Midas Touch Investors Association

Aggarwala Building, The Mall,

Kanpur- 208004
midas@sancharnet.in

March 31, 2017

Shri Edward Hillary Marandi

Assistant General Manager,
Division of SRO Administration,
Market Regulation Department,
Securities and Exchange Board of India,
C4-A, G-Block, BKC, Bandra East,
Mumbai-400051

Sub: Suggestions for amendments in The Securities Contracts (Regulation) (Stock

Exchanges And Clearing Corporations) Regulations, 2012

In response to SEBI circular, we are pleased to offer our views, comments and suggestions
sought by you from public for review of the Regulations pertaining to Market
Infrastructure Institutions (MIIs) viz., Stock Exchanges, Depositories and Clearing
Corporations. These pertain to proposed amendments to the Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (referred as
SECC Regulations), Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996 (referred as D&P Regulations) and related SEBI circulars.

The SECURITIES CONTRACTS (REGULATION) (STOCK EXCHANGES AND CLEARING

CORPORATIONS) REGULATIONS, 2012 have been formulated by SEBI under the SCR Act
and SEBI Act. The combined objectives of the two acts, as stated in their preamble, are:
1. to protect the interest of investors in securities
2. to promote the development of and
3. to regulate securities market and
4. to prevent undesirable transactions in securities by regulating the business therein.

Keeping in mind the foremost objective of SEBI, i.e., to protect the interest of investors in
securities, we suggest inclusion of the following amendments proposed in SECC regulations:

In our view, providing monetary compensation for the losses suffered is a pre-requisite for
Investor protection. Without monetary compensation, investor protection is reduced to a
mere rhetoric.

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In the past, we have experienced in numerous instances that the investors, particularly
small investors, have suffered mammoth losses and have been duped and cheated, through
fraudulent & unfair trade practices and white collar crimes, but in absence of the credible
provisions, investors interest were neither protected nor the losses suffered were
compensated.

There is not a single instance-since the enactment of SEBI Act in 1992- wherein cheated
investors have been given compensation or awarded damages for the losses suffered by
them due to fraudulent and unfair acts. The only exception is the instance of money paid to
applicants of IPOs who were deprived of the opportunity to get allotment in IPOs, on Justice
Wadhwa committees recommendations. The undersigned was one of the member of
Justice Wadhwa committee.

One of the main thrust of our suggestions is to plug the gap of providing compensation in the
regulations and incorporate a provision for giving compensation to cheated investors for the
losses suffered by them.

The source for building a corpus and regular funding for compensation is to be deliberated
upon and finalized, once an in-principle decision for its insertion in regulations is taken by
SEBI. We are, therefore, giving only broad contours for building a corpus and funding
avenues. Similarly, processes and principles for Identification of investors who would qualify
for compensation, to the extent feasible, would have to be deliberated and finalized.

Midas Touch Investors Association have been working for investors interest in Capital
Market since 1995, and have experienced that the investors in Capital Market fail to get
redressal after suffering losses, as illustrated hereunder:

1. Out of about 5200 companies listed at BSE and NSE, 2000 companies were suspended
for non compliance with the listing agreement terms. A detailed Standard Operating
Procedure (SOP) for monitoring by Stock Exchanges- of listing agreement terms
compliance by Listed companies- was formulated by SEBI in 2013. Inspite of that, about
350 companies were compulsorily delisted without taking action specified under SOP, in
2016. Fair price has not been paid to shareholders by the promoters/company till date, as
legally required. Our PIL no. 3007 of 2012 for action against companies and their
promoters for failure to comply with Listing Agreement Terms with the Stock Exchange, is
sub-judice before the Delhi High Court.

2. 5142 companies were exclusively listed at Regional Stock Exchanges (RSEs). Only about
100 companies out of these have been listed at National Stock Exchanges, after the de-
recognition of Regional Stock Exchanges by SEBI. Effectively, the rest of the companies
were delisted post de-recognition of the RSEs as per SEBI Circular. As per our knowledge,
none of the 5000 companies have paid any fair price / exit price under delisting to its
shareholders. We estimate that at least 2000 companies have vanished. Our Special Leave
Petition on the issue was not admitted by Supreme Court. No money paid to shareholders
till date.

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3. Satyam Computers Limited: In 2009, Shareholders of Satyam Computers Limited were
duped by the massive accounting fraud perpetuated by the Company. The Company was
forced to pay damages to its US Shareholders as it was listed in US, but the Indian Investors
did not get anything in absence of legal provisions for damages. Ultimately, largely due to
our efforts, provision for compensation was introduced in the Companies Act, 2013.

4. Vanishing companies: 229 companies were identified by CMC in 2000 subsequent to

Allahabad High Court order in our , Midas Touch Investors Association, PIL : Writ Petition
no. 659 of 1998. No money paid to shareholders till date.

To sum up, investment of shareholders in 7000 listed companies out of 11000 companies
have been wiped out completely.

This underlines the institutional failure in monitoring listed companies by regulators

(Stock Exchanges and SEBI). Instead of administering the law, they facilitated loot of
investors, condoned white collar crimes thereby allowing predators to operate in the
market compromising its integrity. The regulators officials responsible are unfit to hold
such responsible office and ought to be debarred for life for holding similar offices.

5. Broadly, such losses are inflicted on shareholders/investors due to the following:

5.1 Losses incurred by investors due to failure of a listed company or intermediary to redress
his grievance within a reasonable time, say, thirty days of filing with the concerned entity.

5.2 For losses incurred by investors due to Fraudulent & unfair trade practices or devices or
schemes, deceit etc.

5.3 Losses inflicted on shareholders of listed companies (and companies) due to acts of
omission and commission of stock exchanges and depositories in timely administration of
statutory laws, rules and regulations. This includes stock exchange functions and
responsibilities as a Regulator.

Our Suggestions are as follows:

1. Appointment and process for Public Interest Directors

1.1 At least one PID be inducted having minimum 5 years experience and background
in Investor Protection field, the work undertaken by him/her or the non-profit organization
along with its impact should be substantiated by official records or audio-visuals or
documents.

1.2 At least one PID be inducted having minimum 5 years experience and background
in Investor Education and financial literacy field and the work undertaken by him/her or
the non-profit organization along with its impact should be substantiated by CDs/recordings
or documents.

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1.3 A transparent process and criteria be laid down for inviting and short-listing names of
PIDs. A paper ad be required to be given by the stock exchange inviting names. The interviews,
for short listing, be held in public with a provision for participation by experts and leading
associations in the respective fields.

2. Appointment of CEO/Managing Director/ Executive Director

2.1 A public hearing by the Investor Protection Committee prior to, appointment and
renewal or extension, which would look into his track-record as MD/ED of Investor
Protection.

3. Code of Conduct for Public Interest Directors

3.1 Monitoring of Investor Protection should be the integral part of the duties assigned to
PIDs.

3.2 Monitoring of Investor Education and Financial Literacy measures should be the integral
part of the duties assigned to PIDs.

4. Regulatory Compliances

4.1 Process and procedures for ensuring Regulatory compliances by stock exchange, listed
companies and other intermediaries, persons etc. should be spelt out.

5. General Responsibilities

5.1 Process and procedures for ensuring redressal of investor grievances and encouraging fair
trade practice; ensuring fairness, impartiality, efficiency and effectiveness in administering
the stock exchange should be clearly spelt out along with timelines for each stage.

6. Segregation of Regulatory Department

6.1 A comprehensive standard operating procedure with time lines for each activity be laid
down for each of the regulatory task. Designation /Official responsible for the designated task
in the exchange be spelt out for each activity/action/step and displayed on the website of the
exchange.

7. Oversight Committee

7.1 The terms of reference of the oversight committee is very limited and covers only a
miniscule area of exchange working. The scope of Oversight Committee should include the
overall working of the exchange as presently there is no committee entrusted with full
oversight of exchange working.

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8. Investor Grievance Redressal

8.1 For redressal of Investor Grievances, the compliance officer should report to the Public
Interest Director and Investor Grievance Redressal Committee also and a report on redressal
of Investor Grievances must be put on the exchange website.

9. Investor Protection Fund

9.1 The fund should be renamed as Investor Protection and Compensation Fund (IPCF) and
should also be utilised for awarding damages/compensation to investors who have suffered
losses due to any of the reasons enumerated in the above para 5, 5.1, 5.2 and 5.3. Rest of the
activities including holding seminars, research etc. be transferred to Investor Services Fund
(ISF) and Regulatory and Development division.

Utilization of Investor Protection fund (IPF), Investor Service fund (ISF), and Interest
on IPF and ISF

Presently, there is over-lapping and duplication in usage of IPF and ISF Funds by
Stock Exchanges and Depositories and interest earned thereon. For instance,
promotion of investor education and investor awareness programmes through
seminars, lectures, workshops, publications (print and electronic media), training
programmes etc. are sponsored by Stock Exchanges through IPF and ISF and by
Depositories through ISF. For efficient and focused utilization, this requires
rationalization.

Further, we draw your attention to two vital issues concerning the utilization of
funds by IPF and ISF. These relate to the quality and efficacy of the
programmes/activities promoted by Stock Exchanges and Depositories. These
include:

i) Investor education and investor awareness programmes through seminars, lectures,

workshops.

ii) Investor education and investor awareness programmes through publications (print
and electronic media).

iii) Promoting retail participation in securities market.

iv) Undertaking research activities related to securities market and

v) Training programmes etc.

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Impact assessment of funds utilization

To the best of our knowledge, there is no procedure laid down or followed by Stock
Exchange and SEBI for assessing the quality, efficacy and impact of the activities and
programmes on investors, if any. For instance, there is neither any information in the
public domain regarding expenses incurred by Stock Exchanges and Depositories, over the
years, in Investor education and investor awareness programmes through publications,
print and electronic media though staggering amounts are said to have been spent by them
and neither any assessment report of its impact on investors.

Holding of seminars and workshops throughout the country) is one of the major activity
(besides settling claims) promoted by IPF and ISF. However, it has been observed during
last numerous years that the overall quality of investor education and investor awareness
programmes conducted through seminars, lectures, workshops etc., is patchy. No reports
and audio visual recordings of such programmes are available at the stock exchanges and
depositories website. No detailed review, periodically and otherwise, is undertaken by the
Stock Exchanges and Depositories and put up by them in the public domain. In complete
absence of information, one is left in the dark about the content, speakers and participants
in these seminars and workshops to evaluate its efficacy and impact on investors.

In this regard, we would like to draw your attention towards the pioneering work done in
the country by Moneylife Foundation (MLF) in investor education and financial literacy.
Ms. Sucheta Dalal and Debashis Basu are the main founder trustees of MLF. MLF seminars
are of great practical value to investors as they lucidly describe the principles of where-
when-and-why to invest and what to avoid, in an easy and simple language. In last seven
years, the foundation has conducted over 320 events on various topics of investors-public-
consumers interests. Most of them can we watched at YouTube at MoneylifeTV. Its
popularity and impact can be gauged from the response it has received on YouTube
alone. No wonder that in a very short span the views for Moneylifes YouTube channel
have crossed 1.2 million. SEBI may use MLF achievement as an ultimate benchmark for
aspiring non-profit-organizations in this field for grant of funds. We suggest that:

9.2 Audio-Visual recording of all Investor education and investor awareness

programmes conducted through seminars, lectures, workshops etc. be submitted by
the organisers of the programme to ascertain its quality and impact and the same be
put up on website by respective Stock Exchange and Depository along with the amount
of grant given for the individual programme.

9.3 An yearly overall Impact assessment of all programmes be made by an

independent qualified organization and put up on SEBIs and Stock Exchange and
Depository website.

Usage of IPF and ISF in unrelated activities

During last decade, we have observed that huge amount of funds have been utilized in the
name of Investor Education by various stock exchanges and Investor Education
Protection Fund (IEPF) under the Ministry of Corporate Affairs by way of advertisements in
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all types of media, sponsoring special half/one hour programmes on TVs etc and so on.
These expenses under IPF and ISF are uncalled for.

These activities generally relate either to regulation or development of the securities

market. Quite often they have been used for flexing of financial muscle by stock exchanges
or their brand building, hence, there is no justification for such activities to be sponsored
by IPF and ISF in the guise of investor education and protection.

10. Rationalizing Utilization of Investor Protection Fund (IPF) and Investor Services
Fund (IFS)

In view of some of the reasons stated above, we suggest a rationalization of Utilization of

Investor Protection Fund (IPF) and Investor Services Fund (IFS), expanding IPF ambit and
streamlining their utilization, among others, as follows:

10.1 Investor Protection Fund and Interest on IPF will be used by Stock Exchanges and
Depositories for

i) Meeting the legitimate investment claims of the clients of the defaulting members
undertaken by Stock Exchanges and

ii) Meeting the legitimate claims of the beneficial owners by Depositories and

iii) To meet the payment for compensation to be made to investors for the losses
incurred or inflicted upon them due to cheating, fraud and unfair acts as detailed in
para 5.1,5.2 and 5.3 above.

10.2 Investor Services Fund and Interest on ISF will be used by Stock Exchanges and
Depositories for:

(a) Promotion of investor education and investor awareness programmes through

seminars, lectures, workshops.

(b) To utilize the fund for supporting initiatives of Depository Participants for
promotion of investor education and investor awareness programmes.

(c) Setting up of Investor Service Centre.

(d) Capacity Building of non-profit/voluntary organisations who have outstanding

track record of at least seven years in the area of investor protection or investor
education/financial literacy.

(e) To provide funding to individual investors and non-profit/voluntary organisations-

who have outstanding track record of at least seven years in judicial advocacy- for
legal proceedings against listed companies, intermediaries etc.

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10.3 For efficient usage we suggest shifting of certain activities to a Setting-up a new
division under: Regulatory & Development division.

The following activities be transferred to Regulatory & Development division:

Activities for promotion of investor education and investor awareness

programmes through publications print, electronic and social media, training
programmes etc. aimed at enhancing securities market literacy

Promoting retail participation in securities market; and

Promoting Research activities related to securities market;

Cost of training of arbitrators;

11. Power to specify procedures, etc.

11.1 Investor Protection Committee/Regulatory Committee be given the responsibility to give

recommendations to the Board, on a pre-defined intervals, relating to procedures, processes
or guidelines to administer its regulatory responsibilities timely, effectively in a transparent
manner.

12. IPF trust:

12.1 Functions handled: We suggest to add:

The IPF Trust shall disburse the amount of compensation from IPF to the cheated
investors.

12.2 Composition: We suggest that the Trust shall comprise of minimum five members;
three Public Interest Directors who will form a majority; at least one PID each should
be representing: Investor Protection and Investor Education respectively.

One representative from non-profit organization or investor association recognized by

SEBI but having outstanding record of seven years in investor protection or investor
education.

13. Investor Services Committee:

13.1 Composition: We suggest that the Trust Investor Services Committee shall
comprise on the same lines as suggested for IPF Trust.

13.2 Corpus of IPF & ISF: For augmenting the corpus of IPF and ISF, various other
options may be incorporated viz.

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13.3 Transfer of fines imposed on companies and already deposited with stock
exchanges as per SOP for non-compliance of listing agreement terms;

13.4 Direct credit in future fines as per SOP realized, to IPF;

13.5 Transfer of 25% listing fees to the ISF;

13.6 50% contribution by SEBI out of the funds deposited by De-recognized stock
exchanges with SEBI e.g. ISF and other heads;

13.6 Interest on ISF corpus accumulated by stock exchanges over the years to ISF.

Thanking You,

For Midas Touch Investors Association

Virendra Jain
Founder Member & President