The foundation of any economic condition of a country is the Share market. Those people who are wishing to invest in securities get good chances through this medium. Therefore, to strengthen the economic condition of the country and to protect the rights of investors it is essential to control the share market of a country. Keeping this point in view, the Capital Issue (control) Act, 1947 was implemented. But the Act failed to control the share market completely. So to remove its shortcoming, The SEBI was established.
What is SEBI?
SEBI (Securities and Exchange Board of India) is actually a statutory body of the Indian Government that was established to improve the functions of the Stock Market. Its headquarters is in Mumbai, India, with regional offices in New Delhi, Chennai, Kolkata, and Ahmadabad along with other local regional offices across famous cities in India. SEBI is a rightful regulatory body that was founded by the Government of India to control the securities market in India and protect the interests of investors in securities. The main objective of SEBI is to safeguard the rights and interests of investors, establish a code of conduct, decrease any neglect related to the stock exchange, and promote the healthy functioning of the stock exchange. Further, it also regulates the functioning of the stock market, mutual funds, etc.
Establishment of SEBI
Under the stipulation of the Securities and Exchange Board of India Act, 1992. On 12 April 1992, The Securities and Exchange Board of India were established.
Authority and Power of SEBI
The SEBI has three main powers:
- Quasi-Judicial: SEBI has the power to pass decisions linked with fraud and other unscrupulous practices in terms of the securities market. This serves to assure integrity, transparency, and accountability in the securities market.
- Quasi-Executive: SEBI is authorized to perform the regulations and judgments made and to take legal action against the violators. It is also commissioned to examine Books of accounts and other documents if it comes across any contravention of the ordinances.
- Quasi-Legislative: To protect the interests of the investors, SEBI reserves the right to frame rules and regulations. Insider trading regulations, listing obligations, and disclosure requirements are some of its ordinances. These have been formed to keep violations at bay.
However, despite all the powers, the results of SEBI’s functions still have to go in the Securities Appellate Tribunal and the Supreme Court of India.
Role of SEBI
SEBI acts as a watchdog for all the capital market associates. Thus, its main objective is to provide such an environment for the financial market supporters that promote the efficient and smooth working of the securities market.
To make this happen, it assures that the three main partakers of the financial market are taken care of, i.e. issuers of securities, investors, and financial intermediaries.
Issuers of securities
These are organizations in the corporate field that gathers funds from various sources in the market. SEBI assures that the issue of IPOs and FPOs can take place genuinely and healthily.
The markets are active only because of investors. To restore the confidence of the general public who invest their hard-earned money in the market, SEBI is accountable for keeping an environment free from any violations.
Financial Intermediaries are the people who act as a middleman between the issuer and investor. Because of them, the financial transactions are smooth and safe.
Functions of SEBI
The main three functions of SEBI are-
- Protective Function
- Regulatory Function
- Development Function
Let’s discuss these functions below one by one.
1. Protective Functions
Functions that are offered by SEBI to protect the interest of investors and other financial participants which are mention below:
- Checking price rigging.
- Prevent insider trading.
- Promote fair practices.
- Create awareness among investors.
- Prohibit fraudulent and unfair trade practices.
- To promote a code of conduct relating to the security market.
2. Regulatory Functions
To check on the functioning of the business these functions are performed which are:
- Drawing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
- Regulation of takeover of companies.
- Registration of brokers, sub-brokers, merchant bankers, etc.
- Performing and exercising powers.
- To register and regulate the risk capital fund.
- Register and regulate the credit rating agency.
- To carry out an audit of the share market.
3. Development Functions
Some of the development functions are as follows:
- Imparting training to mediators.
- To publish different kinds of information for the benefit of all parties operating in the capital market.
- Carry on research work.
- Encouraging self-regulating organizations.
- Buy-sell mutual funds straight from AMC by a broker.
Structural Set-Up of SEBI
SEBI follows a corporate structure. It consists of a Board of Directors, senior management, department heads, and various significant departments.
To be specific, it constitutes over 20 departments, all of which are controlled by their respective department heads, who in turn are managed by an authority in general.
The SEBI’s hierarchical structure comprises of the following 9 appointed officers –
- The Chairman -Chosen by the Indian Union Government.
- Two members relating to the Union Finance Ministry of India.
- One member is from the Reserve Bank of India or RBI.
- Other five members – Selected by the Union Government of India.
Most Important Departments of SEBI
- The Information Technology Department.
- The Foreign Portfolio Investors and Custodians.
- Office of International Affairs.
- National Institute of Securities Market.
- Investment Management Department.
- Commodity and Derivative Market Regulation Department.
- Human Resource Department.
Apart from these, other crucial departments take care of legal, financial, and enforcement-related affairs.
Objectives of SEBI
SEBI has the following objectives-
- Security to the investors: The prime objective of SEBI is to maintain the interest of people in the stock market and present a sound environment for them.
- Constant flow of savings: To attract the savings of the people to the capital market is the second objective of SEBI. When preferred securities for investment are accessible only then the investors get drawn towards the capital market. Therefore, to achieve the given objective SEBI has started many new securities.
- Transparency in Transactions: An increase in the confidence of the investors in the capital market is only through transparency in transactions. Because of which SEBI was established.
- Fair and proper functioning: The systematic functioning of the capital markets is due to SEBI. As it keeps a close check over the activities of the financial intermediaries like brokers, sub-brokers, etc.
Major Achievements of SEBI
The main major achievement of SEBI are:
1. Dematerialization of Shares
In 1996 the Government introduced the depository system by establishing the National Securities Depository Ltd. (NSDL) and various depository associates. The purpose was to start “paperless” transactions in stock exchanges. But its progress had been slow.
An element of necessity was introduced by SEBI by making the dematerialization of shares compulsory for trading. This has been done in stages for shares being traded daily on a large scale. More than 50% of the trade-in stock exchanges are in the Demat form at present. Dematerialization of shares has boosted trading, especially by FIIs because it eliminates the fear of fake or fabricated shares and bad deliveries. Thus, it has also eliminated transfer problems.
2. Internet Trading
SEBI has allowed internet trading under Order Routing System (ORS) through registered stockbrokers on behalf of clients. It has thus promoted investors to buy and sell shares on the internet on their computers. It is major progress in trading shares at stock exchanges in India.
3. Derivatives Trading
With the introduction of derivatives trading in securities, the secondary market has been modernized.
4. Solving Investors’ Complaints
SEBI has established a separate cell where complaints obtained from the investors are served to. According to SEBI, more than 2 lakh investors complain against companies every year concerning transfers, non-receipt of share certificates, dividend, interest on debentures, etc. It can solve about 90% of them. SEBI desires to eliminate such complaints with more shares coming under the Demit form.
5. Modernization of Stock Exchanges
SEBI has improved the whole operations of stock exchanges in India. All stock exchanges are computerized. The stock market trading is 100% computerized and is on-line. In many developed countries of the world, including America and Japan, the trading is not fully computerized and a large part of their trade is still on-the-floor. This is a big achievement of SEBI. The introduction of electronic trading in all the 23 stock exchanges has decreased transaction costs.
Committees Formed By SEBI
- Alternative Investment Policy Advisory Committee (AIPAC)
- Corporate Bonds and Securitization Advisory Committee (CoBoSAC)
- Depository System Review Committee (DSRC)
- Primary Market Advisory Committee (PMAC)
- Qualified Audit Report Review Committee (QARC)
- Risk Management Review Committee (RMRC)
- SEBI Committee on Disclosures & Accounting Standards (SCODA)
- Takeover Regulations Advisory Committee
- Technical Advisory Committee
10 Advantages of SEBI
The top 10 advantage of SEBI final approval for establishing the Real Estate Investment Trusts –
- Grants funding to financially forced real estate industry for alternate routes
- Mortgage REITs will give finances to property developers
- SEBI has cut the minimum asset pool of REITs from 1000 crores to 500 crore rupees through investing midsized real estate developers to participate
- Enables individuals with a least of 2 lakh rupees investment to earn from formed commercial real estate projects
- Equity REITs can generate revenue for investors via rent or lease from tenants
- Ensures transparency as investors know the property’s current value since the investments are not made in under-construction properties
- Grants the investor’s high returns joined with liquidity
- Tax efficient as REITs will be taxed only once the projects are sold
- Small property developers who don’t have sufficient rent assets to floating Rs. 5 billion REIT can combine with multiple sponsors subject to a maximum of 3 to launch a joint REIT. Each sponsor should hold a minimum of 5% of units and overall 25% of units
- SEBI has given it go-ahead for Foreign Investments in REITs. This will enable insurance companies and pension funds to invest in real estate, by allowing the much-needed financial cushion to this sector.
Mutual Funds Guidelines by SEBI
The Securities and Exchange Board of India (SEBI) Regulations, 1996 is a set of guidelines that have been formed to direct mutual funds in India. As per the said guidelines, mutual funds in India need to register under the Trusts Act, 1882.
Those mutual funds that deal particularly with the money market must get registered with the RBI. The Asset Management Companies (AMC), that handles mutual funds must be SEBI approved. The trustees of the AMC need to ensure that mutual funds are working as per the regulations. It is also committed to the responsibility of controlling the overall performance of mutual funds.
SEBI India has more announced several mutual funds regulations that the sponsors, asset management companies, and shareholders must abide by.
A few of them are mentioned below :
- A mutual fund sponsor, a group of a company, or an assistant of an AMC cannot hold – 10% or more of the total shareholding and voting rights in an AMC or other mutual fund. An AMC cannot be served on any other mutual fund’s board.
- In an AMC of a mutual fund, a shareholder cannot hold 10 percent or more of the total shareholding either directly or indirectly.
- For a sectorial or thematic index, none of the single stocks can have over 35% weight in the said list. While for other indices the cap is 25%.
- When it comes to the top three constituents of the index, their aggregate weight cannot surpass 65 percent.
- When it comes to an individual constituent of the index, the trading frequency must be at least a minimum of 80 percent.
- Each liquid scheme must have at least 20 percent in liquid assets like treasury bills, government securities, cash, repo on government securities, etc.
- At the end of every calendar year, mutual funds must ensure that they have been following the guidelines issued by the Securities and Exchange Board of India. It further requires them to make their constituents of the indices public by getting it published on their respective websites.
Amendments Under SEBI
SEBI has included the following necessary amendments
- Maintenance of structured digital database has been changed from, 5 years to 8 years only after the completion of the relevant transaction.
- There would be a prohibition on outsourcing maintenance of the internal database. As entities routinely outsource their technology and IT functions, SEBI has strictly restricted outsourcing this database to third-party service providers.
- All listed entities, intermediaries, and fiduciaries are required to submit the standard format detecting the violation to stock exchange(s) where the concerned securities are dealt, and not to the securities market regulator anymore.
- It has now allowed offers for sale and rights entitlement transactions to be passed out through the trading window is closed.
- An alternate director appointment for an independent director would not be permitted.
- A minimum of 6 directors would be compulsory on the Board of Directors of top listed entities in a phased means.
- Secretarial Audit will be necessary for the registered entities and their material unlisted subsidiaries incorporated in India and the report would be seized with the annual report.
- Statutory auditor of the registered entities would be required to undertake a limited review of all companies whose accounts are to be merged with the listed entity as per Accounting standard (AS) 21 Consolidated Financial statements.
- The corporate governance section of the annual report for the year 31 March 2019 would include distinctly the names of the listed companies where a person is a director and the category of autocracy.
Shareholder’s approval by special resolution in a general meeting would be compulsory if the total salary paid to the following:
- A single executive promoter director surpasses INR 5 crore or 2.5 percent of the net profit, whichever is higher or
- All executive’s promoter directors surpass 5 percent of the net profits.
- Such approval would be valid only till the expiry of the term of such director. Under section 198 of the 2013 Act Net profits would be calculated.
- Payments made by the listed entities to the related parties concerning brand usage/royalty amounting to more than two percent of the consolidated turnover of the listed entity would be considered material. As currently compulsory by the listing guidelines such related party payments for royalty and brand would need support from the shareholders on a majority of minority basis. This sub-limit of two percent would be considered within the overall 10% limit to determine material RPTs.
- In case the remuneration of a single non-executive director exceeds 50 percent of the pool is distributed to the non-executive directors as a whole, shareholder’s approval by a special resolution would be compulsory every year, and details of such payment would also be revealed.
- Total fee paid to an auditor and all entities on the network firms of which the auditor apart has to be disclosed by the listed entity in its yearly report on a consolidated basis.
Many steps have been taken by SEBI in the last few years to reform the Indian capital market. It has stated various regulations such as freedom in drawing and pricing instruments, the introduction of stock investment schemes, banning the badla system, and the introduction of electronic trading. It also has encountered various controversies in the previous years. But in such a small time SEBI has gained its respect and place in the capital market but still, there are several problems and challenges in front of it which it needs to surmount.
Frequently Asked Questions
Q1. What is the role of SEBI concerning public issues?
Ans The Securities and Exchange Board of India (SEBI) governs the rules, regulations, and procedures relating to public issues in India.
In India, any company that is going public India should get approval from SEBI before opening its IPO. The public issue prospectus is submitted to SEBI by the issuer company’s lead managers, and provide clarification, make changes to the scheme suggested by SEBI, and get it to approval.
In simple words, SEBI confirms the IPO prospectus and makes sure all the statements made in this document are correct and also make sure that document has sufficient information to help investors to choose before applying for shares in an IPO.
Q2. What is Fund of Funds?
Ans. Fund of Funds, in general language, is the funds that are gathered from publicly available sources as an investment strategy of holding a portfolio of other investment funds willingly than investing directly in stocks, bonds, or another security. In the context of AIFs, a Fund of Funds is an AIF which invests in another AIF (Alternative Investment Fund).
Q3. Is the approval of SEBI required for the sale of 2% shares following the terms of the Circular?
Ans. No former approval of SEBI is required for adopting open market sale provided that all the conditions mentioned in the SEBI Circular dated February 22, 2018, for the open market sale are performed by the listed entity.
Q4. When the company is going to get listed on an exchange?
Ans. Companies seeking public issues of their securities file their draft offer document with SEBI through their Lead Manager to the issue. Such draft offer documents are available on SEBI and the Lead Manager’s website. After examination, SEBI submits its comments on the offer document to the concerned LM (Lead Manager). Finally, the issuer company and the LM decide the listing dates/time scales, etc. You may also get in touch with the Lead manager (LM) for further information.
Q5. What is the role of SEBI in the Indian Market?
Ans. The role of SEBI’s in the Indian market is to ensure that the securities market in India functions in a precise manner. It was enacted to preserve the interests of investors and traders in the Indian stock market by giving a healthy environment in securities and to promote the development of, and to regulate the equity market.