Investor empoverment by NSE India

Author Name: 
National Stock Exchange of India

The capital markets in India have evolved over more than a century. The seeds of investor protection were sown way back in 1956 at the time of enactment of the Securities Contracts Regulations Act, 1956, wherein several investor protection measures found their place. Since then, investor protection has been evolving. Over the period, investor protection has been receiving increased attention and focus from the market regulator, the Securities Exchange Board of India (SEBI), as well as stock exchanges. 

In the last decade, India has witnessed a transition of focus from investor protection to investor empowerment. Investor protection in the traditional form has certainly played an important role in helping an investor in the eventuality of his xxx into a problem. However, through experience it has been discovered that empowering the investor with valuable information both at the micro- and macro-levels is the key for creating a safer investment environment, and efforts in this direction would help to prevent problems. Thus, both the regulator and stock exchanges have focused on creating freer flow of information between members and investors, and on transparent dissemination of all market-related information, including price, disclosures by companies, etc. All actions of the exchange have embedded investor empowerment as the nucleus. 

These investor empowering initiatives can be categorized into three components as below. 

  1. Market structure, product design and operational framework 

One of the unique features of Indian markets is that retail investors participate directly in the markets through registered intermediaries, who are popularly known as stock brokers. Given the vast geographical spread of the country and the large number of retail investors, investor empowerment and protection is a core function of both SEBI and the exchanges. NSE India has around 150,000 trading terminals spread across more than 1500 towns and cities, with around 2 to 3 million investors participating in the market on a daily basis. 

The structure of the Indian market is designed to protect the interest of investors. Only intermediaries who have obtained a license from SEBI are permitted to deal on behalf of investors. At the time of granting a license and on a continuous basis, an intermediary’s financial soundness, track record, fit and proper criteria fulfillment are ensured, thereby making sure that they are adequately geared up to service the investors. 

With a view to enhance the transparency of dealings, intermediaries are mandated to route all orders of investors to the trading system of a recognized stock exchange; intermediaries are not allowed to match transactions at their level. The order matching at exchanges takes place on the basis of price-time priority, and hence, a small investor gets same priority as a big investor. There is no discrimination based on size of the order, volume, geographical location, etc. 

Ensuring the safety of the market, protecting its integrity and the interest of investors is the top most priority of exchanges and SEBI. In order to achieve this, NSE India has designed a robust risk management framework which includes upfront margin collection based on real-time margin computation all at client levels. The exchange has also eliminated counterparty risk by introducing a settlement guarantee mechanism whereby the Clearing Corporation guarantees the settlement. Surveillance activities are carried out both at the member and client levels. Further, the clear flow of information is also considered a very important part of market integrity, and hence a framework for disclosures by listed entities and the member entities is in place. The exchange disseminates price-sensitive information to investors at large. 

In order to provide for genuinely robust investor empowerment, the manner in which critical documents have to flow between members and investors at the beginning of a relationship, and also when transactions take place, is mandated by the exchange. Members are required to segregate their own funds and securities from those of clients, and maintain separate accounts for own funds/securities and clients’ funds/securities. Members are required to issue contract notes to investors within 24 hours of a trade execution, and also issue a tatement of funds and securities to investors on a quarterly basis. Members receive funds and securities from the investor for whom transaction is executed, and no third-party funds and securities can be accepted. 

Assurance of members’ meeting the compliance norms is obtained through periodic third-party audits of systems and operations. Besides, the exchange also undertakes examination of the books and records of members to identify potential areas of risks in their operations that may have an impact on investors. 

  1. Investor Education Drive 

Though large numbers of investors participate in the market, the percentage of the Indian population is very low due to lack of awareness about markets, products, how this all operates. Conscious efforts are being made by multiple agencies, like the Ministry of Finances, SEBI and exchanges to include more and more people by creating targeted awareness initiatives. 

Awareness Programs

On a continuous basis, NSE India conducts investor awareness programmes across the country, putting more emphasis on small towns and cities. Programmes are conducted in vernacular languages, so as to eliminate language barriers reducing the reach of the market. During these awareness programs, apart from covering product features and uses, operational aspects like investors’ rights and obligations, “dos” and “don’ts” while investing, and diligence that an investor needs to take are also covered. Educational and informative booklets relating to operational and functional aspects of the market in English and regional languages are distributed. 

Campaigns for financial literacy

Sensing the need to introduce students to the importance of financial planning, NSE India has introduced a financial literacy campaign. The exchange, in collaboration with higher secondary schools and colleges, conducts programmes covering numerous aspects of investment, including need for saving, avenues to pursue, risks in investment, analysis of company financials, etc. 

Use of media to reach out to investors  

The exchange makes use of multiple channels to spread investor awareness. The exchange issues regular alerts on topics which need investor attention through the print media, both like national and regional newspapers. The exchange also makes use of TV as a medium, and conducts educational programs for the benefit of a wide range of investors.

Dissemination of information on website

Information is the key to investment decisions. In order to make adequate information available to retail investors, the exchange displays many pages of details on registered members, the functioning of markets, price-related information, company-related information, and means of investor complaint redressal, etc. As a step towards investor safety, the exchange also offers a facility for trade verification on its site for 10 days wherein an investor can check the details of his trade on the exchange’s own system.

Direct trade information

In addition to the trade information which members give to investors on a regular basis, the exchange randomly sends out trade information directly to some 250 investors daily. This acts as an additional source of information to investors, and enables them to compare the details received from exchange with those received from the member; they can check if any variations exist. Apart from its usefulness to investors, this also keeps a check on members to ensure that on a continuous basis correct investor information is maintained, and also that the regular information sent to investors is correct.

Certification program

For investors who are interested in acquiring a structured understanding of the markets, the exchange offers certification on topics such as derivatives, capital markets, depository operations, mutual fund operations, commodities markets, etc. These courses have evoked good responses from investing community. 

3. Investor Services

Investor services cell

National Stock Exchange of India has established a dedicated investor services cell at its head office and its branches, where a dedicated team of officials attend to various service requests. Basic queries of investors are resolved by telephone and personal meetings. 

Investors having any dispute or difference against a member or a listed corporate entity can lodge their complaints with the Investor Services Cell of the exchange. The exchange takes up the issue with the concerned member or listed entity, calls for explanations, arranges for a meeting between the parties where required to resolve the disputes through its intervention. Whernno resolution is reached, or one of the parties is not satisfied with the compromise, the parties can opt for referring the matter to arbitration.

Arbitration Framework

With a view to quicken the process of legal remedy, the exchange has a formal arbitration mechanism, a quasi-judicial process of dispute resolution. The exchange maintains an arbitration panel at its head and branch offices. One of the parties to a dispute can refer the matter to arbitration. Based on the choice of the parties concerned, arbitrators are appointed. Arbitrators hear out both parties and record their decision on the dispute in the form of an arbitration award. An arbitration award is legally binding on the trading member, and if he is aggrieved by the award, he can challenge the same in a court of law.

Investor protection fund

The exchange has established an investor protection fund trust (IPFT) which is a registered charitable trust. The activities of this trust are focused on spreading awareness amongst investors through various forms of education. Further, the trust also compensates investors up to Rupees 1.1 million in cases where he has dealt with a member who has been removed from membership of the exchange and its funds were not adequate to settle the claims of investors.