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SEBI has had a poor track record in resolving and responding to complaints. It also does not have data pertaining to PoA abuses. The government has asked the market regulator to resolve complaints faster
Rajeev Chandrashekar, Member of Parliament, who had taken cognizance of one particular shocking story brought up by Moneylife, of a retired army veteran Wing Commander CR Mohanraj who nearly lost all his life savings decided to bring to notice issues of small investors in the parliament. Namo Narain Meena, minister of state for finance responded that as many as 28 lakh investor grievances were received by the market watchdog, Securities Exchange Board of India (SEBI). More shockingly, it was found out that SEBI does not have data about Power of Attorney (POA) abuses and hence has no data pertaining to the same.
The minister said, “SEBI has system of categorising the complaints received from investors against stock brokers on 26 parameters based on complaints generally received by it. Complaints of forged POA do not fall in any of these 26 parameters. Thus, SEBI does not have data about the number of incidents where investor's stocks were mishandled and/or allegedly liquidated by brokers, purely based on a forged POA.”
SEBI said it has no data pertaining to POA abuses which is quite common and easy to pull off. Often times, there have been incidents of stock brokers misusing the Power of Attorney (PoA) and getting forged signatures from clients, so that they can sell off customers’ accounts to meet their liquidity needs. Many hapless customers have sent complaints to SEBI only to be shafted.
This suggests that SEBI has a long way to go in terms of offering adequate investor protection. If at all some of the recent measures have been bereft of any logic and homework and have been partial towards institutions, where the once much-maligned entry load was a cheaper option for investors. More shockingly was the way SEBI treated small investor and army veteran Wing Commander CR Mohanraj, who was wiped out by Motilal Oswal which nearly drove him to suicide as he lost his life savings. Stories like these have put spotlight on regulation and protection of small investors in India.
We had done an in depth cover story—Needed: Financial literacy for regulators—on regulators a while back and why investor population has dwindled rapidly.
Whether SEBI has put an effective centralised complaint mechanism in place for speedy redressal of these complaints/grievance, the minister said that SEBI’s new online complaint redressal system, SCORES, has reduced the processing time of complaints. The minister said, “SEBI has informed that it commenced a new web-based centralised grievance redressal system called SCORES (SEBI Complaints Redress System) on 8 June 2011. Despite the new system put in last fiscal, the number of complaints at a staggering 28 lakh in one year speaks of not only how slow it has been in disposing off complaints but also the state of the retail investor in India.
Click here to read what we had to say about regulators, especially SCORES system.
According to the minister, the government has directed SEBI to take appropriate action in time on investor grievances and send its reply to the complainants. Whether it will do anything to fast-track or do anything at all is anyone’s guess.
The new Companies Act will ensure that innocent investors will not be cheated the way they were by. However, the provisions are severe and small companies will face unnecessary problems in raising funds through group companies or other family members and relatives
Companies raise funds for working capital, capital expenditure, and general corporate purposes by issuing securities. Securities do not necessarily mean shares—it may be bonds, debentures, preference shares, and convertibles. Companies raise such funds by issuing securities either by way of public offers or through private placements. Public offers are few and far between. This option is available only to listed companies, and given the level of preparation involved, companies cannot afford to go public every now and then. Hence, the most common way of raising capital by companies is through private placements, which is the issue of securities other than public or rights offers. All offers of securities by private companies are private placements.
The Sahara case highlighted abuse of this provision—some Rs20,000-plus crores were raised from a few million investors. But it was still termed private placement. In response, the Companies Bill, 2012, passed by the Lok Sabha on 18 December 2012 and Rajya Sabha on 20 December, has tightened the provisions pertaining to private placements. But the rules are now so stringent that it may choke companies’ attempts to flexibly raise capital.
What adds to the rigours of the section is that that section is applicable to all securities—debt and equity, and to all companies, public and private.
‘Private Placement’ under the Companies Act, 2012
Part II of Chapter III of the Companies Bill 2012 (on notification, Bill to be called Companies Act, 2012) deals exclusively with private placements. The process of private placements has greatly tightened under the Act. Every offer of securities other than public, rights or bonus offer amounts to a private placement and shall be governed by the Section 42. The Section also requires issue of private placement offer letters for every privately placed offer of securities.
Explanation II (ii) to sub section (2) of section 42 of the Act defines “private placement” as:
“Private Placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.
In terms of Section 42(2) of the Act, a company can make allotment of securities to a maximum of 49 persons in a private placement offer during a financial year. Whiles counting the maximum limit of allottees, qualified institutional buyers (QIBs) and employees who have been issued securities under ESOP may be excluded.
Section 42(4) of the Act makes it very clear that all offers or invitations which do not comply with the provisions of the Section 42 shall be deemed public offers. The explanation to sub-section (2) of the said section also clarifies that any offer to more than 49 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, shall be deemed to be a public offer and shall be regulated by the provisions of the Act as prescribed for a public offer. In addition, compliance with applicable provisions SCRA and SEBI will also be required.
It is important to note here that no exception has been provided to any class of companies, including the NBFCs (non-banking finance companies). However, the limit of 50 subscribers can be extended as and when so deemed fit by the central government. Unless specified, NBFCs and other small private companies will be facing big time as the section covers all companies, whether small or big, private or public.
The provisions on the private placements are applicable to all companies, including small and private companies. This is evident from the language of Section 23 (2) which specifically burdens private companies with compliance of Section 42 in case of private placement offers.
It is important to note here that the Act has relaxed certain provisions for “small companies”; however, no such exemption has been provided to even small companies for making allotments through private placements.
The effect of the Sahara ruling is apparent from the extremely stringent provisions of Section 42 of the Act prescribed for private placements by ALL companies. The compliances/procedure for a privately placed offer is explained below:
The authority to approve the private placements—whether is to be approved by board or the members—has not been specified in the Section. However, adding to other harsh and rigorous provisions on private placements, the Section has prescribed severe monetary penalties for promoters and directors of companies making default in compliance with the prescribed provisions. Section 42(10) lays down the penalty as amount involved in the offer or Rs2 crore—whichever is higher—and, in addition, the company shall also be liable to refund whole monies to the subscribers so raised under the relevant privately placed offer.
Last December, the finance ministry issued Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 (the Rules) and made the preferential allotment rules as applicable to public companies more stringent. The private placement provisions as contained in the Act appear to have been prepared incorporating the provisions of the Rules. The difference between the two is that the Rules are applicable to public companies only and the provisions of the Act on private placement will apply to all companies. The other point of difference is that the Rules require consent of members by way of special resolution for making preferential allotments whereas the Act is silent on such authority approving the private offers. Once the Act comes into force, one will have to wait and watch that whether the Rules will be repealed or the public companies will be required to comply with both the Act as well as the Rules.
 Small companies has been defined in section 2(85) as companies other than public companies having: