To combine all market regulators under one body is a bright idea. Other countries have a single regulator too. But does this idea suit the needs of a complex growing economy like India? AISHWARYA MEHTA finds it does not.
NVESTORS are the sturdiest part of a securities market. They are regarded as the backbone of the market because they influence the extent of activity in the secondary market and the global economy. The expression “investor protection” broadly includes the measures created to safeguard investors from malpractices by companies, merchant banking executives, depository competitors and other intermediaries.
The ambiguities in the secondary market regarding market prices and rates of return are obstacles for many investors to enter stock market operations. There are disclosures of relevant information in terms of issuing securities, market operations and grievance redressal structures, but there is no specific regulator to guarantee to investors a return on investment and capital appreciation.
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India has sector-specific regulators, which increase the confusion for investors in terms of guidance on specific issues. The regulators of the security market in India are:
- The SEBI Act, 1992.
- The Depositories Act, 1996.
- The Companies Act, 2013.
- The Securities Contracts (Regulation) Act, 1956.
- The Prevention of Money Laundering Act, 2002.
- Investors’ rights and remedies under sector-specific regulatory systems; and
- Protection from ambiguous advertising.
Promotional material issued by companies inviting the public to subscribe to debenture issues often comes in printed brochures. However, this promotional material may not be a part of the prospectus or letter of offer. Investors may have complaints with documents that overemphasise the achievements of the corporation.
Company promotional material always mentions something like “this information is only an announcement and not a prospectus” or that it is for “private circulation only”. Still, if ambiguous commercials are issued, an investor has recourse to the law.
Under section 36 of the Companies Act, 2013 an investor can inform the Ministry of Corporate Affairs (MCA) about misleading promotional material. The investor may complain before Consumer forums also, as they have a right against ambiguous commercials under the SEBI Act.
- Inadequate disclosures in the prospectus:
At times, investors must decide based on inadequate information provided in the prospectus by a company. Investors have the right to claim compensation on account of misinformation in the prospectus under sections 34 and 35 of the Companies Act. An application can be sent to the MCA and SEBI in such cases.
- Postponed transfer of securities
The right to sell shares or debentures is regarded as a fundamental right of the investor. There is a possibility of unnecessary delay in transfer of shares or debentures and that can cause huge losses to the investor in terms of bonus, rights, dividends, etc. In cases of inordinate delay, the investor can refer to sections 111 and 113 of the Companies Act, 1956, and an application can be written by the investor to the Company Law Tribunal (CLT), SEBI and MCA.
10. Inordinate delay in paying interest on debentures
There are cases in which investors have criticised regulators on account of delays in getting debenture receipts and certificates. As per sections 118 and 119 of the Companies Act, 2013, the investors have a right to obtain copies and inspect trust deeds. An investor can also write an application to the CLB and approach a court of law under sections 271 and 272 of the Companies Act.
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In addition to the above-mentioned issues and remedies, investors face other problems such as inordinate delays in listing securities, delays in the discharge of allotted letters, unnecessary delay in dispatching securities and non-payment of dividends. For all these problems, the investor may refer to the statutory provisions of the Companies Act and send their grievances to SEBI in writing.
Budget 2021 and a Single Securities Market Code:
Recently, the government announced a consolidated framework for securities law under a Single Securities Market Code. This code will be enacted after consolidating the statutory provisions of the SEBI Act, 1992; Depositories Act, 1996; Securities Contracts (Regulation) Act, 1956 and the Government Securities Act, 2007.
Multiple regulatory systems create confusion because no one regulatory authority can offer an investor guidance on a specific issue. Investor trust can be built in a market where all their issues are resolved quickly and under one roof.
The Single Security Market Code would ensure that there are no grey zones in regular operations. A single regulator also assures investors that no matter their problem, the regulator can resolve it as it is the only authority with jurisdiction over every operation.
Is a multiple-regulator system more effective in India?
In a developing country like India, the regulatory domain is not developed enough to be liberated from all interventions. The merger of various regulators may be efficient in terms of reducing compliance costs and friction between stakeholders, but it may not lead to spontaneous harmony and efficiency between various regulatory functions.
A Single Security Market Code will be ineffective in India because unlike matured economies such as the United Kingdom, the focus and objective of different markets is different in India. For instance, the fundamental focus of the future commodity market is to discover prices and hedging, but the primary focus of the securities market is to form capital.
For a developing nation, competition among the regulators is healthy because it pushes them towards efficient and effective operations. The United States of America, deemed to have the most mature financial market, also has multiple regulators.
Transparency in terms of accountability in a single-regulator system is worth acknowledging. However, in India, regulators have the power to develop the capital market as well. For example, the IRDA is responsible to develop a robust insurance market by educating the investors. Similarly, the FMC is responsible for developing the commodities futures market. Therefore, India needs a multiple-regulator system to expand its markets.
A major concern in the Single Securities Market Code is regarding the regulators’ freedom to fill in the gaps in the existing system, which are congruous with the changing requirements of the economy, along with checks and balances through judicial review of regulatory decisions.
Excessive checks and balances over a regulator will deteriorate the authority given to a single regulator to rewrite the laws. There will be a need to form a Financial Sector Appellate Tribunal after a Single Securities Market Code is established. A tribunal will bring more checks and balances to the working of a single regulatory authority.
If a regulator is seen not to comply with the basic principles of natural justice, then it can be claimed through a writ petition filed in a High Court. So, the question arises, how much legal oversight or checks and balances are enough?
Some people contend that SEBI is already a part of the Securities Appellate Tribunal (SAT), and therefore other regulators can also function under the tribunal after the formation of a Single Securities Market Code. There is no problem with this, until the tribunal questions the single regulatory body on the size and proportionality of the penalties. But what if the tribunal goes beyond and starts an interrogation on the policies and functioning of the regulator?
Agreed that there is a need to reform our laws to avoid regulatory entanglement, but a developing country cannot adopt an entirely new system. Different economies have regulatory frameworks as per their needs. There is no “perfect” regulatory system.
The main task of a regulator is to know how to function in whichever policy-regulatory framework exists in an economy. The advantage of multiple regulators is that each can specialise. All said a Single Securities Market Code will have more disadvantages than advantages.
(Aishwarya Mehta is a fourth-year law student at the Maharashtra National Law University, Nagpur. The views expressed are personal.)