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Securities and Exchange Board of India (SEBI)


Securities and Exchange Board of India (SEBI)

In India, the securities market is regulated by the Securities and Exchange Board of India (SEBI) under the administrative control and supervision of the Ministry of Finance. Established in 1988, the SEBI holds its headquarters in Mumbai and has multiple regional offices across the country in top cities such as New Delhi, Kolkata, Chennai and Ahmedabad. This article talks about the Securities and Exchange Board of India (SEBI) and essential details related to the same.

Objectives of the SEBI

The primary objective of the SEBI is the following.

  1. To protect the interests of the investors and safeguarding their rights.
  2. To promote the development of the securities market.
  3. To encourage fair dealings of the issue of securities.
  4. To develop and regulate a code of conduct to ensure fair practices by securities intermediaries such as brokers and merchant bankers. Thereby, making them professional and competitive in a secured space.
  5. To establish a market space that has a steady flow of saving and where participants may raise funds at a comparatively low cost.

Functions of the SEBI

The Securities and Exchange Board of India Act of 1992 depicts the essential functions of the SEBI. The Board has the authority to approve rules and laws concerning stock exchanges while protecting the investors’ interests and building a platform to promote, develop and regulate the securities market in the country.

The Act also talks about the laws that the SEBI has to enforce for stock exchanges to follow. The SEBI has the authority to examine books of accounts of any recognised stock exchanges or financial mediators. The SEBI urges various businesses to list their shares in stock exchanges and manage the registration of brokers/ distributors.

Below are the various functions of the SEBI in detail.

Regulatory Functions

  1. Regulation of the businesses that are listed in stock exchanges.
  2. Registration and constant regulation of the stockbrokers, sub-brokers and all the intermediaries that are associated, in any manner, with the stock markets.
  3. Promotion and regulation of self-regulatory organisations.
  4. Registration and regulation of the collective investment schemes and mutual funds, and their working.
  5. Regulation of substantial takeover of companies and acquisition of shares.

Prohibitive Functions

  1. Prohibition of practising fraudulent and unfair trade practices in the securities markets.
  2. Prohibition of insider trading of securities.

Educative Functions

  1. Promotion of investor’s education.
  2. Encouraging the training of intermediaries regarding securities markets.
  3. Conducting proper research for essential matters.

Miscellaneous Functions

  1. Conduction of enquiries and audit of stock exchanges, intermediaries in the stock market, and self-regulatory organisations in the securities market.
  2. Implementing the powers delegated by the Central Government.
  3. Performing all the other functions mentioned in the SEBI Act, 1992.
  4. Imposing charges or any other fee for the implementation of the purposes of the Act.

Authority and Powers

Under its legislative capacity, SEBI is entitled to drafting resolutions, conducting investigations and enforcing appropriate actions. Whereas, with its executive function, the SEBI has the authority to pass rules and orders. However, the consequences of the said functions will have to go through the Securities Appellate Tribunal and the Supreme Court of India.

The Board has three main powers:

  • Quasi-judicial
  • Quasi-legislative
  • Quasi-executive

Members of the Board

The SEBI follows the hierarchical structure of an organisation. It comprises of a total of 9 members. The following are the primary members who manage the Board.

  • The Chairman of the Board, as nominated by the Union Government of India.
  • Two members who belong to the Union Finance Ministry.
  • One member who belongs to the Reserve Bank of India.
  • Five members, as nominated by the Union Government of India.

SEBI and Mutual Funds

It is mandatory for mutual funds to register as trusts under the Trusts Act of 1882 according to the guidelines formulated by SEBI. After this, to run a mutual fund, a firm must incorporate as a separate Asset Management Company (AMC). The net worth of a parent company or an asset management company must be a minimum of INR 5 Crores. It is also necessary that the mutual funds be registered with the SEBI.

The Association of Mutual Funds of India (AMFI) is a self-regulation agency with regard to mutual funds. The AMFI is primarily focused on bringing up and developing a Mutual Fund Industry equipped with professional and ethical qualities in India. The Association aims to enhance the areas concerning mutual funds with the goal to protect and promote mutual funds and the stakeholders. Currently, all the 43 Asset Management Companies which are registered with the SEBI, are members of the AMFI.

SEBI Regulations on Mutual Funds

The following are the various regulations that SEBI has formulated for mutual funds.

An associate or a group company, which includes the asset management company of a fund, who is a sponsor of a mutual fund cannot hold the following through the mutual fund schemes.

  • Shareholding and voting rights that are of 10% or more in the asset management company or any other mutual fund.
  • An asset management company cannot have a representation on the board of any other mutual fund.
  • A shareholder is not permitted to hold 10% or more shares, directly or indirectly, in the asset management company of any mutual fund.

SEBI & Insider Trading

It is evident that company insiders hold information that is inaccessible to the public. These insiders have firsthand knowledge of how the company functions and what its future may hold. For instance, if a particular company has issues in the future such as weak earnings, stagnant or slow growth, or lawsuits, then insiders may sell off their shares before the occurrence of such events. When these kinds of information go public, the price of the stock will dip. However, an insider with this information would have avoided the loss by selling off shares before an event. In such a case, an insider beats the market.

Whereas, insiders know when their company is doing well and is on a streak of high potential earnings and innovations. They can own shares before these facts become public. Therefore, when the stocks go up with these facts, insiders obtain a positive profit. In either case, insiders can use private knowledge to beat the market. The concept of insider trading arises from the aspect of a company insider tipping off an outsider with sensitive information. The SEBI Prevention of Insider Trading Regulations of 2015 was proposed to formulate a systematic law which intends to effectively and efficiently regulate the right of insiders to trade in shares and stocks of their own company.

Achievements of the SEBI

The following are some of the significant achievements of the SEBI.

  1. Issuance of guidelines for merchant banks.
  2. A complete ban on Forward Trading.
  3. Registration of multiple investor associations.
  4. Issuance of guidelines on Insider Trading and so.
  5. Formulation of the takeover code.
  6. Registration of mediators associated with the stock exchange.
  7. Formulating the code for mutual funds that require them to publish balance sheets.