SEBI_Role_and_Functions

8/7/2019 SEBI_Role_and_Functions

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SEBISEBI ROLE ANDROLE AND

FUNCTIONSFUNCTIONS


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Why do we need a regulatory body forWhy do we need a regulatory body for

Investor protection in India?Investor protection in India? India is an ` informationally ' weak marketIndia is an ` informationally ' weak market

Boosting capital market demands restoring theBoosting capital market demands restoring theconfidence of lay investors who have been beatenconfidence of lay investors who have been beaten

down by repeated scamsdown by repeated scams

Progressively softening interest rates and an underProgressively softening interest rates and an under

performing economy have eroded investment options,performing economy have eroded investment options,

and require enhanced investing skills.and require enhanced investing skills.


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Missionof SEBIMissionof SEBI

Securities & Exchange BoardSecurities & Exchange Board of Indiaof India (SEBI) formed(SEBI) formed

under the SEBI Act, 1992 with the prime objective ofunder the SEBI Act, 1992 with the prime objective of

Protecting the interests of investors in securities,Protecting the interests of investors in securities,

Promoting the development of, andPromoting the development of, and

Regulating, the securities market and for mattersRegulating, the securities market and for matters

connected therewith or incidental thereto.connected therewith or incidental thereto.

Focus being the greater investor protection, SEBI hasFocus being the greater investor protection, SEBI has

become a vigilant watchdogbecome a vigilant watchdog


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FUNCTIONS OFSEBIFUNCTIONS OFSEBI Section 11 of the Securities and Exchange Board of IndiaSection 11 of the Securities and Exchange Board of India

Act.Act.

Regulation Of Business In The Stock ExchangesRegulation Of Business In The Stock Exchanges

A review of the market operations, organizational structureA review of the market operations, organizational structureand administrative control of the exchangeand administrative control of the exchange

All stock exchanges are required to beAll stock exchanges are required to be Body CorporatesBody Corporates

The exchange provides a fair, equitable and growingThe exchange provides a fair, equitable and growingmarket to investors.market to investors.

The exchanges organisation, systems and practices are inThe exchanges organisation, systems and practices are inaccordance with the Securities Contracts (Regulation)accordance with the Securities Contracts (Regulation)Act (SC(R) Act), 1956Act (SC(R) Act), 1956


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FUNCTIONS OFSEBIFUNCTIONS OFSEBIB) Registration And Regulation Of The Working OfB) Registration And Regulation Of The Working Of

IntermediariesIntermediaries

Portfolio ManagersPortfolio Managers

SubSub-- BrokersBrokersUnderwritersUnderwriters

Stock brokersStock brokersMerchant BankersMerchant Bankers

Secondary MarketSecondary MarketPrimary MarketPrimary Market

regulates the working of the depositories [participants], custodians of

securities, foreign institutional investors, credit rating agencies and such

other intermediaries


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FUNCTIONS OFSEBIFUNCTIONS OFSEBIC) Registration And Regulation Of Mutual Funds, VentureC) Registration And Regulation Of Mutual Funds, Venture

Capital Funds & Collective Investment SchemesCapital Funds & Collective Investment Schemes

AMFIAMFI--Self Regulatory OrganizationSelf Regulatory Organization--'promoting and protecting the'promoting and protecting theinterest of mutual funds and their unitinterest of mutual funds and their unit--holders, increasing publicholders, increasing public

awareness of mutual funds, and serving the investors' interest byawareness of mutual funds, and serving the investors' interest by

defining and maintaining high ethical and professional standards indefining and maintaining high ethical and professional standards in

the mutual funds industry'.the mutual funds industry'.

Every mutual fund must be registered with SEBI and registration isEvery mutual fund must be registered with SEBI and registration is

granted only where SEBI is satisfied with the background of thegranted only where SEBI is satisfied with the background of thefund.fund.

SEBI has the authority to inspect the books of accounts, records andSEBI has the authority to inspect the books of accounts, records and

documents of a mutual fund, its trustees, AMC and custodian wheredocuments of a mutual fund, its trustees, AMC and custodian where

it deems itit deems it necessarynecessary


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SEBI (Mutual Funds) Regulations, 1996 lays down the provisions forSEBI (Mutual Funds) Regulations, 1996 lays down the provisions forthetheappointment of the trustees and their obligationsappointment of the trustees and their obligations

Every new scheme launched by a mutual fund needs to be filed with SEBIEvery new scheme launched by a mutual fund needs to be filed with SEBIand SEBI reviews the document in regard to the disclosures contained inand SEBI reviews the document in regard to the disclosures contained insuch documents.such documents.

Regulations have been laid down regarding listing of funds, refundRegulations have been laid down regarding listing of funds, refundprocedures, transfer procedures, disclosures, guaranteeing returns etcprocedures, transfer procedures, disclosures, guaranteeing returns etc

SEBI has also laid down advertisement code to be followed by a mutualSEBI has also laid down advertisement code to be followed by a mutualfund in making any publicity regarding a scheme and its performancefund in making any publicity regarding a scheme and its performance

SEBI has prescribed norms / restrictions for investment management with aSEBI has prescribed norms / restrictions for investment management with aview to minimize / reduce undue investment risks.view to minimize / reduce undue investment risks.

SEBI also has the authority to initiate penal actions against an erring MF.SEBI also has the authority to initiate penal actions against an erring MF.

In case of a change in the controlling interest of an asset managementIn case of a change in the controlling interest of an asset managementcompany, investors should be given at least 30 days time to exercise theircompany, investors should be given at least 30 days time to exercise theirexit option.exit option.


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FUNCTIONS OFSEBIFUNCTIONS OFSEBID) Promoting & Regulating SelfRegulatory OrganizationsD) Promoting & Regulating SelfRegulatory Organizations

In order for the SRO to effectively execute itsIn order for the SRO to effectively execute itsresponsibilities, it would be required to be structured,responsibilities, it would be required to be structured,organized, managed and controlled such that it retains itsorganized, managed and controlled such that it retains its

independence, while continuing to perform a genuineindependence, while continuing to perform a genuinemarket development rolemarket development role

E) Prohibiting Fraudulent And Unfair Trade Practices InE) Prohibiting Fraudulent And Unfair Trade Practices InThe Securities MarketThe Securities Market

SEBI is vested with powers to take action against theseSEBI is vested with powers to take action against thesepractices relating to securities market manipulation andpractices relating to securities market manipulation andmisleading statements to induce sale/purchase of securities.misleading statements to induce sale/purchase of securities.


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FUNCTIONS OFSEBIFUNCTIONS OFSEBIF] Prohibition Of Insider TradingF] Prohibition Of Insider Trading

Stock Watch System, which has been put in place, surveillanceStock Watch System, which has been put in place, surveillance

over insider trading would be further strengthenedover insider trading would be further strengthened..

G] Investor Education And The Training Of IntermediariesG] Investor Education And The Training Of Intermediaries

SEBI distributed the booklet titled A Quick Reference Guide forSEBI distributed the booklet titled A Quick Reference Guide for

Investors to the investorsInvestors to the investors

SEBI also issued a series of advertisement /public notices in nationalSEBI also issued a series of advertisement /public notices in national

as well as regional newspapers to educate and caution the investorsas well as regional newspapers to educate and caution the investorsabout the risks associated with the investments in collective investmentabout the risks associated with the investments in collective investment

schemesschemes

SEBI has also issued messages in the interest of investors on NationalSEBI has also issued messages in the interest of investors on National

Channel and Regional Stations on DoordarshanChannel and Regional Stations on Doordarshan..


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FUNCTIONS OFSEBIFUNCTIONS OFSEBIH)H) Inspection And InquiriesInspection And Inquiries

I)I) Regulating Substantial Acquisition Of Shares And TakeRegulating Substantial Acquisition Of Shares And Take--oversovers

J)J) Performing Such Functions And Exercising Such PowersPerforming Such Functions And Exercising Such PowersUnder The Provisions OfUnder The Provisions Of The Securities ContractsThe Securities Contracts(Regulation) Act, 1956 As May Be Delegated To It By The(Regulation) Act, 1956 As May Be Delegated To It By TheCentral Government;Central Government;

K)K) Levying Fees Or Other Charges For Carrying Out TheLevying Fees Or Other Charges For Carrying Out ThePurposes Of This SectionPurposes Of This Section

L)L) Conducting Research For The Above PurposesConducting Research For The Above Purposes


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VETTINGBYSEBIVETTINGBYSEBI A company cannot come out with public issue unlessA company cannot come out with public issue unless Draft ProspectusDraft Prospectus is filed withis filed with

SEBI. Prospectus is a document by way of which the investor gets all theSEBI. Prospectus is a document by way of which the investor gets all theinformation pertaining to the company in which they are going to invest. It gives theinformation pertaining to the company in which they are going to invest. It gives thedetailed information about the Company, Promoter / Directors, group companies,detailed information about the Company, Promoter / Directors, group companies,Capital Structure, Terms of the present issue etc.Capital Structure, Terms of the present issue etc.

A company cannot file prospectus directly with SEBI. It has to be filed through aA company cannot file prospectus directly with SEBI. It has to be filed through amerchant banker. After the preparation of prospectus, the merchant banker alongmerchant banker. After the preparation of prospectus, the merchant banker along

with the due diligence certificates and other compliances and sends the same towith the due diligence certificates and other compliances and sends the same toSEBI for Vetting.SEBI for Vetting.

SEBI on receiving the same scrutinizes it and may suggest changes within 21 daysSEBI on receiving the same scrutinizes it and may suggest changes within 21 daysof receipt of prospectusof receipt of prospectus

The company can come out with a public issue any time within 180 days from theThe company can come out with a public issue any time within 180 days from thedate of the letter from SEBI or if no letter is received from SEBI, within 180 daysdate of the letter from SEBI or if no letter is received from SEBI, within 180 daysfrom the date of expiry of 21 days of submission of prospectus with SEBIfrom the date of expiry of 21 days of submission of prospectus with SEBI

If the issue size is upto Rs. 20 crores then the merchant bankers are required to fileIf the issue size is upto Rs. 20 crores then the merchant bankers are required to fileprospectus with the regional office ofSEBI falling under the jurisdiction in whichprospectus with the regional office ofSEBI falling under the jurisdiction in whichregistered office of the company is situated.registered office of the company is situated.

## If the issue size is more than Rs. 20 crores, merchant bankers are required to fileIf the issue size is more than Rs. 20 crores, merchant bankers are required to fileprospectus at SEBI, Mumbai office.prospectus at SEBI, Mumbai office.


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Brokers CodeBrokers Code

The fourThe four--part model, which was recommended by the M R Mayyapart model, which was recommended by the M R Mayyacommitteecommittee

The market regulator would hold the remote control on the management ofThe market regulator would hold the remote control on the management of

the exchanges by approving nominations of 60 per cent nonthe exchanges by approving nominations of 60 per cent non--brokerbrokermembers of an exchange board.members of an exchange board.

Induction and removal of managing director would also be controlled byInduction and removal of managing director would also be controlled bySEBI.SEBI.

Lead to increased control by the markets regulator and also imposeLead to increased control by the markets regulator and also imposerestrictions on elected brokers without giving them any authority.restrictions on elected brokers without giving them any authority.


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Corporate GovernanceCorporate Governance

The listing requirements, are ensured in two ways.The listing requirements, are ensured in two ways.

Corporates are expected to submit compliance reportsCorporates are expected to submit compliance reports

as per clause 49 of the listing agreementas per clause 49 of the listing agreement

They are also required to provide details of the sameThey are also required to provide details of the same

in their annual reportsin their annual reports..


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DelistingDelisting The exit price to be determined in accordance with the book building processThe exit price to be determined in accordance with the book building process

(known as reverse book building) through an electronically(known as reverse book building) through an electronically--linked transparentlinked transparent

facility.facility.

The offer price shall have a floor price, which will be the average of 26 weeksThe offer price shall have a floor price, which will be the average of 26 weekstraded price preceding the date of the public announcement. The final offer pricetraded price preceding the date of the public announcement. The final offer priceshall be determined as the price at which maximum number of shares has beenshall be determined as the price at which maximum number of shares has beenoffered.offered.

After the final price is determined based on the bookAfter the final price is determined based on the book--building process, the promoterbuilding process, the promoteror the acquirer will have to make a public announcement of the final price andor the acquirer will have to make a public announcement of the final price andcommunicate to the exchanges from which the delisting is sought to be made withincommunicate to the exchanges from which the delisting is sought to be made withintwo working days.two working days.

Further, the number of bidding centres shall not be less than 30, including all theFurther, the number of bidding centres shall not be less than 30, including all thestock exchange centres, which should have at least one electronicallystock exchange centres, which should have at least one electronically--linkedlinked

computer terminal each.computer terminal each.

In case the promoter does not accept the above price, he should not make anIn case the promoter does not accept the above price, he should not make anapplication to the exchange for delisting of the securities, as per the guidelines.application to the exchange for delisting of the securities, as per the guidelines.Instead, he shall ensure that the public shareholding is brought up to the minimumInstead, he shall ensure that the public shareholding is brought up to the minimumlimits specified under the listing conditions within six months.limits specified under the listing conditions within six months.

Strict norms for compulsory delisting by stock exchangesStrict norms for compulsory delisting by stock exchanges


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Public IssuesPublic IssuesAn unlisted company has to satisfy the following criteria to be eligible to makeAn unlisted company has to satisfy the following criteria to be eligible to makea public issuea public issue

PrePre--issue networth of the co. should not be less than Rs.1 crore in last 3issue networth of the co. should not be less than Rs.1 crore in last 3out of last 5 years with minimum networth to be met duringout of last 5 years with minimum networth to be met duringimmediately preceding 2 yearsimmediately preceding 2 years

Track record of distributable profits for at least three (3) out ofTrack record of distributable profits for at least three (3) out ofimmediately preceding five (5) yearsimmediately preceding five (5) years

The issue size (i.e. offer through offer document + firm allotment +The issue size (i.e. offer through offer document + firm allotment +promoters contribution through the offer document) shall not exceedpromoters contribution through the offer document) shall not exceed

five (5) times its prefive (5) times its pre--issue networth.issue networth.

In case an unlisted company does not satisfy any of the above criterions,In case an unlisted company does not satisfy any of the above criterions,it can come out with a public issue only through the Bookit can come out with a public issue only through the Book--BuildingBuildingprocess. In the Book Building process the company has to compulsorilyprocess. In the Book Building process the company has to compulsorilyallot at least sixty percent (50%) of the issue size to the Qualifiedallot at least sixty percent (50%) of the issue size to the QualifiedInstitutional Buyers (QIBs), failing which the full subscription moniesInstitutional Buyers (QIBs), failing which the full subscription monies

shall be refundedshall be refunded..


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Initial Public OfferInitial Public Offer In case of an Initial Public Offer(IPO) i.e. public issue by unlistedIn case of an Initial Public Offer(IPO) i.e. public issue by unlisted

company, the promoters have to necessarily offer at least 20% of the postcompany, the promoters have to necessarily offer at least 20% of the postissue capital.issue capital.

In case of public issues by listed companies, the promoters shall participateIn case of public issues by listed companies, the promoters shall participateeither to the extent of 20% of the proposed issue or ensure posteither to the extent of 20% of the proposed issue or ensure post--issue shareissue share

holding to the extent of 20% of the postholding to the extent of 20% of the post--issue capital.issue capital.

In case of any issue of capital to the public the minimum contribution ofIn case of any issue of capital to the public the minimum contribution ofpromoters shall be locked in for a period of 3 years, both for an IPO andpromoters shall be locked in for a period of 3 years, both for an IPO andPublic Issue by listed companies.Public Issue by listed companies.

In case of an IPO, if the promoters contribution in the proposed issueIn case of an IPO, if the promoters contribution in the proposed issueexceeds the required minimum contribution, such excess contribution shallexceeds the required minimum contribution, such excess contribution shallalso be locked in for a period of one year.also be locked in for a period of one year.

In case of a public issue by a listed company, participation by promoters inIn case of a public issue by a listed company, participation by promoters inthe proposed public issue in excess of the required minimum percentagethe proposed public issue in excess of the required minimum percentage

shall also be lockedshall also be locked--in for a period of one year as per the lockin for a period of one year as per the lock--in provisionsin provisionsas specified in Guidelines on Preferential issue.as specified in Guidelines on Preferential issue.


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Initial Public OfferInitial Public Offer

paid up share capital prior to IPO and shares issued on a firm allotmentpaid up share capital prior to IPO and shares issued on a firm allotmentbasis along with issue shall be lockedbasis along with issue shall be locked--in for a period of one year from thein for a period of one year from thedate of allotment in public issue.date of allotment in public issue.

In case of overIn case of over--subscription in a fixed price issue the allotment is done insubscription in a fixed price issue the allotment is done in

marketable lots, on a proportionate basismarketable lots, on a proportionate basis

In case of a book building issue, allotment to Qualified Institutional BuyersIn case of a book building issue, allotment to Qualified Institutional Buyersand Nonand Non--Institutional buyers are done on a discretionary basis. AllotmentInstitutional buyers are done on a discretionary basis. Allotmentto retail investors is done on a proportionate basisto retail investors is done on a proportionate basis

all steps for completion of the necessary formalities for listing andall steps for completion of the necessary formalities for listing andcommencement of trading at all stock exchanges where the securities are tocommencement of trading at all stock exchanges where the securities are tobe listed are taken within 7 working days of finalization of basis ofbe listed are taken within 7 working days of finalization of basis ofallotment.allotment.


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RECOMMENDATIONS ONRECOMMENDATIONS ON

CORPORATE GOVERNANCECORPORATE GOVERNANCE

If an institution wishes to appoint a director on the board of a company, itIf an institution wishes to appoint a director on the board of a company, itshould be approved by the shareholders of the company. Such a person isshould be approved by the shareholders of the company. Such a person isnot to be considered an independent director.not to be considered an independent director.

An institutional director, so appointed, shall have the same responsibilitiesAn institutional director, so appointed, shall have the same responsibilities

and shall be subject to the same liabilities as any other director.and shall be subject to the same liabilities as any other director.

companies should lay down a code of conduct for all the board memberscompanies should lay down a code of conduct for all the board membersand the senior management of company.and the senior management of company.

Mandatory review by audit committees of listed companiesMandatory review by audit committees of listed companies

Companies raising money through a public issue should disclose to theCompanies raising money through a public issue should disclose to theaudit committee, the uses and applications of funds by major category on aaudit committee, the uses and applications of funds by major category on aquarterly basis.quarterly basis.


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Evaluation Of SEBI s PerformanceEvaluation Of SEBI s Performance

Enhancing disclosuresEnhancing disclosures

In most case only the minimum information required under theIn most case only the minimum information required under theCompanies Act is made availableCompanies Act is made available

The manner in which the swap ratio is fixed and what theThe manner in which the swap ratio is fixed and what themanagement thinks of the same is largely taken for granted.management thinks of the same is largely taken for granted.

valuation reports are made available for inspection, but accessvaluation reports are made available for inspection, but accessis not easy for all investors.is not easy for all investors.


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Inability To Utilize The ExistingInability To Utilize The Existing

Powers EffectivelyPowers Effectively SEBI could initiate prosecution proceedings on insider trading only in oneSEBI could initiate prosecution proceedings on insider trading only in one

case and seven cases on fraudulent and unfair practices.case and seven cases on fraudulent and unfair practices.

Only in seven of the 181 cases, SEBI resorted to cancellation of registrationOnly in seven of the 181 cases, SEBI resorted to cancellation of registration

during the last four years.during the last four years.

Though SEBI has the power to impose a penalty of Rs 1.50 lakhs everyThough SEBI has the power to impose a penalty of Rs 1.50 lakhs every

time a person fails to furnish the requisite information, but rarely has thistime a person fails to furnish the requisite information, but rarely has this

power has been exercised by it .power has been exercised by it .

The provision for mandatory punishment of imprisonment in addition toThe provision for mandatory punishment of imprisonment in addition to

award for penalty has scarcely has been used.award for penalty has scarcely has been used.


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Quality OfDecisionsQuality OfDecisions

What is worrying is the poor rate of conviction in major cases.What is worrying is the poor rate of conviction in major cases.Virtually every SEBI decision involving major casesVirtually every SEBI decision involving major cases suchsuchas Sterlite, BPL, Videocon, Anand Rathi and Associates andas Sterlite, BPL, Videocon, Anand Rathi and Associates and

Hindustan LeverHindustan Lever has been overturned by the appealshas been overturned by the appealsprocess (or the Securities Appellate Tribunal).process (or the Securities Appellate Tribunal).

Accounting, audit qualityAccounting, audit quality

The plethora of interThe plethora of inter--corporate investments, intracorporate investments, intra--companycompanyand intraand intra--group transactions, guarantees and contingentgroup transactions, guarantees and contingentliabilities are areas where there is room for considerableliabilities are areas where there is room for considerableconcern.concern.


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Price ManipulationPrice Manipulation No DentNo Dent::

Price manipulation, informed trading and insider trading with keyPrice manipulation, informed trading and insider trading with keyoperators/investors is now routine. This is an area that is difficult tooperators/investors is now routine. This is an area that is difficult totackle for any regulator. But over the last ten years, SEBI has takentackle for any regulator. But over the last ten years, SEBI has takenaction on such price manipulation in just two cases (Bayer ABS andaction on such price manipulation in just two cases (Bayer ABS andAmara Raja Batteries). Here, too, the penal action has hardly beenAmara Raja Batteries). Here, too, the penal action has hardly been

stringentstringent

Enticing ads and investor riskEnticing ads and investor risk

Advertisement sans indication of performance by mutual funds hasAdvertisement sans indication of performance by mutual funds hascontinued regardless of the SEBI guidelines on this.continued regardless of the SEBI guidelines on this.

The Securities and Exchange Board of India (Sebi) is being blamedThe Securities and Exchange Board of India (Sebi) is being blamedfor lack of alertness and poor riskfor lack of alertness and poor risk--management measures withmanagement measures withregard to the automated lending and borrowing mechanism.regard to the automated lending and borrowing mechanism.


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FailuresFailures


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Change In MarketChange In Market

The complete transformation of the trading, clearing andThe complete transformation of the trading, clearing andsettlement infrastructuresettlement infrastructure

Dramatic transformation to a paperless market and transparentDramatic transformation to a paperless market and transparenttrading system. All trades on the National StockExchange aretrading system. All trades on the National StockExchange aresettled in demat (paperless mode).settled in demat (paperless mode).

By also moving towards rolling settlement (albeit after aBy also moving towards rolling settlement (albeit after aconsiderable and unnecessary delay), cutting the settlementconsiderable and unnecessary delay), cutting the settlementcycle and now going forward towards a T+1 settlementcycle and now going forward towards a T+1 settlementsystem, SEBI has made the markets much safer for investorssystem, SEBI has made the markets much safer for investors


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Takeover Code FailuresTakeover Code Failures

The SEBI has not been given the sweeping powers to directlyThe SEBI has not been given the sweeping powers to directlytackle the wrongdoers (many of whom have surfaced duringtackle the wrongdoers (many of whom have surfaced during

the fivethe five--year timeframe when the committee was deliberatingyear timeframe when the committee was deliberating

on the issue) on the takeover front.on the issue) on the takeover front.

The creeping acquisition limit will be applicable for theThe creeping acquisition limit will be applicable for the

financial year, against the earlier practice where a companyfinancial year, against the earlier practice where a company

couldn't exceed the creeping acquisition limit in any onecouldn't exceed the creeping acquisition limit in any one--yearyear

time frame.time frame.

SEBI has almost always been found lacking in the legalSEBI has almost always been found lacking in the legal

foundations of its action against defaulting corporates.foundations of its action against defaulting corporates.


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THANK YOU!!!THANK YOU!!!

SEBI_Role_and_Functions

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