This article has been written by Mr. Yuvraj Singh Rathore, a penultimate student of BBA LLB (H.) at ICFAI Law School, The ICFAI University, Jaipur.

Abstract

Security market is unpredictable maze, bearing high risks with ebb and flow as it’s rudimentary. Its dynamic nature can boon someone with n times gain is to capital or can curse someone with obstante loss. To regulate and to promote the development of securities market, and primarily to protect the interests of investors in securities and for matters connected therewith or incidental thereto, Securities and Exchange Board of India brought into existence. It stands as a cornerstone of regulatory oversight in India’s financial ecosystem. Further it focuses on ensuring fair practices, orderly conduct, and investor protection, whilst, capturing compliance aspects as well.

Introduction

In present era of youth being attracted towards investment in security market, which is a herald of economic growth of overall country & is undoubtedly favorable as it shows the urge & perception of youth to make efforts for self growth & development, it becomes utmost important to keep an eye on the factors which facilitates such investments. As it evident, security market is not a place to play, it involves risk as almost everyone, may so vaguely, once have heard this so called phrase that Mutual funds or so and so are subject to market risks, read all scheme related documents carefully. Therefore, the malign motive of certain companies, in already risky sphere, can turn the whole image & perception of investors, creditors & other stakeholders about security market.

The Securities and Exchange Board of India (“SEBI”) is a body, established in pursuance to the Securities and Exchange Board of India Act 1992 (“SEBI Act”), which makes rules & regulations for companies dealing with security market. As per the SEBI Act, the board is empowered with sufficient power to govern the companies in security market and same time can levy appropriate penalty on non compliance of the direction passed by the board in exercise of the power conferred thereto.    

Historical events 

On 12 April 1988, SEBI was established by the Government of India through administrative body to ensure the smooth functioning of capital market. Following the notorious Scam of 1992, in order to avert the repetition of such scam via closing all the prospective thereof, on 30th January 1992, SEBI got legal teeth through an ordinance issued to protect the interest, money and confidence of investors. The ordinance brought a wide range of powers to the SEBI, allowing SEBI to take steps against insider trading, etc.[1] On 4th April 1992, the said ordinance was subsequently repealed with the Securities and Exchange Board Act, 1992.[2] Thereafter, numerous rules & regulation came into force in exercise to the powers conferred by provisions of SEBI Act. Some of rules & regulations, enforced hitherto, are mentioned infra-

• the Securities and Exchange Board of India (Appeal to the Central Government) Rules, 1993.
• the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.
• the Securities and Exchange Board of India (Annual Report) Rules, 1994.
• the Securities and Exchange Board of India (Terms and Conditions of Service of Chairman and Members) Rules, 1992.
• the Securities and Exchange Board of India (Form of Annual Statement of Accounts and Records) Rules, 1994.
• Securities and Exchange Board of India (Annual Report) Rules, 2021
• SEBI (Prohibition of Insider Trading) Regulations, 2015 (Last amended on January 21, 2019)
• SEBI (Procedure for Search and Seizure) Repeal Regulations, 2015
• SEBI (Bankers to an Issue) Regulations, 1994 (Last amended on May 30, 2018)
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 Last amended on December 31, 2018
• SEBI (Merchant Bankers) Regulations, 1992 (Last amended on March 6, 2017)
• SEBI (Settlement Proceedings) Regulations, 2018
• SEBI (Delisting of Equity Shares) Regulations, 2009 – (last amended on July 29, 2019)
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Last amended on July 29, 2019)
• SEBI (Central Database Of Market Participants) Regulations, 2003 (Last amended on January 07, 2014)[3]

These are mere a glance of the efforts made by the Central Government and SEBI in benefit of the investors & other stakeholders; there are many rules & regulations. 

Organizational structure of SEBI

SEBI has three major regional offices at three major cities i.e. Mumbai (head office), Kolkata & Delhi in order to take cognizance of the complaints filed by investors and to serve him with appropriate solution.  SEBI has established two advisory committees known as the Primary Market Advisory Committee and the Secondary Market Advisory Committee. While these committees provide valuable insights, it’s important to note that they operate in a non-statutory capacity, and SEBI is not obligated to adhere strictly to their advice. The organizational structure of SEBI is well-defined, with a board of members responsible for major decision-making processes. There is a clear delegation of authority through a hierarchical structure, aimed at minimizing confusion within the stock market.

Over the years following its inception, SEBI has assumed control over venture capital funds, issuing comprehensive guidelines for their operation in 1996. By the year 2000, SEBI achieved independent status in regulating all aspects of venture capital funds, depositories, credit rating agencies, and related entities. The emergence of the new issue market in recent times has expanded stock market operations, attracting active investors and traders. The enrollment of stock exchanges has witnessed a significant rise, increasing from 1,200 to 6,000 by the close of 2007. Market capitalization experienced substantial growth during the 1980s and 1990s, driven by increased participation from investors and traders. Regulatory and developmental measures have been continuously revised and implemented to enhance the efficiency of the secondary market. [4]

Corporate Scenario in the Indian Stock Market

The liberalization process initiated with the industrial policy during the Seventh Five Year Plan in 1985. In 1987, UTI commenced operations, mobilizing funds from the public. Investors reaped significant benefits from stock market investments, facilitated by tax relaxations aimed at encouraging investments and fund mobilization. For instance, the exemption limit for dividend income increased to Rs. 15,000 in the income tax schedule. The number of registered companies in India surged dramatically within a short span, with many companies issuing shares in both primary and secondary markets. Over 8,000 companies were listed on major stock exchanges across India, contributing to a substantial increase in market capitalization, reaching Rs. 35,000 crores on the Bombay Stock Exchange by 2007.[5]

Power & Functions of SEBI

Under Chapter IV of the SEBI Act, power & functions of SEBI are ascertained, wherein, it is stated that in order to fulfill its duty to secure the interests of investors in securities and to promote development of, and to regulate securities market, SEBI, if thinks fit, can take following measures-

1. Regulating the bunisses conducted within stock exchanges and other securities markets;
2. Enrolling and overseeing the operations of stock brokers, sub-brokers, share transfer agents, bankers involved in issuing securities, trustees of trust deeds, registrars involved in issuing securities, merchant bankers, underwriters, portfolio managers, investment advisers, and any other intermediaries associated with securities markets in any capacity;
3. Enrolling and overseeing the operations of depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies, and any other intermediaries as specified by the Board through notification;
4. Enrolling and overseeing the operations of venture capital funds and collective investment schemes, including mutual funds;
5. Promoting and regulating self-regulatory organizations;
6. Prohibiting fraudulent and unfair trade practices concerning securities markets;
7. Promoting investor education and providing training to intermediaries of securities markets;
8. Prohibiting insider trading in securities;
9. Regulating significant acquisitions of shares and takeovers of companies;
10. Soliciting information from, conducting inspections, carrying out inquiries, and audits of stock exchanges, mutual funds, other entities associated with the securities market, intermediaries, and self-regulatory organizations within the securities market; and so on. [6]

The board will be empowered to issue direction after the due enquiry, if board is of the opinion that it is necessary in the interest of investors or development of securities market.

Moreover, SEBI possesses the authority to gather pertinent information about organizations. Concerning securities trading, SEBI has the power to regulate, oversee, and authorize trading and investments in specific securities without external evaluation. In the context of mutual funds, an individual investor is limited to investing no more than 10% of the total net assets of a scheme in short-term deposits at a single bank, as outlined by the Securities and Exchange Board of India. When formulating guidelines for the trading and investment of funds in short-term deposits of scheduled commercial banks by mutual funds, the regulator also takes into account the deposit schemes of the banks’ subsidiaries. SEBI has provided guidelines for the investment purpose of “short-term funds,” stipulating a period not exceeding 91 days. [7]

Key Regulatory Areas

SEBI’s regulatory framework encompasses a wide spectrum of areas, each aimed at maintaining market integrity and investor confidence. Some of the key regulatory domains include

1. Listing and Disclosure Requirements SEBI mandates stringent disclosure norms for companies seeking to list on stock exchanges. It requires comprehensive disclosures of financial information, corporate governance practices, and material events to enable investors to make informed investment decisions.
2. Market Conduct and Insider Trading SEBI regulates market conduct to prevent unfair trading practices, market manipulation, and insider trading. It prohibits trading based on unpublished price-sensitive information and imposes stringent penalties on violators.
3. Takeovers and Mergers SEBI regulates corporate takeovers and mergers to ensure transparency, fairness, and shareholder protection. It prescribes detailed regulations governing open offers, delisting procedures, and corporate restructuring activities.
4. Mutual Funds and Collective Investment Schemes SEBI regulates mutual funds and collective investment schemes to safeguard investor interests and promote transparency in fund management. It imposes strict disclosure requirements, investment restrictions, and asset valuation norms to mitigate risks and enhance investor protection.
5. Intermediaries Regulation SEBI regulates various intermediaries such as stockbrokers, depository participants, and investment advisors to ensure compliance with ethical standards, financial integrity, and investor protection measures.

Compliance Imperatives

For market participants, compliance with SEBI regulations is not just a legal obligation but a fundamental aspect of responsible conduct in the financial markets. Effective compliance entails

1. Understanding Regulatory Obligations Market participants must have a thorough understanding of SEBI regulations relevant to their business activities. This necessitates ongoing monitoring of regulatory developments, interpretation of regulatory guidelines, and alignment of business practices with regulatory requirements.
2. Establishing Robust Internal Controls Firms must implement robust internal control mechanisms to ensure compliance with SEBI regulations. This includes establishing compliance policies and procedures, conducting periodic risk assessments, and instituting mechanisms for monitoring and reporting compliance breaches.
3. Investing in Compliance Infrastructure Investing in compliance infrastructure, including technology systems, training programs, and dedicated compliance personnel, is essential for effectively managing regulatory risks and ensuring adherence to SEBI regulations.
4. Engaging in Dialogue with Regulators Establishing open channels of communication with SEBI and other regulatory authorities fosters a culture of compliance and facilitates the resolution of regulatory queries and concerns in a timely manner.
5. Embracing a Culture of Compliance Ultimately, compliance with SEBI regulations is not merely a box-ticking exercise but a reflection of an organization’s commitment to ethical conduct, integrity, and investor protection. Fostering a culture of compliance at all levels of the organization is paramount for building trust and credibility in the financial markets.

Penalties and adjudication

Under Chapter VIA of the SEBI Act, the boards is empowered to impose penalties on certain grounds, that are-

• Penalty for failure to furnish information, return, etc;
• Penalty for failure by any person to enter into agreement with clients;
• Penalty for failure to redress investors’ grievances.
• Penalty for certain defaults in case of mutual funds.
• Penalty for failure to observe rules and regulations by an asset management company.
• Penalty for default in case of stock brokers.
• Penalty for insider trading.
• Penalty for non-disclosure of acquisition of shares and takeovers.
• Penalty for fraudulent and unfair trade practices.
• Penalty for contravention where no separate penalty has been provided.

For the purpose of adjudication on the above mentioned grounds, the board, in compliance of section 15-I of the SEBI Act, will appoint any officer not below the rank of a Division Chief to be an adjudicating officer and follow the procedure mentioned thereto.

Conclusion

In conclusion, the Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating and fostering the development of India’s securities market. Established in 1988 and fortified by the Securities and Exchange Board of India Act, 1992, SEBI has emerged as a cornerstone of regulatory oversight, especially in the wake of significant market events such as the 1992 scam. Over the years, SEBI has enacted numerous rules, regulations, and guidelines to safeguard investor interests, ensure market integrity, and promote transparency within the financial ecosystem.

SEBI’s regulatory framework encompasses various domains, including market conduct, insider trading, takeovers, mutual funds, collective investment schemes, and intermediaries regulation. By imposing stringent compliance requirements and penalties for non-compliance, SEBI seeks to maintain market discipline and foster investor confidence.

In the dynamic landscape of India’s securities market, compliance with SEBI regulations is not just a legal obligation but a fundamental aspect of responsible conduct. Market participants must invest in robust compliance infrastructure, establish internal controls, engage in dialogue with regulators, and embrace a culture of compliance to navigate the complexities of regulatory requirements effectively.

Ultimately, SEBI’s mission is to ensure fair, transparent, and orderly conduct in the securities market, thereby instilling trust and credibility among investors, stakeholders, and the broader financial community. As India’s economy continues to evolve, SEBI remains committed to upholding the highest standards of regulatory excellence and promoting the long-term sustainability of the securities market for the benefit of all stakeholders.

Reference

[1] Ord. 5 of 1992.

[2] S. 35 of SEBI Act.

[3] As per the data on India Code website, the link for the same is: https://www.indiacode.nic.in/handle/123456789/1362/simple-search?page-token=28d8590166aa&page-token-value=02c326afd323792c409906ef525a8373&nccharset=735AF7C6&query=+sebi&searchradio=all 

[4] Dasari, R. B. (n.d.). (PDF) the SEBI role in Indian Stock Market. https://www.researchgate.net/publication/351599280_The_SEBI_Role_in_Indian_Stock_Market 

[5] Ibid

[6] S. 11 SEBI Act

[7] See supra note 4