A STUDY OF CONSUMER AND INVESTOR PROTECTION

THROUGH LAW

A project submitted in partial fulfilment of the course BUSINESS

ENVIRONMENT, 4th SEMESTER during the academic year
2017-2018

SUBMITTED BY:
SHREYA SINHA
ROLL NO.- 1648
B.B.A. LL.B.

SUBMITTED TO:
Dr. MANOJ MISHRA
FACULTY OF BUSINESS ENVIRONMENT

APRIL, 2018
CHANAKYA NATIONAL LAW UNIVERSITY, NAYAYA
NAGAR, MEETHAPUR, PATNA-800001
 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the BB.A. LL.B (Hons.) Project Report entitled “A
STUDY OF CONSUMER AND INVESTOR PROTECTION THROUGH LAW” submitted
at Chanakya National Law University, Patna is an authentic record of my work carried out
under the supervision of Dr. Manoj Mishra. I have not submitted this work elsewhere for any
other degree or diploma. I am fully responsible for the contents of my Project Report.

(Signature of the Candidate)

SHREYA SINHA
Chanakya National Law University, Patna
13/04/2018

i
 ACKNOWLEDGEMENT

“IF YOU WANT TO WALK FAST GO ALONE

IF YOU WANT TO WALK FAR GO TOGETHER”
A project is a joint endeavor which is to be accomplished with utmost compassion, diligence
and with support of all. Gratitude is a noble response of one’s soul to kindness or help
generously rendered by another and its acknowledgement is the duty and joyance. I am
overwhelmed in all humbleness and gratefulness to acknowledge from the bottom of my
heart to all those who have helped me to put these ideas, well above the level of simplicity
and into something concrete effectively and moreover on time.
This project would not have been completed without combined effort of my revered
Business Environment teacher Dr. Manoj Mishra whose support and guidance was the
driving force to successfully complete this project. I express my heartfelt gratitude to him.
Thanks are also due to my parents, family, siblings, my dear friends and all those who helped
me in this project in any way. Last but not the least; I would like to express my sincere
gratitude to our Business Environment teacher for providing us with such a golden
opportunity to showcase our talents. Also this project was instrumental in making me know
more about the A Study of Consumer and Investor Protection Through Law.. This project
played an important role in making me understand more about the use of game theory by the
managers. It was truly an endeavour which enabled me to embark on a journey which
redefined my intelligentsia, induced my mind to discover the intricacies involved in the
competency of the people in consumer and investor protection through law..

Moreover, thanks to all those who helped me in any way be it words, presence,
Encouragement or blessings...

- Shreya Sinha
- 4th Semester
- B.BA LL.B

ii
 TABLE OF CONTENTS

Declaration…………………………………………………………………………………….i

Acknowledgement…………………………………………………………………………….ii

Table of Contents…………………………………………………………………………….iii

Aims and Objectives……………………………………………………………………….…iv

Limitations……………………………………………………………………………………iv

1. Introduction………………………………………………………………………….1-2

2. Research Methodology & Review of Literature………………………………...…3-4

3. Rights of Consumers and Investors……………………………………...………...5-8

4. Consumer Protection Through Law……………………………..…………...…….9-12

5. Investor Protection Through Law ………………………………………………..13-19

6. Findings & Analysis……………………………………………………………...20-21

7. Conclusion & Suggestions…………………………………………………..…..22-23

Bibliography……………………………………………………………………...…………24

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 AIMS AND OBJECTIVES

The objective of this project is to bring to light, the use of law in protection of consumers and
investors.

LIMITATIONS

The presented research is confined to a time limit of one month and this research contains
only doctrinal works which are limited to library sources.

iv
 INTRODUCTION

Recent studies in corporate governance have debated the importance of legal institutions in
shaping financial development. One particular aspect of the legal environment which has
received significant attention is the role of legal protection of investors from managerial
expropriation. Both the theoretical and the empirical literature reach mixed conclusions on
the impact of investor protection laws on firm financing and investment decisions. On one
hand, a number of theories predict that investor protection laws have a significant impact on
corporate policies. These theories are supported by empirical studies which find cross-
country differences in firm financing and investment patterns. These differences are
attributed to heterogeneous investor protections engendered by disparate legal origins (La
Porta, Lopez-de-Silanes, Shleifer, and Vishny (henceforth LLSV) 1997, 1998, 2000b, 2002,
among others). Some scholars, on the other hand, argue that cross-country differences in
financing and investment patterns do not adequately capture the causal impact of legal
development on corporate policy (Rajan and Zingales 2003, Pagano and Volpin 2001, 2005).
Additionally, various studies examine time-series variation in investor protection laws within
countries such as the U.K. and Italy and find that legal protection of investors has little
impact on ownership dispersion and financial development (Franks, Mayer, and Rossi 2009,
Aganin and Volpin 2005).

Empirical identification of the impact of investor protection law on firm financing and
investment decisions requires a setting in which legal investor protections are well-defined
and vary independently of factors that are otherwise correlated with firms’ decisions on
corporate policy.

Consumer Protection has its deep roots in the rich soil of Indian Civilization which dates
back to 3200 BC. In ancient India, human values were cherished and ethical practices were
considered of great importance. Over the years, an increasing number of defective and unsafe
products are being marketed to make a quick buck. A product may become unsafe because it
was manufactured without due regard to the user’s safety. Sometimes even after taking due
care, the product might be unsafe for reasons other than the manufacturer’s carelessness, such
as when it has a defective component. And at the other extreme, a product may be inherently
dangerous. A product’s safety standard and quality are often the buyer’s main considerations

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when making a purchase. They are the most effective means of ensuring consumer’s
satisfaction and loyalty. Besides these two, a product’s functional features, design, colour,
style, packaging, and the assurance of a trouble-free service during its expected lifespan are
other considerations which affect consumer satisfaction.

In India the need for consumer protection is paramount in view of the ever increasing
population and the consequent need for many goods and services of which is no matching
supply. India’s increased consumer exploitation could be attributed to the lack of education,
poverty, illiteracy, lack of information, traditional outlook of Indians to suffer in silence and
their ignorance of the available legal remedies in such cases.

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 RESEARCH METHODOLOGY & REVIEW OF LITERATURE

 Research Methodology

The researcher has relied both on doctrinal sources of data.

Various literary works from the library and internet were used extensively in
collecting the data essential for this study. The researcher has studied various reports
and acts including the Consumer Protection Act, 1986, which is for the protection of
consumers. The researcher has also read various e-articles talking about the protection
of investor and consumer through law, the details of which will be discussed in
“Review of Literature.”

The method of writing used in this project is primarily analytical.

 Review of Literature

The researcher has used various books, articles, reports and acts to complete this research
work. The following were used by the researcher:
1. Corporate Governance and Investor Protection. (2013, November)
This was an article about investor protection in India. This article briefly described most of
the provisions defined for the protection of investors like the Protection of investor under the
companies act, 2013 and the provisions defined by SEBI. This article was very useful for this
research work as it had most of the provisions defined for investor protector. This article was
most useful for the chapter “Protection of Investor through law” of my project.
2. Analysis of Consumer Protection Laws in India.
This article contained all the provisions for the laws for consumer protection in India. This
has provisions from the constitution which were defined to protect the interest of the
consumers and also had provisions of the Consumer Protection Act, 1986. This article was
most useful for the chapter “Protection of Consumer through law” of my project.
3. Consumer Rights and the Consumer Protection Act.
This article contained all the provisions for the laws for consumer protection in India. This
has provisions from the constitution which were defined to protect the interest of the
consumers and also had provisions of the Consumer Protection Act, 1986. This article was

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most useful for the chapter “Protection of Consumer through law” of my project and also for
the chapter “Rights of consumers and investors.”
4. Investors' Protection
This was an article about investor protection in India. This article briefly described most of
the provisions defined for the protection of investors like the Protection of investor under the
companies act, 2013 and the provisions defined by SEBI. This article was very useful for this
research work as it had most of the provisions defined for investor protector. This article was
most useful for the chapter “Protection of Investor through law” of my project.

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 RIGHTS OF CONSUMERS AND INVESTORS

The consumers and investors in a business are vested with certain rights for their protection.
For the consumers a proper legislation has been enacted i.e. The Consumer Protection Act,
1986 and for the protection of investors certain norms are followed and the companies have
their policies as well.
 Rights of Consumers
Consumer Protection Act was introduced in 1986 to protect the interests of consumers. The
basic objective of the act is to reserve the consumers’ rights and provide a platform for the
speedy and easy redressal of their problems.
As per section 6 of the Consumer Protection Act, the following rights have been given to the
consumers:

1. Right to Safety
A consumer has a right to be safe from the hazardous effects of the goods or services. For
example, sub-standard drugs, expired food products, low quality products can be hazardous
to the health, life and property of the consumer. The act provides safety to the consumer
against these effects.

2. Right to be Informed
Right to be informed says that a consumer should be fully informed about the quality,
quantity, methods to use the product, precautions to be taken, manufacturing date and any
other information on which consumer’s purchasing decision may depend.

3. Right to be Heard
A consumer has the right to be heard i.e. he has the right to file a complaint if any of his
rights has been violated. Right to be heard is the most relevant right as all other rights are of
less importance in the absence of this right.

4. Right to Redressal

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If a consumer suffers a loss, due to the negligence of the producer, he has the right to get
compensation in return. Redressal can be in any form like, free repair, refund of money,
replacement of product, and so on.
5. Right to Consumer Education
Consumer rights would be of no use if consumer has no knowledge of them. So, consumer
must be aware of the available rights to him. Therefore, consumer day is observed on 15th
March of every year.
6. Right to Choose
A consumer is free to choose anything from the wide range of goods available in the market.
No seller is allowed to influence the purchasing decision of the consumer.

Rights of a consumer
 Rights of Investors
THE INVESTOR HAS THE RIGHT TO:
1. ASK QUESTIONS - on the investment in which he wishes to apply his savings, on
the transaction and the financial agents involved.
2. BE AWARE OF THE OPPORTUNITIES FOR INVESTMENT - once the amount to
be invested has been decided, along with the horizons for the application and the
investor's risk profile, the financial agent should make clear what opportunities for
investment exist; the agent's assessment should take into account the sum of capital
the investor has available and the degree of risk he is prepared to face.

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3. BE INFORMED OF THE RULES WHICH GOVERN THE MARKET IN WHICH
HE IS INVESTING - the financial agent should provide all the necessary information
on the investment which has been chosen, its operational ability and practices
prevailing in the market; the agent should also declare the legal and regulatory
guarantees to which the investor can resort if the particular rule(s) is not properly
carried out.
4. MAKE HIS CHOICE COUNT - in other words, the investor's wishes should be
respected. Once the investment to be made has been resolved, the financial agent is
not entitled to apply the funds to a different operation from that chosen by the
investor.
5. ENJOY ACCESS TO INFORMATION - this means to request and receive
information from the company or the fund being studied by the investor, so that he
can decide where to make the application of funds (by being able to look at
accounting records and financial information, company documents, the names of the
controlling interests and the directors) through consulting the department of
shareholders in the company, the Exchange on which the share will be negotiated and,
moreover, the CVM. All these facilities are geared to enabling the investor to make a
decision while thoroughly aware of the risks and costs involved.
6. BE INFORMED OF THE RETURNS AND RISKS OF THE APPLICATION - once
the investment has been chosen, the investor requires to be notified by the financial
agent as clearly as possible on the returns yielded by it and the chance (risks) that the
hoped for returns will not actually come to fruition. The definition of the investor's
risk profile is a crucial factor in directing the application with a surer hand.
7. BE AWARE OF THE COSTS ARISING FROM INVESTMENT - no investment is
entirely free from related costs. It is the role of the financial agent to clarify the costs
attached to the application which the investor will have to pay, just as the investor will
need to know the liquid value of the transaction. The investor should refuse to pay any
figure which had not been previously revealed or settled.
8. READ THE CONTRACT FIRST - in other words, be thoroughly aware of the
contract which is associated with the chosen investment. This terms of this contract
should be set out in a clear fashion and the financial agent will be expected to comply
with the rules it contains.
9. RECEIVE DOCUMENTATION TO PROVE THE INVESTMENT - once the type of
investment to be made and the sum of funds involved have been resolved, the

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 financial agent is obliged to provide the investor with a document (detailing the
characteristics of the investment and the sums involved) to vouch for his application.
There is a further obligation to inform the investor of the verifying documents which
will have to be forwarded to the institutions with which the investor deals, as a
guarantee that his wishes will be respected.

10. RECEIVE THE BONDS AND / OR SECURITIES STEMMING FROM THE

OPERATION - once the operation has been performed, after liquidation the investor
should immediately receive the bonds (or, if they are papers, appropriate proof) and
securities associated with the application, sale or redemption.

11. BE INFORMED OF RIGHTS ACCRUING FROM THE INVESTMENT MADE - the

financial agent should inform the investor of the complementary benefits connected with
the investment. For example, in the case of shares, the agent should point out the
existence of dividends, bonuses, split and reverse splits. In the case of ordinary shares, it
is important to explain such matters as voting rights, etc.

12. TO COMPLAIN - TO MAKE RIGHTS COUNT - if rules in force are not observed, the
investor is entitled to take a complaint without any reservations or fear of adverse reaction
to the contracted agent, institution, stock exchange, over-the-counter market or to the
CVM, the regulatory agency responsible for the inspection of the market in securities.

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 CONSUMER PROTECTION THROUGH LAW

Humans have mastered the art of availing services that fulfill their daily needs. Our day-to-
day lives revolve around exploiting the goods and services around us with an aim to lead a
comfortable and hassle-free life. When we avail these amenities, we become ‘consumers’.
The term effectively means that we consume the assets around us. We seem to have a peace
with a fact, and, for the most part, are not ashamed of describing our society as a consumers’
society, even if, at times, we regret that many cherished things–especially human beings and
human relations—are treated as just another consumer good; even if we are progressively
aware of the danger that the aggregate effect of our peacefully enjoyed consumer practices
may have on the environment and the working conditions of people living on the other side of
the world.
The concept of protection of rights of the consumers is not new; rather it is a practice that has
been present in the society and various countries in one form or the other historically. The
Old Testament mentions a form of consumer protection, and so does the Code of Hammurabi,
but only in a mercantile perspective. An early form of movement in defense of consumers
was born in the United States, where the bases for the birth and development of monopoly
and oligopolistic capitalism had started.1 The first consumer organizations were born in
Denmark in 1947 and Great Britain in 1955 where the Government created the Consumer
Council in order to enable consumers to express themselves on issues reserved to producers
and traders.2 But the real normative innovation came with the Single European Act; it
modified the Treaty of Rome3 by solidifying the role of the Economic and Social Committee,
to whom were attributed powers to safeguard the consumers. Over the years, some important
changes were made to the above-mentioned legislation that paved the way for a wider
consumer policy. But despite these additions, it still lacked a solid foundation that allowed
getting real consumer protection.
Consumer Protection through Constitution
The Constitution of India, which came into force on 26th January, 1950 is the primary
document that governs the legislative environment of the country by the virtue of its Articles,
Schedules and Parts. The People of India have solemnly resolved, through the Constitution to

1
G. Alpa, “Il Diritto dei Consumatori”, Bari, 1995, p. 12
2
F. Silva, A. Cavaliere, “I diritti dei consumatori e l’efficienza economica, in “La tutela del consumatore tra
mercato e regolamentazione”, a cura di F. Silva, Roma, 1996, p.12
3
http://www.bankepedia.org/index.php/it/129-italian/t/22858-trattato-di-roma-enciclopedia

9|Page
secure fellow citizens. Justice–Social economic, political, Liberty of–thought, expression,
faith and worship, Equality of–status and opportunity and to promote among them all
Fraternity, thus, assuring dignity of the individual and the unity and integrity of the nation.4
In the words of W. Friedman, the constitution endeavors to establish a social service nation
where, the state performs various functions such as protector, as a dispenser of social service,
as an industrial manager, as an economic controller, as an arbitrator, etc.5 Hence, although
there is no exclusive usage of the word “consumer” in the Constitution, the expressions
“social service”, is deemed to have taken consumer protection into its ambit. The well-known
consumerist Ralph Nadar has equated the word “Consumer” with the word “Citizen”.6 The
phrase “All Citizens” necessarily includes the interest of different sections of people and
various classes of consumers. Moreover, by virtue of Art. 14, all are treated equal in the eyes
of law. In other words, all the manufacturers, traders, producers, distributors, etc., are to
enjoy equal reward or when it comes to punishment, there can be no unequal treatment there
too. It is now well established that under Art. 14 of the Constitution, no state monopoly could
be arbitrary in its dealings with the consumer.7
Under Article 21 which guarantees right to life and personal liberty8 denial of an essential
service by the state might amount to violation of this right. Further, vide Art. 38, a consumer
is entitled to enjoy constitutional protection. It reads:
“The state shall strive to promote the welfare of the people by securing and protecting, as
effectively as it may, a social order in which justice, social, economic, and political, shall
inform all the institution of the national life. Under clause (b) and (c) of Article 39, the state
is duty bound to direct its policy towards securing the distribution of the ownership and
control of the material resources of the community in such away as “to serve the common
good”.9
Art. 42 and 43 further extends the duties of the State in this regard as the essence of the
provisions lies in the fact that the State is responsible to provide equal and humane conditions
for work to everyone and it must strive to build an economic legislation to make sure that the
workers who constitute the bulk of consumers are provided a decent standard of living. Art.

4
The Preamble, Constitution of India, 1950
5
W. Friedmann, Law in Changing Society (Abridged Edition 1959) at p. 378
6
Ralph Nadar as cited in Ross Cranston, Consumer and the Law 1978 p. 378
7
R.D. Shelly v. International Airport Authority of India, AIR 1979 S.C. 1628
8
Bandhua Mukti Morcha v. International Air Port Authority of India, AIR 1979
9
Art. 38, The Constitution of India, 1950

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46 deals with the consumers of educational services of the State and prohibits any kind of
exploitation and injustice.
In order to transform the constitutional mandates into reality and fulfill the aspirations of the
people of India, several legislations have been enacted during the post independent era
dealing with and protecting the rights of consumers and other interrelated persons. 10 So much
so, the main enactments which directly deal with the safeguard of consumers need a close
examination with a view to trace out the growth of consumer protection laws during the post-
independent period through statutory measures and to assess the efficacy of the Protection
being given thereunder to the consumers, individually or as a class or a group. Art. 47 of the
Constitution imposed a duty upon the state to improve public health and keeping in view this
mandate and to make drugs available at reasonable price to all the persons without any
discrimination, the Drugs (Control) Act, 1950 was enacted, and it came into force on 7th
April 1952.
Upon analyzing The Prevention of Food Adulteration Act, 1954 it can be pointed out that the
legislation does not provide any remedy to consumer or group of consumers in the case of
any injury or loss suffered by them due to use of such adulterated, misbranded or prohibited
article of food covered under the “Prevention of Food Adulteration Act, 1954.”11
Consumer Protection Act
Currently being the principle legislation when it comes to the laws for consumer protection in
India, the Consumer Protection Act was enacted in the year 1986 with an aim to provide
more protection to consumers against the evil practices of the market. It effectively deals with
the problems faced by an individual consumer and has no express provisions regarding
“maintaining or increasing supplies of any essential commodity or for securing their equitable
distribution, and availability at fair prices or dealing with persons indulging in hoarding and
black-marketing of, and profiteering in, essential commodities and with the evil of vicious
inflationary prices”.12 The Act is seen as an attempt to remove the helplessness of consumers
against the powerful and dominant players like the merchants and businessmen, often
described as the “network of racketeers”.13 This view was earlier presented by the Hon’ble
Supreme Court of India in the matter of Lucknow Development Authority vs. M.K.

10
CHAPTER-II HISTORICAL DEVELOPMENT OF CONSUMER PROTECTION LAW, www.shodhganga.com
11
D.N. Saraf “Legal Regulation of Pesticides problems and Perspectives” in C.E.R.C. Publication” – Pesticides
Residues in foods, 1969, p. 221
12
Supra 10.
13
Commentry on Consumer Protection Act, J.N. Barowalia, (4th edn., 2010), Universal Law Publishing Co., pp 15,
16

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Gupta.14 The Act of 1986 came into force with effect from 1 July 1987 in the whole of India
except the state of Jammu and Kashmir and is regarded as the Magna Carta in the field of
consumer protection for checking the unfair trade practices and ‘defect in goods’ and
‘deficiencies in services’.15

Types of Redressal Agencies under Consumer Protection Act, 1986

Types of Redressal District Forum State Commission National

Agency Commission
Composition Total three members, Three members, one Out of three
one President who is President who has members, one
or has been or is been a judge of High President who has
qualified to be a Court, other two been judge of
District Judge and members should have Supreme Court, other
out of other two adequate knowledge two members should
members, one should of accounts, have adequate
be a woman. economics, law, accounting
public affairs etc. knowledge.
One should be a
woman,
Establishment It is established by It is established by It is established by
State Government in State Government of Central Government.
each district of the each state.
state.
Cases to be Handled Cases in which cost Cases in which cost Cases in which cost
of goods or services of goods or services of goods or services
or compensation is or compensation is or compensation that
up to Rs. 20 lakh. from Rs. 20 lakh to 1 exceeds 1 crore.
crore
Superiority If a consumer is not Appeals against the Appeals against the
satisfied with the order of State order of National
decision given by Commission can be Commission can be
District Forum, he made to National made to Supreme
can apply further to Commission. Court.
State Commission.

14
AIR 1994 SC 787 (790)
15
J.N BAROWALIA, COMMENTARIES ON CONSUMER PROTECTION ACT, 1986, 13-15(2000)

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 INVESTOR PROTECTION THROUGH LAW

An investor is a person who allocates capital with the expectation of a financial return. There
are different kinds of investors, such as sweat equity investors, angel investors, venture
capital etc.

Sweat equity has been used to describe a party’s contribution to a project in the form of
effort, as opposed to financial equity which is a contribution in the form of capital. The party
contributing his effort is known as Sweat Equity Investors. In a partnership, some partners
may contribute to the firm only capital and others only sweat equity.
An angel investor or angel (also known as a business angel or informal investor) is an
individual with significant financial resources who provides capital for a business start-up.
Usually such investor provides capital in exchange of a percentage of return on his
investment or for partial ownership in the company and a say in management decisions.
Angels typically invest their own funds, unlike venture capitalists who manage the pooled
money of others in a professionally-managed fund.
Venture capitalists are able to provide larger amounts of capital, so this will only be done at a
later stage of development, or in exceptional cases, if the initial stage of the business is
presented as highly successful with great development opportunities.16 Money is provided by
investors to early-stage, high-potential, start-up companies, and in exchange owning equity in
the companies it invests in. This is a very important source of funding for start ups that do not
have access to capital markets. It typically entails high risk for the investor, but it has the
potential for above-average returns.17
Various provisions have been enumerated under the Companies Act, 2013 for the protection
of the Investors. Since the Companies Bill, 2012 received assent of the President of India on
the 29th August, 2013, and published in the Gazette on 30th August, 2013, the Companies
Act, 2013 came into force from 30th August, 2013. Thus the Companies Act, 1956 is
overridden by the Companies Act, 2013 and thus the provisions under the Companies Act,
2013 shall be applicable to all the Companies.

16
R. Chakrabarti, Corporate Governance in India-Evolution and Challenges, available at www.ssrn.com
17
S. Ghosh, Do Board Characteristics Affect Corporate Governance? Firm Level Evidence For India, available at
www.jstor.com

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Protection of investors means safeguard and enforcement of the rights and claims of a person
in his role as an investor. The capital of a company may be divided into Equity capital and
Debt capital. The persons who contribute to the equity capital of a company are called
investors. Investors have the voting rights in every matter of the company and are entitled to
get dividend. It is different from the creditors who contribute to the debt capital of the
company, who in turn get fixed rate of interest on the money so lent. Moreover, creditors
have limited voting rights only with respect to those matters which directly affect their
interest such as reduction of capital, winding up of company etc.
Investors are the insiders of the company. They are known as shareholders or members of the
company. It is to be noted that all members may not be shareholders, but all shareholders are
the members of the company. Section 41 of the Companies Act, 1956 provides that
“member” includes the subscribers of the memorandum of a company, every other person
who agrees in writing to become a member of a company and whose name is entered in its
register of members, and every person holding equity share capital of company and whose
name is entered as beneficial owner in the records of the depository. Section 2(55) of the
Companies Act, 2013 provides for the definition of „member‟ which is same as that given
under S. 41 of the Companies Act, 1956.
Various provisions incorporated for the protection of investors under Companies Act, 1956
and the Companies Act, 2013 are-
(1) Civil Liability for Misstatement in Prospectus.
Section 62 of the Companies Act, 1956 lays down civil liability for misstatement in
prospectus. Where a prospectus invites persons to subscribe for shares in or debentures of a
company, the director, promoter (i.e. party to the preparation of prospectus) and person who
has authorised the issue of the prospectus, shall be liable to pay compensation to every person
who subscribes for any shares or debentures on the faith of the prospectus for any loss or
damage he may have sustained by reason of any untrue statement included therein.
Any person who has subscribed for shares against public issue and sustained loss or damage
due to such misstatement is entitled to relief under this section.
Section 35 of the Companies Act, 2013 provides for the civil liability for misstatement in
prospectus. Where a person has subscribed for securities of a company acting on any
statement included, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof, the company and

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the following persons given below shall be liable to pay compensation to every person who
has sustained such loss or damage. The persons liable, along with the Company are-
(a) Director of the company at the time of the issue of the prospectus;
(b) Has authorized himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval of
time;
(c) Promoter of the company;
(d) Has authorised the issue of the prospectus; and
(e) An expert who is not, and has not been, engaged or interested in the formation or
promotion or management, of the company and has given his written consent to the issue of
the prospectus and has not withdrawn such consent before the delivery of a copy of the
prospectus to the Registrar for registration and a statement to that effect shall be included in
the prospectus.
The measure of damages for the loss suffered by reason of the untrue statement, omission etc.
is the difference between the value which the shares would have had but for such statement or
omission and the true value of the shares at the time of allotment.18 In applying the correct
measure of damages to be awarded to compensate a person who has been fraudulently
induced to purchase shares, the crucial criterion is the difference between the purchase price
and their actual value. It may be appropriate to use the subsequent market price of the shares
after the fraud has come to light and the market has settled.19 The period prescribed for a suit
for damage by shareholder is 3 years as per Article 113 of the Limitation Act, 1963.
In R. v. Lord Kylsant20, a table was set out in the prospectus showing that the company had
paid dividends varying from 8 to 10 percent in the preceding years, except for two years
where no dividend was paid. The statement showed that the company was in a sound
financial position but the truth was that the company had substantial trading loss during the
seven years preceding the date of prospectus and the dividends had been paid, not out of the
current earnings, but out of the funds which had been earned during the abnormal period of
war. The prospectus was held to be untrue due to the omission of the fact which was
necessary to appreciate the statements made in the prospectus.
(2) Criminal Liability for Misrepresentation in Prospectus

18
McConnel v Wright, (1903) 1 Ch 546
19
Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management) Ltd., (1997) 1 BCLC 350 (HL)
20
(1932) k.B. 442

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Section 63 of the Companies Act, 1956 lays down criminal liability for misrepresentation in
prospectus. Every person who has authorised the issue of the prospectus containing any
untrue statement shall be punishable with the imprisonment which may extend to two years,
or with fine which may extend to Rs. 50,000 or both.
Section 34 of the Companies Act, 2013 provides that where a prospectus contains any
statement which is untrue or misleading in form or context in which it is included or where
any inclusion or omission of any matter is likely to mislead, then every person who
authorizes the issue of such prospectus shall be punishable with imprisonment for a term
which shall not be less than 6 months but which may extend to 10 years and shall also be
liable to fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud.21
Thus, the imposition of liability on the persons involved in the preparation of a prospectus is
a measure to regulate the Initial Public Offering. This regulation is necessary to ensure
accuracy, adequacy and timeliness of the material information in relation to both the
prospectus and the concerned issuing company.
(3) Advertisement of prospectus.
Section 58A of the companies Act, 1956, as inserted by Companies Amendment Act, 1974,
states that deposits should not be invited without issuing an advertisement. There should be
an advertisement, including therein a statement showing the financial position of the
company and that the company is not in default in the repayment of any deposit or the
interest charged with respect to such deposit.
Section 30 of the Companies Act, 2013 lays down the provision for advertisement of
prospectus. Where an advertisement of any prospectus of a company is published in any
manner, it shall be necessary to specify therein the contents of its memorandum as regards the
objects, the liability of members and the amount of share capital of the company, and the
names of the signatories to the memorandum and the number of shares subscribed for by
them, and its capital structure.
(4) Investor Education and Protection Fund
Section 205C of the companies Act, 1956 provides for the establishment of Investor
Education and Protection Fund by the Central Government. It is a mandatory duty on the
Government.22 The amounts that shall be credited to the Fund are –

21
Section 447 of the Companies Act, 2013
22
A.K. Thej, Class Actions Under The Indian Companies Act, available at www.kluwerlawonlne.com

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(a) Amounts in the unpaid dividend accounts of companies;
(b) The application moneys received by companies for allotment of any securities and due for
refund;
(c) Matured deposits with companies;
(d) Matured debentures with companies;
(e) The interest accrued on the amounts referred to in clauses (a) to (d);
(f) Grants and donations given to the Fund by the Central Government, State Governments,
companies or any other institutions for the purposes of the Fund ; and
(g) The interest or other income received out of the investments made from the Fund.
Provided that no such amounts referred to in clauses (a) to (d) shall form part of the Fund
unless such amounts have remained unclaimed and unpaid for a period of 7 years from the
date they became due for payment.
Section 205C(3) of the Companies Act, 1956 provides that the Fund shall be utilised for
promotion of investors’ awareness and protection of the interests of investors in accordance
with such rules as may be prescribed.
Section 125 of the Companies Act, 2013 provides that Investor Education and Protection
Fund (“Fund”) shall be established by the Central Government. The following amounts shall
be credited to the Fund-
(a) The amount given by the Central Government by way of grants after due appropriation
made by Parliament by law in this behalf for being utilised for the purposes of the Fund.
(b) Donations given to the Fund by the Central Government, State Governments, companies
or any other institution for the purposes of the Fund.
(c) The amount in the Unpaid Dividend Account of companies transferred to the Fund under
sub-section (5) of section 124. Section 124 provides for the Unpaid Dividend Account.
Section 124(1) states that where a dividend has been declared by a company but has not been
paid or claimed within 30 days from the date of the declaration to any shareholder entitled to
the payment of the dividend, the company shall, within 7 days from the date of expiry of the
said period of thirty days, transfer the total amount of dividend which remains unpaid or
unclaimed to a special account to be opened by the company in that behalf in any scheduled
bank to be called the Unpaid Dividend Account.
Section 124(5) provides that where any money so transferred to the Unpaid Dividend
Account of a company which remains unpaid or unclaimed for a period of 7 years from the

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date of such transfer shall be transferred by the company along with interest accrued, if any,
to the Investor Education and Protection Fund established under section 125 (1).
(d) The amount in the general revenue account of the Central Government which had been
transferred to that account under sub-section (5) of section 205A of the Companies Act, 1956,
as it stood immediately before the commencement of the Companies (Amendment) Act,
1999, and remaining unpaid or unclaimed on the commencement of this Act.
Section 205A (5) of the Companies Act, 1956 prior to the abovementioned Amendment
provided that- Any money transferred to the unpaid dividend account of a company which
remained unpaid or unclaimed for a period of 3 years from the date of such transfer, shall be
transferred by the company to the general revenue account of the Central Government.
(e) The amount lying in the Investor Education and Protection Fund under section 205C of
the Companies Act, 1956.
(f) The interest or other income received out of investments made from the Fund.
(g) The amount received under sub-section (4) of section 38. Section 38 of the Companies
Act, 2013 provides that any person who makes or abets- (a) making of an application in a
fictitious name to a company for acquiring or subscribing for its securities, or (b) makes or
abets making of multiple applications to a company in different names or in different
combinations of his name or surname for acquiring or subscribing for its securities or (c)
otherwise induces directly or indirectly a company to allot, or register any transfer of,
securities to him, or to any other person in a fictitious name shall be liable under Section 447
i.e. shall be punishable with imprisonment for a term which shall not be less than 6 months
but which may extend to 10 years and shall also be liable to fine which shall not be less than
the amount involved in the fraud, but which may extend to three times the amount involved
in the fraud.
Where a person has been convicted under this section, the Court may also order disgorgement
of gain, if any, made by, and seizure and disposal of the securities in possession of, such
person.23 The amount so received through disgorgement or disposal of securities shall be
credited to the Investor Education and Protection Fund.24
(h) The application money received by companies for allotment of any securities and due for
refund
(i) Matured deposits with companies other than banking companies

23
Section 38(3) of the Companies Act, 2013
24
Section 38(4) of the Companies Act, 2013

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(j) Matured debentures with companies
(k) Interest accrued on the amounts referred to in clauses (h) to (j)
(l) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and
amalgamation for seven or more years
(m) Redemption amount of preference shares remaining unpaid or unclaimed for seven or
more years; and
(n) Such other amount as may be prescribed
The proviso to this section provides that the amount referred to in clauses (h) to (j) shall not
form part of the Fund unless such amount has remained unclaimed and unpaid for a period of
7 years from the date it became due for payment.

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 FINDINGS AND ANALYSIS

It can be said that though the redressal mechanism is in place in the country still there is lag
in solving their complaints on time and much to their satisfaction. Indian investors do not feel
safe about investing money in stock market. This may be due to multiplicity of authorities,
overlapping functions; lack of knowledge and understanding of the common investor about
these agencies and lack of enforcement have all acted against investor protection (Fernando,
2009). Recurrence of scams and frauds in regular intervals all these years has also shaken
investor’s confidence in stock market Few of such famous stock market scams and its modus
operandi have been cited below:
Satyam Scam (2009)- A Case of Corporate Fund
Satyam Computers Ltd. (popularly known as Satyam) was leading global business and
Information technology (IT) services company delivering consulting, system integration and
outsourcing solutions. It was incorporated on 24.6.87 with 20 employees by two brothers B.
Rama Raju and B. Ramalinga Raju.25 It grew to became the fourth largest software company
in India with a market capitalization of$3 billion $2.1 billion revenues in 2008.26 The
problem began when Raju announced in Dec, 2008 that in order to de-risk its core business,
the company’s Board had approved acquisition of two Maytas companies i.e. Maytas
Infrastructure Ltd. and Maytas Properties Ltd. The acquisition would mean an outflow of
$1.6 billion from company’s books. The negative reactions from both domestic as well as
foreign investors forced him to retreat within 12 hours27. The fact that Raju’s family held
owned 35% in Maytas Properties Ltd. and 36% stake in Maytas Infra made the suspicion
stronger. Share prices plunges by 55% on concerns about Satyam’s corporate governance28.
The World Bank charged Satyam of its involvement in data theft and bribing the Bank staff
on it 25 Dec, 2008 and banned it from its dealing for next 8 years. Mangalam Srinivasam the
longest serving independent Director on the Board resigned owning moral responsibility over
Satyam scam. This was followed by resignation from three more directors of the company.29
On 7th Jan, 2009, in letter to the Board, B. Ramalinga Raju confessed that there were inflated

25
India Today (New Delhi), January 26,2009, p 43
26
Bhattacharyya K. Asish, “ Satyam: How guilty are the independent directors?”,
http://www.business-standard.com/india/news/satvamhow-guiltv-areindependentdirectors/345912/,
January 12th 2009
27
The Pioneer (New Delhi), January 11, 2009, pi
28
Supra 25
29
The Directors were Vinod K Dham, M RammohanRao, and Krishna Palepu

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cash and bank of Rs. 5040 crore whereas the amount reflected in the books being Rs. 5361
crore.
It also showed receipt of accrued interest ofRs. 376 crore which was not in existence. The
books also reflected an understated liability of INR 1,230 crore and overstated debtors of INR
2,651 crore against the actual debt of INR 490 crore30. Raju also admitted that Satyam’s
profit were inflated over several years. He said that what started as marginal gap between the
actual operating profit and the reported figure attained unmanageable disproportionate
increase as the size of the company grew and every attempt to eliminate that gap failed (Parua
et. al., 2010).

Since its formation, the SEBI has developed and implemented a series of rules and
regulations aimed at protecting investors’ interests through ensuring transparency and
fairness in the market Its ultimate goal is the promotion of informed investor choice and
competent investor decision-making. The SEBI has formulated detailed regulatory
requirements governing the entire securities trading cycle from sophisticated investors trading
on their own account to retail investors receiving investment advice and asset management
services. The SEC requires public companies to disclose meaningful financial information to
the public. This provides a common pool of knowledge for all investors to judge for
themselves whether to buy, sell, or hold a particular security. The SEBI’s disclosure
requirements are not limited to accounting information presented in the prospectus and
annual reports. It extends to other issue-related communications such as advertisements. The
SEBI has laid much emphasis on eradicating the problems of illegal insider trading. The
investor education and awareness programmes of the SEBI have also started generating
positive results. However, much more needs to be done to bring order to the system. There
are plenty of rules and regulations in India, but much deficiency exists in the sphere of their
implantation. Proper attention should be paid to successful implementation of the applicable
rules and regulations.

30
“Raju admits fraud; Satyam books inflated of Rs 5040cr”,
http://wwwjmonevcontrol.com/news/business/raiu-admits-fraud-satvambooksinflatedrs5040cr_375049.html,
January 7th 2011.

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 CONCLUSION AND SUGGESTIONS

A consumer is the one who assumes to be treated like a King as they bring business to the
seller. Previously “consumer was asked to beware” but these days fingers have been pointed
to seller “let seller be beware” as due to policies introduced, government laws, consumer
protection, NGO and the increased competition in the market.
Consumer Protection is a term given to a practice wherein we need to protect the consumer
from the unfair practice, educating them about their rights and responsibilities and also
redressing their grievances.
There are n number of products in the market which are injurious to the health of the
consumer, adulteration, false weights, monopoly and unfair trade practice are some of the
issues that need to be tackled and are to be addressed to protect the consumer against it.
How to protect consumers:
1. By educating the consumer of their rights and responsibilities.
2. By redressal of their grievances.
3. By constituting a judicial body to provide them with the justice.
Consumer Complaints are the first step of redressal that the customer takes in the process of
consumer protection. Hence this is the most important step that the businesses need to handle
with extreme care and dexterity. And in the times of the internet consumer complaints and
feedback has more power than ever
Consumer complaints can actually help an organization improve their products and services.
It is a great form of feedback. It gives you a very fair measure of customer satisfaction. And
if consumer complaints are dealt with swiftly it actually helps with customer retention and
even improves the goodwill of your company.
So instead of treating consumer complaints as a hindrance or a headache, organizations can
treat it as a way to bring about improvement and grow their consumer base.
Though several provisions were provided under the Companies Act, 1956 for protection of
the interests of the shareholders, it did not keep pace with the changing business environment.
The new companies Act addresses several investor concerns and seeks to provide a more
hospitable environment for minority shareholders especially in the wake of scams and
scandals such as the one that hit the Satyam Computer Services in 2008.

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Under the new Act, a prescribed number of members and depositors can file application
against the management or the Company “if its affairs are conducted prejudicial to their
interest or the interest of the Company and may call for specified orders in such respect.”
An application may be filed or any other action may be taken under this section by any
person, group of persons or any association of persons representing the specified persons
affected by any act or omission. Further, where the members seek any damages or
compensation or demand any other suitable action from or against an audit firm, the liability
shall lie on the firm and of each partner who was so involved.
The companies Act also provides for protection for whistle-blowers. The Act contains
provisions to enable the directors and employees to report genuine concerns. Such a vigil
mechanism will provide for adequate safeguards against victimisation of persons who use
such mechanism and make provision for direct access to the chairperson of the Audit
Committee in appropriate or exceptional cases.
Investors are also entitled to an exit option if a company changes its objects. “Specific
provision has been formulated to provide exit opportunity by the promoters to the dissenting
shareholders being those shareholders who have not agreed to the proposal to vary the terms
of contracts or objects referred to in the prospectus,” Corporate Professionals said in a note
describing the provisions on the new law.
Analyzing the various provisions of the Companies Act, 2013, it can be concluded that
legislature has taken affirmative step to protect the interest of the investors. Since investor’s
contribution is very essential in raising fund by the company, care must be taken to address
their needs. However, the investors’ onus of proof of their reliance on the prospectus, and the
loss or damage being caused by the untrue statement included in the prospectus, are
impediments to the recovery of compensation for their investments in an IPO. But such
provision is necessary in order to balance the interest of the Company and the investors.

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 BIBLIOGRAPHY

STATUTES
1. Constitution of India, 1950
2. Consumer Protection Act, 1986
3. The Companies Act, 2013

BOOKS AND WEBSITES

1. Corporate Governance and Investor Protection. (2013, November). Retrieved 04 16,
2018, from Law Teacher: https://www.lawteacher.net/free-law-essays/business-
law/corporate-governance-and-investor-protection-law-essays.php
2. Choper, J. H. (2016). Consumer Protection Law in a Nutshell. Kolkata: West
Academic Publishing; 4 edition.
3. Clementi, G. L. (2012). Definition of Investor Protection. Retrieved 04 18, 2018, from
Lexicon: http://lexicon.ft.com/Term?term=investor-protection
4. Consumer Protection Act. (n.d.). Retrieved 04 16, 2018, from Virtual Learning
Environment: http://vle.du.ac.in/mod/book/view.php?id=12080&chapterid=24340
5. Fisher, J. (2013). The Law of Investor Protection. Delhi: Sweet & Maxwell; 2nd
edition.
6. Furtado, R. (2016, 09 13). Analysis of Consumer Protection Laws in India. Retrieved
04 18, 2018, from Ipleaders: https://blog.ipleaders.in/analysis-consumer-protection-
laws-india/
7. Intro and Inportance of Consumer Protection. (n.d.). Retrieved 04 16, 2018, from
Toppr: https://www.toppr.com/guides/business-studies/consumer-protection/intro-
and-importance-of-consumer-protection/
8. Jayarajan, P. (2012). Consumer Rights and the Consumer Protection Act. Mumbai:
Shri Pathi Rajan Publishers; Fifth Edition.
9. Kanchi. (2015, 04 30). Investors' Protection. Retrieved 04 16, 2018, from Academike:
https://www.lawctopus.com/academike/investors-protection/
10. Ranjan, R. (2016, 09 14). Provisons for the Protection of the Investor under the
Companies Act, 2013. Retrieved 04 16, 2018, from Ipleaders:
https://blog.ipleaders.in/provisions-protection-investor-companies-act-2013/

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