A bill with a class act
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The role of a well functioning financial market is to create conditions wherein the savings in the economy can be smoothly channelized into investments. To make this transmission smooth and attractive for all stakeholders, it’s important that everyone plays by the rules. So, the rules have to be well defined and the interests of all stakeholders adequately protected.
Stock markets in India are regulated and monitored by the Securities and Exchange Board of India (Sebi). Its mandate is to work for the betterment of the market and protect investors’ interest. Sebi constantly works towards improving the rules and laws governing the stock markets and this year was no different. It made several changes in areas such as compliance by listed companies, improving the quality and presentation of information for investors at the time of public issues, and making the grievance redressal system more investor friendly.
However, the most important change of the year was the passage of The Companies Act, 2013, which will bring in significant changes in the way companies function and is likely to better protect the interest of shareholders. Among other things, the new law provides details for the buyout of the minority shareholders and simplifies the rules for mergers. The most notable idea of the Act is the provision for class action suit. Shareholders and depositors in a company can now hold the management accountable in case of wrongdoing. Shareholders can claim damages from the company and its directors for any unlawful or wrongful act on their part. Further to this, auditors, too, can be held responsible for misleading and improper statements.
Of course, some conditions have to be met before a suit is filed or damages claimed. In case a company has a share capital (funds raised by issuing shares), the suit will be accepted only if it is backed by a minimum of 100 shareholders or shareholders holding a certain portion of the equity capital. Further, two class action suits for the same case will not be admitted. The person responsible for the wrongdoing will have to pay the costs associated with the suit. However, if the application is found frivolous, the applicant will have to pay the opposite party a maximum of Rs.1 lakh.
The provision of class action suit is likely to increase shareholder activism, which will, in turn, make company managements more responsible and accountable. Says Amit Tandon, founder and managing director, Institutional Investor Advisory Services India Ltd: “We will have to wait and see how things pan out. But there is a great deal of interest among investors to understand this (class action suits). In the beginning, it’s likely to start with smaller firms.”
Sebi also pointed its gaze at stock exchanges, with a circular in November asking them to put systems in place to monitor the disclosures made by listed companies. There are concerns that disclosures filed are at times inadequate and inaccurate. Therefore, the stock exchanges should monitor the content.
To give exchanges time to put the necessary infrastructure in place, Sebi has asked them to start this exercise with the top 500 companies by market capitalization from the quarter ending December 2013. A penalty structure is already in place for not submitting or delaying the submission of information. Says Prithvi Haldea, chairman, Prime Database: “This will improve the compliance a lot. The stock exchanges were working like a post office—they were getting the information and uploading it without doing any checks.” Haldea further argues that the penalty should be imposed on the management and not the company. After all, if the shares are suspended from trading, it’s the investor who suffers.
Easy to read information
In another move to improve access to data, Sebi has asked all merchant bankers to cull out the general information about a public issue from the abridged prospectus and publish it separately in the form of a General Information Document (GID). It even stipulates how many GIDs to print: at least 5% of the abridged prospectus printed or 50,000, whichever is lesser.
“What was happening was that the abridged prospectus was becoming bulkier and bulkier; most of the information was standard. So the idea (behind GID) is to take out the general information and give company specific information in a more readable format,” says Haldea.
It has made things easier for companies as well. In a board meeting on 24 December, Sebi made the grading process for initial public offerings voluntary. This was mandatory till now. It also approved the Sebi (Procedure for Search and Seizure) Regulations, 2013, on the back of The Securities Laws (Amendment) Second Ordinance, 2013, which gives power to the Sebi chairman to authorize investigations, and search any premises and seize documents for it.
These changes are a move forward. In the end, your money will feel safe when it is away from you.
More the merrier
The capital markets regulator introduced several other changes. Here are two of them:
Investor grievance redressal mechanism:
Exchanges need to make sure that all complaints are resolved at their end within 15 days. If not, a conciliation process has to start immediately. If the member (stock broker, trading member or clearing member) decides to go for arbitration and the value claimed by the investor is not more than Rs10 lakh, investors will be given monetary relief, subject to conditions, during the proceedings.
Broad guidelines on algorithmic trading:
Stock brokers providing algorithmic trading facility will be required to do a system audit every six months. Algorithmic trading involves a complex set of computer programs that automatically execute trades very fast once certain pre-defined parameters are met. Stock brokers have to take corrective action if deficiencies are found. They will not be allowed to use the trading software till the inadequacy is removed. Stock exchanges are also required to monitor trades using the algorithms. The idea is to ensure smooth functioning of the market and avoiding unintended volatility.