Skip to main content

The plight of the small investor

The small investors are a much abused lot worldwide, perhaps nowhere more so than in a developing economy like India. The small investors are absolutely essential for the survival of a fairly under developed stock market like ours yet they are treated exactly like the politicians treat the voting public - by lip-service.

The laws of the land, sloth legal system or the legal agencies are definitely not helping the matter. How can they when they are part of the same system?

Take the example of "Open offers" as reported in the press.


Several small investors are stuck without exit due to indefinite delays in open offers announced by acquirers of companies such as Shree Rama Multi Tech and Marg Ltd. While Shree Rama investors have been waiting for seven years, the Marg open offer was announced in October 2011. Caught in legal disputes and regulatory directives, the investors are yet to get their promised exit. Even as the offers were stuck, the prices of these shares have plummeted, further diminishing the initiative of the acquirers. Marg shares ended Monday’s trade at Rs 31.20 a piece, nearly a third of its open offer price of Rs 91. Shree Rama Multi Tech has crashed from its offer price of Rs 18.60 a piece to Rs 5.90 at on Monday’s close.

Both companies have around 19,000 small shareholders, with holdings of less than Rs 1 lakh each, according to latest exchange filings.

The takeover regulations formulated by the Securities and Exchange Board of India (Sebi) require an acquirer who buys shares in a particular company above prescribed limits, to make an open offer to buy a certain amount of shares from the public. Email questionnaires and repeated attempts to reach company officials did not elicit any response.

Market watchers said the Shree Rama case dates back to 2002, when Nirma had bought convertible notes of the former. In 2005, Nirma came to own 24.25 per cent after the company defaulted. It also announced an open offer. But it later wanted to revise the offer as the market price of the stock was much below the conversion price. The acquirers, then wanted to withdraw the open offer obligations, after alleging siphoning off of funds by the promoters.

On June 5, 2008, SAT upheld the Sebi order, saying Nirma Industries and Nirma Chemical Works tried to wriggle out of a bad bargain, not permissible under Regulation 27(1)(d) of the takeover code. Later, in November 2008, Nirma Group moved the Supreme Court.

In the case of Marg Limited the market regulator, Sebi, ordered the company to raise the open offer price four times, as the company was repeatedly involved in takeover code violations. Sebi asked the company to revise the open offer proposed at Rs 91 a share to around Rs 340. According to the merchant banker, the company has moved the Securities Appellate Tribunal .

The above examples like many others are typical of our financial system. All are trying to or doing their job. It is unfortunate that some investors are suffering but cannot be helped. It is the system. Right?

Similarly with the issue of "Vanishing Companies" or companies suspended by the exchanges elaborated elsewhere in this blog. The companies are being suspended due to "non-compliance with the listing agreement". The exchanges cannot be faulted here as they have followed the rules. But the tragedy is that though suspension from the bourses don’t affect the companies’ operations, it had an adverse impact on its public shareholders, as they cannot sell shares on the exchange until the suspension was revoked by the exchange or Sebi.

This is a classic catch 22. Heads I win, tails you lose.


We talk of bringing back investor confidence in the light of fluctuating stock markets. But the point that is missed or ignored is not the ups and downs of the market which erodes confidence, rather its the genuine feeling of being repeatedly manipulated which is hurting the investors most. While over the years, many laws have been introduced to bring some much needed stability to the system along with creation and empowerment of SEBI, the job of bringing the much needed confidence back is still a dream to be achieved some day. Even SEBI is perceived as a watchdog which sleeps at its job and wakes up only when it cannot be avoided. In SEBI's defence, the country's law and the sloth legal process is a huge obstacle.

Obviously, laws or the system is like this simply because it suits some people. Equality before law sounds so nice but if we are all equal then we should all be driving Jaguars. That is not possible. Frankly, corruption is everywhere and in every country and I am sure had been there since society was formed. But it is the hallmark of the third world that it takes the form of national characteristics.

Articles referred to:
http://www.business-standard.com/article/markets/small-investors-stuck-as-open-offers-in-limbo-113021800848_1.html
http://www.business-standard.com/article/markets/suspended-firms-hc-notices-to-sebi-bourses-113022000577_1.html

Comments

Most viewed this month

One Sided Clauses In Builder-Buyer Agreements Is An Unfair Trade Practice

In CIVIL APPEAL NO. 12238 OF 2018, Pioneer Urban Land & Infrastructure Ltd. vs Govindan Raghavan, an appeal was filed before the Supreme Court  by the builder against the order of the National Consumer Forum. The builder had relied upon various clauses of the Apartment Buyer’s Agreement to refute the claim of the respondent but was rejected by the commission which found the said clauses as wholly one-sided, unfair and unreasonable, and could not be relied upon. The Supreme Court on perusal of the Apartment Buyer’s Agreement found stark incongruities between the remedies available to both the parties. For example, Clause 6.4 (ii) of the Agreement entitles the Appellant – Builder to charge Interest @18% p.a. on account of any delay in payment of installments from the Respondent – Flat Purchaser. Clause 6.4 (iii) of the Agreement entitles the Appellant – Builder to cancel the allotment and terminate the Agreement, if any installment remains in arrears for more than 30 da...

Inherited property of childless hindu woman devolve onto heirs of her parents

In Tarabai Dagdu Nitanware vs Narayan Keru Nitanware, quashing an order passed by a joint civil judge junior division, Pune, the Bombay High Court has held that under Section 15 of the Hindu Succession Act, any property inherited by a female Hindu from her father or mother, will devolve upon the heirs of her father/mother, if she dies without any children of her own, and not upon her husband. Justice Shalini Phansalkar Joshi was hearing a writ petition filed by relatives of one Sundarabai, who died issueless more than 45 years ago on June 18, 1962. Article referred:http://www.livelaw.in/property-inherited-female-hindu-parents-shall-devolve-upon-heirs-father-not-husband-dies-childless-bombay-hc-read-judgment/

Court approached in the early stages of arbitration will prevail in all other subsequent proceedings

In National Highway Authority of India v. Hindustan Steelworks Construction Limited, the Hon'ble Delhi High Court opined that once the parties have approached a certain court for relief under Act at earlier stages of disputes then it is same court that, parties must return to for all other subsequent proceedings. Language of Section 42 of Act is categorical and brooks no exception. In fact, the language used has the effect of jurisdiction of all courts since it states that once an application has been made in Part I of the Act then ―that Court alone shall have jurisdiction over arbitral proceedings and all subsequent applications arising out of that agreement and arbitral proceedings shall be made in that Court and in no other Court. Court holds that NHAI in present case cannot take advantage of Section 14 of the Limitation Act, 1963 for explaining inordinate delay in filing present petition under Section 34 of this Act in this Court.