SEBI : INDIAN CAPITAL MARKET REGULATOR

 History

SEBI was officially established by Government of India in 1988 and bestowed with statutory powers in 1992 with SEBI Act 1992 passed by the Parliament.Initially, SEBI had no statutory power but was given statutory status and powers through an ordinance promulgated on January 30, 1992.In 1995, the SEBI was given additional statutory power through an amendment to the Securities and Exchange Board of India Act, 1992.In April, 1988 SEBI was the sole regulator of capital markets in India under a resolution of the Government.During its establishment in 1988, it had more limited powers.It took place of the Controller of Capital Issues, which regulated the securities markets under the Capital Issues (Control) Act of 1947, passed just months before India gained independence from the British.

In 1988 SEBI’s initial capital was Rs 7.5 million, provided by its promoters (IDBI, ICICI, IFCI). This amount was invested and the amount of interest covers SEBI’s day-to-day expenses. All the legal powers to regulate the Indian capital market correspond to SEBI itself.

REASONS OF EMERGENCE OF  SEBI:

In the late 1970s, the capital market became a well-known term in India. During the fall of the 1970s and the boom of the 1980s, the people of India preferred to work in the capital market as the market was trending. However, with the popularity of the shares, a series of malpractices such as price manipulation, unofficial private placements, non-compliance with the provisions of the Public Limited Companies Act, insider trading, violation of the rules and regulations of the stock market, delay in the delivery of shares and many others.

On this occasion, the Government of India realized the need to establish an authority to reduce these malpractices and regulate the functioning of the Indian stock market, as the majority of the Indian population began to lose their trust in the stock market brand. The Government felt the immediate need to establish a regulatory body to regulate its operation and find solutions to all the problems that the market was going through, as people were losing interest in the market. This led to the establishment of the India Security and Exchange Board.

MEANING AND OBJECTIVE-

All the matters in the Securities market in India is regulated, maintained and looked after by the Securities and Exchange Board of India (SEBI). SEBI received statutory powers through the SEBI Act of 1992.It is the major regulator of securities markets in India and a  counterpart of the Securities and Exchange Commission (SEC) in the U.S.The objective of SEC is “to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto.”SEBI’s responsibility is to ensure that the stock market in India operates in an orderly manner. It is made to protect the interests of investors and traders in the Indian stock market by providing a healthy environment in stocks and to promote the development and regulate the stock market. Furthermore, one of the main reasons for establishing SEBI was to prevent bad practices in the Indian capital market.

ABOUT SEBI:ROLE AND FRAMEWORK:

Indian capital markets are regulated and supervised by the Ministry of Finance, the Securities and Exchange Board of India, and the Reserve Bank of India.The Ministry of Finance looks over and oversees the capital market through the Capital market section of the Department of Economic Affairs. The division is responsible for formulating policies related to the growth and orderly development of the securities markets, that is, equities, debt and derivatives, as well as protecting the interests of investors. Regulation) Act 1956 and India Securities and Exchange Board Act 1992.

SEBI is the principal regulator for Stock Exchanges in India. SEBI is the main body which has tried to ensure that investors are protected from any malpractice and regulates the country’s capital market efficiently for its smooth functioning. All financial intermediaries permitted by their respective regulators to participate in the Indian securities markets are governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required to register with DDPs in order to participate in the Indian securities markets.

SEBI has a corporate structure that includes different departments, all controlled by a department head. Some of the departments are foreign portfolio investors, human resources, collective investment schemes, commodity and derivatives market regulation, legal affairs department and many more departments.The organizational structure of SEBI is made up of 9 members: a chairman is elected by the Government of the Union of India, 2 members are officials of the Union Ministry of Finance, 1 member of the RBI, other 5 members who are elected by the Government of the Union of India.

Functions:

Protective Functions- SEBI performs these functions to protect the interests of investors and financial institutions. Protection functions include verifying price manipulation, preventing insider trading, promoting fair practices, raising awareness among investors, and prohibiting fraudulent and unfair business practices.

Regulation – SEBI has numerous regulations for different intermediaries, there are different regulations for underwriters, brokers, merchant bankers, depositories etc which heavily determines the health of the stock market. It designs the guidelines and code of conduct for financial intermediaries and regulates mergers, amalgamations, and takeovers takeover of companies.SEBI also conducts inquiries and audit of stock exchanges. It acts as a registrar for the brokers, sub-brokers, merchant bankers and many others. The capital market market participants, have to pay fees to SEBI if the regulator asks for it. Apart from controlling the intermediaries, SEBI also regulates the credit rating agencies. It supervises the working of various organisations trading in security market and also to ensure

Development Functions- Within SEBI’s list of development functions, one of them is providing training to intermediaries. SEBI promotes fair trade and the reduction of bad practices. It also educates and sensitizes investors about the stock market through the use of funds available in the IEPF. It promotes research and investigations to ensure the achievement of the above objectives.The stock market is one of the most crucial indicators of the economic health of a country. If people lose faith in the market, the number of participants will go down. Furthermore, the country will also start to lose FDI and FII considerably, which will substantially hamper the country’s foreign exchange inflows.

The security market was a place of manipulation and personal profit before SEBI became a statutory body. One of the famous Indian stock market scams was “Harshad Mehta scam.”After SEBI came into power, stock market affairs started becoming healthier and more transparent. Even after the establishment of SEBI as a statutory body,  there were certain loopholes which were misused against the investors to commit huge scams like  “Ketan Parekh scam”.Although unfair activities occur in the Indian capital market even today, their frequency is quite less. Furthermore, the statutes and regulations of the stock market are updated over and over again. Therefore, day by day, SEBI is becoming more and more strict with its authority.

ROLE:

1.Issuer of securities-They are publicly traded companies that raise funds by issuing shares. SEBI not only protects the investors but also supervises primary market so that the issuers cannot indulge in any malpractice and the initial public offering is carried out effectively and in a good health.

2.Players in the capital market i.e. the traders and investor-Capital markets work only because traders exist. SEBI is responsible for ensuring that investors do not become victims of any fraud or manipulation of the stock market.

3.Investor Protection:Attention should be paid to the following four aspects: fairness and transparency, safeguarding of clients’ money, competent and honest service, integrity of the market and quality of the markets.

4. Financial Intermediaries-They act as mediators in the stock market and ensure that stock market transactions proceed smoothly and safely. SEBI monitors the activities of the stock market intermediaries like brokers and sub-brokers.

5. SEBI has adopted a number of revolutionary steps to re-establish the credit of capital market, which include the Control on Utilizing’ Application Amount’ having no Interest by Companies Releasing Public Issues,Share Price and Premium Determination,Underwriters,Control on Share Brokers,Insider Trading, SEBl’s Control on Mutual Funds, Control on Foreign Institutional Investors.Hence, it can be concluded that the SEBI plays a the supreme role in the smooth operation by regulating the market, protects investors and trims down the fraudulent activities so that, not only the big players can gain profit but an individual who is a retail investor can also gain from the market without being deceived.

6. Innovation-While curbing any undesirable trends, the regulatory framework should not stifle the innovation that is the source of all economic progress, even more so because financial derivatives represent a rapidly developing new area, aided by advances in information technology. risk to which they are exposed, other participants in derivatives trading are attracted to the speculative opportunities such trading offers due to inherently high leverage. For this reason, the risk posed by derivatives traders and speculators is high. This is indicated by some of the widely publicized setbacks in other countries. Therefore, the regulatory framework for derivatives trading, in all its aspects, has to be much stricter than the one that exists for spot trading. The scope of regulation should cover derivatives exchanges, derivatives traders, brokers and sellers, derivative contracts or products, derivatives trading rules, and the derivatives clearing mechanism.   

The four main laws that govern the stock market are:

(a) the SEBI Act of 1992 establishing the SEBI to protect investors and develop and regulate the securities market;

(b) the Companies Act of 1956, which establishes the code of conduct for the business sector in relation to the issuance, award and transfer of securities and the disclosures to be made in public issues;

(c) the Securities Contracts (Regulation) Act of 1956, which establishes the regulation of securities transactions by controlling the stock exchanges;

(d) the Depositories Act of 1996, which provides for the electronic maintenance and transfer of ownership of demat securities.

The government has framed rules under the SCRA Act, SEBI, and the Trustees Act. SEBI has developed regulations under the SEBI Law and the Depositories Law for the registration and regulation of all market intermediaries and for the prevention of unfair commercial practices, use of privileged information, etc. to be met by market participants.

The powers of the Department of Economic Affairs under the SCRA are also simultaneously exercised by SEBI. The powers with respect to contracts for the sale of securities, gold-related securities, money market securities and derivative securities of these securities and ready forward contracts on debt securities are simultaneously exercised by the RBI. The SEBI Law and the Depositories Law are administered primarily by SEBI. The rules and regulations under the securities laws are administered by SEBI.The powers of the Corporations Law relating to the issuance and transfer of securities and the non-payment of dividends are administered by the SEBI in the case of public listed companies and public companies that propose that their securities be listed on the stock market. The SEBI also has two advisory committees for the primary and secondary markets, to provide advisory inputs in the formulation of policies and regulations. These committees are made up of market agents, recognized investor associations and eminent persons linked to the capital markets. These committees are not statutory and their advice is only advisory.

 3.3 SEBI-Important Regulations affecting Capital Markets

The regulations of SEBI have not stayed unvaried but have evolved with the requirements of changing time. Security and Exchange Board of India has reformed the capital market in a way that protects the investors from the fraudulent activities and manipulation of the major market players.SEBI has taken the utmost care towards the investors by providing, investors education. It has also included study material on its website for easy accessibility which can be used by anyone to make an informed decision.It has also published study material for investors to understand the security market deeply.In addition to it, investors can also lodge online complaint on the platform of SCORES against any registered entity, listed company or about any manipulation and fraudulent activity. The brokers have to be now registered under SEBI and any stock exchange, on the other hand, the sub brokers have been asked to act as ‘authorised person’.The clearing and settlement are to be done by clearing corporation through digital method which has now reduced the delays in the settlement.

Before the initial public offering the companies first approach the underwriter who underwrites or subscribes to certain number of shares when the existing shareholders do not subscribe to the security, so that the company can raise full amount of capital. The capital adequacy requirement has been fixed at rupees twenty lakh. Any connected person or a person having some secret information which can affect the prices of the shares and uses such information for buying, selling, agreeing to subscribe to the shares or communicates or allow access to it, is called insider trading. SEBI has significantly prevented the fraud and manipulation by banning insider trading under, Security Exchange Board Of India (Prevention of Insider Trading) Regulations, 2015.

Mutual fund is a fund created by issuing units to investors and invests it in stock market, money market or gold related instruments. SEBI has also taken under it the mutual fund regulation which has increased the flexibility and supervision on the mutual funds. Every mutual fund has to be registered under SEBI.The unfair trade practices has been prevented by introduction of a regulation by SEBI, Securities and Exchange Board Of India (Prohibition of Unfair Trade Practices relating to the Securities Market), 1955. The regulations provides for investigation with regard to selling, buying, subscribing of the shares or dealing in the securities market. Even if a transaction has been made through a broker even then proceeding can be against the person suspected to be involved in unfair trade practices.

On evaluation of the Annual report of SEBI of the year 2018-19, the following are the observations:

In context of primary securities market, certain new regulations were introduced. The introduction of SEBI (Buy-back of Securities) Regulations, 2018 (Buyback Regulations) has incorporated Sections 68 and 70 of the Companies Act. Certain relaxations have been provided to companies undergoing the Corporate Insolvency Resolution Process wherein under the SEBI (SAST) Regulations, 2011, acquisitions pursuant to an approved resolution plan have been exempted from the proviso that prohibits acquisition beyond maximum permissible non-public shareholding under Regulation 3 (2) of Takeover Regulations. Other regulations such as SEBI (ICDR) Regulations, 2018, SEBI (LODR) Regulations, 2015 have also been modified in order to accommodate the interest of companies undergoing CIRP. The transfer of securities is now mandatory to be held in the dematerialized form to improve ease, efficiency and transparency. SEBI has introduced a payment mechanism through UPI alongwith the provision of blocking funds through ASBA facility to reduce the time period for listing of issues. A framework was laid out to establish a Innovators Growth Platform to accredit investors. In addition to that, SEBI has permitted the distribution of dividends through depositories, extended the system driven disclosures to non-promoters under Regulation 29(1) and 29(2) of SAST Regulations by non-promoters.

In the Secondary Securities Market, SEBI has issued guidelines to facilitate ease of doing business in international financial services centre (IFSC) by permitting the clearing corporations operating in IFSC to invest their own funds in AAA rated foreign sovereign securities, apart from central government securities, fixed deposit receipts of banks and liquid schemes of debt mutual funds, subject to a limit of 10 per cent of the total investible resources, excluding funds lying in core settlement guarantee fund of the clearing corporation. Guidelines have been issued by SEBI to enhance the interoperability framework between clearing corporations, revision of haircut in government securities and review of risk management framework for financial market infrastructure. A review of regulations with respect to stock markets, depositories and clearing corporations under the recommendations of the Gandhi Committee was done and permitted eligible domestic and foreign entities to hold upto 15 per cent shareholding in case of depository and clearing corporation, as is the case for stock exchanges. The concept of sponsor has been eliminated and the existing sponsors have been given five years to reduce their shareholding to 15 percentage. Separate BSDA limit has been introduced for boosting participation in the debt holdings in demat account for retail individual investors by relaxing the limits. SEBI has also encouraged the use of Artificial Intelligence and Machine Learning and has directed MIIs to submit quarterly report of the mechanisms incorporated by them.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

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We are also running a series Inspirational Women from January 2021 to March 31,2021, featuring around 1000 stories about Indian Women, who changed the world. #choosetochallenge

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