“The greatest drawback while dealing with regulators is their unwillingness to be assertive,” says Virendra Jain
Virendra Jain, founder of Midas Touch Investors Association, who probably has the most detailed experience of attempting to help investors with redressing grievances addressed to SEBI, talks to Moneylife about the hurdles and problems with the process
In the early 1990s, a bunch of public sector banks and insurance companies were allowed to float the first set of mutual fund schemes outside the Unit Trust of India of 1964. All of them made a debut as subsidiaries of public sector entities and attracted investors due to their pedigree and by offering “assured returns” that were higher than bank fixed deposits. The Harshad Mehta scam of 1992 and the crash in share prices that followed, adversely affected the performance of most mutual funds and they were in no position to honour their commitment to investors. Canstar, a highly aggressive and popular mutual fund scheme floated by Canbank Mutual Fund, a subsidiary of Canara Bank, had raised around Rs800 crore but lost over Rs100 crore in the 1992 scam. Several of its officials were accused of colluding with the scamsters and it seemed set to ditch investors.
A path breaking litigation by Midas Touch Investors’ Association, led by its founder Virendra Jain, not only helped Canstar investors get their money back, but the far-reaching judgement prevented all other mutual funds from ditching investors too. They had to be bailed out by their parent organisations and the dubious practice of ‘assuring returns’ also came to an end.
Khalid Memon interviews Virendra Jain, who has since filed a litigation on the Rs1 lakh crore loss to investors on account of suspended companies and has also intervened in the Public Interest Litigation (PIL) against SEBI’s consent orders which let off law breakers with a small fine.
Moneylife (ML): You filed a path breaking litigation regarding Canstar Mutual Fund in the 1990s. Was a public interest litigation the only option for mutual fund investors in those days? What role did SEBI play?
VJ: We took up this issue in 1996 and filed a writ petition, not a PIL. We followed up the issue very aggressively on behalf of investors for a year before filing the writ petition in the Allahabad High Court, in 1997. Midas Touch Investors Association was founded in 1996 and the petition was filed by us along with an individual unit holder of Canstar, who was a close family member. During the proceedings, the court itself decided to consider it a PIL; we never used the word PIL in the petition. The Securities & Exchange Board of India (SEBI) was in existence for five years by then and, in fact, about 5,000 Initial Public Offerings (IPO) had come out under SEBI’s (Securities and Exchange Board of India) regime.
ML: Will you tell us a little about the Canstar issue?
VJ: Canstar was a mutual fund scheme floated by Canbank Mutual Fund in 1990 and was a 10-year scheme. It was launched as a sort of an IPO, since SEBI did not exist as a statutory body at that time, and the Reserve Bank of India (RBI) permitted Canbank to launch it. While working on this petition, we had to think hard about who to blame for the mess since SEBI had not vetted or sanctioned the scheme; in fact both RBI and SEBI denied responsibility. RBI said post the SEBI Act being promulgated it was no longer responsible, while SEBI said the scheme was launched before the Act was passed so it’s not really their responsibility either. This was a huge problem for us and investors.
I did a lot of research study, consulted a lot of people and we decided to focus on the fact that Canara Bank was the promoter of the mutual fund and the fact that it had ‘assured’ investors that it would quadruple their money in 10 years. We argued that since the scheme was permitted by the RBI, without restrictions on the amount raised or linking it to Canara Bank’s networth (which was around Rs500-700 crore then), there was an implied sovereign guarantee.
Canara bank was 100% owned by the government. Ultimately, there was a Cabinet decision that allowed the central government to pay Rs600 crore to Canara Bank. We got the verdict because we studied the financials of the schemes and made a strong case about the role and responsibility of the parent bank which was earning a fee from the asset management company, even though the schemes themselves were losing money.
ML: Midas Touch Investors Association, which you founded, won a mandate from the Investor Education & Protection Fund to run an Investor Helpline for several years. How many entities/regulators did you have to deal with in the process (SEBI/MCA/stock exchanges/companies/ others)? What has been your experience with each of them?
VJ: We dealt with all the three regulators—SEBI, RBI, Ministry of Corporate Affairs (MCA)—and of course stock exchanges. Our experience with the regulators was mostly bad. We had a very different system of working. We took up grievances against listed companies, some mutual funds and companies that raised fixed deposits/debentures. However, we excluded stock market intermediaries. Essentially, we came across two types of grievances; first, those that should be easily resolved by companies, but are ignored because of lethargy or callousness. Such grievances formed a big part of complaints received. The second type is grievances that are difficult to resolve because investors get stuck with systemic issues.
We resolved nearly 98% of the grievances, some were 10 years or more old and had not been redressed despite all efforts including litigation. The Investor Helpline was able to redress them because of sheer persistence on our part, with no litigation or notice, and without the help of any of the regulators. Our system was to write to the company first, if we did not get a proper response within 30 days, we would go to the concerned exchange. Again, if everything failed, we went to the regulator saying that the company and exchange have failed to redress the complaint and that they must take appropriate action. We provided the regulator with a history of our grievance redressal effort, which required a lot of paper work. A summary was posted on the website of the Helpline.
In a few other cases which could not be resolved easily, we would go into details of the laws applicable and the possible solutions. We would also discuss it with the MCA and write notes on the systemic solution or remedial measures. I view any grievance redressal mechanism as a good microscope which gives a reflection of what is happening in that company etc, the best possible feedback one can get.
ML: What is the greatest drawback or hurdle while dealing with investor complaints and taking it up with regulators?
VJ: The greatest drawback while dealing with regulators is their unwillingness to be assertive and use the powers that are vested under various acts to ensure that grievances are redressed. You end up fighting with the regulators and it becomes a futile exercise.
ML: Many investors tell Moneylife that SEBI’s processes are not geared to help an investor, who has been cheated by a company or a market intermediary, to get his/her money back. If SEBI punishes the intermediary, it does not help the investor. Is this a correct assessment?
VJ: Firstly, I don’t think SEBI has appropriate processes in place for a lot of things— this comes through in our long experience of running the Investor Helpline. Secondly, if you have been cheated, SEBI has no power or intention and, worse, there is no provision of getting investor’s money back under the SEBI Act, or the Securities Contracts Regulation (SCRA) Act, or even the Companies Act or any other statute. Unless a company voluntarily redresses a grievance or pays an investor there is no redress. On very rare occasions, the government or regulator becomes extremely proactive, forces companies to disgorge money and distributes it (it has only happened once in 2010 when SEBI paid Rs95 crore to applicants of 21 IPOs in a strange process that was more of a face saver for the then chairman). In most cases, there is no provisions of giving the investors’ money back; worse, the penal action against intermediaries is also usually too little and too late. SEBI does have powers but it does not act.
I am also unclear about how the SEBI process declares a complaint as having been ‘redressed’. When it comes to redressal, I would say the first focus should be on companies and then on intermediaries. At present there is no pressure on companies to act on a complaint. This goes back to what I said about the process of declaring a complaint as having been redressed. Does the company declare a problem as resolved? Is this cross checked with the investor? At Investor Helpline, when a complaint was addressed, we used to put out the details on our website and write to the investor for his/her view. We would say that if we do not hear from the investor in 15 days, the complaint would be treated as closed based on information from the other side. Shouldn’t the MCA, SEBI, RBI etc follow a similar process to document what is pending, resolved or closed etc?
ML: Do you believe that failure to redress grievances has any role in the sharp decline in India’s investor population over the past two decades of economic liberalization?
VJ: Definitely yes. The underlying problem that we see today does not reflect the actual realities out there; the problems are far worse than what we see today. Public is completely disenchanted because systematic issues are never dealt with. The whole problem lies there—its not just about an individual grievance not getting resolved, the point is that we are not being able to resolve it. The lack of resolution is an indicator rather than the cause of the problem. It manifests as a much larger problem which the government and the regulators simply do not want to address or which they have failed to address.
ML: What is your experience of the grievance redress process in the capital market today? What can be done to improve it?
VJ: One problem we have everywhere is that a bureaucracy that is not accountable to anyone. Secondly, investors are not empowered. So they are forced to run to various officials to have their grievance resolved or to beg the company in which they have invested to resolve their issues. In my opinion, the best solution is to allow investors to directly approach a court or a forum which is adequately empowered to redress his/her grievances and to levy penalty on those responsible and also compensate the investor for the loss and effort involved in having the problem resolved.
ML: In your view, which set of market intermediaries have dealt the biggest blow to investor confidence? Do you see any improvement in their regulation over the past two decades?
VJ: I would put merchant bankers at the top of the list and then other intermediaries who deal with investors. For example brokers who do unauthorized trading in investors accounts, etc. It is difficult to rank other intermediaries, but based on the work we have done in primary markets I would put merchant bankers on top and all those associated with them in floating IPOs. When we talk about improvement in regulations we need to assess the impact of economic liberalization. It has virtually given companies and intermediaries the license to loot investors. Regulations are never tailored to the requirement of investors, or with their protection in mind; regulations are drafted to suit the corporate sector and essentially help them raise money easily even if it amount’s to cheating and looting of the investor. Unless there is a paradigm shift, not just an overhaul, this situation will continue.
ML: What is your experience, if any, of dealing with complaints against mutual funds?
VJ: When it comes to mutual funds we have not dealt with them very much. Till date no mutual fund trustee has been hauled up for the wrong doings in the last 20 years.
Secondly a number of mutual fund schemes have been consistently under performing their benchmark indices but the trustees have done nothing. The asset management companies have also done nothing. It is the responsibility of trustees to oversee performance. They should be hauled up for dereliction of duty on their part.
Lastly, the Association of Mutual Funds in India (AMFI) is the representative body of mutual funds. It conveys the impression that it represents mutual funds, but it does not—it is more of a federation of AMC’s, which is a big distinction.