SEBI Act
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This article is written by Gaurav Raj Grover, a fifth-year law student at Lloyd Law College, Greater Noida. This article discusses the features of SEBI in India.

Introduction

SEBI is also known as the Security and Exchange Board of India was established on 12 April 1992 through the SEBI Act, 1992. It was a non-statutory body established to regulate the securities market. The headquarters of the board is situated in Bandra Kurla Complex, Mumbai. SEBI helps in regulating the Indian Capital Market by protecting the interest of investors and establishing the rules and regulations for the development of the capital market. 

SEBI

SEBI or the Security and Exchange Board of India is a regulatory body controlled by the Government of India to regulate the capital and security market. Before the Security and Exchange Board of India, the Controller of Capital Issues was the regulating body to regulate the market which was controlled by the Capital Issues (Control) Act, 1947. 

Majorly, SEBI controls the issuers of securities, the investors and the market intermediaries. The Board draft regulations and statutes under its legislative authority, also pass rulings and orders under its judicial capacity and operate investigations in its executive limits. SEBI works as a barrier to avoid malpractices related to the stock market by establishing a code of conduct and promoting the healthy functioning of the stock exchange. Initially, SEBI didn’t have the authority to regulate the stock exchange, but in 1992 the Union Government gave statutory powers to SEBI through the SEBI Act, 1992. 

Reasons for the Establishment of SEBI

During the fall of the 1970s and the rise of the 1980s, the people of India were preferring to work in the Capital Market as the market was trending. Without any authority, problems like unofficial private placements, the rigging of prices, unofficial self-styled merchant bankers started violating the rules and regulations of the stock exchange which caused delays in the delivery of shares. 

The Government felt an immediate need to establish a regulatory body to regulate its working and to find solutions for all the problems the market was going through, as the people were losing interest in the market. This led to the establishment of the Security and Exchange Board of India. 

Purpose and Role of SEBI

SEBI helps in creating a healthy environment to facilitate an effective mobilization between the market participants and investors. It helps in locating the resources with the help of the securities market. SEBI establish rules and regulations, policy framework and infrastructure to meet the needs of the market. 

The financial market majorly comprises of three groups:

The Issuer of Securities 

Issuers are the group that works in the corporate department to easily raise funds from the various sources of the market. So, SEBI helps the issuers by providing them a healthy and open environment to work efficiently. 

Investors 

The investors are the soul of the market as they keep the market alive by providing accurate supplies, correct information, and protection to the people on a daily basis. SEBI helps investors by creating a malpractice free environment to attract and protect the money of the people who invested in the market. 

Financial Intermediaries

The intermediaries are the people who act as middlemen between the issuers and the investors. SEBI helps in creating a competitive professional market which gives a better service to the issuers and the investors. They also provide efficient infrastructure and secured financial transactions. 

Organizational Structure of SEBI

The members of the Security and Exchange Board of India are:

  • The Chairman who is appointed by the Union Government of India.
  • Two members who are selected from the officers of the Union Finance Ministry.
  • One member who is appointed from the Reserve Bank of India.
  • The other five members are appointed by the Union Government of India, out of five three must be whole-time members. 

Dr. S.A. Dave was the first Chairman of SEBI who was appointed on 10th April 1988. Ajay Tyagi is the present Chairman appointed on 10th February 2017 replacing U K Sinha. 

Functions of SEBI

SEBI basically protects the interest of the investors in the security market, promotes the development of the security market and regulates the business. The functions of the Security and Exchange Board of India can primarily be categorized into three parts: 

  • Protective Function

Protective functions are used to protect the interest of investors and other financial participants. These functions are: 

  • Prevent Insider Trading: When the people working in the market like director, promoters or employees working in the company starts to buy or sell the securities because they have access to the confidential price which results in affecting the price of the security is known as insider trading. SEBI restricted companies to buy their own shares from the secondary market and SEBI also regulates regular check-ups to prevent insider trading and avoid malpractices.
  • Checks price rigging: The malpractices which create unreasonable fluctuations in the price of the securities with the help of increasing or decreasing the market price of stocks which results in an immense loss for the investors or traders are known as price rigging. To prevent price rigging, SEBI keeps active surveillance on the factors which can promote price rigging. 
  • Promotes fair trade practices: SEBI established rules and regulations and a certain code of conduct in the securities market to restrict fraudulent and unfair trade practices. 
  • Providing awareness/financial education for investors: SEBI conducts seminars both online and offline to educate the investors about insights into the financial market and money management. 
  • Regulatory Function

Regulatory functions are generally used to check the functioning of the financial business in the market. They establish rules to regulate the financial intermediaries and corporates for the efficiency of the market. These functions are: 

  • SEBI designed guidelines and code of conduct for efficient working of financial intermediaries and corporate.
  • Established rules for taking over a company. 
  • Conducts regular inquiries and audits of stock exchanges.
  • Regulates the process of mutual funds.
  • Registration of brokers, sub-brokers, and merchant bankers is controlled by SEBI.
  • Levying of fees is regulated by SEBI. 
  • Restrictions on private placement.
  • Development Function

The development functions are the steps taken by SEBI to improve the security of the market through technology. The functions are:

  • By providing training sessions to the intermediaries of the market. 
  • By promoting fair trading and restrictions on malpractices of any kind. 
  • By introducing the DEMAT format. 
  • By promoting self-regulating organizations. 
  • By introducing online trading through registered stock brokers. 
  • By providing discount brokerage. 

Objectives of SEBI

The objectives of SEBI are:

  • Protection of investors: The primary objective of SEBI is to protect the rights and interests of the people in the stock market by guiding them to a healthy environment and protecting the money involved in the market. 
  • Prevention of malpractices: The main objective for the formation of SEBI was to prevent fraud and malpractices related to trading and to regulate the activities of the stock exchange.
  • Promoting fair and proper functioning: SEBI was established to maintain the functioning of the capital market and to promote functioning of the stock exchange. They are ordered to keep eyes on the activities of the financial intermediaries and regulate the securities industry efficiently. 
  • Establishing Balance: SEBI has to maintain a balance between the statutory regulation and self-regulation of the securities industry.
  • Establishing a code of conduct: SEBI is required to develop and regulate a code of conduct to avoid frauds and malpractices caused by intermediaries such as brokers, underwriters and other people. 

Features of SEBI

Sebi is an organization that is responsible for maintaining an environment that is free from malpractices to restore the confidence of the general public who invest their hard-earned money in the market. SEBI controls the bylaws of every stock exchange in the country. SEBI keeps an eye on all the books of accounts related to the stock exchange and financial intermediaries to check their irregularities. The features of the Security and Exchange Board of India are given below: 

  • Quasi-Judicial 

SEBI is allowed to conduct hearings and can pass judgments on unethical cases and fraudulent trade practices. This feature of SEBI helps to protect transparency, accountability, reliability, and fairness in the capital market. 

  • Quasi-Legislative

SEBI is allowed to draft legislatures with respect to the capital market. SEBI drafts rules and regulations to protect the interests of the investors. For eg: SEBI LODR or Listing Obligation and Disclosure Requirements. This helps in consolidating and streamlining the provisions of existing listing agreements for several segments of the financial market like equity shares. This helps in protecting the market from malpractices and fraudulent trading activities happening at the bay. 

  • Quasi-Executive 

SEBI covers the implementation of the legislation. They are allowed to file a complaint against any person who violates their rules and regulations. They also have the power to inspect all the books and records to check for wrongdoings.

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SEBI Act

The Parliament established the Securities and Exchange Board of India Act,1992 or SEBI Act, 1992 to regulate and develop the securities market in India. It was further amended to meet the changes in the developing requirements of the securities market. 

Features and Regulations of the Act

Sebi is an organization that is responsible for maintaining an environment that is free from malpractices to restore the confidence of the general public who invest their hard-earned money in the market. SEBI controls the bylaws of every stock exchange in the country. SEBI keeps an eye on all the books of accounts related to the stock exchange and financial intermediaries to check their irregularities. SEBI Act defines and gives powers to the body. The SEBI Act is divided into seven chapters that provide the rules and regulations associated with the capital market.

  • The First Chapter is an introductory or preliminary chapter of the Act which provides the title, extent, and definitions of the terms used in the Act. 
  • The Second Chapter is the establishment of the Securities and Exchange Board of India. This chapter deals with management, employees, meetings, and the office of the board. This provides the necessary details of the board established by this Act.
  • The Third Chapter is the transfer of assets, liabilities, etc. of the existing Security and Exchange Board to the Board, which means it declares the provisions to be used to transfer the assets in the case of the formation of a new board.
  • The Fourth Chapter is the powers and functions of the Board. This chapter helps in mentioning the powers and functions of the board which are given by the Act. The Board is bound to follow the instructions given by the act and is not allowed to exploit their powers. 
  • The Fifth Chapter is the Registration Certificate. It deals with the documentation involved in the registration of the stockbrokers, sub-brokers, and share transfer agents, etc. 
  • The Sixth Chapter is finance, accounts, and audits. This chapter controls all the grants given by the Central Government, funds and accounts, to ensure the productivity of the board as well as the capital market.
  • The Seventh Chapter miscellaneous, which discusses other topics that are relevant to the board and the market. To help the board from avoiding mistakes. 

The laws and regulations of the Security and Exchange Board of India are very important and must be followed seriously by the people who are entitled or registered with the stock exchange and capital market of India. The SEBI Act, 1992 is the supreme power of the securities market of India and has the authority to make laws and regulations. And these rules and regulations are applied to all the listed companies, their board of directors, key managerial personnel of such companies, investors, and all the other companies who are associated with the security market sector. 

The most valuable regulations promoted by SEBI are:

  • Regulations on the Issue of Capital and Disclosure Requirements, 2009 

These regulations helped with the issues related to capital and disclosure by improving the trading in securities of the listed companies and investors in India.

  • Regulations on Substantial Acquisition of Shares and Takeovers, 2011 

These regulations of SEBI were established to solve difficulties related to the legal and fair acquisition of shares and takeovers.

  • Regulations on Prohibition of Insider Training, 2015

These regulations introduced new provisions for prohibiting the insider training of securities and tries to protect the laws for lawful and fair trading in India. 

  • The Equity Listing Agreement

These provisions were a reminder of the clauses which mainly dealt with the mandatory compliances to be made between the stock exchange of India and the listed companies. 

Scope of Act

The Preamble of the SEBI Act, 1992 provides that SEBI came into force to cover two objectives:

  • To protect the interests of investors in Securities.
  • To promote the development and regulations of the securities market. 

All the provisions and regulations are made to achieve their goal of improving the market and to reach their goal. SEBI acts like a mini-state as it works includes executive, judiciary and legislature. Section 11 of the SEBI Act allows the board to work on its objective. 

SEBI controls:

  • The regulations of the stock exchange and capital market. 
  • Prohibition of fraudulent and unfair trade.
  • Improving education and training of intermediaries of the securities market.
  • Promoting investors and registering intermediaries. 
  • Regulating substantial acquisition of shares and takeovers of companies. 
  • Calling for information and records.
  • Conducting inquiries of audits and stock exchanges.

SEBI is India’s capital market regulator and is trying to benefit the investors by:

  • Increasing the trading volumes 
  • Syncing with the Global Markets
  • Hedging

SEBI helped the market participants by consolidating their settlement functions at a single clearing meeting and by reducing the effective trading cost for investors. The board improved the market by allowing the contributions of the foreign participants through certain background checks before entering the Indian Market.

Depository Institutions

In every economy, depositories play an important role in developing the country, as the developing countries don’t have enough investments to complete their schemes efficiently. A well functioning securities market can stabilize economic growth. India needs investment for growth, so they need to improve market efficiency and protect the interests of investors to attract them to invest in our market. So, the capital market needs to improve investment opportunities for investors and take care of their interests and security. 

In India, the depository institutions are governed under the Securities and Exchange Board of India (SEBI). The depository must be formed under the Companies Act and must receive a certificate from SEBI. Depositories registered under SEBI are:

  • Central Depository Service Limited (CDSL) 
  • National Securities Depositories Limited (NSDL)

NSDL was established in 1996 by the National Stock Exchange (NSE). NSE introduced the rolling system which helped the investors to receive their payment within 5 days of the sale as it was 8-12 days, before NSE. CDSL was promoted by the Bombay Stock Exchange (BSE). 

Advantages

Depository Systems play an important role as they help in eliminating the risks of holding physical securities. Initially, the buyers had to keep an eye on the transfer of shares but now the depository systems have reduced the risks by involving technology in the process. This helped in improving the chances of foreign investments in the Indian Capital Market. The advantages of Depository Institutions are:

  • It reduced the chances of forgery and delay.
  • Unlike physical transfer, these transfers are immediate. 
  • The securities are controlled by the stock exchange.
  • It reduced the chances of bad delivery, fake certificates, and signature related issues.
  • The fear of losing the certificate is reduced as everything is online. 
  • This electronic system is time-saving. 
  • It restricted the transfer of Benami properties. 

Depository Participants

The agents which provide services related to depositories to investors is known as a depository participant. Any approved institution from RBI which agrees on the rules prescribed by SEBI can be a depository participant. For example stockbrokers, financial corporations, foreign banks, etc. 

Free Transferability

Free transferability of securities with security, accuracy, and speed is given by the Depositories Act, 1996. It was achieved by:

  • By making the securities of public limited companies freely transferable with some exceptions.
  • By dematerializing the securities in the depository mode.
  • By maintaining the ownership records in a book-entry form. 

Rights of Transferee

The rights of transferee are:

  • The transferee must receive the share certificate in due time.
  • The transferee must receive a copy of the annual report with the auditor’s report.
  • The transferee must receive the dividends in due time.
  • The transferee must inspect the statutory registers at the registered office. 
  • The transferee must receive corporate benefits like rights, bonus, etc.
  • The transferee must receive the residual proceeds.
  • The transferee must receive an offer in case of takeover or buyback under SEBI regulations.

So, SEBI introduced the Depositories Act, 1996 to make share transfer secured and easily accessible because SEBI is trying to protect and develop the interest of the investor in the Indian Market. 

SEBI Notifications

Date

Title

2nd August 2019

Streamlining issuance of SCORES Authentication for SEBI registered intermediaries

1st August 2019

Database for Distinctive Number (DN) of Shares – Action against non-compliant companies

1st August 2019

Rationalisation of the imposition of fines for false/incorrect reporting of margins or non-reporting of margins by Trading Member/Clearing Member in all segments

26th July 2019

Streamlining the Process of Public Issue of Equity Shares and convertibles- Implementation of Phase II of Unified Payments Interface with Application Supported by Block Amount

26th July 2019

Staggered Delivery Period in Commodity futures contracts

26th July 2019

Guidelines for Liquidity Enhancement Scheme (LES) in Commodity Derivatives Contracts

SEBI Guidelines

Date

Title

13th Sep 2019

Guidelines for Data Sharing

26th Jul 2019

Guidelines for Liquidity Enhancement Scheme (LES) in Commodity Derivatives Contracts

13th Jun 2019

Guidelines for Enhanced Disclosures by Credit Rating Agencies (CRAs)

23rd Apr 2019

Guidelines for determination of bidding, allotment and trading lot size for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)

26th Mar 2019

Guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR) of Market Infrastructure Institutions (MIIs)

15th Jan 2019

Guidelines for public issue of units of REITs – Amendments

15th Jan 2019

Guidelines for public issue of units of InvITs – Amendments

26th Nov 2019

Operating Guidelines for Alternative Investment Funds in International Financial Services Centres

13th Nov 2019

Guidelines for Enhanced Disclosures by Credit Rating Agencies (CRAs)

16th July 2018

Strengthening the Guidelines and Raising Industry standards for RTAs, Issuer Companies and Banker to an Issue – Clarification

4th July 2018

Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under

5th June 2019

Guidelines for Preferential Issue of Units by Infrastructure Investment Trusts (InvITs)

20th April 2018

Strengthening the Guidelines and Raising Industry standards for RTA, Issuer Companies and Banker to an Issue

17th April 2019 

Amendment to the Securities and Exchange Board of India (STP Centralised Hub and STP Service Providers) Guidelines, 2004

16th Aug 2019

Parking of Funds in Short Term Deposits of Scheduled Commercial Banks by Mutual Funds – Pending deployment

4th July 2019

Details of Daily Inter-Scheme Transfer in Corporate Bonds by Mutual Funds

21st May 2019

Participation of Mutual Funds in Commodity Derivatives Market in India

26th April 2019

Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2019

11th April 2019

Technology Committee for Mutual Funds / Asset Management Companies (AMCs)

8th March 2019

Circular on Filing of Advertisements under SEBI (Mutual Funds) Regulations, 1996

SEBI v. Sahara

Background

Initially, there was a floating-issue of Optionally Fully Convertible Debentures (OFCDs) with Sahara India Real Estate Corporate Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) which affected the collective subscription from 25th April 2008 up to 13th 2011. The company bagged roughly Rs. 17,656 crore during this period. This whole amount was collected in the name of ‘Private Placement’ from 30 million investors without fulfilling the requirements needed to comply with public offerings of securities. So, as a result, the Whole Time Member of SEBI passed an order on 23rd June 2011 to refund the money which was collected from the investors and restrained the companies promoters including Mr. Subrata Roy from reaching the securities market. Sahara appealed the orders of the Whole Time Member in front of the Securities Appellate Tribunal (SAT) and the appeal was dismissed by SAT through an order on 18th October 2011. In the end, Sahara appealed in front of the Supreme Court against the SAT order. 

Issues

There were many issues raised while the Supreme Court was interpreting the various provisions of the SEBI Act, the Companies Act, and the Securities Contract (Regulation) Act, 1956. The issues were:

  • The first issue was that, whether SEBI has its jurisdiction over this matter under Section 11, 11A, 11B of SEBI Act and Section 55A of the Companies Act or this matter comes under the Ministry of Corporate Affairs. 
  • The second issue was that, whether the hybrid Optionally Fully Convertible Debentures comes under the category of ‘Securities’ as defined in the Companies Act, SEBI Act, and SCRA to allow SEBI to have jurisdiction to investigate the case. 
  • The third issue was that the OFCDs subscribed by the people is a private placement or not. If not then who has jurisdiction over the matter. 
  • The fourth issue was that, whether the provisions given under Section 73 of the Companies Act is applied over the case or not.
  • The fifth issue was that, whether the provisions provided under the Public Unlisted Companies, 2003 will have jurisdiction over this case.

Arguments and Supreme Court Judgments

In this case, the Supreme Court held that SEBI has no jurisdiction to investigate or adjudicate this matter as the SEBI Act allows SEBI with special powers to protect the interest of the investors. The powers given to SEBI can not supersede other regulations provided under different laws which means SEBI must respect the provisions of other laws and must not conflict with the Ministry of Corporate Affairs where the interests of investors are at stake. The Supreme Court also laid down objectives for the enactment of the SEBI Act and inserted Section 55A in the Companies Act to provide special powers to SEBI in the matters related to the transfer of securities. So, the Supreme Court advised that SEBI has the jurisdiction to administer the listed public companies in matters related to the transfer of securities and also in those public companies where there is intended to obtain the securities which are listed under the Stock Exchange of India. 

The Supreme Court stated that the OFCDs issued by the companies are in the nature of ‘hybrid’ instruments, so it doesn’t come under ‘security’ within the definition provided by the Companies Act, SEBI Act, and SCRA. As the definition of ‘Securities’ provided under Section 2(h) of SCRA contains ‘marketable security’ rather ‘hybrid instruments’. So, the Court can not question the marketability of the instrument as it was offered to millions of people and debentures came under security as described by the provisions of SEBI Act, the Companies Act, and SCRA. 

The Supreme Court described the intentions of the companies was to show OFCDs as the public placement but they don’t act like that when offered to more than 50 people. Section 67(3) states that any security which is offered and subscribed by more than 50 persons will be considered as a public offer which gives the jurisdiction to SEBI and the companies have to comply with all the legal provisions related to this matter. 

Sahara argued that the Companies Act is not applicable as it is applied to only listed companies and no company can be forced to get listed on the stock exchange. The Supreme Court rejected this argument and stated that the law is clear and impartial. The Supreme Court also observed that Section 73(1) of the Act provides a restriction on every company intending to offer shares and debentures to the public.

Conclusion

So, SEBI strongly believes that the investors are the soul of the securities market and they need to protect the interests of investors for the development of the capital market. SEBI deals with all the policies and regulations of the market. SEBI also signed a contract with the International Organization of Securities Commission and allowed its members to maintain a regular check for cross border misconduct in their respective jurisdictions. This case is considered as the landmark judgment in India’s Corporate Landscape as it helped in preventing war between MCA and SEBI. 


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