20 - Chapter 14 PDF
20 - Chapter 14 PDF
20 - Chapter 14 PDF
CHAPTER 14
1. Conclusion
The capital market is a place where the suppliers and users of capital meet to
share one anothers views, and where a balance is sought to be achieved among
diverse market participants. The securities decouple individual acts of saving
and investment over time, space and entities and thus allow savings to occur
without concomitant investment. Moreover, yield- bearing securities makes
present consumption more expensive relative to future consumption, inducing
people to save. The composition of savings changes with less of it being held in
the form of idle money or unproductive assets, primarily because more
divisible and liquid assets are available.
The capital market acts as a brake on channeling savings to low- yielding
enterprises and impels enterprises to focus on performance. It continuously
monitors performance through movements of share prices in the market and the
threats of takeover. This improves efficiency of resource utilisation and thereby
significantly increases returns on investment. As a result, savers and investors
are not constrained by their individual abilities, but facilitated by the
economys capability to invest and save, which inevitably enhances savings
and investment in the economy. Thus, the capital market converts a given
stock of investible resources into a larger flow of goods and services and
augments economic growth. In fact, the literature is full of theoretical and
empirical studies that have established causal robust (statistically significant)
two-way relation between the developments in the securities market and
economic growth.
The Indian capital markets dates back to the 18th century when the securities
of the East India Company were traded in Mumbai and Kolkata. However, the
orderly growth of the capital market began with the setting up of The Stock
Exchange, Bombay in July 1875 and Ahmedabad Stock Exchange in 1894.
Eventually, 22 other Exchanges in various cities sprang up.
The Capital Market Liberalization of the Indian economy began in 1991. Since
then, we have witnessed wide-ranging changes in both laws and regulations,
443
and a major positive transformation of the corporate sector and the corporate
governance landscape. Perhaps the single most important development in the
field of corporate governance and investor protection in India has been the
establishment of the Securities and Exchange Board of India in 1992 and its
gradual and growing empowerment since then. Established primarily to
regulate and monitor stock trading, it has played a crucial role in establishing
the basic minimum ground rules of corporate conduct in the country. Concerns
about corporate governance in India were, however, largely triggered by a
spate of crises in the early 1990sparticularly the Harshad Mehta stock
market scam of 1992--followed by incidents of companies allotting
preferential shares to their promoters at deeply discounted prices, as well as
those of companies simply disappearing with investors money 405.
Given the significance of capital market and the need for the economy to grow
at the projected over 8 per cent per annum, the managers of the Indian
economy have been assiduously promoting the capital market as an engine of
growth to provide an alternative yet efficient means of resource mobilization
and allocation. Further, the global financial environment is undergoing
unremitting transformation. Geographical boundaries have disappeared. The
days of insulated and isolated financial markets are history. The success of
any capital market largely depends on its ability to align itself with the global
order.
To realize national aspirations and keep pace with the changing times, the
capital markets in India have gone through various stages of liberalization,
bringing about fundamental and structural changes in the market design and
operation, resulting in broader investment choices, drastic reduction in
transaction costs, and efficiency, transparency and safety as also increased
integration with the global markets.
1.1 Regulatory Efficacy
The capital markets in India were underdeveloped, opaque, dominated by a
handful of players, and concentrated in a few cities. Manipulation and unfair
practices were perceived to be widespread and rampant, prompting an overseas
researcher to describe it as a snake pit. The transformation of the Indian
405
Omkar Goswami, 2002, Corporate Governance in India, Taking Action Against Corruption in Asia
and the Pacific (Manila: Asian Development Bank), Chapter 9.
444
securities markets was initiated with the establishment of the Securities and
Exchange Board of India (SEBI) in 1989, initially as a informal body and in
1992 as a statutory autonomous regulator with the twin objectives of protecting
the interests of the investors and developing and regulating the securities
markets over a period of time. SEBI has been empowered to investigate,
examine, visit company premises, summon records and persons and enquire
and impose penalties commensurate with misconduct. The first and foremost
challenge for the fledgling regulator was to create a regulatory and supervisory
framework for the market, a job that proved formidable, because vested
interests resisted every new step.
However, with the designing and notification of 32 regulations/guidelines
(amended many times over), during a decade and half of its existence, the
apparatus steadily evolved and has come to grips with the situation. SEBI has
instituted a consultative process of framing regulations. All reports / concept
papers / policy proposals are posted on SEBI web site www.sebi.gov.in for
comments from market participants and the public. The comments are
compiled and considered before finalizing regulations. Even the draft
regulations are put on the website before notification for legal pundits to
comment if the law framed is in consonance with the spirit of initiatives. This
has a profound impact not only in terms of receiving valuable input and
building public opinion before framing regulations / guidelines but also in
improving the quality, acceptability and implementibility. SEBI has formed a
number of committees comprising of eminent experts and market practitioners
to support it in the design of reforms for different aspects of the markets. The
regulator posts all its orders, including those delivered on appeals against its
orders, on its website. On request, it provides informal guidance on payments
of nominal fees and issues no action letter so that the participants can seek
clarity on any aspect and adopt appropriate business strategy in consonance
with the applicable regulations.
SEBI has put time lines for performance of its various functions like
registration and renewal on the web-site. These measures work as a self-
disciplining mechanism within SEBI and provide full transparency to its
functioning.
445
406
SEBI Annual Report 2009-10
446
the major policy initiatives taken by SEBI relating to the secondary market
during 2009-10407.
1.2.2(a) Trading Hours on Stock Exchanges :
With a view to align Indian markets with those of the international markets to
facilitate assimilation of any economic information that may flow in from
other global markets, SEBI vide circular dated October 23, 2009, decided to
permit the stock exchanges to set their trading hours (in the cash and
derivatives segments) subject to the condition that the trading hours are
between 9 am and 5 pm and
1.2.2 (b) Disclosure of Investor Complaints and Arbitration Details on
Stock Exchange Website
Based on the feedback received from investors and their associations to bring
in more transparency in the grievance redressal available in the stock
exchanges, it was decided that details of complaints lodged by clients/
investors against trading members and companies listed in the exchange, on
their website. The aforesaid disclosure shall also include details pertaining to
arbitration and penal action against the trading members.
1.2.2 (c) Transparency in Dealing between a Client and Stock Broker and
Strengthening of know you client (KYC) Norms
SEBI received representation from several Investors Associations regarding
the problems faced by the investors because of the complex registration
documents that are signed by the investors for trading in the securities market.
There were also sometimes complaints from investors against the stock
brokers alleging misuse of their funds and securities, non receipt of electronic
contract notes (ECNs), unauthorized trading in their accounts, etc. It was
observed that a majority of the complaints were arising mainly due to certain
authorizations taken by the stock brokers from the clients, e.g. running account
authorization and authorization to the stock brokers to create email ID on
behalf of the clients.
Therefore, with a view to instill greater transparency and discipline in the
dealings between the clients and the stock brokers, SEBI, vide circular dated 3
rd December 2009, issued the following guidelines:
407
ibid
449
regulatory changes introduced by SEBI in the interim may not have been
complied by the exchanges.
In fight of the above, SEBI vide circular dated October 7, 2009 has
stipulated that the stock exchanges that have no trading for a period of six
months of more shall resume trading only after ensuring that adequate and
effective trading systems, clearing and settlement systems, monitoring and
surveillance mechanisms, risk management systems are in place and have
also complied with all other regulatory requirements stipulated by SEBI
from time to time. Further, the stock exchanges shall resume trading only
after obtaining prior approval from SEBI.
1.2.3 Take Overs
Interpretative Circular to Clarify the Applicability of Provisions of
Regulations 11 (2)
To facilitate consolidation of holdings, SEBI had amended regulation 11
(2) of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (SAST Regulations) on October 30, 2008 so as to allow
a creeping acquisition of up to five percent to persons holding 55 percent
or more but less than 75 percent of the shares or voting rights in a
company.
However, SEBI received representations from market participants/ listed
companies seeking clarity on interpretation of the aforesaid provision,
particularly regarding the applicable time-frame under the said provision.
The same was, accordingly, clarified by SEBI, vide an interpretative
circular dated August 6,2009. The said circular, inter-alia, provided that an
acquirer holding 55 percent to 75 percent of the shares or voting rights in a
company may further acquire upto a maximum of five percent in such
company, in one or more tranches, without any restriction on the time-
frame within which the same can be acquired.
1.2.4 Investor Assistance and Education
1.2.4(a) Redressal of Investors Grievances
SEBI has in place a comprehensive mechanism to facilitate redressal of
grievances against intermediaries registered by it and against companies
whose securities are listed or proposed to be listed on stock Exchanges. The
451
office of Investor Assistance and Education (OIAE) acts as the single window
interface, interacting with investors seeking assistance of SEBL.
Investors can submit their grievances in any form i.e. plain paper, card, via e-
mail etc, at the Head Office at Mumbai of at any of the Regional Office at
Delhi, Chennai, Kolkata and Ahmedabad. Besides, grievances can also be
filed in standardized forms that are available at all its offices. Investors also
have the option to electronically file their grievances through the SEBI
website (www.sebi.gov.in). All complaints received by SEBI (excluding those
which refers/ pertain to investigation) are individually acknowledged with
unique number, which facilitates tracking.
Dedicated investor helpline telephone numbers ate available for investors
seeking general guidance pertaining to securities markets and to provide
assistance in filling grievances. Dedicated personnel manning the helpline also
guide the investors in filing up the grievance submission forms as well as in
determining the appropriate authority if their grievance is outside the purview
of SEBI. The grievances lodged by investors are taken up with the respective
listed companies and are continuously monitored. The company is required to
respond in prescribed standard format in the form of Action Taken Report
(ATR). Upon the receipt of ATR the status of grievances is updated. Where
the response of the company is insufficient/inadequate, follow up action is
initiated. Grievances pertaining to brokers and depository participants
are taken up with concerned stock exchange and depository for redressal and
monitored through periodic report obtained from the stock exchanges and
depositories. Grievances pertaining to other intermediaries are taken up with
them directly for redressal.
During 2009-10, SEBI receive 32,335 grievances from investors and resolved
42,742 grievances as compared to 57,580 grievances receive and 75,989
grievances resolved in 2008-09. As on March 31, 2010 there were 1,60,593
grievances pending resolution as compared to 1,71,000 unresolved grievances
as on March 31, 2009. These include 1,22,713 complaints where appropriate
regulatory action have been initiated.
Types of investors grievances received and redressed, as on March 31, 2010,
are given in the Table 1.4 and type-wise status of grievances awaiting
redressal is provided in Table 1.5.
452
*Includes 1, 22,713 grievances where action has been initiate u/s 11B, 15C or
prosecution launched.
453
1.2.4(b) Regulatory Action against Companies and its Directors for Non-
redressal of Investor Complaints
a) Top 100 companies in terms of number of unresolved grievances were
identified and were vigorously followed up for resolving grievances.
Adjudication proceeding under section 15C of SEBI Act were initiated
against the following13 companies which failed to redress investor
complaints, after having been called upon by SEBI to redress the same.
b) Out of he above proceeding, in the following three case, the
application proceeding are completed and penalty has been levied for
non-redressal of investor grievances:
c) In addition to the above adjudication proceeding, notice has also been
issued to the following 33 companies and its 150 directors under
section 11(4)(b) of the SEBI Act, 1992 why they shall not be debarred
from accessing securities market till they resolve investor grievances,
for their failure to redress the investor grievances and respond to
SEBIs notices to redress complaints:
1.2.4(c) SCORES (SEBI Complaints Redress System)
SEBI is in the process of upgrading the investor grievance
redressal mechanism. The upgraded mechanism would be a
web-based. Centralized grievances redress system for SEBI.
The software for the new system is being developed by the
National Informatics Centre (NIC), Ministry of Information
Technology, New Delhi.
The salient features of the new system are:
a) Centralised complaints tracking system for entire SEBI.
b) Grievance pertaining to any of the Regional Offices of SEBI
can be lodged from anywhere.
c) All complaints and Action Taken Report to be in electronic
mode
d) Action taken and the current status of the complaint can be
accessible to the investor, online.
e) Facility for online updation of Action Taken Reports.
454
the concept of anchor investor, introducing pure auction in the FPO process,
extension of ASBA mechanism and strengthening of the regulatory framework
governing public offerings. It would continue to work towards making the
issue process transparent, investor friendly and to mitigate risks associated
with the system.
As parts of its efforts to make the market more efficient, transparent cost
effective and safe, the measures like in person verification of clients,
regulation of credit rating agencies, introduction, standardizing the contracts
size, revision of trading hours, etc have been initiated by SEBI. In its
endeavour for development of corporate debt market, number of initiatives has
been introduced and some more measures are in the offing in coming years.
Investor assistance and investor education are the prime objectives of SEBI as
a regulator. As part of the investor education initiatives, SEBI has launched
many initiatives during the past one year through organizing seminars,
workshops, investors meet etc. This would help in achieving in the country. It
has introduced financial literacy programmes in schools curriculum in
collaboration with NISM. In years to come, it proposes to launch many such
programmes for investor education and financial literacy.
In the coming years, SEBI would continue its efforts, with a clear objective of
investor protection through investor education and market development. The
broad direction in which SEBI plans to move will be guided by twin beacons
i.e., reduction of transaction costs and cutting down the time taken in
completing the transactions.
1.3 Regulation of Securities Market:
1.3.1 Intermediaries : - As per the functions of SEBI as specified in Section
11of the SEBI Act, 1992, SEBI has made good regulation on intermediaries.
These regulations are as under:
(i) Streamlining the Registration Process of intermediaries
The entire procedure of registration and renewal has been streamlined
and has been mad more transparent during 2009-10.The status report
on registration/renewal of applications of intermediaries is put on SEBI
website on a monthly basis giving a clear position whether the
application is pending with SEBI or with the intermediary . If it is
pending with SEBI, the date of receipt of letter from the intermediary
460
Table 3.1a : Intermediaries other than Stock Brokers and Sub-Brokers in the
Process of Registration
Type of Intermediary Pending as on March 31, 2010
1 2
Merchant Banker 11
Bankers to an Issue 2
Depository Participants 29
Registrar to an Issue and Share 1
Transfer Agents 2
Credit Rating Agency
1.3.3 SUPERVISION
Effective supervision through on site and off-site inspections, enquiry against
violations of rules and regulations, enforcement and prosecutions are essential
features of effective enforcement of regulation. SEBI conducts inspections
either directly or through organizations like stock exchanges, depositories etc.
Inspections on a periodic basis were conducted to verify the compliance levels
of intermediaries. Specific/limited purpose inspections were conducted on the
basis of complaints, references, surveillance reports, specific concerns, etc.
Stock exchanges and depositories were also directed by SEBI to carry out
periodic/ specific purpose inspections of their members/ participants.
(i) Inspection of Market Intermediaries
SEBI has taken a number of steps during the year, to expedite inspection
process and improve quality of inspection reports and follow up action. In the
year 2009-10, actions were initiated on the basis of inspections carried out
during the year as well as in case of inspections done in the earlier years. The
findings of the inspections were communicated to the intermediaries and
discussed with them wherever necessary, to ascertain their views and action
was initiated in accordance with the seriousness of the violation. Further,
intermediaries were also specifically advised about the areas where
improvement / corrective steps were required. They are now required to report
to SEBI about the corrective steps were required. They are now required to
report to SEBI about the corrective steps taken by them and also place the
463
same before their board/ partners/ proprietor, as the case may be. These steps
taken by SEBI will improve the level of compliance among the intermediaries.
(ii) Inspection of Stock Brokers/ Sub-brokers
During 2009-10, total number of inspections including stock brokers and sub-
brokers were 36 as compared to 38 during last year. It includes 34 inspections
of stock brokers and two inspections of sub-brokers (Table 3.16). In addition,
SEBI also directed that the stock exchanges/ clearing corporations
Table 3.16 : Inspection of Stock Broker/ Sub-brokers
Particulars 2008-09 2009-10
Inspections Completed- 34 34
Stock Brokers
Inspections Completed 4 2
Sub-brokers
Total 38 36
shall inspect all active members in various segments every year. Accordingly
the inspection carried out by the stock exchanges for the year 2009-10 is as
under.
Table 3.16 a : Inspection by Stock Exchanges/ Clearing Corporation
Exchange Inspection Across
Market Segments
1 2
BSE 550
NSE 1,232
MCX-SX 52
Further. SEBI vide circular dated August 22,2008, advised the stock
exchanges to direct their stock brokers/ clearing members to carry out
complete internal audit on a half yearly basis by independent auditors. The
focus of the internal audit is to assess the efficacy of the internal controls and
soundness of the risk monitoring system of the trading/ clearing member.
Internal auditors are required to submit their audit reports to the entity. The
entity would place the report before its Board of Directors/ Proprietors/
Partners and shall forward the same along with para- wise comments to the
464
respective stock exchange within three months of the end of the half year
period.
(iii) Inspection of Other Intermediaries
During 2009-10, regular inspections were completed for 18 depository
participants, nine registrars to an issue and share transfer agents, four
debenture trustees and two merchant bankers (Table 3.17)
Table 3.17 : Inspection of other Market Intermediaries
Particulars 2008-09 2009-10
1 2 3
Registrar to Issue and 5 9
Share Transfer Agent
Bankers to an Issue 0 0
Debenture Trustee 0 4
Merchant Banker 0 2
Underwriter 0 0
Depository Participant 26* 18
Credit Rating Agency 2 0
Total 33 33
warranted. To enhance the efficacy of the surveillance function, SEBI has put
in place a comprehensive Integrated Market Surveillance System (IMSS)
which generates alerts arising out of unusual market movements. SEBI also
keeps a continuous vigil on the activities of the stock exchanges to promote an
effective surveillance mechanism and Integrated Surveillance Department also
carries out inspection of Surveillance department of major stock exchanges.
(ii) Surveillance Actions
During the year 2009-10, NSE initiated preliminary examination and
investigation in a total 257 cases and BSE initiated examination and
investigation in 1,331 cases.
Further, as surveillance measure, during the year, NSE shifted 644 scrips to
Trade-for-Trade segment and BSE shifted 2,198 scrips to Trade- for Trade
segment .NSE imposed a price band (two percent, five percent and 10 percent)
in 1,542 instances and BSE in 3,214 instances. Further, NSE and BSE verified
73 and 59 rumors respectively (Table 3.18)
Table 3.18: Number of Surveillance Actions during 2009-10
Nature of Action NSE BSE
Scrips Shifted to Trade for 644 2,198
Trade Segment (190) (1,078)
1.3.5 Enforcement
(i) Orders
Interim order against Mr. Dipak Patel (Portfolio Manager of M/s.
Passport India Investment (Mauritivw) Limited) and connected entities
SEBI found that a client named Mr. Kanaiyalal Baldevbhai Patel was prima
facie trading ahead of orders placed by M/s. Passport India Investment
(Mauritius) Limited, a sub-account of M/s. Passport Capital LLC. It was prima
facie observed that Mr. Dipak Patel, Portfolio Manager of M/s. Passport India
Investment (Mauritius) Limited was passing on trade related information to
the client, which appeared to be in violation of provisions of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations 2003. This activity continued from January 2007 till
January 2009. In view of the above, SEBI passed an interim order dated May
28 2009 with following directions:
Mr. Dipak Patel, Portfolio Manager of M/s. Passport India Investment
(Mauritius) Ltd. not to buy, sell of deal in any securities, directly or indirectly
till further directions in this regard. Mr. Dipak Patel not to be associated with
any FII or sub- account or any registered entity of SEBI till further orders. Mr.
Kaniyalal Baldev Patel, Mr. Anandkumar Baldevbhai Patel, M/s. Bhoomi
Industries were directed not to buy, sell or deal in any securities, directly or
indirectly till further directions in this regard. They were directed to deposit
profiles amounting to Rs. 1,12,68,660 with the National Stock Exchange of
India Ltd. (NSE) within 15 days from the date of issue of the order. M/s
Passport Capital LLC and its sub-account M/s. Passport India Investment
(Mauritius) Ltd. to conduct an internal enquiry into the above matter and
initiate appropriate actions against their employee.
Interim Order in the matter of M/s. GHCL Ltd.
A Complaint was received by SEBI wherein it was alleged that M/s GHCL
Ltd. were reporting false shareholding details of the promoters in their
quarterly filling with the Stock exchanges. The said filing is required under
clause 35 of the Listing Agreement with each NSE and BSE.
On examination SEBI found that M/s GHCL had filed false shareholding of
the promoters repeatedly over the four quarters of 2008, thereby misleading
the investors about commitment of the promoters towards the company.
468
Mr. Rajesh Patel Prima facie colluded to misuse the stock exchange
mechanism to profitably exit from their positions in the scrip RTS on February
11, 2009. They had orchestrated a plan to default in the pay in obligation of
the buy clients who provided an exit to the seller, thereby defrauding the stock
brokers.
In view of the above, SEBI passed an interim order dated June 5,2009
prohibiting Mr. Mukesh G Konde, Mr. Ashok Narayan Waje, Mr. Nitesh
Ashok Jadhav, Ms. Hetal Patel, Mr. Rajesh Patel, Mr. Chetan Shah, M/s. Om
Associates and M/s. Bhavani Trading Company from buying, selling or
dealing in securities market, directly or indirectly, till further orders and
directing BSE to withhold the payout of February 11,2009 of Ms. Hetal Patel
and Mr. Chetan Shah in a separate escrow account, till further orders.
Order in the matter of M/s. KLG Capital Services Ltd.
Investigation was conducted in the scrip of M/s. KLG Capital Services Ltd.
wherein it was observed that Mr. Hemant R. Patel, Mr. Praveen Mohnot and
Mr. N. Ravichandran, who are executives of M/s SKIL Infrastructure Limited
(SKIL), and their relatives, namely, Ms. Priyanka Singhvi, daughter of Mr.
Praveen Mahnot, and Ms Anita Ravichandran, wife of Mr. N. HN.
Ravichandran, communicated unpublished price sensitive information (UPSI)
and / or dealt in the shares of M/s. KLG during February 22-27, 2008 while in
Possession of UPSI. Therefore these entities violated various provisions of
SEBI Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations
,1992.
Subsequent to hearing granted to the entities in the matter, an order
was issued with the following directions :
Mr. Hemant Patel and Mr. Praveen Mohnot were
restrained from buying, selling or dealing in the securities market in
any manner whatsoever or accessing the securities market, directly or
indirectly and holding position or Director in the Board of Director of
any listed company for a period of five years.
Mr. N. Ravichandran was restrained from buying,
selling or dealing in the securities market in any manner whatsoever or
accessing the securities market, directly or indirectly and holding
470
Trading) Regulations 1992, SEBI passed a cease and desist order dated
November 18,2009 directing Dr. Krishna to cease and desist from issuing or
continuing to issue online offer soliciting unpublished price sensitive
information, communicating directly or indirectly any inside information
received and recommending or counseling trading in scrips for which inside
information is received. Investors are also cautioned not to avail of the online
offers made by Dr. Krishna in this regard, or any similar proposals contained
in advertisements, in print or electronic media.
M/s. Pyramid Saimira Theatre Ltd. (PSTL)
SEBI had conducted investigations inot the alleged irregularities in the
allotment of employee quota shares in the Initial public Offer (IPO) of M/s.
Pyramid Saimira Theatre Ltd. (PSTL) The investigations prima facie revealed
that Mr. Sanjay Jhabak and Mr. Dheeraj Jain cornered the employee quota
shares of PSTL in collusion with the company and some other persons in the
IPO and made and unjust profit of Rs. 53,69,028 and Rs. 54,75,079 by selling
the shares immediately on listing. The above persons preferred consent
proceeding and paid Rs. 80,53,542 and Rs. 82,12,619 respectively as consent
terms.
(iii) IPO irregularities :
SEBI conducted investigations into the dealings in various IPOs during the
period 2003-05 and found that certain entities (key operators) acted in concert
with financiers and through medium of thousands of fictitious/ benami demat
account cornered shares meant for retail investors. Thereafter, key operators
transferred shares to financiers on or before the day of listing, who ultimately
sold them in the market after listing and made huge ill-gotten gains.
Some of the entities applied for consent and consent order was passed in
respect of Mr. Gautam N Jhaveri and Mr. Javeri Gautambhai for Rs. 2.7 crore,
Mr. Manoj Sekseria for Rs. 2.2 crore Mr. Jitendra Lalwani for Rs.9.6 crore,
Mr. Sheelu Lalwani for Rs. 5.2 crore, Mr. Dharmesh K Katakia for Rs. One
crore, Mr. Dharmesh Bhupendra M for Rs. 1.1 crore.
1.3.6 INVESTIGATION
Timely completion of Investigation cases and effective, proportionate and
dissuasive action in case of violation of established securities laws is
important for protection of investors interest, ensuring fair, transparent and
472
orderly functioning of the market. It is also vital for improving the confidence
in the integrity of the securities market. Importance of effective and credible
use of investigation has also been underscored by IOSCO in its Principles for
the Enforcement of Securities Regulation.
Keeping the above objectives and principles of Securities Regulations in view,
SEBI initiated investigation to examine alleged or suspected violations of laws
and obligations relating to securities market. The possible violations may
include price manipulation, creation of artificial market, insider trading,
capital issue related irregularities, takeover related violations, manipulation of
financial results, non-compliance of disclosure requirements and any other
misconduct in the securities markets.
1.3.6.a). Trends in Investigation Cases
Since 1992-93, SEBI has undertaken 1,359 investigation cases. In 1,264 cases
investigations have been completed. Apart from enforcement action, an
important attendant benefits resulting from such investigations is contribution
to the policy changes with a view to further strengthen the regulatory and
enforcement environment. During 2009-10, 71 new cases were taken up for
investigation and 74 cases were completed (Table 3.19 and Chart 3.3)
Recent experience and trends in the type of investigation cases undertaken by
SEBI indicate that technology and newer methods are being used by violators
of securities laws to conduct their business in the market. In the cases that are
referred to Investigation Department, significant increase in the number of
cases with alleged front running has been observed over the last two years. 13
cases of front running were referred to Investigation Department in the years
2008-09 and 2009-10. As front running involves leakage of information from
sources such as the institutional client desk or brokers traders handling such
institutional orders, a proper investigation orders, a proper investigation into
these cases should help to put in place or strengthen the existing system and
procedures, so that the possibility of such institutions becoming sources for
leakage of trading information is reduced, in the future.
473
Chart 3.3
200
180
160
140
120 Cases taken up for investigation
100
80 Cases Completed
60
40
20
0
0
4
8
1
01
-9
-9
-9
-0
-0
-0
-0
-0
93
95
97
99
01
03
05
07
-2
09
19
19
19
19
20
20
20
20
20
Table 3.19: Investigations by SEBI
Year Cases Taken up for Cases
Investigation Completed
1 2 3
1992-93 2 2
1993-94 3 3
1994-95 2 2
1995-96 60 18
1996-97 122 55
1997-98 53 46
1998-99 55 60
1999-00 56 57
2000-01 68 46
2001-02 111 29
2002-03 125 106
2003-04 121 152
2004-05 130 179
2005-06 159 81
2006-07 120 102
2007-08 25 169
2008-09 76 83
2009-10 (P) 71 74
Total 1,359 1,264
Chart 3.4
408
SEBI Annual Report 2009-10 (www.sebi.gov.in)
475
Chart 3.5
A detail break up of all regulatory actions is given in Table 3.21 and Chart 3.6.
There are five enforcement mechanisms that SEBI uses in case of any
violation(s) pertaining to the laws regulating the securities market. Age-wise
analysis of enforcement actions details viz. actions u/s 11, 11B and 11D of
SEBI Act, Enquiry proceedings, Adjudication proceedings, Prosecution
477
2008-09, 19 warnings were issued to stock brokers and 98 consent orders were
passed.
As regards registrars to an issue and share transfer agents, enquiry proceedings
were initiated against one entity and adjudication proceedings were initiated
against another. Further, warning/deficiency/advisory letters were issued to
three other entities.
In respect of depository participants, adjudication proceeding were initiated
against four entities and warning/deficiency/advisory letters were issued to 10
entities.
Warning/deficiency/advisory letter was issued to one credit rating agency and
three merchant bankers and adjudication proceedings were initiated against
one debenture trustee and one merchant banker each.
1.3.7 (c) Regulatory Actions against Mutual Funds :Warning and
Deficiency Letters :
During 2009-10, 17 warning letters were issued to 15 mutual funds
considering the directed Society General, registered FII, not to issue,
subscribe or otherwise transact in any new ODIs or P- Notes in India
till such time it provides a true and correct reporting of its ODI and P
Notes transactions to SEBI furthermore, given the aforesaid prima
facie violations, societe Generale was also required to show cause as to
why appropriate proceedings including cancellation of its certificate
Investor should not be initiated.
1.3.7 (d) Regulatory Actions against Stock Brokers and Sub-brokers
a) Illegal trading outside stock exchanges:
clients till further instructions. SEI also ordered inspection of the books
and records of the sub-broker.
b) SEBI order in the matter of M/s Pinnacle Share Registry Private
Limited
SEBI had conducted an inspection of the share transfer records of M/s
Parsoli Corporation Ltd and its Registrar and Share Transfer agent viz.
M/s Pinnacle Shares Registry Private Limited based on complaints
received from investors on alleged fraudulent transfer and
dematerialization of shares from their accounts. SEBI had passed an
interim order dated February 20, 2009 under Sections 11(1), 11(4) and
11 B of the SEBI Act, 1992 prohibiting M/s Pinnacle Shares Registry
Private Limited from entering into any fresh agreements with client
companies in its operations as registrar to an issue and share transfer
agent till further orders.
Subsequently, SEBI passed an order dated October 14, 2009 under
Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008
cancelling the certificate of Registration granted by SEBI to M/s
Pinnacle Shares Registry Private Limited (PSRPL) as Registrar to an
Issue and a Share Transfer Agent, with effect from February 28, 2010.
c) SEBI order in the matter of M/s Sterling Holiday Resorts (India)
Limited
SEBI passed an order dated November 10, 2009 under Section 11 B of
the SEBI Act, 1992 read with Section 19 of the Depositories Act,
1996, against M/s Sterling Holiday Resorts (India) Limited for failing
to dematerialize 2,99,800 shares of M/s Gujarat Industrial Investment
Corporation Limited. M/s Sterling Holiday Resorts (India) Limited
was directed to dematerialize the 2,99,800 shares of the company
standing in the name of M/s Gujarat Industrial Investment Corporation
Limited, immediately, but not later than fifteen days from the date of
receipt of the order.
480
1.3.8 PROSECUTION
I Trends in Prosecution
(i) Number of Prosecutions Launched
30 prosecution cases launched during 2009-10 as compared to
29 in 2008-09 (Table 3.26) Till 2009-10, region-wise, the high
number of prosecutions were launched in Head Office/Western
Region (595) followed by the Northern Region (345) (Table
3.27)
(ii) Higher Court Proceedings
During 2009-10, 66 applications/petitions were filed in the
Higher Courts and Supreme Court. During the period 26 case
were disposed and a total of 92 cases are pending.
Table 3.26 Prosecution Launched
Year No. of cases in which No. of persons/entities
prosecution has been against whom prosecution
launched has been launched.
Upto and 9 67
Including 1995-96
1996-97 6 46
1997-98 8 63
1998-99 11 92
1999-2000 25 154
2000-2001 28 128
2001-2002 95 512
2002-2003 229 864
2003-2004 480 2406
2004-2005 86 432
2005-2006 30 101
2006-2007 23 152
2007-2008 40 185
2008-2009 29 114
2009-2010 30 109
SEBI launched prosecution against Endowment Forest (I) Ltd. And its
directors alleging violation of Section 12 (IB) of SEBI Act read with
Regulations. 5(1), 68(1), 73(1) and 74, of the SEBI (Collective Investment
Scheme) Regulation, 1999, for failure of the entity to obtain registration
for its various CIS schemes or in the alternative to wind up the schemes
and repay an amount of more than Rs. 10.7 lakh collected from the
investors.
The Court of Additional Sessions Judge, Delhi held that that the
accused company neither got registered its CIL nor wound investors as per
the provision of CIS Regulations and became punishable u/s 24 of SEBI
Act. The Court convicted Mrs. Savita Kansal (accused no.7) for the
aforesaid offence rigorous imprisonment for six months and with a fine of
Rs. 50.000/- each, in default of payment of which the accused shall
undergo simple imprisonment for two months each. During the pendency
of the trial Mr. Virendra Kumar Kansal (accused no. 2, Mr. J C. Kansal
(accused no. 3) and Mr Jagdish Chander (accused no. 6) had expired and
Mr. B K Bhat (accused no. 5, Mr. Prabhakar Pillathu (accused no. 8) and
Mr. G M Bhat (accused no.9) were declared proclaimed offenders.
b. SEBI vs. M/s. JBR Forestry Ltd. and other (CC No. 1194 of 2003).
SEBI launched prosecution against M/s JBR Forestry Ltd. and its
directors alleging violation of Section 12 (IB) of SEBI Act read with
Regulation 5( ), 68(1), 73 (1) and 74, of the SEBI (Collective Investment
Scheme) Regulation, 1999, for failure of the entity to obtain registration for its
various CLS schemes or in the alternative to wind up the schemes and repay
an amount of more than Rs. 1.1 lakh collected from the investors.
Ms. Renu Sharma (accused no. 2) Mr. Pradeep Kumar (accused no. 3)
and Mr. Manoj Kumar (accused No. 4) pleaded guilty before the Court of
Additional Sessions Judge, Delhi. After hearing the arguments on sentence the
Court sentenced the accused nos. 2, 3 and 4 to a pay fine of Rs. 10.000/- each,
in default of which the accused the were sentenced of accused that if any
482
investor approaches SEBI the assurance given to the investors. The Ms.
Ravinder Kaur (accused no. 5) was declared as proclaimed offender.
C SEBI vs. M/s Rimjhim Agro Forest Ltd. and others (CC No. 56 of
2009)
SEBI launched prosecution against M/s. Rimjhim Agro Forest Ltd.
and its directors alleging violation of section 12 (IB) of SEBI Act read with
regulations 5(1), 68(1), 73(1) and 74, of the SEBI (Collective Investment
Scheme) Regulation, 1999, for failure of the entity to obtain registration for
its various CLS schemes or in the alternative to wind up the schemes and
repay an amount of more than Rs. 1.1 lakh collected from the investors.
The Court of Additional Sessions Judge held that the accused company
neither got registered its CIS nor wound up the same and not even repaid the
money to its investors as per the provisions of CIS Regulation and became
punishable of CIS Regulations and became punishable u/s 24 of SEBI Act.
The Court convicted and sentenced the Mr. P.S. Choudhry (accused No. 2)
Mr. D.S. Thakur (accused no. 3) Mr. S.S. Thakur (accused No.5) and Mr.
Roop lal (accused no. 6) with rigorous imprisonment for one year each and
also with a fine of Rs. 1,00,000/- each. In default of payment of fine the
accused shall undergo simple imprisonment for six months each. The Court
has further ordered that out of the amount of fine realized a sum of Rs.
20,000/- be paid to SEBI after expiry of period of revision/appeal, towards the
expenses incurred by it. During the pendency of the trial the Mr. K C Kaundal
(accused no. 7) were declared proclaimed offenders.
d. SEBI vs. M/s. Ankur Forest and Project Devolpment India Ltd.
and others (CC No. 33 of 2009)
SEBI launched prosecution against M/s. Ankur Forest and Project
Development India Ltd. and its directors alleging violation of Section 12 (1B)
of SEBI Act read with Regulations 5(1), 68(1), 73(1) and 74 of the SEBI
(Collective investment Scheme) Regulation, 1999, for failure of the entity to
obtain registration for its various CLS schemes or in the alternative to wind up
the schemes and repay the money collected from the investors.
The Court of Additional Sessions Judge, Delhi held that the accused
company neither got registered its CIS nor wound up wound up the same and
not even repaid the money to its investors as per the provisions of CIS
483
discharge, the default constitutes a continuing offence. The court has also
held that the non compliance of Regulations 73 and 74 fro winding up the
company is continuing in nature and as such the offences is also continuing in
nature. Further, Section 24 of the SEBI Act is amended with effect from
October 29, 2002 and the offence under section 24 became punishable with
imprisonment for a term which may extend to ten years or with fine which
may extend to twenty five crore rupees or with both. Hence the complaint is
not barred by limitation.
II. Nature of Prosecution
Table 3.28 represents the nature of prosecutions launched under
various sections of different Acts. Prosecutions are launched by SEBI under
the SEBI Act, 1992, Companies Act, 1956, Depositories Act, 1996, SC(R)
Act, 1956 and the Indian Penal Code. As on March 31, 2010, 1, 129 cases
were launched under the SEBI Act, 1992.
Table 3.28: Nature of Prosecutions Launched as on March 31, 2010
Nature of Prosecution Launched Number of Cases
1 2
Securities and Exchange Board of India Act, 1992 (SEBI
Act) 934
SEBI Act & Securities Contracts (Regulation) Act, 1956
(SCRA) 91
SEBI Act, SCRA & Companies Act 1
SEBI Act & Companies Act 1
SEBI Act & Indian Penal Code 5
Companies Act, 1956 70
Securities Contracts (Regulation) Act, 1956 5
Depositories Act, 1996 14
Indian Penal Code 8
Total 1,129
409
Developments of Capital Market In India At London School Of Economics On 2nd
October, 2006
410
Committee on payment and Settlement International Organisation of Securities
Commissions principles and G30 committee (January 2003, under the chairmanship of Sir
Andrew Large
488
The focus of development and the quality of regulation have not just centered
on primary and secondary markets, they have also been directed at quality of
intermediation and enforcement. The mutual fund industry of India which has
gone through a host of reforms via the regulatory interventions today has some
outstanding features like benchmarking Mutual Fund schemes, valuation
norms, uniform cut off time, comprehensive risk management etc. An
independent study organized by the Asian Development Bank Cadgon report
testifies to this.
The investors and issuers can take comfort and undertake transactions with
confidence if the intermediaries as well as their employees (i) follow a code of
conduct and deal with probity and (ii) are capable of providing professional
services. All the intermediaries in the securities market are now registered and
regulated by SEBI. A code of conduct has been prescribed for each
intermediary as well as for their employee, in addition to applicability of fit
and proper person regulatory standards. Further, capital adequacy and other
norms have been specified and a system of monitoring and inspecting their
operations has been instituted to enforce compliance. Disciplinary action is
taken against them for violating any ground rules. All the intermediaries in the
market are mandated to have a compliance officer, who reports directly and
independently to SEBI non- compliance observed by him.
The economic survey 2003-2004 by the Government of India had the
following to say: "The securities markets have made enormous progress in
recent years. India's equity market is now being increasingly recognised as a
success story on the world scale." These reforms have boosted the confidence
of investors (domestic and international) in Indian securities market. There are
four parameters to ascertain the level of investor confidence: - (a) investments
by FIIs, (b) growth of mutual funds industry, (c) subscriptions to the IPOs and
(d) the increase in the number of accounts with the depositories. During the
last financial figures the mutual funds mobilized net resources of about Rs.
520 Billion, equivalent to about one forth of incremental bank deposits.
Mutual funds' assets increased from Rs. 1.1 Billion at the end of March 2003
to Rs. 300 billion at the end of August 2006. Indian companies raised about
Rs. 38 billion through euro issues. The year gone by witnessed a net FII
(Portfolio moneys) inflow of US $ 14 billion.
491
The benchmark indices, namely the SENSEX and S&P CNX NIFTY,
generated astounding returns of 83 percent and 81 percent respectively, during
2003-2004. The market capitalization grew from Rs. 7 trillion at the end of
March 2003 to Rs. 14 trillion at the end of March 2004 to Rs. 28 trillion as on
June 2006, indicating that the equity market is bigger than the banking system.
The Primary issue in the last year added at least Rs. 2 trillion market
capitalisations. The trading in cash segment of exchanges increased from Rs.
932062 crore in 2002-2003 to Rs. 2385632 crore in 2005-2006. The trading in
derivatives increased from Rs. 442332 crore to Rs. 4840362 crore during the
same period. The turnover in government securities increased from
Rs.1941621 crore to Rs. 2639897 crore. The number of demat accounts with
the Depository Participants has increased considerably during the last three
years from 3.5 million to 8.5 million & is increasing at the rate of over 100000
per month.
The efficacy of the market where entry and exit are possible at will and the
liquidity has spread from being skewed to just about 100 to more than 500
securities, is a matter of substantial comfort. Over 2500 securities (equity) are
traded for more than 100 days in a year. The overseas investors are no more
glued to researches and assessments on index stocks and have been observing
keenly and investing in the mid cap segment.
The changes in the market have been really fast paced and it has been
possible with the co-operations of all the market participants, other
regulators and Government of India.
The agenda, includes making the corporate debt market vibrant: cash and
future, operationalization of Indian Deposit Receipts (IDRs), and
corporatisation and demutualisation of remaining stock exchanges (has already
begun with Stock exchange Mumbai) where the ownership, management and
trading rights resides with three different sets of people in order to avoid
conflict of interest. The settlement cycle has to migrate to T+1. New products
are to be extended to cover entirety of market participants. National training
and skill delivery institute has to be commissioned quickly to build a cadre of
professionals to man the specialized functions in the capital market. There is a
492
need to spread equity cult and build institutions like pension funds to enlarge
the size of the market and balance volatility.
The regulation of listed companies, a job performed in a fragmented manner
by SEBI and Ministry of Company Affairs, needs to be consolidated to
eliminate regulatory arbitrage, shooting out from the kinks of regulatory
jointing by unscrupulous operators, and blurring of regulatory accountability.
Further, regulation is an evolutionary process and has to be refined on an
ongoing basis. Thus SEBI would and should continue to travel on the learning
curve with a view to reorient and reconfigure ground rules (regulations), its
investigating abilities and investors protection measures.
Several systematic changes have taken place during the short history of
modern capital markets. The setting up of the Securities and Exchange Board
(SEBI) in 1992 is a landmark development. It got its act together, obtained the
requisite powers and became effective in early 2000. It has made the markets
attractive to foreign institutional investors. Investors who hold shares in
limited companies and mutual fund units are about 20-30 million.
The setting up of the National Stock Exchange in 1984, the introduction of
online trading in 1995, the establishment of the depository in 1996, trade
guarantee funds and derivatives trading in 2000, have made the market safer.
The introduction of the Fraudulent Trade Practices Act, Prevention of Insider
Trading Act, Takeover code and Corporate Governance Norms, are major
developments in the capital market over the last few years that history shows
us that retail investors are yet to play a substantial role in the market as long
term investors. Retail participation in India is very limited considering the
overall savings of households. Capital markets will change completely if they
grow beyond the cities and stock exchange centers reach the Indian villages.
Both SEBI and retail participants should be active in spreading market
wisdom and empowering investors in planning their finances and
understanding the markets.
It has been a long journey for the Indian capital market. Now the capital
market is organized, fairly integrated, mature, more global and modernized.
The Indian equity market is one of the best in the world in terms of
technology. Advances in computer and communications technology, coming
together on Internet are shattering geographic boundaries and enlarging the
493
investor class. Internet trading has become a global phenomenon. The Indian
stock markets are now getting integrated with global markets.
Road Ahead
However, I would not like to hand out the impression that in the Indian capital
markets everything is hunky dory and needs no improvement, polishing or
refurbishing. In fact, dynamics of the global environment dictate that those
charged with the responsibility of bringing about changes must always seek out
new learnings by experience, criticism and judgments. The market depth
needs to be supplemented with further product diversification-mortgage and
asset backed securities, warrants, and disinvestment in the public sector. The
debt market of India, though large and next only to Japan, in Asia lacks
vibrancy and does not provide adequate options for meeting medium to long
term funds, required for green field projects, in particular. Infrastructure
funding (essential for continued high economic growth) has become an issue in
the absence of a vibrant debt market. There is no market for below investment -
grade paper or what is called junk bonds.
2. SUGGESTIONS
In view of the study above the following suggestions are recommended to
effectively protect the interest of investor and shareholders::-
SEBI should do more to gain the confidence and faith of common
person by introducing strict regulations i.e. regulation to cancel the
illegally allotted securities, regulation to winding up of companies of
intermediaries etc.
SEBI should be empowered to attach and auction the assets and
properties of companies who has violated its regulations and did not
attention to them.
There are huge amount of unclaimed shares and dividends pending in
companies, therefore, SEBI should initiate actions to hand over them to
rightful owners or take in the custody of investor education fund or
may credit it to IEPF and utilised for compensating the investors.
494
The securities exchange should be listed, so that investors can get fair
dealings in stock exchanges
The open offer document of company while issuing IPO contains the
disclaimer clause of the SEBI also which states as it is to be distinctly
understood that submission of the RHP to SEBI should not in any way
be deemed or construed that it has been cleared or approved by SEBI.
If this type of disclaimer published by SEBI, it will not gain the
confidence of investors. So SEBI should delete these lines and make
sure that RHP filed with it is cleared by SEBI.
There are bulk messages for stock tips are coming on phone, emails
etc. So SEBI should put check on it.
The investors are overcharged by PMS provider, the SEBI should
regulate the uniform system of charges obtained by PMS provider
SEBI should set up the arbitration on complaints and penalty or award
amount should be paid to the aggrieved investors;
Now a days foreign funds are coming to India in via mean and they
have invested for short term, so SEBI should put check on these
investments and make sure that foreign funds should be invested for
long term
The redressal of grievances of investor should be on top priority and
should be handled in effective manner, there should not be casual
approach for complaints
As per the the Economic Times dated 20.10.2010, there are large
number of complaints pending with fund houses. According to AMFI
records, 39 mutual fund houses have more than 4.5 lakh complaints
against them. UTI Mutual fund, with over one crore folios, tops the list
with 99,347 such issues. The countries oldest house has received more
than 30,900 complaints relating to non- receipt of dividend and another
16700 marking non receipt of statements of accounts. Birla sun life MF
has more than 24.66 lakh investor folio, had over 95,000 complaints
during 2009 and 2010. ICICI Mutual fund has been hit by over 57,600
grievances while Reliance Mutual had about 10,200. Of the 7,600
complaints lodged against HDFC Mutual Fund, over 5600 are
496
exchanges (has already begun with Stock Exchange Mumbai) where the
ownership, management and trading rights resides with three different
sets of people in order to avoid conflict of interest.
The settlement cycle has to migrate to T+1.
New products are to be introduced to meet the needs of all kinds of
market participants. MAPIN (unique identification) has to be extended
to cover entirety of market participants. National training and skill
delivery institute has to be commissioned quickly to build a cadre of
professionals to man the specialized functions in the capital market.
In the open offer of the IPOs the pricing are like Rs 130 to 140, these
bid price are very confusing to the retail investors, as they bid on the
minimum price on Rs. 130, therefore, they didnt get the share as their
bid was at lower price. So, the bidding price should be same.
There is a need to spread equity cult and build institutions like pension
funds to enlarge the size of the market and balance volatility.
The regulation of listed companies, a job performed in a fragmented
manner by SEBI and Ministry of Company Affairs, needs to be
consolidated to eliminate regulatory arbitrage, shooting out from the
kinks of regulatory jointing by unscrupulous operators, and blurring of
regulatory accountability. Further, regulation is an evolutionary process
and has to be refined on an ongoing basis.
The agreement to be executed between client and stock brokers are not
in uniform, the member client agreement BSE is different and there are
number of onerous clauses for the members. The clause of Brokerage,
Commission and Fees does not disclose any schedule of brokerage,
fees and commission, while it is required as per SEBIs directions. But
these directions of SEBI have been flouted by stock broker and stock
exchanges. So, SEBI should prescribe uniform standard form of
member client agreement
The member client agreement contains that stock broker shall not be
liable or responsible for non execution of the orders of the client due to
any link / system failure at the client / stock broker/ exchange end.
However, the Delhi High Court held that brokers are liable for any
499
investments have been lost. Therefore, SEBI should SEBI should made
regulations to protect the investors right at the time of winding up of
companies.
Thus, SEBI would and should continue to travel on the learning curve with a
view to reorient and reconfigure ground rules (regulations), its investigating
abilities and investor protection measures.
If above suggestion will have consideration by the SEBI, it may help to protect
the interest of INVESTORS AND SHAREHOLDER in securities market.
Nonetheless, India will do well as it is fully convinced that capital markets
allow people to do more with their savings and ideas and talents than would
otherwise be possible. In the process, it would also facilitate increasingly
larger number of citizens participating in the capital market in some form or
other and share the opportunity of profiting from economic gains. Let me
conclude with a recent opinion expressed by Mr. Steeve Vickers, President
International Risk 'Finance ASIA' published in Finance Asia.com on Sept,
29th 2005, "The stock market has been transformed from proverbial den of
thieves to one of the most transparent automated and well regulated in the
world- with record foreign institutional investment inflows a testimony to
this".
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