SECURITIES AND EXCHANGE BOARD OF INDIA

SEBIs BACKGROUND
The government of India passed two legislations that governed the securities
market till early 1992 were the Capital Issues (Control) Act, 1947 (CICA) and
the Securities Contracts (Regulation) Act, 1956 (SCRA). The CICA fails to
provide a stock market which is free from unfair trade practices. The capital
market has witnessed tremendous growth in recent times, lots of unfair trade
practices also started in stock markets such as price rigging, unofficial
premium on new issue, and delay in delivery of shares, violation of rules and
regulations of stock exchange and listing requirements. Due to these
malpractices the customers started losing confidence and faith in the stock
exchange. However, need was felt to have a single authority to regulate and
administrative body in April 1988, so Government of India decided to set up
an agency or regulatory body known as Securities Exchange Board of India
(SEBI). As Parliament was not in session, and there was an urgent need to
instil a sense of confidence in public in the growth and stability of the
market, the President promulgated the Securities and Exchange Board of
India Ordinance, 1992.

INTRODUCTION
In 1992, a multicore securities scam rocked the Indian financial system.1 The
then existing regulatory framework was found to be fragment and
inadequate and hence, a need for an autonomous, statuory, and integrated
organization to ensure the smooth functioning of capital market was felt. To
fulfill this need, the Securities and Exchange Board of India (SEBI), Which was
already in existence since April 1988, was conferred statutory powers to
regulate the capital market.
The Securities and Exchange Board of India (SEBI) was established on 12
April 1988 as a non-statutory body through an Administrative Resolution of
the Government for dealing with all matters relating to the regulation and
development of the securities market and investor protection and also to
advise the government on all these matters. It has been monitoring the
activities of stock exchanges, mutual funds, merchant bankers, etc.

1 HARSHAD MEHTA CASE.

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was
amended in the years 1995, 1999, 2002 and 2010 to meet the requirements
of changing needs of the securities market and Responding to the
development in the securities market.

OBJECTIVES OF SEBI
The preamble defines the object of SEBI, An Act to provide for the
establishment of a Board to protect the interests of investors in securities
and to promote the development of, and to regulate, the securities market
and for matters connected therewith or incidental thereto.2
The SEBI has been entrusted with both the regulatory and development
functions. The objectives of SEBI are as follow:-

Investor protection,
Promoting the development,
Regulating the securities.
Promotion of efficient services by brokers, merchant bankers and other
intermediaries so that they become competitive and professional. Investor
protection focuses on making sure that investors are fully informed about
their purchases that insider activity does not threaten the worth of some
portfolios for the enrichment of others, and those holding are not simply lost
in instances of brokerage failure.

SEBI AS REGULATOR
STRUCTURE OF SEBI

2 PREAMBLE OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

SEBI was a non-statutory body without any statutory power. By the

amendment in 1995, the SEBI was given additional statutory power by GOI.
Management of the Board.-3
(1)The board shall consist of the following members, namely:(a) a Chairman;
(b)two members from amongst the officials of the Ministry of the Central
Government dealing with Finance and administration of the Companies
Act, 1956;
(c) one member from amongst the officials of Reserve Bank;
(d)five other members of members of whom at least three shall be the
whole-time members,
to be appointed by the Central Government.
FUNCTIONS OF SEBI4
The SEBI performs functions to meet its objectives. To meet three objectives
SEBI has three important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:-

3 Section 4 of SEBI ACT, 1992

4 NCERT, BUSINESS STUDIES- XII

These functions are performed by SEBI to protect the interest of investor and
provide safety of investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main
objective of inflating or depressing the market price of securities. SEBI
prohibits such practice because this can defraud and cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors,
promoters etc. These insiders have sensitive information which affects the
prices of the securities. This information is not available to people at large
but the insiders get this privileged information by working inside the
company and if they use this information to make profit, then it is known as
insider trading, e.g., the directors of a company may know that company will
issue Bonus shares to its shareholders at the end of year and they purchase
shares from market to make profit with bonus issue. This is known as insider
trading. SEBI keeps a strict check when insiders are buying securities of the
company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are
likely to induce the sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to
evaluate the securities of various companies and select the most profitable
securities.

(v) SEBI promotes fair practices and code of conduct in security market by
taking following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders
wherein companies cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has
provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares
unrelated to market prices.

2. Developmental Functions:These functions are performed by the SEBI to promote and develop activities
in stock exchange and increase the business in stock exchange. Under
developmental categories following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and
adoptable approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock
exchange.

3. Regulatory Functions:These functions are performed by SEBI to regulate the business in stock
exchange. To regulate the activities of stock exchange following functions are
performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate
the intermediaries such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview
and private placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers,
share transfer agents, trustees, merchant bankers and all those who are
associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
POWER OF SEBI
(i)

Power to make rules5

(ii)

Power to make regulations6

(iii)

Power relating to stock exchanges & intermediaries

(iv)

Power to impose monetary penalties

5 Sec. 29 of SEBI ACT

6 Sec. 30 of SEBI ACT

The SEBI Act originally provided for penalty of suspension and cancellation of
a certificate of registration of an intermediary. SEBI was empowered to
adjudicate a wide range of violations and impose monetary penalties on any
intermediary or other participants in the securities market. The amendment
Act listed out a wide range of violations along with maximum penalties
leviabla.
(v)

Power to initiate action in functions assigned

(vi)

Power to regulate insider trading

(vii)

Power under Securities Contact Act

(viii) Power to regulate business of stock exchanges

(ix)

Power to adjudicate7

(x)

Power to Central Government to issue directions8

(xi)

Power of Central Government to supersede the Board9

(xii)

Power to remove difficulties10

Securities Appellate Tribunals: An efficient and effective system of

regulation calls not only for firmness, but also for fairness. The amendment
Act provided for establishment of one or more SATs to hear the appeals from
the orders of the adjudicating officers. Anybody not satisfied with the orders
of the SAT can prefer an appeal to the High Court. This ensured fairness in
the process of adjudication.
PENALITIES UNDER SEBI ACT
15A Penalty for failure to furnish information, return, etc.
15B Penalty for failure by any person to enter into agreement with clients
7 Sec. 15I of SEBI ACT
8 Sec. 16 of SEBI ACT
9 Sec. 17 of SEBI ACT
10 Sec. 34 of SEBI ACT

15C Penalty for failure to redress investors grievances

15D Penalty for certain defaults in case of mutual funds
15E Penalty for failure to observe rules and regulations by an asset
management company
15F Penalty for default in case of stock broker
15G Penalty for insider trading
15H Penalty for non-disclosure of acquisition of shares and take-overs
15HA Penalty for fraudulent and unfair trade practices
15HB Penalty for contravention where no separate penalty has been
provided

ACHIEVEMENTS OF SEBI
(1) Guidelines to Companies
For the protection of the investors SEBI had issued guidelines to the
companies (old as well as new). SEBI was given the full power to
regulate and control over the stock exchange. In the present time, SEBI
has introduced a code of advertisement via all the possible sources for
the public for ensuring fair and true statement disclosure and also
made underwriting of issue optional subject to certain terms and
conditions.
This is for the protection of small investors due to misleading
information. If the companies dont followed the guidelines then SEBI
can take action against that company.
(2)Portfolio Management Services
If we see the past time the infringed PMS started from the year of
1993. The SEBI framed regulation of PMS keeping that securities scam
in mind. We can say that this is a good start on the part of SEBI.
(3)Mutual funds
On January 20, 1993 the mutual funds were placed under the control of
SEBI. SEBI by its regulations is trying to make mutual funds in healthy
investment lines.
(4)Guidelines for the intermediaries
SEBI control the unfair trade practices which is operate by the
intermediaries in securities market. By the different guidelines SEBI
protect the interest of the investors.

(5)Action for delays in transfers and refunds

Many companies are providing its investors delays in transfer of shares
and delays in refunds of public issue money, SEBI prohibited it for gives
protection to investors and avoids their exploitation by the delayed
payment by the companies.
(6)Takeovers and mergers
SEBI had issued guidelines as regards takeovers and mergers of the
companies. It is for the purpose of the transparency in acquisitions of
shares to make it fair. It also avoid the unfair takeovers and mergers.
(7)Foreign institutional investors
This is in pursuance of the government SEBI regulate Foreign institutional
investors that the SEBI started the registration of FII.
(8)Control on Merchant Banking
Merchant bankers are now to be authorized by SEBI. Now they have to
followed guidelines given by SEBI and also norms and a code of conduct
now the merchant bankers become more accountable.
(9)Orderly functioning of Stock Exchange
SEBI is improving the transparency in the securities market. SEBI is the
reason of the growth of Indian Stock Exchange.
(10)

Guidance of investors

SEBI publish numbers of guidelines for the investors for make them aware
regarding the investment scheme and provide education to the investors.

MAJOR CONTROVERSIES
(I)

SEBI V. INSURANCE REGUALOTORY AND DEVELOPMENT

AUTHORITY11

In 2010, SEBI issued show cause notices to many life insurers and asked
them to stop introducing unit-linked insurance plans, without its
permission as these hybrid insurance products mimicked mutual fund
schemes that are regulated under SEBIs collective investment scheme
11 SEBI v. IRDA o Unit linked insurance plans,

norms. The order gave rise to a battle between the capital markets
regulator and the insurance regulator. The President of India had to pass
an ordinance amending the Collective Investment Scheme norms and
keeping ULIP under IRDA. Subsequently, IRDA went on an overdrive for a
complete makeover of ULIP regulations.
(I)

MUTUAL FUNDS

After 2009, SEBI abolish the agent commission for the distribution of financial
product, many industry and legal expert criticized that order of scrapping of
entry fees in mutual funds. The order provided many advisors to sell the
other products that offered better incentives, resulting in stagnation of assets
under management.
(II)

PARTICIPATORY NOTE

In October 2007, in the wake of an appreciating rupee, SEBI proposed to curb

issuance of participatory notes (P-notes), a favorite investment route used by
foreign institutional investors (FIIs). SEBI was concerned about the quality of
money flowing into India through P-notes but many say it was an attempt to
curb excessive dollar flows. The BSEs benchmark Sensex crashed 1,700
points the very day after the announcement and it led to suspension of
trading for an hour. The crash forced the finance minister to clarify that the
government was not against FIIs and there would be no immediate ban on Pnotes.
(III)

SAHARA

In November 2010, SEBI barred two Sahara group firms from raising money from the public in
any manner, citing violations of capital-raising norms. Another directive followed in June 2011,
asking Sahara firms to return money to investors with 15% interest. This marked the beginning
of a legal battle between the regulator and the company as the latter argued that since unlisted
entities were raising funds, SEBI has no jurisdiction over them. The case was heard in the
Securities and Appellate Tribunal and later went up to the Supreme Court, which directed Sahara
to refund the money. (Sahara has filed a defamation case in a Patna court against Mints editor

and some reporters over the newspapers coverage of the companys disputes with Sebi. Mint is
contesting the case.)

(IV) MCX-SX12
In a bid to ensure compliance of exchanges with market infrastructure
regulations, Sebi got into a bitter legal spat with Indias newest stock
exchange MCX-SX in 2009. The regulator fought a three-year long battle with
the promoters of the exchange, alleging the latter violated norms by
attaching put options in its share purchase agreement with investors and not
following permissible routes for capital reduction. While Sebi alleged that
MCX-SX promoters did not comply with ownership and governance norms
required by an exchange, MCX-SX claimed that it had not violated any such
norm, that it took prior permission of other regulators, and followed
permissible routes for capital reduction. Later, MCX-SX was given a license to
start equity trading and given three years to reduce promoter holding in the
exchange.
The crisis of confidence did not strike suddenly. In fact, SEBI's journey to
ignominy is a result of a series of failures over the past decade. As its longest
serving chairman, Mehta has to share the blame for some of the failures.
With the hunt for a new SEBI chief on and an organizational overhaul on the
cards, it's important to find out what went wrong with India's first regulator.
Why did the capital market watchdog not even whine when unscrupulous
brokers and financiers repeatedly took investors for a ride?
A major allegation against Mehta is that he seldom acted on his own. It took
either a government fiat or a scam for SEBI to act. Be it Ketan Parekh and his
associates diverting thousands of crores of rupees to rig the prices of some
scrips or the rampant misuse of badla (the system of carrying forward a
transaction by paying interest on the outstanding) at the CSE that eventually
triggered payment problems across other exchanges, SEBI slept through
most major capital market crises.

12 Multi Commodity Exchange Stock Exchange (MCX-SX)

Mehta resisted the introduction of rolling settlements which would have

brought down the trading cycle to a day and ensured a uniform trading cycle
in all stock exchanges. Rolling settlements would have killed badla and
Mehta was not keen to perform the last rites of the age-old carry-forward
instrument.
Mehta was also opposed to derivatives (products that allow speculators to
take a bet on the future price of a stock), though formally he maintained his
commitment. As a result, futures and options trading could be launched only
last year, instead of 1996 when it was first proposed.
"By resisting rolling settlements and derivatives, Mehta ensured that critical
reforms in the markets were stalled," says a senior capital market
functionary. There are many who feel that SEBI did not back modernization to
the extent it should have.
Says Ajay Shah, assistant professor at the Indira Gandhi Institute of
Development Research: "If SEBI had shown the vision to go ahead with
rolling settlements and derivatives in 1996, a lot of the problems the markets
have faced today would not have happened."
It took a scam in March for the finance minister to announce the introduction
of rolling settlements in Parliament. Under pressure from the Government,
Mehta banned badla. Around the same time, allegations about the UTI's role
in propping up Ketan Parekh's favorite shares were flying thick and fast.
But SEBI refused to look into the UTI's transactions, with Mehta claiming that
the UTI did not come under the regulator's purview. He forgot, perhaps, that
any transaction in the capital markets can be scrutinized by SEBI and even
individuals who are not registered with it can be probed for insider trading or
price rigging.
By this time, SEBI's credibility had taken a hit and the action had shifted from
Mittal Court in Mumbai to North Block in Delhi. With the Government
tightening the screws on SEBI, the watchdog sacked broker directors at BSE
and CSE, announced action against BPL, Sterlite, Videocon and Harshad
Mehta, and barred broking outfits suspected of involvement in the scam from
trading. However, the tough measures had come too late.

SEBI also failed to check the problem of companies raising money from the
public and then vanishing. "It took SEBI and the Department of Company
Affairs three years to decide who would take action against vanishing
companies," says Prithvi Haldea, primary market expert who is also on SEBI's
Primary Market Committee. Interestingly, this committee has not met for a
year.
To be fair, some of SEBI's failures are rooted in the law that governs the
regulator. Unlike in the US where the regulator investigates a case and then
hands over the matter to a judicial authority, in India SEBI does everything
on its own. It's a situation where the policeman framing the charges and the
judge deciding the case is the same person.
"We never wanted to be the policeman and the judge. In fact, half the
problems arose because of this," says Mehta. Still, repeated pleas for
amending the SEBI Act have gone unheeded. The question is not whether
SEBI has enough powers but whether it has the right powers. As Mehta
points out, many of the orders passed by SEBI are struck down by courts.
"What do we do? How do we take action?" he asks.
Another flaw in the working of SEBI is that there are no full-time board
members. This gives the SEBI chairman overriding powers, something many
people feel can be dangerous. Mehta, who can't help but feel victimised,
says the real issues have been marginalised. We only highlight individuals
and never issues. Take the case of a multiplicity of regulators. There are
overlaps which are taken advantage of. If the country's capital markets are to
be regulated properly this issue will have to be resolved," he argues.
Internally, SEBI has had a brain drain. Its top was packed with IAS and
Revenue Department officials, which created dissent among the cadre. The
grumbles snowballed into charges of favoritism and corruption.
A number of young professionals quit SEBI to move over to higher salaries at
FIIs. After the scam, the Government woke up and refused to give further
extensions to officials on deputation. But Mehta asked for three more
deputationists to replace those who had gone back. Nothing changed, much
to the demoralization of the staff.
SEBI hasn't been able to effectively use technology for market surveillance.

Even though price movements can be monitored to detect an inordinate rise

in a scrip's price, SEBI officials are dependent on exchanges for transaction
details. "If regulators want to take out human discretion, they must rely more
and more on technology," says Jayanth Varma, professor at IIM Ahmedabad
and former SEBI member.

CHALLENGES AHEAD
With the advent of new technology, SEBI will have to continuously upgrade
its manpower and improve its capacities to deal with situations that can
arise. Creating a more robust framework to successfully deal with the
menace of insider trading and strict implementation of buyback norms will
also play an important role in assuring a sustained investor interest. SEBI
would further have to strongly handle the issue of fraudulent collective
investment schemes. Although SEBI has approved a proposal to penalize
unregistered CIS entities and has decided to declare the illegal mobilization
of funds as a fraudulent and unfair trade practice; the long term results of
these steps will only ensure their effectiveness. To ensure that FIIs continue
to invest in India and to channelize household savings into the capital market
will be another challenge. Moreover, SEBI is currently facing one of its
biggest legal battles against two Sahara companies regarding refund of
around 24,000 crore rupees.

CONCLUSION
The capital market of India requires monitoring rather than over-regulation.
The SEBI can ensure a free and fair market and take India into the league of
major global capital markets in the next round of reforms. The SEBI has to
balance between the costs of regulation and market development. The
should be cross-border cooperation between various regulators and
regulators and industry.