Investors lost Rs1 lakh crore due to poor regulation. Will there be a CBI probe?
Moneylife Digital Team 15 May 2013

Investors are paying the price for companies’ failure to follow listing norms and the companies are allowed to get away scot-free by the exchanges and regulators. A PIL is seeking probe by the CBI into this gross mischief

It is estimated that as much as Rs1 lakh crore of savings have been flushed down the drain because of poor supervision and regulation. This attitude continues to be evident in the regulators’ stand on public interest litigations (PILs) filed by investor rights groups.

Midas Touch Investors' Association has filed a PIL in the Delhi High Court alleging, among other things, that stock exchanges have failed, as first line regulators, to ensure compliance of the listing agreement by companies and take action in the event of non-compliance. How did the Securities Exchange Board of India (SEBI) react? Its affidavit in response says, the PIL is “devoid of merit”and has been filed by the petitioner “without appreciating the fact that the interest of the investors have duly been taken care of and protected” by SEBI.

How true is this? Well, consider some facts. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) told a committee chaired by MS Sahoo in 2010-11, that 1,845 companies listed at BSE and 203 companies at NSE were not in compliance of the listing agreement terms. Trading in securities of most of these 2,048 companies (out of 5,000 companies listed on the BSE and NSE) has since been suspended leaving small shareholders holding illiquid shares. In effect, investors pay the price when companies do not meet listing norms—the companies themselves get away scot free. The table provides the number of companies that are suspended by the BSE each year since 1995.

Midas Touch estimates that the total value lost to investors due to these suspensions is a high as Rs1 lakh crore due to their investment in around 3,000 such companies listed on the BSE, NSE and 14 regional exchanges.

What action has SEBI taken against these companies? Its counter affidavit filed in the court provides the answer. SEBI claims to have initiated action against 23 companies for failure to redress investor grievances. Of these, it proposes to start adjudication proceedings in 19 cases. It is important to note that the MS Sahoo Committee itself was constituted by SEBI only on Midas Touch’s insistent demand, as a accredited investor association, to initiate action against companies that forget about investors once they have raised public money and are no longer interested in staying listed and following onerous compliance and disclosure rules.

Do SEBI and the bourses have other powers that could have been invoked against these companies instead of suspending trading, which only hurts investors? The petition documents that too.

According to Midas Touch, the Securities Contracts (Regulation) Act (SCRA) gives plenty of scope for regulatory action.
* Under Section 23A, the failure to furnish information, returns or report to stock exchange within the time specified in the listing agreement is liable to be punished with a penalty of Rs1 lakh per day or Rs1 crore, whichever is lower.
•  Section 23E provides for a penalty of up to Rs25 crore for failure to comply with provisions of listing conditions.

Failing to comply with the listing agreement is also liable for prosecution u/s 23(2) of Securities Contracts (Regulation) Act, 1956 (SCRA). Stock exchanges can initiate this prosecution and the law provides for imprisonment that may go up to 10 years with or without a fine, which may be as high as Rs25 crore.

As Midas’s writ petition points out, SEBI’s failure to invoke these powers and perform its statutory duties, “has enabled thousands of listed companies, their promoters and directors to get away with unfair practices and violation of listing agreement terms”. It says “Small investors are the biggest losers due to such inaction. Resultantly, their estimated investment of over Rs1 lakh crore has been blocked, is in suspended animation for years and perhaps gone down the drain with all its ramifications on the health of securities market and economy.

The number of affected small investors may be one crore. They have lost heavily and withdrawn from the securities market, severely affecting fund-raising by companies for speedier development of the economy.”

The petition also points out what Moneylife has harped upon with monotonous regularity. “During two decades of enactment of SEBI Act, 1992, the number of retail investors has gone down from two crore to 80 lakh; Share of household savings deployed in the securities market has gone down drastically, during first half of 1990s over 10% of financial household savings were deployed in the securities market which has dropped to around 4% currently”.

Midas goes on to expose SEBI’s track record. It says, SEBI ought to have initiated “Prosecution/Penalty proceedings against more than 12,000 promoter and directors (an average of six directors and promoters per company) and 2,000 compliance officers/company secretary of  2,048 companies u/s 23 A, for each year, starting from the year 2004.

It ought to have started adjudication proceedings against over 20,000 entities for penalty u/s 23E and filed criminal complaints u/s 23(2) against defaulting companies and the persons responsible.”

Instead, SEBI was more occupied with disposing off 1,755 cases in four years through the consent mechanism rather than start direct adjudication action even in a dozen cases over the past eight years.

Midas Touch concludes that this smacks of an unholy nexus between unscrupulous corporates, stock exchanges and SEBI to loot ordinary investors. Its petition has asked for direction to the Central Bureau of Investigation (CBI) to investigate, fix accountability for dereliction of duty by SEBI and stock exchanges officials and take appropriate action against them. It also seeks a write of mandamus directing SEBI to act on the recommendations of the Sahoo Committee in a time-bound manner and to start adjudication proceedings against promoters of all the suspended companies under the SCRA provisions.

ashwin bahl
1 decade ago
CBI ? Probe? what good will that do for the aam aadmi IE investor ?
shanti Patel
1 decade ago
MIDAS TOUCH seems to be the only Investors' Association which is very active and has shown the way to others.
All the investors should unite and take up the matter with the appropriate authority.
In this country things move like CHALTA HAY. Laws are on paper and nobody bothers about it
Unless ethics and moral values change and Educated people take up the matter collectively, it is difficult to change the atmosphere.
Instead of TALKING, if people take ACTION and support person like BHAGVANJI RAYANI and such others, Officers of the Bombay Stock Exchange,National Stock Exchane and SEBI have to act.
I am fighting a battle in corporate word know how difficult to fight single handedly. People are reluctant to support and do not bother till water comes to their home.
I think investors should become a member of Shareholders Association and Managing committee members should take action like MIDAS TOUCH is taking. If the VOICE is RAISED from all parts of India, officers have to act.
I request every reader to ACT and just not write and forget.

Shanti Patel
Chartered Accountant
nagesh kini
1 decade ago
While crowing about having 'initiated action' against n number of defaulting companies, letting go equal numbers off the hook, SEBI needs to tell the world how many prosecutions have been taken to their logical conclusion and how many given a burial by 'consent without admitting guilt. It leaves the poor investor gasping for breath!
Replied to nagesh kini comment 1 decade ago
I smell a fish in SEBI's Consent Order mechanism. It is an easy and inexpensive way out for those promoters and their directors, merchant bankers & Auditors who have cleverly avoided penal & criminal proceedings through the Consent mechanism. This must be probed . The connivance of SEBI officials needs to be exposed
nagesh kini
Replied to sachchidanand comment 1 decade ago
The Consent Order mechanism needs to be put an end to with immediate effect as it is in deed the easiest way to get out. There is no need for any probes.
nagesh kini
1 decade ago
While crowing about having 'initiated action' against n number of defaulting companies, letting go equal numbers off the hook, SEBI needs to tell the world how many prosecutions have been taken to their logical conclusion and how many given a burial by 'consent without admitting guilt. It leaves the poor investor gasping for breath!
arun adalja
1 decade ago
very good job done by midas touch.we have lot of organisations but nobody takes any initiative in this respect.exchanges are not bothered about investors and they always favour company and no action only delisting or suspension they can do.sebi is another sleeping watchdog he never wakes up.
1 decade ago
Midas Touch has really done best anyone can do for protecting Investors. All small shareholders of these companies who have taken Investors for a ride must be compensated by attaching properties of directors/ promoters. Some of the known persons , just name a few, H.P. Ranina, Sunil Gavaskar etc , have lured investors by lending their names at the time of public issues and later on conveniently resigning from the Board of Directors. Some of the Companies can be named . Topline Shoes, Atash Industries etc.I am a victim of this fraud & hope that Midas Touch will succeed in some action from judiciary.
Ashok Visvanathan
1 decade ago
Midas Touch is probably correct. However in the case of companies that are heavily borrowed, the banks step in and take the assets. In such cases the companies dont/wont/cant do voluntary liquidation. In some industries the debt equity ratio is high and this can happen. I am not sure what percentage of the companies fall into this bracket.
Replied to Ashok Visvanathan comment 1 decade ago
Instead of Getting Nothing , better to get Some Amount, so that he can throw away Share Certificate.In Such situation, Banks also will be Careful in giving LOANs , instead of Presant Practice of taking Some Bank Manager's Individual Benefit and Granting Loans based on Increased Estimes/ Projections.Whole System gets Regulated. As SEBI calculates Interest also on Invested Amount - Investor's Due also will be Substatial,and their Percentage of Share on Liquidation of company will be High and Banks are taught Lessons.
1 decade ago
I lost Rs.2,25,000/- from my father's retirement benefits in the Harshad Mehata scam. I kept away from the market for a long time.

But, the then FM's (Hon P. Chidambaram)assertion the India growth is glowing and the then SEBI Chairman's (Mr. Damodaram)innovative steps taken to revamp SEBI,(I got benefitted by Rs.27 with his such steps) lured me back to the Market. This time I lost Rs.10 lacs, (30 years accumulated savings in Govt. service), which prompted me to commit suicide, but immediately realised that I am far better than an un-organised Farmer, who are used to be at stake every time, and futher I thought that the markets are legalised gambling to level the rich with the poor. Hence, now, I strongly recommend any one not to get lured by any kind of reforms of the market.
Vaibhav Dhoka
1 decade ago
Collecting public money is the most easiest way to become RICH in INDIA.You Collect And Vanish NO Question asked.Because we have debilated regulator in SEBI and Stock exchanges.
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