The Uniform Securities Act, 1985, of United States requiring, inter alia, justification of issue price on parameters like offer prices to be related to earnings ratios or some other benchmarks, fixing norms in respect of interest and dividend coverage with respect to senior securities, regulating the price that insiders must pay for their stock in relation to the proposed price for public investors, etc and its impact on post-listing prices can be studied while considering evolution of new norms for fixing offer prices. The parameters that may be stipulated should lead to greater exactitude in fixation of the offer price and the offer price so arrived should act as the ceiling with the option to the issuers to peg the offer price at a lower level. The ceiling price should be duly certified by a qualified chartered accountant firm drawn from a panel that may be specially constituted by Sebi.
Percentage Of Minimum Public Offer
Liquidity In The Secondary Market
Lack of liquidity in the secondary market is a matter of serious concern. Out of 9,810 securities listed on the Bombay Stock Exchange as on March 31, 2001, which is the highest in the world, only 3,927 were traded in 2000-01. Out of this, 1,596 securities were traded for more than 100 days while 1,016 securities were traded for less than 10 days. In fact, top 10 shares account for about 85 per cent of the trading, while top 100 shares account for 99 per cent of the trading. About 500-600 shares get traded continuously on a daily basis. Widening the capital base for entitlement for listing, enhancing the percentage of public offer, compulsory appointment of market makers by issuers, etc, are measures that need to be implemented immediately to improve liquidity.
Investor Education And Protection Fund
Against the dismal background detailed above, establishment of Investor Education and Protection Fund (IEPF) and constitution of an 11-member Committee headed by the Secretary to the Department of Company Affairs and 10 members nominated by the Reserve Bank of India, Sebi and/or from any other ministry of department of the central government dealing with investor protection activities and experts from the field of investor education and protection under Section 205C of the Companies Act, effective from October 1, 2001, is particularly welcome.
Dividend, matured deposits, matured debentures and application money remaining unpaid for a period of seven years and accrued interest thereon would be credited to this fund. Lack of adequate funds, which was a major cause for failure in this regard, can no longer be an alibi as the IEPF will be having an estimated amount of about Rs 500 crore, which should give an annual income of at least Rs 40 crore. With another annual inflow of at least Rs 10 crore, the fund will have an annual income of about Rs 50 crore.
Section 205C lays down that the fund shall be utilised "for promotion of investors awareness and promotion of interests of investors." The rules of IEPF provide that the committee is entitled to release funds for activities relating to investors education, awareness and protection.
The way the committee is constituted will result in the fund acting as a limb of the Government, with a bureaucratic set-up cramped by its own rules and regulations. It is desirable to recast the organisation as an autonomous body drawing lessons from the Securities Investor Protection Corporation (SIPC) set up in US in 1970 under the Securities Investors Protection Act. Whenever a brokerage firm fails, SIPC steps in and helps in the recovery of assets of the customer and also reimburses the remaining claims of upto $500,00 per customer. During the period of 30 years till December 2000, SIPC advanced $391 million to make possible the recovery of $3.8 billion in assets for an estimated 4,43,000 investors.
IEPF must undertake the work of educating the investors not only directly but also through some accredited institutions like investors associations registered with Sebi and the regional stock exchanges by granting financial assistance. These institutions can also be used for launching class action against companies violating the various provisions of Companies Act such as Sections 62 and 63 relating to mis-statements in prospectus and causing harm to the investors.
Another major area of concern is with regard to the plight of investors in vanishing companies. Apart from deterrent penal action against the promoters and directors of these companies, investors in these companies need to be compensated fully. To begin with, each of the investors can be given compensation to the extent of Rs 1 lakh from IEPF.
Protection of investors due to defaults of brokers is also a matter of serious concern. To begin with, additional cover to the extent of say Rs 5 lakh per client can be given by IEPF over and above the protection that clients get from the Customers Protection Funds of stock exchanges.
Growing illiquidity in the Indian stock markets has resulted in a situation wherein investors are not able to sell the securities even for a nominal amount so that they can book losses and thereby reduce their income-tax liability. IEPF can buy all such shares from the investors wanting to sell them at a nominal value of say one paisa per share.
While investors can book losses, IEPF may make a reasonable profit as quite a few of these companies have hidden wealth in terms of land, etc.
Attracting small investors to the stock market, thereby offering to them opportunities to enrich themselves is, in fact, a constitutional obligation on the part of the Government of India as Article 39 of the Constitution of India enjoins that "the ownership and control of the material resources of the community are so distributed as best to subserve the common good." Educating the investors and protecting their interests are measures that are vital to achieve this objective.
(The author is the chairman of Inter-Connected Stock Exchange of India Ltd. These are his personal views)