THE ROLE
OF
IN
INDIAN CAPITAL MARKET
Rahul Rajoria
ROLL NO. 38
PGDM-RM, 2009-11
K. J. SOMAIYA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, MUMBAI
Preamble SEBI...............................................................................................................................1
The Genesis of SEBI......................................................................................................................2
SEBI ACT, 1992............................................................................................................................4
Constitution of SEBI.................................................................................................4
Functions of SEBI.....................................................................................................5
SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992.............................................................6
Registration of Stock Broker & Sub-Broker.............................................................6
SEBI (Prohibition of Insider Trading) Regulations, 1992............................................................7
Prohibition on dealing, communicating or counselling (Regulation 3)....................8
Violation of provisions relating to insider trading....................................................9
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating To Securities Markets) Regulations, 2003........................................................................................................................10
Prohibition of certain dealings in securities............................................................11
Prohibition against Manipulative, fraudulent and unfair trade practices................11
Overview of Indian Capital Market.............................................................................................12
Capital Market Regulation...........................................................................................................14
Annexure
BGyan - Role of regulators and SEBI in Capital Markets..........................................................16
The BIG Scams............................................................................................................................18
References....................................................................................................................................22
PREAMBLE
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as
“…..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”
The Genesis of SEBI
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.
The basic objectives of the Board were identified as:
to protect the interests of investors in securities;
registering and regulating the working of stock brokers, sub-brokers etc
to promote the development of Securities Market;
to regulate the securities market
for matters connected therewith or incidental thereto.
Promoting and regulating self-regulatory organizations and
Prohibiting fraudulent and unfair trade practices calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self - regulatory organizations, mutual funds and other persons associated with the securities market.
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Since its inception SEBI has been working targeting the securities and is attending to the fulfilment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
Major part of the liberalisation process was the repeal of the Capital Issues (Control) Act, 1947, in May 1992. With this, Government’s control over issues of capital, pricing of the issues, fixing of premia and rates of interest on debentures etc. ceased, and the office which administered the Act was abolished: the market was allowed to allocate resources to competing uses. However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted to establish SEBI with statutory powers for:
(a) protecting the interests of investors in securities,
(b) promoting the development of the securities market, and
(c) regulating the securities market.
Its regulatory jurisdiction extends over companies listed on Stock Exchanges and companies intending to get their securities listed on any recognized stock exchange in the issuance of securities and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI can specify the matters to be disclosed and the standards of disclosure required for the protection of investors in respect of issues; can issue directions to all intermediaries and other persons associated with the securities market in the interest of investors or of orderly development of the securities market; and can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. In short, it has been given necessary autonomy and authority to regulate and develop an orderly securities market. All the intermediaries and persons associated with securities market, viz., brokers and sub-brokers, underwriters, merchant bankers, bankers to the issue, share transfer agents and registrars to the issue, depositories, Participants, portfolio managers, debentures trustees, foreign institutional investors, custodians, venture capital funds, mutual funds, collective investments schemes, credit rating agencies, etc., shall be registered with SEBI and shall be governed by the SEBI Regulations pertaining to respective market intermediary.
of SEBI
The Central Government has constituted a Board by the name of SEBI under Section 3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other places in India. SEBI consists 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 Companies Act, 1956;
(c) one member from amongst the officials of the Reserve Bank of India;
(d) five other members of whom at least three shall be whole time members to be appointed by the Central Government.
The general superintendence, direction and management of the affairs of SEBI vests in a Board of Members, which exercises all powers and do all acts and things which may be exercised or done by SEBI.
The Chairman also has powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by the Board.
The Chairman and members referred to in (a) and (d) above shall be appointed by the Central Government and the members referred to in (b) and (c) shall be nominated by the Central Government and the Reserve Bank respectively. The Chairman and the other members are from amongst the persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to SEBI.
of SEBI
SEBI has been obligated to protect the interests of the investors in securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. The measures referred to therein may provide for:-
(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, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be
associated with securities markets in any manner;
(c) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf;
(d) registering and regulating the working of venture capital funds and collective investment schemes including mutual funds;
(e) promoting and regulating self-regulatory organisations;
(f) prohibiting fraudulent and unfair trade practices relating to securities markets;
(g) promoting investors' education and training of intermediaries of securities markets;
(h) prohibiting insider trading in securities;
(i) regulating substantial acquisition of shares and take-over of companies;
(j) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self- regulatory organisations in the securities market;
(k) calling 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 any transaction in securities which is under investigation or inquiry by the Board;
(l) performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;
(m) levying fees or other charges for carrying out the purpose of this section;
conducting research for the above purposes;(o) calling from or furnishing to any such agencies, as may be specified by SEBI, such information as may be considered necessary by it for the efficient discharge of its functions;
(p) performing such other functions as may be prescribed.
SEBI may, for the protection of investors,
(a) specify, by regulations for
(i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and
(ii) the manner in which such matters, shall be disclosed by the companies and
(b) by general or special orders :
(i) prohibit any company from issuing of prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities,
(ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited may be issued. (Section 11A).
SEBI may issue directions to any person or class of persons referred to in section 12, or associated with the securities market or to any company in respect of matters specified in section 11A. if it is in the interest of investors, or orderly development of securities market to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market to secure the proper management of any such intermediary or person (Section11B).
SEBI (STOCK BROKERS & SUB-BROKERS) , 1992
In terms of regulation 2(g), ‘small investor' means any investor buying or selling securities on a cash transaction for a market value not exceeding rupees fifty thousand in aggregate on any day as shown in a contract note issued by the stock-broker.
of Stock Broker
A stock broker applies in the prescribed format for grant of a certificate through the stock Exchange or stock exchanges, as the case may be, of which he is admitted as a member (Regulation 3). The stock exchange forwards the application form to SEBI as early as possible as but not later than thirty days from the date of its receipt.
SEBI takes into account for considering the grant of a certificate all matters relating to buying, selling, or dealing in securities and in particular the following, namely, whether the stock broker:
(a) is eligible to be admitted as a member of a stock exchange,
(b) has the necessary infrastructure like adequate office space, equipment and man power to effectively discharge his activities,
(c) has any past experience in the business of buying, selling or dealing in securities,
(d) is subjected to disciplinary proceedings under the rules, regulations and bye-laws of a stock exchange with respect to his business as a stockbroker involving either himself or any of his partners, directors or employees, and
(e) is a fit and proper person.
SEBI on being satisfied that the stock-broker is eligible, grants a certificate to the stock-broker and sends intimation to that effect to the stock exchange or stock exchanges, as the case may be. Where an application for grant of a certificate does not fulfil the requirements, SEBI may reject the application after giving a reasonable opportunity of being heard.
Registration of Sub-Broker
An application by a sub-broker for the grant of a certificate is made in the prescribed format accompanied by a recommendation letter from a stockbroker of a recognised stock exchange with whom he is to be affiliated along with two references including one from his banker (Regulation 11A). The application form is submitted to the stock exchange of which the stockbroker with whom he is to be affiliated is a member. The eligibility criteria for registration as a sub-broker are as follows:
(i) in the case of an individual:
(a) the applicant is not less than 21 years of age,
(b) the applicant has not been convicted of any offence involving fraud or dishonesty,
(c) the applicant has at least passed 12th standard equivalent examination from an institution recognised by the Government, and Provided that SEBI may relax the educational qualifications on merits having regard to the applicant's experience.
(d) the applicant is a fit and proper person.
(ii) In the case of partnership firm or a body corporate the partners or directors, as the case may be, shall comply with the following requirements:
(a) the applicant is not less than 21 years of age,
(b) the applicant has not been convicted of any offence involving fraud or dishonesty, and
(c) the applicant has at least passed 12th standard equivalent examination from an institution recognised by the Government. Provided that SEBI may relax the educational qualifications on merits having regard to the applicant's experience.
The stock exchange on receipt of an application, verifies the information contained therein and certifies that the applicant is eligible for registration. The stock exchange forwards the application form of such applicants who comply with all the requirements specified in the Regulations to SEBI as early as possible, but not later than thirty days from the date of its receipt. SEBI on being satisfied that the sub-broker is eligible, grants a certificate to the sub-broker and sends intimation to that effect to the stock exchange or stock Exchanges as the case may be. SEBI grants a certificate of registration to the appellant subject to the terms and conditions. Where an application does not fulfil the requirements, SEBI may reject the application after giving a reasonable opportunity of being heard. The sub-broker shall -
(a) pay the fees as specified in Schedule III,
(b) abide by the Code of Conduct specified in Schedule II,
(c) enter into an agreement with the stock-broker for specifying the scope of his authority and responsibilities.
(d) comply with the rules, regulations and bye-laws of the stock exchange.
(e) not be affiliated to more than one stock broker of one stock exchange.
SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 1992
Insider trading is prohibited and is considered an offence vide SEBI (Insider Trading) Regulations, 1992. The definitions of some of the important terms are given below:
‘Dealing in securities’ means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent.
‘Insider’ means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.
A “connected person” means any person who-
(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act, or
(ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.
“Price sensitive information" means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of that company. The following shall be deemed to be price sensitive information: -
(i) periodical financial results of the company;
(ii) intended declaration of dividends (both interim and final);
(iii) issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the undertaking;
(vii) any significant changes in policies, plans or operations of the company.
Unpublished means information which is not published by the company or its agents and is not specific in nature. Speculative reports in print or electronic media shall not be considered as published information.
Prohibition on dealing, communicating or counselling (Regulation 3)
No insider shall–
· either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;
· communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities; Provided that nothing contained above shall be applic