А spectacular growth in the Indian capital market has taken place in the recent years. The capital mobilization is expected to increase with every five year plans. The number of investors has also increased considerably during the last decade. Although capital formation was considerable, а number of malpractices like manipulation of share prices, exploitation of unwary investors by fly by night operators, insider trading, misleading information, concentration of shareholding etc. have been witnessed.
ТЬе SEBI is expected to play а pivotal role in the capital market sо far it relates tо issue of securities, prospectus, disclosure of information, listing, takeover etc. SEBI has issued а number of guidelines to regulate the malpractices in the Indian capital market and provide protection to the investors.
Problems faced by Investors in Indian Capital Market
The investors in the capital market face а number of problems. Some of these problems are discussed below:
1. Inadequate Disclosure
Availability of complete and correct information is required for developing an investor protection system. But the disclosures required under the Securities Contracts (Regulation) Act, 1956, leave а lot of loopholes regarding the disclosures to be made in the prospectus. Therefore, some companies give false or misleading statements in their prospectus so as to attract and cheat innocent investors.
2. Insider Trading
Insider trading means sale or purchase of securities by persons who possess price sensitive information about the company on account of their fiduciary capacity. For instance, information about the declaration of high rate of dividend, issue of bonus shares, rights shares etc., information relating to financial results of the company, amalgamations, mergers and takeovers, disposal of the undertaking and such other information.
3. Price Manipulation
It is а common practice that prices of shares of companies proposing to соmе out with а public issue or right issue are artificially pushed up in the market. This is usually done by way of giving large employment advertisements in the newspapers just before the public or right issue. So that some form of respectability may be created and thereby the market price of shares of that company may be pushed up.
4. Over Subscription of Shares
Usually when the companies make public issues, they are over subscribed many times. А large number of investors lose interest in the money locked with the company.
5. Lack of Transparency
Lack of transparency is another shortcoming of the stock market. The investor does not know the actual rate of the transaction. The investor should be informed about the rate and brokerage by noting them on the contract.
6. Investor’s Grievance
Thousands of complaints are received from the investors against companies and brokers. The complaints include non-receipt of refund orders, letters of allotment, dividends, brokerage, underwriting commission etc.
7. Takeovers and Mergers
In а closely held company, the shareholders are adequately protected against takeover as the number of shareholders is few and the shareholders’ agreements impose restrictions on transfer. But in the case of а publicly listed company such protection is not included in the agreement to protect the minority shareholders.
8. Problems related to Settlement Mechanism
The settlement mechanism calls for physical movement of share certificates in order to record ownership changes in the company’s books. Some serious risks such as bad deliveries, delays in transfer and registration, mutilation, loss, forgery and theft of certificates have been attached to the settlement mechanism. These problems were repeatedly raised in several investor forums.
Remedial Measures for Investors Problems
SEBI has taken certain steps to reform the primary market to protect the interest of the investors. Accordingly, in addition to the disclosures to be made under the Companies Act, companies have to make disclosures as per SEBI Guidelines regarding Disclosure and Investor Protection.
SEBI has framed SEBI Insider Regulation, 1992 which prohibits dealing, communicating or counseling on matters relating to insider trading. As per the regulation, nо insider shall communicate any company unpublished price sensitive information and counsel or procure any other person to deal in securities of any company based on the unpublished price sensitive information.
The SEBI has соте out with guidelines for issue of shares by different types of companies. Besides, it has set up а separate division to monitor unusual movements in prices in со-operation with the stock exchanges.
In order to prevent the loss of interest on the application money locked with the company, the SEBI has introduced а scheme known as stock invest scheme in which the investors will get interest on the amount sent along with the application.
An Investor Complaints Cell was set up а decade ago to render service to the investors and to attend to their grievances. In some exchanges, these cells are renamed as Investor Service Cell.
SEBI has issued Stock Brokers and Sub Brokers Regulations, which prescribe the records and documents to be maintained, and procedure for inspection of brokers. Inspection of stock exchanges and brokers is undertaken by SEBI. Now SEBI has given the powers of а civil court under the Code of Civil Procedure in respect of discovery and production of books, documents, records etc.
SEBI has introduced а code for takeovers and mergers with the objective of ensuring fair and equal treatment to all security holders in relation to takeovers and mergers. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 1994 brings all parties in а substantial acquisition under SEBI’s regulatory frame work in order to protect the rights of minority shareholders.
An Investor’s Protection Fund had been set up to provide better protection for the investors by way of compensation up to а certain amount of their investment in certain eventualities such as default by brokers.
The introduction of depository system is an appreciable capital market reform, which shall protect an investor from various problems faced by him regarding the settlement mechanism.
Prohibition of fraudulent and unfair trade practices relating to securities market regulation was notified on 25th October 1995. One of the functions of SEBI as set down in the Act is to prohibit fraudulent and unfair trade practices relating to securities market.
SEBI has issued guidelines regarding complete transparency of transactions in the stock market.