The Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations. It is the highest authority on matters relating to the operation of Security markets, Stock Exchanges, Commodities Markets, etc. in India.
In this article, Team YLCC explores the role of SEBI as a regulator of the financial markets in India. Read on!
Structure Of SEBI
The hierarchical structure of SEBI consists of the following members:
The chairman of SEBI is nominated by the Union Government of India.
Two officers from the Union Finance Ministry will be a part of this structure.
One member will be appointed from the Reserve Bank of India. Five other members will be nominated by the Union Government of India.
In addition to this, there are 20 departments working under the SEBI including the departments of corporation finance, economic and policy analysis, debt and hybrid securities, enforcement, human resources, investnment management, commodity derivatives, market regulation, legal affairs, and more.
Functions Of SEBI
The Securities And Exchange Board of India (SEBI) functioning as a regulator executes a wide variety of vital functions as laid down in the governing statute- SEBI Act of 1992. Given below we have elaborated on SEBI’s function under 3 categories:
PROTECTIVE FUNCTIONS
- Checks and Penalises Price Rigging– The practice of price rigging refers to the manipulation of the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI aggressively prohibits such practices because it is fraudulent in nature and investors feel cheated in such practices.
In FY 2019-20, SEBI detected only 35 cases of share price rigging, which basically involves artificial demand, supply trades to move price. It is the lowest detection rate since at least 2008. Experts are of the opinion that SEBI’s intense surveillance measures and the various circuit filters that it has imposed have curbed price rigging in the cash segment.
- War Against Insider Trading– Insider trading is referred to as the practice of trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. Insider trading can be either illegal or legal depending on when the insider makes the trade. Insider trading is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.
In India, SEBI has a strict stance against insider trading. SEBI (Insider Trading) Regulation, 1992 is aimed at laying strict guidelines to curb insider trading practices. Furthermore, the penalties and punishments for committing insider trading have been defined under Chapter IV-A of the SEBI Act.
- Prohibiting Fraudulent and Unfair Trade Practices- Under SEBI guidelines, companies are not permitted to make any misleading claim or statement which is likely to result in the public buying more securities of the company.
- Spreading Awareness– SEBI regularly undertakes steps to educate investors so that they are able to understand the law and how to transact safely on the securities market.
- Other Protective Functions– In accordance to its commitment to fair practices and code of conduct, SEBI takes certain steps from time to time including the issuance of guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm. SEBI also has jurisdiction over investigating cases of insider trading and penalises all offenders guilty of committing such activity. In addition to this, SEBI has also ceased the practice of making preferential allotment of shares unrelated to market prices.
DEVELOPMENTAL FUNCTIONS
SEBI is one of the few regulatory bodies in India which not only regulates but also innovates. SEBI authorities aim to function in public interest and attempts to make the securities markets accessible to common citizens. Developmental functions also involve promoting and developing activities in stock exchange and increase the business in stock exchange. The SEBI’s developmental functions include:
- Training of intermediaries of the securities market for smooth functioning
- Promoting activities of stock exchange by taking measures like allowing internet trading through registered stock brokers
- Making underwriting optional to reduce the cost of issue and allowing Initial Public Offering (IPO) in primary market.
REGULATORY FUNCTION
This is perhaps the most important function of the SEBI. In order to be able to execute these powers effectively, the regulatory body has been conferred with a variety of powers, which have been mentioned below:
- Firstly, the quasi-legislative powers conferred upon the regulatory body allow it to formulate suitable rules, regulations and guidelines as the securities market may require from time to time. These rules usually tend to encompass obligations of players involved, insider trading regulations and mandatory disclosures.
- Quasi-judicial powers of the SEBI allow it to pass judgments in cases of frauds and unethical practices pertaining to the securities market. This helps in ensuring transparency, accountability and fairness in the securities market.
- Quasi-executive powers of the SEBI allow the body to examine the Book of Accounts and other crucial documents and information in order to collect evidence against violations. If an entity or individual is found guilty of a violation, the SEBI has the legal authority to impose rules, pass judgments and penalise the violator accordingly.
Some other regulatory functions of the SEBI include:
- Protecting the interests of the Indian investors and developing glitch-free functioning of the securities market
- To monitor company takeovers and acquisition of shares
- Registration and regulation of the working of mutual funds
- Conducting inquiries and audit of stock exchanges
- Regulating merchant banks, brokers, underwriters etc.
- Registration and regulation of stock-brokers, sub-brokers, share transfer
SOME EXAMPLES OF SEBI PENALTIES:
- SEBI vs Bombay Stock Exchange (BSE)
In early 2022, SEBI imposed a ₹3 lakh penalty on BSE for engaging indirectly in activities that are unrelated/non-incidental to its activities as the stock exchange and thus in violation. SEBI had examined investments made by BSE to check whether the latter was engaged in activities that are unrelated or not incidental to its activity as a stock exchange without the market regulator’s approval. The period of examination relates to all the existing stakes/shares in other entities held by the BSE and/or its subsidiaries as of March 26, 2021. In the course of the investigation, SEBI found that the BSE had acquired stakes in various businesses without taking requisite approvals from SEBI.
- In October 2022, SEBI, in a 100-page order, barred ten entities, including Bombay Dyeing & Manufacturing Co Ltd (BDMCL) and the company promoters, from markets for up to two years. BDMCL’s non-executive chairman Nusli N Wadia, non-executive director Ness N Wadia, and erstwhile managing director (MD) Jehangir N Wadia were also prohibited from being associated with markets, including as director or key managerial personnel in a listed company for one year.
- In the very same month, imposed a penalty of Rs 2 lakh each on Gautam Dutta, CEO—operations of PVR Ltd, NC Gupta, company secretary of PVR Ltd, and Pramod Arora, chief development officer of PVR Ltd, for non-disclosure of their impugned trades to PVR Ltd under SEBI (Prohibition of Insider Trading) Regulations and for failing to obtain pre-clearance of trades in the shares of the company.
- In 2022, SEBI also cancelled the registration of an NSE stock broker Sri Bheemeswara Securities for violating market norms.
In the light of recommendations of various committees and criticisms of analysts of capital market, a number of suggestions can be made to improve SEBI’s performance in future. SEBI needs to be vested with more powers; among these, mention may be made of the following important ones:
- To supervise effectively the working of stock exchanges on a day-to-day basis.
- To insist on companies for the supply of extensive information on a regular basis.
- To penalize members of stock exchanges who were found to violate securities laws.
- To debar wrong-doers from any activity in the stock market and impose on them civil penalties and initiate criminal proceedings.
- To make rules about the manipulative practices.
YLCC would like to thank its Content Team for their valuable insights in this article.
