PROJECT WORK ON THE TOPIC TITLED:

A LEGAL AND ANALYTICAL FRAMEWORK FOR INVESTOR

PROTECTION IN INDIA

Submitted to: Mr. Ashok Kumar Sharma

Faculty of Investment Law

Submitted by: Rajeev Ranjan

Roll-1360
9th Semester,5th Year
B.A.LL.B(Hons.)

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA-800001
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 ACKNOWLEDGEMENT
I would like to thank my faculty Mr. Ashok Sir whose guidance helped me a lot
with structuring my project.
I owe the present accomplishment of my project to my friends, who helped me
immensely with materials throughout the project and without whom I couldn’t have
completed it in the present way. I would also like to extend my gratitude to my
parents and all those unseen hands who helped me out at every stage of my project.
THANK YOU,
RAJEEV RANJAN

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 PARTICULARS PAGE

1. ACKNOWLEDGEMENT 02

2. RESEARCH METHODOLOGY 04

3. CHAPTER 1 05-10

4. CHAPTER 2 11-15

5. CHAPTER 3 16-18

6. CHAPTER- 4 19-23

7. BIBLIOGRAPHY 25

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RESEARCH METHODOLOGY
Aims and Objectives:
The aim of this research paper is to present a detailed study on investor protection laws.
Scope and Limitations:
The researcher has used the doctrinal method and has relied on the secondary sources for the
content of the research paper.
Owing to the large number of topics that could be included in the project, the scope of this
research paper is exceedingly vast. However in the interest of brevity, this paper has been limited
to the topics which deal with judicial aspect of the topic only.

Chapterisation:
The project has been divided into four chapters :
 The first chapter deals with the Introduction.
 The second chapter deals with the Securities contracts (regulation) act, 1956.
 The third chapter deals with Depositories act, 1996.
 The fourth one deals with the Methods of Investor Protection

Sources of data :
The researcher has relied on the following secondary sources of data:
• Books
• Websites
• Articles
Method of Writing
The method of writing followed in this project is both analytical and descriptive.
Mode of Citation :
The researcher has followed a uniform mode of citation in this project.

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Introduction

Investor protection is one of the essential roles of authorities to make them involved in the financial
market. Stock market plays a predominant role in the financial market. Investor protection helps
to develop the market, so that mobilization of funds can be increased. Increase in market potential
is another way to increase the growth of the market. Every nation has its own legislation framework
for the stock market. That varies from country to country. In India, there is a strong need for an
effective regulation for stock market so that the investors’ interest can be safeguarded in a better
way1. In order to regulate stock market and the participants of stock market there are various
legislations are framed. It minimizes the risks and protects the investor. Among other legislations
the Companies Act 1956, the Securities Contracts (Regulation) Act 1956, the Securities Exchange
Board of India Act 1992, and Depositories

Act 1996 have a direct bearing on regulation and investor protection.

As such, in this paper an attempt has been made to analyze the legal provisions of

i. The Companies Act, 1956

ii. The Securities Contracts (Regulation) Act, 1956

iii. The Securities Exchange Board of India Act, 1992

iv. Depositories Act, 1996.

The companies act, 1956

The Companies Act contains 658 Sections, 15 Schedules and several rules. In India, any person
likes to form private or public companies, associations and partnerships; they have to be registered
as companies under the Companies Act. The Companies Act 1956 (herein after referred to as the
“Act”) is a comprehensive piece of legislation administering the all the companies in India. It deals
with incorporation of company and matters incidental thereto. It provides the provisions with
respect to names of companies, memorandum and articles. It deals with prospectus and allotment
and others matters relating to issue of shares or debentures. The Act also regulates underwriting,

1
Singh H.K, Meera Singh(2001), “Mutual Funds and Indian Capital Market-Performance and Profitability”, Kanishka
publishers, Distributors, New Delhi-110 002, P. 17.

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the use of premium and discounts on issues, rights and bonus issues, payment of interest and
dividends, supply of annual reports and other information.

Objectives of the act

The objective of the Act is to provide all the legislative procedures, restriction, rules and
regulations and other information relates to companies. One of the objectives of the Act is, to
protect the legitimate interest of the owners and shareholders by ensuring effective participation
and control. It provides legislative standards to reduce the risk of the shareholders which are
discussed in the following sections.

Disclosures of information in the prospectus

All public companies intended to issue share, must issue a prospectus by providing details about
the company. Prospectus is any document includes any notice, circular, advertisement or other
document inviting deposits from the public or inviting offers from the public for the subscription
or purchase of any shares, debentures, and a body corporate (Section 2 (36).

Powers of SEBI in Company Act

SEBI has powers to administer the companies in the aspects of issue of prospectus, issue and
transfer of securities and non payment of dividend by listed companies and public companies
which are intend to list on recognized stock exchanges in India.

(Section 55A).

Every prospectus issued by companies shall state the following general information of the
company like,

a. name and address of registered office of the company,

auditors and lead managers.

b. Consent of the Central Government for present issue

c. Industrial license

d. Name of the stock exchange made for listing

e. Statement declaring refund of issue if minimum subscription of 90% is not received

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f. Date of opening and closing of issue

g. Rating of proposed share and underwriting of the issue.

h. Statement by board of directors stating that details of all monies received from public, utilization
and un utilization of money.

i. Capital structure of the company

j. Information about company, management and project

Deposits are not to be invited without issuing an advertisement and prospectus should be registered
before the date of its publication (58A). The terms of contract mentioned in prospectus should not
be varied and it should not include an expert statement who is involved in the formation or
promotion of the company (Section 57). Every person who is authorized in prospectus shall liable
for the loss or damages or any untrue statement given in prospectus. They shall be punishable with
imprisonment for a term.

Prospectus should be registered with the registrar along with the name of the director, authorized
agent before its publication (Section 60). Any financial institution, public sector bank or scheduled
bank whose main object is financing shall file a shelf prospectus. Shelf prospectus is a prospectus
issued by any financial institution or bank for one or more issues of the securities or class of
securities specified in that prospectus (Section 60A).

Penalty and punishments

The director, promoter or every person authorized the issue of the prospectus is responsible for
any loss or damage is occurred due to untrue statement included in the prospectus (Section 62) and
if he failed to prove either that the statement was immaterial or that he has reasonable ground to
believe, and did up to the time of the issue of the prospectus believe, that the statement was true,
he shall be punishable with imprisonment for a term which may extend to two years, or with fine
which may extend to fifty thousand rupees, or with both (Section 63).

If a prospectus is issued in contravention of Section 57 or 58, the company and every person/party
involved in the issue is punishable with fine which may be extend to Rs.50,000.(Section 59). Any
person, knowing or recklessly making any statement, promise or forecast which is false, deceptive
or misleading or by any dishonest concealment of material facts, induces or attempts to induce

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another person to enter into or to offer to enter into any agreement for, acquiring, disposing of,
subscribing for or underwriting shares or debentures shall be punishable with imprisonment for a
term which may extend to five years, or with fine which may extend to one lakh rupees or with
both (section 68)

Any person who makes in a fictitious name an application to a company for acquiring or
subscribing for, induces a company to allot, register any transfer of shares to him or any other
person in a fictitious name shall be punishable with imprisonment for a term which may extend to
five years (Section 68A). Any person who acquires any share in contravention of the provisions
of section 108A shall be punishable with imprisonment for a term which may extend to three years,
or with fine which may extend to fifty thousand rupees, or with both (Section 108I). If any
company made default with registration particulars while filing its application with the registrar
the company, and every officer of the company or other person who is in default, shall be
punishable with fine which may extend to five thousand rupees for every day during which the
default continues, they shall be punishable with fine which may extend to ten thousand rupees
(Section 142).

If a person is convicted of any offence in connection with the promotion, formation or management
of a company or in the course of winding up a company, a person has been guilty of any offence
for which he is punishable (whether he has been convicted or not) (Section 203).

Dividend should be paid to the registered holder of such share or to his order or to his bankers
(Section 206). Where a dividend has been declared by a company but has not been paid, or the
warrant has not been posted, within thirty days from the date of the declaration, to any shareholder
entitled to the payment of the dividend, every director of the company is knowingly a party to the
default, be punishable with simple imprisonment for a term which may extend to three years and

shall also be liable to a fine of one thousand rupees for every day during which such default
continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per
annum during the period for which such default continues (Section 207).

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Allotment of shares

A listed public company which intend to sell their shares by listing in any recognized stock
exchanges in Indian, be administered by the Securities and Exchange Board of India.

Deposits are not to be invited without issuing an advertisement and prospectus should be registered
before the date of its publication (58A). The terms of contact mentioned in prospectus should not
be varied and it should not include an expert statement who is involved in the formation or
promotion of the company (Section 57). Every person who is authorized in prospectus shall liable
for the loss or damages or any untrue statement given in prospectus. They shall be punishable with
imprisonment for a term.

Allotment of shares is prohibited unless minimum subscription received which specified in

prospectus. All the shares are to be allotted through stock exchange where the company is listed.
Whenever companies have share capital makes any allotment of its shares with thirty days. A
company may issue two types of share capital namely Preference share capital and Equity share
capital.

Every company which accepts deposits from small depositors shall intimate to the tribunal any
default made by it in repayment of any such deposits. No allotment shall be made unless minimum
subscription is made (Section 69). No allotment shall be made unless statement in lieu of
prospectus delivered to Registrar at least three days before the first allotment (Section 70). Every
company has to make an application to one or more recognized stock exchanges for permission to
issue shares before the issue of prospectus (Section 73).

Limitations of a company

No company limited by shares, and no company limited by guarantee and having a share capital,
shall have power to buy its own shares (Section 77).

Companies are restricted to acquire without prior approval of the Central Government, no
individual, firm, group, constituent of a group, body corporate shall jointly or severally acquire or
agree to acquire, any equity shares in a public company, or a private company which is a subsidiary
of a public company. If the total nominal value of the equity shares intended to be so acquired
exceeds, or would, together with the total nominal value of any equity shares already held in the

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company by such individual, firm, group, constituent of a group, body corporate or bodies
corporate under the same management, exceed twenty-five per cent of the paid-up equity share
capital of such company. When a company make changes in the controlling of the company that
would be prejudicial to the interests of the company or to the public, Central Government may
direct not to transfer or block of shares (Section 108D(1)).

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Securities contracts (regulation) act, 1956

Securities Contracts (Regulation) Act, 1956 (herein after referred to as the “SC(R) Act”) is to
prevent undesirable transactions in securities by regulating the business of dealing securities. The
SC(R) Act incorporated for the purpose of assisting, regulating or controlling the business of
buying and selling or dealing in securities carried by individuals or society in India. The Act has
been amended from time to time according to the needs of capital market.

This Act has 31 Sections and was administered by the Central Government. After the enactment
of SEBI Act 1992, SEBI board has powers concurrently to administrate almost all the provisions
of this Act.

The preamble of securities contracts (regulation) act, 1956

SC(R) Act provides direct and indirect control in all aspects of securities trading. From
establishment stock exchange to listing the company in recognized stock exchanges it prevents all
undesirable actions by regulating and providing the procedures in a prescribed manner. The
Central Government has powers to grant of recognition of stock exchanges and withdrawal of such
recognition.

Recognition and withdrawal of stock exchanges

Any stock exchange, which is desirous of being recognized, has to make an application in the
prescribed manner to the Central Government (Section 3). Every application shall be accompanied
by a copy of the bye-laws of the stock exchange for the regulation, control of contracts, copy of
rules relating in general to the constitution of the stock exchange. In particular the application shall
be accompanied by the following

• The governing body of stock exchange, its constitution and powers of management.

• The manner in which the business is transacted.

• The powers and duties of the office bearers of the stock exchange.

• The admission into the stock exchange of various classes of members, the qualifications for
membership, and the exclusion, suspension, expulsion and re-admission of members.

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• The procedure for the registration of partnership as member of the stock exchange, nomination
and appointment of authorized representatives and clerks.

If the Central Government and SEBI makes necessary inquiry to obtain further information like,
The rules and byelaws of stock exchange applying for registration are fulfill the condition
prescribed and ensure fair dealing and to protect investors (Section 4(1)).

If the Central Government and SEBI are satisfied, it may grant recognition to the stock exchange.
Every grant of recognition to a stock exchange shall be publishes in the Gazette of India and also
in the official Gazette of the state in which the principal office of the stock exchange is situating
(Section 4(5)). If the recognized stock exchange has not been corporatized or demutualized or it
fails to submit the scheme (Section 4B(1)) with in specified time , the scheme has been rejected
by SEBI(Section 4B(5)), the reorganization grant to such stock exchange under Section 4 has been
withdrawn.

Delegation of Powers to Securities and Exchange Board of India

Following powers of Central Government are transferred to the SEBI to administer the Stock
Exchange.

a) To call for periodic returns from recognized stock exchanges (Section 6(2)).

b) To prescribe maintenance of certain document by the Stock Exchange (Section 6(2)).

c) To call upon a recognized Stock Exchange or any member of the Stock Exchange to furnish
explanation or information relating to the affairs of the Stock Exchange or its members.

d) To appoint any person to enquire into the affairs of the governing body of any Stock Exchange
(section 6 (3)).

e) To approve the bye-laws of the Stock Exchange for regulation and control of the Contracts
(Section 9).

f) To amend the bye-laws of Stock Exchanges (Section 10).

g) To compel a public limited company to its shares on recognized stock exchanges (Section 21)

h) To amend rules, direct certain rules to be made rules in respect of relating to contents in the
application for recognition of stock exchanges ( Sections 3 & 8)
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i) To seek furnishing of annual reports by Stock Exchanges (Section 7)

j) To supersede the governing body of a recognized stock exchange ( Section 12)

k) To prevent undesirable speculations in specified securities in any state or area ( Section 16)

l) To make or amend rules or Articles of Association of stock exchanges regarding voting rights
to members of exchange at any meeting (Section 7(A)(2) )

m) To issue notification declaring this section apply to an area. Consequent upon which contracts
issued in that area otherwise than between members of an exchange or through or with such
member shall be illegal (Section 13).

n) To regulate and control the business or dealing in spot delivery contract ( Section 18(2))

Listing of securities in stock exchanges in India

The term “listing” is admission of Securities of Securities of a company for dealing in recognized
stock exchanges. According to the companies (amendment) Act 1998, every company desires to
offer shares or debentures to the public for subscription by the issue of a prospectus have to make
an application to one or more recognized stock exchanges for permission of the Securities
intending to be so offered to be dealt with in the Stock Exchanges (Section 73(1) of Companies
Act).

Any person can apply in any recognized stock exchange to list the securities by satisfying the
conditions of the listing agreement with the stock exchange. A recognized stock exchange may
delist the securities, after recording the reasons (Section 21).

A recognized stock exchange can refuse to list the securities of any public company or collective
investment scheme under the reasonable ground. In this case a company shall be entitled to furnish
the reasons with the stock exchange or Securities Appellate Tribunal against the refusal of stock
exchange with in fifteen days from the date of the decision of the stock exchange (Sections 22,
22A)

Rights for the holders

Holder of any security has rights to receive and retain any dividend declared by the company
whose name is registered on the books of the company (Section 27). In case of transfer for security,

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unless the transferee who claims the dividend from the transferor has lodged the security and all
other documents relating to the transfer which is required by the company for being registered in
his name within fifteen days of the date on which the dividend became due. The period shall be
extended in case of delay in transfer of documents due to post or in case of death of transferee or
in case of loss of the transfer deed by theft (Section 27(1)(ii)).

It is right of the transferee to enforce his rights against transferor in relation to the transfer where
the company has refused to register the transfer of the security in the name of the transferee
(Section 27 (2)(b)). Holder of mutual fund has rights holder to receive and retain any income
declared by mutual funds (Section 27B(1)). In case of transfer for units or instruments, Even
though the units are transferred unless the transferee who claims the income issued by mutual fund
from the transferor has lodged the all documents relating to the transfer which is required by the
mutual fund for being registered in his name within fifteen days of the date on which the income
became due. The period shall be extended in case of delay in transfer of documents due to post or
in case of death of transferee or in case of loss of the transfer deed by theft (Section 27B (1)(ii)).

It is right of the transferee being units or other instruments issued by mutual funds to enforce his
rights against transferor in relation to the transfer where the mutual fund has refused to register the
transfer of the security being units issued by mutual fund in the name of the transferee(Section
27B(2)(b)).

Securities and exchange board of India act, 1992

Securities and Exchange Board of India is an Act to provide for the establishment of a Board to
protect the interests of investors in securities and promote the development of, and to regulate, the
securities market and for matters connected therewith or incidental thereto. This act is amended
by time to time. There are 35 sections which are divided into seven chapters in which it clearly
indicates the dominant role of SEBI Act towards investors protection from risk. Central
Government appoints a board named Securities and Exchange Board of India for the establishment
of this Act. SEBI is an independent and effective regulator. It has sound regulations in respect of
intermediaries, trading mechanism, settlement cycles, risk management of companies.2 The board
shall consist of a chairman, two members from ministry, one from Reserve Bank of India, five
members from other is appointed by the Central Government. The board head office is at Mumbai
and establishes offices at other places in India (Section 3 & 4). Appointed members shall be

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removed if the person is insolvent, unsounded mind, and convicted of an offence (Section 6). The
board shall meet at such times and places regard to the transaction of business and the decision for
a problem is taken by majority votes of the members present (Section 7).

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Depositories act, 1996

Depositories Act provides regulations to the depositories in securities and for matters connected
therewith or incidental thereto. The regulations has been given in 31 sections. In this Act,
"beneficial owner" means a person whose name is recorded as such with a depository (Section
2(1(f))).

"Depository" means a company formed and registered under the Companies Act, 1956 (Section 1
of 1956) and which has been granted a certificate of registration under sub-section (1A) of section
12 of the Securities and Exchange Board of India Act (Section 2(1(e))) and "issuer" means any
person making an issue of securities (Section 2(1(f))).

No depository shall act as a depository unless it obtains a certificate of commencement of business

from the Board (Section 3). A depository shall enter into an agreement with one or more
participants as its agent (Section 4). Any person who has entered into an agreement shall surrender
the certificate of security, for which he seeks to avail the services of a depository, to the issuer in
such manner as may be specified by the regulations (Section 6). The beneficial owner shall be
entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities
held by a depository (Section 10).

The depository as a registered owner shall not have any voting rights or any other rights in respect
of securities held by it (Section 10(2)), the beneficial owner shall be entitled to all the rights and
benefits and be subjected to all the liabilities in respect of his securities held by a depository
(Section 10(3)). Every depository shall furnish to the issuer information about the transfer of
securities in the name of beneficial owners. Every issuer shall make available to the depository
copies of the relevant records in respect of securities held by such depository (Section 13).

Without prejudice to the provisions of any other law for the time being in force, any loss caused
to the beneficial owner due to the negligence of the depository or the participant, the depository
shall indemnify such beneficial owner (Section 16).

Power of SEBI in depositories Act

SEBI has power to authorize any person to make an enquiry or inspection in relation to the affairs
of the issuer, beneficial owner, depository or participant. They have to submit a report of such

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enquiry or inspection within specified period mentioned in the order (Section 18). SEBI has powers
to give directions to prevent the affairs of any depository or participant being conducted in the
manner detrimental to the interests of investors or securities market (Section 19).

Penalties

Any person, who is required by this Act have to furnish any information, document, books, returns
or report to the Board, fails to furnish the same within the time specified, he shall be liable to a
penalty of one lakh rupees for each day during which such failure continues or one crore rupees,
whichever is less for each such failure (Section 19A)

If a depository or participant or any issuer or its agent or any person, who is registered as an
intermediary is fails to enter into agreement, such depository or participant or issuer or its agent or
intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less for every such failure (Section 19B).

If any depository or participant or any issuer or its agent or any person, who is registered as an
intermediary called upon by

the Board in writing, to redress the grievances of the investors, fails to redress such grievances
within the time specified by the Board, such depository or participant or issuer or its agents or
intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less (Section 19C)

If any issuer or its agent or any person, who is registered as an intermediary fails to dematerialize
or issue the certificate of securities of a depository by the investors, within the time specified or
abets in delaying the process of dematerialization or issue the certificate of securities of a
depository of securities, such issuer or its agent or intermediary shall be liable to a penalty of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is
less (Section 19D). If a depository or participant or any issuer or its agent or any person, who is
registered as an intermediary fails to reconcile the records of dematerialized securities with all the
securities issued by the issuer as specified in the regulations, such depository or participant or
issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during
which such failure continues or one crore rupees, whichever is less (Section 19E).

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If any person fails to comply with the directions issued by the Board under section 19, within the
time specified by it, he shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less (Section 19F). if any person
contravenes or attempts to contravene or abets the contravention of the provisions of this Act or
of any rules or regulations or he shall be punishable with imprisonment for a term which may
extend to ten years, or with fine, which may extend to twenty five crore rupees, or with both
(Section 20(1)). If any person fails to pay the penalty imposed by the adjudicating officer or fails
to comply with any of his directions or orders, he shall be punishable with imprisonment for a term
which shall not be less than one month but which may extend to ten years, or with fine, which may
extend to twenty-five crore rupees, or with both (Section 20(2)).

If a company has been committed an offence, the in-charge is responsible to the conduct of the
business of the company and shall be liable to punishment (Section 21). No court inferior to save
on a complaint made by the Central Government or State Government or the Securities and
Exchange Board of India or by any person (Section 22). Any person aggrieved by an order of the
Board made or the regulations may prefer an appeal to the Central Government. If the appellant
satisfies the Central Government by sufficient cause for not preferring the appeal within the
prescribed period an appeal may be admitted after the expiry period (Section 23).

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Methods of Investor Protection

As has been mentioned above, one of the primary concerns of investors is the security of their
investments. Investors need positive assurance that their investments are protected and safe. In
acknowledgement of this, every effort should be made to ensure that the market operates under
secure conditions. Efforts should be made to put in place a sound regulatory structure to ensure
that all market activities are conducted in accordance with the acceptable standards of fairness,
transparency, professionalism and integrity. Specific measures should be adopted with a view to
prohibiting fraudulent trading practices, manipulation of security prices, insider trading and other
abusive practices. The measures that are believed to strengthen investor protection are narrated
below.

Maintaining the Integrity of Corporate Reporting

High quality corporate financial reporting is of paramount importance for the efficient and
effective functioning of the capital market. Corporate financial reporting is a mechanism that
enables investors to assess a company’s financial status and performance, its business strategies
and risk profiles, and its overall management of resources. Comparable, consistent and transparent
reporting serves the basis for efficient allocation of resources. Quality reporting practices reduce
risks to investors and the return they demand. Companies often adopt fraudulent means to produce
misleading financial statements. There are a variety of techniques that are used for this purpose.
The most common manipulating techniques are overstatement of revenue, understatement of
expenses, overstatement of assets and understatement of liabilities.

There should be appropriate mechanisms to detect and deter financial reporting frauds.
Appropriate mechanisms should be put in place to ensure that accounting and reporting standards
are of high quality and that those standards are properly implemented by the preparers of financial
statements. The preparation and presentation of financial statements is the responsibility of
company management It is the company management which is also legally responsible for the
quality and content of those statements. An effective corporate governance system is required to
monitor the financial reporting process. This monitoring is to be done by the audit committee
whose responsibility it is to ensure that financial reporting process is credible and that the financial
statements reflect the company’s financial picture in a fair and transparent manner.

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The financial statements prepared by company management, are examined by an external auditor
in order to form an opinion as to whether they properly reflect the financial position and
performance of the company. The independent verification by the auditor provides assurance about
the reliability and credibility of the information provided in financial statements. The auditor
should conduct his audit in an unbiased and objective manner. He should be independent, both in
fact and in appearance, of the clients he audits. If the auditor compromises his independence, his
ability to give an unbiased opinion will be impaired. Adequate safeguards should be there to
preserve auditor independence. Financial reporting fraud is a costly type of occupational fraud.
There are also other types of occupational fraud that can plague businesses and hurt investor trust.
These include bribery and corruption, data theft, asset misappropriation, and money laundering.
Effective mechanism should be in place to mitigate risks from these frauds.

Protecting Investors in the Primary Market

The primary market is the medium for floating pubic issues. It is the primary market which brings
together investors and capital seekers. The primary market comprises the public issues and the
private placement market. The former consists of companies entering the market to raise funds
from all types of investors. Their debut is known as the initial public offers (IPOs). In private
placements, there are only a few select subscribers to the issues. Investors investing in the primary
market need much more protection and safeguards than those in the secondary market. This is so
because the information source about the investment is often confined to offer
documents/prospectus of the issuer. There are instances of vanishing companies and fly-by-night
promoters, which act as a deterrent to investor confidence. Strong regulation is needed especially
in the sphere of IPOs.

There should be mechanism to ensure that only credible issuers with adequate disclosures in their
offer documents are allowed to access the public issuances. Issuers offering securities for sale to
the public should be required to tell the truth about their business, the securities they are selling
and the risks involved in those securities. Appropriate procedures should also be in place to
regulate the activities of various intermediaries like merchant bankers, brokers, underwriters,
registrars, and transfer agents who are involved in primary market operations.

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Prohibiting Insider Trading

Insider trading is a continuing problem of tremendous magnitude. It continues because the

temptation to use inside information make quick profit is very strong. Appropriate procedures
should be established to aid in the prevention of insider trading. Insider trading undermines the
confidence and integrity in the capital markets. Insider trading, which refers to the illegal selling
and/or buying of securities by corporate insiders based on material non-public information, has
been at the center of many stock market scandals of late. The information on which insider trading
is based is the information that concerns the business or finance of a company or may have a
significant effect on the market price of company securities upon making it public. Examples of
insider trading include transacting on the advanced knowledge of forthcoming bonus/right issues,
on the discovery of new sources of revenue generation, and on an unanticipated increase in
expenses. In insider trading, insiders get an unfair advantage, which has the potential to discourage
outside investors.

The prevention of insider trading is considered to be an important function of market regulators.

In the USA, the Securities and Exchange Commission (SEC) devote considerable resources to
combat insider trading. It seeks to prohibit insider trading through mandatory regulations. The
Securities Exchange Act of 1934 made it illegal to use material, non-public information to achieve
personal gains in trading and required insiders to return profits obtained from buying and selling
securities using such information (Bettis and Duncan, 1998). This original legislation has been
broadened subsequently to enhance its effectiveness. Mandatory regulations similar to those of the
SEC also exist in many other jurisdictions around the world.

Regulation of Financial Intermediaries and Other Market Professionals

Financial intermediaries and market professionals play a critical role in security markets. Financial
intermediaries are professional businesses in the securities industry through which the exchange
of securities in secondary markets is ultimately performed by individual investors. Proper
mechanisms should be put in place for licensing intermediaries, supervising intermediaries and
monitoring their compliance with applicable laws and regulatory standards, and investigating

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relevant breaches and misconduct by intermediaries and, where appropriate, taking enforcement
and disciplinary actions against them.

Besides financial intermediaries there are also several other market professionals that are an
essential part of the security market system. They include brokers-dealers, investment advisers,
stock exchanges, clearing agencies, and credit rating agencies. These professionals are needed to
maintain high standard of professional excellence. Brokers, investment advisers, and credit rating
agencies are the entities that investors turn to for guidance and technical assistance. It is the duty
of these entities to see to it that investors are treated fairly and that their investments are protected.
Regulatory measures should be instituted requiring brokers and advisers to tell investors the truth
and recommend to them only those securities that are suitable for them.

Maintaining Strong Vigilance on Stock Market Manipulators and Price Riggers

Strong vigilance is needed on the activities of those who try to manipulate stock prices through
deceptive means. Appropriate measures should be adopted in order to prevent stock price
manipulation by manipulators. The stock market is very dynamic in nature; prices of stocks keep
on fluctuating. There is nothing wrong if the rise and fall of prices in the stock market are the result
of market forces alone. But there are factors other than the collective wisdom of investors that
often become the determinant of stock market movement. Prices of stocks are often manipulated
deliberately by manipulators to secure personal benefits. There are several techniques that
manipulators adopt to manipulate stock prices. One common form is that of artificially pushing
the price up in order to sell larger volumes at higher price. Another common form of manipulation
is artificially forcing the price down.

Regulation of Mutual Funds

There are many retail investors in India who participate in the capital market through pooled
investment vehicles. The most common among these vehicles are mutual funds. They pool
investors’ money into one larger, centrally managed set of assets. One of the most significant
benefits of mutual funds is that by investing a few thousand rupees in one fund an investor can
obtain instant access to a diversified portfolio. It is in view of this and several other benefits that
mutual fund investment has become very much attractive to investors. Security market regulators
are required to promote measures to ensure that funds are run to benefit investors and not for those

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who manage them. Rules should be framed requiring fund managers to provide accurate, timely,
and complete information about their funds in a form that is investor-friendly.

Educating Investors

Investor education is an important element of investor protection. Educated investors are better
able to protect themselves. There are rules and regulations to protect investors but this is not
enough. Investors should also do their part to protect themselves. It is believed that the best
protection is an informed and knowledgeable investor. An educated investor is a protected
investor, and a protected investor is a better player in the market. Investors should empower
themselves by enhancing their financial literacy. Quality investor education provides investors
with the skills, knowledge and confidence that will allow them to make informed judgments
regarding their own investments and financial well-being. Educated investors are aware of their
rights. They are able to ask the right questions, and they know where to check to verify and clarify
their rights.

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Conclusion

India has well regulated legislation framework to run the market in a systematic way. The
Company Act, 1956 prevents initial misleading and systemize the companies provides the
guidelines to do business by starting a company. Securities Contract regulations Act, 1956 control
the business dealings of the stock market, the transactions are monitored and prevent fraudulent
dealings. The Securities Exchange Board of India Act, 1992 incorporated especially to protect the
investor and promote the business.

Depositories Act, 1996 regulates the depositories which hold securities like shares, debentures,
bonds, government securities, mutual fund units etc. These regulations try to prevent misleading,
misrepresentation and fraudulent actions in the stock market. Still it can be seen many fraudulent
activities in stock market. Continuous monitoring and proper documentation alone does not
prevent the investor from loss. Educating investor is making them to escape from the loss.

The investor also should be involved in the trading they should not blindly go with the
intermediaries. They must have the responsibility of managing their hard earned money with the
help of intermediaries. The tightened rules and regulations does not protect the investor until the
investor is not understand their role on the investment.

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BIBLIOGRAPHY

BOOKS

1. Parikh Parag, Stocks to Riches: Insights on Investor Behavior

2. Saraogi Rahul, Investing in India: A Value Investor's Guide to the Biggest
Untapped Opportunity in the World

WEBSITES

1. www.legalservicesindia.com › article › Protection-of-the-interest-of-the-

investor
2. https://www.sebi.gov.in › sebi_data › attachdocs
3. https://nse-india.com › int_invest › content › regulatory_framework

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