UNIT II

Regulatory Institutions – SEBI, TRAI, Competition Commission of India.

SEBI – Securities and Exchange Board of India

SEBI plays an important role in regulating all the players operating in the Indian capital markets. It
attempts to protect the interest of investors and aims at developing the capital markets by enforcing
various rules and regulations.

1. What is SEBI?

The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and
commodity markets in India. It was established in 1988 and given statutory powers on 12 April 1992
through the SEBI Act, 1992. SEBI's primary objective is to protect the interests of investors in
securities, promote the development of securities markets, and regulate the securities market. Head
office of SEBI is in Bandra Kurla Complex, Mumbai.

2. Structure of SEBI
SEBI has a corporate framework comprising various departments each managed by a department
head. There are about 20+ departments under SEBI. Some of these departments are corporation
finance, economic and policy analysis, debt and hybrid securities, enforcement, human resources,
investment management, commodity derivatives market regulation, legal affairs, and more.
 Corporation Finance Department (CFD): Deals with the regulation of corporate finance
activities.
 Economic and Policy Analysis (E&PA) Department: Conducts economic research and
policy analysis.
 Debt and Hybrid Securities Department: Oversees the regulation of debt and hybrid
securities.
 Market Intermediaries Regulation and Supervision (MIRSD): Regulates and
supervises market intermediaries.
 Investment Management Department (IMD): Regulates mutual funds and other
investment vehicles.
 Enforcement Department: Handles enforcement actions against violations of securities
laws.
 Legal Affairs Department: Provides legal support and handles litigations.
 Surveillance Department: Monitors market activities to detect and prevent market
manipulations.
 Investor Protection and Education Fund (IPEF) Department: Focuses on investor
protection and education.
 Commodity Derivatives Market Regulation Department (CDMRD): Regulates the
commodity derivatives market.
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.

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3. Functions of SEBI

Some of the key functions of SEBI include:

1. Regulating Stock Exchanges and Other Securities Markets: SEBI has the authority to
regulate and supervise the functioning of stock exchanges and other intermediaries in the
securities market to ensure their orderly and efficient functioning.
2. Protecting Investor Interests: SEBI works to protect the interests of investors by enforcing
regulations and guidelines that ensure transparency, fairness, and integrity in the securities
market.
3. Promoting and Regulating Self-regulatory Organizations: SEBI encourages the
establishment of self-regulatory organizations (SROs) and oversees their functioning to ensure
they operate within the regulatory framework.
4. Prohibiting Insider Trading: SEBI takes measures to prevent insider trading by enforcing
regulations that prohibit the use of confidential information for trading purposes.
5. Regulating Substantial Acquisitions and Takeovers: SEBI oversees substantial acquisitions
of shares and takeovers of companies to ensure that such activities are conducted in a
transparent and fair manner.
6. Conducting Investor Education and Training: SEBI conducts various programs to educate
and train investors about the securities market and their rights and responsibilities as investors.

SEBI plays a crucial role in maintaining the stability and integrity of the Indian securities market,
ensuring that it operates in a fair and transparent manner.

4. Authority and Power of SEBI

The SEBI has three main powers:
i. Quasi-Judicial: SEBI has the authority to deliver judgments related to fraud and other unethical
practices in terms of the securities market. This helps to ensure fairness, transparency, and
accountability in the securities market.
ii. Quasi-Executive: SEBI is empowered to implement the regulations and judgments made and to
take legal action against the violators. It is also authorized to inspect Books of accounts and other
documents if it comes across any violation of the regulations.
iii. Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interests of
the investors. Some of its regulations consist of insider trading regulations, listing obligation, and
disclosure requirements. These have been formulated to keep malpractices at bay.
Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate
Tribunal and the Supreme Court of India.

5. Mutual Fund Regulations by SEBI

The Securities and Exchange Board of India (SEBI) has established comprehensive regulations to
govern mutual funds in India. These regulations ensure transparency, protect investors, and maintain
the integrity of the mutual fund industry. Key aspects of SEBI's mutual fund regulations include:

Formation and Registration

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- Sponsor: A sponsor is a company that sets up the mutual fund. It must have a sound track record
and reputation of fairness in transactions. The sponsor must contribute at least 40% of the net worth of
the asset management company (AMC).

- Trustee: The mutual fund is set up as a trust under the Indian Trusts Act, 1882, and the trustee holds
its assets for the benefit of the unit holders. Trustees ensure that the fund is managed according to the
rules and regulations.

- Asset Management Company (AMC): The AMC manages the mutual fund and its investment
portfolio. It must be registered with SEBI and adhere to the guidelines laid down by SEBI.

Key Regulations and Guidelines

1. Scheme Classification:

- Mutual funds must classify their schemes into specific categories (e.g., equity, debt, hybrid) to
provide clarity to investors.

- Each scheme must be clearly defined in terms of its investment objectives, risk profile, and asset
allocation.

2. Offer Document and Disclosures:

- Mutual funds must provide a comprehensive offer document, including a Scheme Information
Document (SID) and a Statement of Additional Information (SAI).

- The offer document must contain all relevant information about the scheme, including investment
objectives, risk factors, load structure, and expenses.

3. Net Asset Value (NAV) and Pricing:

- Mutual funds must calculate and disclose the NAV of each scheme on a daily basis.

- The NAV must be published on the mutual fund’s website and the website of the Association of
Mutual Funds in India (AMFI).

4. Investment Restrictions:

- Mutual funds must adhere to specific investment limits and restrictions to ensure diversification
and mitigate risks.

- There are limits on the exposure to a single sector, stock, or debt instrument to reduce
concentration risk.

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5. Expenses and Fees:

- SEBI has prescribed limits on the total expense ratio (TER) that a mutual fund can charge to
ensure that expenses are kept in check.

- There are also guidelines on entry and exit loads (fees charged at the time of purchase or
redemption of units).

6. Investor Protection:

- Mutual funds must follow fair valuation principles to ensure that the NAV reflects the true value of
the scheme’s assets.

- They must also have a well-defined grievance redressal mechanism to address investor complaints.

7. Reporting and Audits:

- Mutual funds are required to submit periodic reports to SEBI, including financial statements,
performance reports, and compliance reports.

- Independent auditors must audit mutual funds to ensure adherence to regulations and accounting
standards.

8. Distribution and Sales Practices:

- SEBI has guidelines for the distribution and sale of mutual fund units, including norms for
advertisements, disclosures, and commissions to distributors.

- AMCs must ensure that distributors are registered with AMFI and follow the code of conduct.

9. Risk Management:

- Mutual funds must have robust risk management systems in place to identify, monitor, and
mitigate various risks associated with their investments.

- Stress testing and scenario analysis are also part of the risk management practices.

10. Corporate Governance:

- Mutual funds must ensure high standards of corporate governance, including the roles and
responsibilities of the board of trustees and the AMC.

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 - Independent directors on the board of the AMC and trustees play a crucial role in overseeing the
operations.

These regulations aim to create a transparent, efficient, and investor-friendly mutual fund industry in
India, ensuring that investors' interests are well protected.

TRAI

Telecom Regulatory Authority of India (TRAI) is an independent regulatory body established by the
Telecom ensuring the orderly growth of the telecom sector while protecting the interests of both
telecom service providers and consumers. It encourages technological improvements and makes
recommendations for how providers can improve efficiency and technical compatibility. To that end,
TRAI establishes standards for quality of service (QoS) and supervises how service providers share
revenue. TRAI also conducts periodical surveys to ensure that telecom service providers are acting in
the best interest of consumers and are operating in compliance with universal service obligations.
Here are some key points about TRAI:

1. Establishment: TRAI was established in 1997 by the Telecom Regulatory Authority of India Act,
1997. It replaced the earlier Telecom Regulatory Authority of India Ordinance.

2. Regulatory Functions: TRAI's primary functions include regulating tariffs for telecommunications
services, ensuring fair competition, promoting efficient use of spectrum, and protecting the interests of
consumers.

3. Policy Recommendations: TRAI makes recommendations to the government on various policy

matters relating to telecommunications. These recommendations cover areas such as licensing,
allocation of spectrum, and quality of service standards.

4. Consumer Protection: TRAI works to safeguard consumer interests by addressing complaints,

monitoring quality of service parameters, and promoting transparency in the telecom sector.

5. Independence: TRAI operates as an autonomous regulatory authority, with its decisions guided by
the principles of transparency, predictability, and non-discrimination.

6. Evolution and Adaptation: Over the years, TRAI has adapted its regulations to keep pace with
technological advancements and changes in the telecom industry. It plays a crucial role in shaping the
regulatory framework that governs telecommunications in India.

Overall, TRAI plays a pivotal role in ensuring a competitive and efficient telecommunications market
in India while protecting consumer interests and promoting growth in the sector.

Competition Commission of India (CCI)

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The Competition Commission of India (CCI) is a statutory body established under the Competition
Act, 2002. It is responsible for enforcing the Act across India and ensuring that markets work in a
competitive manner, which benefits consumers, businesses, and the economy as a whole.

Key Functions and Responsibilities of CCI:

1. Preventing Anti-competitive Practices:

o The CCI identifies and investigates practices that may harm competition, such as
cartels, monopolistic behaviors, and abuse of dominance. It takes action to prevent
such practices and imposes penalties where necessary.
2. Regulating Mergers and Acquisitions:
o The CCI reviews mergers and acquisitions to ensure that they do not have a negative
impact on competition in the market. It has the authority to approve, modify, or block
proposed deals if they are likely to result in significant competition concerns.
3. Promoting Competition:
o The CCI advocates for competition in markets by conducting market studies, issuing
guidelines, and advising the government on policies that may impact competition. It
also works to spread awareness about the benefits of competition.
4. Consumer Protection:
o While its primary focus is on promoting competition, the CCI also indirectly protects
consumers by ensuring that markets are competitive, leading to better quality goods
and services at fair prices.
5. Investigative Powers:
o The CCI has the power to investigate complaints related to anti-competitive practices
and can take suo moto action if it identifies a potential violation of the Competition
Act.
6. Imposing Penalties:
o The CCI can impose penalties on businesses that violate the Competition Act. These
penalties can include fines and orders to cease anti-competitive practices.
7. Advisory Role:
o The CCI advises the Central and State Governments on competition-related issues,
including framing of policies that may affect competition.

Structure of CCI:

The CCI consists of a Chairperson and a minimum of two and a maximum of six other members,
appointed by the Central Government. The members are experts from various fields such as law,
economics, and commerce.

Notable Cases and Actions:

The CCI has been involved in several high-profile cases involving large corporations and has imposed
significant penalties for anti-competitive practices. Some of these cases involve sectors like
telecommunications, cement, automotive, and digital platforms.

Importance of CCI:

The CCI plays a crucial role in maintaining the integrity of the Indian market. By ensuring that
businesses compete fairly, it fosters innovation, efficiency, and consumer welfare, contributing to the
overall economic development of the country.
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Historical Background:

 Formation: The CCI was established on October 14, 2003, but it became fully functional only
in May 2009.
 Replacement of MRTP Act: The Competition Act, 2002, which governs the CCI, replaced
the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. The new Act was designed
to better address modern economic realities and ensure fair competition in the marketplace.

Jurisdiction and Scope:

 Nationwide Jurisdiction: The CCI has jurisdiction across India, and its mandate covers all
sectors of the economy. However, it does not have jurisdiction over sectors regulated by
specific laws, such as telecommunications and banking, where specialized regulatory bodies
exist.
 Proactive Role: The CCI has the power to take action not only based on complaints but also
on its own initiative (suo moto) if it detects anti-competitive practices.

Investigative Arm: Director General (DG)

 The CCI's investigative arm is led by the Director General (DG), who conducts investigations
into potential violations of the Competition Act. The DG gathers evidence, conducts raids
(known as dawn raids), and prepares reports that are then reviewed by the CCI for final
decisions.

Merger Control:

 Thresholds for Notification: Not all mergers and acquisitions require CCI approval. Only
those that meet certain asset or turnover thresholds must be notified to the CCI. This ensures
that only significant transactions that could potentially harm competition are scrutinized.
 Phased Review Process: The CCI reviews mergers and acquisitions in phases. If a merger
raises no significant competition concerns, it is cleared in Phase I. If there are potential
concerns, the investigation moves to Phase II for a more detailed analysis.

Key Concepts in Competition Law:

 Cartels: A cartel is an agreement between competitors to fix prices, limit production, or divide
markets. Cartels are considered one of the most serious violations of competition law, and the
CCI has imposed heavy fines on companies found guilty of cartelization.
 Abuse of Dominance: A company is said to abuse its dominant position if it uses its market
power to prevent competition or exploit consumers. The CCI investigates such practices and
can order the company to cease such behavior and impose penalties.
 Anti-competitive Agreements: These include agreements between businesses that restrict
competition, such as price-fixing, market-sharing, and bid-rigging agreements.

Advocacy and Education:

 Awareness Programs: The CCI conducts various awareness programs and workshops for
businesses, consumers, and legal professionals to educate them about competition law and its
benefits.

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  Publications: The CCI regularly publishes newsletters, case studies, and research papers to
promote understanding of competition issues and the importance of fair competition.

Challenges and Criticisms:

 Complexity of Cases: Some cases involve complex economic analysis, which can make
investigations lengthy and complicated.
 Balancing Act: The CCI must balance the need to protect competition with the need to not
stifle business growth and innovation.
 Globalization: With increasing globalization, the CCI must collaborate with competition
authorities in other countries to address cross-border competition issues, which can be
challenging.

Recent Developments:

 Digital Markets: The CCI has been increasingly focusing on the digital economy,
investigating practices of major tech companies for potential abuse of dominance, data privacy
concerns, and anti-competitive behavior.
 Changes in Thresholds: The CCI periodically updates the thresholds for merger notifications
to reflect changes in the economy and business environment.

Future Outlook:

 The CCI is expected to continue evolving its approach to address new challenges in the
economy, especially with the rapid growth of digital markets, e-commerce, and technology-
driven sectors. Its role will be crucial in ensuring that competition laws keep pace with these
changes to protect consumer interests and maintain fair competition.