Securities and Exchange Board of India (SEBI)

Introduction

•  The Securities and Exchange Board of India (SEBI) was constituted on 12th April 1988 as an interim administrative body under the Finance Ministry.

•  Initially SEBI was a non-statutory body without any statutory power.

•  Four years later, on 4th April 1992 a notification awarding autonomous status and given statutory powers to SEBI was issued (Securities and Exchange Board of India Act, 1992), to protect the interests of the investors in securities along with promoting and regulating the securities market.

•  Headquartered in Mumbai, the Securities and Exchange Board of India (SEBI) has four regional offices located in Ahmedabad, Chennai, Delhi and Kolkata.

 

Objectives of SEBI

•  SEBI has following objectives-

1.  The primary objective of SEBI is to protect the interest of people in the stock market and provide a healthy environment for them.

2.  Prevention of malpractices and regulation of the securities market.

3.  SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.

 

Composition of SEBI Board

•  Section 4(1) of the SEBI Act provides that the SEBI Board shall consist of the following nine (9) members, namely:

1.  A Chairman. Chairman is to be nominated by the Central Government.

2.  Two members from amongst the officials of the Ministry of the Central Government dealing with finance and administration of the Companies Act 2013;

3.  One member from amongst the officials of the Reserve Bank Of India;

4.  Five other members of whom at least three shall be the whole time members, to be appointed by the Central Government.

 

Authority and Power of SEBI

•  The SEBI has three main powers:

1.  Quasi-Judicial: SEBI has the authority to deliver judgements 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.

2.  Quasi-Executive: SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. It is also authorised to inspect Books of accounts and other documents if it comes across any violation of the regulations.

3.  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 obligations, 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.

 

Functions of SEBI

•  To review the market operations, organizational structure and administrative control of the stock exchanges.

•  SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers, share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars, underwriters, and other associated people to register and regulate work.

•  It promotes the development of the securities market and regulates the business.

•  It regulates the operations of depositories, participants, custodians of securities, foreign portfolio investors, and credit rating agencies.

•  It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities market.

•  To conduct inspections and inquiries

•  It ensures that investors are educated on the intermediaries of securities markets.

•  It monitors substantial acquisitions of shares and take-over of companies.

•  SEBI takes care of research and development to ensure the securities market is efficient at all times.

 

Issues with SEBI

•  In recent years SEBI role became more complex, the capital markets regulator is at a crossroads.

•  There is excessive focus on regulation of market conduct and lesser emphasis on prudential regulation.

•  SEBI statutory enforcement powers are greater than its counterparts in the US and the UK as it is armed with far greater power to inflict serious economic injury.

•  It can impose serious restraints on economic activity, this is done based on suspicion, leaving it to those affected to shoulder the burden of disproving the suspicion, somewhat like preventive detention.

•  Its legislative powers are near absolute as the SEBI Act grants wide discretion to make subordinate legislation.

•  The component of prior consultation with the market and a system of review of regulations to see if they have met the articulated purpose is substantially missing. As a result, the fear of the regulator is widespread.

•  Regulation, either rules or enforcement, is far from perfect, particularly in areas like insider trading.

•  The Securities offering documents are extraordinarily bulky and have substantially been reduced to formal compliance rather than resulting in substantive disclosures of high quality.

 

Changes Introduced by SEBI in capital market

•  T+2 trading settlement system.

•  De-materialization of share certificates (1999).

•  Banned entry loads for mutual fund schemes in 2009.

•  The task of giving approvals to FII registrations was handed over to SEBI in 2003. In order to discourage FII investments made through P-notes, Securities and Exchange Board of India has imposed sufficient checks and balances to avoid the flow of black money into the Indian markets.

•  Strict vigil on usage of IPO issue proceeds, greater disclosure by companies and their bankers and allotment of a minimum number of shares to retail investors. Keeping with the times, SEBI has also introduced e-IPO procedure for electronic bidding in public offers to help investors bid for shares in a cost-effective manner.

•  In 1996-97, Securities and Exchange Board of India directed all exchanges to fix the daily price band at 10% and a weekly overall limit of 25% to curb undesirable volatility. To bring about a coordinated trading halt in all equity and derivatives market nationwide, Securities and Exchange Board of India introduced an index-based circuit breaker system applicable at 10%, 15% and 20% movement either way.

•  Securities and Exchange Board of India has a web-based centralized grievance redress system called SEBI Complaints Redress System – SCORES for assisting investors to lodge their complaints in a structured way.

 

Mutual Funds and SEBI

•  Mutual funds are managed by Asset Management Companies (AMC), which need to be approved by SEBI. A Custodian who is registered with SEBI holds the securities of various schemes of the fund. The trustees of the AMC monitor the performance of the mutual fund and ensure that it works in compliance with SEBI Regulations.

•  The firm must be established as a separate AMC to offer mutual funds. The net worth of such a parent firm or AMC must be at least Rs 50,000,000. Mutual funds dealing exclusively with money markets must register with the Reserve Bank of India (RBI); all other mutual funds must register with SEBI.

•  Recently, a self-regulation agency for mutual funds has been set up called the Association of Mutual Funds of India (AMFI). AMFI focuses on developing the Indian mutual fund industry in a professional and ethical manner.

•  AMFI aims to enhance the operational standards in all areas with a view to protect and promote mutual funds and their stakeholders. To date, there are 44 Asset Management Companies that are registered with SEBI and are members of AMFI.

•  Some of them are Aditya Birla Sun Life AMC Limited, BNP Paribas Asset Management India Private Limited, Edelweiss Asset Management Limited, and Quant Money Managers Limited. A sponsor of a mutual fund scheme, a group of the company or an associate, which involves AMC of the fund, cannot hold the following in any form:

•  10% or above of the voting rights and shareholding in the AMC or any other mutual fund scheme.

•  An AMC cannot have representation on the board of any other mutual fund.

•  Shareholders can’t hold more than 10% of the shares both directly and indirectly in AMC of the mutual fund.

 

SEBI Guidelines on Mutual Funds Reclassification

•  Funds must be named based on the core intent of the fund and asset mix. It should specify the risk associated clearly.

•  SEBI has suggested 16 classifications for debt funds, ten classifications for equity funds, six classifications for hybrid, two for solution funds, and two for index funds.

•  SEBI has reclassified large-cap, mid-cap, and small-cap based on market cap relative rankings rather than absolute market cap cut-offs.

The debt fund classification is prescribed based on the duration of the fund and the asset quality mix.

•  All categories except index funds can only have one fund per classification, i.e. an AMC can have a maximum of 34 funds other than index funds.