Empowering SEBI: Case For Statutory Framework To Compensate Victims Of Corporate Fraud

The Securities and Exchange Board of India (SEBI) is the market regulator focused on protecting investor interests. However, its role in settling disputes between investors and companies is still debated. While SEBI regulates and enforces rules, it does not have a solid system for providing remedies that focus on investors.

Since the Securities and Exchange Board of India Act was introduced in 1992, SEBI has slowly expanded its power over intermediaries and listed companies. However, it has not developed adequate remedies for individual investors. The main issue lies in the conflict between SEBI's duty to maintain market integrity and the private nature of investor-company disputes. These disputes usually involve concerns like manipulative selling, failures in disclosure, or governance issues. Such matters often impact specific investors rather than the entire market. SEBI's enforcement powers, recognized by the Supreme Court, have not been effectively transformed into systems for ensuring compensation for investors who have incurred losses.

Statutory Framework

SEBI gets its authority from the Securities and Exchange Board of India Act, 1992. Section 11 focuses on investor protection, but the Act does not establish a direct way for investors to seek compensation. This limitation shapes how SEBI operates.

More specifically, the design focuses on regulatory oversight, investigations, and enforcement actions, like issuing orders to intermediaries, imposing market bans, and applying fines. It does not provide a private way for investors to claim damages directly through SEBI. While Section 11 broadly aims to protect investors and promote the securities market, the specific powers granted to SEBI mainly allow it to act in the public interest and deter misconduct across the market.

Without a clear legal mechanism for individual investors to pursue compensation directly from SEBI or through a SEBI-run forum, there is a gap in remedies. Although SEBI can investigate and penalize wrongdoing, individual investors generally seek monetary relief elsewhere, such as through civil court actions. This gap is particularly evident in situations where many retail investors experience the same losses due to a single series of actions, as there is no integrated way for them to seek collective or coordinated compensation under SEBI's framework.

Judicial Recognition of SEBI's Powers

In the case of Sahara India Real Estate Corp. Ltd. v. SEBI, the Supreme Court recognized SEBI's extensive powers to protect investors, including the ability to order disgorgement of profits. Similarly, in SEBI v. Ajay Agarwal, the Court highlighted SEBI's role in prevention and remedy.

In N. Narayanan Vs. Adjudicating Officer, SEBI the Supreme Court affirmed that SEBI has the duty and authority to act against directors who manipulate financial results to mislead investors, reinforcing fiduciary duty and market integrity. The Court upheld a two-year market ban and a ₹50 lakh penalty, concluding that creating artificial market volume via fraudulent statements is market abuse. However, these decisions mainly address regulatory enforcement rather than personal dispute resolution.

The Supreme Court articulated SEBI's powers broadly: SEBI is seen as a blend of legislative, executive, and judicial authority capable of creating guidelines to protect investors and the securities market. Nonetheless, the remedies suggested by the Court, like disgorgement, are primarily focused on removing illegal gains from wrongdoers and ensuring regulatory compliance, rather than compensating specific investors based on their losses. Thus, even though Sahara and Ajay Agarwal confirm that SEBI can take preventive and remedial actions, they frame "remedy" within a public law context focused on deterrence. What is still missing is a legal framework that enables SEBI to provide investor-specific remedies, whether through distribution of disgorged funds or through other organized systems within a coherent adjudicatory process.

'Limits of Investor Redress

The SCORES platform (an online grievance redressal facilitation platform provided by SEBI) acts as an administrative tool without binding decision-making authority. Investors often receive procedural updates rather than actual remedies. As it currently stands, SCORES mainly helps file, forward, and track investor complaints. It directs grievances to the relevant entity and monitors responses within set timeframes, but it does not serve as a forum for adjudicating disputes or awarding compensation. This means resolution on SCORES often depends on whether a complaint has been "addressed" administratively, not whether an investor has received full compensation or a clear ruling on liability and loss.

The difference between "procedural closure" and "substantive remedy" is key to understanding the limits of investor redress in the current SEBI system. A complaint may be marked as closed simply because a response was given or steps were taken, yet the main issue concerning wrongdoing, breach, or compensation might still be unresolved from the investor's perspective. This highlights the need to distinguish SEBI's complaint-handling process from a real adjudicatory system that results in enforceable remedies for investors.

Comparative Perspective

United States: The SEC conducts enforcement actions alongside class actions and restitution funds to ensure investor compensation.

United Kingdom: The Financial Conduct Authority (FCA) collaborates with the Financial Ombudsman Service (FOS), which provides binding compensation awards.

Australia: The Australian Securities and Investments Commission (ASIC) works with both court-based and ombudsman-led dispute resolution systems.

In comparison to these countries, India does not have a unified system for compensation. The common element in these models is the presence of a securities regulator working alongside established structures for investor redress. This includes specialized ombudsman institutions, court-supervised restitution mechanisms, and collective action options coordinated with regulatory enforcement. In all these cases, the enforcement tools of the regulator are linked to a broader framework that allows individual and small investors to convert findings of wrongdoing into real compensation.

In contrast, the Indian system, as seen in SEBI's legal powers and complaint processes, keeps regulatory enforcement and individual remedies more separate. This separation explains why SEBI has focused on enforcement but not on restitution: even when successfully taking enforcement action, the path from a regulatory decision to actual financial recovery for individual investors is neither straightforward nor firmly built into SEBI's processes.

Need for Reform

Reforms should include:

• Statutory compensation mechanisms
• Online dispute resolution systems
• Mandatory arbitration frameworks
• Transparent distribution of disgorged funds

A statutory compensation mechanism tied to the SEBI Act would align legal provisions with Section 11's investor protection goals by providing a clear route for connecting securities-law violations to monetary compensation for affected investors. This system could work alongside SEBI's existing enforcement powers, maintaining deterrence while addressing the current deficiencies in remedies.

Additionally, incorporating online dispute resolution and arbitration into securities law would offer manageable ways to resolve high-volume, low-value investor disputes that do not suit traditional litigation, while making sure that outcomes are binding and enforceable. Finally, a transparent framework for distributing disgorged amounts—focused on compensating affected investors when possible—would close the current gap between enforcement-based disgorgement and restoration for investors.

SEBI's evolution needs to shift from enforcement to restitution. A modern securities regime must not only regulate markets but also address investor harm. The expansion of powers shows that there are legal foundations for a strong, investor-focused remedial framework. However, the design so far has favored market-wide enforcement over organized compensation systems. Aligning the Indian model with practices from other countries will require statutory and institutional reform. It will also need a shift in perspective that views redress and restitution as essential parts of securities regulation rather than as mere side effects of enforcement.

Author is an Advocate practicing at Supreme Court of India. Views are personal.