gfiles Magazine November Issue 2011

ANALYSIS

investor safeguards

 

Investor protection: who bothers about it?

SEBI seems to be following in the footsteps of MCA and has abandoned the idea of educating and protecting investors

 

 

by DR GS SOOD

 

INVESTOR protection as an agenda may be high on the priority list of the Finance Ministry but the two key implementing agencies, i.e. the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI), seem to be least bothered about it as indicated by the way they are functioning in this regard. This probably is the single most important reason for the sharply dwindling investor population in the country and may pose a big hurdle in the process of capital formation that the country desperately needs to increase if the sharply declining growth rate is to be arrested. According to the D Swarup Committee report, India has 0.80 million investors (who invest in debt and equity markets, either directly or through mutual funds and market-linked insurance plans) which represents a sharp decline from the figure of 20 million, as claimed by the investor surveys commissioned by SEBI in the 1990s.

 

The main purpose of constituting the Investor Education and Protection Fund (IEPF) under the MCA was to spread awareness amongst investors and educate them so that they could take informed decisions and protect themselves from being taken for a ride.

 

This is possibly the only way to achieve the ultimate goal of investor protection and development of healthy capital markets in a country that can ensure the safety of investors and bring them back to the capital markets. It is quite understandable that such a task is herculean and can only be achieved over a very long period of time especially in a country where there is mass illiteracy and lack of formal education.

 

However, the goal of spreading financial literacy and investor education has started appearing a mirage if one looks at the composition of the Sub- Committee on IEPF constituted to achieve it. A cursory look at the members gives enough of an idea of how hardly any of them has either a research background on issues facing small investors or as actually worked with small investors. The fund under the IEPF which runs into around Rs 1,000 crore has now every possibility of being squandered since it has been entrusted to those very hands against whom the investors usually have to fight for their rights. It is very strange that a committee working for the interests of investors has no investors’ representation.

 

SEBI too seems to be following in the footsteps of the MCA and has almost abandoned the idea of educating and protecting investors, judging by the way its new chief is functioning. The gains made during the previous chief’s regime appear to have been squandered.

 

Whereas Investor Association meetings were called and conducted very religiously during each quarter of the year under Bhave (who did not miss a single meeting), Sinha is yet to call his first meeting in almost nine months since he assumed charge. Whereas Bhave always encouraged his critics to speak their minds, Sinha is busy keeping them and potential critics at arm’s length. The present SEBI chief has in fact reversed some of the gains that were achieved the very hard way during Bhave’s time with the active cooperation and assistance of some of the more vocal Investor Association representatives.

 

His anxiety to avoid any new controversy and wanting to play it safe seem to be stalling any fresh thinking and the initiation of any bold reforms.

 

A closer look at the composition of major committees reconstituted by the present SEBI chief is enough indication of the future of investor protection at least during his tenure. The three major committees, i.e. Primary Market, Secondary Market and Mutual Fund Advisory Committee, have been reconstituted with the clear intent of marginalizing the presence of investor activists. The number of representatives of the SEBI-registered Investor Associations is not only reduced drastically, at the same time it has been ensured that the stalwarts and more vocal investor activists are kept at bay. It goes without saying that the morale of Investor Associations, who till date have been instrumental in the spread of investor education, is at an all time low and is likely to hamper the investor education programme at the grass-roots level.

 

Investor Association meetings were called and conducted regularly under Bhave . Sinha is yet to call even the first meeting in almost 9 months since he assumed charge.

 

I have had the opportunity to work with four different SEBI chiefs and have no hesitation in admitting that Bhave’s tenure can best be described as the golden era for small investors. His firm resolve, swiftness and the attitude of facing contentious issues head-on resulted in landmark decisions such as “No entry loads” for mutual funds, IPO grading, streamlining of the arbitration mechanism, code of conduct for Investors’ Associations, empanelment of qualified resource persons for investor awareness and financial literacy programmes, issue of unauthorized trading in clients’ accounts and guidelines with regard to PoA by clients favouring brokers, SMS alerts and simplification of the client registration form with brokers to better protect investors and avoid confusion, compensation to investors in the IPO scam, ASBA, and so on.

 

The present scenario in MCA and SEBI therefore suggests that investor education and protection remain the last priority for the regulators in India, including the stock exchanges. The programme has been reduced to a numbers crunching game with the regulators indulging in one-upmanship with least regard for deliverables. g