initiation of legal proceedings to abhay.docx

8/19/2019 Initiation of legal proceedings to abhay.docx

1/35

INVESTMENT LAW

Initiation of legal proceedings to ‘affect’ the

welfare of investors in mutual funds

Abhay khandelwal

PRN:!!""#$

Division % Class "!&'

Under the guidance of

MR.ARJUN CHOUDHARY

Sy!iosis "a# School$ NO%DA

Sy!iosis %nternational University$ &UN'

March$ ()*+

1


2/35

INVESTMENT LAW

()*+ARA,I-N

% here!y declare that the ,ro-ect entitled “ Initiation of Legal Proceedings

to ‘affect’ the Welfare of Investors in MUTUAL FUNDs” su!itted for

the Sy!iosis "a# School$ NO%DA for %nvestent "a# is y original #or

and the ,ro-ect has not fored the !asis for the a#ard of any degree$

fello#shi, or any other siilar titles.

/A0HAY 1HAND'"2A"3

&lace4 NO%DA

Date4 5th Octo!er ()*+

2


3/35

INVESTMENT LAW

*)R,I.I*A,)

6he ,ro-ect entitled “ Initiation of Legal Proceedings to ‘affect’ the

Welfare of Investors in MUTUAL FUNDs” su!itted to the Sy!iosis "a#

School$ NO%DA for %nvestent "a# as a ,art of %nternal assessent is !ased

on y original #or carried out under the guidance of &rof. Ar-un Chaudhuri

fro July ()*+ to Octo!er ()*+. 6he research #or has not !een su!itted

else#here for a#ard of any degree.

6he aterial !orro#ed fro other sources and incor,orated in the thesis has

!een duly acno#ledged.

% understand that % yself could !e held res,onsi!le and accounta!le for

,lagiaris$ if any$ detected later on.

/A0HAY 1HAND'"2A"3

Date4 5th Octo!er ()*+

3


4/35

INVESTMENT LAW

A*/N-0+)(1)2)N,3

% #ould lie to than y %nvestent "a# faculty$ &rof. Ar-un Chaudhuri for

guiding e at every ste, in the co,letion of the ,ro-ect and also increasing

y no#ledge. 2ithout his hel, this ,ro-ect #ould have !een inco,lete

and various as,ects not understood or covered.

4


5/35

INVESTMENT LAW

IN()4

A5 ,I,+) PA1)%5 *)R,I.I*A,)

*5 A*/N-0+)(12)N,(5 IN,R-(6*,I-N

7I3,-R8 -. 26,6A+ .6N( IN(63,R8 IN IN(IA

)5 -R1ANI3A,I-N -. 26,6A+ .6N(3.5 -%9)*,I)

15 R)3)AR*7 2),7-(-+-1875 +)1I3+A,I-N3

I5 3,-*/ )47AN1)3

95 R6+)3 AN( R)16+A,I-N3/5 IN)3,-R PR-,)*,I-N .6N(

+5 IN)3,-R A0AR)N)33 PR-1RA22)25 IN)3,-R )(6*A,I-N AN( PR-,)*,I-N .6N(

N5 (I3*+-36R)3 AN( IN)3,-R PR-,)*,I-N

-5 *A3) 3,6(I)3P5 *-N*+63I-N

;5 R).)R)N*)

Initiation of legal proceedings to ‘effect’ the welfare of investors in

mutual funds

IN,R-(6*,I-N

5


6/35

INVESTMENT LAW

A Mutual 7und is a for of collective investent that ,ools oney fro

any investors and invests the oney in stocs$ !onds$ short8ter oney

aret instruents$ and9or other securities. %n a Mutual 7und$ the fund

anager trades the fund:s underlying securities$ reali;ing ca,ital gains or

loss$ and collects the dividend or interest incoe.

6he investent ,roceeds are then ,assed along to the individual investors.

6he value of a share of the Mutual 7und$ no#n as the net asset value

/NA


7/35

INVESTMENT LAW

together and ae these !enefits availa!le to the entire grou,. 6here are no

?,ers@ for the largest investor and no ,enalties to the sallest88all Mutual

7und holders ,ay the sae fees and receive the sae !enefits.

Mutual funds are also ,o,ular !ecause they ,rovide an e>cellent #ay for

anyone to direct a ,ortion of their incoe to#ards a ,articular investent

o!-ective. 2hether you:re looing for a !road8!ased fund or a narro#

industry8focused niche fund$ you:re alost certain to find a fund that eets

your needs.

%f #e loo into the history of %ndian Mutual 7und the U6% utual fund is the

first Mutual 7und coes in *B. Unit 6rust of %ndia /U6%3 #as esta!lished in

*B !y an Act of &arliaent control !y the reserve !an of %ndia. 6here #as

governing !y the Reserve 0an of %ndia and functioned under the Regulatory

and adinistrative control of the Reserve 0an of %ndia. %n *E U6% #as de8

lined fro the R0% and the %ndustrial Develo,ent 0an of %ndia /%D0%3

too over the regulatory and adinistrative control in ,lace of R0%. 0ody #as

reserve !an of %ndia .!ut in * constituted of securities and e>change

!oard of %ndia/ S'0%3 6he S'0% /Mutual 7und3 Regulations #ere su!stituted

!y a ore co,rehensive and revised Mutual 7und Regulations in *B. 6he

industry no# functions under the S'0% /Mutual 7und3 Regulations *B.*

7I3,-R8 -. 26,6A+ .6N( IN(63,R8 IN IN(IA

6he history of utual funds in %ndia can !e !roadly divided into four distinct

,hases

.IR3, P7A3) = >'#&?@

An Act of &arliaent esta!lished Unit 6rust of %ndia /U6%3 on *B. %t #as set

u, !y the Reserve 0an of %ndia and functioned under the Regulatory and

1 www.amfindia.com

7


8/35

INVESTMENT LAW

adinistrative control of the Reserve 0an of %ndia. %n *E U6% #as de8

lined fro the R0% and the %ndustrial Develo,ent 0an of %ndia /%D0%3

too over the regulatory and adinistrative control in ,lace of R0%. 6he first

schee launched !y U6% #as Unit Schee *B5. At the end of *EE U6% had

Rs.B$)) crores of assets under anageent.

3)*-N( P7A3) = >?@&>> B)N,R8 -. P6%+I* 3)*,-R .6N(3C

*E ared the entry of non8 U6%$ ,u!lic sector utual funds set u, !y

,u!lic sector !ans and "ife %nsurance Cor,oration of %ndia /"%C3 and

Feneral %nsurance Cor,oration of %ndia /F%C3. S0% Mutual 7und #as the first

non8 U6% Mutual 7und esta!lished in June *E follo#ed !y Can!an Mutual

7und /Dec E3$ &un-a! National 0an Mutual 7und /Aug E3$ %ndian 0an

Mutual 7und /Nov E3$ 0an of %ndia /Jun )3$ 0an of 0aroda Mutual 7und

/Oct (3. "%C esta!lished its utual fund in June *E #hile F%C had set u,

its utual fund in Dece!er *). At the end of *$ the utual fund

industry had assets under anageent of Rs.5$))5 crores.

,7IR( P7A3) = >>&"!! B)N,R8 -. PRIA,) 3)*,-R .6N(3C

2ith the entry of ,rivate sector funds in *$ a ne# era started in the

%ndian utual fund industry$ giving the %ndian investors a #ider choice of

fund failies. Also$ * #as the year in #hich the first Mutual 7und

Regulations cae into !eing$ under #hich all utual funds$ e>ce,t U6% #ere

to !e registered and governed. 6he erst#hile 1othari &ioneer /no# erged

#ith 7ranlin 6e,leton3 #as the first ,rivate sector utual fund registered

in July *. 6he * S'0% /Mutual 7und3 Regulations #ere su!stituted !y

a ore co,rehensive and revised Mutual 7und Regulations in *B. 6he

industry no# functions under the S'0% /Mutual 7und3 Regulations *B. 6he

nu!er of utual fund houses #ent on increasing$ #ith any foreign

utual funds setting u, funds in %ndia and also the industry has #itnessed

several ergers and ac=uisitions. As at the end of January ())$ there #ere

8


9/35

INVESTMENT LAW

utual funds #ith total assets of Rs. *$(*$E)+ crores. 6he Unit 6rust of

%ndia #ith Rs.55$+5* crores of assets under anageent #as #ay ahead of

other utual funds.

.-6R,7 P7A3) = 3IN*) .)%R6AR8 "!!

%n 7e!ruary ())$ follo#ing the re,eal of the Unit 6rust of %ndia Act *B

U6% #as !ifurcated into t#o se,arate entities. One is the S,ecified

Undertaing of the Unit 6rust of %ndia #ith assets under anageent of

Rs.($E+ crores as at the end of January ())$ re,resenting !roadly$ the

assets of US B5 schee$ assured return and certain other schees. 6he

S,ecified Undertaing of Unit 6rust of %ndia$ functioning under an

adinistrator and under the rules fraed !y Fovernent of %ndia and does

not coe under the ,urvie# of the Mutual 7und Regulations.

6he second is the U6% Mutual 7und$ s,onsored !y S0%$ &N0$ 0O0 and "%C. %t

is registered #ith S'0% and functions under the Mutual 7und Regulations.

2ith the !ifurcation of the erst#hile U6% #hich had in March ())) ore than

Rs.B$))) crores of assets under anageent and #ith the setting u, of a

U6% Mutual 7und$ conforing to the S'0% Mutual 7und Regulations$ and #ithrecent ergers taing ,lace aong different ,rivate sector funds$ the

utual fund industry has entered its current ,hase of consolidation and

gro#th.

-R1ANI3A,I-N -. 26,6A+ .6N(3

%n accordance #ith the ,rovisions of the %ndian 6rust Act$ *EE( every utual

fund shall !e constituted in the for of a trust. S'0% Fuidelines$ *( s,ell

out in clear ters the esta!lishent nors for utual funds. %t

conte,lated a three8tier syste for anaging the affairs of utual funds.

6he three constituents are the s,onsoring co,any$ the trustees and the

9


10/35

INVESTMENT LAW

assets anageent co,any /AMC3. 6hese three constituents #ere

incor,orated in S'0% Regulations$ *B for the anageent of utual

funds. A,art fro these three$ Custodians and transfer agents are t#o ore

i,ortant constituents of utual funds.

3P-N3-R

S,onsor of a utual fund is ain to the ,rooter of a co,any as he gets

the fund registered #ith S'0%. Under S'0% regulations$ s,onsor is defined as

any ,erson #ho acting alone or in co!ination #ith another !ody cor,orate

esta!lishes the utual fund. S,onsor can!e %ndian co,anies$ !ans or

financial institutions$ foreign entities or a -oint venture !et#een t#o entities.

As Reliance utual fund has !een s,onsored fully !y an %ndian entity.

2hereas$ funds lie 7idelity utual fund and J & Morgan utual fund are

s,onsored fully !y foreign entities. %C%C% &rudential utual fund has !een

set u, as a -oint venture !et#een %C%C% 0an and &rudential ,lc. 0oth

s,onsors have contri!uted to the ca,ital of the Asset Manageent Co,any

of %C%C% &rudential.

S'0% has laid do#n the eligi!ility criteria for s,onsor as it should have asound trac record and at least five years e>,erience in the financial services

industry. S'0% ensures that s,onsor should have ,rofessional co,etence$

financial soundness and general re,utation of fairness and integrity in

!usiness transactions. At least 5) ,ercent of the ca,ital of AMC has to !e

contri!uted !y the s,onsor. Also$ they identify and a,,oint the trustees and

Asset Manageent Co,any. S,onsors are also free to get incor,orated an

AMC as #ell as to a,,oint a !oard of trustees. 6hey$ either directly or actingthrough trustees$ #ill a,,oint a custodian to hold the fund assets. 6o su!it

trust deed and draft of eorandu and articles of association of AMC to

S'0% is also a duty of s,onsor. After the utual fund is registered$ s,onsors

technically tae a !acseat.

10


11/35

INVESTMENT LAW

,R63,))3

Under the %ndian trust act *EE($ a s,onsor creates utual fund trust$ #hich

is the ain !ody in creation of utual funds. 6rustees ay !e a,,ointed as

an individual or as a trustee co,any #ith the ,rior a,,roval of S'0%. As

defined under the S'0% regulations$ *B$ trustees ean !oard of trustees

or 6rustee Co,any #ho hold the ,ro,erty of utual fund for the !enefit of

the unit holders. A 6rustee acts as the ,rotectors of the unit holdersG

interests and is the ,riary guardians of the unit holdersG funds and assets.

S,onsor e>ecutes and registers a trust deed in favour of trustees. 6here

ust !e at least 5 e!ers in the !oard of trustees and least t#o third of

the need to !e inde,endent. 7or e>a,le$ HD7C 6rustee Co,any "iited

is the 6rustee of HD7C Mutual 7und vide the 6rust deed dated June E$ ())).

%t has five !oard e!ers$ of #ho three are inde,endent.

6o ensure fair dealings$ utual fund regulations re=uire that trustee of one

utual fund cannot !e a trustee of another one$ unless he is an inde,endent

trustee in !oth the cases$ and has a,,roval of !oth the !oards. AMC$ its

directors or e,loyees shall not act as trustees of any utual fund. 6rustees

ust !e the ,erson #ith e>,erience in financial services. S'0% has also

defined the rights and o!ligations of trustees. Under their rights$ trustees

a,,oint AMC #ith the ,rior a,,roval of S'0%. 6hey a,,rove each of the

schees floated !y AMC in consultation #ith the s,onsors. 6hey have the

right to o!tain fro the AMC$ such inforation$ as they consider necessary

to fulfill their o!ligations.

6rustees can even disiss AMC #ith the a,,roval of the S'0% and in

accordance #ith the regulations. Under their o!ligations$ trustees ust

ensure that the transactions of utual funds are in accordance #ith the trust

deed and its activities are in co,liance #ith S'0% regulations. 6hey ust

11


12/35

INVESTMENT LAW

ensure that AMC has all the ,rocedures and systes in ,lace$ and that all

the fund constituents are a,,ointed. Also$ they ust ensure due diligence on

the ,art of AMC in the a,,ointent of !usiness associates and constituents.

6rustees ust furnish to S'0%$ on half8yearly !asis a re,ort on the activities

of the AMC.

A33), 2ANA1)2)N, *-2PAN8 BA2*C

Asset Manageent Co,any is the !ody engaged to run the sho# of a

utual fund. 6he s,onsor or trustees a,,oint AMC to anage the affairs of

the utual fund to ensure efficient anageent. S'0% desires that AMC

ust have a sound trac record in ters of net #orth$ dividend ,aying

ca,acity$ ,rofita!ility$ general re,utation and fairness in transactions. AMC is

involved in !asically three activities as ,ortfolio anageent$ investent

analysis and financial adinistration. 6herefore$ the directors of AMC should

!e e>,ert in these fields. S'0%Gs regulation for AMC re=uires that it should

have a net #orth of at least Rs. *) crore at all ties and that a co,any can

act as an AMC of one utual fund only. Also$ at least +) ,ercent of the

e!ers of the !oard of an AMC have to !e inde,endent and these can !e

the director of another AMC also. %ts chairan should !e an inde,endent

,erson.

AMCs cannot engage in any !usiness other than that of financial advisory

and investent anageent. %ts eorandu and articles of association

have to !e a,,roved !y the S'0%. Statutory disclosures regarding AMCs

o,erations should !e ,eriodically su!itted to S'0%. &rior a,,roval of the

trustees is re=uired$ !efore a ,erson is a,,ointed as a director on the !oardof AMC. An AMC cannot invest in its o#n schees until it is disclosed in the

offer docuent. Moreover in such investents$ AMC #ill not !e eligi!le for

fees also. 6he a,,ointent of an AMC can !e terinated !y the a-ority of

trustees or !y + ,ercent of unit holders. '>a,le4 HD7C Asset Manageent

12


13/35

INVESTMENT LAW

Co,any "td. #as a,,roved !y S'0% vide itsletter dated June )$ ())) to

act as an Asset Manageent Co,any of the HD7C utual fund. %n ters of

investent anageent agreeent$ the trustee a,,ointed this AMC. HD7C

holds B) ,ercent of the ca,ital and Standard "ife %nvestents holds

reaining 5) ,ercent of the ca,ital of the AMC. %ts !oard has *( e!ers of

#ho B are inde,endent.

A,art fro three constituents discussed a!ove$ Custodians and transfer

agents are another t#o i,ortant constituents of utual funds. 6hese have

!een discussed !elo#.

*63,-(IAN

S'0% re=uires that each utual fund shall have a custodian #ho is

inde,endent and registered #ith it. S'0% regulations ,rovide for the

a,,ointent of a custodian !y trustees of the utual fund #ho are

res,onsi!le for carrying on the activities of safe ee,ing of securities and

,artici,ating in any clearing syste on !ehalf of utual fund. Custodian is

not ,eritted to act as a custodian of ore than one utual fund #ithout

the ,rior a,,roval of S'0%. 6hey should !e inde,endent of the s,onsors. Asfor e>a,le$ %C%C% 0an is a s,onsor of %C%C% &rudential Mutual fund. %t is

also a custodian !an. 0ut it cannot offer its services to %C%C% &rudential

Mutual fund$ !ecause it is a s,onsor of this fund.

6he a,,ointent of any agency as custodian de,ends u,on its trac record$

=uality of services$ e>,erience$ trans,arency$ co,uteri;ation and other

infrastructure facilities. Custodians ,riarily ,erfor securities settleent

functions. Ho#ever$ soe also offer fund accounting and valuation services.

6he res,onsi!ilities of custodian include delivering and acce,ting securities

and cash$ to co,lete transactions ade in the investent ,ortfolio of

utual funds. Custodians also trac and ee, ,ayouts and cor,orate actions

such as !onus$ rights$ offer for sale$ !uy !ac offers$ dividends$ interest and

13


14/35

INVESTMENT LAW

rede,tion on the securities held !y the fund. 6hey also loo after that the

discre,ancies and failure ust !e tiely resolved.

,RAN3.)R A1)N,

Registrar and transfer /R63 agents are res,onsi!le for creating and

aintaining investor records e,t in nu!ered account called folios and

servicing the. 6hey acce,t and ,rocess investor transactions and also

o,erate investor service center /%SCs3 #hich acts as an official ,oints for

acce,ting investor transactions #ith a fund. As for e>a,le$ Co,uter Age

Manageent Services /CAMS3 is the R6 agent for HD7C utual fund. R6

functions include issuing and redeeing the units and u,dating the unit

ca,ital account. R6 ,erfor creating$ aintaining and u,dating the

investorsG records and ena!ling their transactions such as rede,tion$

,urchase and s#itches. 6hey also do !aning the ,ayent instruents such

as drafts and che=ues given !y investors and notifying the AMC. R6 send

statutory and ,eriodic inforation to investors and ,rocess ,ayouts to

investors in the for of dividends and rede,tions

-%9)*,I)6he o!-ect of the study is that it has e,hasis on the legal ,roceedings to

IaffectG the #elfare of investors in utual funds.

R)3)AR*7 2),7-(-+-186his study is a descri,tive research #here in the source for the data #ill !e

secondary. 6here has !een very liited ,u!lished data and inforation #ith

regard to this study.

Hence the study #ill try to understand the regulations #ith relation to the

utual fund. 6his study #ill cover all the legal as,ects in relation to initiation

of legal ,roceeding to affect #elfare of investors in utual funds.

+egislations

14


15/35

INVESTMENT LAW

,he 3)%I ActD >>"4 6he S'0% Act$ *( #as enacted to e,o#er S'0%

#ith statutory ,o#ers for4

/a3 &rotecting the interests of investors in securities$

/!3 &rooting the develo,ent of the securities aret$ and

/c3 Regulating the securities aret. %ts regulatory -urisdiction e>tends over

cor,orate in the issuance of ca,ital and transfer of securities$ in addition to

all interediaries and ,ersons associated #ith the securities aret.

%t can conduct en=uiries$ audits$ and ins,ection of all concerned$ and

ad-udicate offences under the Act. %t has the ,o#ers to register and regulate

all aret interediaries$ as #ell as to ,enali;e the in case of violations of

the ,rovisions of the Act$ Rules$ and Regulations ade there under. S'0% has

full autonoy and the authority to regulate and develo, an orderly securities

aret.

3ecurities *ontracts BRegulationC ActD >$'4 6his Act ,rovides for the

direct and indirect control of virtually all as,ects of securities trading and the

running of stoc e>changes$ and ais to ,revent undesira!le transactions in

securities. %t gives the Central Fovernent regulatory -urisdiction over4

/a3 Stoc e>changes through a ,rocess of recognition and continued

su,ervision$

/!3 Contracts in securities$ and

/c3 6he listing of securities on the stoc e>changes.

As a condition of recognition$ a stoc e>change co,lies #ith the conditions

,rescri!ed !y the Central Fovernent. Organi;ed trading activity in

15


16/35

INVESTMENT LAW

securities taes ,lace on a s,ecified recogni;ed stoc e>change. 6he stoc

e>changes deterine their o#n listing regulations$ #hich have to confor to

the iniu listing criteria set out in the Rules(.

(epositories ActD >>': 6he De,ositories Act$ *B ,rovides for the

esta!lishent of de,ositories in securities #ith the o!-ective of ensuring free

transfera!ility of securities #ith s,eed$ accuracy$ and security !y4

/a3 Maing securities of ,u!lic liited co,anies freely transfera!le$ su!-ect

to certain e>ce,tions.

/!3 Deateriali;ing the securities in the de,ository ode.

/c3 &roviding for the aintenance of o#nershi, records in a !oo entry for.

%n order to strealine the settleent ,rocess$ the Act envisages the transfer

of o#nershi, of securities electronically !y !oo entry$ #ithout aing the

securities ove fro ,erson to ,erson. 6he Act has ade the securities of

all ,u!lic liited co,anies freely transfera!le$ restricting the co,anyGs

right to use discretion in effecting the transfer of securities$ and the transfer

deed and other ,rocedural re=uireents under the Co,anies Act have !een

dis,ensed #ith.

*ompanies ActD >$': %t deals #ith the issue$ allotent$ and transfer of

securities$ as #ell as various as,ects relating to co,any anageent. %t

,rovides the standard of disclosure in ,u!lic issues of ca,ital$ ,articularly in

the fields of co,any anageent and ,ro-ects$ inforation a!out other

listed co,anies under the sae anageent$ and the anageentGs

,erce,tion of ris factors. %t also regulates under#riting$ the use of ,reiu

and discounts on issues$ rights$ and !onus issues$ the ,ayent of interest

and dividends$ the su,,ly of annual re,orts$ and other inforation.

2 http://www.sebi.gov.in/sebiweb/home/section/1/ega!"#$amewo$%

16


17/35

INVESTMENT LAW

Prevention of 2oney +aundering ActD "!!"4 6he ,riary o!-ective of

this Act is to ,revent oney laundering$ and to allo# the confiscation of

,ro,erty derived fro or involved in oney laundering. According to the

definition of ?oney laundering$@ anyone #ho ac=uires$ o#ns$ ,ossess$ or

transfers any ,roceeds of crie$ or no#ingly enters into any transaction

that is related to the ,roceeds of crie either directly or indirectly$ or

conceals or aids in the concealent of the ,roceeds or gains of crie #ithin

%ndia or outside %ndia coits the offence of oney laundering. 0esides

,rescri!ing the ,unishent for this offence$ the Act ,rovides other easures

for the ,revention of oney laundering. 6he Act also casts an o!ligation on

the interediaries$ the !aning co,anies$ etc. to furnish inforation of

such ,rescri!ed transactions to the 7inancial %ntelligence Unit8%ndia$ to

a,,oint a ,rinci,al officer$ to aintain certain records$ etc.

R)3)R) %AN/ -. IN(IA BR%IC

R0% is the regulatory authority of !ans in %ndia. 0ans can function as

s,onsors$ custodians and distri!utors of utual funds. 7or ,erforing these

functions$ they are su!-ect to regulations sti,ulated !y R0% fro tie to

tie. R0% is the regulator of the governent securities and oney arets

in %ndia. Since utual funds ay invest in these securities$ they are re=uired

to a!ide !y the R0% Regulations as ay !e a,,lica!le.

3,-*/ )4*7AN1)3

%t is andatory for close8ended funds to !e listed on a stoc e>change.

Mutual funds also offer e>change traded funds /'673 that can !e !ought and

17


18/35

INVESTMENT LAW

sold on a stoc e>change. 7or these funds$ the utual fund #ill enter into a

listing agreeent #ith stoc e>change and su!-ect itself to the necessary

regulatory and disclosure re=uireents. 0S' 6raining %nstitute #hich

organi;es 6raining ,rogras ,eriodically on various su!-ects lie

co,rehensive ,rogras on Ca,ital Marets$ 7undaental Analysis$

6echnical Analysis$ Derivatives$ %nde> 7utures and O,tions$ De!t Maret$ etc.

7urther$ for the Derivatives aret 0S' also conducts the co,ulsory 0S'Gs

Certification on Derivatives '>change /0CD'3 certification for 6rading

Me!ers and their dealers to i,art !asic iniu no#ledge of the

derivatives arets.

*ompensation to the Investors

Ca,ital aret includes investent into ris !earing instruents. %n such

cases$ the investor is re=uired to ae his o#n assessent of ris and

re#ard. No co,ensation could !e visuali;ed for such investors #hose

investents #ere in ris !earing instruents. Siilarly$ investent in a

fi>ed return instruent necessitated a careful revie# of the !orro#ing entity.

Such actions #ould also !e su!-ected to no#n or declared riss. 0esides$

the ca,ital aret also ,rovides an o,,ortunity for an investor to e>it. 6he

need therefore$ is to ensure ,ro,er and healthy aret o,eration so that

investors could e>ercise their e>it o,tions in a reasona!le and e=uita!le

environent. Ho#ever$ there ay !e situations #here such a frae #or is

distorted through frauds. 6here ay !e ,rovisions for co,ensation in the

event of fraud !y co,anies !eing esta!lished in securing funds fro

investors. 7or this ,ur,ose lifting of cor,orate veil ay !e ena!led !y the

la#.

0S' is the only '>change in %ndia$ #hich offers the highest co,ensation of

Rs.*+"acs in res,ect of the a,,roved clais of any %nvestor against the

defaulter 6rading Me!ers of the '>change.

18


19/35

INVESTMENT LAW

Rules and Regulations

6he Fovernent has fraed rules under the SCRA$ the S'0% Act$ and the

De,ositories Act. S'0% has fraed regulations under the S'0% Act and the

De,ositories Act for the registration and regulation of all aret

interediaries$ and for the ,revention of unfair trade ,ractices$ insider

trading$ etc. Under these Acts$ the Fovernent and S'0% issue notifications$

guidelines$ and circulars that the aret ,artici,ants need to co,ly #ith.

6he SROs$ lie the stoc e>changes$ have also laid do#n their o#n rules and

regulations

Investors Protection .und BIP.C

6he Fovernent has esta!lished an %nvestor 'ducation and &rotection 7und

/%'&73 under Sec. ()+ C of the Co,anies Act$ *+B under #hich unclaied

funds on account of dividends$ atured de,osits$ atured de!entures$ share

a,,lication oney etc. are transferred through the %'&7 to the Fovernent

!y the co,any on co,letion of seven years. 6he Fovernent is re=uired

to utili;e this aount through an %nvestor 'ducation and &rotection 7und.

7or this ,ur,ose$ the ,roceeds fro the co,anies are credited to the

Consolidated 7und of %ndia through this fund. 6he 7und ay then !e

entrusted #ith full fledged res,onsi!ility to carry out activities for education

of investors and ,rotection of their rights.

0S' is the first '>change to have set u, the :Stoc '>change %nvestors

&rotection 7und /%&73 in the interest of the custoer:s of the defaultere!ers of the '>change. 6his fund #as set u, on *)th July$ *EB and has

!een registered #ith the Charity Coissioner$ Fovernent of Maharashtra

as a Charita!le 7und. 6he a>iu aount of Rs. *)$))$))) ,aya!le to an

investor fro %nvestor &rotection 7und in the event of a default !y a 6rading

19


20/35

INVESTMENT LAW

Me!er has !een revised to Rs. *+$))$))) #hich shall !e a,,lica!le to the

clients of the 6rading Me!er of the '>change$ #ho #ill !e declared

Defaulter after +th Dece!er$ ()). /6his has !een ,rogressively raised !y

0S' fro Rs.*)$))) in *EE to the ,resent level3.

0S' is the only '>change in %ndia$ #hich offers the highest co,ensation of

Rs.*+lacs in res,ect of the a,,roved clais of any %nvestor against the

defaulter 6rading Me!ers of the '>change.

6he 6rading e!ers at ,resent contri!ute * ,aisa ,er *lah of gross

turnover. 6he Stoc '>change contri!utes (.+K of the listing fees collected

!y it. Also the entire interest earned !y the '>change on *K security de,osit

e,t !y #ith it !y the co,anies aing ,u!lic 9 rights issues is credited to

the 7und.

Investor Awareness Program

"aunching the Securities Maret A#areness Ca,aign organi;ed !y S'0%

/January ())3$ the &rie Minister said the ,rolonged =uietness in the stoc

arets had tested the confidence of the sall investor #ho #as the

!ac!one of the securities aret. %f investors are not attracted$ then

co,anies #ill not !e a!le to raise oney through the ca,ital aret. 6he

%ndian household investor$ off late$ has !een ,utting uch of his savings in

non8financial assets. 'ven #ith financial assets$ ost of the savings are

going to the !aning syste. 6his is not the !est or the ost ,roductive use

of our savings$ he said. %n recent years$ there had !een any instances of

co,anies raising oney fro the aret !y creating hy,e and then

defrauding the investor. Many of the issued shares at hefty ,reius

ost of their scri, are no# trading #ell !elo# their face value. Stoc aret

scas !rought a !ad nae to the %ndian !usiness counity. 6his is ho#

!oo #ent !ust and ho,es turned to dust for any gulli!le investors. And

3 https://www.sec.gov/investo$/p&bs/sec"g&ide"to"m&t&a!"'&nds.pd'

20


21/35

INVESTMENT LAW

that is ho# the investor counity lost confidence in the aret$ leading to

,rolonged stagnation. 6he &rie Minister$ therefore$ called u,on the aret

regulator and the interediaries to learn the right lessons fro our

e>,erience of the ,ast fe# years. He said #e need arets that are no#n

for their safety and integrity.

%nvestor A#areness ,rogras are !eing regularly conducted !y stoc

e>changes to educate the investors and to create a#areness aong the

%nvestors regarding the #oring of the ca,ital aret and in ,articular the

#oring of the Stoc '>changes. 6hese ,rogras have !een conducted in

alost all over the country.5

6he %nvestor A#areness ,rogra covers e>tensive to,ics lie %nstruents of

%nvestent$ &ortfolio a,,roach$ Mutual funds$ 6a> ,rovisions$ 6rading$

Clearing and Settleent$ Rolling Settleent$ %nvestors: &rotection 7und$

6rade Fuarantee 7und$ Deateriali;ation of shares$ inforation on De!t

Maret$ %nvestorsG Frievance Redressal syste availa!le #ith S'0%$ 0S'

Co,any "a# 0oard$ inforation on Sense> and other %ndices$ #orsho,s

and %nforation on Derivatives$ 7utures and O,tions etc.

Investor )ducation and Protection .und

6he Fovernent has esta!lished an %nvestor 'ducation and &rotection 7und

/%'&73 under Sec. ()+ C of the Co,anies Act$ *+B under #hich unclaied

funds on account of dividends$ atured de,osits$ atured de!entures$ share

a,,lication oney etc. are transferred through the %'&7 to the Fovernent

!y the co,any on co,letion of seven years. 6he Fovernent is re=uired

to utili;e this aount through an %nvestor 'ducation and &rotection 7und.

7or this ,ur,ose$ the ,roceeds fro the co,anies are credited to the

Consolidated 7und of %ndia through this fund. 6his constitutes a cu!ersoe

4

https://a$chive.o$g/st$eam/someimp!ications00patt/someimp!ications00patt(d)v&.t*t

21


22/35

INVESTMENT LAW

echanis and has to !e carefully e>ained in conte>t of the rights of

holders of securities and the role of the Fovernent in ,rotecting the #hile

,roviding resources for investor education.+

6he Coittee recogni;es a need for ensuring the e>,ro,riated aounts to

!e credited !ac to the %'&7 in their entirety. %t #ould !e desira!le if this is

ena!led through a direct transfer of unclaied aounts directly to a

se,arate statutory fund under the control$ su,ervision and anageent of

an Adinistrator$ #ithout routing it through Consolidated 7und of %ndia. 6he

Fovernent should also ,rovide funds to augent the cor,us of the fund

through grants #hich ay !e ,ro,erly de,loyed and anaged. Returns fro

such a 7und should !e availa!le to !e utili;ed for a co,rehensive

,rograe of education of sall investors. 6he 7und ay then !e entrusted

#ith full fledged res,onsi!ility to carry out activities for education of

investors and ,rotection of their rights.

6he Coittee also discussed various eans !y #hich funds already

availa!le under the %'&7 could !e utili;ed ore effectively. %t noted that the

Ministry of Co,any Affairs$ #ho adinister the 7und$ had already initiated

soe schees in this regard. 6he Coittee recoended that the

structure and adinistration of the 7und should !e reva,ed as a!ove and

schees should !e ade ore co,rehensive and their sco,e e>,anded to

ena!le flo# of correct inforation to the investors as #ell as their education

in res,ect of their rights. Such ,rograes should have s,ecial co,onents

for education at school9college level$ on line and distance learning$ su,,ort

genuine efforts in the Non8Fovernental sector$ inforation collection$

research and analysis on atters of sall investor concerns$ ena!le ca,acity

5 http://www.+o&$a$tic!e!ib$a$+.com/cons&me$s/what"a$e"the"cons&me$s"$ights"

&nde$"section"6"o'"the"cons&me$"p$otection"act/1135/

22


23/35

INVESTMENT LAW

!uilding of ad-udicators such as Consuer Courts on issues involved in legal

redressal of investor co,laints.B

3tate eEpropriation of dividend

6he echanis of e>,ro,riating certain unclaied aounts due to the

investors for transfer to the %'&7 as ,rovided in the ,resent la# also raises a

!asic issue as to the right of the State to e>,ro,riate such ,roceeds #hen

the underlying instruent or security is still in the hands of the investor #ho

has not !een a!le to clai it for any reason. 6he Coittee reained

unconvinced as to ho# the rights of the claiant holding a ,articular

instruent could !e e>tinguished in such cases. %n vie# of the Coittee$

la# should ena!le investors to clai returns on the securities as long as such

instruents are held !y the. Court ordered refunds should also !e ade

fro the funds availa!le #ith %'&7. 7or this ,ur,ose$ there should !e suita!le

aendent in the la#. %t goes #ithout saying that the ,rocedure for aing

clais also needs to !e si,lified to facilitate rei!urseent of such clais

s,eedily. 6here #as$ therefore$ a need to revie# the e>isting ,rovisions of

Section ()+ C of the Co,anies Act and ,ayent of un,aid dividend to the

legitiate claiants$ irres,ective of the la,se of tie.

Role of N1-s in Investors education

Many ,ro!les relating to investors$ ,articularly$ sall investors$ can !e

tacled !y educating the investors. Sall investors should !e encouraged to

either invest through Mutual 7und echaniss$ or should tae investent

decisions only after getting ade=uate inforation a!out riss and re#ards.

6he investors should also !e encouraged to ,artici,ate in the ,roceedings at

general eetings /either ,hysically or through ,ostal !allot$ including !y

electronic edia3 in a constructive anner. 6his re=uires i,roving the

general a#areness of the investors through inforal echaniss. 6he hel,

6 https://www.ici.o$g/pd'/b$o(&nde$standing(m's(p.pd'

23


24/35

INVESTMENT LAW

of various NFOs engaged in investor ,rotection activities should also !e

taen for this ,ur,ose. 6he Coittee ,erceives a ,ositive role for

%nvestorsG Associations 9 NFOs in this regard #hich should !e su,,orted !y

!oth the Fovernent as #ell as cor,orate entities.

*lass Action F (erivative 3uits

A situation ay arise #here!y the interest of the co,any ay need to !e

,rotected fro the actions of the ,ersons in control of the co,any. At the

sae tie$ the interests of the larger !ody of investors9shareholders ay

have to !e ,rovided legal avenues to ,rotect the co,any in their interest.

7or this ,ur,ose$ the la# should ,rovide for Iclass action9derivative suits on

!ehalf of de,ositors9shareholders. 6he ,rooters$ anagers held guilty of

isfeasance 9 fraud should !e ased to ,ay the legal costs$ if ,roven guilty.

6his conce,t has !een considered !y the Coittee #hile e>aining issues

relating to inority rights. 6he Coittee feels that siilar ,rinci,les #ould

also !e relevant for investor ,rotection and recoends the sae.

(isclosures and Investor Protection

6he Coittee is of the vie# that ,ro,er and tiely disclosures are central

to safeguarding investor interests. 6he la# should ensure a disclosure

regie that co,els co,anies to disclose aterial inforation on a

continuous$ tiely and e=uita!le !asis. %nforation should !e disclosed

#hen it is still relevant to the aret. 6he co,anies should$ therefore$ !e

ade to disclose routine inforation on a ,eriodic !asis and ,rice sensitive

inforation on a continuous !asis. Ca,ital aret regulator and stoc

e>changes have a significant role to ,lay in ensuring that such inforation is

accessi!le !y all aret ,artici,ants rather than a fe# select aret ,layers.

Use of odern technology$ internet$ co,uters$ should !e ena!led to

enhance the efficiency of the disclosure ,rocess. %t should !e ,ossi!le to

24


25/35

INVESTMENT LAW

su!it and disseinate financial and non8financial inforation !y electronic

eans.

"a# should also ,rovide a regie for enforceent of standards for

accounting$ audit and non8financial disclosure through setting of such

standards and their effective onitoring and enforceent. At the sae tie$

the Fovernent should ensure the ,rofessional inde,endence of standard

setters$ trans,arency of their activities and ade=uate eans of disci,lining

defaulters. 6here should !e a regie of stringent ,enalties$ !oth civil and

criinal for default in disclosure.

*A3) 3,6(8

"!! 26,6A+ .6N( 3*AN(A+ B6535C6he utual fund scandal of ()) #as the result of the discovery of illegal

late trading and aret tiing ,ractices on the ,art of certain hedge fund

and utual fund co,anies. On Se,te!er $ ())$ Ne# Yor Attorney

Feneral 'liot S,it;er announced the issuance of a co,laint against Ne#

Jersey hedge fund co,any Canary Ca,ital &artners ""C$ charging that they

had engaged in Llate tradingL in collusion #ith 0an of Aerica:s Nations

7unds. 0an of Aerica is charged #ith ,eritting Canary to ,urchase

utual fund shares$ after the MAR1'6S had closed$ at the closing ,rice for

that day. S,it;er:s investigation #as initiated after his office received a ten8

inute June ()) ,hone call fro a 2all Street #orer alerting the to an

instance of the late trading ,ro!le.

‘+ate ,rading’

An unethical /if not illegal3 ,ractice of a hedge fund ,urchasing and then

selling securities /usually shares of a utual fund3 after the close of a

7 http://www.!ega!se$vicesindia.com/a$tic!e/a$tic!e/p$otection"o'"the"inte$est"o'"the"

investo$"1560"1.htm!

25


26/35

INVESTMENT LAW

trading day$ !ut aing the transactions a,,ear as though they occurred

!efore the aret close.

‘2arket ,iming’

6he act of atte,ting to ,redict the future direction of the aret$ ty,ically

through the use of technical indicators or econoic data.

3)* investigation6he S'C is charged #ith the regulation of the utual fund industry in the

United States. 7ollo#ing the announceent of S,it;er:s co,laint$ the S'C

launched its o#n investigation of the atter #hich revealed the ,ractice of

Lfront runningL. 6he S'C claied that certain utual fund co,anies alerted

favored custoers or ,artners #hen one or ore of a co,any:s funds

,lanned to !uy or sell a large stoc ,osition. 6he ,artner #as then in a

,osition to 6RAD' SHAR'S of the stoc in advance of the fund:s trading.

Since utual funds tend to hold large ,ositions in s,ecific stocs$ any large

selling or !uying !y the fund often i,acts the value of the stoc$ fro

#hich the ,artner could stand to !enefit. According to the S'C$ the ,ractice

of front8running ay constitute insider trading.

3A7ARA IN(IA PARI0AR IN)(,-R3 .RA6( *A3)On (B 7e!ruary ()*5$ the Su,ree Court of %ndia ordered the arrest of

Su!rata Roy$ Chairan 7ounder of Sahara %ndia &ari#ar$ for failing to

a,,ear in connection #ith the Rs.(5$)))8crore de,osits his co,any has not

refunded to its investors. He #as eventually arrested on (E 7e!ruary ()*5

!y Uttar &radesh ,olice on a Su,ree Court:s #arrant$ in a dis,ute #ith

Maret Regulator 8 S'0%. He #as granted interi !ail !y Su,ree Court of

%ndia for the sae on (B March ()*5 on condition of de,ositing Rs *)$)))crore #ith the MAR1'6 regulator S'0%. As of August ()*5$ Roy is still in -ail

and is trying to sell soe of his hotel ,ro,erties to raise enough oney.

26


27/35

INVESTMENT LAW

6he Securities and '>change 0oard of %ndia /Se!i3 on (th July ()*+$

cancelled the registration of Sahara Asset Manageent Co,any /AMC3

#ithin si> onths fro the date of the order.E

All the assets the co,any have !een anaging #ould have to !e

transferred to a different fund house as ,er the order. 6he regulator had

o!served that the ,rooters of Sahara AMC #ere not ?fit and ,ro,er@.

According to the disclosures ade to Se!i$ the shareholding ,attern /e=uity3

of Sahara AMC includes 5B ,er cent stae of Sahara %ndia 7inancial

Cor,oration "iited /Sahara S,onsor3.

?&ending conte,t ,roceedings against Su!rata Roy Sahara$ SH%C"9S%R'C"

/grou, co,anies of Sahara3 and other litigations initiated and ,ending

against Su!rata Roy Sahara$ Sahara M7 along #ith the Sahara AMC and

Sahara S,onsor are no longer fit and ,ro,er ,ersons to carry out the

!usiness of a Mutual 7und$@ stated the ((8,age order ,assed !y #hole8tie

e!er &rashant Saran.

6he regulator has also held the fund house guilty of not disclosing the

ongoing litigations 88 the case in the Su,ree Court$ Se!i order in ()**$

#hich had directed Sahara to refund its investors$ and also !arred Su!rato

Roy fro associating #ith any listed ,u!lic co,any and any co,any that

raises oney fro the ,u!lic.

?Sahara AMC has violated the ,rovisions of Regulation (( of the M7

Regulations$ #hich re=uires the AMC to infor Se!i of any aterial change

in the inforation or ,articulars$@ stated the order. Saran also noted that

Su!rata Roy has continuously failed to ,rovide the re=uired inforation as,er the M7 Regulations since June ($ ()**.

8 http://www.stab!einvesto$.com/2015/03/,ase"-t&d+"&mps&m"nvestment"-toc%"

a$%ets.htm!

27


28/35

INVESTMENT LAW

Sahara M7 has !een directed to transfer the activities of Sahara S,onsor and

Sahara AMC to a Se!i8a,,roved AMC #ithin five onths fro the date of the

order.

%f the s,onsors fail to transfer the !usiness and the AUM to another AMC$

Sahara #ould !e re=uired to redee the units allotted to its investors and

credit the res,ective funds to its investors$ #ithout any additional cost.

9m 2utual .und And 9m *apital 555 vs 3ecurities And )Echange %oard

-f India>

6he a,,ellants !eing aggrieved !y the order of the Ad-udicating and 'n=uiry

Officer of S'0% dated ((nd of January ())5 have ,referred these a,,eals.

0y the i,ugned order$ the res,ondent has i,osed a ,enalty of Rs.) lahs

on the J.M. Ca,ital Manageent &vt. "td. /the second a,,ellant herein3 and

a further su of Rs.() lahs on the J.M. Mutual 7und /the first a,,ellant

herein3. 6hese ,enalties #ere i,osed on the a,,ellants for their failure to

co,ly #ith section *+' and section *+D of S'0% Act.

Section *+' deals #ith failure to o!serve rules and regulations !y the asset

anageent co,any and section *+D deals #ith defaults in case of utual

funds 6he J.M. Mutual 7und is the utual fund and the J.M. Ca,ital

Manageent &vt. "td. is the asset anageent co,any. 0oth the utualfund as #ell as the asset anageent co,any have !een i,osed #ith a

,enalty of Rs. +) lahs in all. 6he graveent of the charge against the

a,,ellant #as that the s,onsors of the first a,,ellant had suffered an order

at the hands of S'0% for violating S'0% /Su!stantial Ac=uisition of shares and

6aeover3 Regulations$ * /hereinafter referred to as the Regulations3.

6he s,onsors #ere the JM 7inancial and %nvestent Consultancy Services

&vt. "td. /hereinafter referred to as the Ls,onsorsL3. 6he s,onsors #erevisited #ith an order !y S'0% for violating the Regulations and a ,enalty of

Rs. *$E)$)))98 #as levied on the s,onsors !y S'0%. 6he s,onsors a,,ealed

to the Securities A,,ellate 6ri!unal and the 6ri!unal !y its order confired

9 2005 57 -, 262 -

28


29/35

INVESTMENT LAW

S'0%:s order and reduced the ,enalty fro Rs.*$E)$))) to Rs. * lah. 6he

order of the 6ri!unal !ecae final. 6his ,iece of inforation #as not

incor,orated in the offer docuent ,re,ared !y the a,,ellants and vetted !y

S'0%.

Su!se=uently$ the a,,ellants devised seven schees #hich #ere ,ro,osed

to !e launched. 6he schees #ere the JM F Sec 7und$ the JM Short 6er

7und$ the JM 0asic 7und$ the JM High %ncoe 7und$ the JM 7i>ed Maturity

&lan$ the JM Sector Series and JM F Sec Marathon Series. 2hile devising the

schee the co,liance officer of the a,,ellant infored the s,onsors that

there #as a duty cast on the s,onsors of the utual fund to ae a relevant

disclosure to the a,,ellants. 6he letters of the co,liance officer to the (nd

a,,ellant dated indicate that the a,,ellants had infored s,onsors to ae

all the relevant disclosures as re=uired under Regulation ( of the Mutual

7und Regulations.

%t a,,ears that the s,onsors failed to ae any ention #ith res,ect to the

order ,assed against the s,onsors !y the 6ri!unal. %t also a,,ears fro the

records that the s,onsors a,,roved the a!ove said schee !ut did not

infor the a,,ellants a!out the order of SA6 i,osing a ,enalty on the ins,ite of letters #ritten !y the co,liance officer of the a,,ellants to the

s,onsors. After getting the a,,roval of the s,onsors on various as,ects of

the atter$ the draft offer docuents #ere filed #ith S'0% under Regulation

(E of the Mutual 7und Regulations. Curiously S'0% advised certain

odifications in the offer docuents !ut did notice the ,enalty i,osed on

s,onsors. S'0% ased the a,,ellants #hether any cases #ere ,ending

against the a,,ellants and against the trustees. 6he a,,ellants also stated inthe offer docuent as follo#s4

L6he 7und further confirs that there is no other case #here ,enalty #as

a#arded !y S'0% against the S,onsor of the Mutual 7und or any co,any

associated #ith the S,onsor in any ca,acity$ including the AMC$ the 6rustee

29


30/35

INVESTMENT LAW

Co,any or any of the Directors or ey ,ersonnel of the AMC and the

6rustee Co,any.L

%t is su!itted !y the learned senior counsel for the a,,ellant that the

res,ondent adittedly had$ at all aterial ties$ no#ledge of the said

,roceedings and ,enalties. 6he res,ondent$ ho#ever$ did not re=uire the (nd

a,,ellant to carry out any odification in the drafts Offer Docuents filed !y

it #ith the res,ondent #ith res,ect to disclosure of the said ,roceedings and

,enalties. 0y failing to do so$ the res,ondent itself failed to ,erfor its duty

to the investors in vetting the draft offer docuents. %t #as stated that it

#ould !e ine=uita!le indeed that the res,ondent$ though failing to discharge

its statutory o!ligation after acce,ting a su!stantive fee of Rs. (+$)))98 for

each offer docuent vetted !y it$ should !e allo#ed to get off scott free

#hilst the res,ondent itself i,osed a grossly dis,ro,ortionate ,enalty on

the a,,ellants.

%n the result$ HonG!le Court hold that the i,ugned order ,assed against the

first a,,ellant JM Mutual 7und is set aside. 2e ho#ever odify the order

,assed against the second a,,ellant and reduce the ,enalty fro Rs. )

lahs to Rs. + lahs. %t is su!itted !y the learned counsel for the a,,ellantthat !y virtue of the interi order$ a su of Rs. lah has !een de,osited.

6he !alance aount of Rs. ( lah shall !e de,osited #ithin four #ees fro

the recei,t of the order.

3)%I vs5 3hriram 2utual .und G -thers = Appeal No5 >$"&"# of

"!!#

a3 Ad-udicating Officer /AO3 on Shrira Mutual 7und /SM73 i,osed a

,enalty of Rs. ( lah as it had re,eatedly e>ceeded the ,erissi!le

liits of transactions through its associate !roer$ in ters of

Regulation (+/3 /a3 of S'0% /Mutual 7unds3 Regulations.

30


31/35

INVESTMENT LAW

!3 On an a,,eal !y SM7$ Securities A,,ellate 6ri!unal vide its final

-udgent and order dated August (*$ ())$ set aside AOGs order inter

alia on the ground that the liit #as not e>ceeded intentionally.

c3 S'0% filed an a,,eal under S'C6%ON *+ of the S'0% Act in the

Honora!le Su,ree Court.

d3 6he Honora!le Su,ree Court ,ronounced its final -udgent and order

on May ($ ())B. Honora!le Su,ree Court set aside the -udgent of

SA6 and settled the issues as under4

Mens rea is not an essential ingredient for contravention of the ,rovisions

of a Civil Act.

&enalty is attracted as soon as contravention of the statutory o!ligation as

conte,lated !y the Act is esta!lished$ and therefore the intention of the

,arties coitting such violation !ecoes iaterial. Unless the language of the statue indicated the need to esta!lish the

eleent of ens rea$ it is generally sufficient to ,rove that a default in

co,lying #ith the statue has occurred.

Once the contravention is esta!lished$ the ,enalty has to follo# and only

the =uantu of ,enalty is discretionary.

6he SA6 has erroneously relied on the -udgent of Hindustan Steel "iited

vs. State of Orissa /A%R *) SC (+3 as the said case has no a,,lication in

the ,resent case #hich relates to i,osition of civil lia!ilities under S'0% Act

and Regulations$ and is not a criinal9=uasi8criinal ,roceeding. %,uting ens rea into the ,rovisions of Cha,ter


32/35

INVESTMENT LAW

/inetic )ngineering +td5 vs 6nit ,rust -f India And -rs5Set of guidelines /second guidelines3 #ere issued !y the Ministry of 7inance

/De,artent of 'conoic Affairs88%nvestent Division3$ 6he ,rea!le to

these guidelines states Lutual funds have !ecoe a a-or vehicle for

o!ilising the saving ,articularly fro the sall and household sector for

investent in the aret. %n vie# of the gro#ing i,ortance in the ca,ital

aret$ their e>,anding investor !ase and the decision to allo# utual

funds to !e set u, in the -oint and ,rivate sectors$ it has !ecoe necessary

to evolve a co,rehensive set of ,rudential guidelines for the all8round

develo,ent and regulation of utual funds and for ensuring investors:

,rotection.L %n these guidelines also$ Lutual fundL has not !een defined !ut

it only states that the e>isting utual funds should confor to these

guidelines #ithin a ,eriod of si> onths fro the date of issue of these

guidelines. Unlie the earlier guidelines of *)$ there is no e>,ress

,rovision to e>e,t statutory cor,orations in these guidelines. %n res,ect of

investent liitation$ these guidelines ,rovide that no individual schee of

utual fund should invest ore than + ,er cent$ of its cor,us in any one

co,any no utual fund under all schees taen together should invest

ore than *) ,er cent$ of its fund in the shares or de!entures or other

securities of a single co,any. 0esides these investent liitations$ these

guidelines ,rovide for guidelines relating to esta!lishent$ asset

anageent co,any$ trustees and trust co,anies$ custodian$ schees$

#inding8u,$ incoe distri!ution$ etc.

*-N*+63I-N

6he securities aret o,erations ,roote the econoic gro#th of the

country. More efficient is the securities aret the greater is the ,rootion

effect on econoic gro#th. %t is$ therefore$ necessary to ensure that

securities aret o,erations are ore efficient$ trans,arent and safe. 6he

investors need ,rotection fro the various al,ractices and unfair ,ractices

32


33/35

INVESTMENT LAW

ade !y the cor,orate and interediaries. As the individual investors

counity and the investent avenues are on the rise$ it is interesting to

no# ho# the investors shall !e ,rotected through various legislations.

Securities aret in general are to !e regulated to i,rove the aret

o,erations in fair dealings and easy to access the aret !y cor,orate and

investors. 6he ,resent ,ositive attitude of investors is heartening though

investor sentients have !een shaen !y the various scandals. 'ven though$

there are various o,,ortunities availa!le for investent$ investors are scared

of investing in cor,orate. %n this situation$ the individual investors ,rotection

!ecoes necessary to sustain the econoic develo,ent of all countries. 6o

achieve the desired level of econoic gro#th is de,endent u,on investorGs

,rotection availa!ility of the concerned country.

Flo!ally$ there is increased evidence to suggest that investor ,rotection has

assued an i,ortant role in the econoic develo,ent of a country.

%ntegrity of the financial arets and econoic #ell !eing of the country

de,end on cor,orate accounta!ility and investor confidence. 6he glo!al

concern to ae ca,ital arets safer$ trans,arent$ strengthening financial

syste and anaging the crisis cannot !e =uicly fi>ed. 0ut they add u, to

a stronger syste. Flo!ally$ any countries have undergone investorGs

confidence crisis in different as,ects. 6he glo!al evidence suggests that

every tie there is stoc aret crisis$ oney ,ours into !an de,osits.

S'0%$ if not *))K$ than for sure it has !een near to *))K success as far as

the ,rotections of the investors are concerned. As #e have seen that via

different guidelines it had ade it sure that no stone reains unturned in

the ,ath of the ission of ,rotecting the investors.

Again #ith econoic recovery in the country$ the funds are diverted to the

arets. %nvestors ,anic #hen arets slide. %t is i,ortant for investors toreali;e that returns on e=uities are cyclical in nature and also$ aret oves

u, and do#n #ith tie. Understanding aret and !eing ,atient #hile

aret is going do#n is i,ortant #hile investing in e=uities. 6he revival of

investorGs ,rotection in the cor,orate securities aret is necessary to ae

aret ore efficient !y eans of converting savings to investent. %f the

investors have not !een ,rotected ,ro,erly !y eans of rate of return and

33


34/35

INVESTMENT LAW

ca,ital$ the cor,orate #ill not !e a!le to collect the funds fro the aret

#ith chea, rate and effectively in future days. 7or gaining the confidence of

investors in the securities aret there is a need to ,rovide an ade=uate

rate of return and fair o,erating efficiency of cor,orate in the securities

aret$ then the investors lure !ac to aret. 6his can !e done !y a seriesof systeatic easures$ #hich #ould !uild their confidence in the systes

and ,rocesses and ,rotect the interest of investors.

R).)R)N*)

Carhart M. /*3$ ?On &ersistence in Mutual 7und &erforance@$ Journal

of 7inance$


35/35

INVESTMENT LAW

Sa!rinathan$ S. /()*)3. S'0%Gs regulation of the %ndian Securities Maret4

Acritical revie# of the a-or develo,ent.

initiation of legal proceedings to abhay.docx

Documents