Investor protection 8212; is it too much or too little?

In India, plantation companies were allowed to rip off over Rs 15,000 crore without a shred of regulation or accountability until they col...

In India, plantation companies were allowed to rip off over Rs 15,000 crore without a shred of regulation or accountability until they collapsed. Even after, it led to a tussle between government departments to avoid responsibility for regulating the sector. Investors who have lost their money have no hope of redressal.

Funnily enough, even the aggressive and proactive SEC does not consider its rules adequate to protect investors. It expects investors to file individual litigation. The average US investor has powerful support from their judicial system 8212; individuals can afford the cost of litigation, the judicial process is usually swift and the damages huge and exemplary. Also the fear of an individual triumph snowballing into a class action suit is so enormous that it forces companies to treat their shareholders with respect pay attention to the quality of their disclosures.

Yet, the system is by no means perfect. Fraudsters and scamsters are always a jump ahead of the regulator and coming up with new ways to beat the system. The difference is that the process of tightening regulation is dynamic and continuous.

More importantly, the alleged excessive regulation has not killed the US market, nor even stifled it. Though market intermediaries may crib, they fall in line and live with the bureaucracy and the market continues to thrive and expand and become safer. On the other hand, the Indian experience has repeatedly proved that inadequate regulation and absence of protection leads to large-scale fraud against investors and ends up killing different segments of the financial market.

Over the last 15 years, the first to collapse was the market for corporate debentures 8212; investors are still running from SEBI to DCA for redressal. With liberalisation came the IPO boom. Again the market is not yet fully recovered from its three-year collapse. The one-line repeal of the Controller of Capital Issues Act allowed a free-for-all which led to several thousand crores of losses and hundreds of vanished companies. Then came the collapse of the plantation companies and non-banking financial companies 8212; again, investors have not recovered a single rupee and the promoters have made away with the loot.

The mutual fund industry remains a problem area. Investors were forced to wage a long battle with nationalised bank promoted mutual funds merely to force them to keep their promises. The government controlled UTI is the bigger problem. When UTI nearly went bankrupt in 1998, the government bailed it out with a Rs 4800 crore-fund infusion and created the SUS-98 8212; a special scheme in which to transfer public sector shares held by it. Those share prices have slumped substantially the last two years. Newspaper reports say that the value of UTI8217;s investments has eroded substantially again. Funnily, the government continues to keep UTI outside the regulatory supervision of SEBI in spite such a recommendation by the Vaghul Committee as well as the Deepak Parekh committee.

All these experiences only establish that far from creating a police state, or an over regulated market, we need to work a lot harder at protecting investors. We need to sensitise the judiciary to understand the concept of exemplary damages, we need to look at expeditious disposal of investor litigation; we need to consider whether better equipped consumer courts would be the appropriate forum for trying individual investor complaints.

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It will be a sad day for investors if SEBI begins to lose focus and starts relaxing existing regulation, instead of pushing for disgorgement of unlawful earnings, fighting for higher compensation and working at empowering investor associations.

Author8217;s email: suchetadalalyahoo.com