Simran Khuran - Investment

*Simran Khuran (A3211116061)
The multi crore securities scam that rocked the Indian financial system in 1992 (Harshad
Mehta, the 1992 Security Scam) had the existing regulatory framework to be fragmented and
inadequate and hence, a need for an autonomous, statutory, and integrated organization to
ensure the smooth functioning of capital market was felt. To fulfil this need, the Securities
and Exchange Board of India (S.E.B.I), which was already in existence since April 1988, was
conferred statutory powers to regulate the capital market.
SEBI has earned respect from domestic and global investors for improving the efficacy of the
market by ensuring a well-functioning market development dematerialisation of shares,
shortening settlement cycles, initiating nationwide electronic trading, introducing risk
management systems, establishing clearing corporations, nurturing the mutual fund industry
and so on. However, regulation, either rules or enforcement, is far from perfect, particularly
in areas like insider trading, where SEBI’s track record is none too bright. Even when the
perpetrators are caught and punished, the penalty is often so low that the regulations have lost
any deterrent effect they might possess. Even today, SEBI does not have the power to tap
phone records, a recommendation of the Vishwanathan panel.
However, SEBI in August 2019 formalised an informant mechanism which was expected to
reap rewards in terms of getting better conviction. Under this, SEBI will reward an
informant ₹1 crore if the tip-off provided by him or her leads to headway in investigating an
alleged case of insider trading. This will give the regulator a platform to widen the net and
increase the quality of evidence and investigative processes.
Further, various securities market participants, viz., self-regulatory organisations such as
stock exchanges and depositories, intermediaries like stockbrokers, service providers
like asset management companies, portfolio managers, merchant bankers, and investors
etc, have all been more critical of SEBI than appreciative. It has been recently accused
of being "callous", "overreaching", "inert" in performance of its duties and in exercising
its power. Besides, the regulator has often been indicted of being inconsistent and
lacking transparency in its conduct. Midas Touch Investor Association filed a Public
Interest Litigation (PIL) against SEBI and the two national stock exchanges alleging that they
failed as regulators in fulfilling their statutory duty of protecting investors. It was submitted
that there was inaction on the part of SEBI in performing its statutory duties which has
enabled thousands of listed companies, their promoters and directors to get away with unfair
practices, violating the listing agreement terms without imposition of statutory monetary
penalty and penal action.
Analysts felt that the major reason for SEBI's failure to protect investors was lack of skilled
human capital. For instance, they quoted the example of the KP scam in which KP had taken
huge positions in ten stocks. In spite of SEBI possessing this information, it could not gauge
KP's vested interests in acquiring these huge positions and his illegitimate plans. Moreover,
lurking in the back of every investor's mind is the fear that someone will take away his
money which is very precious for him. The aim of the investor is to get adequate returns on
his investments and that he must be protected from the losses. Though SEBI provides the
comprehensive guidelines for Investor Protection Fund/ Customer Protection Fund at Stock
Exchange, but the amount of compensation is provided to the investor only against the
defaulter member broker. The regulator is silent on the losses of the investor which occurs in
the natural course of action, that is, at the time of downfall of the market. It is necessary to
evolve a comprehensive Securities Law for the protection of the investor from the monetary
losses. In the interest of investor, for his protection from the losses, it is necessary that the
regulator must adopt a developmental approach, provide a specific administrative authority
and have an integrated framework.
Also, the regulator at times fails to read the pulse of the market which has led to delays in
the development. The Securities Appellate Tribunal (SAT) has pulled up the market regulator
for not having a proper mechanism to compensate investors who are victims of stock market
manipulations. In the matter of Ashok Dayabhai Shah & Ors. vs SEBI1, SAT stated that,
“We have no hesitation in stating that SEBI as a regulator in the instant case has not
performed its duties and has kept the complaint pending for more than six years, which
speaks volumes by itself. The tribunal fails to fathom why the complaint could not have been
decided unless SEBI officials had a vested interest in not deciding the matter."
Regulatory gaps, arbitrage and turf wars harm the investor as retired bureaucrats, sometimes
with very little understanding of the market, are given a free reign over an entire market.
Indian investors need a unified regulatory environment, with roles in accordance to function
and not form. This means that financial products that are similar in their function should be
governed by similar regulations.
1
Ashok Dayabhai Shah & Ors. vs Sebi on 14 November, 2019, SAT
In addition, Scams and frauds going undetected also have to do with the capacity of
regulators. The Punjab and Maharashtra Co-operative Bank (PMC) scam and Punjab National
Bank (PNB) fraud prove this well. The PMC scam caught the Reserve Bank of India (RBI)
asleep at the wheel in its supervision of co-operative banks. The bank used over 21,000 fake
accounts to conceal non-performing assets of real estate firm Housing Development and
Infrastructure Ltd. It took a scam to the tune of about ₹4,355 crore for RBI to direct co-
operative banks to replace the existing system of email-based reporting at bank branches to a
web-based central system (central information system for banking infrastructure). Besides,
despite numerous attempts the debt market volume has increased but it has failed to attract
sufficient liquidity. The regulator needs to develop a vibrant corporate debt market and
securitization market but these largely remain part of over the counter market
SEBI’s efforts are to create effective surveillance mechanism for the securities market, and
encourage responsible and accountable autonomy on the part of all players the market would
be possible if the intermediaries set themselves up as effective self-regulatory bodies. Self-
regulation is therefore the cornerstone of the regulatory framework advocated by SEBI,
which like management by exception would result in regulation by exception. SEBI has taken
a number of steps in the last few years to reform Indian capital market. It has past various
regulations such as freedom in designing and pricing instruments, introduction of stock invest
scheme and introduction of electronic trading. It also has faced various controversies such as
Ulips, Sahara and MCXSX controversies. In such a small time SEBI has earned its respect
and place in the capital market however there are various problems and challenges in front of
it which it needs to overcome

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