Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

November 05, 2000

Judiciary will have to help investors’ cause

When companies fail to follow good corporate practices no other stakeholders are badly or immediately affected as minority investors. So much so that investors ought to be in the best position to ensure good corporate governance. Instead, they are the weakest segment of the capital market and rarely able to fight for or protect their own interests and investment. The basic problem is that investors are not organised and cannot put up a common front. Also the savvy ones usually vote with their feet and dump their investment, rather than worry about fighting bad practices. A bigger problem is the popular corporate view that investors need no protection; they are all greedy operators who rush to buy when prices are at the highest and whine when they collapse.

This attitude has ensured that India’s investor population is simply not growing as fast as it ought to, and this is ultimately bound to hurt the corporate sector most in a liberalised economy. After all, secondary market trading does not fund projects. Indian business needs genuine investors with an investment horizon beyond 24 hours in order to expand and diversify. Though the Securities and Exchange Board of India (SEBI) claims a grievance redressal rate of over 95 per cent in the past two years, this does not tell the real story. Investors have lost money in plantation companies, fixed deposits, vanishing companies and through erosion of secondary market prices in the last few years and are badly disenchanted. They also feel helplessness in dealing with anti-investor moves by companies, siphoning of money by promoters or simple bad management. If investors are treated shabbily in India, it is mainly because of the paucity of genuine and powerful investors associations which could fight for investor rights.
In fact, statistics show that the phenomenal growth of the secondary market and increased automation and transparency has not led to a corresponding growth in the number of investors. Despite 23 stock exchanges and a 125-year-old trading history, India has less investors at 19 million individual than communist China which has 25 million. This fact alone should seriously worry industry associations and policy makers in a free market since it is the best indicator of disenchantment with the system. Instead, there is no serious attempt to understand investor issues or to build investor associations.

SEBI made a serious attempt to build investor associations, grant them accreditation in 1992. After that, the next meeting of investor associations was only called by SEBI in 1998 and a far more genuine and productive meeting was held last week. In 1992, SEBI had 13 recognised investor associations, today it has nine, of which three have been given provisional recognition. It is a catch-22 situation. Individuals and groups who work honestly and genuinely for investors do not have the money or the infrastructure to canvass membership or gain accreditation. There are barely three investor associations with even basic infrastructure to receive complaints and follow them up; and only two who have the resources to consider litigation to fight for investors rights.
Ironically, while the number of investors stagnates, the funds available for aiding recognised associations is set to increase. Firstly, the government, through the new Companies Act has provided for the creation of an independently administered Investor Education and Protection Fund created out of the pool of money available in the form of unclaimed dividends, fixed deposits and share application money. Though the Fund is still to take off due to inevitable bureaucratic hurdles, it remains, on paper at least, a substantial source of funds for empowering investor protection groups.

Secondly, SEBI has decided to fund recognised associations to the extent of Rs one lakh each for investor education activities. It has also agreed to provide another Rs one lakh for infrastructure needs and to consider some reimbursement of the legal expenses on genuine litigants.

Thirdly, the stock exchanges which segregate a part of their listing fees for investor protection activity have begun to provide grants to investor associations for investor education. The National Stock Exchange and the Bombay Stock Exchange have both made some headway in this direction. Such funding is imperative for building up investor associations - particularly in smaller towns such as Kolhapur, Hyderabad, Kanpur, Coimbatore, Chennai, Jaipur and Patan. But nine recognised associations cannot begin to address investors’ needs. If India has 23 stock exchanges, it stands to logic that there should be at least as many strong investor associations in the country. Instead, Mumbai which headquarters four stock exchanges (BSE, NSE, OTCEI and the Integrated Stock Exchanges of India) has one politically backed association, which derives most of its clout from its main promoter - Bharatiya Janata Party MP Kirit Somiaya.

The problem is that investor groups need seed money to commence their activities, establish a record of accomplishment and to achieve the minimum acceptable membership. It is only then that they are eligible for accreditation and monetary grants. The problem is that investors are unwilling to join investor groups because most of them have a pathetic track record. Until recently, SEBI also treated investor associations as a necessary evil, rarely consulted them and refused to allow them more than a token role in the process of framing regulation.

There is a similar problem with the way the judicial system functions and perceives investor issues. Not only is litigation a slow and expensive process, but even in the few cases where courts have ruled in favour of investors (including consumer courts) the relief and costs granted to them are so niggardly that they only acts as a deterrent to investor litigation. This is in direct contrast to the United States, where access to the legal system ensures that compensation is exemplary and serves as a deterrent to anti-investor action.

The judiciary will have to play a key role in the growth of investor protection groups by awarding suitable compensation and costs. It is only when investors can see that it pays to be part of such organisations, they will cough up membership and ensure the independence of such groups. Otherwise, even the newly funded and accredited investor associations will only focus on ineffectual education and seminars and play no role in fighting the investors’ cause.