In this article, Varsha Jhavar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the regulation of Designated Stock Exchanges in India.

Introduction

Stock Exchange is a platform where the trading of securities happens in an organized manner. The securities may be shares or debts. The stock exchange has not been defined under any Act, but the commercial definition is generally accepted. Securities and Exchange Board of India, established in 1992, is the principal regulator of stock exchanges in India.

Securities are financial assets that are tradable and can be divided into three categories- Equity securities (stocks), Debt securities (bonds) and Derivative securities. The trading of securities can be done on an exchange or over the counter. So, basically stocks are a subset of securities. Securities are freely transferable, i.e., they can be transferred from one person to another without notifying the company whose stocks are being traded.

Some Terms clarified/explained

A stock exchange is a market where securities are bought and sold.

Designated stock exchange has been defined under Section 2(1)(d) of the Securities and Exchange Board of India (Issue and Listing Debt Securities) Regulations, 2008, as, “a stock exchange in which securities of the issuer are listed or proposed to be listed and which is chosen by the issuer for purposes of a particular issue under these regulations”. In case a stock exchange has trading terminals at more than one place in the country, one of them shall be chosen by the issuer as the designated stock exchange.

An issuer is a legal entity, i.e., the government, corporation or investment trust, which sells securities to the public, to fund its operations. The Investor is the person who invests or finances a company, by purchasing a part of the company, through the medium of stocks and becomes a part-owner of that company.

A company may raise funds by offering securities to the public when it is done it is called initial public offering. This kind of market is called Primary market. When these shares are further traded by the investors, the market is called secondary market.

The person or company which does the buying and selling of stock on behalf of another person or company is called stockbroker and the charge which he levies for the buying and selling of the stock is called brokerage charge.

The process of transition of an exchange from mutually-owned association to a shareholder held company.

History

In its initial days, the securities market was in the form of a co-operative society, where trading was conducted by members on a mutual basis. Then the Securities Contracts (Regulation) Act, 1956 was passed which corporatized and demutualised the stock exchanges. The trading continued according to the old system for a long time. By1991, the volume of stocks being traded reached to unprecedented levels. The Securities and Exchange Board of India (SEBI) was established as the apex body for regulation of stock exchanges in India in 1988. In 1992 another Act was introduced, which conferred the extensive range of powers on SEBI. SEBI set up in 1988, was made a statutory body in 1992.

Securities and Exchange Board of India

Share market is the one of the major pillars for the economy of a country. It is very important to control the share market in order to strengthen the economic condition of the country and thereby protect the rights of the investors. Keeping this thing in view, the Capital Issue (Control) Act, 1947 was enforced. But the Act failed to fully control the Share Market. In order to remove its drawbacks, Securities and Exchange Board of India (SEBI) was established in 1992.

The SEBI Act enumerates the powers with respect to regulating the stock exchange. The act has conferred a wide variety of powers to SEBI.

Some of the most important powers of SEBI with respect to regulating the Indian stock market are listed below:

Specifying rules and regulations

SEBI has the authority to specify rules and regulations to control the stock exchange. For example, the timings i.e. opening (9.15 am) and closing (3.30 pm) time of the market has been set by SEBI, and it retains the right to change the timing if required.

Providing licenses to dealers and brokers

Every dealer or broker requires a prior approval and license from SEBI to start distributing securities to investors. It also reserves the right to withhold or cancel the license of brokers and dealers not adhering to guidelines. 

Reviewing the performance of various stock exchanges

The regulating body is also responsible for the performances of various stock exchanges and bringing transparency in their functioning. 

Controlling mergers, acquisitions and take-overs of the companies

Some companies try to manipulate stocks and buy a majority stake in other companies with an intention of a take-over. SEBI controls and prohibits such movements if it is not in the interest of the company. 

Prohibiting unfair trade practices in the market

While SEBI has laid down specific guidelines that promote fair trade practices, many companies occasionally undertake activities that are not healthy for the market. SEBI has the power to prohibit such activities and take action against the parties involved in such a trade. Penalties may range from Rs 25 crores or 3 times the profits made out of such failure, whichever is higher.

Imposition of Penalties in case of violation

A number of acts / activities have been identified and declared to be punishable by SEBI. The same has been mentioned under various sections of the Act.

Stock broker activities

A penalty can be imposed in case a stockbroker defaults or fails in –

1. Issuing in Contract Note, or
2. Delivering any security or making payment of an amount due to an investor , or
3. charges an amount of brokerage which is in excess of brokerage specified in the regulations.

The penalty may range from Rs 1 lac per day to Rs 1 crore depending on the type of default or failure.

Insider Trading

A person becomes liable of insider trading if –

1. Deals of self or others on basis of unpublished / confidential price sensitive information, or
2. Communicates any unpublished price sensitive information, or
3. Counsels any person to deal in securities of any corporate on basis of unpublished price sensitive information.

The penalty can be very heavy is such cases going upto Rs 25 crores or thrice the profit made out of such insider trading activity, whichever is higher.

Non Disclosure of acquisition of shares and takeovers

Non Disclosure penalty is applicable if a person fails to –

1. Disclose his total shareholding in a corporate body before acquiring further shares of the corporate body, or
2. Makes a public announcement so are to acquire shares at a certain price, or
3. Makes a public offer by sending an offer letter to the shareholder of the concerned corporate, or
4. Makes payment of consideration to shareholders who sold their shares pursuant to the offer letter as mentioned earlier.

Here again, the penalty can be very heavy ranging from Rs 25 crores or thrice the profit made out of such Non Disclosure activity, whichever is higher .

Contravention of rules where no separate penalty has been provided

The Act has also specified the penalty for such instances wherein no specific or separate penalty has been provided. The penalty in such cases may go upto Rs 1 crore.

Broadly, for the purpose of clarity on regulatory aspects and other functions of the SEBI, one can divide the functions of SEBI into three parts:

Protective Functions:

• To check unfair trade practices in respect to share / security market.  
• To check insiders trading in shares / securities.
• To provide education relating to dealing in securities to the investors.  
• To provide a code of conduct relating to the security market.

Regulatory Functions (already enumerated earlier in detail):  

• To regulate the business doing done in the share / securities market.  
• To register and regulate the various venture capital funds.  
• To carry out an audit of the share markets.  
• To register and regulate the credit rating agency.

Developmental Functions:

• To impart training to the various Intermediaries.  
• To encourage self regulating organizations.  
• To carry on research work.  
• To publish various kinds of information for the education & convenience of all the parties operating in the capital markets.

Conclusion

The stock market as mentioned earlier is a barometer of the state of the economy for a country. It indicates the direction, the growth and overall health of the economy. All this is reflected on a real time basis, in the most transparent & non partisan manner, strictly on the basis of merits. Therefore regulating the performance and activities of the stock market, so that same may be conducted in an orderly manner, is of critical importance. The SEBI Act and the provisions incorporated in the Act are all a measure of the importance that has been placed on the orderly conduct of the stock market. Any violations are to be dealt with in a strict manner along with the provision of large and stringent penalties.

References:

• A Study of Indian Stock Market Scenario with Reference to Its Growth (2017) Pankaj Srivastava & Mr. Ugrasen Imperial Journal of Interdisciplinary Research (IJIR) Vol-3, Issue-4, 2017 ISSN: 2454-1362
• SEBI Act, 1992