Sucheta Dalal :Four things Sebi needs to do to save small investors
Sucheta Dalal

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Four things Sebi needs to do to save small investors  

Oct 9, 2006

At the inauguration of the new Sebi Bhavan last Friday, Finance Minister P. Chidambaram said that the periodic scams and sharp volatility in the capital market scares a lot of ordinary people and makes them distrustful about investment. He wanted the regulator to find ways to allay the fears -- genuine and irrational of this large middle ground of savers and turn them into investors.


How would the regulator go about doing this? Here are four ways in which it could quickly improve investor confidence in the market.


IPO ratings. The large middle-ground of people who distrust the capital market include thousands of investors who burnt their fingers by investing in scores of fly-by-night companies that vanished with their money in the 1993-95 period. Another wave of IPOs, including scores of realty companies, is getting ready to raise public money once again. The difference is that the issues are bigger and premium expectations are higher.


In the 1990s, some newspapers did try to provide the public with an objective analysis of IPOs, but were criticised for their trouble, because investors were too keen to invest and unwilling to heed warnings. The regulator needs to push for independent rating of IPOs. Sebi has made a small beginning by seeking voluntary rating of a few IPOs. The effort holds promise and must be quickly made mandatory and funded out of Sebi\'s own Investor Protection Fund, which has been strongly endorsed by the Prime Minister.


Grievance redressal. One way of allaying investors\' fears is by putting in place efficient grievance redressal mechanisms. Sebi already provides on-line grievance redressal ( system, complete with a tracking number. This is welcome, but there is room for speed as well as networking with other grievance redressal efforts. Another is a free Investor Helpline, set up by the Midas Touch Investors Association and funded by the Investor Education and Protection Fund ( ). This e-helpline, which was launched on September 8, 2006 has already shown a decent record of grievance redressal, given that it has hardly been publicised. The site has 11 different forms for lodging specific grievances which include non-receipt of dividend, intimation about shares sent for transfer, demat, remat, bonus shares, refund money and fixed deposit related issues. This is probably because it has a proper system for processing complaints as well as forwarding, retrieval and systematic follow-up and reminders.


Although grievance redressal is a notoriously difficult exercise, since several companies are indifferent to investor issues, Midas has already collected several thank-you notes from satisfied complainants. For instance R. Jacob from Visakhapatnam got back the principal on his fixed deposit with Escorts Ltd. Although this is an unsecured deposit, the fact that the Helpline is sponsored by the Ministry of Company Affairs obviously made the difference. Sebi would do well to liaise with the Investor Helpline, to encourage greater redressal and also keep track of companies that plan to raise fresh public funds when they have pending investor complaints.


Information verification. The investor verification process conducted by stock exchanges is flawed. While it conveys the impression that stock exchanges are verifying media reports to make accurate information available to the larger body of investors, it is doing just the opposite. Companies have long since realised that stock exchanges merely act like a post offices when they seek their response to news reports. Consequently, they provide evasive and sketchy replies to stock market queries, which are accepted without a question. Yet, stock exchanges themselves are the first level of self regulation that the Finance Minister alluded to. Companies have also realised that bourses have no way of knowing if they omit to inform them about potentially “price sensitive” information, because there is no verification process.


Dinesh Dalmia of DSQ Software was the first to exploit this when he did not bother to inform the stock exchanges about a 50 per cent increase in his capital through a preferential offer of shares. Interestingly, Sebi has been rather slow in following up such complaints. In one case, a Sebi official told a complainant that Sebi only acts as a post office and seeks answers from the bourses. In that case it is two post offices too many and it only confuses investors. Sebi needs to get serious about enforcing the provisions of Clause 49 of the Listing Agreement of stock exchanges by forcing the bourses to follow through on information, at least when they receive complaints.


Registration of financial advisors. At a meeting of capital market intermediaries, a Foreign Institutional Investor (FII) remarked that India is the only country where unregistered entities are allowed to spew financial advice to investors over television channel without any fiduciary responsibility or registration whatsoever. It is interesting that Sebi has made no effort to bring in some restrictions on such specific portfolio advice even after it has fined such advisors for abuse of their positions.


In the past, officials have argued that there is no provision in the Sebi Act to initiate action against such superficial advice, but the Sebi Act has been amended several times and is apparently due for another comprehensive overhaul. If financial advisors have not yet been regulated, it is probably the market regulator fails to see the need to do so.


-- Sucheta Dalal