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Securing the Big/small investor

By Syed Kamran Razvi

Published in Business Standard

In the post-Parekh scenario, the small investor is scared

and deep into debt. The series of scams indicate that

there is something seriously wrong with the system.

Moreover the repeated financial-epidemics entail the

vulnerable nature of immune system. The immunity

seems to have been lost long time back.

There seems to be no corrective measure in place to

avoid the magnitude or scale of such scams/ scamsters.

It places two dispositions, either the existing regulatory

regime is too feeble to enable any checks and balances.

Other being the lack of will to apply the existing

regulations.

In line of firing is the deadly combination of the banking

and investment. This is also a combination for

profitability of the banking system. While an ambitious

young man used the combination with financial

intelligence, but there was lack of prudence.

It is this financial prudence which is precisely lacking in

the banking and financial segment of the Indian

financial system. The failure of the Banking regulatory

mechanism is plain failure of the RBI. The failure of the

element of prudence in Investment is a failure which so

far has no singular authority. Sometimes the dual

regulatory bodies or authorities without clear mandate

for intervention create germane conditions for reckless

investment market.

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This reckless behaviour has a casualty who is most

neglected, which is the small and marginal investor. In

past one decade this has enabled the scamsters to

runaway with collective deposits to the tune of

Rs.40,0000 Crores ( NBFC frauds) and Rs.10000 Crores

(Plantation companies).

This means that a good part of small savings has simply

vanished which could have been the life savings of

some of the affected depositors.

More recently there is proposal to introduce the new

regulatory body on the Scheduled Banks (Cooperative

Banks). This may help to some extents. However if

undeniably more regulatory bodies, more specific in

function are required. SEBI is not so wellequipped or

comfortably disposed as the legal transposition helps

the evasive wheeler-dealers. The concurrent or over-

lapping jurisdiction to try the evasive financial/stock

companies between SEBI and Department of Company

Affairs, is very lucrative for the wheeler-dealers. Indeed,

in the stock scam this precise over-lapping of authority

acted as catalyst. The authority and presence of the

Regulatory authorities and agencies is to be continuing

one, it is not be invoked at the time of crime already

committed. The word or expression regulatory authority

would fail of any value, if it acts as policeman. The

checks and balances is what comprises and includes

Regulation/Regulatory authority.

In the instant case of stock scams and Bank

scandals, it cannot be ignored that had there been

proper Investigating counsels/inspectors as provided in

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the Companies Act and that under the SEBI Act, the

regulation of the scams would have been better.

Aspect of regulation is not just legislative but the

professional bodies and the code of practice followed by

the private institutions i.e. self-regulatory bodies.

Unfortunately this has never been a priority in any of

the budget/Financial Act though. An interesting

reference in this regard is the Financial Services

Act,1986 of Britain, which is an excellent piece of

codification, catering to all regulatory bodies,

concerning the financial matters.

The structure is that there is a principle watch-dog Like

SEBI in India. In Britain it is known as Securities and

Investment Board. This Board is all too powerful with

statutory authority to delegate the task of routine

enforcement to different regulatory and self-regulatory

organizations. In short there is a master regulatory body

which is empowered by way of enabling legislation to

set standards for other regulators, supervision and

monitoring of the other regulators, promotion of clear,

ethical , prudential business standards enforcement of

requirements both by itself and in support of the other

Regulators.. Lastly, it has the power of overseeing of

appropriate restitution and compensation.

Back to Indian scenario SEBI and Department of

Company Affairs share these responsibilities minus an

important ingredient of enforcement of requirements for

themselves and other regulators , whom they regulate.

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It is interesting to see that colonial principle of

administration predominates the mindset whereby

responsibilities come without actual control of funds. A

Funds starved or dependent agency cannot enforce the

diktats. Thus the innate though innocuous looking

impossibility is not just a legal malaise but is the origins

of all ills.

In modern era if the Investor protection cannot be

granted or ensured, then it is bound to reflect on the

efficacy and desire/need for the new economic set-up. It

is so as the Agrarian Indian mindset is changed from

bicycle economy to vibrant economy, the strength of

the regulators is a necessity and inevitable to the New

economic policy. A safe investment is what defines the

economic indicators/trends.