How does SEBI exercise control over stock brokers under section 11 of the Act?

INTRODUCTION

For trading with all affairs of the development and order of the securities markets and preservation of the investors, the SEBI (Securities Exchange Board Of India)  was instituted on 12th April 1988 as non- sanctioned body by the Administrative Resolution of the Government. SEBI was constituted as a statutory body on 21st February 1992.

Section 11(1) of the SEBI Act provides the objective: that there should be the protection of investor’s interests in securities and to encourage the growth of securities markets. Before the SEBI Act, 1992 the three principal statutes ruling the securities markets were-

  • The Capital Issues (Control) Act, 1947
  • The Companies Act, 1956
  • The Securities Contract (Regulation) Act, 1956

NEED FOR REGULATIONS

It can be studied by the different participant’s view point in the securities market:

(i) From Companies issuing securities

  • Correct pricing of the securities so that the issuers will not favour the other financial methods.

    TYPES OF COSTS

  1. Direct
  2. Indirect
  • So, there must be a limitation of costs while issuing securities.

(ii) From the Investors point of view

  • Preservation of investors interests.
  • Easy and low-cost transactions
  • Speedy liquidness

(iii) Intermediaries view point

Many facilities and better services are provided frequently by the intermediaries which help in reducing the cost of the transaction.

(iv) Stock Exchanges

For the development of the financial sector stock exchanges need a strategy that would provide simple liquidity and be able to cope up with the changing business environment.

STRUCTURE AT SEBI

(i) SEBI is made up of body corporate

(ii) SEBI operates through a Board of Directors.

(iii) Each division is lead by an executive director i.e. there are five divisions at SEBI.

(iv) SEBI has its branches in Chennai, Delhi, Kolkata, Ahmedabad and Mumbai being the Head Office.

(v) Two consulting bodies have been established one for primary and one for secondary markets.

SEBI FUNCTIONS

The functions performed by SEBI are provided under sections 11(1), 11(2), 11(2A) and 18. The role and power of the Board are broad and functional and have the power to deal in an effective manner to preserve the investor’s interests and shareholders. Section 11(1) provides that there should be the assurance of investors titles in securities and to encourage the growth of securities markets. Section 11(2) provides the measures for protection which includes-

  • Managing the stock market exchanges
  • Listing and controlling the functioning of

Stock brokers

Sub brokers

Share transfer agencies

Merchant dealers

Underwriters

  • Encouraging self-regulatory organisation
  • Investors education to be promoted
  • Administering examination and audits of the intermediaries
  • Measures can be taken by the Board to conduct the inspection of any book or any document

Case: SEBI v. Shivam Investment And (in re) Enour Software Ltd, in this it was decided by the Court that SEBI can undertake the course of action under section 11 to conserve the interests of the investors and to control the securities market.

Case: Virendra Bansal v. Securities and Exchange Board of India and Another held that the Scheme (Interest Liability and Regularization) 2004, floated by SEBI is valid and enforceable in agreement with the Act, 1992 so the Gujarat High Court decided it as a combined effect of the details.

POWERS OF SEBI

Securities Exchange Board of India underlines the following powers:

(1) Stock exchanges and delegates

Trading in securities, SEBI has extensive powers with regard to stock exchanges and intermediaries. SEBI can ask for information concerning the business transactions for a survey or another object.

(2) To inflict financial penalties

SEBI possesses the authority to urge financial penalties on capital markets intermediaries.

(3) Initiate actions

SEBI is empowered to initiate actions in order to assign functions like setting up the guidelines or introducing certain rules.

(4) Power to control insider trading

SEBI is empowered to control insider trading or can maintain merchant bankers role.

(5) The securities Contracts Act delegated its several powers to SEBI for its effective regulation.

(6) SEBI has the controlling power of stock exchanges, mutual funds, unfair trade practices related to securities.

Case: Securities Exchange Board of India v. Ajay Agarwal In this, it was stated that there was the distortion of facts in the company’s prospectus and investors were misled. While having the authority SEBI restricted the Directors of the Company to access the securities as the facts were  misquoted during the issue of public shares. So, it was held by the Board that Section 11 cannot be invoked.

Case: KSL and Industries Ltd v. Securities Exchange Board of India, It was said  that under section 11 of the SEBI Act, 1992 has the authority to provide directions to the persons correlated with the securities market. SEBI has the power to exercise the right over any corporation which was connected with the security market which would consist of many individual members associated. If any breach is bound by any company associate then SEBI would be empowered to take steps and change such guidance as are suitable for the company.

SECTION 11(C): POWER TO ORDER INVESTIGATION

The Board under section 11(C)(1) has sufficient grounds to believe that-

  • The investors dealing with the transaction in securities which are dangerous to them and to the securities market or,
  • Any person so connected with the securities market infringed the provisions of the Securities Exchange Board of India Act.

The Board may at any time order in writing the Investigating Agency to review the proceeding or actions of such agent or the persons so connected with the securities market.

Section 11(C)(2) renders that it must be the responsibility of every administrator, director or employees of the company to preserve and produce to the Inspecting Authority all the relevant information on books, registers or other records.

Section 11(C)(3) administer that the Investigating Authority may keep all the records in its possession provided by the employees of the company for six months and thereafter return it.

Section 11(C)(4) states that the Investigating Authority shall provide the certified copies when the person on whose behalf reports are presented.

Section 11(C)(5) provides that any person whether manager, managing director, officer or any person connected with the securities market, can be examined on oath.

Section 11(C)(6) deals that if any person declines to provide fair cause or denies

  • To produce any record to the Investigating Authority or,
  • To supply certain information or,
  • To appear personally to the Research Agency.

Then, he shall be condemned with arrest for one year a term which may extend to one year.

Section 11 (C)(7) states that the person to be examined provides the notes of examination signed by such person to use it as evidence against him.

SECTION 11(D): POWER TO TERMINATE AND SUSPEND TRANSACTIONS

Section 11(D) states that after conducting inquiry if it is found that any person is violating the rules and regulations of the Board or violating any provision of the Act, the Board may pass an order to refrain and cease such person from committing such violations.

REFERENCES

1. https://shodhganga.inflibnet.ac.in/bitstream/10603/7800/9/09_chapter%203.pdf

2.https://shodhganga.inflibnet.ac.in/bitstream/10603/190231/6/chapter%204…%20final%20changes%20doc.pdf

3. https://kalyan-city.blogspot.com/2010/11/powers-of-sebi-securities-and-exchange.html

4. https://shodhganga.inflibnet.ac.in/bitstream/10603/7800/12/12_chapter%206.pdf


 

Aishwarya Says:

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