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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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