Assessing the efficacy of retail investors’ protection regime in India

ABSTRACT

This article explores the strength of the retail investors’ protection regime in India and verifies whether it can withstand vulnerabilities that put retail investors in a precarious position. Delving upon two major causes of vulnerabilities, i.e. concentrated shareholding pattern in the listed public companies and the passive nature of retail investors, this paper establishes the veracity of these claims through the use of data collected from a sample of BSE top thirty companies to establish the effect it brings. This article also evaluates the efficacy of borrowed legislative techniques from other corporate governance regimes to protect investors in companies incorporated in India. Finally, it concludes by highlighting the deficiency in the enforcement system and demonstrating how the Indian corporate regime has failed to plug the vulnerabilities that affect retail investors and provides recommendations to reform the system to safeguard their interests.

KEYWORDS:

• Corporate governance
• fraud examination
• retail investor protection
• company law

Acknowledgements

The author would like to acknowledge the efforts and guidance of Prof. Sakshat Bansal of Jindal Global Law School, who assisted the author by being a mentor providing helpful comments on the paper. An earlier version of this paper was submitted towards credit requirement of Jindal Global School towards the course Company Law.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Financial markets are where securities are traded. These include stock, bonds, commodities etc. Financial markets are divided into two parts which are capital market are money market. Money market is for short term debt while capital markets are for long term debt. Capital markets are further divided into primary market and secondary market. Primary markets are those where securities are first traded and created. Secondary market are those where subsequent trading happens. See PB Malla, Corporate Governance: History, Evolution, and India Story (Routledge 2010) 77–78; S Yadav, ‘Stock Market Volatility – A Study of Indian Stock Market’ (2017) 6 Global Journal for Research Analysis 629. See also FAQ of SEBI on these markets <www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485843476566.pdf> and FAQ 2 <https://investor.sebi.gov.in/pdf/reference-material/primarymarkets.pdf>.

2 Superpower relates to raising finance. This derives its base from the fact that single power entity has more credit worthiness than fractioned individuals. Malla (n 1) 34–48.

3 IPO stands for Initial public offer. In IPO shares of company are open for public to subscribe. SEBI ICDR Regulation 2018, chapter II part I provides eligibility conditions for IPO and SEBI ICDR s.2(w) defines it. Further Public offer (FPO) is when listed company seeks to issue more shares. SEBI ICDR s.2(q) defines it and SEBI ICDR chapter IV deals with it.

4 Rights issue is when existing shareholders are invited purchase additional shares and given preference. Companies Act 2013 s. 62 r/w SEBI ICDR Regulation 2018 chapter III deals with this and SEBI ICDR s.2(xx) defines it.

5 Composite issue is those which involve public issue and rights issue take simultaneously, SEBI ICDR s.2(h) defines this.

6 Bonus issue is when additional shares are allotted to existing shareholders. Companies Act, 2018 s.63 defines it and SEBI ICDR regulations 2018, chapter XI deals with it.

7 Private placement is where company allots shares to investors that are chosen by them. Companies Act 2013, s.42 r/w Companies (prospectus and allotment securities) rules 2014, rule 14 concerns this.

8 Preferential allotment is where shares are allotted to select group of people. SEBI ICDR regulations 2018, chapter V concern this and SEBI ICDR regulation s.2(nn) defines it.

9 Qualified institutional placement (QIP) is done to avoid standard regulatory compliance and it assists company in raising finance faster than traditional methods like IPO etc. in QIP shares are offered to select investor groups like qualified institutional buyer (QIBs) and public is not involved. SEBI ICDR 2018, s.2(tt) defines QIP and chapter VI of this regulation provide eligibility conditions and applicable law.

10 Institutional placement programme (IPP) are those where additional securities are offered to select groups like QIBs and public is not involved. This is dealt with as per SEBI ICDR 2009, chapter VIIIA.

11 This derives its base from market-oriented governance models. The pillar of the stock market is its liquid nature. Liquidity attracts investors and companies are attracted by vast amount they can borrow. But market is liquid only if has a strong investor protection regime. If investors cannot cash out, then market will collapse. It won’t attract that many investors and if investors are not their companies won’t find raising finance lucrative. Malla (n 1) 87–100.

12 Hoffman shows through empirical analysis how investor confidence leads to more investment. Situations like fraud though don’t stop the market but it evokes a cautious approach which forms a detrimental approach. But in theory continuous frauds could lead to collapse of market. Hence significant of investor confidence cannot be overlooked. AOI Hoffmann and T Post, ‘How Does Investor Confidence Lead to Trading? Linking Investor Return Experiences, Confidence, and Investment Beliefs’ (Social Science Research Network 2016) SSRN Scholarly Paper ID 2333419 <https://papers.ssrn.com/abstract=2333419> accessed 2 January 2022.

13 Companies Act 2013 s. 179 is an example of such mechanism. Under this scope of power of BOD is provided. It provides set criteria wherein BOD can themselves make a decision and where BOD requires shareholder’s approval.

14 There are multiple examples of compliance mechanism like Companies Act, 2013 s.134 wherein directors report has to be prepared or s.129 regarding preparation of financial statements etc.

15 Examples of such measures are Companies Act 2013, s.210 wherein Central govt can initiate investigation into affairs of companies. Generally enforcements are of 3 types public, private and gatekeepers. Public enforcement can be found in provisions like Companies Act 2013, s.248. Examples of private enforcement are s.241 and s.245. Gatekeepers’ enforcement can be seen through s.143(2) and s.102 wherein role of auditors is important. See Chapter 12 of A Afsharipour and P Paranjpe, Handbook on Corporate Governance in India (The Conference Board 2021) 220–25. See also J Armour, H Hansmann and R Kraakman, ‘Agency Problems, Legal Strategies, and Enforcement’ (Social Science Research Network 2009) SSRN Scholarly Paper ID 1436555 <https://papers.ssrn.com/abstract=1436555> accessed 4 July 2021.

16 DIP (disclosure and investor protection) guidelines of 2000, clause 2.2.2B (v) define qualified Institutional buyer. SEBI (ICDR) 2018 s. 2(ss) also defines it.

17 Anchor investors are those who make a bid before IPO and are generally QIBs. SEBI (issue of capital and disclosure requirements) 2018, s.2(c) defines it.

18 SEBI (FII) Regulation 1995, s.2(f) defines these type of investors. See also FAQ of RBI <www.rbi.org.in/fiilist/index.html>.

19 SEBI (ICDR) Regulation 2018, s. 2(jj).

20 There is no fixed definition of such individuals, but they are generally individuals with more than 2–5 crores of investable surplus.

21 This term is defined in SEBI (ICDR) Regulation, 2018, s.2(zf).

22 According to SEBI(ICDR) Regulation, 2018 s.2(zf). 25% minimum holding for Non promoter shareholders is mandated by law. Non-promoter holdings include retail investors. Securities and Contract regulations, 1956 rule 19A prescribe minimum public shareholding at 25%. See also, FAQ of SEBI on SAST regulations <www.sebi.gov.in/sebi_data/faqfiles/mar-2022/1648620806406.pdf>. Lately in 2013 govt tried to increase this to 35%, but it was faced with a backlash from promoters and company Union. Now, Sebi has decided to lower this threshold and relax these rule. See S Modak, ‘Sebi Relaxes 25% Minimum Public Shareholding Norms, Deadline Postponed’ (Business Standard India, 14 May 2020) <www.business-standard.com/article/markets/sebi-relaxes-25-minimum-public-shareholding-norms-deadline-postponed-120051401698_1.html> accessed 24 October 2021.

23 They usually maintain portfolio and follow the approach of not putting all their eggs in different basket meaning they invest in multiple stocks and investments.

24 It is observed that retail investors are cautious in their approach, especially in high-risk transactions due to their limited technical know-how of stock market. It is seen from the fact that SEBI annual reports focusing on increasing investor knowledge by running various program to empower retail investors. They realise that retail investor has some hesitation with stock markets. So counter these hesitations they run these program to offer knowledge to them so that they can reap benefits of stock markets. With advent of Demat Account process being shifted online this aspect has reduced. The fact is that retail investors are careful in investing and have a fear of stock market is due to high risk factor. They think twice before buying shares. We can understand this through a simple proposition if you have scarcity of money then you think twice before spending especially if takes a heavy chunk of your budget. This is the reason why companies break shares into low prices thereby making it affordable for retail investors. An investor is likely to buy 10 rupee share but hesitate when buying 100 rupee share if he has budget of 500 rupees. G Smith, ‘Stock Splits: A Reevaluation’ (2019) 28 The Journal of Investing 21 <https://joi.pm-research.com/content/28/4/21> accessed 10 June 2022.

25 Technical knowledge limitations stem from managerial class i.e. BOD spreading misinformation through asymmetries and expropriate shareholder value. See Malla (n 1) 87–100.

26 See speech given by Peter Driscoll who works at office of compliance inspections and examinations. This speech was published at website of SEC and talked about protecting retail investors from frauds. It was stated that frauds are front runners on creating vulnerability for retail investors as class. ‘SEC.Gov | How We Protect Retail Investors’ <www.sec.gov/news/speech/speech-driscoll-042919> accessed 10 June 2022.

For Indian Context see, D Sharma and R Verma, ‘Reaction of Stock Price to Frauds’ Announcements: Evidence from Indian Banking Sector’ (2020) 16 Asia-Pacific Journal of Management Research and Innovation 157 <https://doi.org/10.1177/2319510X20930879> accessed 16 June 2022.

27 Vijay Mallya took multiple loans to finance his airlines known as kingfisher airlines. There were critical concerns raised on credit worthiness of various credit rating organization. This scam resulted in massive losses to shareholder. During the aftermath of the scandal, he left India for the UK. India is still trying to extradite him. See ‘Corporate Governance Failures in India’ (International Journal of Law Management & Humanities) <www.ijlmh.com/paper/corporate-governance-failures-in-india/> accessed 10 June 2022.

28 Nirav Modi took multiple letter of credit from PNB bank without providing requisite collaterals. This series of transaction were done with the connivance of the bank and from one particular branch. It resulted in massive shocks for banking industry. See ‘Corporate Governance Failures in India’ (International Journal of Law Management & Humanities) <www.ijlmh.com/paper/corporate-governance-failures-in-india/> accessed 10 June 2022.

29 In Yes Bank scam, investor money was used to siphon of the funds and launder money. In this scam public money was used to fund DHFL and the co-founder’s received kickback for approving and authorizing those transaction. Under the corporate governance regime, if it were to function as per theory then such a transaction shouldn’t have received approval of shareholders. On this, see ‘Rs 5,000-Crore Fraud By Yes Bank’s Rana Kapoor, Wadhawans: Probe Agency’ (NDTV.com) <www.ndtv.com/india-news/yes-bank-fraud-rs-5-000-crore-fraud-by-yes-banks-rana-kapoor-wadhawans-probe-agency-2913012> accessed 10 June 2022.

30 On this, see SEBI Report 2018 or 2019 <www.sebi.gov.in/reports/annual-reports/jul-2019/annual-report-2018-19_43670.html>. Every year there is a mention of investor awareness programmes and the extreme need of it. Not only their financial knowledge is limited but their knowledge on rights of investor is also limited. Further there are other scams that coming to light which impact investors. IL&FS there were issues with accounting and external auditors were found to be conniving with management to present financially sound company records. But it was later found that it wasn’t the case. Read more at T Rathod and H Tiwari, ‘Analysis of Indian Laws in the Wake of IL&FS Crisis’ (2020) 3 Journal on Corporate Law and Governance 218 <http://gov.nlujodhpur.ac.in/wp-content/uploads/2021/02/Volume-3-Issue-2-2020.pdf>. Tata Mistry is another controversy wherein Cyrus Mistry was dismissed against the wishes of investors by promoters. This led to a huge controversy where class action suits were filed but they were stricken since investors were not part of one class. Read more at H Kaswa and S Pandey, ‘A Recurrent Quest for Corporate Governance in India: Revisiting the Imbalanced Scales of Shareholders’ Protection in Tata-Mistry Case’ (2021) 4 Journal on Corporate Law and Governance 121 <http://jclg.in/wp-content/uploads/2021/11/JCLG-Volume-IV-Issue-2.pdf>. In the Infosys crisis, the former CEO Sikka was overpaid, and investors were not happy with management decision. With subsequent constraint on financial position demand for reduction in his compensation was raised. Subsequently a huge controversy broke out and Companies Act 2013 learnt from this and put a cap on compensation offered to managerial personnel of the company. Read more at S Kothari, ‘The Infosys Crisis: Who Ended Up Paying the “Price”?’ (2020) 3 Journal on Corporate Law and Governance 127 <http://gov.nlujodhpur.ac.in/wp-content/uploads/2021/02/Volume-3-Issue-2-2020.pdf>.

31 Adolf Berle and Gardiner Means, ‘The Modern Corporation and Private Property, New York’: The Macmillan Company (1932) <https://edisciplinas.usp.br/pluginfile.php/106085/mod_resource/content/1/DCO0318_Aula_0_-_Berle__Means.pdf>.

32 We see a fading significance of effective corporate governance regime in modern times. Corporate governance is not working as per the vision imagined by drafters. As per theoretical understanding, effective management is that management which involve shareholders to appoint BOD which results in BOD appointing other key managerial personnel. But promoter have gained the ability to misuse this vision. Promoter group misuse the powers and use various techniques like disarmament which results in appointing puppet directors. They effectively take control of all the three arms within the regime thereby appointing both BOD and key managerial positions. This affects the independent structure of board of directors and its functions. As per theorical foundation of the Companies Act 2013, a person can be on all three positions which are BOD, Promoter and KMP. If we analyse this in light of substantial control over shares by promoters, it can be easy to control each arms. See, N Balasubramanian, Leading from the Top: Directors Who Make the Difference (2016).

33 See Armour, Hansmann, and Kraakman (n 15). See also, P Gompers, J Ishii and A Metrick, ‘Corporate Governance and Equity Prices’ (2003) 118 The Quarterly Journal of Economics 107 <www.jstor.org/stable/25053900> accessed 24 June 2022; Leora Klapper and Inessa Love, ‘Corporate Governance, Investor Protection, and Performance in Emerging Markets’, (2004) 10 Journal Of Corporate Finance 703.

34 On this, see Balasubramanian (n 32).

35 Few exceptional cases have presented themselves. But those cases are very rare and disperse nature of retail investors hampers collective shareholder activism here. Cases like Tata Mistry have seen shareholders coming together. But these cases dwindle especially on closer look and tracing the origin of movements. On analysis shareholder activism would drop if you remove the cases involving promoters who started the activism. Hardly any big cases have come up over the years. In Tata Mistry case though shareholders especially retail came together but the action was initiated by Sharpooji Paloonji promoter group etc. See for more information, U Varottil, ‘Case-Study Evidence of Shareholder Activism’ (IndiaCorpLaw, 24 February 2016) <https://indiacorplaw.in/2016/02/case-study-evidence-of-shareholder.html> accessed 24 October 2021.

36 Refer to empirical data in Table 1. We can see that attendance is low. It is seen paucity of time is reason for attendance. For more see also, D Solomon and E Soltes, ‘What Are We Meeting For? The Consequences of Private Meetings with Investors’ (2015) 58 The Journal of Law & Economics 325 <www.jstor.org/stable/10.1086/684038> accessed 24 October 2021.

37 Attendance rate is low if we analyse Table 1 data present in appendix.

38 Malla (n 1) 158–60.

39 Even RBI is concerned about Institutional investors taking over and miniscule participation. Based on 2003 report and other factors govt had decided to raise retail investor shareholding in a company from 25% to 35%. But govt. has dropped recently due to active conflict from companies. See, Amarendra Acharya, ‘Corporate Bond Market in India: Issues and Challenges’ (2011) 32(3) RBI Occasional Papers, Social Science Research Network <https://rbidocs.rbi.org.in/rdocs/content/PDFs/3ARCO100114.pdf>. See also RBI Annual Report dated 27 August 2003 <www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=338>.

40 G Singh, ‘Corporate Governance: An Insight into the Imposition and Implementation of Gender Diversity on Indian Boards’ (2020) 13 Indian Journal of Corporate Governance 99 <https://doi.org/10.1177/0974686220930839> accessed 24 October 2021.

41 U Varottil, ‘Evolution and Effectiveness of Independent Directors in Indian Corporate Governance’ (2010) 6 Hastings Business Law Journal 281 <https://repository.uchastings.edu/hastings_business_law_journal/vol6/iss2/1>.

42 ibid.

43 ibid.

44 Malla (n 1) 58–75.

45 One can argue that proxy votes are way to tackle it. But not many votes are received through mail in box or proxy voting etc. The possibility of success is limited due to internet issues and lack of technical information. Retail investors are distant from managerial aspect of business and its implication and thereby they prefer to stay away from it. Further covid has seen continuous internet issues among many regions in India excluding metropolitan cities. Due to the pandemic, internet connectivity has increased yet time as concept also needs to be appreciated. See, U Varottil, ‘The Advent of Shareholder Activism in India’ [2012] SSRN Electronic Journal <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2165162>.

46 Liquidity is primary focus of security markets like stock exchange. Most of the security market offer immediate liquidity in terms of trading of shares. Hence timely exit plays a key role to protect oneself from excessive price fluctuations. But timely exit relies heavily on information/analysis of financials of company. See, Malla (n 1) 65–78.

47 These type of situation like frauds, mismanagement, insider trading leads to heavy price fluctuations and reduction in price of stocks thereby causing heavy losses to retail investor without fault of their own.

48 Suchismita Bose, ‘Securities Market Regulations: Lessons from US and Indian Experience’ (2005) 2(20–21) The ICRA Bulletin, Money & Finance <https://ssrn.com/abstract=1140107>.

49 Security exchange commission of America. American equivalent of SEBI, an enforcement agency that regulates security market.

50 Security Exchange Board of India-Regulatory agency that regulates security market in India.

51 Bose (n 48).

52 Insiders stealing profits by selling output, assets of company etc to another firm they own at below market price. R La Porta and others, ‘Investor Protection and Corporate Governance’ (2000) 58 Journal of Financial Economics 3 <https://linkinghub.elsevier.com/retrieve/pii/S0304405X00000659>.

53 YC Huang and YJ Cheng, 'Stock Manipulation and its effects: pump and dump versus stabilization' (2015) 44 Review of Quantative Financing and Accounting 719.

54 Tata Mistry, 2021 SCC OnLine SC 272.

55 It is pertinent to note that information disclosures success depends on enforcement. Enforcement depends on three prongs – depth of disclosure, timely manner of information submitted and lastly access to that information. Information disclosure fail in India despite the disclosures being in depth and extensive. This is because retail investors are passive and timely access to information can never happen with them. Further an empirical research was conducted to understand the efficacy of information disclosure. It was seen that mandated disclosures of any kind fail due to the fact that the one who has to disclosure information would file or disclose such information in a manner that is incomplete or misleading. Further in this study it was seen the disclosures efficacy is directly proportional to simple-mindedness of the disclosure and portrayal of information. A perfect example for this is prospectus. In recent times prospectus have vast amounts of disclosures and run on an average of 200–300 pages in India. These are worded and termed in legal jargon which is hardly understood by any layman investor. See O Ben-Shahar and CE Schneider. ‘The Failure of Mandated Disclosure’ (2011) 159(3) University of Pennsylvania Law Review 647–749 <www.jstor.org/stable/41149884>.

56 Rajesh Chakrabarti, Pradeep K Yadav, and William L Megginson, ‘Corporate Governance in India’ (Forthcoming) Journal of Applied Corporate Finance <https://ssrn.com/abstract=1012222>.

57 Companies Act 2013

58 Indian Accounting Standards issued by Institute of Chartered Accounts of India.

59 Indian Companies Act 2013, Section 241–245.

60 Foss v Harbottle, (1843) 2 Hare 461.

61 Mernier v Hooper, (1874) 9 C App. 350, perpetuation of fraud by majority was construed to be oppressive and the act done can be reversed despite having majority backing.

62 Rajamundry v electric Supply co v Nageshwar roa, AIR 1986 SC 213.

63 Shanti Prasad Jain v Kalinga, AIR 1965 SC 1535.

64 See Needle v Needle, (1981) 3 SCC 333.

65 Tata v Cyrus Mistry, 2021 SCC OnLine SC 272.

66 SEBI ensures that corporate governance rules are being followed by companies and disclosures and auditing is done is proper manner without any malpractices. It ensures transparent and clean environment is followed in the market.

67 ATR (Action Taken Report) is one of the ways that SEBI makes sure companies are responding correctly and properly towards Investor grievances.

68 SEBI Act 1992.

69 SEBI Act 1992 s.11(4).

70 SEBI Act 1992.

71 SEBI Act 1992 s.30. It prescribes power of SEBI to create regulations so as to carry its objective properly.

72 Securities and Exchange Board of India (LODR requirements) 2015.

73 Securities Contract and regulation Act 2018.

74 SEBI Annual Reports 2018–2019 <www.sebi.gov.in/reports/annual-reports/jul-2019/annual-report-2018-19_43670.html>.

75 SEBI Annual Reports 2018–2019 <www.sebi.gov.in/reports/annual-reports/jul-2019/annual-report-2018-19_43670.html>.

76 U Varottil, ‘India: The Efficacy of India’s Legal System as a Tool for Investor Protection’ in Pierre-Henri Conac and Martin Gelter (eds), Global Securities Litigation and Enforcement (Cambridge University Press 2019) <www.cambridge.org/core/product/identifier/9781316258118%23CN-bp-23/type/book_part>.

77 Amit Bhaskar, ‘Disgorgement in Indian Financial Markets – a Critical Study’ [2013] 112 CLA (Mag.) 32.

78 ibid.

79 Report of Wadhwa Committee titled ‘The Committee on Reallocation of Shares in the Matter of IPO Irregularities’ dated 29 December 2009, <www.sebi.gov.in/reports/reports/dec-2009/justice-wadhwa-committe-report-on-reallocation-of-shares-in-the-matter-of-ipo-irregularities-annexures-not-made-public-for-confidentiality-reasons_2903.html>.

80 It is stated that less than 10% of retail investors are able to break or generate a CAGR that beats inflation value of 6–8% with stock market investments. This statement encapsulates and highlights how poor the financial literacy is in India. Despite the efforts of SEBI and various other agencies to teach the general public about stock market there is sense of fear within retail investors regarding stock market. Many choose to avoid it and invest in sources that are less risky. I think the issue and failure of investor training is related to experience. To understand the nuances of stock market one has to teach that through experience, and it cannot be encapsulated within a classroom or webinar teaching module. A study aimed at understanding crowdfunding phenomena tried to understand what an efficacious investor education program would look like. Apart from financial literacy and warning signals to identify fraudulent conduct or red signals in financials, experience-based educational training is pertinent for its success. See CR Friesz, ‘Crowdfunding & Investor Education: Empowering Investors to Mitigate Risk & Prevent Fraud’ (2015) 48 Suffolk University Law Review 131.

81 Bhaskar (n 77).

82 SEBI Annual Report 2018–2019 <www.sebi.gov.in/reports/annual-reports/jul-2019/annual-report-2018-19_43670.html>.

83 Credit Analysis and Research Ltd.

84 Investment Information & Credit Rating Agency of India Ltd.

85 N Kumar, ‘Credit Rating methodology and Agencies’ [1994] 15 CLA (MAD) 50.

86 ibid.

87 ibid.

88 ibid.

89 Zomato was allotted a credit rating of ‘outperform’ by Credit Suisse. See A Mudgill, ‘After Jefferies, Credit Suisse Expects 100% Rally on Zomato! Should You Buy This Dip?’ (The Economic Times, 27 July 2022) <https://economictimes.indiatimes.com/markets/stocks/news/after-jefferies-credit-suisse-expects-100-rally-on-zomato-should-you-buy-this-dip/articleshow/93158031.cms?from=mdr> accessed 17 July 2023. Similarly, Nykaa has been given BBB+ (stable) rating on 3 August 2022 despite widening of losses and reduction in market share. This rating is unchanged since its IPO. See CRISIL Rating History of Nykaa Fashion <www.crisilratings.com/en/home/our-business/ratings/company-factsheet/archived-rating-rationales.html?prodCategory=CGBLR&companyCode=NYBEPL>. Further, IPO grade of 3 out 5 was allotted to Paytm’s parent company one97communication by Crisil <www.crisilratings.com/content/dam/crisil/our-businesses/capital-markets/ipo-grading-list/view-rationale/CRISIL-Research_ipo-grading-rat_One97-communications.pdf>. In these documents you can note a trend. When the company is in losses and in financial distress, these credit rating agency and prospectus of these companies focus on long-term prospective growth. This allows agencies to present a higher rating thereby leading to questionable ratings. The case of Amtek in 2016 is especially pertinent for this point. CARE and Crisil, the two biggest credit rating agency in India, removed the Amtek’s Bonds rating and downgraded it immediately when Amtek was on verge of defaulting on its bond’s repayment. JP Upadhyay, ‘CARE, Crisil May Face Sebi Action in Amtek Auto Case’ (mint, 22 June 2016) <www.livemint.com/Money/wCOP9C63UmWFIe4X6pgsyK/Amtek-Auto-case-Sebi-may-take-action-against-CARE-Crisil.html> accessed 17 July 2023.

90 J Payne, The Role of Gatekeepers in N Moloney, E Ferran and J Payne (eds),Oxford Handbook of Financial Regulation (Oxford University Press 2015) <https://papers.ssrn.com/abstract=2428121> accessed 17 July 2023.

91 Recital 11, Council Regulation 462/2013 of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies [2013] OJ L146/1.

92 Council Regulation 1060/2009 of 16 September 2009 on credit rating agencies [2009] OJ L302/1, art 7.

93 SEC, 'Report to the Congress on Assigned Credit Ratings' <www.sec.gov/news/studies/2012/assigned-credit-ratings-study.pdf> 28–30.

94 JKS Ho, ‘Bringing Responsible Ownership to the Financial Market of Hong Kong: How Effective Could It Be?’ (2016) 16 Journal of Corporate Law Studies 437 <https://doi.org/10.1080/14735970.2016.1191301> accessed 30 January 2022.

95 Chakrabarti, Yadav, and Megginson (n 55).

96 Varottil (n 76).

97 R Gamble, ‘Jostling for a Larger Piece of the (Class) Action: Litigation Funders and Entrepreneurial Lawyers Stake Their Claims’ (2017) 46 Common Law World Review 3 <https://doi.org/10.1177/1473779516677212> accessed 29 January 2022.

98 ‘Third Party Funding in India’ (Cyril Amarchand Mangaldas, June 2019) <www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf>.

99 ibid.

100 ibid.

101 The same problems that have been highlighted exist in different countries as well. In the US, a study was conducted to understand the retail investors’ concerns in class action suits. In this study it was seen that US laws favour institutional investors heading and leading the class actions rather than retail investors. Further it was observed that retail investors have no voice and institutional and other investors that have significant holding shadow the concerns of retail investors. It was seen laws frequently around the globe use terms like ‘large financial loss’ or ‘biggest financial losses’ to indicate a preference towards investors that hold significant stake in the company. Also, the legal and financial acumen of these investors that hold large shareholding overshadow the concerns and competitive edge that retail investors could offer. Hence more often than not even if class actions are initiated it is likely that retail investors would be overshadowed by these large investors. Apart from the claims these are some additional concerns that lead to failure of class-action suits. DH Webber, ‘The Plight of the Individual Investor in Securities Class Actions’ (2012) 106 Northwestern University Law Review 157.

102 SEBI Annual Reports 2018–2019 <www.sebi.gov.in/reports/annual-reports/jul-2019/annual-report-2018-19_43670.html>

103 Varottil (n 76).

104 S Choi, ‘Regulating Investors Not Issuers: A Market-Based Proposal’ (2000) 88 California Law Review 279.

105 Chakrabarti, Yadav, and Megginson (n 55); R Chakrabarti, W Megginson, and PK Yadav, ‘Corporate Governance in India’ (2008) 20 Journal of Applied Corporate Finance 59.