Capital Market Regulations..

..131

such as repo rate, reverse repo rate, etc. They are the intermediarybody between the market
and the government. They have other various functions in capital markets such as the
implementation of various monetary policies, managing the foreign exchange system,
settlemernt, and payments systems.
2. SecurityExchange Board of India (SEBI)- This body can also be considered as the apex
body of capital market regulators.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The SEBIwas established on April 12, 1988 through an administrative order. It became a
statutory and really a powerful organization only in 1992 when the Controller of Capital
body
Issueswas [Link] was constituted by the Government of India as a non-statutory
to promote the developments of the security
markets and to provide adequate investor
protection and to act as the independent regulator of Stockexchanges,the primary market,
of Finance. Its Head
Mutual Funds etc. SEBI is under the overall control of the Ministry
three regional offices in New Delhi, Calcutta
Office is in Mumbai (formerlyBombay). It has
of overseeing the
and Chennai. Each regional office is set up to carry out inter alia the duty
Stock Exchange and their brokersand attend to the complaintsagainst them, to acceptoffer
for the registration
documents of new issues of .200 million or less and to accept applications
important constituent of the financial
of Merchant Bankers. It has since become a very

regulatoryframework in India.

a statutory body established under the SEBI

SEBI is a principal regulatory body that is also
in securities but also promote the
Act,1992. They not only protect the interest of investors
brokers, investors,
market. It controls, and manages several institutional
supervises,
persons related The body's primary function
to the market.
companies, and all other associated
practices such as insider trading or manipulating
is to prohibit malpractice or unfair trade
the
direct contról of this body as they adopt
funds. The stock [Link] under the
many other such
for regulating the market. They perform
flexible and adaptable approach
exchanges,regulating
of intermediaries, auditing of stock
regulatory functionssuch as training
funds.
and registering the mutual conferred to
Notification delegated the Powers
The Government of India through a Gazette
to SEBI in September 1994. The
under Contracts (Regulation) Act 1956
the Securities
it
Laws (Amendmen)
were increased through the Securities
regulatorypowers of the SEBI
which was subsequentlyreplaced
by an Act of Parliament. The
Ordinance of January 1995, operation
1996, which came into retrospective
Government passed the Depositories Act in

from 20September1995
Reasons to Form SEBI increased in the
is also
market, the number of malpractices
With the growth of securities

capital market. securities in tho

the price of
Companies manipulated
[Link] f security prices:
of securities. They tried to push up
the prices artificially
stock market to pushup the price
 132. .FinancialMarkets and Institutions

before the actual issue of securities in the market.

[Link] rigging: A group of speculators buy the securities and they will buy and sell securities

themselvesto push up the prices.

[Link] trading: Companies, agentsand brokersindulged in insider trading which created

wide fluctuation in prices of securities. The insiders who are privy to price sensitive

informationuse such information for their advantage to make capital gains.

4. Delay: Delay in listing of securities, and delay in settlement of dealings is also noticed.

5. Lack offair dealings: There were nofair dealings in issue of securities. SEBI was formed to
promote fairdealing in issue of securities and toensure that the capital markets function
efficiently, transparently and economically in the better interests of both the issuers and
the investors.

6. Protection The promoters should be able to raise funds at a relatively low

of investors:
cost. At the same tim, investors must be protected from unethical practices and their

rights must besafeguardedso that there is a steadyflowof savings into the market. There
must be proper regulation and code of conduct and fair practice by intermediaries to
make them competitive and professional.
7. Lack of control over brokers: There no proper control over the activitiesof the jobbers
is

and brokers inthe stock [Link] of the brokers have not professional standards.
Since, its formation, SEBIhas been instrumental in bringing greater transparencyin capital
Under the umbrella of SEBI, companies issuing sharesare free
issues. to fix the premium
provided adequate disclosure is made in the offer documents.

SEBIhasintroduced a few reforms, but the stockbrokers have been low to acceptthe need
for reform. Reform measuresincludeimproved transparency, computerization, enactment
againstinsider trading, improved capital adequacy,restrictions on forward trading, and
provisions to encourage corporate menmbership inthe stock exchanges.
Objectives of SEBI

The primary objective of the SEBI is to promote healthy and growthof market and
securities

secureinvestors protection. The SEBI hasbeen given both the regulatory and developmental
functions. The main objectives of SEBI are as follows.

[Link] the interests of investors. As a result, there will be a steadyflow of savingsinto

the capital market.
[Link] objective SEBI is to ensure fair practices by the issuers
of the of securities like
companies so that they can raise the required resources with minimum cost.

B. Promotion of efficient services by brokers, merchant bankers and other intermediaries

so
that they become competitiveand professional and

4. Matters connected therewith and incidental thereto.

Role of SEBI

This regulatory authority acts as a watchdog for all the capital market participants and its
Capital Market Regulations. .133

main purpose is to provide such an environment for the financial market enthusiasts that
facilitate the efficient and smooth wotking of the securities market. SEBI also
plays an
importantrole in the economy. To make this happen, it ensures that the three main participants
of the financial market are taken care of, i.e. issuers of securities, investors, and financial
intermediaries.

[Link] of securities

These are entities in the corporate field that raise funds from various sourcesin the market.
This organizationmakes sure that they get a healthy and transparent environment for their
needs.
[Link]
Investors arethe ones who keep the marketsactive. This regulatory authority is responsible
for maintaining an environment that is free from malpractices to restore the confidernce of

the generalpublicwho invest their hard-earned money in the markets. It educates them
regarding all investment issues so that they can protect themselves from malpractices. It
makes its investors fully aware of all affairs concerned with trading activities. SEBI also

providestime to time training to financial intermediaries for better functioning and serving
investors well. It aims at improving their understandingwith people.
3. Financial Intermediaries
These are the people whoact as middlemen between the issuers and investors. They make
the financial transactions smooth and [Link] regulates the functioning of all financial

intermediaries like stockbroker, share transfer-agent, Portfolio managers, Underwriters,

Trustees, Merchant bankers, sub-broker etc. All these intermediarieswork as per the
instructions of SEBI.

4. Merger
SEBI keep an eye and fully regulates all merger,acquisition and takeoveractivities. It aims at
removing and reducing all fraud activities from the Indiancapital market. With the aim of

creating a monopoly in the capital market,many big companies want to buy and merge with
differentcompanies. SEBIavoids all such mergers and acquisition activities and checks
whether it is done for development purposes.

[Link] Portfolio Management Activities

SEBIin order to check the capital market performance evaluates report of portfolio
management activities from time to time. demands a performance report from all registered
It

portfolio managers in India by sendinga letter to them. This helps inevaluating and regulating

capital market performance in India

Functions of SEBI
SEBI Carried out its functions effectively and brought about immense changes in the
environment of the investmentmarket to the benefit of the common investor. The important
functions of SEBIare enumerated below.
134.. Financial Marketsand Institutions

1. It shall be the duty of the Board to protect the interests of the investors in securities and to
promote, develop and to regulate the securities market by taking appropriatemeasures
2. Regulatingthe businessin stock exchanges and any other securities markets.
3. Registering and regulating the working of stock brokers, sub-brokers, sharetransfer agents,
merchant bankers, underwriters, portfolio managers, investmentadvisers and such other
intermediaries who may be associated with securities markets in any manner.
4. Registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies and such other
intermediaries in the capital market.
5. Registering and regulating the working of venture capital funds and collective investment
schemes includingmutual funds;
6. Promoting and regulating self-regulatory organizations.

7. Prohibiting fraudulentand unfair trade practices relating to securities markets.

8. Promoting investorseducation and training of intermediaries of securities markets.

9. Prohibiting insider trading in securities.

10. Regulatingsubstantial acquisition of shares and take-over of companies.

11. Collecting information, undertaking inspection, conducting inquiries and audits of the
stock exchanges,mutual funds and other persons associated with the securities market
and intermediaries and self- regulatory organizations in the securities market.
[Link] such functions and exercising such powers under the provisions of Securities
Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;

13 Levying fees or other charges.

[Link] research for the above purposes.

[Link] such other functions as may be prescribed.

16 Calling from [Link] to any such agencies, as may be specified by the Board,such
informationasmay be considered necessary by it for the efficient discharge of its functions
17. In certain circumstances, the Board shall have the same powers as are vested in a civil
Court under the Code of Civil Procedure, 1908while trying a suit, in respect of the following

matters, namely:
(a) The discovery and production of books of account and other documents, at such place
and such time as may be specified by the Board;
(b) Summoning and enforcing the attendanceof persons and examining them on oath;

(c) Inspection of any books, registers and other documents of any person, at any place.
Powers
[Link] is made the regulator for monitoring the due compliance and enforcing the provisions
of this Act. SEBI is empowered in respect of the following matters under Securities Contract
Act.
Capital Market Regulations.. ..135

[Link] for periodical

returns from the stock
exchanges.
[Link] any explanationor informationrelating to the affairs of the exchange or members tromn
the recognized stock
exchange or members.
[Link] compel public companies
to list their shares.
[Link] give direction to stock exchanges in generalor stock exchange in particular to make
rules or to amend rules.

[Link] supersede the governing body of a stockexchange.

[Link] suspend the businessof a recognized
stock exchange.
[Link] contract in certain cases.

[Link] grant recognition to stockexchanges.

[Link] of recognition of stockexchanges.
[Link] or amending rules or articles of association of stock exchanges regarding voting
rights of the members of a stock exchange atany
meeting
[Link] to declare applicability of section 17 of the Securities Contract (Regulation) Act in
any state of area to grantlicence to dealers in stock exchanges.
[Link] control of the business of dealing in spot delivery contracts.

[Link] to grant registration to intermediaries.

[Link] to levy fees or other chargesfor carrying out the purpose of registration.
Organizational Structure of SEBI
SEBIAct provides for the establishmentof a statuary Board consisting of six members,
namely:
(a) A Chairman;
(b) Two members from amongst the officials of the Ministries of the Central Government

dealing with Finance and Law;

(c) One member from amongst the officials of the Reserve Bank of India.

(d)Two other members appointed by the Central Government who are professionalstand
knowledge relating to the securities market.
having experienceor special

General Superintendence
of the Board shall
The general superintendence,direction and management of the affairs
all powers and do all acts and things which
vest in a Board of members, which may exercise
powers of general
may be exercised or done by the Board. The Chairman shall also have
superintendence and direction of the affairs of the Board and may also exercise all powers
and things, which may be exercised or done by the [Link] Chairman and
and do all acts
the ability, integrity and standing and capacity in dealing
the other two members should have
or
They should have special knowledge
with problems relating to securities market.
or in any other
accountancy,and administration
experience of law, finance, economics, to the Board.
shall be useful
discipline, which, in the
opinion of the Central Government,
136. ..Financial Markets and Institutions

SEBI and Central Government

SEBI receives grantfrom the central government to conduct its activities. It also collects fees,
charges etc. A fund called General Fund is created and all the grants, fees, charges etc are
credited in this [Link] fund is used to meet the expenses of the board and to pay
salaries to the staff, remuneration to the officers, members of the board etc. The central

govemment hasthe power to issue directions to the board,to supersede the board, if necessary
and to call for returns and reports. The central government also gives necessaryguidelines
or makes regulations and rules for SEBI.
Departments
The activities of SEBI aredivided into four operational department such as
primary market
department, secondary market department, issue management and intermediaries
department. Currently SEBIconsists of the followingdepartments:
1. The Primary Market Department
2. The Secondary Market Department
3. Issue management and intermediarydepartment.
4. The Institutional Investors, the Mergers and Requisitions, Research and Public
Department (||MARP Department)
5. The Legal Department and
6. The Investigation Department
n executivedirector heads each department.

Primary market department:Thisdepartment deals with policy matters and regulatory issues

relating to primary market,registration, portfolio management services, and Self regulatory

organisations(SROs),market intermediaries and redressal of grievances.
Secondary market department: The main furnction of this department is to look after the
and regulation of the secondary market. It
policies also deals with administration of major
stockexchanges and mattersrelated with it.

The issue management and intermediariesdepartment: It is responsible for vetting all

prospectus and letters of offer for public issues, right issues, coordinating with the primary
market policy, for registration, regulation and monitoring of issue related intermediaries.
The Institutional Investors, the Mergers and Requisitions, Research and Public Department
IMARP Department): This department frames policies for foreign institutional investors,

mutual fundsand othermatterslike publications, membership in international organisation

etc. The registration of FIll's is dealt with by the IMARP Department.

Legal department: It looksafter all legal matters under the supervisionof the generalcouncil.
Investigation department: It carries out the inspection and investigation under the supervision
of the chief of investigation.
Apart from the abovedepartments,SEBI has two advisorycommittees,That is one for primary
market and another for secondary market. Committees are non-statutory bodies. The
Capital Market Regulations. ...137

commitee consists of personsbelonging to market players, recognized investo associations

and eminent personsconnected with capital market. The advisorycommittee advicein matters
related with framing of policies and
regulations.
SEBI GUIDELINES
SEBI has issued a number of guidelines related to primary markets,secondary markets,
mutual funds,merchant bankers,Financial Instruments,Employee Stock Option and Stock
PurchaseScheme, investors protection etc. The SEBI has first started with issuing guidelines
for merchant bankers, mutual funds, portfolio managers and then extended to all

intermediaries in the market, like brokers, sub brokers, underwriters, registrars, collecting
bankers,debenture trustees etc.

Protection of the investors

SEBI has taken a number of steps to protect the interest of the investors. It is the major
responsibility of [Link] following are some of the steps takento protect the interest of
the investors relatewith different issues.
1. New issues
The offer document of an issuing company shouldcontain true, fair, fullandadequate material
[Link] would help the investors to take appropriatedecision on the investments in
theissue.

Companies entering the capital market are required to advertise in the newspapers and
required to giveannouncements regarding the proposed issue of capital.

The companies will giveadvertisementsin the newspapers to support public issue. There is

a possibility of
giving exaggerated claims, dividends, prospects and capital appreciation in
these [Link] this willmislead the investors. To protect the investor, it is directed

that no materialrelating to the new issueor any other information such as turnover, profits,

dividends forfutureyears which is not contained in the prospectus, should be released.

The allotmentprocedure must be transparent. It should not be contaminated with any bias.
It should be made fairly and equitably.

There should be no delay to refund or despatch of sharecertificates.

Risks factors involved in securities are to be highlighted in the offer of issue.

Stock brokers are required to disclose as to whether he is acting as a principal or broker to

the investors for avoiding conflict.

2. Directions
SEBIhas provided number of guide lines relating to issues. The board may pass certain

directions to the concerned parties in the interest of the security market and in the interest of

the investors if these guidelines are violated. Before giving direction the concerned persons
heard.
are given an opportunity of being
1. Theconcerned persons are directed to refund any money collected under an issue to the

with or without requisite interest.

investors
 138.
..Financial Marketsand Institutions

[Link] concened persons are directed not to acess the capital market for a particular period.

[Link] concened stockexchange is directed not to list or permit trading in the securities.

4. The concerned stockexchange is directed to forfeit the security deposit deposited by the
issuer company.
Any other direction, which the Board may deem fit and proper in the circumstancesof the
case.

3. Other important measures

Anumber of steps have been taken to ensure that investors are enabled to make informed
choices and decisionsand achievefair deals in their financial dealings. Someof them are:
[Link] Data and Retrieval System (EDIFAR)were made operational in July 2002.
Filing

This is an automated web based system for filing, retrieval and dissemination of information
relating to corporates.

[Link] has been made compulsory for debt oriented and balanced funds for
providing objective analysis of the performance of the mutual fund schemes.
ii.A Code of conduct for Mutual fund intermediaries has
been prescribed
[Link] forRisk Management System is issued .It is implemented for the Mutual Funds
in order to eliminate or minimize the risks in operations of Mutual Funds.
[Link] have been issued for the valuation of unlisted equity sharesby Mutual Funds

with a view to bringing about uniformity in the calculation of Net Asset Value.
vi.A provisionof nomination for the unit holders has been [Link] has been an
investorfriendly measure.
[Link] have been advised to follow a uniform method to calculate the sale and
repurchase price. This would avoid creation of confusion in the minds of the investors.

[Link] prohibited rebating and discounting by the Mutual Funds, thus, ensuring that all

investors get fair treatment.

[Link] issued to Mutual Funds due diligence while making

for exercising

investments in ynlisted equity shares. The mutual funds now cannotbuy unlisted equity
shares at a price higher than the price worked out in accordance with detailed pricing
formula. Thus mutual funds cannotbuy unlisted equity shares at arbitrary high prices.

,x.A detailed study was conducted on unit holding pattern in mutual funds industry for the
first timne.

[Link] a view to improve corporate governance standards, trustees who act as first line

regulators are now required to meet on bi-monthlybasis instead of earlier requirementof

meeting on quarterlybasis. They are required to review the performance and compliance
of regulations on bi-monthlybasis
[Link] charges for investors were rationalized.
[Link] Participants have been directed that no Account closure charges shall be
imposed on the closure of any Beneficial Owner accountsby any depository participant.
Capital Market Regulations.. .139

[Link] secretarial audithas been made mandatorv for listed entities to reconeie u

issue capital and electronic shares.

4. Investors' Education

SEBIhas issued a few investors guidance,advertisementsand published b0OkS to e

investorS. Itpublished a book named Investors Grievance-Rights and Remedies. It nas
issued an advertisementcode for the issues to ensure that the
advertisementsgiven d
and fair and which do not contain any misleading facts. which will vitiate the investors.
investmentdecisions.
5. Quick Reference
The booklet named 'a quick reference guide for investors' is published by
SEBl to Provide
basicintormation to help investors. This reference guide provides awarenesS to investos
about the following.
1. The rights that an investor should have as a stakeholder in a company;
2. The responsibilities of the investor.
3. The risks that the investor has to be assumed;

[Link] procedures relating to trading and transfer of the securities; and

5. The remedies forproblemns that the investor may encounterin the securities market.
[Link]
(a) The merchant bankers should give high priority to investor grievances. They should take
all preventivesteps to minimize the number of complaints.
(b) Proper grievancemonitoring and redressal system in co-ordination with the issuers and
the Registrars to Issue shall be set up by the lead merchant banker. The lead merchant
banker should also take all necessary measures to resolve the grievances of the investors
quickly.
O The merchant bankers should actively involve with the post-issue, refund and allotment
activities. They should also monitor investor grievances arising there from regularly.

7. Investor's Information Centre

Investor Information Centres have been set up in every recognized stock exchange. It will
with the concerned
take up thecomplaintsof the investors related to the securities traded/listed
affected in the
stock exchange. It will also take up all other complaintsregarding
the trades

of the exchange.
exchange and the relevant member
Trade Practices
8. Prohibition of Fraudulent And Unfair
on prohibition of fraudulent and unfair trade practices relating
SEBI has notified regulations

to the securities market. The regulation imposed prohibition against market manipulation,
purchase of securities and unfair practices relating
misleading statements to induce sale or
to the securities.

SEBI introduced strong and effective

To protect the integrity of the security market,
The stock exchanges were asked
enforcement measures against violations by intermediaries.
 140. .Financial Marketsand Institutions

to implement uniform norms for the impositionof circuit breakers and trading suspensions
in case were price manipulationwas suspected.

9. Inspections andEnforcement
SEBI has the powers of a civilcourt in respect of discovery and production of books,
documents, records, accounts,summoning and enforcing attendance of company/person
and examining them under oath. SEBI can levy fines for violations related to failure to submit
informationto SEBI / to enter into agreements with clients /toredress investor grievandes,

violations by mutual funds/stockbrokersand violations related to insider trading takeovers

etc.

10. Insider Trading

Insider trading may be defined as the sale or purchase of securities by persons who posses
price sensitive information about thecompany, on accountof their fiduciary capacity involving

confidenceor trust. The SEBI Insider Regulations, 1992 prohibits dealing, communicating or
counselingon mattersrelating to insider trading. It has laid down that no insider shall

)Communicate any unpublished sensitive information with or without his request

for insider trading.

I1) Counsel or procure any other person to deal in the securities of any company on
the basis of unpublished price sensitive information.
The SEBI Act, 1992 was amended in October 2002 and SEBI's powers were enhanced to

check cases of insider trading, fraudulentand unfair trading practices in securities markets
and market manipulation in order to protect the investors. SEBI has been given powers to

levy deterrent penalties against individuals, corporates and individuals in the mattersrelated
to market manipulation,insider trading and fraudulentpractices.
11. Stocks invest

When an investor applies for securities, he is required to remit application money. The
allotment formalities will ordinarily take 70 days from the date of the closure of the
subscription list. The investor may receive application money back if allotment is made
partially or no allotment. It will cause a loss of interest to the investor for the amount locked

up with the company. It means that the company can take advantage of kiting'or keeping

the cash float in the mean time. To prevent such undesirablepractices SEBl introducedStock
vest scheme in March 1992.
The State Bank of Indiaat the and Exchange Board of Indiadesigned
behest of the Securities
the scheme. It a legal, non-negotiable instrumentlike an account payee cheque,
is essentially

for subscriptionto capital issues. As per the scheme application for securities can be
accompanied by a stockinvest. An investor can buy these from an issuing bank provided
that he holds an accountthere. The [Link] in the investor's account,earning interest,
tillsuch time as allotmentis made, On finalization of the allotment, the registrar
indicates
the entitlement of the investor and the stockinvest is presented to the controlling branch of

the collecting bank claiming the amount on the basis of allotment. Only then the investor's