The two exclusive 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- The CICA repealed in 1992 as a part of liberalization process to allow the companies to approach the market directly provided they issue securities in compliance with prescribed guidelines relating to disclosure and investor protection.
- Under the constitution which came into force on January 26, 1950, stock exchanges and forward markets came under the exclusive authority of the Central Government.
- The Government appointed the A. D. Gorwala Committee in 1951 to formulate a legislation for the regulation of the stock exchanges and of contracts in securities.
- Following the recommendations of the Committee, the SCRA was enacted in 1956 to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and to prevent undesirable transactions in securities.
It gives Central Government regulatory jurisdiction over
(a) stock exchanges through a process of recognition and continued supervision,
(b) contracts in securities, and
(c) listing of securities on stock exchanges.
The legal reforms began with the enactment of the SEBI Act, 1992, which established SEBI with statutory responsibilities to
- protect the interest of investors in securities,
- promote the development of the securities market, and
- regulate the securities market.
- The allocation of resources by government, rather than by market, contributed to shrinkage of the securities market. People started to keep their savings out of the markets.
- As a part of the liberalisation process, the CICA was repealed by an Ordinance on May 29, 1992 paving way for market determined allocation of resources.
It was considered necessary to create a statutory agency, which would ensure fair play in the market, develop fair market practices, prescribe and monitor conduct of issuers and intermediaries so that the securities market enables efficient allocation of resources. The enactment of the SEBI Act, 1992 was an attempt in this direction.
Constitution : The Act established a Board, called Securities and Exchange Board of India (SEBI), to protect the interests of investors in securities and to promote the development of and to regulate the securities market. It prescribed that the Board would consist of a Chairman, one member each from amongst the officials of the finance ministry, the law ministry and the RBI and two other members. In order to avoid conflict of interest, it was provided that a member shall be removed from office if he is appointed as a director of a company.
(a) Regulating the business in stock exchanges and any other securities markets,
(b) Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio mangers, investment advisors and such other intermediaries,
(c) Registering and regulating working of CIS, including mutual funds,
(d) Promoting and regulating self regulatory organizations (SROs),
(e) Prohibiting fraudulent and unfair trade practices relating to securities market,
(f) Promoting investor education and training of intermediaries,
(g) Prohibiting insider trading in securities,
(h) Regulating substantial acquisition of shares and takeover of companies,
(i) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries and SROs,
(j) Performing such functions and exercising such powers under the SCRA as may be delegated by the Central Government.
(k) Levying fees or other charges for carrying the above purposes,
(l) Conducting research for the above purposes and
(m) Performing such other functions as may be prescribed.
Autonomy and Accountability :
- The SEBI Act granted powers of last resort to Central Government.
- The Central Government was empowered to supersede the Board for a period not exceeding six months if it is of the opinion that the Board is unable to discharge the functions and the duties.
- The Board was also obligated to submit to Central Government a report in the prescribed form giving a true and full account of its activities, policy and programmes during the previous year within 60 days (increased to 90 days by 1995 amendment) of the end of each financial year.
- The Act empowered SEBI to make regulations, with the previous approval of Central Government, consistent with the Act and the rules, to carry out the purposes of the Act.
- The Act empowered Central Government to exempt, in public interest, any person or class of persons dealing in securities from the requirements of registration.
- Amendments in SCRA :
- Central Government has delegated almost all the powers under the SCRA by notifications issued in 1992 and 1994. All the powers under the Securities Contracts (Regulation) Rules, 1957 have also been transferred to SEBI in 1996.
- In order to develop the market for government securities, the definition of ‘securities’ was amended to include government securities within its ambit.
In the light of experience gained with the working of the SEBI Act, 1992, it was considered desirable to expand the jurisdiction of SEBI, enhance its autonomy and empower it to take a variety of punitive actions in case of violations of the Act.
- Composition of Board:
- The amendment Act deleted the provision relating to disqualification of a member of Board on his being appointed as a director of a company from the statute.
- It inserted a new provision to make it obligatory for a member of Board, who is director of any company and who has any direct or indirect pecuniary interest in any matter coming up for consideration at a meeting of the Board, to disclose the nature of interest and refrain from participating in the deliberations or decisions of the Board with respect to that matter.
- Jurisdiction of SEBI
The amendment Act empowered SEBI to register and regulate the working of the intermediaries like depositories, custodians for securities and also certain other persons associated with the securities market like foreign institutional investors, credit rating agencies, venture capital funds etc.
- The amendment Act which incorporated section 11A to SEBI’s regulatory powers over corporates in the issuance of capital, transfer of securities and other related matters.
- 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 adjudicating officer is required to be appointed by SEBI. He shall not be an officer below the rank of a division chief of SEBI. He will hold an enquiry after giving a person reasonable opportunity of being heard for the purpose of determining if any violation has taken place and imposing penalty. To ensure fair enquiry and penalty, it was provided that appeal against the orders of adjudicating officers would lie to the SAT, which was also constituted by the amendment Act.
Appeals from the orders of an adjudicating officer can be preferred to the SAT. The appeals against the orders of SAT can be preferred to the High Court.
- The amendment Act inserted section 11B to empower SEBI to issue directions to all intermediaries and other persons associated with the securities market
- In the interest of investors,
- In the interest of orderly development of the securities market,
- To prevent the affairs of any intermediary including a mutual fund from being conducted in a manner detrimental to the interest of investors or of the securities market,
- To secure the proper management of any such entity.
Autonomy of SEBI:
The autonomy of SEBI was reinforced by the following provisions:
(i) SEBI was vested with the powers of a civil court;
(ii) Section 20A barred the jurisdiction of civil court in respect of actions or orders passed by SEBI.
(iii) Section 23 was amended to extend the immunity from suit, prosecution or other legal proceedings to SEBI or any of its members, officers or employees in respect of action taken in good faith;
(iv) Section 26 was amended to permit SEBI to file complaints in Courts under section 24 in respect of offences under the SEBI Act.
(v) By amendment to section 28, the power of last resort of the Central Government to exempt any person or class of persons dealing with securities market from the requirement of registration with SEBI was withdrawn;
(vi) Sections 29 and 30 were amended to amended to provide that the conditions for grant of registration would be determined by Regulations and not by Rules;
(vii) Section 30 was amended to provide that the SEBI can notify regulations without approval of the Central Government.
Securities Appellate Tribunal :
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.
Amendments in SCRA: The amendment Act also amended SCRA. In the last few years there has been substantial improvements in the functioning of the securities market. However there were inadequate advanced risk management tools. In order to provide such tools and to deepen and strengthen the cash market, a need was felt for trading of derivatives like futures and options. But it was not possible in view of prohibitions in the SCRA. Its preamble stated that the Act was to prevent undesirable transactions in securities by regulating business of dealing therein, by prohibiting options, etc. Section 20 of the Act explicitly prohibited all options in securities. Section 16 of the Act empowered Central Government to prohibit by notification any type of transaction in any security. In exercise of this power, government by its notification in 1969 prohibited all forward trading in securities. Introduction of trading in derivatives required withdrawal of these prohibitions. The amendment Act withdrew the prohibitions by repealing section 20 of the SCRA and amending its preamble.
The SCRA was amended to allow an exchange to establish additional trading floor outside its area of operation with approval of SEBI.
The Act provides a legal basis for establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by
(a) making the securities of public limited companies freely transferable;
(b) dematerializing the securities in the depository mode; and
(c) providing for maintenance of ownership records in a book entry form.
Legal Basis : The Depositories Act, 1996 provides a legal basis for establishment of multiple depositories and entrusts them with responsibility of maintaining ownership records of securities and effecting transfer of securities through book entry only. The depositories render, through participants, any service connected with recording of:
(a) allotment of securities; and
(b) transfer of ownership of securities.
Both the depository and participant need to be registered with SEBI under section 12 of the SEBI Act, 1992, and are regulated by SEBI.
Only a company formed and registered under the Companies Act, 1956 can be registered as a depository.
The ownership records of securities maintained by depositories/participants, whether maintained in the form of books or machine readable form, shall be accepted as prima facie evidence in legal proceedings. The depository is treated as if it were a bank under the Bankers’ Books of Evidence Act, 1891.
Free Transferability of Securities :
The securities of all public companies have been made freely transferable.
These provisions, read with section 7 of the Depositories Act make the transfer of securities in any company, whether listed or not, other than a private company and a deemed public company, free and automatic.
Partial Dematerialisation of Securities :
Section 9 of the Depositories Act provides that the securities held by a depository shall be dematerialized and be fungible.
The Act envisages that ownership of securities shall be reflected through book entry system and this will not require existence of securities certificates.
E. Securities Laws (Amendment) Act, 1999
This Act has inserted provisions relating to derivatives, units of CIS and delegation of powers under the SCRA to RBI.
- SEBI set up a 24 member Committee under the Chairmanship of Dr. L. C. Gupta on 18th November 1996 to develop appropriate regulatory framework for derivatives trading in India.
- The Committee submitted its report on March 17, 1998 recommending among others, that the derivatives may be declared as securities under section 2(h) (ii)(a) of the SCRA, so that the regulatory framework applicable to trading of securities could govern trading of derivatives also.
Collective Investment Scheme :
During mid 1990s, many companies especially plantation companies had been raising capital from investors through schemes, which were in the form of CIS.
In order to strengthen the hands of SEBI to protect interests of investors in plantation companies, the Act amended the definition of “securities” to include within its ambit the units or any other instruments issued by any CIS to the investors in such schemes
Strengthening Organisations :
- The Amendment Act strengthened the board of SEBI by increasing the number of members from five to eight, providing for at least three whole time members and substituting the representation of the Ministry of Law by the Ministry dealing with administration of the Companies Act, 1956.
- The Amendment Act converted the SAT to a three member body consisting of a presiding officer and two other members to be appointed by the Central Government.
- It provided that only a sitting or retired judge of the Supreme Court or a sitting or retired Chief Justice of a High Court would be eligible to be appointed as presiding officer of the SAT and such appointment shall be made in consultation with the Chief Justice of India or his nominee.
- The presiding officer will hold the office for a term of five years or until he attains the age of sixty eight years, whichever is earlier.
- A member of SAT can hold office for a term of five years or until he attains the age of sixty two years, whichever is earlier.
Empowering SEBI : The Amendment Act conferred on SEBI a lot of additional powers to deal with any kind of market misconduct and protect the investors in securities. For example, it can now prevent issue of any offer document if it has any misgivings about the antecedents of promoters / companies concerned. Under the amended provisions, SEBI can now:
(i) call for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of transactions in securities which are under investigation or enquiry by SEBI
(ii) conduct inspection of any book or register or other document or record of any listed public company; If, however, the said company is not a registered intermediary, SEBI can inspect only if it has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.
(iii) issue commissions for examination of witnesses or documents while exercising powers to call for information or conduct inspection;
(iv) In case of a listed public company, which is not a registered intermediary, the SEBI can exercise its powers of impounding and retaining proceeds or securities, attaching bank accounts or directing non-alienation of assets only if it has reasonable grounds to believe that the company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.
(v) prohibit, for the protection of investors, any company from issuing any offer document including a prospectus or advertisement soliciting money from the public for the issue of securities, and specify the conditions subject to which such offer documents can be issued
(vi) specify the requirements for listing and transfer of securities; and
(vii) pass an order requiring a person to cease and desist from committing or causing a particular violation of any of the provisions of the SEBI Act, or any rules or regulations made there under.
H. The Securities Laws (Amendment) Bill, 2003
The Securities Laws (Amendment) Bill, 2003 proposes these amendments.
- Demutualisation of Exchanges: The Bill makes it mandatory that all stock exchanges, shall be corporatised and demutualised on and from a date appointed by SEBI.
- Delisting of Securities : A listed company or an aggrieved investor can file an appeal before SAT against the decision of the exchange delisting the securities. The Bill allows a company to delist its securities from an exchange.
- Clearing Corporation : The Bill inserts a new section to provide that an exchange may, with the approval of SEBI, transfer the duties and functions of a clearing house to a clearing corporation for the purpose of the periodical settlement of contracts and differences there under, and the delivery of and payment for securities.
- The Bill empowers SAT and Courts to compound any offence punishable under the SCRA, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, either before or after institution of any proceeding.