Regulatory Mechanism

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Regulatory Systems for Equity Markets

1. Securities & Exchange Board of India (SEBI)

Establishment: SEBI was established under the SEBI Act of 1992. It is the primary regulatory body for the Indian securities market.

Key Functions:

  • Protective Functions:
    • Price Rigging: SEBI monitors and takes action against practices that manipulate stock prices. Price rigging involves artificially inflating or deflating stock prices to deceive investors or manipulate market outcomes.
    • Insider Trading: SEBI prohibits trading based on material, non-public information. This means that individuals with access to confidential information about a company are not allowed to trade stocks based on this information.
    • Fraudulent and Unfair Trade Practices: SEBI aims to prevent fraudulent activities and unfair trading practices, such as market manipulation, false trading, and misleading information.
  • Development Functions:
    • Training: SEBI promotes the training and education of market intermediaries, such as brokers and investment advisors, to ensure they operate effectively and ethically.
    • Promoting Activities: SEBI supports and encourages the development of stock exchanges and other market entities by adopting flexible and adaptable approaches to regulation.
  • Regulatory Functions:
    • Rules and Regulations: SEBI establishes rules and codes of conduct for market intermediaries like merchant bankers, brokers, and underwriters. It sets standards for their operations to ensure fairness and transparency.
    • Registration and Oversight: SEBI registers and regulates the functioning of various intermediaries, including stock brokers, sub-brokers, share-transfer agents, and mutual funds. It ensures these entities comply with regulatory requirements.
    • Takeover Regulation: SEBI oversees the takeover of companies, ensuring that such transactions are conducted fairly and transparently.
    • Inquiries and Audits: SEBI conducts investigations and audits of stock exchanges to ensure they comply with regulations and maintain market integrity.
    • Foreign Participation: SEBI regulates the participation of foreign financial intermediaries and Foreign Portfolio Investors (FPIs) in the Indian stock market. FPIs must register with authorized depository participants to invest in India.

2. National Stock Exchange of India (NSE)

Role and Responsibilities:

  • Registration of Members: NSE establishes rules for the registration of its members, who are entities allowed to trade on the exchange.
  • Listing of Securities: NSE sets criteria and guidelines for companies to list their securities on the exchange. This involves ensuring that listed companies meet certain financial and regulatory standards.
  • Monitoring Transactions: NSE monitors trading activities to ensure compliance with market rules and regulations. This includes surveillance to prevent manipulative practices.
  • Compliance: NSE ensures that its members and listed companies adhere to regulatory requirements and internal policies.
  • Additional Functions: NSE performs other functions related to the regulation and operation of the stock market, including market development and investor protection.

Regulation: NSE operates under the oversight of SEBI, which ensures that the exchange adheres to regulatory standards and maintains fair trading practices.

3. Stock Exchange

Definition: A stock exchange is a marketplace where securities, such as stocks and bonds, are bought and sold. It functions similarly to a traditional marketplace, but for financial securities rather than physical goods.

Key Aspects:

  • Trade: In the context of a stock exchange, trading refers to the buying and selling of securities. Transactions are executed based on the current market price, which is determined by supply and demand.
  • Trading Members: To trade on an exchange, individuals or entities must be registered as trading members. These members execute buy and sell orders on behalf of investors.
  • Investors: The stock market includes a diverse range of participants, from individual retail investors to large institutional investors like banks, mutual funds, and insurance companies.

Rules and Regulations:

  • Uniform Regulations: All market participants, regardless of their type (individuals or institutions), must follow the regulations set forth by SEBI and the stock exchange. This ensures a level playing field and protects market integrity.

Important Facts:

  • SEBI’s Role: SEBI is responsible for protecting investors, promoting fair trading practices, and fostering market development.
  • NSE’s Role: NSE facilitates efficient trading, listing, and monitoring of securities while adhering to SEBI’s regulations.
  • Stock Market Dynamics: The stock market operates on the principles of supply and demand, and its functioning is governed by a combination of regulatory bodies and exchange-specific rules to ensure transparency and fairness.