148 SMALL INVESTORS GRIEVANCES AND REDRESSAL MECHANISM IN INDIAN CAPITAL MARKET ABSTRACT DR. P. VENUGOPAL*; DR.K.SUDARSAN**; DR.D.HIMACHALAM*** *Principal, Seshachala Institute of Management Studies, PUTTUR- 517583, Chittoor District, A.P. **Assistant Professor, Sreenivasa Institute of Technology and Management Studies (SITAMS), Chittoor. ***Professor, Sri Venkateswara University, Tirupati. The present article is an exploration of small investors grievances and redressal mechanism in Indian Capital Market. It explains the importance of Indian security market and the need for small investors protection. It is a market in which long period securities are exchanged. At present the capital market plays an important role in mobilizing resources and diverting them in productive channels. In this way, it facilitates and promotes the process of economic growth in the country. The capital market helps the investors to invest in long term financial assets in many ways. The study reveals that in spite of the market reforms and regulatory measures initiated by those at the helm of affairs, many investors continue of suffer several difficulties from a multitude of elements involved in the capital market. The gullibility of the investors is a major factor inviting difficulties to them. If they educate themselves better on the intricacies of the market and show more restraint and caution, a major share of their problems could be averted. This article aims to analyze various grievances in primary market as well as secondary market and knowledge about their regulatory mechanisms. KEYWORDS: Capita Market, Small Investors, Primary and Secondary market, SEBI, Grievances and Redressal Mechanism. INTRODUCTION Capital Market is a supporting system that provides vitality and sustenance to industrial and commercial enterprises. Recognizing the need of capital market development as a precondition for the blossoming of industries allied areas, every government strives hard for the sustained growth of their capital market. In India, development of capital market acquired momentum during the liberalization era. Our government took many measures for the development of the capital market on sound and healthy lines. Introduction of online trading, dematerialization of securities, derivatives trading, rolling settlement in the
149 stock exchanges etc. are notable among them. This has resulted in increased transparency in dealings, rise in market volume, increased market capitalization of companies etc. The Indian capital market also went through a major transformation after 1992, although the beginning of such an initiative could be seen since the second half of 1980 s. Since then the market has been growing in leaps and bounds and aroused interests in the investors. The reason for such a development was an increasing uncertainty caused due to liberalization and standardization of the prudential requi8rements of the banking sector for global integration of the Indian financial system, rise in their non-performing assets led to a decrease in credit from banks to the commercial sector. With liberalization and opening of the gates led to an expansion of three broad channels of financing the private sector investments: a) Domestic capital market b) International capital market (American depository receipts and Global depository receipts) and c) Foreign direct investment. The efficiency of the capital market which can be defined in terms of its ability to reflect the impact of all relevant information in the prices of the securities and the large number of profit driven individuals who act dependently on one another grew tremendously in the Indian context. The number of issues enlisted before and after 1991 has been exponential in nature. Some of the major reasons for its growth are advent of SEBI and abolishment of Capital Issues control act, new regulations for protection of investors, on-line trading, depositories and credit rating system etc. here it has been tried to highlight the major problems linked with new issue market and the problem solving mechanisms built to take care of the investors. Small investors are the backbone of Indian Capital Market. Their active participation results in channeling savings into various infrastructural and productive activities. As per the latest estimate made by SEBI, there were 19 million share owning individuals in India. This is too small a figure considering the fact that the population of our country exceeds one billion. In many developed countries like USA, a large proportions of people ark their investment in capital market instruments. It is true that Indian capital market underwent radical changes as a result of liberalization measures. However such reforms have not proved instrumental in attracting the majority of investors into the capital market. Considering the fact that individual savings represent a major chunk of domestic savings, more investors must be brought to the mainstream of the capital market. Hence there is a need to instill confidence in capital market investment in the minds of investors. Individual investors in our country suffer from certain inherent drawbacks. There is a general reluctance on the part of the people to invest either directly or indirectly in capital market. This may be due to many reasons. Firstly, successful investment in capital market can be done only by those who have a fairly good knowledge of capital market. Consequently people shy away from investing in it. Secondly, investors encounter various impediments created by other market participants. Consequent investor complaints keep escalating year after year. The standard of service information being provided to
150 shareowners in India by companies and stock brokers are not only below world standards but leave a majority of Indian shareowners dissatisfied. Thirdly, the series of securities scams unearthed over the past few years have dampened the sprit and enthusiasm of investors. The Securities and Exchange Board of India (SEBI), in 1991 made a compilation of common investor grievances, relevant legal provisions and various remedies available to the investors. The grievances were grouped under the following heads. Grievances 1 Refund Order/ Allotment Advise1 2 Non-Receipt of Dividend 3 Non-Receipt of share certificates after transfer 4 Debentures 5 Non-Receipt of letter of offer for rights 6 Collective Investment schemes 7 Mutual funs/ venture capital funds/ Foreign Ventures/ Capital Investors/ Foreign Institutional Investors/ Portfolio manager, Custodians 8 Brokers/Securities lending Intermediaries/ Merchant Bankers/ Registrars and Transfer agents/ Debenture Trustees/ Bankers to Issue/ Credit Rating Agencies Trustees/ Underwriters/ Depository Participants 9 Securities Exchanges/ Clearing and settlement organizations/ Depositories 10 Derivative Trading 11 Corporate Governance/ Corporate Restructuring/ substantial Acquisition and Takeovers/ Buyback/ delisting/ Compliance with Listing conditions. Apart from the above grievances, investors face certain other problems as well. This is mainly due to lack of market liquidity in many securities, excessive speculation in the market, price rigging on many scrips, insider trading by those possessing price sensitive information, excessive premium charged by some company promoters under the guise of free pricing norms etc.
151 At present there exists a mechanism for redressing grievances of the investors. The Government of India has made elaborate legislative measures for protecting their interest. Such legislation lies spread in various Acts like Companies Act, 1956, Securities Contract (Regulation) Act, 1956 Consumer Protection Act, 1986 and SEBI Act, 1992. An aggrieved investor can approach a court of law and seek legal remedy. Besides, each stock exchange maintains an Investor Grievances Cell to redress grievances and an Arbitration Committee to settle disputes regarding stock market transactions. However, investors look forward heavily to SEBI has now become a key player in the financial regulatory framework in India. ROLE OF SEBI ON INVESTOR PROTECTION SEBI was established in 1988 as a non-statutory body to deal with all matters relating to the development and regulation of the securities market and protecting the interests of investors. Subsequently, it was armed with statutory powers through the promulgation of SEBI Act, 1992. It is also vested with the power of a civil court and can summon all categories of market intermediaries to investigate on their working, to impose penalty and to initiate prosecution against them. For the effective functioning of the capital market, it has issued several guidelines; notable among them is that on disclosure and investor protection. It contains a substantial body of requirements for the issuers and intermediaries to ensure higher standards of integrity and fair dealing. In order to ensure that no malpractice taken place, a representative of SEBI supervises the allotment process. SEBI has also issued an advertisement code for the issuers to ensure that the advertisement remains fair and does not contain statements that mislead the investor or vitiate their informed judgment. Its regulatory polices and actions are found to have a great bearing on the efficiency of the capital market and though it on the efficiency of the whole economy. Investors can approach SEBI by filing their complaints against companies and brokers. It has set up certain procedures like the categorization of complaints and their regular follow-up with defaulting companies, Registrars and Merchant Bankers. With a view to handle a large volume of complaints, the grievances redress cell has been computerized. A comparative view of the number of investor complaints received by SEBI and the rate of redress of such complaints is given in Table No.1. TABLE NO: 1 COMPLAINTS RECEIVED AND REDRESSED BY SEBI Years Grievances Received Grievances Redressed Redressal Rate Year-wise Redressal
152 During the Year Cumulative During the Year Cumulative Percentage (%) Rate (%) 1991-92 18,794 1,8794 4,061 4,061 21.61 21.6 1992-93 1,10,317 1,29,111 22,946 27,007 20.92 20.8 1993-94 5,84,662 7,13,773 3,39,517 3,66,524 51.35 58.0 1994-95 5,16,080 12,29,853 3,51,842 7,18,366 58.41 68.2 1995-96 3,76,478 16,06,331 3,15,652 10,34,081 64.37 83.8 1996-97 2,17,394 18,23,725 4,31,865 14,65883 80.38 198.66 1997-98 5,11,507 23,35,232 6,76,555 21,42,438 91.74 132.27 1998-99 99,132 24,34,364 1,27,227 22,69,665 93.24 128.34 1999-00 98,605 25,32,969 1,46,553 24,16,218 95.39 148.63 2000-01 96,913 26,29,882 85,583 25,01,801 95.13 88.31 2001-02 81,600 27,11,482 70,328 25,72,129 94.86 86.19 2002-03 37,434 27,48,916 38,972 26,11,101 94.99 104.11 2003-04 36,744 27,85,660 21,531 26,32,632 94.51 58.60 2004-05 54,435 28,40,095 53,361 26,85,993 94.57 98.03 2005-06 40,485 28,80,580 37,067 27,23,060 94.53 91.56 2006-07 26,473 29,07,053 17,899 27,40,959 94.28 67.61 2007-08 54,933 29,61,986 31,618 27,72,577 93.61 57.58 Source: SEBI Annual Report 2008-09 It can be seen form the table that during the financial year 1991-92 SEBI received 18,794 complaints of which 4,061 were resolved marking a redress rate of 21.6%. The number of complaints registered a substantial increase in subsequent years and reached the peak level of 5,84,662 in 1993-94. Subsequently it gradually declined and in 2007-08, it received only 54,933 complaints. Considering the fact that investor problems cannot be warded off within a short period, it is worth inquiring whether it is a sign of the deflated investor confidence in SEBI. On the redressal front also a corresponding progress was
153 noticed. In 1997-98 SEBI resolved a record number of 6,76,555 complaints. Surprisingly during the years from 1996-97 to 2007-08 the number of complaints resolved surpassed the number of complaints received. Even though this may be termed as sign efficiency, it could not also be as read as a failure to resolve the grievances in time. In spite of these acts the role taken by SEBI as a market regulator, through Marker Surveillance, Enforcement of Discipline among different market players and other policy measures regarding capital market operations is to be appreciated. GRIEVANCES OF INVESTORS The foregoing discussion analyses that individual investors are facing many difficulties in the capital market. Some of them owe their origin to lack of marker experience and ill-conceived decisions of investors, while many others are caused by factors beyond their control. There is a misconception among the public that capital market is a short-cut to multiply investments within a short span of time. This paradox has attracted some investors to the market, who do not posses even an elementary knowledge of capital market investment. The irrational and haphazard investment decisions of these half-baked investors have resulted in untold miseries to them. Besides this, the manipulative practices of other market participants like share brokers and company promoters have aggravated their grievances. Among the consequences are inadequately or lack of returns, opportunity loss form alternative investments and above all the mental strain of investors. It will seriously impair the confidence of investors leading to their massive withdrawal from the capital market, which adversely affect the economic development of the country. It makes imperative to study the difficulties encountered by investors in the capital market. The study was conducted identifying Andhra Pradesh (AP) as the sample area. For the purpose of the study, the state of AP is divided into three geographical regions- Rayalaseema, Kostha, Telangana. A district at random has been selected from each of the three regions. The districts selected are Chittoor in Rayalaseema, Krishna in Kostha and Hyderabad in Telagana. A sample 300 individual investors, i.e. 100 each form each of the above districts have been selected for detailed investigation. In my field enquiry, as many as 175 investors opined that they have experienced a difficulty or another while investing in the capital market. But the nature and cause of the difficulty varied form person to person. In the context of close analysis investor grievances were classified under four heads namely grievances in the primary market, the secondary market and those against brokers. A ranking of investor grievances has been made taking into account the relative differences in the gravity of the problem. Only the first three ranks are considered for analysis and weighted scores are prepared by assigning weight of 3, 2 and 1 for the first, second and third rank respectively. The non-commendable practices leading to grievances are analysed under each head separately. GRIEVANCES IN THE PRIMARY MARKET Making investment in the new issue market is relatively simple. With an element of luck, investors could get allotment of good securities at reasonably low prices from the primary market. This is the main factor, which induces more and more investors to the
154 primary market. At the same time the incidence of grievances is also relatively high in this sector. The grievances of investors were mainly due to misleading advertisements, nonreceipt of allotment advice or refund orders, non-receipt or delayed receipt of share certificates, issues made by vanishing companies and non-listing of securities in the stock exchanges. The nature of grievances in the primary market as pointed out by respondents presented in Table No.2 shows that investing in issues made by the vanishing companies, i.e. fly-by-night companies promoted with a view to mobiles funds though public issues, ranked first with a weighted score of 30.46%. Misleading advertisement (25.27%), Nonlisting of securities (15.23%) and Non-receipt of share certificate (12.63%) followed suit. TABLE NO.2 NATURE OF GRIEVANCES IN THE PRIMARY MARKET Nature of grievances Weighted Score Percentage Weighted Rank Issues make by Vanishing Companies 228 30.46 I Misleading advertisements 189 25.27 II Non-listing of securities 114 15.23 III Non-receipt of share certificate 95 12.63 IV Non-receipt of allotment advice 62 8.26 V Non-receipt of refund orders 61 8.15 VI Total 750 100 GRIEVANCES IN THE SECONDARY MARKET Investors could buy and sell the existing securities from the stock exchange through the stockbrokers. Since investors were not permitted entry to stock exchanges, stock market transactions were characterized by lack of transparency. It is true that technological reforms in the marketing like on-line trading and dematerialization of securities led to increased transparency and helped in solving some of the major problems. However many problems continue to haunt investors. They include bad delivery, delay in transfer and transmission, problems relating to conversion to shares, problems of consolidation and splitting, delay in issue of duplicate certificate and liquidity problems.
155 The responses of investors collected in the course of the study show that (Table No.3) liquidity problem with a weighted score of 30.08% in the most distressing one in the secondary market followed by bad delivery (27.38%), delay in transfer and transmission of securities (19.98%) and problems relating to conversion to shares (9.76%). Hence the analysis reveals that the benefits offered by stock exchange are not fully enjoyed by investors in respect of the majority of listed scrips.
156 TABLE NO.3 NATURE OF GRIEVANCES IN THE SECONDARY MARKET Nature of grievances Weighted Score Percentage Weighted Rank Liquidity problem (lack of Trading/delisting) 237 30.08 I Bad Delivery 216 27.38 II Delay in transfer and transmission 158 19.98 III Problems relating to conversion to shares 77 9.76 IV Delay in issue of duplicate certificate 58 7.30 V Problems on consolidation & Splitting 43 5.50 VI Total 789 100 GRIEVANCES AGAINST BROKERS The operational flaws of companies caused the giant share of the grievances to investors in the primary and secondary market as analysed above. Apart from companies, stock brokers and sub-brokers constitute a major source of investor complaints. The complaints raised against brokers include delay or non-receipt of contract notes, arbitrary commission charged by brokers and sub-brokers, delay in payment or even non-payment of securities sold and delay in delivery or non-delivery of securities purchased by investors. The major complaints raised by the respondents against brokers are depicted in Table No.4. It is evident from the table that delays in payment or non-payment on the sale of securities is the major complaint against brokers with a weighted score of 33.39% while charging arbitrary commission (29.13%) and delay in delivery or non-delivery of share certificate (28.62%) are other major complaints in the order of importance.
157 TABLE NO.4 GRIEVANCES OF INVESTORS AGAINST BROKERS Nature of grievances Weighted Score Percentage Weighted Rank Delay in payment or non-payment 174 33.39 I Arbitrary commission 151 29.13 II Delay in delivery or non-delivery of share certificates 149 28.62 III Delay or non-receipt of contract note 46 8.86 IV Total 520 100 REDRESS OF GRIEVANCES As has been pointed out above, Government and policy-makers have evolved a number of measures to solve the problems faced by investors in the capital market. But many investors are not seen to have adequately utilized the grievance redress mechanism available in the capital market. The following Table No.6 compiles in a tabular form the responses received from the small investors regarding their knowledge about the redressal system. TABLE NO: 6 SMALL INVESTORS: KNOWLEDGE ABOUT REDRESSAL SYSTEM Regulators No. of Investors % of Investors SEBI 83 48.57 RBI 26 15.14 Stock Exchange 5 2.86 Consumer Court 9 5.43
158 Ministry of Corporate Affairs 11 6.29 Company Law Board 9 5.14 Investors organization 5 3.14 Civil Court 3 2.00 Others 19 11.43 Total 170 100.00 The purpose in asking the respondents questions about the redressal system was to understand their knowledge about the present regulatory system and its status. In some ways there responses were encouraging. But it was somewhat disconcerting to find the responses. It was clear that all of them knew that there were many in the system. They approached various regulators viz. the SEBI, RBI, CLB, MCA, Consumer Courts and others. They also knew that proper regulator should be approached. Their knowledge that there are separate regulators for different financial instruments is in a way encouraging. From Table No.6 it is clear that 26 of the sample (15.14%) know about RBI functioning as a regulator. But they did not know which department of the RBI should be contacted for redressal. The Indian investors in general know that the RBI is one of the most reputed Indian institutions concerned with banks. But from the survey, it is found that the knowledge of the respondents about the different functions of the RBI is limited. Therefore they send their complaint/ grievance for remedying to different departments, contact the wrong person. In some cases, it is found that they have approached the wrong institutions. Complaints which ought to be sent to the SEBI are sent to the RBI. Under the circumstance, what is needed is to encourage small investors, whenever they have a grievance, at least write to some regulator. And Regulators and the Government should evolve a system among themselves to pass on the complaints/ grievances of the small investors received to the appropriate regulators. These bodies should inform the investing public as to the correct/ right regulator, (either RBI or SEBI) and that their complaints have been forwarded to the regulator concerned for follow up action. Their belief that the SEBI is a regulator is not very encouraging, although it does performs some regulatory functions. The investors have heard the SEBI as a government agency connected with the Share Bazaar, Public Issues, Capital market etc. But they do not seems to know for what type of grievances the SEBI is to be contacted, which department and who the official concerned. For instance, some small investors seem to have approached the SEBI for redressal in cases of fraud committed by the private sector, which is not related to the SEBI at all. While approaching some agency for help and redressal deserves appreciation, at the same time, it is necessary to inform correctly all investors the appropriate agencies to be contacted for redressal. As Table No.6 shows, I the sample as
159 many as 83 persons (48.57%) have approached the SEBI or recognized it as an authority for investors grievance redressal. But they are not quite sure that it is the right institution to be approached for the redressal of their particular grievance. Some contact police and other agencies for different types of fraud not knowing that for their particular problem the SEBI is the right agency to be contacted. Among the sample respondents 19 people (11.43%) believed that the police or broker concerned could be approached for redressal. But the police are an agency concerned with the maintenance of law and order in general system in the country. Fraud, cheating, manipulation, and similar irregularities in the stock market do not come under their purview. It is their ignorance about the redressal system that makes some go to the police for help. To summarize knowledge of small investors about the redressal system, it is found that they have some but imprecise knowledge about the regulatory system, names of various regulators etc. But their ignorance about it is greater then their knowledge. Though a small investor knows about the names of various regulators viz., ROC, MCA, SEBI and others, he does not know about the right agency to be contacted or approached. Nor does he know about the right department and the person in the agency to be contacted. He does not understand the technicalities of the redressal system. He gets confused and lost in it. While going through the responses a unique thing was been observed, it was observed that almost 50% cases of the sample failed to approach to correct appropriate authority or regulator. The aggrieved investors were found to have suffered losses of different magnitudes. The nature of incidence of losses shows that among the 259 aggrieved investors, 146 have suffered monetary losses due to the un-commendable practice of market participants. It follows that even though the offenders could be booked in many cases, the damage caused could not be repaired. The intensity of loss suffered by aggrieved investors shows in table no.7. TABLE NO.7 LOSS SUFFERED BY INVESTORS LEADING TO GRIEVANCES Amount (in Rs.) Frequency Percentage 0-3000 9 6.29 3001-5000 21 14.15 5001-10000 28 18.87 10001-20000 30 20.44
160 20001-50000 50 34.28 50001-100000 6 4.09 More than 100000 3 2.20 Total 146 100 The above Table No.7 shows the range of the amount of money lost by the sample investors. It ranges form Rs.3000 to Rs.3,00,00, the average being approximately Rs.40,000. Given the size of small investors population in India, it is no ordinary loss to the investing community. CONCLUSION The study reveals that in spite of the market reforms and regulatory measures initiated by those at the helm of affairs, many investors continue of suffer several difficulties from a multitude of elements involved in the capital market. The gullibility of the investors is a major factor inviting difficulties to them. If they educate themselves better on the intricacies of the market and show more restraint and caution, a major share of their problems could be averted. At the same time, the market participants and companies should recognize that the gullibility of the investors is not a sign of their strength but the result of the weakness of the system. In depriving the investors of what is due to them and trying to corner illicit wealth, they are killing the goose that lays the golden egg. Every one should bear in mind that capital survives on and is sustained by investor satisfaction and trust. Hence the market participants should reciprocate positively to the efforts taken by the authorities in letter and spirit and avoid delays caused by protracted legal procedures. Only then Indian capital market will be on par with other developed markets of the world. REFERENCES 1. Handbook of Statistics on the Indian Securities Market 2009. 2. Nifty 50 Stock of the nation, Indian Securities Market A Review, National Stock Exchange of India Limited, Volume X, 2007 3. Ram Khanna, Paramjit Singh and Vanita (2004), Financial Markets in India and Protection of Investors, Published by New Century Publications, New Delhi. 4. Securities and Exchange Board of India, annual reports 2002 to2009 www.sebi.gov.in 5. Survey of Indian Investors conducted by Securities and Exchange Board of India (SEBI) & National Council of Applied Economic Research (NCAER) -1999-2000.
161 6. www.sebi.com/investor