Strangled in bourse tangle

Sheer apathy on the part of the regulator of the country’s capital markets, the Securities and Exchange Board of India (Sebi), has resulted in a huge amount of money belonging to small investors virtually going down the drain. The total amount belonging to small investors that is currently “blocked” in some 2,000 companies whose shares have been “de-listed” by stock exchanges is estimated to be in excess of Rs 100,000 crore.

Despite the fact that a committee appointed by Sebi itself has recommended stern action against the promoters and directors of these rogue firms, the regulator has been dragging its feet in punishing those responsible for playing around with the hard-earned savings of tens of thousands of ordinary people.
The Securities Contracts (Regulation) Act (SCRA) of 1956 and the rules that have been formulated under the act specify the terms and conditions under which a company’s shares can be listed and thereafter made available for trading on stock exchanges. The same set of rules also specifies the circumstances under which a particular company’s shares can be suspended for trading for non-compliance with the listing regulations.
As per an amendment to the act in 2004, the fine for non-compliance with the terms and conditions of the listing agreement on a company’s promoters, directors and other officials (including its secretary) was increased from `1,000 to as much as Rs 25 crore. Under the law, over and above the fine, the maximum penalty that can be levied by Sebi or the concerned stock exchange authority on conviction can be 10 years in prison. Despite these laws that might appear intimidating, the fact is that thousands of promoters, directors and officials of companies have so far managed to get away without a scratch despite violating the SCRA.
These startling facts would not have come out into the open had it not been for the active intervention of a few dedicated individuals, one of whom is Virendra Kumar Jain, founder member of Midas Touch Investors’ Association, a non-profit, registered society that is recognised by Sebi as a body engaged in activities relating to protecting the rights of small investors. This society runs a website (www.investorhelpline.in [2]) which, as its name signifies, is aimed at helping small investors with grievances against companies that have literally run away with the money.
Over the recent past, this website has received over 14,000 complaints from investors. Of these complaints, roughly 2,000 complaints or one-seventh (over 14 per cent) of the total related to 450-odd companies whose shares had been suspended for trading for non-compliance with listing agreements by the authorities of stock exchanges, mainly, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It needs emphasising that out of the 5,000-odd companies whose shares are listed with the BSE and the NSE, the shares of as many as 40 per cent of these companies (or more than 2,000 companies) have been suspended for trading. By any standards, this is an extremely high proportion.
Once a company’s share is suspended from trading, there are two possibilities: either the suspension is revoked or the exchanges de-list the shares. As soon as the latter takes place, the rights of investors and the chances of getting his/her grievances redressed get drastically circumscribed. All subsequent punitive action against the defaulting companies and their promoters, directors and officials can only take place under the provisions of the Companies Act of 1956 — which is expensive and time-consuming.
On December 7, 2010, at a meeting of representatives of investors’ associations with Sebi officials, it was pointed out that small investors were being greatly inconvenienced when a company’s shares are suspended for trading because suspension means the shares cannot be sold and investors cannot recover their money. Since the authorities of stock exchanges categorically expressed their “inability” to assist in the redressal of investors grievances, it was pointed out that action would have to be taken by the regulator. That day, Sebi set up a committee to look into these aspects of investor grievances.
On March 7, 2011, the committee recommended that Sebi initiate punitive action against the promoters and directors of 1,845 companies whose shares had been listed with the BSE and 203 companies whose shares had been listed with the NSE. Interestingly, 425 companies whose shares were listed with the BSE and 60 with the NSE were considered “still active” since the companies had not yet gone into liquidation. The committee then suggested amendments to the listing agreements drawn up under the SCRA.
On December 23, 2011, at another meeting called by Sebi, with representatives of investors’ associations, Mr Jain asked the officials present why no action had been taken against the defaulting companies. He followed this up by writing a letter to Sebi chairman U.K. Sinha on February 27 this year. Still, no action was taken. Eventually, on May 18, Midas Touch Investors’ Association moved a public interest litigation before the Delhi high court. This petition is scheduled to come up for hearing in August.
Mr Jain believes the amount belonging to small investors that has been blocked in the companies whose shares have been suspended from trading has gone up from Rs 58,000 crore to more than Rs 100,000 crore over the past three and a half years.
Will Sebi act only after the court orders it to do so? Is the government impervious to grievances of an estimated 10 million small investors? Why has the number of small investors in India’s stock exchanges come down in recent years even as the number of foreign institutional investors (FIIs) has gone up? Is it a desirable situation that the rise or fall of indices in the country’s stock exchanges should be almost entirely dependent on the purchase or sale decisions of FIIs?
Sadly, the answers to these questions are obvious.

The writer is an educator and commentator