Statutory and judicial perspectives on investor’s protection in India: with special reference to inspection, investigation and audit

Abstract

In the modern industrial and commercial age, company has become one of the most important organizations in all business organizations. It plays a great role in the growth of national as well as international economy. India is a developing country which requires a healthy corporate atmosphere so that investment can be made by domestic as well foreign investors. As we know that capital is the backbone to run the companies and security market, so any kind of liquidity crunch will force the companies to become sick and it ultimately leads to its winding up. This will seriously impact the economic growth of the country. Many companies have been incorporated and today also their numbers are increasing fast by leaps and bounds. Company is an organization which is deemed as legal person. Though it is an artificial person but it has capacity to exercise all the powers and the functions as provided to a corporation and is liable for the act done on behalf of it. There are large numbers of the persons such as shareholders, stakeholders, creditors, employees, customers, other investors etc. whose interest are attached with the company. It is not possible for all them to take part in the conduct and management of the affairs of the company, so few selected persons amongst the members of the company conducts and manages the routine affairs of the company which is known as Board of directors. The power for the general management of the company is vested in Board. They may exercise all such general management power but subject to the provisions made in Companies Act, Memorandum of Association (MOA), Article of Association (AOA) and resolutions passed either in the general and annual general meeting of the company. However, it is found that there is the separation of powers between the ownership and management in the company. Yet the shareholders or members of the company are empowered to control and regulate the affairs of the company by the resolution passed in the general meeting of the company, but it is not possible for the Board to take consent of all the members of the company for the routine day to day function of the company Therefore, several provisions have been made in the Companies Act, 2013 (in Companies Act 1956 also)to take all major decisions by the shareholders or the members in the general meeting of the company through a resolution passed either by simple majority or special majority as the case may be. Generally, an investor has three objectives while investing his surplus money, namely safety of the investment of hard earned money, liquidity position of invested money, and a good return with least or at no risk on investment in selected securities. Therefore any investor needs protection of his investment. Protection of the interest of investors is paramount duty of a company through its Board of directors, who have invested in the company and in fact it is one of the main features of corporate governance. It also paves the way for long term sustainability of the company in modern period. There are several provisions enshrined to protect the rights of the investors but still many scams, serious frauds in capital market, fraudulent and unfair trade practices relating to securities markets insider trading, sudden stake selling, cartelization etc are occurring which has shaken the confidence of investors. They feel insecure to invest money in the capital market. Due to that a kind of fear is created in the mind of foreign investors to invest in Indian market. India is a developing country and capital is the backbone to run the companies and security market. Any kind of liquidity crunch will force the companies to become sick and it ultimately lead to winding up. That will seriously impact the economic growth of the country. The following legislations protect the interest of investors and govern the capital securities markets in India: (a) The Companies Act, 2013, which sets the code of conduct for the corporate sector in relation to issuance, allotment, and transfer of securities, and disclosures to be made in public issues. (b) Security and Exchange Board of India (SEBI) Act, 1992, which regulates the security market and protect the investors. (c) The Securities Contracts (Regulation) Act, 1956, which provides for the regulation of transactions in securities through control over stock exchanges. (d) The Depositories Act, 1996- This provides for electronic maintenance and transfers of ownership of demat (dematerialized) shares. This Act provides for the establishment of depositories like NSDL and CDSL to curb the irregularities in the capital market and protect the interests of the investors and paved a way for an orderly conduct of the financial markets through the free transferability of securities with speed, accuracy and transparency. (e) The Prevention of Money Laundering Act, 2002- object of this Act to prevent money-laundering and to provide for confiscation of property derived from money-laundering