A Project Report in Business Law

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A PROJECT REPORT IN

BUSINESS LAW

PROJECT TITLE: “Investors Protection Guidelines By

SEBI.”

Submitted On: 1ST MARCH 2013

UNDER THE AEGIS OF

Submitted To: Submitted By:

Mr. F.M.A. KHAN Dilip Kumar

PGDFS - 2011-13

Roll No. : FT-(FS)-11-319



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CONTENTS

Sr. No. Particulars Page No.

1. Introduction of Investors Protection Guidelines BY SEBI 3

2. Objectives Of SEBI 4

3. Investors Protections Measures By SEBI 5

4. SEBI Reforms On Stock Exchanges 65. Critical Appraisal Of Investors Protections Measures By

SEBI

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6. Bibliography 13



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Investors Protection Guidelines By SEBI

Introduction: Investor protection is one of the most important

elements of a thriving securities market or other financial investment

institution. Investor protection focuses on making sure that investors are fully

informed about their purchases, transactions, affairs of the company that they

have invested in and the like. SEBI had issued guidelines for the protection of

the investors through the Securities and Exchange Board of India (Disclosure

and Investor Protection) Guidelines, 2000. The measures in practice gave

mixed results. On the positive front, many banks sponsored mutual fund had

launched assured return schemes and lured the investor's huge contribution.

When they failed to deliver the promise, SEBI gave directive to sponsor bank to

honor the commitment made by the mutual funds, which cost the sponsor

banks over Rs 2000 crore. SEBI has introduced a supplementary process of

applying in public issues, viz. ASBA process. The application money shall

remain blocked in the bank account till finalization of the basis of allotment in

the issue or till withdrawal / failure of the issue or till withdrawal / rejection of

the application, an initiate that safeguards the interests of both issuing

company and the investor. Investor education campaigns have been yieldingpositive results to some extent, still lot more needs to be done. Indian investors

have been steadily fleeing the market, despite the apparent spread of „equity

cult‟, which calls for immediate attention of the apex body to frame and

effectively implement the measures to protect the interests of small investors,

and restore their confidence in the stock market.

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was

amended in the years 1995, 1999 and 2002 to meet the requirements of

changing needs of the securities market and responding to the development in

the securities market. The Primary function of Securities and Exchange Board

of India under the SEBI Act, 1992 is the protection of the investors‟ interest

and the healthy development of Indian financial markets. No doubt, it is very



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difficult and herculean task for the regulators to prevent the scams in the

markets considering the great difficulty in regulating and monitoring each and

every segment of the financial markets and the same is true for the Indian

regulator also. But what are the responsibilities of the regulators to set the

system right once the scam has taken place, especially the responsibility of

redressing the grievances of the investors so that their confidence is restored?

T he redressal of investors‟ grievances, after the scam, is the most challenging

task before the regulators all over the world and the Indian regulator is not an

exception. SEBI had issued guidelines for the protection of the investors

through the Securities and Exchange Board of India (Disclosure and Investor

Protection) Guidelines, 2000.

Objectives of SEBI : The SEBI has been entrusted with both the

regulatory and developmental functions. The objectives of SEBI are as follows:

Investor protection, so that there is a steady flow of savings into the

Capital Market.

Ensuring the fair practices by the issuers of securities, namely,

companies so that they can raise resources at least cost.

Promotion of efficient services by brokers, merchant bankers and

other intermediaries so that they become competitive and

professional.

Investor protection is one of the most important elements of a thriving

securities market or other financial investment institution. Simply put, investor

protection is the effort to make sure that those who invest their money in

regulated financial products are not defrauded by brokers or other parties. It‟s

important to note that unlike government insurance for monetary deposits,

investor and customer protection does not extend to covering losses when the

securities or products decrease in value. Investors have to assume the

existence of risk as part of their opportunity for gains. Investor protection

focuses on making sure that investors are fully informed about their purchases



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that insider activity does not threaten the worth of some portfolios for the

enrichment of others, and those holdings are not simply “lost” in instances of

brokerage failure.

Investors Protection Measures By SEBI:

Section 11(2) of the SEBI Act contains measures available with SEBI to

implement the legislated desire of investor protection. The measures available

with SEBI include the following:

Regulating the business in Stock Exchanges (ses) and any other

securities markets.

Registering and regulating the working of intermediaries like stock

brokers, sub-brokers, share transfer agents, bankers to an issue,

trustees of trust deeds, registrars to an issue, merchant bankers,

underwriters, portfolio managers, investment advisers etc. Associated

with securities markets.

Registering and regulating the working of the depositories, participants,

custodians of securities, foreign institutional investors, credit rating

agencies and other intermediaries.

Registering and regulating the working of venture capital funds and

collective investment schemes, including mutual funds.

Promoting and regulating self-regulatory organizations.

Prohibiting fraudulent and unfair trade practices relating to securities

markets.

Prohibiting insider trading in securities. Regulating substantial acquisition of shares and takeover of companies

Promoting investors‟ education and training of intermediaries of

securities markets.

Carry out inspection/ audits of the ses / intermediaries etc.



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Call for information from any bank / any authority / corporation /

agencies in respect of any transaction in securities which is under

investigation or inquiry by SEBI.

Performing such functions and exercising such powers under the

Securities Contracts (Regulation) Act, 1956 (SCRA).

Levying fees or other charges.

Conducting research.

Performing such other functions as may be prescribed.

SEBI Reforms on Stock Exchanges :

The reforms are summarized below.

1. Compulsory audit and inspection of stock exchanges and their

member brokers and their accounts.

2. Transparency in the prices and brokerage charged by brokers by

showing them in their contract notes.

3. Board of Directors of stock exchanges has to be reconstituted so as to

include non-brokers, public representative, and Govt. representatives

to the extent of 50% of the total number of members.

4. Regulation of Portfolio Management Schemes (PMS): SEBI has

already tightened PMS norms by making it mandatory for portfolio

managers to keep separate accounts of clients rather than keeping

their investments in pool account. Earlier, PMS providers used to

open 'pool PMS' as a common account under one head, put money

received from a set of clients in it and then invest the same on behalf

of the whole group. This move is aimed at ensuring that portfolio

managers handled clients‟ money in a transparent manner.



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5. Capital adequacy norms have been laid down for members of various

stock exchanges separately and depending on their turnover of trade

and other factors.

6. Applications Supported by Blocked Amount (ASBA) in case of IPO:

SEBI has introduced a supplementary process of applying in public

issues, viz. ASBA process. ASBA is an application for subscribing to

an issue, containing an authorization to block the application money

in a bank account with a bank which offers the facility of applying

through the ASBA process. The bank shall then block the application

money in the bank account specified in the ASBA, on the basis of an

authorization given by the account holder. The application money

shall remain blocked in the bank account till finalization of the basis

of allotment in the issue or till withdrawal / failure of the issue or till

withdrawal / rejection of the application. 7. Contents of Offer Document: In addition to the disclosures specified

in Schedule II of the Companies Act, 1956, the prospectus shall also

contain all material information which shall be true and adequate so

as to enable the investors to make informed decision on the

investments in the issue.

8. IPO grading/credit rating: Grading of all IPO of equity shares or

other securities convertible into equity shares is mandatory. Grading

shall be obtained from at least one credit rating agency registered with

SEBI and shall be disclosed in the Prospectus or Red Herring

Prospectus.

9. Promoters' Contribution And The Lock In Requirements: SEBI has

also plugged loop holes in the computation of promoters' contributionand the lock in requirements thereof. Henceforth, securities pledged

by the promoters with banks and financial institutions as collaterals,

will not be eligible in the computation of promoters' contribution, thus

upholding the spirit of the legislation. Further, the promoters' locked



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in securities can now be pledged with banks or financial institutions

only if the purpose of the loan is to finance one or more objects

specified in the issue thereby preventing misapplication of pledging for

any other purposes.

10. Prohibition of Insider Trading: SEBI (Prohibition of Insider

Trading) Regulations, 1992[Insider Trading Regulations] deals with

prohibition on dealing, communicating or counseling on matters

relating to insider trading based on unpublished Price sensitive

information etc. The following shall be deemed to be price sensitive

information

Periodical financial results of the company;

Intended declaration of dividends (both interim and final);

Issue of securities or buy-back of securities;

Any major expansion plans or execution of new projects;

Amalgamation, mergers or takeovers;

Disposal of the whole or substantial part of the undertaking;

and

Significant changes in policies, plans or operations of the

company

11. SEBI Code of Ethics for Directors: The securities and Exchange

Board of India (SEBI) has formulated a code of ethics for directors and

functionaries of stock exchanges aimed at establishing professional

and ethical standards for creating a fair and transparent market

place. The silent features of this code of ethics includes Fairness andtransparency in dealing with the matters relating to the exchange and

investors

Prohibition on dealing in securities in proprietary accounts by

elected office bearers such as President, Vice President,

Treasurer etc.



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Disclosure of dealing in securities by functionaries and

directors of exchange,

Avoidance of conflict of interest in decision-making.

Compliance with the regulatory laws exercising due diligence in

the performance of duties.

12. Investors Grievances Redressal Cell: SEBI also takes up

grievances against the various intermediaries registered with it and

related issues. Given below are types of grievances for which

investors could approach SEBI.

Type-I : Refund Order/ Allotment Advise.

Type-II: Non-receipt of dividend.

Type-III: Non-receipt of share certificates after transfer.

Type-IV: Debentures.

Type-V: Non-receipt of letter of offer for rights.

Type VI: Collective Investment Schemes.

Type VII: Mutual Funds/ Venture Capital Funds/ Foreign

Venture, Capital Investors/ Foreign Institutional Investors/

Portfolio Managers, Custodians.

Type VIII: Brokers/ Securities Lending Intermediaries/

Merchant Bankers/ Registrars and Transfer Agents/ Debenture

Trustees/ Bankers to Issue/ Underwriters/Credit Rating

Agencies/ Depository Participants.

Type IX: Securities Exchanges/ Clearing and Settlement

Organizations/ Depositories.

Type X: Derivative Trading.

Type XI: Corporate Governance/ Corporate Restructuring/Substantial Acquisition and Takeovers/ Buyback / Delisting /

Compliance with Listing Conditions.

13. Action Against Directors Of Vanishing Companies: Emergence

of Vanishing companies has shaken investors‟ faith to the core. Matter



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was campaigned and representations made to ensure that such cases

do not occur in future, resulting in SEBI forming a committee

examining and exploring various courses of action such as including

authenticated photographs, passport numbers, PAN number etc. of

the promoters / directors at the time of incorporation and in the

prospectus along with monitoring the end use of funds.

14. Investor Awareness Campaign: The major thrust has been on

educating and informing the small investors which is clearly evident

from the motto that 'An informed investor is a safe investor'. Keeping

complete faith on the above all endeavors have been made in this

direction including announcing the year 2003 as the 'Jaagte Raho'

year and and awareness and organized more than 1000 investor

conference, exhibitions, mela, seminars, Union Budget meetings and

public meetings for small investors all over India. More than 5 Lacs

investors took part in various programmes. Till date, more than 2188

workshops have been conducted in around 500 cities/towns across

the country.

Advertisement: SEBI has prepared simple “dos and don‟ts” for

investors relating to various aspects of the securities market.

Till date, over 700 advertisements relating to various aspects of

Securities Market have appeared in 48 different newspapers/

magazines, covering approximately 111 cities and 9 regional

languages, apart from English and Hindi.

Educative Materials: SEBI has prepared a standardized

reading material and presentation material for the workshops

All India Radio: With regard to educating investors through themedium of radio, SEBI Officials regularly participate in

programmes aired by All India Radio.

Website Dedicated To Investor Education:

http://investor.sebi.gov.in

http://investor.sebi.gov.in/





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Cautionary Message On Television: With a view to use the

electronic media to reach out to a larger number of investors, a

short cautionary message, in the form of a 40 seconds film let,

has been prepared and the same is being aired on television

Protection Of Retail Investor: Retail investors are not in a

position to identify and /or appreciate the risk factors

associated with certain scripts or schemes. With the result they

are not able to make informed investment decisions. SEBI has

strongly requested small investors to take adequate precaution

before investing in any forthcoming IPO issues. It is observed

that 8 out of 37 companies have dubious promoters and

merchant bankers. Investors also cautioned not to invest in

certain B2 & Z category listed companies who are declaring

excellent quarterly results as its authenticity is doubtful.

15. Reduction In D-Mat Charges: One of the major grievances in this

Information Technology environment affecting the investors was

dematerlization charges being very high as compared to keeping

securities in physical form. This was limiting many investors in

getting their securities converted to D-mat form. Matter was taken up

and resulted in reduction of D-mat charges benefiting Lakhs of

investors where 90% of the securities in India are traded through

NSDL.

16. Tackling False Promise Of Assured Returns By Banks

Sponsored Mutual Funds: Many banks sponsored mutual fund had

launched assured return schemes and lured the investor's huge

contribution. However at the time of maturity could not match theassured return. Sponsored bank also tried to raise their hands e.g.

Canara Bank, Indbank, State Bank etc. Campaigned and fought

heavily the matter with the SEBI / mutual fund / finance ministry

and insisted that all the assured returns should be paid to the



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investors. Due to the intervention SEBI gave directive to sponsor bank

to honor the commitment made by the mutual funds. Shortfall of

more than Rs. 2000 Crores was met by sponsor banks for benefit of

small investors.

17. Compensation From Investor Protection Fund: Investor

protection fund of stock exchange provided for Rs.5 lacs / 10 lacs

compensation per client in case of default by the broker. The same

was interpreted by stock exchange as applicable per sub broker.

Thereby all the clients of a sub broker were getting benefit of Rs.10 /

Rs.5 lacs in aggregate only. Took up the issue with the stock

exchanges and insisted upon applicability of the limit vis-à-vis client

of a sub broker and not per sub broker. In case of Century

consultants defaults at least 100 clients took benefit of this and

avoided losses of more than 10 Crores.

Critical Appraisal Of Investor Protection Measures By SEBI

SEBI being a premiere institution for dealing with the problems

relating to securities has advanced a long way towards protecting the

investors from the hazards of the predators existing in the market. On

the positive front, many banks sponsored mutual fund had launched

assured return schemes and lured the investor's huge contribution.

However at the time of maturity could not match the assured return.

Sponsored bank also tried to raise their hands e.g. Canara Bank,

Indbank, State Bank of India etc. SEBI gave directive to sponsor bank to

honor the commitment made by the mutual funds. Shortfall of more than

Rs.,2000 crores was met by sponsor banks for benefit of small investors.

By beginning of the new millennium in 2000, SEBI has

strengthened and established itself as an all powerful regulatory body for

the capital market, all intermediaries in it, SROs, stock Exchanges, listed

companies, Venture Funds, Mutual Funds etc. These measures include



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permission for e-broking, share trading via net with orders to be routed

through the websites of brokers, acceptance of Kumarmangalan Birla

Report on Corporate Governance and of K.B. Chandrasekhar Panel

Report on Venture Funds. The SEBI has given directives to the listed

companies and to the top 150 companies in particular to observe the

code of corporate governance by March end 2001. The contrary scenario

was that only the big fishes could escape the net and the small ones were

still striving to uphold their existence.

It is also pointed that SEBI watchdog is a dog without teeth. It only

wears dentures to fight against manipulators and finally those people get

away with murder. A recent case study is the Essar Steel delisting story.SEBI watched silently when the promoters came to the market, didn‟t

share profits and left the investors high and dry and took the cool

delisting option. SEBI just said - its as per GOI laws. Do investors need a

SEBI to tell that? Aggrieved investors comment that Investor Protection is

a big joke and money making exercise. SEBI came with finger printing

and collected close to 100 Crores .The scheme was scrapped; then why

money was not returned by SEBI? Had it been by other market players

SEBI would have demanded them to pay .There is one yard stick for the

Ruler and the other for the Ruled.

Bibliography:

The Indian Financial System Markets, Institution & Services 3rd Edition

By Bharati V. Pathak

www.sebi.gov.in/guide

http://www.bseindia.com

http://www.nseindia.com

www.wikipedia.com

http://www.sebi.gov.in/guide


http://www.bseindia.com/


http://www.nseindia.com/


http://www.wikipedia.com/






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A Project Report in Business Law