Wednesday, April 9, 2014

Compensating Investor Losses in India

Posted on SSRN is a new working paper titled “The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India” that I have authored.

The abstract is as follows:

Any legal system may potentially deploy two separate but related models to ensure the accuracy of disclosure in the capital markets. First, it may possess legal institutions in the form of regulatory bodies with power to make regulations regarding disclosures and to enforce those regulations through powers of sanction conferred upon them. Second, it may adopt the model that relies upon the courts to grant remedies to investors who are victims of inaccurate or misleading disclosures thereby suffering losses.

This paper tests the efficacy of the two models in their application to India. The exploration of India is interesting and helpful because India’s capital markets have witnessed exponential growth in the last two decades. At first blush, it might be simple to attribute this to India’s legal system through civil liability and its enforcement through the judiciary. Counterintuitively, though, India’s common law legal system operating through the judiciary has not played a vital role in the development of the capital markets through a rigorous civil liability regime. Delays in proceedings due to alarming pendency levels in litigation before Indian courts and skyrocketing costs in initiating litigation are some of the factors that have disincentivized investors from relying upon the civil liability regime for enforcing their compensation claims.

At the same time, other factors have been at play. India’s capital markets regulator, the Securities and Exchange Board of India (SEBI) has been instrumental in formulating policies and regulations governing capital markets, and its actions have been rapid and dynamic to suit the needs of the changing markets, by operating through the power of sanctioning various market players.

The paper concludes with the finding that while the general approach in most common law markets is for courts to play a significant role in the development of the capital markets through the process of compensating investors for losses, the success of India’s capital markets growth has hinged upon the regulatory process rather than the courts.

This paper represents the legal position as of February 2014, and does not include subsequent developments such as the notification of further sections of the Companies Act, 2013 with effect from April 1, 2014 and also the re-promulgation of the Securities Laws (Amendment) Ordinance, 2014. These developments, however, do not affect the principal outcomes discussed in the paper.

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