This article has been written by Ms. Komolika Srivastava, a final-year student at ILS Law College, Pune.

ABSTRACT

This article delves into the crucial role played by the Securities and Exchange Board of India (SEBI) in shaping a transparent and well-regulated securities market. Examining SEBI’s initiatives at both macro and micro levels, the article traces its evolution into a statutory body in 1992 and outlines its core objectives outlined in the preamble.

A substantial section is dedicated to SEBI’s proactive market surveillance during 1997-98, showcasing measures like the InterExchange Market Surveillance Group and Uniform Intra-day Price Bands. The author emphasizes SEBI’s dedication to risk management and volatility control through measures like detailed margining systems and circuit filters. The article also explores SEBI’s forward-looking stance with the Integrated Market Surveillance System (IMSS) and the interim surveillance arrangement.

The investigative capabilities of SEBI take the spotlight, with over 900 cases handled since 1992-93, resulting in significant regulatory improvements. The article concludes by underscoring SEBI’s essential role as a guardian ensuring fairness and transparency in India’s dynamic securities landscape.

INTRODUCTION

In the pursuit of a well-regulated market, the Securities and Exchange Board of India (SEBI) has strategically developed initiatives at both macro and micro levels to cultivate investor confidence in the fairness and integrity of securities markets. At the broader level, SEBI has crafted comprehensive regulatory frameworks, policies, and strategic plans overseeing the overall market functioning, setting the stage for a transparent and efficient marketplace where participants can operate with assurance and clarity.

At a more granular level, SEBI is intricately involved in the operational nuances of the market, implementing measures to ensure genuine and impartial price discovery. Vigilant monitoring of market movements enables SEBI to rapidly identify and address instances of market manipulations, reinforcing investor trust in market credibility. Furthermore, SEBI prioritizes market safety by deploying robust risk containment measures, including advanced margin systems, circuit filters, and daily price bands. This collective risk management framework not only curtails abnormal price behavior but also serves as a proactive safeguard against potential market crises. Through the diligent enforcement of these regulatory measures, incorporating inspections and collaborative efforts, SEBI ensures rigorous compliance with market regulations, sustaining the overall integrity and reliability of securities markets.

SEBI (SECURITIES EXCHANGE BOARD OF INDIA)

SEBI was initially established as a non-statutory body on April 12, 1988, by a resolution of the Government of India. Recognizing the necessity for a more robust regulatory framework, it was later constituted as a statutory body in 1992. The Securities and Exchange Board of India Act, 1992 (15 of 1992) came into effect on January 30, 1992, providing the legal framework for SEBI’s regulatory functions.

The preamble of the Securities and Exchange Board of India Act succinctly articulates the fundamental responsibilities of SEBI. It outlines its primary purpose as protecting investors’ interests in securities, along with promoting and regulating the securities market and related matters. This legal framework establishes SEBI’s authority and delineates its crucial role in overseeing and shaping the functioning of India’s securities market.

MARKET SURVEILLANCE

The inception of the Investigation, Enforcement, and Surveillance Department marked a significant step in fortifying market oversight. This department was established to proactively address challenges and ensure the integrity of the securities market. Its creation underscored the regulatory commitment to vigilance and the protection of investor interests.

The formation of the Market Surveillance Division in July 1995 further exemplified SEBI’s dedication to effective market monitoring. This specialized division was tasked with detecting abnormal market movements and identifying potential market manipulations. By focusing on real-time surveillance, the Market Surveillance Division became a cornerstone in maintaining the fairness and transparency of the securities market.

The effectiveness of market surveillance relies on a diverse range of information sources. The text highlights key inputs for the Market Surveillance Division, including trading data from stock exchanges, investor complaints, market intelligence, newspaper reports, and other relevant sources. This multi-faceted approach ensures a comprehensive understanding of market dynamics and potential irregularities.

During the crucial period of 1997-98, SEBI implemented a series of surveillance systems and risk containment measures to fortify market integrity. Independent surveillance cells at stock exchanges were established for continuous monitoring, providing an additional layer of oversight. The introduction of a detailed margining system, circuit filters, daily and weekly price bands, and intra-day trading limits for stockbrokers demonstrated a commitment to pre-emptive risk management and volatility control. These measures collectively aimed to enhance the robustness of the securities market and mitigate potential risks associated with market fluctuations.

STRENGTHENING OF SURVEILLANCE AND MONITORING MECHANISMS (1997-98)

1. Inter Exchange Market Surveillance Group: The establishment of the Inter Exchange Market Surveillance Group in 1997-98 reflected a collaborative effort among stock exchanges. This group played a pivotal role in discussing market trends, revising risk containment measures, and addressing issues related to the dissemination of price-sensitive information and coordination between exchanges.
2. Uniform Intra-day Price Band: The introduction of a standardized intra-day price band was a notable measure aimed at regularizing price variations throughout a trading day. This initiative contributed to market stability by providing a consistent framework for controlling intra-day volatility.
3. Price Bands for Infrequently Traded Scrips: Acknowledging the necessity for guidelines on price bands for less actively traded scrips, a small group, comprising representatives from major stock exchanges, worked towards framing guidelines. This initiative aimed to bring uniformity and clarity to managing price variations for infrequently traded securities.
4. Public Disclosure of Actions Against Stockbrokers: SEBI’s insistence on the public disclosure of actions taken against member brokers by stock exchanges underscored a commitment to transparency. This measure aimed to keep market participants informed and contribute to the overall accountability of stockbrokers.
5. Dissemination of Price-Sensitive Information: Recognizing the importance of proper dissemination of price-sensitive information, SEBI directed stock exchanges to swiftly display such information on their terminals, ensuring quick access to critical data.
6. Dealing with Market Rumors: Acknowledging the potential impact of market rumors, SEBI took proactive steps by urging stock exchanges to promptly verify and address rumors. Designating compliance officers for quick verification from listed companies demonstrated a commitment to maintaining market integrity.
7. Coordination Between Stock Exchanges: To enhance coordination and information exchange, SEBI directed stock exchanges to designate coordination officers. This measure facilitated swift communication between exchanges during exceptional market conditions, contributing to a more synchronized response.
8. Joint Inspection and Investigation for Stock Brokers with Multiple Memberships: Recognizing the complexity of stock brokers with multiple memberships, SEBI advocated for joint inspection and investigation by stock exchanges. This collaborative approach aimed to streamline regulatory efforts and ensure comprehensive oversight.
9. Inspection of Surveillance Cells of Stock Exchanges: SEBI’s initiative to inspect surveillance cells of stock exchanges reinforced its commitment to proactive assessment and improvement. This process, carried out regularly, aimed to enhance the effectiveness of surveillance mechanisms.

DEVELOPMENT AND IMPLEMENTATION OF STOCK WATCH SYSTEM

1. Core Group Meetings: The formation of the Core Group during 1996-97, consisting of representatives from major stock exchanges, facilitated discussions and decision-making in the development and implementation of the Stock Watch System.
2. Workshop on Stock Watch System: SEBI organized a workshop on the Stock Watch System, featuring participation from the Core Group and surveillance cell staff from stock exchanges. The workshop, conducted by NASDAQ staff, provided valuable insights and guidance.
3. Parameters and Alerts for Phase I: Through collaboration with the Core Group, SEBI finalized the basic parameters and alerts for Phase I of the Stock Watch System. These parameters laid the foundation for effective market surveillance and timely detection of potential irregularities.
4. Interaction and Coordination with Stock Exchanges: SEBI maintained a continuous exchange of information and ideas with stock exchanges to foster purposeful market monitoring and surveillance. This ongoing interaction played a crucial role in shaping the Stock Watch System and its implementation.

ROLE OF MARKET SURVEILLANCE IN EXCEPTIONAL MARKET CONDITIONS (1996-98)

1. Volatility and Turbulence in 1996-97: The markets experienced significant volatility and turbulence in 1996-97, evidenced by notable fluctuations in benchmark indices. SEBI’s role during this period was crucial in implementing measures to stabilize the markets and prevent systemic risks.
2. Market Conditions in 1997-98: The following year, 1997-98, presented challenges amid economic uncertainties in Asia. SEBI’s response to the market conditions demonstrated adaptability, with measures such as adjusted price bands and exposure limits to stabilize the markets.
3. Regulatory Measures during Market Volatility: SEBI proactively introduced regulatory measures during periods of heightened market volatility. These included reducing daily price bands, adjusting exposure limits, and engaging in prompt communication with stock exchanges to maintain market stability.
4. Market Stability and Safety: Despite challenging conditions, SEBI’s stringent administration of mark-to-market margining systems and adherence to prudential exposure norms ensured market stability and safety. The use of circuit breakers and price bands specific to individual securities proved effective in preventing panic and maintaining overall market conditions under control.

ADVANCED MARKET SURVEILLANCE SYSTEM

In a bid to bolster market surveillance effectiveness, SEBI has opted to introduce an advanced Integrated Market Surveillance System (IMSS) spanning various stock exchanges and market segments, encompassing both cash and derivative markets. The envisioned IMSS solution is designed to accomplish several key objectives:

1. Online Data Repository: Implementation of an online data repository with the capability to capture transaction data and reference data from diverse sources such as stock exchanges, clearing corporations/houses, and depositories. This repository will accommodate different formats for both securities and derivatives markets.
2. Research and Regulatory Analysis Platform: Development of a research and regulatory analysis platform aimed at identifying potential instances of market abuse. This platform will serve as a robust tool for regulatory scrutiny and in-depth analysis.
3. Sophisticated Alert Engines: Introduction of advanced alert engines adept at working with various data formats, including database, numeric, and textual data. These engines will autonomously identify patterns of abuse, issuing alerts covering aspects such as insider trading, fraud, and general market surveillance. SEBI kickstarted the implementation process by forming a high-level technical committee comprising experts. This committee meticulously studied SEBI’s technical requirements, defined parameters, and facilitated the global competitive bidding process to identify a vendor for the IMSS solution, ensuring a time-sensitive implementation.

TRANSITIONAL SURVEILLANCE ARRANGEMENT

During the ongoing operationalization of IMSS, an interim surveillance mechanism has been in effect since June 2003. This interim arrangement involves regular weekly surveillance meetings with major stock exchanges (BSE, NSE) and depositories (NSDL, CDSL). These confidential meetings provide a platform for exchanging views on emerging concerns, and specific abnormalities, and considering proactive actions.

In these weekly sessions, SEBI collaborates with stock exchanges and depositories to aggregate inputs, promoting enhanced coordination, information sharing, and proactive, collective actions. The meetings serve as a specialized, interactive forum for promptly addressing ongoing surveillance issues and responding to emerging concerns. In the fiscal year 2004-05, a total of 57 such surveillance meetings were conducted, with additional meetings scheduled as needed based on market exigencies.

INVESTIGATION

The primary aim of investigations is to scrutinize alleged or suspected violations, collecting evidence to pinpoint individuals/entities responsible for irregularities and breaches, including:

• Manipulation of prices
• Creation of artificial markets
• Insider trading
• Irregularities in public issues, takeover violations, and other forms of misconduct.

These investigations involve identifying the involved parties, gathering detailed data on primary issuances, secondary market transactions, and trading specifics. After investigations conclude, various actions are initiated under the SEBI Act and related regulations. These actions may include imposing monetary penalties, issuing warnings, suspending activities, canceling registrations, prohibiting dealings in securities, and banning access to the capital market.

Since 1992-93, SEBI has undertaken over 900 investigation cases. The experience gained from these investigations has played a crucial role in shaping policies and procedures in the regulatory and enforcement landscape. Some notable outcomes include:

• Amendments to the SEBI Act in 2002, strengthening various provisions
• Amendments to Insider Trading Regulations in February 2002
• Thorough revision of Fraudulent and Unfair Trade Practices Regulations in 2003-04
• Ban on Offshore Corporate Bodies (OCBs) in the markets by RBI following investigations in 2001
• Mandatory disclosure of Participatory Notes (PNs) by Foreign Institutional Investors (FIIs)
• Mandating unique client codes
• Providing suggestions to other operational departments of SEBI for periodic amendments to regulations/guidelines
• Offering inputs to other regulatory agencies such as RBI, MCA, CBI, ED, and Income Tax Department.

Investigation Process Stages:

1. Initial Inquiry: The first stage involves a preliminary investigation based on facts sourced from a reference and feedback obtained from exchanges and relevant sources. This aims to determine if the matter necessitates a formal investigation. Information is gathered from various sources, including exchanges, depositories, secondary databases, companies, and brokers as needed. As this phase is preliminary, enforcement measures such as document production and information summoning cannot be enforced. The available information guides the assessment of whether a formal investigation is required to establish charges of violations.
2. Official Investigations: Following the findings of the preliminary investigation, a case moves on to formal investigation. At this juncture, the SEBI Act grants authorities the power to:

• Request information
• Mandate the production of documents
• Examine witnesses, among other actions.

3. Post-Investigation Proceedings: After concluding the investigation, the Enforcement Division takes action based on the recommendations of the approving authority. Actions may encompass:

• Issuing warning letters
• Initiating inquiry proceedings against registered intermediaries
• Commencing adjudication proceedings for imposing penalties
• Issuing directions under the SEBI Act
• Initiating prosecution

CONCLUSION

SEBI is instrumental in ensuring the integrity of India’s securities market, employing initiatives at both macro and micro levels. The regulator’s commitment to investor confidence and fair market practices is evident through specialized departments, robust surveillance, and continuous enhancements.

The regulatory measures implemented during 1997-98, including the InterExchange Market Surveillance Group and Uniform Intra-day Price Bands, showcase SEBI’s dedication to comprehensive market oversight. Looking ahead, the implementation of the Integrated Market Surveillance System (IMSS) signifies a revolutionary step in market monitoring.

SEBI’s rigorous approach to investigations, with over 900 cases since 1992-93, has resulted in crucial amendments and stringent actions against market irregularities. In essence, SEBI stands as a stalwart guardian, ensuring fairness, transparency, and investor trust in India’s dynamic securities landscape.

REFERENCES:

1. This article was originally written by SEBI and published on the official government website. The link for the same is herein https://www.sebi.gov.in/sebi_data/commondocs/ar99002f_h.html
2. This article was originally written by SEBI and published on the official government website. The link for the same is herein https://www.sebi.gov.in/about-sebi.html
3. This article was originally written as part of the Report delineating the functions of SEBI as specified in Section 11 of the SEBI Act, 1992.  The link for the same is herein https://www.sebi.gov.in/sebi_data/commondocs/Part33_p.pdf