Securities Exchange Board Of India (SEBI)

Securities Exchange Board Of India (SEBI)

The securities markets which emerged from periphery into the mainstream of the financial markets from 1980s, and especially since the beginning of 1990s. The equity markets in India have witnessed a spectacular growth in terms of its ability to raise resources and to allocate with efficiency.

But this process requires strict regulatory compliance, due to possible malpractices by unscrupulous companies. Although a strict regulatory compliance policy was in place before the liberalization of the Indian economy, the focus was on greater control. The legal framework before 1990s was highly fragmented, both in terms of laws and acts under which the regulations allowed the functioning of Government departments.

For example, the Capital Issue (Control) Act, which was administered by the Controller of Capital Issue (CCI) in the Ministry of Finance required all companies to obtain prior approval for issue of capital to the public. Under this arrangement the pricing as well as the features of the capital structure such as debt-equity ratios were controlled by the Government. Similarly, the Securities Contract Regulation Act was administered by the Directorate of Stock Exchanges, also the Ministry of Finance. Its aim was to prevent undesirable transactions in securities issued and traded. It empowered the Government of India to recognize\derecognize stock exchanges, stipulate rules / byelaws for their functioning; compel listing of securities by public companies, etc. Such a system of regulation and control inadequate in the context of liberalized economy.

Thus, the next phase of reforms in the capital market was initiated. This required for an integrated and focused regulatory framework with its administration by an independent / autonomous body. The Capital Issue (Control) Act was repealed in 1992 and office of the Controller of Capital Issue (CCI) was abolished. The Securities Exchange Board of India was established in April, 1988 by a regulatory order and acquired a statutory status in 1992.

With the announcement of the liberalization of the Indian economy in 1991, by way of reforms package, the volume and value of business in the primary and secondary segments of the capital markets increased. But this also was accompanied by stock market scams. The prevailing regulatory framework was fragmented and required integration.

It was in this perspective that the Securities and Exchange Board of India (SEBI) which was in existence from 1988, was given statutory powers to regulate the capital markets. The SEBI obtained legal regulatory powers by way of an ordinance issued on 30th January, 1992. The ordinance conferred wide ranging powers on SEBI including:

• • Prohibition of insider trading.
  • Regulation of acquisition of substantial shares.
  • Takeover of business.
  • Recognition of stock exchanges.
  • Membership criteria.
  • Powers to regulate other specific functions of capital markets.

This enabled the repealing of the Capital Issue (Control) Act and the abolition of the office of the Controller of Capital Issue (CCI) in 1992. The statutory powers to SEBI were conferred on 21st February, 1992. The objectives of establishing SEBI includes investor protection, promotion and development of capital markets while simultaneously regulating the functioning of the securities markets, risk containment, broad basing the markets by enlargement of participation, maintaining market integrity and promoting long-term investments.

The ordinance that was passed was repealed, after the SEBI Act was enacted on 4th April, 2009. Thus, the SEBI Act of 1992 along with the Companies Act, 1956, ensured development of specific powers to SEBI. The regulatory powers of SEBI were further enhanced through the Securities Law (Amendment) ordinance of Jan 1995. The SEBI functions as an independent body under the Ministry of Finance and is accountable to Parliament. Thus, SEBI functions as an independent body and are accountable to the Indian Parliament. There are specific statutes for governing the markets.

 

Scope Of SEBI Act

The SEBI Act lays down the constitution for the management of SEBI. The SEBI board of members consists of Chairman, two members from amongst the officials of the ministers of the Central Government dealing with finance and law, one member from amongst the officials of the RBI (constituted under the RBI Act, 1934), two other members appointed by the Government of India – who shall be professionals and inter alia, have experience and knowledge of the securities markets.

In its endeavor to protect the investors’ interests in securities markets, and to promote the development of capital markets.

Following comprise of the powers and functions of SEBI:

• • Regulating the stock exchanges: extending/cancelling their recognition.
  • Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors, and other intermediaries associated with the securities markets.
  • Registering and regulating the functioning of the Collective Investment Schemes, including mutual funds – portfolio management services, etc.
  • Promoting and regulating self regulatory organizations.
  • Prohibiting fraudulent and unfair trade practices in the securities markets.
  • Promoting investor education and trading practices in the securities markets.
  • Prohibiting insider trading in securities markets.
  • Regulating substantial acquisition of shares and takeovers of companies.
  • Conducting external audit, inquiries by calling for specific information, undertaking inspection activities of stock exchanges and intermediaries, self-regulatory organization in the securities markets.
  • Performing functions under the SCRA, 1956 and as directed by the Government of India.
  • Levying fees or the other charges from intermediaries in the capital markets.

The SEBI has powers to implement the following actions:

• • Call for information from any intermediary or market participant.
  • Inspect books of depository participants, issuers or beneficiary owners.
  • Suspend or cancel a certificate of registration granted to a depositary participant or issuer.
  • Request the RBI to inspect books of a banker to an issue.
  • Suspend or cancel the registration of the baker to an issue.
  • Suspend or cancel the certification issued to the custodian of securities.
  • Suspend or cancel the registration of a foreign institution investor.
  • Investigate and inspect the books of accounts of and records of insiders.
  • Investigate an acquirer, a seller, or merchant banker for violating takeover rules.
  • Suspend or cancel registration of a merchant banker to an issue.
  • Investigate the functioning of mutual funds, their trustees, and asset management companies.
  • Investigate any person dealing in securities on complaint of contravention of trading regulation.
  • Suspend or cancel registration of errant portfolio managers.
  • Suspend or cancel the certification of registrars and share transfer agents.
  • Suspend or cancel the certification of brokers who fail to furnish information of transactions in securities or who furnish false information.

Since then, it has emerged as an autonomous and independent statutory body with the following objectives:

• • To protect the interest of investors in securities.
  • Promote the development of the securities markets in India.
  • Regulate the securities markets in India.

In order to achieve the above objectives, SEBI was provided with special statutory powers based on the following legislation:

• • The SEBI Act.
  • Securities Contract Regulation Act.
  • Depositories Act.
  • Delegated powers under the Companies Act.
  • SEBI supervises the markets based on the specific regulations and guidelines of schemes.

 

SEBI Securities Markets Regulations And Guidelines Regulations

• • SEBI (Stock Brokers and Sub-Brokers) Regulations.
  • SEBI (Prohibition of Insider Trading) Regulations.
  • SEBI (Merchant Bankers) Regulations.
  • SEBI (Portfolio Managers) Regulations.
  • SEBI (Registrars to an Issue and Share Transfer Agents) Regulations.
  • SEBI (Underwriters) Regulations.
  • SEBI (Debenture Trustees) Regulations.
  • SEBI (Bankers to an Issue) Regulations.
  • SEBI (Foreign Institutional Investors) Regulations.
  • SEBI (Custodian of Securities) Regulations.
  • SEBI (Depositories and Participants) Regulations.
  • SEBI (Venture Capital Funds) Regulations.
  • SEBI (Mutual Funds) Regulations.
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.
  • SEBI (Buyback of Securities) Regulations.
  • SEBI (Credit Rating Agencies) Regulations.
  • SEBI (Collective Investment Schemes) Regulations.
  • SEBI (Foreign Venture Capital Investors) Regulations.
  • SEBI (Procedure for Board Meeting) Regulations.
  • SEBI (Issue of Sweet Equity) Regulations.
  • SEBI (Procedure for Holding Enquiry by Enquiry Officers and Imposing Penalty) Regulations.
  • SEBI (Prohibition of Fraudulent and Unfair Trading Practices relating to Securities Markets) Regulations.
  • SEBI (Central Listing Authority) Regulations.
  • SEBI (Ombudsman) Regulations.
  • SEBI (Central Database of Market Participants) Regulations.
  • SEBI (Self Regulatory Organization) Regulations.
  • SEBI (Criteria for Fit and Proper Person) Regulations.

Guidelines

• • SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Regulations.
  • Guidelines for opening up of Trading Terminals abroad.
  • SEBI (Disclosure and Investor Protection Guidelines).
  • SEBI (Delisting of Securities) Guidelines.
  • SEBI (STP Centralized Hub and STP Service Providers) Guidelines.
  • Comprehensive Guidelines for Investor Protection Fund / Customer Protection Fund at Stock Exchanges.

Schemes

• • Securities Lending Schemes
  • SEBI (Informal Guidance Scheme).

 

Role Of SEBI

SEBI prohibits unfair and fraudulent trading practices – such as insider trading, price manipulation, price rigging, circular trading, etc. It also regulates substantial acquisition of shares and takeovers. In order to safeguard the integrity of the markets and to provide investor protection, there is a comprehensive real-time surveillance mechanism. The 3-tier level of regulation involves the Government of India under the Ministry of Finance, SEBI and the Stock Exchange themselves. Stock exchanges are the first level of regulation from the traders and broker-members point of view. The stock exchanges themselves have surveillance cells, which track malpractices. SEBI also keeps a constant vigil on the trading activities. News and rumours appearing in the media as discussed in the weekly surveillance meetings with the representatives of stock exchanges. In exceptional circumstances, SEBI initiates special investigation on basis of reports received from various sources. In order to increase the stringency of surveillance measures, SEBI has signed an agreement with a consortium consisting of the following entities: HCL Technologies Ltd., Securities Markets Automated Reach and Training and Surveillance Limited, Australia. The agreement was to establish a comprehensive “Integrated Market Surveillance System” (IMSS) in March, 2006. IMSS would generate automatic alerts that would help the regulator to identify and track market manipulations, insider trading activity, etc.

In order to resolve the overlapping of regulatory control between multiple regulators, a High Level Coordination Committee (HLCC) has been formed under the chairmanship of the RBI Governor. The Committee meets at regular intervals to resolve any issues. There are also Standing Technical Committee (STC) for RBI regulated, SEBI regulated and IRDA regulated entities. These Standing Technical Committee deliberate on inter-regulatory issues and provide input for the HLCC meetings.

 

Enforcement Of Regulation

Strict enforcement of regulations is done through investigations and adjudications. If after a preliminary investigation, it is found necessary, then a formal investigation team is formed. In such circumstances, SEBI may call for specific information from market participants and institutions, compelling production of documents and examination of witness, etc. There is an elaborate procedure for adjudication and prosecution of participants / agencies responsible for violation of the regulations. The Chairman and Whole Time Members of SEBI are vested with statutory power to impose penalties, issue directions, suspend / cancel a registration, etc. Also a set of adjudicating officers work independently and have powers to pass orders. These orders are also posted on SEBI website for public information.

The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal (SAT). The orders of SAT are appealable before the Supreme court.

SEBI has powers to register and regulate all intermediaries in capital markets. It has the powers to levy penalty in case of violations of the Act, Rules or Regulations within its purview. SEBI can also conduct inquiry into the role of intermediaries, in case of scams or other market abuses. The list of intermediaries under its jurisdiction is given in the above table.

Broadly, the responsibilities of SEBI under the SEBI Act, 1992 can be summarized as follows:

• • Register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisors, and such other intermediaries associated with the securities markets.
  • Register and regulate the working of the depositories, depository participants, custodian of securities, foreign institutional investors, credit rating agencies, or any other intermediary associated with the securities markets as notified by SEBI.
  • Register and regulate the working of venture capital funds, collective investment, mutual funds.

The prior mentioned intermediaries can operate in securities markets, only after obtaining certificate of registration from SEBI. The regulator has the powers to suspend or cancel a certificate of registration that has been issued. It has sub-committees for specifying the aggregate disclosure of critical information from market intermediaries. SEBI also has powers to promote and regulate Self-Regulatory Organization (SRO).

 

Supervisory Role Of SEBI

SEBI has the authority to inspect the books of accounts and records of depository participants, registrar to a primary issue and other market intermediaries. SEBI can also issue show cause notices to companies on the basis of reports submitted by the depositories. SEBI periodically inspects stock exchanges, with the following objectives.

• • To ensure that the stock exchange provides an environment that is conducive for all the market participants, i.e., the market should be fair and equitable for all market participants, without any bias.
  • To ensure that the stock exchange has complied with the necessary rules for the grant of recognition to the stock exchange, under the SCRA.
  • To ensure that the stock exchange’s organizational structure, rules, bye-laws, regulations are within the purview of the regulatory structure as well as the SCRA.
  • To ensure that the stock exchange has implemented the directions, guidelines and instructions issued by SEBI.
  • To ensure that the stock exchange have adequate trading and surveillance capabilities, exchange risk management systems, and management control systems in place.

Inspection of exchange involves a thorough review of existing operations, management, organizational structure and administrative control. The inspection of the brokers and sub-brokers is periodically conducted by SEBI. SEBI has also laid down regulations for audit to be conducted by the stock exchanges, on its members’ accounts. The disclosure requirement framework has been put in place, to maintain checks and balances on the trading activities. The books of accounts maintained by the intermediaries including the subsidiaries of stock exchanges (that have become members of larger exchanges themselves), need to adhere to the SCRR.

SEBI also conducts periodic inspection of the depositories. In order to verify the technology used by market intermediaries, a system audit is also conducted. SEBI has also laid down guidelines for conducting the system audit by stock exchanges. The audit also covers the front-end Trader Work Stations used by brokers.

SEBI has established market surveillance mechanisms for ensuring safety and integrity of the markets. Even though the frontline surveillance responsibility lies with the stock exchanges, SEBI has a separate surveillance department which monitors market movement (volatility in prices) and analyzes trades between specific market participants. In case of any malpractice or market abuse that is identified, SEBI takes immediate action with the assistance of the stock exchanges and depositories. The surveillance cells of the stock exchanges also play a very important role in ensuring market discipline. In this perspective, violation in open interest position limits, circuit filter limits and other validation and verification parameters are tracked on a real-time basis. Market abuses such as insider trading, circular trading, price rigging, price manipulation, etc. is closely monitored. Inspection of mutual funds is done through independent chartered accountant firms.

SEBI has initiated several measures to facilitate Investor protection and investor education. In this regard, SEBI has published booklet, “Quick Reference Guide for Investor” – so that investors who are uninitiated in the securities markets would be able to understand and identify the intricacies involved in securities trading. SEBI also publishes advertisements, make public announcements and also conducts investor awareness campaigns of the overall benefit of investors. SEBI also has formed an Investor Grievances Redressal and Guidance Division, for the benefit of investing public.

In order to promote the concept of corporate governance among companies, SEBI has informed stock exchanges to incorporate corporate governance norms as part of the listing agreement of companies. Good corporate governance leads to better confidence among the public. SEBI appointed a committee under the chairmanship of Shri. Kumaramangalam Birla of the Aditya Birla Group and a former member of the SEBI board. Based on the committee recommendations, code of ethics and corporate governance standards has been framed. Subsequently, another committee under the chairmanship of Shri. N. Narayana Murthy, Chairman and Chief Mentor, Infosys was constituted. SEBI has also proposed corporate governance ratings – the credit rating agencies, CRISIL and ICRA, have done analysis in this regard.

 

Achievements Of SEBI

Some of the major achievements of SEBI in its 20 years of existence are as follows:

• • SEBI has formulated new programs, policies and has continuous reviewed the capital market in India for the overall growth and development.
  • Under SEBI’s stewardship, the secondary markets have grown from an average daily turnover in stock exchanges of less than Rs. 500 Crores to more than Rs. 100,000 Crores.
  • The primary markets have developed in a major way.
  • Computerization facilitated electronic trading. SEBI has been instrumental in ensuring effective regulations and governance of markets.
  • Improvements in the clearing and settlement systems.
  • Establishment of depositories – facilitating dematerialization.
  • Immediate and prompt action on malpractices and entities involved in the same – this has instilled confidence among the public.
  • SEBI streamlined and simplified and issue procedure in primary markets.
  • Overseeing the development of mutual funds as investment vehicles – regulation of mutual funds was a major challenge, which SEBI has lived up to.
  • SEBI’s regulations on substantial acquisition and takeovers has ensured a framework to be put in place for mergers, amalgamations and takeovers.
  • SEBI has demarcated the functioning, roles and responsibilities of market intermediaries such as merchant bankers – they are prohibited from undertaking leasing and bills discounting activities.
  • SEBI has also been responsible for implementing the rolling settlement system.

 

Other Services

SEBI has also launched a Securities Markets Awareness Program (SMAP) as a proactive measure to ensure investor education. Based on the Narayana Murthy Committee Report on Corporate Governance, companies are expected to adhere to standards prescribed for the same.

The Office of Investor Assistance and Education (OIAE) is the interface between SEBI and investors – for taking complaints from investors and to pursue the same either directly or through the Investor Complaint Cell of the concerned department.

 

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