Securities Laws
(1) SEBI will now financially help investors to proceed
legally against companies to obtain compensation for losses they may have
suffered or to pursue other claims. Recently, on August 11, 2009, it issued SEBI
(Aid for Legal Proceedings) Guidelines, 2009. These guidelines should be read in
the context of the earlier SEBI (Investor Protection and Education Fund)
Regulations, 2009 (‘the Regulations’) notified earlier that form the base of
these Guidelines since it is from this Fund that SEBI would provide financial
aid for legal proceedings.
(2) Let us understand a little of the background of these
‘guidelines’ since not only it would help one appreciate the need and
eligibility of such legal aid but it would also hopefully clear some confusion
arising from certain over-technical reading of these ‘guidelines’ that has been
reported at various places. Views have been expressed on the basis of such
technical reading that these ‘guidelines’ are still-born and cannot help anyone.
I believe there are reasons to believe this is not so and I will try to explain
the reasons for such belief.
(3) Typically investors are small and scattered.
Individually, they do not have the financial motivation, expertise and finally
the morale to fight against huge companies. But just as five fingers make a
fist, investors could get together to fight for their rights. And a good way to
get going together is by forming investors associations or becoming members of
such associations. SEBI has encouraged formation of such associations by
providing recognition to them. It is reported recently that there are about 23
such associations though some are reported to have dubious/political background.
SEBI has also encouraged them further by providing, by these Guidelines, that it
will provide legal aid if such associations (‘Associations’) propose to act
against the companies at fault on behalf of investors.
(4) These Guidelines read with the Regulations lay down
certain types of matters such as misstatements in connection with sale of
securities, non-payment of dividends, non-delivery of securities and so on. If
certain specified conditions are specified, SEBI would grant legal aid for legal
proceedings.
(5) But, you may ask, why should investors be made to take
legal action even if through Associations and even if aided? Why should not SEBI
take action itself — because investor protection is raison d’être for SEBI (to
use a fancy word — J — to mean SEBI’s reason for existence)? And I think the
answer to this, as explained in more detail later herein, also should clarify
the confusion that these Guidelines are ineffective and are not required.
Briefly, I think the intention is that SEBI would typically take penal action to
punish legal violations. It may even take action in appropriate cases to ensure
that losses to investors are compensated. However, there may be cases where
direct action by investors against companies is more appropriate and it is this
category of cases for which legal aid is proposed to be given.
(6) Let us now review these Guidelines in some detail and
before doing so let us summarise them first. There may be some cause for action
by investors because of defaults, omissions, etc. by companies. Associations may
seek to take action against such entities on behalf of investors. If at least
1000 investors are affected and if the defaults, etc. are of the specified type,
then SEBI may grant a limited legal aid for the specified expenses for such
legal proceedings.
(7) What type of defaults, omissions, etc. are covered ?
(a) The Regulations lay down various such defaults and it is worth reviewing them directly as so laid down in these Regulations :
‘legal proceedings’ means any proceedings before a court or tribunal where one thousand or more investors are affected or likely to be affected by :
(i) mis-statement, misrepresentation or omission in connection with the issue, sale or purchase of securities;
(ii) non-receipt of securities allotted or refund of application monies paid by them;
(iii) non-payment of dividend;
(iv) default in redemption of securities or in payment of interest in terms of the offer document;
(v) fraudulent and unfair trade practices or market manipulation;
(vi) such other market misconduct which in the opinion of the Board may be deemed appropriate;
but does not include any proceeding where the Board is a party or where the Board has initiated any enforcement action;
(b) The Investors and the Associations would have to review whether their grievance is covered by the above list. Of course, such grievance should also give a cause for action in Court/Tribunal under some law. It is only such defaults, etc. that legal aid can be given. The list is not exhaustive though and SEBI may cover other market misconduct as it may deem appropriate.
(c) A concern has been repeatedly expressed by various authors that most of these above defaults would normally result in SEBI also taking penal action or SEBI is a party to certain proceedings. In view of this and in view of the last few words of the above clause, it is argued, no aid is possible at all. Therefore, it is stated, that these Guidelines are still-born and no one would be eligible to legal aid.
(1) However, is this really so ? Perhaps not. Note that the term ‘proceeding’ is referred to in the earlier part of the clause also. Legal proceedings have been referred to in the clause and then it is stated that if SEBI is a party to such proceedings then such proceedings are not covered. Obviously, if the action is by the Association directly against the errant company without SEBI being made a party, then such proceedings are still eligible. I don’t think there is scope for arguing that ‘proceedings’ should mean any proceedings and could therefore cover even penal proceedings. Both these proceedings would be under different laws and for different intention and results. One is intended to be a direct action for compensation and the other is for punishing the entity.
2) Secondly, if SEBI has initiated penal proceeding against the errant entity, would this mean that SEBI has taken ‘enforcement’ action? According to me, this is not so. Firstly, if one reads the clause carefully, the enforcement action is qualified by the word ‘proceeding’ which, as we saw earlier, should mean proceeding in a court or tribunal. Further, I think it is possible to take a view that ‘enforcement’ proceedings should be different from penal proceedings. If, e.g., SEBI itself has initiated action to enforce a provision of law for compensating investors, then there cannot be multiple proceedings. However, if SEBI has taken action to penalise an errant entity, such action should not be deemed to be an “enforcement” action. Having said that, it must also be conceded that the clause could have been worded better.
(8) Who is eligible to claim legal aid?
a) The legal aid would not be given to individual investors but to ‘Investor Associations’. Thus, Investors will have to approach an Associations or alternatively such Associations may suo motu seek to initiate proceedings.
b) It is given on a first come first served basis! Obviously, there is a need to prevent multiple proceedings and finance of such proceedings but this is a simplistic solution.
c) The Associations would need to establish or provide the following data to be eligible for legal aid:
i) that the Investors relied on such misstatement, etc.
ii) that the Investors suffered loss on account of such reliance.
iii) that at least 1000 investors are affected. In a sense, this would limit the scope of action. Having said that, this does not mean that at least 1000 Investors should have complained and agreed to such action.
9. What type of expenses are covered and to what extent?
a) Expenses of court, advocates and related expenditure are eligible for aid.
b) The limit of aid is Rs.20 lakhs if the proceedings are before the Supreme Court and Rs.10 lakhs otherwise.
c) Further, the limit is also of 75% of the amount incurred.
d) The aid is for expenses only.
e) Prior clearance of estimate, etc. from SEBI is a must for claims.
10. Miscellaneous:
a) There is no time limit within which SEBI will intimate whether it will or will not grant aid though, to be fair, such criticism may be premature and one may hope that disposal of application is expeditious. However, SEBI, the ‘guidelines’ say, will endeavor to pay the claims within 15 days of the receipt of account.
b) In India, there is no single law that provides for compensation to Investors for defaults by companies, etc. In fact, even the SEBI Act, Regulations, etc. do not provide for such action. Indeed, jurisdiction of Courts is barred and only SEBI can initiate action. Here, I may add that such bar is only for matters covered under the SEBI Act and not for direct action for compensation by Investors/ Associations. There have been reports and views that since there is a bar on such direct action, it would mean that these Guidelines have no relevance. However, I respectfully submit that this is not so. The bar against direct action for violation of the law is for such limited purposes only.
c) A concern has been expressed that SEBI may get handicapped if it finances such proceedings and thereby does not take action itself. Thereby, It may give a Signal that it has no powers. As I stated earlier, this should not be so. The penal action that SEBI can take is different from action for compensation that Associations may take. I think even if SEBI has lost in its penal proceedings, the Investors case is not automatically lost. The standards of proof that SEBI has to fulfill for a penal action are obviously far higher than a civil action requires.
Conclusion:
All in all, I think the’ guidelines’ are misunderstood and are being prematurely written off as ineffective. In letter and spirit, they represent a good start and give some scope for promoting taking of action. It is true that in practice they may be misused. e.g., the ‘first-come-first-served’ rule may be misused whereby an Association with an half-hearted interest may still block action by others. The limit on aid – absolute as well as of percentage – may sound unrealistically low though. Having said that, there are several good features in the ‘guidelines’ and one should wait to see how the ‘guidelines’ work in practice.
