Professional Documents
Culture Documents
Semester VII
B B A LL .B . ( H o n s .) C o u rs e
ARTICLE ON
In the Course of
Corporate Governance
As a par t of continuous evaluat ion sche me
Submitted By:
Prerna Gupta
BBA LLB(H)
Submitted To:
Mr. Rahul Mishra
ABSTRACT
The shareholders rights as stressed by the Companies Act, other statues and various
committees give any investor or the reader the impression that there are enough provisions in
the laws of the land, there has hardly been any conviction under them all these years. The
liberalization of the Indian economy since 1991 seems to have opened the floodgates of
scams and provided vast opportunities to fly-by-night operators. These have destroyed
shareholder values.
This paper mainly focuses on the various laws enacted for the investor protection in India,
committees on investor protection and the lacuna in it which resulted in poor track record of
shareholders. Also the paper focuses on SEBI for safeguarding the interest of shareholders
through various regulations and guidelines.
INTRODUCTION
The shareholders rights as stressed by the Companies Act, other statues and various
committees give any investor or the reader the impression that there are enough provisions in
the laws of the land, there has hardly been any conviction under them all these years. Since
1990, more than INR 600,000 million was collected from prospective shareholders by several
companies that did the vanishing trick. Though their names are posted on the World Wide
Web, none of the directors or promoters has been prosecuted either by the Registrar of
Companies or the SEBI who can file criminal complaints against them under Section 621 of
the Companies Act. Directors and promoters can be made personally liable for false
statements found in the prospectus. Apart from civil liability, Section 63 of the Companies
Act stipulates that persons issuing false or untrue statements will be punishable with
imprisonment for two years. Section 68 stipulates that any person who dishonestly induces
other persons to subscribe for shares or debentures can be imprisoned for five years. But
neither the government nor SEBI has thought it fit to prosecute these scammers for more than
a decade1. However, it is heartening to note that recently, after a decade of inactivity the
ministry has cracked the whip on vanishing companies.
Prioritizing investor protection, particularly small investors, the Ministry of Company Affairs
(MCA) has initiated prosecutions against vanishing companies under the Companies Act as
well as other legislations. Besides, launching prosecutions under the Companies Act, action
has been taken against such entities by way of registering first information report (FIR) under
Indian Penal Code, and vigorously pursuing the prosecutions already launched In fact, in the
case of Maa Leafin & Capital Ltd, the accused has been convicted for non-filing of statutory
return,2 a Ministry official said. Further, FIRs have been launched against 40 companies, of
which 28 have been registered. In the case of Trith Plastic Ltd of Gujarat 3, charge-sheet has
been filed in the court and directors of the company have been arrested.
http://www.thehindubusinessline.com/2004/12/13/stories/2004121302390100.htm
http://www.thehindubusinessline.com/2004/12/13/stories/2004121302390100.htm
www.israeli-corporate-governance.org/files/.../Investor_Protection.pdf
continuing concerns about the speed and effectiveness with which fraudulent activities are
detected and punished, which after all, should be the major focus of the capital market
reforms in the country.
The SEBINCAER study5 estimated that the investor population in India was 12.8 million or
nearly 8 per cent of all Indian households. The Household Investors Survey of SCMRD
(1997)6 revealed the following: (i) a majority of investors reported unsatisfactory experience
of equity-investing; (ii) 80 per cent of the investors said that they had little or no confidence
in company managements; (iii) 55 per cent respondents showed little or no confidence on the
market regulator, SEBI; and (iv) most preferred saving instruments and government saving
schemes and banks fixed depositors This reflected a considerable erosion of investor
confidence in securities and corporations.
All these surveys underlined the need for restoring the investors confidence in private
corporations, which enjoy little credibility with investors who have badly burnt their fingers
in a series of scams. This calls for a credible programme of corporate governance reform,
focusing on outside minority shareholder protection. The situation does not seem to have
changed much today notwithstanding the CIIs code and SEBIs guidelines and is the reason
why investors prefer government securities rather than corporate securities. The sooner this
trend is reversed, the better it will be for the development of the capital market in the country.
www.ncaer.org/publication_details.php?pID=165
www.scmrd.org/Published%20Studies.htm
https://www.safaribooksonline.com/library/view/business.../c8s10.xhtm
Investor Education and Protection Fund which is under the Companies Act should be shifted
to the SEBI Act and be administered by SEBI;
SEBI should be the only capital market regulator, clothed with the powers of investigation;
The regulator, SEBI should require all IPOs to be insured under third party insurance with
differential premium based on the risk study by the insurance company;
SEBI Act, 1992, should be amended to provide for statutory standing committees on
investors protection, market operation and standard setting; and
The Securities Contracts (Regulation) Act, 1956, should be amended to provide for
corporatization and good governance of stock exchanges.
the directors of a non-banking finance company have agreed to pay back to the company a
large sum of money it lost, due to their indiscretion in an investment decision.
https://ideas.repec.org/f/pla273.html
systems that we can align the objectives of the two sets of players (investors and managers)
as closely as possible.
CONCLUSION
The phenomenal growth of modern corporations, have brought about the kind and order of
material wealth to the international community that was never possible a few years ago. But
this growth was possible, due to the evolution of public limited or joint stock companies,
which are most attractive to investors. In such organizations, financial liability of the
shareholders is limited to the extent of the shares held by them. However, the investor needs
to be protected from insiders as he is not involved in the day-to-day management of the
company. To realize such an investor protection, countries have evolved rules, regulations,
systems and mechanismsboth internal (to the company) and external.
There is a global consensus about the objective of good corporate governance: maximizing
long-term shareholder value. The members of a company enjoy various rights in relation to
the company. These rights are conferred on them either by the Indian Companies Act of 1956
and 2013 or by the Memorandum and Articles of Association of the company or by the
general law, especially those relating to contracts under the Indian Contract Act, 1872.
Various committees have been set up both in India and elsewhere to guide the shareholders
with regard to good corporate governance, especially their long term interests. The SEBI, as
the custodian of investor appointed Narayana Murthy Committee on Corporate Governance
focused on investors and shareholders. Though the Companies Act, other statutes and
recommendations of various committees give an investor the impression that there are
enough provisions in the laws of the land, there has hardly been any conviction under them
all these years. Strong investor protection is associated with effective corporate governance.
Investors by virtue of their investments in securities of corporations obtain certain rights and
powers that are expected to be protected by the State which gave the legal entity to the
corporate bodies or the regulators designated by the State to do so.
Recent research confirms that an essential feature of good corporate governance is strong
investor protection The insidersboth managers and controlling shareholderscan
expropriate the investors in a variety of ways. Investor protection is not attainable without
adequate and reliable corporate information. There are rules and regulations that are designed
to protect investors. The objective of the corporate is to protect the rights of outside investors,
including both shareholders and creditors. Investor protection provides an impetus for the
growth of capital markets. Due to lack of proper investor protection, the capital market in
India has experienced a stream of market irregularities and scandals in the 1990s. There are
several agencies in India that are expected to protect investors. These include the SEBI,
Department of Company Affairs, Department of Economic Affairs, Reserve Bank of India,
Consumer Courts and Courts of Law.
An objective analysis of the problems faced by investors in countries like India, leading to an
erosion of their confidence in the capital market with the attendant adverse impact on the
economic growth, shows that the major problems arise due to corporate miss governance and
not due to minor aberrations in following the procedures set by SEBI. To rectify such a
situation, actions that lead to corporate miss governance should be codified and small
investors provided with statutory rights to enforce civil liability against the directors whose
misdeeds and non-application of minds in investment or other decisions have adversely
impacted the company and its shareholders.
In last it should be remembered that it has taken more than a decade for the government to
initiate legal action against the scammers. Besides, it should be kept in mind that the slowgrinding judicial processes will take its own time and if past experience is any guidance, it
will take another decade or more at the fastest, to get the judgement. Even then, there is no
guarantee that the guilty will be convicted and the poor investors money returned This is the
state of affairs that has caused untold misery to the poor Indian shareholder/investor.