This article on ‘Role of SEBI in Investor Protection: All you need to know’ was written by Vishnu Vardhan, an intern at Legal Upanishad.
Investors form the backbone of the securities market, not only influencing market activity but also contributing to economic activity. The increasing number of investors in India is a positive trend. Recent developments indicate that, aside from foreign institutional investors (FIIs) and institutional investors, small investors are gradually rebuilding their trust in the capital markets. This renewed confidence comes after a period of uncertainty following stock market scandals in the past decade. Safeguarding investors is of utmost importance.
The Securities and Exchange Board of India (SEBI) plays a central role in the Indian financial market, with responsibilities that encompass the regulation and oversight of various aspects of the securities market. One of its primary goals is to protect the interests of investors. This article delves into SEBI’s role in investor protection, explores pertinent sections and legal precedents, and offers recommendations for enhancing investor protection in India’s dynamic financial landscape.
SECURITY EXCHANGE BOARD OF INDIA (SEBI)
The Securities and Exchange Board of India serves as the regulatory authority overseeing India’s securities market. Operating under the Ministry of Finance within the Government of India, SEBI was initially established as an executive body on April 12, 1988. Subsequently, it was granted statutory powers on January 30, 1992, through the SEBI Act, 1992. SEBI was established with the primary objective of creating an environment conducive to the efficient mobilization and allocation of resources. It accomplishes this goal by providing the necessary practices, framework, and infrastructure to meet the increasing demands of the market.
The SEBI Act, 1992
The SEBI Act of 1992 serves as the legal foundation for SEBI’s operations. Within this Act, Section 11 plays a significant role by delineating SEBI’s core responsibilities, notably the safeguarding of investors’ interests. This section grants SEBI the authority to undertake essential actions aimed at fostering the growth and regulation of the securities market while prioritizing the protection of investors’ rights.
The Securities Contracts(Regulation) Act, 1956
The Securities Contracts (Regulation) Act, 1956 (SCRA), was introduced to avert undesirable transactions within the securities sector. SEBI draws its authority from the SCRA to oversee and safeguard the concerns of investors. The SCRA serves as the cornerstone of SEBI’s jurisdiction and duties. It encompasses provisions about the registration of stock exchanges, the oversight of contracts, and the imposition of sanctions for activities that manipulate or defraud, all of which indirectly bolster the protection of investors.
SEBI’s ROLE IN SAFEGUARDING INVESTORS
- Issuance of Guidelines: SEBI regularly issues directives to various market participants, including companies launching new offerings, mutual funds, portfolio managers, merchant bankers, underwriters, and lead managers. These guidelines aim to enhance transparency in their operations and prevent any exploitation of investors. SEBI has also introduced a code of advertising for public issues to ensure fair and accurate disclosures. Additionally, certain underwriting requirements have been made optional to reduce the cost of issuance. SEBI diligently monitors intermediaries to ensure compliance with these guidelines, taking punitive actions when necessary to protect investors.
- Public Interest Advertisements: SEBI disseminates public interest advertisements to educate investors about the fundamental aspects of different financial instruments and the precautions they should take before making investments. These campaigns aim to raise awareness among investors about their rights and available remedies. SEBI has published informative booklets to further guide investors.
- Handling Investor Complaints: SEBI provides a platform for investors to file complaints related to issues with their investments in industrial securities and financial assets. These complaints often concern non-receipt of refund orders, allotment letters, dividends, interest payments, or delays in share and debenture transfers. SEBI actively addresses these complaints through appropriate measures.
- Investor Education: Recognizing the importance of investor education, SEBI promotes the formation of investor associations that disseminate information through newsletters. SEBI also publishes two monthly publications, namely “SEBI-Market Review” and “SEBI Newsletter,” to educate, guide, and protect investors.
- Investor Surveys: SEBI conducts surveys to assess investment opportunities and provide valuable insights for the benefit of small investors. The findings from these surveys are widely publicized to offer proper guidance to investors in making informed investment decisions.
- Introduction of Stockinvest: SEBI has introduced Stockinvest as a new instrument to facilitate the application process for shares. Developed in collaboration with banks, Stockinvest allows investors to earn interest on their application funds until the shares are allocated, providing an additional layer of protection.
- Company Disclosures: SEBI has established disclosure norms requiring companies to publish half-yearly unaudited results. The format of prospectuses has also been revised to offer more comprehensive information to investors. SEBI insists that every share application form is accompanied by an abridged prospectus. These disclosure provisions are designed to inform and protect small and average investors.
CHALLENGES FACED BY SEBI IN PROTECTING INVESTORS
- Market Complexity: The securities market has grown increasingly intricate with a wide array of financial instruments and trading strategies. This complexity poses difficulties for investors, particularly retail ones, who may struggle to grasp the nuances of these markets, rendering them susceptible to misinformation and fraudulent schemes.
- Fraudulent Schemes: Fraudsters and swindlers constantly develop innovative and sophisticated methods to deceive investors. Ponzi schemes, chit funds, and other deceitful investment schemes persist as significant threats to investors.
- Lack of Financial Literacy: A substantial portion of the Indian populace lacks financial literacy. Numerous investors may not fully grasp the risks associated with diverse investment products, leaving them vulnerable to ill-informed investment choices.
- Market Volatility: Market volatility can lead to rapid and substantial fluctuations in the value of securities. Abrupt market downturns can result in considerable losses for investors, necessitating SEBI’s efforts to protect them during such turbulent periods.
- Unregulated Investment Advisers: The proliferation of unregistered and unregulated investment advisers offering financial counsel and portfolio management services presents a concern. Investors may unknowingly engage with these advisers, who may not act in their best interests.
- Technology Risks: As financial markets increasingly rely on technology, the risk of cyberattacks and technical glitches that disrupt trading and compromise investor data grows. SEBI must continually enhance cybersecurity measures to protect investors.
- Market Manipulation: Market manipulation, encompassing insider trading and price rigging, remains a concern. Detecting and preventing such activities can be challenging, necessitating vigilant monitoring and investigative efforts.
- Intermediary Oversight: SEBI oversees a wide range of intermediaries, including brokers, mutual funds, and credit rating agencies. Ensuring that these intermediaries act in the best interests of investors and adhere to regulatory standards presents an ongoing challenge.
SUGGESTIONS FOR ENHANCING INVESTOR PROTECTION
- Enhance Enforcement Mechanisms: SEBI should bolster its enforcement capabilities by augmenting the number of qualified staff and harnessing technology for surveillance and investigations. This would enable swift identification and penalization of securities law violators.
- Streamline Regulatory Framework: Simplify regulations, disclosures, and procedures to make the regulatory framework more accessible to retail investors, reducing complexity and confusion.
- Investor Education and Literacy: SEBI should continue its efforts to enhance investor education and awareness. Collaborations with educational institutions and industry associations can help disseminate financial literacy effectively.
- Whistleblower Protection: Establish a robust whistleblower protection program to encourage individuals to report securities violations. It is essential for whistleblowers to feel secure when reporting misconduct.
- International Collaboration: Given the global nature of financial markets, SEBI should strengthen cooperation with international regulatory bodies to effectively combat cross-border securities fraud and market manipulation.
- Strengthen Corporate Governance: Focus on improving corporate governance practices in listed companies. This entails ensuring independent boards of directors and transparency in executive compensation practices.
SEBI has spared no effort to safeguard investors from the misconduct and fraudulent activities of issuers and market intermediaries. The organization addresses investor grievances by conducting investigations and taking action when the concerned parties fail to resolve complaints within the specified timeframe. SEBI has issued and continually updated various guidelines to tackle emerging challenges, ensuring the safety of investors’ savings and upholding their confidence nationwide.
However, despite its dedicated efforts, SEBI has not achieved complete success in its mission. This is evident from the Swaroop committee report, which indicates a significant decline in the investor population in India. The number has fallen from 20 million in the 1990s to just over 8 million in 2009. This sharp decline can be attributed to widespread malpractices in the capital market, instances of investors being treated unfairly at different stages, and the absence of an efficient mechanism for the prompt and satisfactory resolution of investor complaints within specified timeframes.
- Securities and Exchange Board of India Act, 1992
- ‘Investor Protection’, Legal Vidhiya, 1 July 2023, available at: https://legalvidhiya.com/investor-protection/
- Patwant Kaur and Jasmindeep Kaur, ‘Investors Grievances in India: Role of SEBI’, 3(1) Journal of Finance and Accounting (2016)
- Rahul Kumar Baisla, ‘Role of SEBI in protecting the Investors Interest: A Critical Study’, 5 South Asian Law Review Journal (2019)