SECURITIES AND EXCHANGE BOARD OF INDIA

SEBI’s BACKGROUND

The government of India passed two legislations that governed the securities market till early 1992 were the Capital Issues (Control) Act, 1947 (CICA) and the Securities Contracts (Regulation) Act, 1956 (SCRA). The CICA fails to provide a stock market which is free from unfair trade practices. The capital market has witnessed tremendous growth in recent times, lots of unfair trade practices also started in stock markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. However, need was felt to have a single authority to regulate and administrative body in April 1988, so Government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI). As Parliament was not in session, and there was an urgent need to instil a sense of confidence in public in the growth and stability of the market, the President promulgated the Securities and Exchange Board of India Ordinance, 1992.

INTRODUCTION

In 1992, a multicore securities scam rocked the Indian financial system.1 The then existing regulatory framework was found to be fragment and inadequate and hence, a need for an autonomous, statuory, and integrated organization to ensure the smooth functioning of capital market was felt. To fulfill this need, the Securities and Exchange Board of India (SEBI), Which was already in existence since April 1988, was conferred statutory powers to regulate the capital market.

The Securities and Exchange Board of India (SEBI) was established on 12 April 1988 as a non-statutory body through an Administrative Resolution of the Government for dealing with all matters relating to the regulation and development of the securities market and investor protection and also to advise the government on all these matters. It has been monitoring the activities of stock exchanges, mutual funds, merchant bankers, etc.

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years 1995, 1999, 2002 and 2010 to meet the requirements of changing needs of the securities market and Responding to the development in the securities market.

1 HARSHAD MEHTA CASE.

OBJECTIVES OF SEBI

The preamble defines the object of SEBI, ‘An Act to provide for the establishment of a Board 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’.2

The SEBI has been entrusted with both the regulatory and development functions. The

objectives of SEBI are as follow:-

Investor protection,

Promoting the development,

Regulating the securities.

Promotion of efficient services by brokers, merchant bankers and other intermediaries so that

they become competitive and professional. Investor protection focuses on making sure that

investors are fully informed about their purchases that insider activity does not threaten the

worth of some portfolios for the enrichment of others, and those holding are not simply lost in

instances of brokerage failure.

SEBI AS REGULATOR

STRUCTURE OF SEBI

SEBI was a non-statutory body without any statutory power. By the amendment in 1995, the

SEBI was given additional statutory power by GOI.

Management of the Board.-3

(1) The board shall consist of the following members, namely:-

(a) a Chairman;

2 PREAMBLE OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 19923 Section 4 of SEBI ACT, 1992

(b) two members from amongst the officials of the Ministry of the Central Government

dealing with Finance and administration of the Companies Act, 1956;

(c) one member from amongst the officials of Reserve Bank;

(d) five other members of members of whom at least three shall be the whole-time

members,

to be appointed by the Central Government.

FUNCTIONS OF SEBI4

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three

important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

1. Protective Functions:-

These functions are performed by SEBI to protect the interest of investor and provide safety of

investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating

or depressing the market price of securities. SEBI prohibits such practice because this can

defraud and cheat the investors.

(ii) It Prohibits Insider trading:

4 NCERT, BUSINESS STUDIES- XII

Insider is any person connected with the company such as directors, promoters etc. These

insiders have sensitive information which affects the prices of the securities. This information is

not available to people at large but the insiders get this privileged information by working

inside the company and if they use this information to make profit, then it is known as insider

trading, e.g., the directors of a company may know that company will issue Bonus shares to its

shareholders at the end of year and they purchase shares from market to make profit with

bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying

securities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to induce

the sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities

of various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following

steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies

cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and

imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to

market prices.

2. Developmental Functions:-

These functions are performed by the SEBI to promote and develop activities in stock exchange

and increase the business in stock exchange. Under developmental categories following

functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable

approach in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:-

These functions are performed by SEBI to regulate the business in stock exchange. To regulate

the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries

such as merchant bankers, brokers, underwriters, etc.

(ii) These intermediaries have been brought under the regulatory purview and private

placement has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer

agents, trustees, merchant bankers and all those who are associated with stock exchange in any

manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

POWER OF SEBI

(i) Power to make rules5

(ii) Power to make regulations6

(iii) Power relating to stock exchanges & intermediaries

(iv) Power to impose monetary penalties

The SEBI Act originally provided for penalty of suspension and cancellation of a certificate of registration of an intermediary. SEBI was empowered to adjudicate a wide range of violations and impose monetary penalties on any intermediary or other participants in the securities market. The amendment Act listed out a wide range of violations along with maximum penalties leviabla.

(v) Power to initiate action in functions assigned

(vi) Power to regulate insider trading

(vii) Power under Securities Contact Act

(viii) Power to regulate business of stock exchanges

(ix) Power to adjudicate7

(x) Power to Central Government to issue directions8

(xi) Power of Central Government to supersede the Board9

(xii) Power to remove difficulties10

5 Sec. 29 of SEBI ACT6 Sec. 30 of SEBI ACT7 Sec. 15I of SEBI ACT8 Sec. 16 of SEBI ACT9 Sec. 17 of SEBI ACT10 Sec. 34 of SEBI ACT

Securities Appellate Tribunals: An efficient and effective system of regulation calls not only for firmness, but also for fairness. The amendment Act provided for establishment of one or more SATs to hear the appeals from the orders of the adjudicating officers. Anybody not satisfied with the orders of the SAT can prefer an appeal to the High Court. This ensured fairness in the process of adjudication.

PENALITIES UNDER SEBI ACT

15A Penalty for failure to furnish information, return, etc.

15B Penalty for failure by any person to enter into agreement with clients

15C Penalty for failure to redress investors’ grievances

15D Penalty for certain defaults in case of mutual funds

15E Penalty for failure to observe rules and regulations by an asset management company

15F Penalty for default in case of stock broker

15G Penalty for insider trading

15H Penalty for non-disclosure of acquisition of shares and take-overs

15HA Penalty for fraudulent and unfair trade practices

15HB Penalty for contravention where no separate penalty has been provided

ACHIEVEMENTS OF SEBI(1) Guidelines to Companies

For the protection of the investors SEBI had issued guidelines to the companies (old as well as new). SEBI was given the full power to regulate and control over the stock exchange. In the present time, SEBI has introduced a code of advertisement via all the possible sources for the public for ensuring fair and true statement disclosure and also made underwriting of issue optional subject to certain terms and conditions.This is for the protection of small investors due to misleading information. If the companies don’t followed the guidelines then SEBI can take action against that company.

(2) Portfolio Management Services If we see the past time the infringed PMS started from the year of 1993. The SEBI framed regulation of PMS keeping that securities scam in mind. We can say that this is a good start on the part of SEBI.

(3) Mutual funds

On January 20, 1993 the mutual funds were placed under the control of SEBI. SEBI by its regulations is trying to make mutual funds in healthy investment lines.

(4) Guidelines for the intermediaries

SEBI control the unfair trade practices which is operate by the intermediaries in securities market. By the different guidelines SEBI protect the interest of the investors.

(5) Action for delays in transfers and refunds

Many companies are providing its investors delays in transfer of shares and delays in refunds of public issue money, SEBI prohibited it for gives protection to investors and avoids their exploitation by the delayed payment by the companies.

(6) Takeovers and mergers

SEBI had issued guidelines as regards takeovers and mergers of the companies. It is for the purpose of the transparency in acquisitions of shares to make it fair. It also avoid the unfair takeovers and mergers.

(7) Foreign institutional investors

This is in pursuance of the government SEBI regulate Foreign institutional investors that the SEBI started the registration of FII.

(8) Control on Merchant Banking

Merchant bankers are now to be authorized by SEBI. Now they have to followed guidelines given by SEBI and also norms and a code of conduct now the merchant bankers become more accountable.

(9) Orderly functioning of Stock Exchange

SEBI is improving the transparency in the securities market. SEBI is the reason of the growth of Indian Stock Exchange.

(10) Guidance of investors

SEBI publish numbers of guidelines for the investors for make them aware regarding the investment scheme and provide education to the investors.

MAJOR CONTROVERSIES

(I) SEBI V. INSURANCE REGUALOTORY AND DEVELOPMENT AUTHORITY11

In 2010, SEBI issued show cause notices to many life insurers and asked them to stop introducing unit-linked insurance plans, without its permission as these hybrid insurance products mimicked mutual fund schemes that are regulated under SEBI’s collective investment scheme norms. The order gave rise to a battle between the capital markets regulator and the insurance regulator. The President of India had to pass an ordinance amending the Collective Investment Scheme norms and keeping ULIP under IRDA. Subsequently, IRDA went on an overdrive for a complete makeover of ULIP regulations.

(I) MUTUAL FUNDS

After 2009, SEBI abolish the agent commission for the distribution of financial product, many

industry and legal expert criticized that order of scrapping of entry fees in mutual funds. The

order provided many advisors to sell the other products that offered better incentives, resulting

in stagnation of assets under management.

(II) PARTICIPATORY NOTE

In October 2007, in the wake of an appreciating rupee, SEBI proposed to curb issuance of

participatory notes (P-notes), a favorite investment route used by foreign institutional investors

(FIIs). SEBI was concerned about the quality of money flowing into India through P-notes but

many say it was an attempt to curb excessive dollar flows. The BSE’s benchmark Sensex crashed

1,700 points the very day after the announcement and it led to suspension of trading for an

hour. The crash forced the finance minister to clarify that the government was not against FIIs

and there would be no immediate ban on P-notes.

(III) SAHARA

 In November 2010, SEBI barred two Sahara group firms from raising money from the public in

any manner, citing violations of capital-raising norms. Another directive followed in June 2011,

asking Sahara firms to return money to investors with 15% interest. This marked the beginning

of a legal battle between the regulator and the company as the latter argued that since unlisted

entities were raising funds, SEBI has no jurisdiction over them. The case was heard in the

11 SEBI v. IRDA o Unit linked insurance plans,

Securities and Appellate Tribunal and later went up to the Supreme Court, which directed Sahara

to refund the money. (Sahara has filed a defamation case in a Patna court against Mint’s editor

and some reporters over the newspaper’s coverage of the company’s disputes with Sebi. Mint is

contesting the case.)

(IV) MCX-SX12

In a bid to ensure compliance of exchanges with market infrastructure regulations, Sebi got into

a bitter legal spat with India’s newest stock exchange MCX-SX in 2009. The regulator fought a

three-year long battle with the promoters of the exchange, alleging the latter violated norms by

attaching put options in its share purchase agreement with investors and not following

permissible routes for capital reduction. While Sebi alleged that MCX-SX promoters did not

comply with ownership and governance norms required by an exchange, MCX-SX claimed that

it had not violated any such norm, that it took prior permission of other regulators, and

followed permissible routes for capital reduction. Later, MCX-SX was given a license to start

equity trading and given three years to reduce promoter holding in the exchange.

The crisis of confidence did not strike suddenly. In fact, SEBI's journey to ignominy is a result of a series of failures over the past decade. As its longest serving chairman, Mehta has to share the blame for some of the failures. With the hunt for a new SEBI chief on and an organizational overhaul on the cards, it's important to find out what went wrong with India's first regulator. Why did the capital market watchdog not even whine when unscrupulous brokers and financiers repeatedly took investors for a ride?A major allegation against Mehta is that he seldom acted on his own. It took either a government fiat or a scam for SEBI to act. Be it Ketan Parekh and his associates diverting thousands of crores of rupees to rig the prices of some scrips or the rampant misuse of badla (the system of carrying forward a transaction by paying interest on the outstanding) at the CSE that eventually triggered payment problems across other exchanges, SEBI slept through most major capital market crises.Mehta resisted the introduction of rolling settlements which would have brought down the trading cycle to a day and ensured a uniform trading cycle in all stock exchanges. Rolling settlements would have killed badla and Mehta was not keen to perform the last rites of the age-old carry-forward instrument.Mehta was also opposed to derivatives (products that allow speculators to take a bet on the future price of a stock), though formally he maintained his commitment. As a result, futures

12 Multi Commodity Exchange Stock Exchange (MCX-SX)

and options trading could be launched only last year, instead of 1996 when it was first proposed."By resisting rolling settlements and derivatives, Mehta ensured that critical reforms in the markets were stalled," says a senior capital market functionary. There are many who feel that SEBI did not back modernization to the extent it should have.Says Ajay Shah, assistant professor at the Indira Gandhi Institute of Development Research: "If SEBI had shown the vision to go ahead with rolling settlements and derivatives in 1996, a lot of the problems the markets have faced today would not have happened."It took a scam in March for the finance minister to announce the introduction of rolling settlements in Parliament. Under pressure from the Government, Mehta banned badla. Around the same time, allegations about the UTI's role in propping up Ketan Parekh's favorite shares were flying thick and fast.But SEBI refused to look into the UTI's transactions, with Mehta claiming that the UTI did not come under the regulator's purview. He forgot, perhaps, that any transaction in the capital markets can be scrutinized by SEBI and even individuals who are not registered with it can be probed for insider trading or price rigging.By this time, SEBI's credibility had taken a hit and the action had shifted from Mittal Court in Mumbai to North Block in Delhi. With the Government tightening the screws on SEBI, the watchdog sacked broker directors at BSE and CSE, announced action against BPL, Sterlite, Videocon and Harshad Mehta, and barred broking outfits suspected of involvement in the scam from trading. However, the tough measures had come too late.SEBI also failed to check the problem of companies raising money from the public and then vanishing. "It took SEBI and the Department of Company Affairs three years to decide who would take action against vanishing companies," says Prithvi Haldea, primary market expert who is also on SEBI's Primary Market Committee. Interestingly, this committee has not met for a year.To be fair, some of SEBI's failures are rooted in the law that governs the regulator. Unlike in the US where the regulator investigates a case and then hands over the matter to a judicial authority, in India SEBI does everything on its own. It's a situation where the policeman framing the charges and the judge deciding the case is the same person."We never wanted to be the policeman and the judge. In fact, half the problems arose because of this," says Mehta. Still, repeated pleas for amending the SEBI Act have gone unheeded. The question is not whether SEBI has enough powers but whether it has the right powers. As Mehta points out, many of the orders passed by SEBI are struck down by courts. "What do we do? How do we take action?" he asks.Another flaw in the working of SEBI is that there are no full-time board members. This gives the SEBI chairman overriding powers, something many people feel can be dangerous. Mehta, who can't help but feel victimised, says the real issues have been marginalised. “We only highlight individuals and never issues. Take the case of a multiplicity of regulators. There are overlaps

which are taken advantage of. If the country's capital markets are to be regulated properly this issue will have to be resolved," he argues. Internally, SEBI has had a brain drain. Its top was packed with IAS and Revenue Department officials, which created dissent among the cadre. The grumbles snowballed into charges of favoritism and corruption.A number of young professionals quit SEBI to move over to higher salaries at FIIs. After the scam, the Government woke up and refused to give further extensions to officials on deputation. But Mehta asked for three more deputationists to replace those who had gone back. Nothing changed, much to the demoralization of the staff. SEBI hasn't been able to effectively use technology for market surveillance. Even though price movements can be monitored to detect an inordinate rise in a scrip's price, SEBI officials are dependent on exchanges for transaction details. "If regulators want to take out human discretion, they must rely more and more on technology," says Jayanth Varma, professor at IIM Ahmedabad and former SEBI member.

CHALLENGES AHEAD

With the advent of new technology, SEBI will have to continuously upgrade its manpower and improve its capacities to deal with situations that can arise. Creating a more robust framework to successfully deal with the menace of insider trading and strict implementation of buyback norms will also play an important role in assuring a sustained investor interest. SEBI would further have to strongly handle the issue of fraudulent collective investment schemes. Although SEBI has approved a proposal to penalize unregistered CIS entities and has decided to declare the illegal mobilization of funds as a fraudulent and unfair trade practice; the long term results of these steps will only ensure their effectiveness. To ensure that FIIs continue to invest in India and to channelize household savings into the capital market will be another challenge. Moreover, SEBI is currently facing one of its biggest legal battles against two Sahara companies regarding refund of around 24,000 crore rupees.

CONCLUSION

The capital market of India requires monitoring rather than over-regulation. The SEBI can ensure a free and fair market and take India into the league of major global capital markets in the next round of reforms. The SEBI has to balance between the costs of regulation and market development. The should be cross-border cooperation between various regulators and regulators and industry.