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SEBI as a Market regulator, Powers and Functions of SEBI

03 Oct, 2018 RBI General Studies

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  •  The securities market is regulated by various agencies such as the Department of Economics Affairs (DEA), the Department of Company Affairs (DCA), the Reserve Bank of India (RBI), and the SEBI
  • The activities of these agencies were coordinated by a high level committee on capital and financial markets.
  • Financial Stability and Development Council (FSDC), has replaced the High Level Coordination Committee on Financial Markets (HLCCFM).
  • The Chairman of the FSDC is the Finance Minister of India and its members include the heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC) , Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance), Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic Adviser. The commodities markets regulator, Forward Markets Commission (FMC) was added to the FSDC in December 2013.

The capital market, i.e.,the market for equity and debt securities is regulated by the   Securities  and Exchange Board of India (SEBI).  

The four main legislations governing the capital market are as follows - 

  • The SEBI Act, 1992 which establishes the SEBI with four-fold objectives of protection of the interests of investors in securities, development of the securities market, regulation of the securities market and matters connected therewith and incidental thereto.
  • The Companies Act, 1956 which deals with issue, allotment and transfer of securities, disclosures to be made in public issues, underwriting, rights and bonus issues and payment of interest and dividends.
  • The Securities Contracts (Regulation) Act, 1956 which provides for regulations of securities trading and the management of stock exchanges.
  • The Depositories Act, 1996 which provides for establishment of depositories for electronic maintenance and transfer of ownership of demat securities.

The SEBI was set up with statutory powers on February 21, 1992 through an ordinance. The ordinance was repealed by the SEBI Act on April 4, 1992. The objectives defined by the ordinance for the board were-

  1. Investor protection and
  2. Promotion and development of the capital market while simultaneously regulating the functioning of the securities market.
Rsponsibilities of SEBI –
  • Register and regulate the working of the stock brokers, sub-brokers, share-transfer agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors and such other intermediaries associated with the securities market.
  • Register and regulate the working of the depositories, depository participants, custodian of securities, foreign institutional investors, credit rating agencies, or any other intermediary associated with the securities market as the SEBI may specify by notification.
  • Register and regulate the working of the venture capital funds, collective investment schemes, including mutual funds.
Powers and Functions of the SEBI
  • Regulating the business in stock exchanges and any other securities market.
  • Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors, and such other intermediaries who may be associated with the securities market in any manner.
  • Registering and regulating the working of collective investment schemes, including mutual funds.
  • Promoting and regulating self regulatory organisations.
  • Prohibiting fraudulent and unfair trade practices in the securities market.
  • Promoting investor education and trading of securities in securities market.
  • Prohibiting insider trading in securities.
  • Regulating substantial acquisition of shares and takeover of companies.
  • Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self-regulatory organizations in the securities market.
  • Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947, (subsequently repealed) and the Securities Contracts (Regulations) Act, 1956, as may be delegated to it by the central government.
  • Levying fees or other charges for carrying out the purposes of Section 11 of the act.

The SEBI exercises powers under Sections 11 and 11B of the SEBI Act, 1992, The SEBI, with its powers, can carry out the following functions.

  • Ask any intermediary or market participant for information.
  • Inspect books of depository participants, issuers or beneficiary owners.
  • Suspend or cancel a certificate of registration granted to a depository participant or issuer.
  • Request the RBI to inspect books of a banker to an issue. And suspend or cancel the registration of the banker to an issue.
  • Suspend or cancel certification issued to the custodian of securities.
  • Suspend or cancel registration issued to foreign institutional investors.
  • Investigate and inspect books of accounts and records of insiders.
  • Investigate an acquirer, a seller, or merchant banker for violating takeover rules.
  • Suspend or cancel the registration of a merchant banker.
  • Investigate the affairs of mutual funds, their trustees, and asset management companies.
  • Investigate any person dealing in securities on complaint of contravention of trading regulation.
  • Suspend or cancel the registration of errant portfolio managers.
  • Cancel the certification of registrars and share transfer agents.
  • Cancel the certification of brokers who fail to furnish information of transactions in securities or who furnish false information.
Regulations, Guidelines, and Schemes Issued by the SEBI

 

Regulations
YEAR
REGULATION

1992

  • SEBI (Stock Brokers and Sub Brokers) Regulations
  • SEBI (Prohibition of Insider Trading) Regulations
  • SEBI (Merchant Bankers) Regulations

1993

  • SEBI (Portfolio Managers) regulations
  • SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.
  • SEBI (Underwriters) Regulations
  • SEBI (Debenture Trustees) Regulations

1994

  • SEBI (Bankers to an Issue) Regulations,

1995

  • SEBI (Foreign Institutional Investors) Regulations

1996

  • SEBI (Custodian of Securities) Regulations
  • SEBI (Depositories and Participants) Regulations
  • SEBI (Venture Capital Funds) Regulations
  • SEBI (Mutual Funds) Regulations

1997

  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations

1998

  • SEBI (Buyback of Securities) Regulations

1999

  • SEBI (Credit Rating Agencies) Regulations
  • SEBI (Collective Investment Schemes) Regulations

2000

  • SEBI (Foreign Venture Capital Investors) Regulations

2001

  • SEBI (Procedure for Board Meeting) Regulations.

 

2002

  • SEBI (Issue of Sweat Equity) regulations
  • SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations

2003

  • SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations
  • SEBI (Ombudsman) Regulations
  • SEBI (Central Listing Authority) Regulations
  • SEBI (Central Database for Market Participants) Regulations

2004

  • SEBI (Self Regulatory Organisations) Regulations.
  • SEBI (Criteria for Fit and Proper Person) Regulations
Guidelines
  • SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
  • SEBI (Disclosure and Investor Protection) Guidelines, 2000.
  • SEBI (Delisting of Securities) Guidelines, 2003.
Schemes
  • Securities Lending Scheme, 1997.
  • SEBI (Informal Guidance) Scheme, 2003.
Regulation of the Securities Market
  • The SEBI has powers to register and regulate all market intermediaries. The SEBI has powers to penalize them in case of violations of the provisions of the act, rules and regulations made thereunder.
  • It can conduct enquiries, audits, and inspection of all market intermediaries and adjudicate offences under the SEBI Act, 1992.
  • The SEBI registers and regulates the intermediaries in the primary market. Some of the major intermediaries it regulates are merchant bankers, underwriters, bankers to an issue, registrars to an issue and share transfer agents and debenture trustees.
  • The SEBI registers and regulates various intermediaries in the secondary market such as brokers, subbrokers, stock exchanges, foreign institutional investors (FIIs) custodians, depositories, mutual funds, and venture capital funds.
Supervision of Securities Market

The SEBI supervises the securities market through on-site and off-site inspections, enforcement, enquiry against violation of rules and regulations, and prosecutions. It undertakes inspection of the books and records of depository participants and registrar to an issue. It also issues showcause notices to companies on the basis of reports submitted by the depositories.

It also undertakes inspection of stock exchanges to ensure that

  • the exchange provides a fair, equitable, and growing market to investors;
  • the exchange has complied with the conditions if any, imposed on it at the time of renewal of grant of its recognition under Section 4 of the SC (R) Act, 1956;
  • the exchange’s organisation systems and practices are in accordance with the Securities Contracts (Regulation) Act, 1956 and rules framed thereunder;
  • the exchange has implemented the directions, guidelines, and instructions issued by the SEBI from time to time; and there are adequate control mechanisms and risk management system.
  • It also undertakes inspection of brokers/sub-brokers. It has directed the exchanges to carry out comprehensive inspection of atleast 20 per cent of the active brokers every year.
Inspection of Mutual Funds
  • Inspection of mutual funds is carried out by independent chartered accountant firms.
  • SEBI issues warning and deficiency letters to mutual funds considering the magnitude and seriousness of violations of SEBI regulations/ guidelines.
  • Of the total warnings, majority of the warnings were issued for violating the advertising code and the investment restrictions.
  • SEBI has made it mandatory for mutual funds to pay interest @15 per cent per annum for delays in the dispatch of repurchase/redemption proceeds to the unit holders Because of such action, the interest amount paid by mutual funds has declined.
Self Regulatory Organisations (SROs)
  • An SRO is the first level capital market regulator which is a non-government body, having statutory responsibility to regulate its own members for fair and efficient practices.
  • The activities generally
  • undertaken by the SRO are—registering members, establishing rules and regulations for its members to effectively promote market integrity and market efficiency, ensuring compliance,  conducting inspections of members, enhancing the level of investor protection, and also mediating in broker-investor disputes.
  • The Association of Merchant Bankers of India, the Association of Mutual Funds of India (AMFI) , the Indian Banks’ Association(IBA) and the Association of NSE Members of India (ANMI) perform the functions of SROs.
  • The SEBI has framed the SEBI (Self Regulatory Organisations) Regulation, 2004.

 

SEBI can penalize under the conditions if a person or a company fails to :-

  • To furnish any document, return or report to the Board.
  • If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made there under to enter into an agreement with his client, fails to enter into such agreement.
  • If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board.

 

  • Penalty for certain defaults in case of mutual funds :-
  1. If any person carries on any collective investment scheme, including mutual funds, without obtaining certificate of registration from the Board also fails to comply with the terms and conditions of certificate of registration.
  2. fails to despatch unit certificates of any scheme in the manner provided in the regulation governing such dispatch.
  3. fails to refund the application monies paid by the investors within the period specified in the regulations.
  4. fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations.
  5. Penalty for default in case of stock brokers:-
  6. fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member.
  7. fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations
  8. charges an amount of brokerage which is in excess of the brokerage specified in the regulations

 

 

  • Penalty for insider trading
  • Penalty for non-disclosure of acquisition of shares and takeovers.
  • Penalty for fraudulent and unfair trade practices.

 

Power to adjudicate.

SEBI shall appoint any officer not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

Establishment of Securities Appellate Tribunals.
  • The Central Government shall by notification, establish one or more Appellate Tribunals to be known as the Securities Appellate Tribunal to exercise the jurisdiction, powers and authority conferred on such Tribunal.
  • A Securities Appellate Tribunal shall consist of a Presiding Officer and two other members, to be appointed, by notification, by the Central Government:
  • Provided that the Securities Appellate Tribunal, consisting of one person only, established before the commencement of the Securities and Exchange Board of India (Amendment) Act, 2002, shall continue to exercise the jurisdiction, powers and authority conferred on it by or under this Act or any other law for the time being in force till two other Members are appointed under this section.
Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal.

(a) He must be a sitting or retired Judge of the Supreme Court or a sitting or retired Chief Justice of a High Court; or

(b) is a sitting or retired Judge of a High Court who has completed not less than seven years of service as a Judge in a High Court.

  • The Presiding Officer of the Securities Appellate Tribunal is appointed by the Central Government in consultation with the Chief Justice of India.
  • The Presiding Officer and every other Member of a Securities Appellate Tribunal shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for re-appointment unless he attains an age of 62 years.
Appeal to the Securities Appellate Tribunal.
  • Any person aggrieved, (a) by an order of the SEBI made, or (b) by an order made by an adjudicating officer may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter can file within a period of forty-five days from the date on which a copy of the order made by Board or the Adjudicating Officer, is received by him.
  • The appeal filed before the Securities Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.
  • Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code (45 of 1860), and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973.
  • if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.
  • Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision. Provided that the Supreme Court.

  

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