In this article, Sagrika Tanwar discusses the Role of SEBI in regulating the primary market for securities.
Securities and Exchange Board Of India [SEBI] is a regulator of securities market in India. Initially, it was formed for the purpose of observing the activities afterward in May 1992, Government of India granted legal status to SEBI. What is the function of Primary Market under SEBI? What is the role of SEBI? What is the process of issuance of securities? Role of SEBI in eliminating insider trading?
Functions Of Primary Market Under SEBI
- Primary Market facilitates capital growth by encouraging individuals to convert savings into investments.
- Primary Market being the part of Capital market also issues new securities.
- Government or Public sector institutions and companies can obtain funds in exchange of a new stock or bond issues via an investment Bank or financial Syndicate of securities dealers.
- It encourages Initial Public Offerings [IPO]
Role of SEBI
Protecting the interest of investors
- SEBI ensures that the investors do not get befooled by misleading and false advertisements. In return, SEBI issued guidelines so as to protect investors and also ensured that the advertisement is fair and concise.
- Regulation of price rigging: Price rigging refers to manipulation of prices by way of fluctuating the prices with the object of inflating and depressing the market price of securities.
- SEBI make efforts to educate investors so that they are able to make choices between the offerings of different companies and choose the most profitable securities.
- SEBI has issued guidelines to investigate cases of fraud and insider trading. Adding to this the provisions for fine and Imprisonment.
To ensure Development activities in Stock Exchange
- E-Trading: Concept of E-trading have been introduced few years back by SEBI to eliminate the discomfort. It simplifies the process of buying and selling of securities.
- The initial public offering of Primary Market (which is a part of Capital market) permits through stock exchange.
- SEBI promotes training of intermediaries of securities market with the object of smooth functioning.
Regulate the business of stock exchange and activities of stock exchange
SEBI introduced proper Code Of Conduct applicable to everyone who is a part of the process of buying and selling of securities, stock exchange, etc. Following are the areas of concern:
- Rules and Regulations to regulate intermediaries such as Broker, underwriters, etc.
- Registers and Regulates the working of merchant Bankers, sub-brokers, stock-brokers, share transfer agent, trustees, etc.
- Registers the working of mutual Funds.
- SEBI regulates turnover of the companies.
- It also conducts inquiry and audits.
To Regulate Insider Trading
Insider Trading have been a problem since the introduction of the Market dealing with buying and selling of securities, stock exchange, etc. An Insider is a person or a group of people having first- hand knowledge about the internal issues and Ups and downs of a company. The moment insider gets to know about the loss which is going to occur, the shares under insider’s name are sold immediately. Hence, company suffers a huge amount of loss.
Process of Issuance Of Securities
Preparation of Prospectus
The prospectus must contain following information:
- Registered Office
- Names and Addresses of
- Company Promoters
- Managing Directors
- Company Secretary
- Legal Advisor
It also includes information related to project, plant location, Technology, collaboration, products, export obligations, etc. Intermediaries includes underwriters and Brokers are separately appointed by the company to sell the minimum number of shares. Prospects issued by the company must be approved by SEBI. A company offers minimum of 49 percent of the amount of shares to the public.
Following mentioned are the ways of issuing stocks in Market,
- Initial Public Offering [IPO]
When a company make public issue of shares for the very first time it is referred to as Initial Public Offering. Process of Initial public offering as per the guidelines of SEBI includes: Firstly, issuance of prospectus is the first and foremost task, the prospectus must include every detail about the company and about the issue; Secondly, issuance of share Application Forms by the intermediaries (underwriters and brokers); Thirdly, brokers make a list of orders collected from clients and then place orders with the company; Fourthly, company then begins with the allotment of Shares with the help of stock exchange. After the Allotment procedure share certificates are delivered to the investors or credited to their respective Demat Accounts. Investors Must be vigilant about additional offers and tempting IPO which company offers.
Factors must be kept in mind while studying an IPO offer document
- Private Placement
The securities are offered for sale privately to some specific individuals and other institutions. No prospectus is issued to cut the cost and time involved in the process of allotment and issuance. This method is very popular among investors these days. This way, shares are concentrated in few hands only. Thus this increases the price temporarily and is sold to the small and common investors.
- Offer For Sale
Process of offer for sale is somewhat similar to private placements. Stock Brokers negotiate with companies regarding the price and terms and conditions bsed of which the shares are being issued. After negotiation, intermediaries buy shares from the company. Securities are then sold to the investors at a higher price to earn some extra profit. This method is adopted to save time and cost of the process.
- Bought out deals
Bought out deals are those deals wherein a company in order to introduce its shares to the market sells all its equity shares to a single broker. The sale under Bought out deals is similar to that of Offer for sale.
- Right Issue
Right issue is made by a company to its existing shareholders in proportion to the number of shares that they posses.
Guidelines by SEBI,
- Only Listed company can make right issue.
- Right can be made only in respect of fully paid up shares.
- Company will have to make announcement before such issue and this cannot be withdrawn.
- The right issue should be open for minimum period of 30 days, and maximum up to 60 days.
- Company will have to make an agreement with the depository to issue the shares in Demat form.
- Bonus Issue
Extra Bonus received is treated as a part of Profit under Share Capital and thus it is divided between the shareholders of a company.
- Book- Building
Under normal circumstances, brokers are the intermediaries through which shares are allotted whereas under book building process feedbacks of the investors are taken for the fixation of price of the shares
SEBI in one of the important body which regulates both Primary as well as Secondary Market. Above written Article is based on Primary market which deals with issuance of new securities and deals with certain issues related to Primary market. SEBI encourages both growth and development of the security market and act as a watchdog.
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