SEBI and its guidelines

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Securities and Exchange Board of India (SEBI) Act, 1992

Establishment and Background:

  • Date Established: April 12, 1992.
  • Purpose: To regulate the securities market in India and protect investor interests.
  • Headquarters: Bandra Kurla Complex, Mumbai.
  • Regional Offices: New Delhi, Kolkata, Chennai, Ahmedabad.

Historical Context:

  • Capital Issues (Control) Act, 1947: Before SEBI, this Act controlled capital issues and pricing. Its repeal in 1992 marked a shift towards a more liberalized market, allowing market forces to allocate resources.
  • SEBI Act, 1992: Enacted to provide statutory powers to SEBI for effective regulation, ensuring investor protection and market development.

Key Objectives:

  • Protecting Investors:
    • Price Rigging: SEBI monitors and prevents price manipulation to ensure fair trading.
    • Insider Trading: Prohibits trading based on non-public information.
    • Fraudulent Practices: Prevents unfair trade practices like misleading information or deceptive conduct.
  • Promoting Market Development:
    • Training: SEBI promotes the training and development of market intermediaries.
    • Flexibility: Adopts adaptable approaches to support stock exchanges and market activities.
  • Regulating the Market:
    • Rules and Regulations: SEBI frames regulations to govern intermediaries such as brokers, merchant bankers, and underwriters.
    • Registration and Compliance: Registers and regulates intermediaries, mutual funds, and other market participants.

Regulatory Jurisdiction:

  • Scope: Covers all companies listed on stock exchanges, those seeking listing, and all intermediaries involved in the securities market.
  • Disclosure Standards: SEBI sets standards for disclosure to protect investors and ensure transparency.
  • Enforcement: Can issue directions, conduct audits, and adjudicate violations of the Act.

Structure of SEBI:

  • Chairman: Nominated by the Union Government.
  • Members:
    • Union Finance Ministry: Two officers.
    • Reserve Bank of India: One member.
    • Union Government: Five additional members.
  • Departments: SEBI has over 20 departments, including Corporation Finance, Economic and Policy Analysis, Debt and Hybrid Securities, Enforcement, Legal Affairs, and more.

Functions of SEBI:

  • Investor Protection:
    • Prevent Unfair Practices: Ensures fairness in securities transactions and protects investors from fraud.
  • Market Development:
    • Encourage Growth: Supports the development and growth of the securities market through various initiatives.
  • Regulation:
    • Intermediary Regulation: Registers and regulates stockbrokers, investment advisers, and other intermediaries.
    • Operational Oversight: Monitors depositories, custodians, foreign institutional investors, and credit rating agencies.
  • Education and Awareness:
    • Investor Education: Promotes knowledge about market operations and investment opportunities.
  • Research and Development:
    • Market Efficiency: Conducts research to ensure the securities market operates efficiently.

Authority and Powers:

  • Quasi-Judicial:
    • Judgments: SEBI can adjudicate disputes related to market practices and violations.
    • Enforcement: Takes action against unethical practices and ensures compliance.
  • Quasi-Executive:
    • Implementation: Enforces regulations and inspects books of accounts to ensure adherence to rules.
  • Quasi-Legislative:
    • Rule-Making: Formulates rules and regulations to maintain market integrity, such as those governing insider trading and disclosures.
  • Appeals: SEBI’s decisions can be challenged in the Securities Appellate Tribunal and, ultimately, the Supreme Court of India.

Registration of Intermediaries:

  • Intermediaries: Entities involved in the securities market must obtain SEBI registration to operate, including:
    • Stock-Brokers: Facilitate trading of securities.
    • Sub-Brokers: Assist stock-brokers in executing trades.
    • Share Transfer Agents: Manage the transfer of shares.
    • Merchant Bankers: Provide advisory services for capital raising.
    • Portfolio Managers: Manage investment portfolios.
    • Investment Advisers: Offer investment advice.
    • Depositories and Custodians: Safeguard and manage securities.
    • Credit Rating Agencies: Assess the creditworthiness of securities and issuers.
    • Foreign Institutional Investors: Invest in Indian markets, subject to SEBI regulations.

SEBI’s role is crucial in ensuring a fair, transparent, and orderly securities market in India, protecting investors and promoting market development.

Role of SEBI (Securities and Exchange Board of India)

1. Establishment and Purpose:

  • Founded: SEBI was established on April 12, 1992, with statutory powers granted by the SEBI Act, 1992.
  • Objective: SEBI’s main goal is to protect the interests of investors in securities, promote the development of the securities market, and regulate its functioning.

2. Functions of SEBI:

Protective Functions:

  • Price Rigging: SEBI monitors and prevents practices that artificially inflate or deflate stock prices.
  • Insider Trading: It prohibits trading based on non-public information to ensure a level playing field.
  • Fraudulent and Unfair Trade Practices: SEBI acts against deceptive practices that harm investors.

Developmental Functions:

  • Training: SEBI promotes the training of intermediaries like brokers, underwriters, and merchant bankers to improve market efficiency.
  • Promoting Stock Exchanges: It encourages activities of stock exchanges and adopts flexible approaches to market changes.

Regulatory Functions:

  • Rules and Regulations: SEBI formulates and enforces rules and regulations for market intermediaries (brokers, bankers, etc.), ensuring their compliance and discipline.
  • Registration: It registers and regulates intermediaries, such as stock brokers, sub-brokers, mutual funds, and more.
  • Market Oversight: SEBI regulates company takeovers, audits stock exchanges, and oversees transactions to ensure fair practices.
  • Foreign Portfolio Investors (FPIs): SEBI’s regulations govern foreign investments in Indian securities markets.

3. Structure of SEBI:

Hierarchical Framework:

  • Chairman: Nominated by the Union Government of India.
  • Members: Includes two officers from the Union Finance Ministry, one member from the Reserve Bank of India, and five other members appointed by the government.

Departments:

  • SEBI has various departments including Corporation Finance, Economic and Policy Analysis, Debt and Hybrid Securities, Enforcement, and Legal Affairs.

4. Authority and Powers:

  • Quasi-Judicial: SEBI can deliver judgments related to market fraud and unethical practices.
  • Quasi-Executive: SEBI implements regulations, conducts inspections, and takes legal actions against violators.
  • Quasi-Legislative: SEBI formulates rules and regulations to ensure investor protection and market integrity.

5. Registration of Intermediaries:

  • SEBI mandates registration for various market intermediaries, including stock brokers, portfolio managers, mutual funds, credit rating agencies, and foreign institutional investors.

Stock Exchanges

1. Definition and Role:

  • Stock Exchange: A regulated marketplace where securities (stocks, bonds, etc.) are bought and sold. It provides a platform for buyers and sellers to transact.
  • Primary Exchanges in India: Prominent exchanges include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

2. How Stock Markets Work:

Stock Trading:

  • Transactions: Investors buy and sell securities through brokers who are members of the exchange.
  • Price Determination: Prices are set based on supply and demand dynamics. For example, if more buyers are interested in a stock, its price will rise.

3. Functions of Stock Exchanges:

Liquidity and Marketability:

  • High Liquidity: Allows investors to easily buy and sell securities, converting them to cash quickly. This feature attracts investors as it ensures ease of entry and exit from investments.

Price Determination:

  • Market Mechanism: Prices are determined through continuous trading where supply and demand meet. Indexes like the Sensex track overall market performance.

Safety:

  • Regulation: Exchanges operate under SEBI’s oversight to ensure that all transactions are conducted within a legal framework, minimizing fraud and malpractice.

Contribution to the Economy:

  • Capital Mobilization: Facilitates the efficient mobilization and allocation of capital, preventing idle funds and fostering economic growth.

Spreading of Equity:

  • Public Participation: Promotes wider ownership of securities among the public, increasing market participation and spreading economic benefits.

Speculation:

  • Regulated Speculation: While speculative trading is part of the market, it is kept within legal bounds to ensure stability and liquidity. Speculation can help in price discovery but is monitored to prevent excessive volatility.

SEBI ensures a well-regulated, transparent, and efficient securities market in India, while stock exchanges provide a structured platform for trading securities, contributing to economic growth and market liquidity.