Securities and Exchange Board of India (SEBI) and Capital Market in India

 

 

The capital market consists two components, new issue market where companies’ issues shares directly to the public and the secondary market, where existing shares are bought and sold. The Securities Contract (Regulation) Act, 1956 and the Securities Contract (Regulation) Rules, 1957, governs the trading of old securities. The Act was provided for recognition to the Stock exchanges and gave wide ranging powers to the Government to control and regulate the stock exchanges. Securities market in India witnessed a phenomenal growth in the 1980s leading financial disintermediation with corporate sector placing increasing, greater reliance on the market for satisfying their long-term financial needs and emergence of new intermediaries and institutions in the country and thereby developing a new awareness and interest in investment opportunities. With the development of securities market, the number of malpractices also increased in both primary and secondary markets. The malpractices were noticed in companies, merchant bankers and brokers who are operating in market.

Securities and Exchange Board of India (SEBI):

Under such circumstances, Government felt the need for setting up an apex body to develop and regulate the stock markets in India. Then, the Securities and Exchange Board of India (SEBI) was set up on 12^th April, 1988, as a non-statutory body. After that Government took four years period to bring a separate legislation in the name of Securities and Exchange Board of India Act, 1992, coving statutory powers. The Act charged to SEBI with comprehensive powers over practically all aspects of capital market operations.

SEBI was established with the dual objectives of protecting the rights of small investors and regulating and developing stock markets in India. The board was subsequently upgraded as a fully autonomous body in the year 1992. SEBI monitors the activities of not only stock exchanges but also merchant bankers. The basic objectives of the board were identified as follows:

i)                    To protect the interest of investors so that there is a steady flow of savings into the capital market.

ii)                  To regulate the securities market and ensure fair practices by the issuers of securities so that they can raise resources at minimum cost.

iii)                To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional.

 

Functions of SEBI:

To ensure that interests of investors are well protected and the development of the securities market is well promoted, the SEBI has to perform two major functions, namely regulatory functions and developmental functions. Section 11 of the SEBI Act specifies the functions as follows:

1.      Regulatory Functions:

SEBI has to regulate the business in stock exchanges and other securities market, registering and regulating the working of the stock brokers, share transfer agents, bankers to an issue, merchant bankers, underwriters, etc. and regulating the working of collective investment schemes including mutual funds. SEBI has to prohibit fraudulent and unfair trade practices in the securities market and regulate substantial acquisitioning of shares and takeover of companies. SEBI can call for information, undertake inspection, conduct audit of stock exchange and intermediaries etc. It also levies fees or other charges for carrying out its responsibilities. These functions are as follows:

a)      Regulation of stock exchange and self-regulatory organizations.

b)      Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market.

c)      Registration and regulation of the working of collective investment schemes including mutual funds.

d)     Prohibition of fraudulent and unfair trade practices relating to securities market.

e)      Prohibition of insider trading in securities.

f)       Regulating substantial acquisitions of shares and take-over of companies.

 

2.      Development Functions:

SEBI also has to act as a development institution in order to serve as an regulating body to develop securities market and safeguard interest of investors. SEBI has to aware investors about their rights in clear and specific terms. Development functions can be summarized as under:

a)      To promote investor’s education.

b)      To arrange training of intermediaries.

c)      To conduct research and publish information useful to all market participants.

d)     To promote fair practices and code of conduct for self-regulatory organizations.

e)      To promote self-regulatory organizations.

 

Powers of SEBI:

In brief, powers of SEBI can be summarized as follows:

a)      To call periodical returns from recognized stock exchanges.

b)      To call any information or explanation from recognized stock exchanges or their members.

c)      To direct enquiries to be made in relation to affairs of stock exchanges or their members.

d)     To grant approval to bye-laws of recognized stock exchanges.

e)      To make or amend bye-laws of recognized stock exchanges.

f)       To compel listing of securities by public companies.

g)      To control and regulate stock exchanges.

h)      To grant registration to market intermediaries.

i)        To levy fees of other charges for carrying out the purpose of regulation.

j)        To declare applicability of section 17 of the Securities Contract (Regulation) Act in any state or area and to grant licenses to dealers in securities.

 

SEBI and Capital Market:

 Various steps have been taken by SEBI, to improve the practices, maintain transparency in capital market. To improve the functioning of stock exchanges, SEBI has drawn up a program for inspecting stock exchanges.  SEBI has introduced a number of measures to reform the primary market. Its motive is to strengthen the standards of disclosure, introduce certain procedural norms for the issuers and intermediaries, and remove the inadequacies and systemic deficiencies in the issue procedures. SEBI has laid down certain eligibility norms for registration of intermediaries, such as capital adequacy, infrastructure. No person can act as a sock-broker, unless he holds a certificate granted by SEBI. SEBI has directed the stock exchanges to broad base their governing boards and to reframe the composition of their arbitration, default, and disciplinary committees. Merchant bankers were also statutorily brought under the regulatory framework of SEBI. In Nov 1992, SEBI issued regulations for insider trading, to prohibit dealings. SEBI has issued a separate set of guidelines for financial institutions in sept.1992, for disclosure and investment protection. SEBI has also framed regulations for Mutual funds. To maintain transparency in transactions, SEBI has made it mandatory for brokers to maintain separate accounts for their clients. Brokers should disclose transaction price and brokerage separately, and should also file audit report to SEBI. SEBI has also given directives to stock exchanges to ensure that contract notes are issued by brokers to clients within 24 hours of the execution of the contract. The bankers to the issue has been brought under the purview of SEBI for the investor protection. Unit Trust of India was also brought under the regulatory jurisdiction of SEBI. To protect the interest of small investors, SEBI allowed investors with very small holding to sell in the stock exchange in physical form under a special scheme. Such can be dematerialized by buyers. SEBI has modified the existing framework for book building, to make this mechanism popular. SEBI has allowed freedom to issuers to issue the securities at market determined rates.

SEBI is a regulatory body, near about 25 years old and capital market system is more than 100 years. At this maturity stage capital market requires monitoring instead of regulating. SEBI performs it through developing self-regulatory system in capital market. From the above discussion we can say that, SEBI has introduced various improvements to change India’s capital market in recent years. SEBI has brought Indian capital market to international standards, by enhancing transparency, maintaining fair trade practices, and by improving efficiency. The Indian capital market has experienced a drastic transformation during last two decades. Before the establishment of SEBI, as compared to international standards Indian capital markets ranking was very low. After the introduction of SEBI, the scenario has changed completely. Due to some extensive capital market reforms, now Indian capital market is in top level rank. In fact, it is now considered to be way ahead of many developed country capital market.