February 07, 2012
Midas Touch Investors Association
Sub: www.investorhelpline Project & Class Action Suits in Companies Bill,2011
I am writing this letter to you with mixed feelings.
We have been receiving numerous mails from investors regarding non-availability of facility for grievance lodging on our www.investorhelpline.in portal, which has been discontinued. But, first, the good news.
In the wake of Satyam accounting fraud, we had taken up the cause of seeking compensation on behalf of its cheated retail investors. As SEBI Act and the Companies Act did not contain any provision for awarding compensation to the duped investors, we filed a petition on behalf of 3 lakh individual investors, under the Consumer Protection Act, seeking Rs.4987 crore damages from Satyam Computers, Raju brothers, its statutory auditors-Price Waterhouse- and independent directors. The petition, modeled on Class Action Suits prevalent in U.S., was filed for the first time in India. However, Midas Petition before the National Consumer Disputes Redressal Commission and its appeal before Hon’ble Supreme Court were dismissed, leaving the investors in a lurch.
We strongly believe that- especially in event of losses suffered due to fraud or unfair trade practices- there can not be investor protection sans compensation. We vigorously advocated, with the Ministry Of Corporate Affairs and Parliamentary Standing Committee on Finance for its inclusion in the Companies Bill, which was under its consideration. The Standing Committee gave us the privilege to depose before it. We are pleased that our suggestion has been incorporated in the Companies Bill, 2011. We are thankful to the government and especially to then Minister of Corporate Affairs, Shri Salman Khurshid, for its incorporation. We view it as the most important legislation, on enactment, ever made for credible protection of cheated investors. It is a paradigm shift. In investor protection, tackling white collar crime and corporate governance.
The said Bill empowers shareholders and depositors to claim damages or compensation from or against the company or its directors, auditors including audit firms, any expert or advisor or consultant for any fraudulent, unlawful or wrongful act or conduct. This provision can be invoked by filing an application, as a class action, before the Tribunal. The requisite numbers of investors for filing class action suit is not less than 100 members of the company or such percentage of the total number of members as prescribed, whichever is less. Subject to compliance of requisite minimum members, any person or any association of persons representing the affected persons, can also file an application. On admission of application, the Tribunal shall issue a public notice to all members of that class. All similar applications prevalent in any jurisdiction would be consolidated into a single application. Class members are allowed to choose the lead applicant and in the event of their failure to do so, the Tribunal has the power to appoint a lead applicant who shall be in charge of the proceedings from the applicants’ side. The cost or expenses is to be defrayed by the company or any other person responsible for any oppressive act.
We hope that it would get Parliaments’ approval and that there are no devils’ in fine print.
Now, the bad news.
As you are aware, we had undertaken Investor Helpline(IH) online project to assist investors, free of charge, in redressal of their grievances. The second 3 year term of the project expired on June 30, 2011 and was not extended sponsorship by Investor Education & Protection Fund (IEPF), under the Ministry of Company Affairs. We made a representation and requested the Corporate Affairs Minister(MCA), Dr. M.Verrappa Moily, to review the decision in light of the projects outstanding performance in assisting investors, and especially in view of lack-lustre track record of the Ministries sub-ordinate offices in grievance redressal. The decision to discontinue, I told him, was retrograde and anti-small investor. He assured us that he will get the matter looked into and then have a meeting with us. The meeting never took place.
However, it is my pleasure to share with you our performance, experiences and highlights of the project, during five years of its operation.
Investor Helpline(IH) Grievance data: September 2005 to June 2011
Comparison with on-line MCA 21 Grievance data*
Analysis of Pending grievances
• 100s of grievances pending for more than 10 years were redressed.
• Positive media coverage since inception.
• Investor Helpline working has been appreciated in response to a question in Parliament and by
• Ministry of Corporate Affairs (MCA) in its Annual Report of 2010-11, which stated that investor helpline “has been rendering effective services to the investors”.
• IH data identified gaps in administration, rules, regulations and legal framework. It took up these matters with the respective authorities which triggered review and strengthening of system in some crucial matters e.g.
- Compulsory Delisting: Tighter ‘rules’ and ‘regulations’ framed by Ministry of Finance and SEBI, respectively for “Compulsory Delisting”: For the first time, payment of exit price at fair valuation made mandatory in case of Compulsory Delisting also.
- Review of monitoring process adopted by stock exchanges regarding compliances of listing agreement terms by companies & action on non-compliance: It has been decided by SEBI, in 2010, that stock exchanges would submit a standard operating procedure, with time lines, to SEBI for finalization.
- Empowering investors to seek compensation through class action suits in the event of fraud.
- Merchant bankers to disclose past track record of IPO’s handled by them.
While conceiving and developing the system, we set two standards for ourselves:
First, zero tolerance for non redressal of grievances (excepting those where judicial proceedings were under way or where penal provisions were to be invoked by the authorities) and, second, an endeavor to have the best system- feasible within the sanctioned resources -from an users’ and investor perspective.
To a very large extent, we were able to attain these goals. Firstly, the performance of www.investorhelpline.in has been excellent and way beyond ours, Ministries and experts expectations. We achieved 98% redressal amongst the solvable grievances. For this, I thank the entire team of Investor Helpline whose dedicated work made this possible. Your well over 1000 appreciation letters and thank you mails spurred us to strive harder. My grateful thanks- on behalf of the entire helpline team- to all of you for expressing your appreciation for our services and encouraging us.
Investor helpline had developed a unique, transparent, inter-active, user-friendly system with strong follow-up, status updation and back office processes. SEBI has recently revamped its on-line complaints handling system. A presentation of SCORES (Sebi Complaint Redress System) was made by its officials in the investor associations’ meeting held on December 23, 2011, though no data of complaints handled was given. Subsequently, on my limited queries, I discovered that the system and processes adopted by SEBI does not contain some critical aspects which are crucial for grievance redressal. In their absence, I am afraid, the grievance redressal rate would be far from satisfactory. This observation is made not to pull down SCORES but as a responsible person actively involved in this specific sphere. Investor helpline system and processes, which was conceived six years ago, contained these features.
Investor Helpline was perhaps the first facility, to our knowledge, which took up investor grievances- against companies and mutual funds- falling under three different regulators i.e. MCA, SEBI & RBI. This eliminated the hassle for an investor to search for different service providers for each regulator. In practice, we have found the concept sound, extremely useful for investors. The credit for this concept lies entirely with Sucheta Dalal- who is amongst the best-known financial journalists in India and was awarded the Padma Shri in 2006- and is also founder and trustee of Moneylife Foundation. We simply took it forward and implemented it.
We were forced to close a large number of grievances after exhausting our elaborate process. This culminated in a request to the authorities to take penal or any other appropriate action, for getting them resolved. Although most of these were against listed companies, SEBI-in utter disregard of its statutory obligation to protect investor interest- was unwilling to invoke the powers vested with it in the penal provisions u/s 15C of the SEBI Act and u/s 23C of SCR Act. These powers were given to SEBI -as a part of an elaborate penal provisions introduced through amendments in 2002 & 2004 respectively- as it was found that the extant penalties were non-existent or too low to serve as an effective deterrent.
“23C:If any company whose securities are listed or proposed to be listed in a recognized stock exchange, after having been called upon by Securities Exchange Board of India or a recognized stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by Securities Exchange Board of India or a recognized stock exchange, he or it shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
We received about 2000 grievances against companies which were ‘Suspended’ by the exchanges. These included over 100 companies which were not available on their last known official addresses of stock exchange, SEBI, Registrar of Companies and depositories (in few instances) and the exchange had also received back the mails undelivered. On our insistence, SEBI set up two committees to suggest an action plan for: ‘suspended companies against whom investor grievances were pending’ and ‘companies which had not complied with the listing agreement terms’. But the committees’ (of which I was a member) recommendations were implemented in a half-hearted manner, defeating its very purpose.
In such a situation, small investors are left with no option, notwithstanding the adequate deterrent provided by the legislature in the Act. It boils down to issue of: How to make regulator accountable and effective safeguards for investors in the event of failure of regulator to administer the law. Under these circumstances-leaving aside the issue of regulators accountability- investors empowerment, which gives him a right to claim the penalty for delay etc., through a citizens charter type instrument, is required to end his dependence on whims and fancies of the regulator or administration. Similar was our experience with the Registrar of Companies (ROC) and Regional Directors, who administer the Companies Act. In fact, Parliamentary Standing Committee on Finance in its 2010 report had expressed its concern on the high pendency of investor grievances with the cell of the Ministry of Corporate Affairs and Registrar of Companies.
In light of the above facts, one may wonder why investor helpline projects’ extension was declined by Investor Education & Protection Fund(IEPF)? It can not be because of it’s performance, which was appreciated, over the years, in and outside the parliament. IEPF has a corpus of well over Rs.500 crore exclusively pooled from investors unclaimed dividends, matured debentures, deposits and interest thereon etc. This is to be used only, as per the Companies Act, for “Education” and “Protection” of investors. Investor Helpline was the only project sponsored by it for ‘protection’ of investors and the rest pertain to ‘education’ including information and awareness. Inspite of its huge corpus, IEPF has been struggling to utilize Rs.5 crore per annum only with advertisements/publicity forming a substantial chunk. So, there was no financial constraint for discontinuing IH project. The consequence for small investors- status quo ante- leaving them entirely at the discretion of bureaucracy.
It is a direct fall
out, we believe, of corporate capture of IEPF. According to the IEPF rules, its
managing committee shall consist of eleven members with Secretary, Ministry of
Corporate Affairs as its Chairperson. Other members shall be nominated by RBI,
SEBI and or from any other Ministry or Department of Central Government dealing
with investor protection activities and experts from the field of investors’
education and protection. As against these, present committee does not include
any expert(s) from the field of investors’ education and protection, and
instead, is entirely packed with corporate world; by representatives of
Confederation of Indian Industry (CII), FICCI, ASSOCHAM, Institutes of Chartered
Accountant of India, Company Secretaries of India and Cost & Works Accountants
of India and National Stock Exchange. Essentially, it was investor grievances
against companies which were handled by helpline and now their representatives (corporates
and their professionals) are the decision makers. To decide, the best usage of
investors own money for their protection!
P.S. Now onwards, please mail to: email@example.com