Mumbai: India’s securities market regulator will offer financial help to select investor rights groups fighting court battles against listed companies and market intermediaries such as brokerages. This was decided at a board meeting held on 2 February.
The country lacks home-grown activist investors with the financial muscle to shake up corporate managements. But it has several associations of small investors that are pesky, popular and populist. Many have loose affiliations with political parties.
Currently, there are 22 such investor associations registered with the Securities and Exchange Board of India (Sebi)—and they will qualify to get money from the Rs15 crore Investor Protection and Education Fund that it created in July 2007 for “investor education and related activities”.
The investor fund has been largely used till now to sponsor investor education camps across the country. But it could now be used for more activist causes.
“The fund would be utilized for...aiding Sebi-recognized investor associations to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed,” says the agenda that was cleared by Sebi’s directors on 2 February.
A lot will depend on how the regulator identifies legal battles worth funding, especially since many investor groups are propelled by political agendas and are rife with vested interests.
A former Sebi chairman, who asked not to be named, sounded a note of caution. “This step (to fund investor groups) is good, but scrutinizing cases and the agenda of investor groups will be a challenge,” he says.
“Funding will be considered on a case-to-case basis,” said a senior Sebi official, who did not want to be identified. Sebi will pick up to 75% of legal fees in these cases.
“There are many things investors can do compared to a regulator,” says Jayanth R. Varma, professor at the Indian Institute of Management, Ahmedabad (IIM-A). “Investors understand markets better than regulators.”
The size of the investor fund, too, will be increased. Grants and donations from the Union and state governments or other institutions approved by Sebi will be credited to it. Additional investment by Sebi, and the interest or other income from investments made from the original corpus, will also be added to the investor protection fund.
The market regulator has established certain ground rules to help pick the cases where it will offer financial help to investor groups.
Legal cases fought by investor associations will qualify for Sebi funding only if there are a thousand or more investors affected, or likely to be affected, by issues such as mis-statement in offer document, non-payment of dividend, fraudulent and unfair trade practices or market manipulation.
Legal aid will not be provided if the Sebi board is a party in the court case or where it has initiated enforcement action.
IIM-A’s Varma, who is also a former Sebi board member, said the degree of professionalism in an investor association will be the key.
According to him, a more effective step will be if India introduces class action law suits, as in the US.
A class action suit is one filed by a group of people who are affected by a common issue. In the US, most lawyers charge a fee only if they win class action suits for their clients, unlike the flat fees charged by Indian lawyers irrespective of whether they win or lose a case. The US model provides incentives for lawyers to fight cases where investors cannot pay upfront.
Sebi-approved associations include groups from big cities such as Mumbai, New Delhi, Ahmedabad, Chandigarh and Kolkata. It also includes groups from smaller cities such as Kolhapur, Vijayawada, Bhopal, Cuttack, Puducherry and Aizawl.
“As of now, people are not interested in joining investor associations,” says A.P. Bakliwal, president of Sebi-registered Bombay Shareholders’ Association, which has 400 members who paid Rs2,100 for a life membership.
“There is no full-time staff, even maintaining an office costs money. If we get funds, we will fight against anything that is not fair from the investors’ point of view,” Bakliwal adds.
Investor activism of the sort practised by some of the global hedge funds is rare in India. Class action suits, too, are nowhere on the horizon. Sebi’s plan to partly fund select shareholder battles could be a useful start.
IIM-A’s Varma sounded a note of caution: “It is easy for a large firm to buy out a small association of retail investors”.
Ravi Krishnan contributed to this story.