|Midas Impacts JPC Recommendations For Investor Protection|
Joint Parliamentary Committee (JPC) consisting of 30 Members of Parliament ( 20 from Lok Sabha and 10 from Rajya Sabha) was constituted to inquire into the stock market scam and matters relating thereto. The Speaker Lok Sabha appointed Lt.Genl. (Retd.) S.P.M. Tripathi as Chairman of the Joint Committee on 27.04.2001.
The terms of reference of the committee included " To suggest measures to protect small investors".
Midas Touch was invited by, and, deposed before the JPC on June 06, 2002. Virendra Jain, Hon. Secretary of Midas Touch gave the oral deposition before the Committee. Besides this, Midas Touch had also submitted three Memorandas to the Committee. These detailed some of the reasons for the scam which was being investigated, systemic weaknesses and specific suggestions for restoring investor confidence by strengthening of the system.
The Committee presented its report to the Parliament on December 19, 2002. Some parts of Midas Touch deposition were quoted in this report and numerous suggestions made by Midas were accepted and formed part of the recommendations made by the Committee in Chapter XIV titled "Investors Protection".
If implemented, these recommendations can revolutionise Indian securities market into one of the most efficient and safe one in the world. Some of the extracts of JPC report are reproduced hereunder:
Extracts of JPC Report
JPC Report Para 14.9: Midas Touch Investors Association has suggested that SEBI should be empowered to award damages / compensation to the investors for the losses suffered by them due to manipulation in prices.
JPC Report Para 14.15: To a query regarding wrong disclosures in the prospectuses, a representative of Midas Touch Investors Association during his personal appearance before the Committee said :
"Regarding the wrong disclosures in prospectuses, I would like to say that we did a study of a lot of draft prospectuses and found that there were glaring mistakes. We wrote to the SEBI before the public issues came up. They had been given huge amounts of loans by public financial institutions. We pointed it out but nothing was done. Some of them did not go into public issue because the market turned bad but financial institutions gave loans, in some cases up to Rs. 100 crore."
JPC Report Para 14.16: Enquired whether he appreciated the method of fixing price through book building method, the representative of the Midas Touch Investors Association Said :-
"Not at all. It is totally detrimental". In the Book building mechanism, etc. we are excluding the small investors an opportunity to participate in it."
JPC Report Para 14.17: According to Midas Touch Investors Association the present rules as stand framed for "Preferential Allotment" of shares are inherently anti-investor since it erodes his wealth and is a powerful tool, with a few exceptions, for the entrenched managements to manipulate market price of shares.
JPC Report Para 14.18: Explaining the scope for manipulation on account of preferential allotment, the Association has stated that normally a portion of shares owned by promoter group is under lock-in i.e. that they cannot be sold for a certain period. For manipulation of their share prices, promoters require a lot of money. They, normally, raise a substantial part of it, through pledging of their holdings. Preferential allotment of shares when made, comes in handy for sustaining the manipulation. The shares allotted replenishes his holding sold at a very high price or may even increase the percentage of the promoters holding at a lower price as well as it enables him to pledge the same to raise further money required for manipulation and to release the earlier holdings already pledged. It also enables the promoter to sustain liquidity by giving more shares in the market, helps him raise more money required without jeopardizing his control on the company robbing existing small shareholders and trapping the unsuspecting investor in the secondary market. The Association also stated that hundreds of companies, whose share prices went through the roof in the boom, had availed of this loophole.
JPC Report Para 14.19: Midas Touch Investors Association has, therefore, suggested banning of Preferential allotment to any class of shareholders with an exception of allotment to foreign technical collaborators with the stipulation that the preferential allotment to them be made on the basis of market prices with a minimum lock-in-period for the entire allotment made on preferential basis and the existing promoters shall not sell/transfer/pledge their shares for a minimum period which may be specified.
JPC Report Para 14.27: DCA has further stated that inspections in the current "Scam" seem to indicate that one of the routes used for manipulation of share prices has been the so called preferential allotment of shares. The inspections have brought to light that brokers such as Shankar Sharma, Ketan Parekh, Harish Biyani, D.K. Singhania, etc. received preferential allotment of shares from companies such as HFCL, After Infosys and DSQ Software etc. DCA is considering framing under Section 81 read with Section 642 of the Companies Act to govern preferential allotment of shares. DCA has proposed to do this in consultation with SEBI which has issued regulations for preferential allotment. Some of the ideas which have come up in this regard are as follows :
(i) Preferential allotment of shares cannot be made to a company, if one of its (allottee's) objectives is to trade in shares/securities, or to any individual or firm, which deals with or trades in shares and securities.
(ii) There should be lock-in-period of, say, about 18 months.
(iii)Preferential allotment should be made only against receipt of full consideration.
(iv) Preferential allotment should be linked to a fair valuation of the share.
(v) Preferential allotment should be limited to a percentage of the existing paid-up capital, say about 10%.
JPC Report Para 14.28: Pointing out that investors have lost confidence due to the happenings in the last decade in the stock market, a representative of Midas Touch Investors Association cited the case of vanishing companies and said :
"In the years immediately after liberalization, 1.5 crore new investors, small investors as we call them, came into the market between 1992 and 1996 through IPOs. They were duped. At that time Rs. 86,000 core were raised in four years through public issues and right issues by four thousand odd companies. Most of these 1.5 crore investors who came in for the first time in the stock market were dupedů..Till dated 229 companies (only) have been identified by the Government appointed monitoring committee, as having made public issues and disappeared. No one has been arrested and no money has been recovered. There has not been even an action plan as to how to recover that money."
JPC Report Para 11.28: The Capital market had witnessed a boom period during 1993-94 and 1994-95 when many new companies have tapped capital market and collected funds from the public through issue of shares/debentures and fixed deposits. Many of these companies have defaulted in their commitments made to the public while mobilizing funds. Some of these companies are not even traceable. This has caused disappointment and anxiety to the public who had invested their hard earned money in these companies. The Securities and Exchange Board of India (SEBI) has looked into this problem and has identified 229 listed companies which have collected funds through public issue and are not available now at their registered offices.
JPC Report Para 11.30: The present status of 229 vanishing companies as provided by DCA is as follows :-
Sl.No. Status No. 01.
Originally identified by SEBI
Found to be regular in filing document
Companies started filing documents subsequently
Companies under liquidation
Seized by State Govt.
Identified and asked to update document
(default notice issued)
Still vanished 69
JPC Report Para 11.31: Prosecutions were launched against 135 companies for non filing of Balance sheet and Annual Report (out of these against 33 companies, police complaints were also filed). However, in December 2001, a decision was taken to proceed against these companies for non-compoundable offences, carrying the punishment of imprisonment. Consequently, 79 prosecutions under sections 62/63, 68 and 628 of the Companies Act have been launched as on 10.06.2002.
JPC Report Para 11.32: SEBI has debarred 87 companies and 336 directors u/s 11B of the SEBI Act from raising money from the Capital Market and dealing in Capital Market in any form, for a period of five years. The field offices of DCA have taken action against such companies for violation, if any, of the provisions of the Companies Act, 1956 and tried to enlist assistance of police authorities and general public to ascertain the whereabouts of such companies. A Central Coordination and Monitoring Committee consisting of Secretary DCA and Chairman SEBI was set up in March, 1999 for taking stringent action against unscrupulous promoters who raised moneys from investors and misused them. The Coordination Committee has met from time to time and has taken the following decisions :-
(i) the process of identifying vanishing companies has to be an on going exercise, a continuous vigil is to be maintained, and additions made to the list, as required.
(ii) to continue action for filing prosecutions u/s 62/63/68 and 628 of the Companies Act, 1956 against the vanishing companies and their directors for Civil/Criminal liability for mis-statement in prospectus, fraudulently inducing persons to invest money and making false statements in the offer documents. Priority in action will be taken against the companies which had raised Rs.10 crore, or over.
(iii) In respect of the companies, which are still "vanished", it was decided that SEBI would engage a top lawyer and have a "model" FIR drafted by him/her and after approval of the Coordination Committee, this "model" FIR will be sent to all the Task Forces to register the FIR against all such companies.
(iv) Action against the companies that have gone into winding up or are before the BIFR and their directors will also be initiated after obtaining leave of BIFR/Courts, if such permission is required.
(v) SEBI would obtain advice from a top lawyer on the possibility of attachment of properties of the directors of vanishing companies.
(vi) The names of the directors of the vanishing companies shall be put in the website of DCA and SEBI if the directors stand disqualified as per section 274(1) (g) of if any company, and/or its directors are being prosecuted for non-compoundable offences.
JPC Report Para 14.29: With a view to restoring investor confidence, the Midas Touch Investors Association made the following suggestions :
(a) Manipulation of share prices to be made a cognizable offence:-
"Insider Trading", "Price-Rigging" and manipulation of share prices through "fraudulent and unfair trade practices" be made a cognizable offence under the SEBI Act and SEBI be authorized and made responsible for filing of F.I.Rs in all such cases.
(b) Promoters to disclose their intent to increase or decrease their shareholding :-
The disclosure should contain information regarding reasons and object of the proposed change in the promoters holding, source of funding in case fresh purchases are proposed, their present holdings, lock-in period details, quantities pledged etc.
(c) To define "Undesirable activities" in the SEBI Act :-
To empower SEBI to declare such persons/entities found to be involved in "Undesirable activities" as "Undesirable" and prohibit them from holding office of director or trustee or in any fiduciary capacity for at least five years or till they have compensated the investors for the losses suffered due to their action/inaction, whichever is later. Definition of "Undesirable activities" be provided in the SEBI Act and SC(R) Act and may include activities like insider trading, price-rigging, manipulation of market price of shares, fraudulent and unfair trade practices, directors and promoters of Vanishing companies, failure to make continuing disclosures of price sensitive information timely, non-payment of listing fees or failure to submit important information to the stock exchanges forcing them to suspend trading of it's securities which adversely affects the interest of the existing small shareholders.
(d) Investors' Charter :-
For efficient administration of the existing system, imparting it transparency and accountability an 'INVESTORS CHARTER" be made by all the regulators, viz. SEBI, DCA and RBI under the respective laws they administer. DCA has made a "Citizens Charter" somewhat on these lines. This would create awareness amongst the investors regarding their rights and obligations. The said Charter may include :
- Delineation of functions and responsibilities of each official whom the investor should contact for redressal of his grievance or administration of a particular provision of law, the time limit for redressal/action and in case of the failure to resolve the same.
- The method by which the individual official and/or concerned department/cell/directors be held accountable and action against the erring person and financial penalties laid down in the respective acts.
(e) Monetary penalties to be twice the amount of unlawful gains made by manipulators or losses suffered by investors whichever is higher.
(f) Mechanism for seizure of assets and disgorgement of unlawful gains.
(g) Representation to investors on Board of Companies, SEBI etc. :-
The small investors should be adequately represented on the -Board of Directors of listed companies through election amongst themselves and through representatives of investors association on the Board of SEBI and Stock Exchanges as well as on the Committee constituted for administration of Investor Education Protection Fund etc.
(h) Representation to investors on various Advisory Committees :-
The small investors should be given adequate weightage and represented through the investors association in the various committees formed by SEBI, Reserve Bank of India and the Central Government.
(i) A Committee to check end-use of funds raised through Public or Rights issue or misutilisation of funds :-
To constitute a Committee (like Task Forces constituted for Vanishing Companies) under the SEBI Act which shall be responsible and empowered to examine the end-use of funds raised by the companies through Public or Rights issue or through any method. If deemed necessary in investor interest, it may further inquire into misutilisation/diversion/siphoning of funds by listed companies.
(j) Awarding compensation for the services rendered :-
Provision for awarding compensation, by SEBI to the individuals/NGOs, may be incorporated in the SEBI Act, for successful complaints lodged and pursued by them or on sensitive information supplied regarding the securities market operation. This may be modeled on the lines of the provisions of Securities and Exchange Commission of USA.
(k) Awarding compensation to successful litigation :-
Adequate compensation to be paid, by the regulator, on successful completion of the case or an understanding between the concerned parties, to the investors association which brings matters of investors interest to light, pursue them through Writ Petition/PIL.
JPC RECOMMENDATIONS IN THE REPORT
JPC RECOMMENDATIONS Para 11.42: The committee note that the action by SEBI and DCA has enabled the tracing of 160 out of 229 companies which were earlier treated as vanished. There are still 69 companies which remain untraced. The Committee urge that the 'model' FIR which is at drafting stage should be finalised soon and the Central Coordination and Monitoring Committee should ensure that FIR against all the vanishing companies are registered without further loss of time and further ensure that whereabouts of the vanishing companies are ascertained. The Committee also desire that definition of vanishing companies should be made comprehensive.
JPC RECOMMENDATIONS Para 11.43: Apart from SEBI's action of debarring 87 companies and 336 Directors from accessing the Capital Market, the DCA has launched 79 prosecutions against these companies for non compoundable offences carrying the punishment of imprisonment. What the Committee are seriously concerned is about how the investors may get their money back from the vanishing companies. The Committee urge that SEBI, DCA, Company Law Board and RBI should work seriously towards achieving this objective and take all necessary steps, including attachment of properties of directors of vanishing companies.
JPC RECOMMENDATIONS Para 14.52: Investor protection is a continuous exercise and not a one-time effort. A recent survey done by National Council of Applied Economic Research for SEBI reveals that only a nominal portion of household savings flow into the capital market. The main reason for such insignificant flow can be attributed to lack of confidence of the retail investors in the capital market. It has been observed that poor disclosures at the time of public issue and manipulative pricing of the 'issues' by the companies often results in robbing the uninformed investor. In order, therefore, to ensure that the investors are well informed, it is not only very important to have full disclosures but also to ensure that these are authentic. The Committee recommend that the Managing Director/Chief Executive Officer and one Director of the Company at least, must certify all disclosures made by the listed companies to be true and correct in case the same are found to be false, these official must attract criminal liability under the law.
JPC RECOMMENDATIONS Para 14.53: The Committee are also given to understand that the prospectus is not vetted by SEBI, with the result that promoters are able to bring public issues at highly manipulative prices. It is therefore imperative that SEBI should formulate suitable guidelines for evaluating the prospectus and in case of dubious or fraudulent promoters, it must stop the public issue. As regards IPOs (Initial Public Offering), two vital issues -pricing and tracking the end use of funds have been totally neglected by SEBI. While determining pricing is a difficult task, there can be differences of opinion about the price genuinely, but to leave this entirely to the discretion of management based on the recommendations of the merchant bankers, does not serve the interests of small investors. The very fact that during the mid-nineties, in many cases, dishonest management of the companies cheated the poor investors of thousands of crores by bringing out highly overpriced issues and SEBI did not react, on the plea that in the free market regulator need not interfere, is not acceptable to the Committee. Totally free market pricing in a market which is highly imperfect and has a long history of fraud and manipulation is not a workable solution. Fair pricing through the book building rules has also failed to achieve the desired results. It is, therefore, suggested that SEBI should either use industry benchmarks or evolve other suitable criteria for this purpose. SEBI and DCA have been quibbling for the past many years, each one saying that to determine the end use of the funds raised through IPO was not its responsibility, with the result that manipulative promoters have had full liberty in diverting the funds. The Committee are of the view that this responsibility must be discharged by SEBI and the management of defaulting companies should be suitably punished.
JPC RECOMMENDATIONS: Para 14.54: The Committee feel that award of compensation to aggrieved investors is an area which requires urgent attention. The Committee in this connection note that Dr. N.L. Mitra in his study on investors' protection has suggested that Consumers' Court or Securities Tribunal should be empowered to award compensation to aggrieved investors. He has also suggested a separate Act for protecting investors' interest. The Committee feel that implementation of these suggestions will go a long way in protecting the investors' interest and accordingly recommend expeditious consideration of these suggestions for implementation.
JPC RECOMMENDATIONS Para 14.55: An Investors Association has made a plea for banning preferential allotment of shares, except for foreign collaboration, on the ground of being inherently anti-investor and being a powerful tool to manipulate market prices of shares. The Committee note that SEBI has since decided to bring preferential allotment of shares under the take-over code and will subject it to stringent discipline. This step should not eliminate preferential allotment of shares to legitimate purposes like giving equity stake to a technical collaboration but should be strictly watched to prevent misuse. The Committee hope that the Department of Company Affairs, as proposed, would expeditiously frame rules governing preferential allotment of shares under Section 81 of the Companies Act in consultation with SEBI.
JPC RECOMMENDATIONS 14.57: A number of suggestions has been made to protect the Investor's Interest and to restore the confidence of investors in the stock market as contained in paragraphs 14.29 and 14.31. Some of these have been recommended in this report under the Section "Powers of SEBI" which include the suggestions regarding power of investigation, power to impound/retain documents, attachment of the properties of defaulting Promoters/Directors/Companies, enhancement of monetary penalty, power to disgorge ill-gotten profits and power to impound ill-gotten money. The committee particularly agree with the suggestions viz., distribution of impounded funds amongst the affected investors, making manipulation of shares a cognizable offence, mandatory disclosure by promoters of their intention to increase or decrease their share holdings and the need to define "undesirable activities" and accordingly recommend that appropriate action be taken in this regard. The Committee is inclined to agree to giving representation to investors on Boards of listed companies, on SEBI, and on various Advisory Committees, and recommend that this aspect be examined for suitable action. The Committee hope that suggestions for encouragement and suitable funding of investors associations will receive consideration in order to ensure their active participation in matters relating to investors protection.
JPC RECOMMENDATIONS Para 14.61: The committee also recommend that a Committee consisting of representatives of SEBI, DCA, RBI (NBFC and Banking Division), Stock Exchanges, Investors Associations should be set up to develop an effective investor grievances redressal system.