Gross injustice to Indian investors, says NGO

Yesterday, we wrote about the incongruity of shareholder compensation in India vs the US taking the Satyam case as an example. Simply put, American shareholders were compensated for their loss but India does not have the tort law that will allow shareholders to sue companies that seeks to defraud them.

Midas Touch Investors Association, a Delhi-based association went to the Supreme Court seeking compensation for investors who lost money in the Satyam case. The Supreme Court dismissed the petition and asked the association to seek another recourse. Virendra Jain, who heads the association, does not think there is any.

“Indian investors have no chance of getting any compensation like those in America,” he said. In an interview with Firstpost he says that investor protection cannot be complete without the remedy of compensation.

Excerpts from the interview:

You have said that there is no scope for Indian investors seeking compensation in the Satyam case?

There is no recourse for Indian investors. There is no remedy of compensation available under the current dispensation in statutes like the Securities Exchange Board of India Act, Securities Control Regulation Act (SCRA) and Companies Act.

Mahindra Satyam has recently compensated US investors by settling pending cases with SEC. What are your thoughts on this?

It is unfair for Indian investors. It highlights the gross injustice done to investors in India. It is a matter of principle.

What has been in your view the damage so far of not having such a mechanism?

For getting effective investor protection, one of the main things necessary for redressal is that investors should be able to get compensation and laws should provide that. They exist in Western countries. Indian retail investors have not been able to repose faith in the system. This is reflected in the very low participation of retail investors in the securities markets. Our study shows that only 2% of household savings find way into equity markets today against 9% in 1990s. This is despite reforms like shift to electronic trading from floor-based trading, paperless trading from paper-based and so on.

Do you think regulators have enough teeth or the new Companies Bill will ensure that?

The responsibility of investor protection primarily rests with Sebi. Yes, the Companies Act is supposed to protect investors. The regulator Sebi has enough teeth to protect investors interest. The problem lies with the administration at Sebi. Our experience is that Sebi is unwilling to implement rules and regulations. For example, in the primary market, Sebi has adopted a disclosure-based regime. We often see that companies make misleading statements in the offer document and are still allowed to go public. The other weakness is in the area of surveillance of stock prices and effective action in the event of unprecedent volatility is almost absent. It compromises price discovery and effectiveness of the market.

How can the confidence be restored?

An effective mechanism to regulate regulators is necessary. Currently, regulators are accountable to Parliament and in practical terms they are assigned to Parliamentary committee. There is a need for effective oversight by the Parliament. They need to be accountable to investors of affected parties and empowering investors to directly initiate action against regulators. Investors are almost at the mercy of regulators whether they take action or not.

Listen to the full audio interview with Virendra Jain: