Unit IV

Investor Protection
Role of SEBI in Investor Protection
1. Investor Education and Awareness
Investors need to have sufficient knowledge of investment avenues,
the risk involved in each of them, factors affecting security prices on
day to day basis, trading and settlement mechanisms, role of
intermediaries and precautions to be taken while investing in shares,
mutual funds or any other security.
SEBI has played an active role in creating awareness on the above
through its investor awareness programmes.
SEBI conduct independent awareness programmes as well as joint
awareness programmes in association with other entities including
investor associations educational institutions etc.
Cont…
2. Regulation of intermediaries
SEBI has enacted a number of regulations in order to govern the
intermediaries in Indian securities markets.
Thus there are separate regulations for brokers, mutual funds,
investment advisors, bankers to an issue, merchant bankers etc.
Through this regulations, SEBI lays down the eligibility conditions for
intermediaries to participate in securities markets, define minimum
capital requirement, their role and obligations, the manner in which
they are going to operate, compliance and penalties that may be
imposed on intermediaries in case they do not comply with SEBI
regulations.
Cont…
3. Investor protection and education fund
SEBI has created a separate regulation called SEBI(Investor Protection and
Education fund) Regulation, 2009.
This fund is utilised for the purpose of conducting educational activities
including Seminars, workshops, training and publications for the benefit of
investors.
4. Strict entry norms for companies issuing securities
It is very important to ensure fraudulent entities do not enter securities
market as there have been several instances where promoters of such
entities have disappeared after collecting large sum of money from
investors by issuing securities.
Cont…
SEBI has therefore implemented strict entry norms for companies
entering securities market for issue of equity and other securities.
These norms and conditions are stated in terms of networth, track
record of profitability, revenues and maximum amount of capital that
can be raised.
5. Strict regulations on promoters of companies
SEBI has also implemented strict control on promoters through regulations
related to their investment in companies.
As per these regulations, promoters of companies collecting capital
through public issues are required to contribute not less than 20% of
the post issue capital.
Cont…
Further, this capital will remain locked for a period of 3years.
Therefore, promoters cannot sell their shares during this lock in period.
6. Measures to curtail market volatility and stabilise prices
Stock market volatility is one of the important reasons for loss of wealth to
investors.
In order to contain such sharp rise or fall in prices of shares, SEBI has
introduced market-wide circuit breakers.
Circuit-breakers are a mechanism that stops nationwide trading in shares
for some time once prices breach a particular level.
This halt in trading provides a breathing space to investors to evaluate their
buy and sell decisions.
Cont…
7. Separate regulation for prohibition of unfair practices in markets
SEBI enacted (Prohibition of Fraudulent and unfair practices relating
to Securities Market) Regulations, 2003.
This regulation specifically prohibited fraudulent purchase and sale of
securities and adoption of wide range of manipulative tactics by any
person including intermediaries to cheat investors
8. Prohibition of insider trading
Insider trading implies trading in the stock market by making use of
price-sensitive information which is otherwise not available to public.
Cont…
 it is a malpractice adopted by ‘insiders’ such as directors, employees,
financial intermediaries, or any other person who by virtue of their
work positions have access to private information about company’s
performance or future actions.
due to availability of advanced information they trade in shares of
such companies.
Since transaction based on insiders information are unfair to other
investors, SEBI through its insider trading regulations has specifically
prohibited such deal.
Role of Stock Exchanges in Investor Protection
1. Dissemination of information
Stock exchanges play a vital role in dissemination of information
needed by investors in taking informed investment decisions
 Stock exchanges supply this information through websites, their own
publications, trading platforms and other media.
This information pertains to prevailing security prices, trading
volumes, corporate announcement, stock price performance of
various companies, companies suspended from trading on account of
various issues etc.
Cont…
2. Regulation of brokers
Stock exchange permit trading in securities only by SEBI registered
brokers.
Further, they themselves ensure that brokers fulfil eligibility
conditions listed by these exchanges for becoming member of the
exchange.
The names of such approved brokers are made available to the
investors through the member directory of the exchange on their
website
Cont…
3. Investor Education
Stock exchanges play vital role in investor education.
Through their websites, they provide lot of information on investor
rights and obligations, precautions to be taken while dealing with
brokers and other intermediaries, investor education seminars and
workshops, etc.
4. Surveillance actions
Stock exchanges has installed number of Surveillance mechanism in
order to track market manipulation and curb unexplained price
movement.
This places control on price movements due to rumours and fake
information.
Cont…
5. Settlement guarantee mechanism
Stock exchange through their clearing corporation have established
settlement guarantee fund which on some exchanges like BSE is
referred to as Trade guarantee fund.
The main of this fund is to ensure that trades made by investors are
settled even if one party fail to honour the commitment.
6.Investor protection fund
Stock exchange has set up investor protection fund.
This fund is use for compensating investor who suffer when stock
exchange member are declared as defaulters.
Cont…
The amount of compensation extend to maximum of Rs.15lakh per
investor.
In case of NSE, this compensation extend to maximum of Rs.25lakh
per investor in respect of claim arising declaration of default of
member on or after January 6, 2017.
Investor Grievance and their Redressal system
I. Nature of Investor Grievances
Some of the major grievances of investors can be categorised as follows.
 Corporate frauds
Delay in transfer of shares
Non receipt of corporate benefits
Delay/Non receipt of annual report
Delay/Non receipt of redemption amount of debentures
Non receipt of sale proceeds of shares or other securities
 Non receipt of interest on debt securities
Corporate governance issues
Cont…
 Unauthorised trade by brokers
Non updating of investor information with companies or other
intermediaries.
Overcharging of stock market manipulation including price rigging
etc.
Cont…
II. Investor Grievance Redressal System
a) Registering complain with stock exchange or a depository
An investor may have complaint against a company or market
intermediary such as stock broker or depository participant.
In such case the investor should first approach the concerned
company or intermediary against whom he has complaint.
If the investor does not get satisfactory response from such company
or intermediary, then he can approach stock exchange or depository.
The complaint can be lodged with the investor service cell of the
exchange.
Cont..
 Generally investor should get response from investor service cell
within 15 days.
In case investor is not satisfied with the response of investor service
cell he can refer the matter to higher level committees of the
exchange which are known as Investor Grievance Resolution Panel at
NSE or Investor Grievance Redressal Committee at BSE.
In case investor is not satisfied with the response of higher level
committees, investor can apply for arbitration.
Matters not settled through arbitration can be settled in the court.
Cont…
b) Registering complaint with SEBI
When investor is not satisfied with the response of stock exchange or
a depository, he can approach SEBI to register his complaint.
SEBI handles wide range of complaint related to
(i)Any security market intermediary
(ii)Listed companies and
(iii)Any market manipulations, insider trading etc.
This complaints can be lodged through physical form or SEBI has
launched an online system for registering grievances.
This system is called as SCORES ( SEBI Complaints Redress System)
Insider Trading
 Insider trading implies dealing in securities by insider with price
sensitive information before such information is made public.
 this price- sensitive information may be related to company’s
performance or some future actions(such as declaration of dividend
bonus shares, mergers etc.)
When it is available to select few insider (such as directors,
employees, merchant bankers etc.) they may use it for buying and
selling securities at advantageous price before the price get affected
to release of such information to public.
Sometimes insiders may pass this confidential information to other
entities so that they can also benefit from such information.
This type of trading using unpublished price- sensitive information is
called as insider trading.