Investor’s Protection

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This article is written by Indra Priyadarshini, a student of Alliance University, Bangalore. This article discusses investor’s protection. It also gives a brief on the measures taken by SEBI in this regard and the relevant provisions of the Companies Act, 2013. 

INTRODUCTION

Investors have a very important and crucial role in the financial and securities market. They are also known as the shareholders or members of the company. They are the ones who decide the level of activity in the market. They help in the growth of the market by investing money in funds, stocks, etc., and as a result also aid in economic development. By protecting them, you can protect and enforce the rights and claims of a person in his role as an investor. This is why it is essential to protect the interests of the investors. Various methods have been enacted in order to protect the interested of the investors from malpractices. The Securities and Exchange Board of India (hereinafter referred to as SEBI) provides for the regulations of the Mutual Funds and investor’s protection. SEBI has taken several measures to protect and safeguard the investors from malpractices in mutual fund, stock market, shares, etc. The Companies Act, 2013 also has various provisions related to investor’s protection.

Who are Investors?

The capital of a company is divided into 2- Equity and Debt. Creditors are those persons who contribute to the debt capital of a company, whereas investors are those who contribute to the equity capital of a company. The creditors get a fixed rate of interest on the amount they loan and have limited voting rights only on matters which are directly linked to their affairs, like winding up of the company, or reduction of capital. On the other hand, investors have voting rights in all matters of the company and are also permitted to obtain dividend. The investors are insiders of the company and are also referred to as shareholders or members. It is important to keep in mind that not all members are shareholders, but all shareholders are members of a company. According to Section 2(55) of the Companies Act, 2013, the definition of the word “member” includes the subscribers of the memorandum of a company, persons who agrees in writing to become a member of a company and whose name is entered in the company’s register of members, and persons holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository. 

Investor’s Protection under the Companies Act of 2013

The shortcomings of the previous Companies Act of 1956 in preventing white-collar crimes and providing investors protection was disclosed by the “Indian Enron”. The fall out of Satyam in 2009 highlighted the dire need for protection of investors in India. Therefore, the Companies Act of 2013 was fixated at ensuring sufficient protection to investors. Various provisions were introduced in the 2013 Act to facilitate accountable and transparent management in company’s in order to safeguard the interests of the stakeholders’ like prohibition of insider trading, introduction of class action suits, offence of fraud, and enhanced penalties for breaches and non-compliances. The following provisions of the Companies Act, 2013 are related to protection of investors:

  1. Section 73- Under this section, a company accepting or reviewing deposit from the general public is a punishable offence except in manner stated under Chapter V of the Act and the Companies (Acceptance of Deposit) Rule, 2014. 
  2. Section 34- A brief information about a company’s profile and their investment proposals are written in the prospectus, which is issued to the general pubic. In this regard, Section 34 imposes criminal liability for any misstatements in the prospectus. 
  3. Section 447- If there is any false or misleading information in the prospectus which is issued, distributed or circulated, which encourages others to make an investment, then they shall be liable for action under this section. Fraudulent act of deliberate concealment of facts to induce people to invest money is also punishable under this section. 
  4. Section 36- This section provides punishment for persons who deliberately induce investors to invest by any agreement for the purpose or the pretended purpose in order to secure a profit. 
  5. Section 123- It is in the agenda of every Assistant General Manager to declare the dividend. Dividend refers to the profits gained by the company and its distribution among the shareholders according to the amount paid-up shares they hold, i.e., it is the return on the investment made by them. This section of the 2013 Act mandates that the dividend should be credited in investors account within in five days after the declaration.
  6. Section 125- This section provides for the establishment of investors education and protection fund by the central government. This fund is credited with the unpaid or unclaimed amount of application money, matured money, or deposits. This fund has to be used solely for the promotion of investor’s awareness and protection of the interests of investors. 
  7. Section 136- This section deals with the right to demand financial statements. It states that every member of a company has the right to get access to the copies of the Balance-Sheet and Auditors Reports. In case of default, the company will be made liable to pay a fine of rupees twenty-five and the concerned authority will be penalised to a fine of rupees five thousand. 
  8. Section 436- In cases where Section 136 is not complied with, then the investor has another option i.e., to proceed against the company or the officers in court according to the guidelines enlisted under Section 436 of the Act. 

These are a few of the sections under the Companies Act, 2013 which provide for investors protection. 

  1. MEASURE TAKEN BY SEBI:

The SEBI has taken numerous measures to ensure the protection of interest of investors. They have released many directives, established investor protection fund to compensate investors, and conducted several investor awareness programmes. Section 11(2) of the SEBI Act enumerates the measures taken for investors protection:

  1. Stock Exchange and other securities market business regulation. 
  2. Registration and regulation of intermediaries in the business like brokers, bankers, trustees, investment consultants, etc. 
  3. Works of custodians, participants, credit rating agencies, foreign investors, depositors, etc. being recorded and monitored. 
  4. Registration of investment schemes like Mutual fund and venture Capital funds, and regulation of their working. 
  5. Promoting and controlling of self-regulatory companies. 
  6. Checking regularly for frauds and unfair trading practices relating to the securities market. 
  7. Monitoring and regulating major transactions and take-over of the companies. 
  8. Conducting investor awareness and education programme. 
  9. Training the intermediaries in the business. 
  10. Assessing and auditing the security exchanges and intermediaries. 
  11. Calculating fees and other charges

CONCLUSION

Protecting the interests of the investors is one of the most prioritised duty of the regulatory bodies. The SEBI has enacted several hard measures to ensure investor protection. The SEBI guidelines and measures ensure that all aspects of the investors interests are safeguarded. But there is still room for improvement. The investor awareness programme has helped to a great extent. These measures are necessary to establish an accountable and transparent transaction. It is up to the issuers and investors to abide by the guidelines to really secure the securities market. The Companies Act, 2013 increasingly focuses on regulations relating to investors  protection as well and ensuring a more transparent work environment in all levels of a company’s management and removing any hidden hurdles which may directly or indirectly tamper with the working of a company. In order to maximise the protection of interests of the investors, the company’s law has to be coordinated with other legislations.

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