SEBI intermediaries
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This article is written by Ayushi Sinha, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.

Introduction

Intermediary by definition, in any field, is an individual who is in the role of a mediator facilitating an agreement or a reconciliation. Accordingly, intermediaries of SEBI too are the bridges or links between the investor and the stock exchange and/or SEBI. 

Section 11 and section 12 of SEBI Act, 1992 defines an Intermediary. Stockbrokers, sub-brokers, portfolio managers, depositories, investment advisers, share transfer agents, merchant bankers, underwriters, registrars to an issue, foreign institutional investors, custodians of securities, venture capital funds, mutual funds, asset management companies, credit rating agencies, those in connection and associated with the securities market in any manner, are all broadly categorised as ‘Intermediaries of SEBI

Kinds of intermediaries

Further, these intermediaries are again classified into two broad categories. The primary and secondary Intermediaries. The major role holders of Primary market intermediaries are briefly defined below:

TYPE

DESCRIPTION

REGULATION

  • MERCHANT BANKERS

Merchant bankers have a central role in the procedure of issue management. Lead managers have to confirm perfection of the material supplied in the offer document. They have to guarantee amenableness and adherence with SEBI rules, principles and Guidelines for Disclosures and Investor Safeguard. A due diligence credential is submitted to SEBI confirming that the disclosures are reliable, unbiased and acceptable to enable the potential stakeholders to make a well informed investment. SEBI progressively propagates and doctrines the need to enhance the standard of disclosures. One such requirement is evaluating the net worth of the intermediary and judging if it is in consonance with the level of transactions being indulged by it.

SEBI (Merchant Bankers) Regulation), 1992

  • UNDERWRITERS

Additionally, all SEBI registered merchant bankers of defined categories, stockbrokers and mutual funds can also play the role as underwriters. 

SEBI (Underwriters) Rules and Regulations, 1993

  • BANKERS TO AN ISSUE

It applies to the scheduled banks standing-in as bankers to an issue. The eligibility criteria and reporting periodicity for bankers to an issue is documented in these regulations. 

SEBI (Bankers to the Issue) Rules and Regulations, 1994

  • PORTFOLIO MANAGERS

It applies to registration of portfolio managers with SEBI. The portfolio management activities are the sole and core responsibility of the registered portfolio managers. All merchant bankers of categories I and II can act as portfolio managers with previous authorization from SEBI. 

SEBI (Portfolio Managers) Rules and Regulations, 1993

  • DEBENTURE TRUSTEES

It shall apply to debenture trustees to be registered with SEBI. Their active role is in ensuring the amenability by the issuers with the norms of the deed pertaining to the debenture trust, creation of the security, imbursement of interest, debenture redemption, handling of grievances of debenture holders w.r.t interest/redemption proceeds not received on payable dates. 

SEBI (Debenture Trustees) Rules and Regulations, 1993

  • REGISTER TO AN ISSUE AND SHARE TRANSFER AGENTS

It applies to the Registrars to an issue (RTI) and are share transfer agents (STA). Registration is approved in two categories: category I – as registrar to the issue plus share transfer agent; category II – as either registrar to an issue or share transfer agent. Secondary Market Intermediaries.

SEBI (Registrar to the Issue and Share Transfer Agent) Rules and Regulations, 1993

  • STOCK BROKERS

It applies to all stock brokers trading in stocks/securities. 

SEBI (Stock Brokers and Sub Brokers) Regulation 1992

  • SUB- BROKERS

Sub-brokers play a major role in transactions of securities by singular stockholders/depositors. This also falls under the category of secondary markets and the need to regulate this market is also unquestionably domineering. Brokers are hesitant to take accountability of the deeds of the sub-brokers resulting in major challenges faced in registering them with SEBI.

SEBI (Stock Brokers and Sub Brokers) Regulation 1992

Regulation of financial intermediaries by SEBI

Financial market in India is developing with speed and being among the oldest in the world enjoys a good reputation and standing among the developing economies. 

Procurement and vending of monetary entitlements, possessions, services and securities are central to any financial market. Banking and non-banking financial institutions, merchants, debtors and creditors, depositors and debtors, and negotiators are the contributors on demand and supply side in these markets. Financial markets may be a definite address or locality, e.g., stock exchange, or it may merely be an on-mobile-set market. There are governing institutions outlining rules and regulations in the financial markets for smooth operations and working of monetary markets.

Ministry of Finance, Ministry of Company Affairs (MCA), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) are the primary regulators ensuring proficiency and efficacy of the financial market. Besides there are several other regulatory network bodies, i.e., Company Law Board, Registrar of Companies, the Stock Exchanges. Keeping in view the dynamic changes in the economy, the regulatory structure also has been modified to cater to it. Above is a perspective of the regulations in the financial market in general. In the ensuing paras, the regulation of Intermediaries specifically by SEBI has been enunciated.

Securities and Exchange Board of India (Intermediaries) regulations, 2008 applies w.r.t. regulation of the Intermediaries. It includes key indicators in the passage of intermediaries like their registration, their responsibilities, any punitive actions/scrutiny, deferment/annulment of their license, code of conduct and leading corporate governance practices to be observed by them. 

The Market Intermediaries Regulation and Supervision Department is answerable for the registering, regulating, ensuring compliance and undertaking inspections of market place intermediaries w.r.t all sections of the markets viz. equity, equity derivatives, currency derivatives, debt and debt connected derivatives and product derivatives. Of late, monitoring risk assessment of the intermediary is also in their ambit of role responsibilities besides checking singular issues like turnover norms, grievances, forfeitures, etc.

The regulation of intermediaries is ensured through the various rules and regulations enunciated by SEBI with conditions of strict compliance. SEBI has the Power to Issue Directions under Section 11(B) to the mentioned intermediaries with regards to matters connection with Section 12.

 The key steps in registration and monitoring of the intermediaries are enunciated below:

  1. Details to be submitted in line with the format of FORM A of Schedule 1 of SEBI (Intermediaries) regulations, 2008. 
  2. SEBI board awards permission to the applicant to be registered as intermediary with SEBI consequent to fruitful disclosure & authentication of facts. The Board shall issue a certificate of registration only when the intermediary meets the regulations made under this Act. 178 (IA). 
  3. Application with incomplete information is liable to be rejected by SEBI board as not fit or erroneous, furnishing false data, failure to meet eligibility requirements etc. rendering it unfit for acceptance.
  4. Post proper registration, the details of a compliance officer are required to be submitted with the SEBI board annually on 1st April of each year. He is held responsible for guaranteeing/ certifying compliances to all SEBI guidelines on behalf of the intermediary. 
  5. The complaints of the investors are required to be maintained by the intermediary in documentary form with the requirement to resolve the same within 45 days of registration of the complaint. 
  6. SEBI also issues circulars periodically stating the do’s and don’ts and responsibilities of the intermediaries over and above what is enshrined in SEBI (Intermediaries) Regulations 2008.
  1. No cash is to be accepted and disbursed by the brokers and sub-brokers from the customer towards consideration for buying-selling of securities. The modalities of payments need to be as per the modes allowed by Reserve Bank of India i.e. demand drafts, account payee crossed cheques, direct electronic fund transfer like IMPS, NEFT etc. 
  2. “Demat mode” should be directly to/from the client’s “beneficiary accounts” while transacting in securities. However, this requirement is not mandated for a body established and verified under the approved scheme of the stock exchange and/or SEBI.
  3. No person shall, without obtaining a certificate of registration from the Board, shall sponsor or effect to be backed or carry on or cause to be carried on any funds apropos a venture capital or combined investment systems including mutual funds.

SEBI notifications regarding intermediaries

In June, 2018, SEBI[1] has brought various notifications to the notice of market intermediaries registered with SEBI. These pertain to the ones issued on Prevention of Money Laundering Rules by the GOI. It is mandated to make UIDAI issued Aadhaar number and Income Tax Rules, 1962 related Permanent Account Number (PAN) mandatory for both fresh and present accounts with the financial market intermediaries as a prerequisite for completing the KYC process.

Investment related advice should not be provided directly or indirectly by an Intermediary or their personnel. In case they are in the business of giving guidance, the interest of the employer and/or family members in such activity should be disclosed to SEBI. They need to comply with the code of conduct in line with schedule III of SEBI (Intermediaries) Regulations, 2008.

Certain activities have been prohibited by SEBI for outsourcing to third party by an intermediary[2]. Some of these are mentioned below:

  • Checker activities cannot be outsourced by the depository participants. 
  • Record-keeping and PMLA obligations by RTA’s (Registrar and transfer agents) should be undertaken within.
  • Client orders w.r.t Pay-in/pay-out of capitals/securities should be managed by Brokers. 
  • Financial instruments should be cleared by the Banks by themselves.
  • Due diligence on issue pricing and supervision of other intermediaries cannot be subcontracted by the Merchant bankers to other parties.

Further, a recent amendment[3] to the SEBI (Intermediaries) Regulation, 2008 w.e.f. April 17, 2020 was made, whereby, Chapter V B was inserted giving power to the Board to exempt certain people from the purview of this regulation. Such exemption is to be enforced only for a maximum duration of 12 months in respect to a technological innovation pertaining to a  new product being tested, their functioning, business models etc. in the light of the live environment of regulatory sandbox in the securities market. However, conditions have to be fulfilled in regard to the ones laid down by the Board. 

Conclusion 

SEBI board protects the interest of investors, by appointing an inspecting authority to keep an eye on the books of account of the intermediaries, by overseeing the internal control systems, and evaluating the efficacy of the redress mechanism followed by intermediaries on complaints of the investors. 

References

[1] https://www.sebi.gov.in/legal/circulars/jun-2018/amendments-to-prevention-of-money-laundering-maintenance-of-records-rules-2005_39207.html

[2] https://www.sebi.gov.in/legal/circulars/dec-2011/guidelines-on-outsourcing-of-activities-by-intermediaries_21752.html

[3] https://www.sebi.gov.in/legal/regulations/nov-2017/securities-and-exchange-board-of-india-intermediaries-regulations-2008-last-amended-on-april-17-2020-_38453.html


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