment of auditors.
  • Investor protection provides an impetus for the growth of capital markets. When investors are protected from the expropriation of insiders, they pay more for securities which makes it attractive for entrepreneurs to issue securities. Through investor protection, financial markets can develop with ease and perfection, which in turn can accelerate economic growth by (i) enhancing savings and capital information; (ii) channelizing these into real investment and (iii) improving the efficiency of capital allocation, since capital flows into more productive uses.
  • Recent research confirms that an essential feature of good corporate management is strong investor protection. The “insiders”— both managers and controlling shareholders—can expropriate the investors in a variety of ways. Investor protection is not attainable without adequate and reliable corporate information. There are rules and regulations that are designed to protect investors.
  • The objective of the corporate is to protect the rights of outside investors, including both shareholders and creditors. In many countries, firms are owned and controlled by promoter families and in such closely held firms, insiders use every opportunity to abuse the rights of other shareholders and steal their profits through devious means. Investor protection provides an impetus for the growth of capital markets. Due to lack of proper investor protection, the capital market in India has experienced a stream of market irregularities and scandals in the 1990s. There are several agencies in India that are expected to protect investors. These include the SEBI, Department of Corporate Affairs, Department of Economic Affairs, Reserve Bank of India, Consumer Courts and Courts of Law.
  • An objective analysis of the problems faced by investors in countries like India, leading to an erosion of their confidence in the capital market with the attendant adverse impact on the economic growth, shows that the major problems arise due to corporate misgovernance and not due to minor aberrations in following the procedures set by SEBI. To rectify such a situation, actions that lead to corporate misgovernance should be codified and small investors provided with statutory rights to enforce civil liability against the directors whose misdeeds and non-application of minds in investment or other decisions have adversely impacted the company and its shareholders. Some of the misdeeds would include (i) breach of fiduciary duty; (ii) siphoning off corporate funds; (iii) misapplication of company’s funds; (iv) price manipulation or insider trading; (v) manipulation of accounts; (vi) failure to disclose conflicts of interests; (vii) fraud or cheating; (viii) misappropriation of corporate assets and (ix) losses caused due to mismanagement or negligence.
  • Another important protection to the investor would be by strengthening the enforceability of accounting standards in India, as has been done in the United States through the Sarbanes–Oxley Act. In India, though all the accounting standards have been made mandatory as a result of forceful pleas by various committees on corporate governance, they have not still acquired the legal status, in practice. This lack of legal sanction enables violators and wrongdoers go scot free. Therefore, it is absolutely necessary that all the accounting standards should be legally enforced and exemplary punishments meted out to violators if the investor is to be protected and corporate governance ensured for the larger benefit of the economy and the nation.
KEY WORDS
affiliated entities code of corporate governance debenture holder
dematerialization depository financial markets
grievance redressal initial public offers investor protection
joint stock company legislative provision limited liability company
listed companies mutual funds ownership and control
postal ballots regulatory agencies rights to information
share transfers shareholder protection shareholder
stock brokers stock exchanges trading of securities
transfer of securities unlisted public companies  
DISCUSSION QUESTIONS

 

  1. Discuss in your own words the need for consumer protection in any society, especially in societies such as ours where the consumer is ignorant, not well informed and likely to be deceived in numerous ways. What are your suggestions to make things better for the consumer?
  2. Trace the growth of consumer protection. Critically examine the roles Ralph Nader and the American government played in accelerating the growth of consumer protection.
  3. One of the lacunae that is found in the literature on consumer protection relates to consumer duties and responsibilities. Critically examine this aspect and suggest ways and means of improving consumer awareness and responsibilities.
  4. Discuss the legal remedies that are available to the consumer to protect himself from exploitation. Does it really protect him?
  5. Discuss critically the Consumer Protection Act 1986 and the latest amendments made to give it more teeth.
SUGGESTED READINGS

Bhaskar, Amit. “How SEBI Should Deal With Disgorged Money”, http://www.legalserviceindia.com/article/l272-How-SEBI-Should-Deal-With-Disgorged-Money.html, 1 December, 2008.

Cadbury, A., Report of the Committee on the Financial Aspects of Corporate Governance, London, 1992.

http://72.14.235.132/search?q=cache:ASzUQdFTr8J:www.sebi.gov.in/circulars/2007/dip0307.pdf+SEBI+GUIDELINES+FOR+THE+PROTECTION+OF+INVESTORS&hl=en&ct=clnk&cd=2&gl=in.

http://72.14.235.132/search?q=cache:Brg7NhEiTRMJ:www.sebi.gov.in/circulars/2008/Cir-Dil322008.

Khanna, Sri Ram (Ed.). Financial Markets in India and Protection of Investors. New Delhi, India: VOICE (Voluntary Organization in Interest of Consumer Education), New Century Publications, 2003.

Neelamegam, R. and R. Srinivasan. Investors’ Protection, A Study of Legal Aspects. Delhi, Raj Publications, 1998.

Parikh, Kirit S. and R. Radhakrishna (Eds.). India Development Report 2004–05. New Delhi, Oxford University Press.

Report of J. J. Irani Committee on Company Law, 2005.

Report of SEBI’s (N. R. Narayana Murthy) Committee on Corporate Governance, 2003.

Report of the Naresh Chandra Committee on Corporate Audit and Governance, 23 December, 2002.

Report of the SEBI’s Kumar Mangalam Birla Committee on Corporate Governance, 07 May, 1999.

Report of the Task Force on Corporate Excellence through Governance, 2000.

SEBI, “Amendments to SEBI (Disclosure and Investor Protection) Guidelines 2000”, Circular No. CFD/DIL/DIP/33/2008/08/12 (Bombay: Securities and Exchange Board of India), 8 December, 2008. Available at www.sebi.gov.in

SEBI, “Amendments to SEBI (Disclosure and Investor Protection) Guidelines 2000,” Circular No. SEBI/CFD/DIL/DIP/29/2007/03/12 (Bombay: Securities and Exchange Board of India), 03 December, 2007.

SEBI, “Comprehensive Guidelines for Investor Protection Fund/Customer Pro tection Fund at Stock Exchanges,” Circular No. MRD/DoP/SE/Cir-38/2004 (Bombay, India: Securities and Exchange Board of India), 28 October, 2004. Available at www.sebi.gov.in

Securities and Exchange Board of India, “A Quick Reference Guide for Investors”.

Securities and Exchange Board of India (disclosure and investor protection) Guidelines, 2000.

The Confederation of the Indian Industry, Desirable Corporate Governance: A Code, April 1998.