Special agency, court must to tackle frauds: Study

Virendra Verma

Mumbai, May 15: THE government should set up a special investigating agency and also constitute a special court to solve and handle cases relating to financial frauds, says a recent study on investor protection.

Further, the study also calls for setting up an apex coordination committee, which shall periodically meet to review the capital market operations and suggest corrections, if required. Members of this committee may be the Securities and Exchange Board of India (Sebi) chairman, Reserve Bank of India (RBI) deputy governor and Department of Company Affairs (DCA) joint secretary.

A study conducted by Centre for Business Law Studies’ Dr NL Mitra at Bangalore, was submitted to the government last month. The study on investor protection was conducted at the behest of the Sebi and the RBI to look into the existing standard of the protection of investors’ interest and the future need.

Accordingly, the draft Investor Protection Bill, 2001 (as prepared by Dr Mitra) has suggested that there should be a heavy penalty slapped on market intermediaries for their failure to comply with the stringent guidelines suggested in the proposed Bill.

According to the proposed Bill, various market intermediaries shall have to pay a penal compensation of five times the claim to the affected investors.

Interestingly, while the draft Bill has formally accepted the definition of investor as defined in the draft prepared by the Sebi on Investor Protection Act, 2000, Dr Mitra has attempted to frame a definition for financial fraud, which is currently undefined in any Indian statute while also indicating the type of punishments that needs to be given in frauds.

According to the draft Bill, a person, including the financial intermediary, shall be deemed to have committed a financial fraud if:

* he conducts unfair practice in the capital market
* resorts to price rigging
* resorts to non-compliance with the market regulations with a view to inflict wrongful loss to some and or deriving wrongful gain or such other activities as may be prescribed by the board from time to time. Persons charged of such activities shall be permanently disqualified to operate in the market and can be imprisoned up to seven years with fine up to five times the damage caused to the market.

The definition of financial fraud gains importance, according to Dr Mitra, as financial frauds are not well defined in India. It said that in India there was no law to deal with investigation, prosecution and punishment of financial fraud. The report said that most often the market was not built on fundamentals and that made the market regulators job quite tough.

In order to overcome these deficiencies the draft Investor Protection Bill has said that Sebi should have more powers for investor protection. The powers listed for Sebi include investigation to take specific action against various market players who do not follow the game rules.

These powers may include Sebi’s right to refuse public issues proposed by the promoters of companies, if the norms are not followed. In addition, the market regulator must have the power to carry out investigations against any promoters or management and such investigation must be covered under the criminal procedure code, the report said.