Is investor protection a myth? Why is SEBI dragging its feet on the ombudsman after notifying it in 2003?

The ombudsman scheme for the capital market, approved and notified by SEBI eight years ago, has not been implemented by successive chairmen for mysterious reasons. Will the market regulator, under its new chairman, introduce the scheme at least now to safeguard the interest of investors?

One of the weakest areas in investor protection in the capital and securities market has been the poor grievance redressal mechanism. The 2009 Swaroop Committee report states that the investor population in our country has declined from 20 million in the 1990s to just over 8 million in 2009. One of the main reasons for this steep fall in the investor population can be attributed to the rampant malpractices observed in the capital market, the short-changing of investors at various levels, and the absence of any mechanism for expeditious and satisfactory disposal of investor complaints in a time-bound manner.

The Reserve Bank of India (RBI) had on 14 June 1995 introduced the banking ombudsman scheme, which has been functioning reasonably well under the guidance and supervision of the central bank. The banking ombudsman scheme has been revamped a few times since then, to provide a satisfactory complaints redressal forum for all customers of commercial banks, and it has resulted in a considerable improvement in customer services and a substantial expansion in banking services.

So, in early 2003, the proposal for an ombudsman for the securities and the capital market was discussed at a meeting of the Legal Advisory Committee constituted by the Securities and Exchange Board of India (SEBI). The Committee, headed by former chief justice of India MN Venkatachaliah, suggested the framing of the Ombudsman Regulations for the capital market, by SEBI, pursuant to its function under section II of the SEBI Act, 1992. Accordingly, a concept paper on an ombudsman for the securities market was prepared and a copy of the draft regulations was put up on the website of SEBI inviting comments from the public in May, 2003.

In all earnestness, taking into account the responses received from the public, SEBI notified the SEBI (Ombudsman) Regulations 2003 for the establishment of the Office of the Ombudsman to redress the grievances of investors in the securities and capital market. (Notification number SO 953(E), dated 21 August 2003.) This was followed by two amendments to the regulations, the first one on 5 December 2003 and a second on 9 November 2006. (Source: SEBI website)

It is said that 'mysterious are the ways of God'. In our context, we could adapt that to say, 'mysterious are the ways of SEBI', for nothing appears to have been done in the past eight years either to appoint an ombudsman, or to set up the office of ombudsman to implement the August 2003 notification issued by the regulatory body itself. Surprisingly the whole scheme has been put in cold storage by the successive chairmen for unknown reasons, while investors continue to suffer at the hands of unscrupulous players in the capital market.

There are numerous examples of how even reputed companies flout rules and regulations with impunity, and SEBI has been able to do precious little to protect the hapless investors. An extreme case of failure to honour the commitments made at the time of the public issue is that of ONGC, a Maharatna company in the public sector, who has not settled the claims of investors arising out of its maiden public issue of 2004, as is evidenced by their own admission in the quarterly results published by them for the last seven years. (Read 'ONGC's  mockery of investor services'.)  SEBI has been a mute spectator to this, and the company is ready to launch its follow-on public offer shortly.

It is gathered from the statistics published on the SEBI website that during the past 20 years of the existence of SEBI, from 1990 to 2010, more than 27.06 lakh complaints were received by the regulator and 25.46 lakh of these complaints have been resolved, with about 1.6 lakh complaints unresolved. This is an average of over 135,000 complaints a year and an average of over 500 complaints received by SEBI each working day. With the steep fall in the investor population, the number of complaints too has come down during the past few years. Nevertheless, these statistics certainly justify the need for a strong and efficient grievance redressal machinery in the interest of developing the capital market along healthy lines.

SEBI should now conduct a thorough investigation into this matter and answer the following questions to restore the confidence of investors in the capital market and trust in the institution of the market regulator itself.

1. What is the reason for not implementing the ombudsman scheme in the capital market for the last eight years, even though it was duly notified in 2003?

 2. Who is responsible for such callousness in not implementing the scheme that was already notified by SEBI?

3. Is the notification and amendments that were issued still valid, and if so can the ombudsman scheme be introduced now without any further delay?

4. How can SEBI prevent such things from happening in the future, as such inaction undermines the credibility of the regulatory body which is expected to set an example of good corporate governance?

5. Can investors whose complaints have not been settled to their full satisfaction during these past eight years, be permitted to refer their complaints to the ombudsman now, in order that they get a fair deal?

Apart from serving the needs of investors, the biggest advantage of setting up an independent ombudsman is that SEBI, which has enough on its plate, would be relieved from this onerous responsibility and could devote more time and attention to other critical issues that affect the capital market. Therefore, SEBI, in its own enlightened self-interest, should set up the office of the ombudsman without any further delay and create an environment of justice and fair play for the benefit of aggrieved investors in our country.

(The author is a banking and financial consultant. He writes for Moneylife under the pen name 'Gurpur'.)

1 decade ago
Please tell me what is the basis for stating investor population in our country has declined from 20 million in the 1990s to just over 8 million in 2009. It seems both figures are uncomparable. Atleast now we can verify number of demat accounts but what is the basis of 1990 figure? Is it number of folios. Even after several hundreds of public issue has come since then. the market cap increased many fold. Is it true that despite the investor population reduced by more than 60% so many issues are being oversubscribed. The number of demat accounts has steady increase excluding several million physical shareholders (Reliance Industries alone has more than 2 million physical folios). Is it fair to make a judgement based on two uncomparable figures.
1 decade ago
Is it not ironic that the word "Lokpal" was coined from the concept of the Ombudsman. Given the new vigour around the Jana lokpal proposal, the Capital markets "Ombudsman" will get more traction from SEBI. We can only hope.
1 decade ago
All regulators in India are Bete Noir of the people of this country. They have done nothing good for the people.




saarey jaha se achha (nahi) hai yeh hindustan hamara!
Dr Vaibhav Dhoka
1 decade ago
No one can expect OMBUDSMAN at SEBI as MIRSD department at SEBI will never allow this to happen as they will be loosing their extra earning from brokerage houses to turn blind towards grievances against them.And that too when Mr Bhave coterie was at helm of affair.The establishment of OMBUDSMAN will be a rare hope.
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