- Meaning of SEBI.
- Establishment and Management of SEBI.
- Background and Need of SEBI.
- Functions of SEBI.
- Powers of SEBI.
- Changes Introduced by SEBI in Capital Market.
- Regulatory Aspects of SEBI.
- Achievement of SEBI.
What is Securities and Exchange Board of India (SEBI) ?
Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations. During the decade of 1980s, the Indian stock market grew by leaps and bounds. The growth of the stock market necessitated the existence of a controlling agency. The Securities Exchange Commission in America serves as a watch dog over the function of the stock market in USA. Considering the stock market development in India, the Government decided to set up a controlling authority and thus, SEBI or Securities Exchange Board of India was established on 12th April 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992.
What is the Reason for “Establishment and Management of SEBI” ?.
Establishment and Management of SEBI :
A fair and efficient securities market plays an important role in a country’s efforts towards industrialization. It directly affects mobilization and efficient channelizing of savings of the household sector into productive enterprise. The securities market encourages thrift and risk taking. It helps enterprises to raise money in a cost effective manner. There was a spectacular growth in the securities market. In the same way there was also a growth in the awareness of and interest in investment opportunities available in the securities market among lay savers. The was a need to sustain this growth and crystalize the awareness and interest the rights must be fully protected, trading malpractices must be prevented. Therefore, the government felt the need of setting up, a statutory apex board to promote orderly and healthy growth of the securities market for investor protection.
A) Establishment :
The establishment of the Securities and Exchange Board of India (SEBI) was a land mark government measure to monitor and regulate capital market activities and to promote healthy development of the market. On the suggestions of the high powered committee on stock exchange reforms, namely the G.S. Patel Committee, the Government of India step up the Securities and Exchange Board of India (SEBI) on April 12, 1988. The chairmanship of the board was entrusted to Dr. S.A.Dave, the executive Director of IDBI. The other members of the Board were nominated by the Government. They were drawn from professional brokers, financial consultants, merchant bankers, investors, stock exchange authorities, Finance Ministry, etc. It was made a statutory body by the Securities and Exchange Board of India Act, 1992.
B) Management :
Section 4 of the above Act lays down the constitution of the management of SEBI. The Board of members of SEBI shall consist of a chairman, two members from amongst the officials of the Ministries of the Central Government dealing with finance and law, one member from amongst the officials of the RBI, two members to be appointed by the central Government, who shall be professionals and interalia have experience or special knowledge relating to securities market. The general superintendence, direction and management of the affairs of the Board shall vest in a Board of Members, which may exercise all powers and do all acts which may be exercised or done by that Board.
Need of Securities and Exchange Board of India (SEBI) :
There was an urgent need to have a regulating authority in order to check the malpractices on the part of issuers of securities, merchant banker, brokers and dealers, etc.
The need to have the Securities Exchange Board of India was felt because of following reasons :
1) To Provide a Degree of Protection to Investors :
It is a healthy sign if there is a steady flow of savings of investors into the securities market. At the same time, the investors rights and interests must be safeguarded. Investors are always interested in receiving returns on their investments by assuring safety and liquidity to their investments. SEBI sees to it that there are no malpractices on the part of any concerned agency so that the investor is not short circulated. SEBI has recently uncovered many seams whereby ordinary investors are taken for a ride. For example, the existence of multiple D-MAT accounts in Ahmedabad, insider trading of many securities in BSE and NSE, etc.
2) To Ensure Fair Dealings by Issues of Securities :
It was found essential that issuers of various securities were cheating the investing public. It was recently found that many fictitious companies were being formed to dupe thousands of innocent investors. The need for SEBI therefore was acutely felt by honest companies who wanted to raise finance in the right way.
3) To Ensure Proper Returns from Stock Exchange :
There was a necessity to have an agency to whom stock exchanges should report their activities regularly. SEBI fulfilled this need.
4) To Make Enquiries into the Affairs of the Stock Exchange and Ask for any Relevant Information :
It was felt that the Government must intervene into the affairs of the stock exchanges in case of doubtful dealings and ask for relevant information to make enquiries. The Government could do this now with the setting up of SEBI.
5) To Regulate Mutual Funds :
With the proliferation of a large number of mutual funds in India, the Government thought it necessary to have an authority which would regulate mutual funds and ensure proper control on liquidity in the economy. SEBI is meant to cover the working of mutual funds.
6) To Frame Norms and Rules for Market Participants :
An authority was required to be set up to frame norms and rules for various market participants such as corporate bodies, brokers, agents, banks, mutual funds etc. SEBI was thus to according entrusted the job of forming various norms and rules not only for local participants but also foreign investors.
7) To Issue Guidelines for Raising Capital in India and Abroad :
A separate agency was required to issue guidelines for new companies wanting to raise funds, pricing various issues, underwriting, making adequate disclosures, etc.
8) Determination of Fee Structure for Intermediaries:
There was no proper regulation of fees charged by various brokers, middlemen and banks who acted as intermediaries for trading in securities. An agency was therefore required so that a proper fee structure could be set up for different services offered by different market participants.
9) To Take Punitive Action Against Malpractices :
Many financial scams went into litigation earlier and no action was taken for years together. However, an agency which could dispense fast justice in such cases was a necessity of the times. SEBI is authorized to take certain punitive actions to curb such activities.
Above explains the need for SEBI in India.
What are the Functions of SEBI ?
SEBI seeks to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation. SEBI plays an important role as a controlling authority and a development institution.
Major Functions of SEBI :
SEBI performs various functions to achieve its objectives. These functions are given below:
1) Creation of Proper and Conductive Atmosphere :
It is the function of the SEBI to create a proper and conductive atmosphere required for raising money from the capital market. The atmosphere includes the rules, regulations, trade practices, customs and relations among institutions, brokers, investors and companies. It has to endeavour to restore the trust of investors and particularly safeguard the interest of the small investors. This can be achieved by meeting the needs of the persons connected with the secunues market and establishing proper co-ordination among the three main groups directly connected with its operations. They are investors, corporate sector and intermediaries.
2) Investors Education :
It is the function of SEBI to educate investors and make them aware of their rights in clear and specific terms. It shall provide investors with formation and see that the market maintains liquidity, safety and profitability of the securities which are crucial for any investment.
3) Creation of Proper Investment Climate :
SEBI has to create proper investment climate to enable corporate sector to raise industrial securities easily, efficiently and at affordable minimum cost.
4) Making of Effective Laws :
It is the main function of the SEBI to devise laws with unified set of objectives, single administrative authority and an integrated framework to deal with all the aspects of the securities market. It has to make law-making and observance flexible enough to suit the prevailing market conditions and circumstances. It will ensure that the rules are versatile and non-rigid to provide automatic and self regulatory growth.
5) Development of Proper Infrastructure :
SEBI has to develop a proper infrastructure so that market automatically facilitates expansion and growth of business of middlemen like brokers, jobbers, commercial banks, merchant bankers, mutual funds, etc. Thus, it will ensure that they provide efficient service to their constituents, namely, investors and corporate sector at competitive price.
6) Creation of Framework :
SEBI has to create the framework for more open, orderly and unprejudiced conduct in relation to takeover and mergers in the corporate sector. It is to be done to ensure fair and equal treatment to all security holders and to facilitate such takeovers and mergers in the interest of efficiency by prescribing a mechanism for more orderly conduct.
7) Authoritative Institution :
It has to work as an authoritative institution to see that the intermediaries are financially sound and equipped with professional and competent manpower.
8) Establishment of Effective Inspection Machinery :
SEBI has to establish an effective inspection machinery which is expected to act like an umpire. It will provide to its players timely guidance, encouragement and incentives as well as impose upon them a self discipline to observe the rules of the game.
9) Prohibition of Malpractices :
It is the function of the SEBI to prohibit the malpractices prevailing in market such as insider trading, kerb trading, shares cornering, unreasonable delay in effecting share transfer by companies. The Board works as an authority to execute such provision and it will be responsible to ensure that they really work effectively.