[By Aditya Maheshwari and Kaushlendra Pratap Singh]
The authors are students at the Gujarat National Law University, Gandhinagar.
Introduction
The securities market (“market”) is a gravitating concept modulated by various controllable and uncontrollable factors. One of the significant aspects of the flourishment and progression of the market is the role of investors’ confidence in the market and the regulatory body. On various occasions, an accentuation is being made on the part of transparency in economic and regulatory policies for perpetuating the Investors’ Confidence in the market.
The term investors’ confidence in its generic sense can be understood as investors’ readiness to capitalize on the investment possibilities and intermediation channels that are accessible to them based on their assessment of risk and reward. To make it possible for investors to access information related to various securities and regulations, the role of the Security Exchange Board of India (“Board”) has become prominent.
This article intends to crack wide open the efforts being made by Board to protect investors’ interests, the comparison being made to other foreign legal regimes, and the aperture in the present legal regime related to it.
The mutuality between investors’ confidence and transparency in the policies regulating investors
The relationship between Investors’ Confidence and Transparency has been impregnable when it comes to the legal or the financial aspect. Investors consider the legal and regulatory environment along with political and economic aspects before making any kind of investment in the market. As per the Global Investment Competitiveness (GIC) survey in the years 2017 and 2019, two-thirds of the investors in the market, study policy uncertainty as a significant factor in their investment decision.
When it comes to transparency, systematic publication of the rules and regulations, clarity and specificity of the legal provisions of the administrative procedure, and the availability of the portals and other mechanisms are some of the criteria to be considered by the regulatory body. There is an inverse relationship between the regulatory risk and the investment by the foreign investors as the lack of certainty holds the investors back from investing in such market
While it has already been discussed the mutuality between the transparency in the regulation and the investors’ confidence, the upcoming sections would discuss the present regulatory framework in India to enhance investors’ confidence and how changes can be made in the present legal regime. For instance, European Union enacted separate legislation to bring transparency to increase investors’ confidence.
Investors’ confidence – present legal regime and recent amendments
As discussed above, the mutuality between investors’ confidence and transparency in the policies regulating investors in the market, the Board, since its inception in the year 1992, has undertaken specific measures and further made amendments for the protection of the investors’ interest as well as bringing transparency in the process regulating them.
Existing legal framework for the protection of investors’ interest in India
Since the inception of the Security Exchange Board of India Act, 1992 (“Act”), the legislature’s intention and objective were clear behind enacting this statute which can be determined through the preamble of the statute. The preamble uses the expression “protect the interests of investors in securities” in the preamble which upfront clears the role of the regulatory board. Moreover, to make it an obligation, the same is enshrined under Section 11(1) of the Act.
Further, in regarding initiating an investigation as well as passing orders by the Board, one of the significant reasons is to protect the interest of the investors and against transactions that are detrimental to the investors. Initially, the investors’ grievances redressal procedure under this Act was incorporeal, however, with the introduction of the Investor Grievance Redressal Mechanism, the investors’ confidence in the market increased significantly. To add extra cushion to investors’ protection in the market, the penalty is being imposed on the listed company and person acting as an intermediary that fails to address the grievances of the investors.
Consolidating the present legal framework for the protection of investors’ interest in India
While in the initial legislation, certain statutory remedies were available to the investors in India however, to consolidate the existing legal framework, the Board over the last decade made substantial amendments to the Act as well as issued circulars to further substantiate the position of investors in India. Starting with the introduction of the Investors Protection and Education Fund in the year 2009 which is used to educate the investors about the current market situation as well as provide restitution to eligible and identifiable investors who have suffered losses resulting from a violation of securities laws under regulation 5(1) and 5(3) of the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.
As discussed in detail earlier about the role of transparency in policies regulating investors and investors’ confidence, the Board to provide clarity and transparency regarding revealing the shareholding pattern to the investors amended in the initial circular issued in the year 2015.
Moreover, the Board to enhance the investors’ grievances mechanism, put forwarded various measures such as –
- Arbitration Mechanism at Stock Exchanges
To vitalize the investors’ grievance mechanism, the Board introduced the arbitration mechanism to resolve investors’ grievances. The measure was taken regarding the speedy disposal of the grievances. Moreover, to further enhance this mechanism, the Board brought transparency to the process of arbitration by providing public dissemination of profiles of arbitrators.
- SEBI Complaints Redress System
The SEBI Complaints Redress System (“SCORES”) is an online mechanism to assist investors’ to lodge compliant and further track the process of such complaints virtually. Moreover, the Board made it a devoir for the recognized stock exchanges to design and implement an online web-based complaints redressal system of their own.
Analysis – shortcomings in the present legal regime
Now that it has been discussed in detail the regulatory regime concerning investors’ protection in India, this section aims to compare the grievances redressal mechanism prevailing in India and other countries along with the challenges in the present regime.
Comparison of investors’ grievances redressal mechanism in India and other countries
While the Grievances Redressal Mechanism (hereinafter as “GRM”) in India has been already discussed in the above section, the comparison can be made based on two factors:
- Conflict of interest
In regard to complaint handling by Financial Service Providers (hereinafter as “FSP”) is concerned, the mechanism being used by the regulators around the globe is similar in nature i.e., through a centralized web-based grievance redress system. However, the major distinction among them is the complaint redressing process. In Germany, the FSP complaint handling system is conflict free i.e., the independency of the redressal agency from the regulator as the same is considered an essential requirement for fair and transparent redressal of investors’ grievances. Since, in India, the redressal mechanism of each intermediary is yet to develop, there is a conflict of interest in the present mechanism.
- Involvement of the regulator in complaint redressal
While countries such as Australia, the United Kingdom, and France, the involvement of the regulator is next to nothing. However, in the case of India, while the service of arbitration is being provided to the investors, in case of not getting relief under relevant FSPs, an application can be filed to the Board. The involvement of the regulator ensures the grievances are redressal expeditiously.
Challenges in the present legal regime
While over the last three decades, various changes are being made in the legal regime regulating the security market to ensure the protection of investors’ interests and enhance investors’ confidence. However, certain challenges are that are still up in the air. One is the lack of transparency in the regulations governing investors. For instance, Press Note 3 of 2020 restricting the investors from bordering countries investing in India failed to define the term beneficial owner which affected the foreign investors.
Moreover, the issue of unregulated platforms affecting the interest of the investors is a cause of concern. For instance, unregulated platforms dealing in algorithm trading being volatile in nature can affect lots of retail investors, and presently, there is no GRM available to the investors against such enterprises. While efforts are being made to strengthen the algorithmic trading framework and to educate the investors about the incompetency of the Board in this regard, this is a consequential issue that needs to be addressed instantly.
Conclusion
There is a global trend of achieving the objective of protecting the investors’ interest in the security market wherein countries enact various legislations to give effect to the objective. As far as the legal regime in India is concerned, there has been a substantial development in regard to protecting the investors’ interest and enhancing investors’ confidence through developing IPEF and online grievances redressal mechanisms. However, with the security market being highly volatile in nature, it is laborious to cover every intermediary and platform under the jurisdiction of the Board.
It is suggested by the authors that to overcome the challenges mentioned above, the Board along with the relevant ministries should issue unambiguous circulars and leave no scope for external interpretation. Moreover, the Board must continuously keep track of the actions which affect the interest of the investors and broadened the scope of its powers.