Sebi Act: Regulating and Monitoring Stock Market

SEBI is a non-statutory body established under SEBI Act 1992 on 12th April 1988 and given statutory powers on 30th January 1992.

SEBI is also known as the Securities and Exchange Board of India.

The Objectives of SEBI are to act as a regulatory body that monitors the capital market and regulates its activities, keeping a check on companies and brokers’ activities that violate the provisions of the SEBI Act, 1992.

The role of SEBI is to ensure the protection of interests of the investors and aims to provide a safe and sound investment atmosphere for investors by formulating guidelines for the functioning of the capital market.

History and Evolution of SEBI Act

Before SEBI came into existence, a regulatory authority called the controller of capital issues controlled the capital market in India.

The controller of capital issues derived its authority under control Capital Issues (control) Act, 1947.

Securities and exchange board of India (SEBI) gets established under section 3 of the SEBI Act, 1992.

Setup of SEBI India

As per sub-clause (3) of section 3, the SEBI has its office established in Bombay.

It may establish offices at other places in India.

As per section 4 of this act, SEBI incorporates a management board of 9 members, which includes:-

1. A chairman appointed by the Union Government of India
2. Two members belonging to the Union Finance Ministry of India-nominated by the central government
3. One member belonging to officials of India- nominated by the Reserve Bank of India
4. Five members, out of which at least three should be full-time members, are appointed by India’s central government.

Removal of members of the board

The central government can remove the members from office if any conditions under section 6 of the act are satisfied. The conditions include:

1. If the person is declared insolvent by a competent court
2. If the person is declared of unsound mind by a competent court
3. If the person gets convicted of any offence which, according to the central government, is an offence involving immorality
4. If the person abuses his position, his continuation in the office will be deleterious in the public interest.

The person’s removal shouldn’t take place without giving him a reasonable opportunity to present his defence.

There are many committees under SEBI that are responsible for all legal, financial and enforcement related affairs.

1. Primary market advisory committee(PMAC)
2. Market data advisory committee(MDAC)
3. Technical group on social-stock exchange(SSE-TG)
4. Advisory committee on SEBI investor protection and Education Fund (IPEF)
5. Secondary market advisory committee(SMAC)
6. Commodity derivatives advisory committee(CDAC)
7. Corporate Bonds and Securities Advisory Committee(CoBoSAC)
8. Committee on fair market conduct
9. Risk management review committee
10. High powered steering committee on cyber security (HPSC-CS)
11. High-level committee for reviewing the SEBI (Prohibition of Insider trading) Regulations, 1992

And more committees under SEBI aids it in its functioning.

Power and Functions of SEBI

Section 11 of the Sebi act defines the function of the SEBI To regulate the capital market and protect the interests of investors; SEBI can take up some measures laid in this act.

1. Regulate the businesses in stock exchanges and other stock markets.
2. Register and regulate the work of stockbrokers, sub-brokers, share transfer agents, portfolio managers, merchant bankers, etc.
3. Register and regulate the work of depositories, credit rating agencies, foreign institutional investors, custodians of securities, and other such intermediaries.
4. Regulate and promote self-regulatory organisations
5. Prohibit unfair trade practices relating to the securities market.
6. Promoting investors’ education concerning the securities market
7. Training intermediaries in these markets.
8. Prohibit insider trading.
9. Undertaking inquiries and inspection,
10. Calling records for inspection regarding securities transactions from any person, bank, authority, corporation, appointed under any statute made by central government or state government, etc.
11. Furnishing information to any agency, whether internal or external having a similar function as that of the board for the enforcement of securities law and preventing violations
12. Levying penalties for the violations in securities law and ensuring its enforcement
13. Suspend any securities from the trading market or restrain a person from trading in this market.

Besides these functions, SEBI has some power in its hands to prohibit malpractices.

SEBI performs its power in three ways:-

Quasi-judicial powers:-

SEBI has the power to deliver judgements for proceedings of unethical practices to ensure transparency in cases.

Quasi-executive powers:-

It has the power to conduct an inquiry or investigation and check records and books of a company’s accounts to extract proper evidence in case of violations.

Quasi-legislative powers:-

It ensures the protection of the interest of investors by issuing SEBI guidelines and rules and regulations for the conduct of various bodies associated with the stock market.

These powers are laid from section 11A to 11D. These are:-

1. To regulate or prohibit the issue of prospectus, offer documents or advertisement, soliciting money for the issue of securities.
2. Power to issue directions for regulation and development of the securities market.
3. Power to conduct an investigation related to securities transactions and in respect of any violation by any intermediary, investor, or company.
4. Power to cease or desist a person from causing or committing any violation of Sebi’s guidelines or rules, or provisions under this act.

SEBI Board also has the power to adjudicate and summon a person to enforce the attendance of a person and check the accounts and records of a company, person or any other intermediary body and conduct an inquiry by a person appointed by the board under section 15I of the act.

Any stock broker, sub-broker, share transfer agent, banker to an issue, trustee of a trust deed, registrar to an issue, merchant banker, etc., can obtain a certificate of registration under section 12 of the SEBI Act after satisfying the conditions per this act.

To protect the malpractices in the capital market, section 12A of the SEBI act prohibits insider trade practices, deceptive devices and substantial acquisition of securities.

According to this section, no person should

1. Engage in any deceiving or manipulative practice
2. Engage in insider trading
3. Engage any device or scheme to defraud concerning any transaction related to stocks.
4. Deals in securities while in possession of non-public information or communicate such information to someone in contravention of this act.
5. Acquire shares of a company more than the percentage of equity listed on the stock exchange.

Penalty Under SEBI Act

There are penalties laid for violations of the rules or provisions laid under this act.

These penalties are laid from section 15A to 15HB.

Section 15A Penalty for failure to furnish information, books or other documents, return, etc.

Section 15B Penalty for failure to enter into any agreement with clients required to get entered.

Section 15C Penalty for failure to resolve investor’s grievances

Section 15D Penalty for certain defaults in case of mutual funds

Section 15E Penalty for failure to observe rules and regulations by an asset management company

Section 15F– Penalty for default in case of stockbrokers

Section 15G Penalty for insider trading

Section 15H Penalty for non-disclosure of acquisition of shares and takeovers

Section 15HA Penalty for fraudulent and unfair trade practices in the securities market

Section 15HB Penalty for contravention where no separate penalty is provided

The minimum penalty for most of the offences laid in these sections is one lakh.

The penalty for insider trading and non-disclosure of acquisition of shares and takeover under sections 15G and 15H, respectively, is 10 lakh and will extend up to 25 crores.

The penalty for unfair trade practices under section 15HA is a minimum of 5 lakhs extending up to 25 crores or three times the profit made out of such practices, whichever is higher.

Securities appellate tribunal

A securities appellate tribunal is established under section 15K of the SEBI Act, having jurisdiction in an appeal against all the matters decided by the SEBI Board or India’s Insurance regulatory and development authority(IRDAI).

The appeal should get filed within 45 days of passing the order by the board or IRDAI.

What is Securities?

Security is a negotiable fungible instrument that holds a monetary value, and acquiring this security represents an ownership position in a publicly traded corporation or company.

An owning of these securities shows the ownership in the involved corporation, PSU, company.

Trading in these stocks will show the shareholding in a company or holding ownership of a company by share percentage.

Securities are of two types:-

1. Equity securities
2. Debt securities

Equity security represents the shareholding of a company, partnership or trust by holding stock or shares of that organization.

Debt security: A borrowed money representing the loan’s size with interest rate and its maturity with a renewal date

Securities Law in India

India witnessed a reform in the securities market by introducing legislation to regulate highly sensitive and manipulative markets, i.e. capital markets.

The legislations were enacted to monitor the securities market and protect the interests of investors, promote the development of the securities market without any violation on the part of intermediaries and other such bodies.

The legislations are:-

• Securities and exchange board of India (SEBI), Act, 1992.
• The depositories Act, 1996.
• And other legislation like the Indian stamp act, the income tax act, the companies act, the banker book evidence act, the Benami transaction (prohibition) act. Were amended recently to act as a stimulus to SEBI Act and Depositories act.
• The listing of securities on the stock exchange requires compliance under some laws, bye-laws, rules and regulations and guidelines issued by the government.
• Some of the laws governing these provisions are the companies act, 2013, the securities contracts (regulation) act, 1956, the securities contract (regulation) rules, 1956.
• Intermediaries in a market are regulated by SEBI (intermediaries) Regulations, 2008.
• The takeover of a company by an acquirer of a target company is called a takeover.
• When an acquirer acquires substantial voting rights by acquiring a considerable amount of shares of the target company, it gets termed as “substantial acquisition of shares.”
• The takeover of a target company in the securities market gets regulated by SEBI (substantial acquisition of shares and takeovers) Regulations, 2011 to protect the interests of small investors, which are an inherent part of this market.
• To prohibit unfair and fraudulent trade practices and insider trading in the market, SEBI Act, 1992 has prescribed the guidelines for the conduct and penalty for its violations.
• SEBI Act 1992 also established a grievance redressal mechanism to resolve disputes between SEBI and bodies and persons associated with the market.
• To prohibit any further violation and promote the development of the market, SEBI, by performing its quasi-judicial powers, lays penalties on them for enforcement of the provisions laid under the act.
• The securities appellate tribunal (SAT) gets established under the SEBI Act, 1992 to resolve and deal with the appeal against the orders of SEBI or an adjudicating officer.

Relationship between company law and securities law in India

The Companies act, 2013 governs company law in India, while the securities law of India governs securities law in India.

The most common relationship between both acts is that the securities get issued by the companies or business organisations incorporated under the companies act, 2013.

These securities are dealt with and regulated by the Securities and exchange board of India, established under the SEBI Act, 1992.

The companies act protects the interests of shareholders, while the Sebi act protects the interests of investors in the market.

Both the acts prohibit unfair and fraudulent trade practices.

A shareholder owns some percentage of a share in a company or business organisation, while an investor is a person who is interested in taking ownership of any company or business organisation.

Difference between statutory body and constitutional body

There is a substantial difference between both.

Constitutional body

A constitutional body derives its importance and gets established under the constitution of India.

It derives its powers and authority from the provisions mentioned in the constitution of India.

Any change in the mechanism of these bodies will require an amendment of the constitution.

Bodies like UPSC, CAG, Election commission, Finance commission, etc. are constitutional bodies.

Statutory Body

While an act of parliaments establishes a statutory body, these are non-constitutional bodies.

It derives its powers and authority from that act enacted by the parliament of India.

They are called statutory because the laws enacted by the legislature are called statutes.

Example:- Securities and Exchange Board of India is a statutory body established under the SEBI Act 1992, an act of parliament.

Another example of a statutory body is the Armed forces tribunal established under the armed forces tribunal act, 2007.

Case study Involving SEBI Act

SAHARA v. SEBI

Whether SEBI had jurisdiction over unlisted companies?

In the case of Sahara v. SEBI, the issue arose about the jurisdiction of SEBI.

Sahara Housing Investment Corporation Limited (SHICL) and Sahara India Real Estate Corporation Limited (SIRECL) are the unlisted companies. They issued Optionally fully convertible debentures (OFCD’s) to 3 Million subscribers raking up to 26,000 Crore Rupees INR with a paid-up capital of Rs. 10,00,000 and no assets.

SEBI took cognizance of the matter and issued a show-cause notice to both the companies under Section 67 (3) of the companies Act.

SHICL appealed to Securities appellate tribunal and then to the Supreme Court, claiming that an unlisted company does not come under the ambit of SEBI and gets governed by Unlisted Public Companies (Preferential Allotment) Rules 2003 by the Companies registrar and not SEBI.

Considering Section 55A of the Companies Act 1956, the Supreme Court ruled that any public offer by an unlisted company for more than 49 individuals would come under the ambit of SEBI.

SEBI v. IRDA

Whether SEBI has the powers or jurisdiction in the matter concerning ULIP’s as IRDA approved it?

In 2010, SEBI passed an order under Section 11, 11B and 12(1B) of the SEBI Act, passed a sou moto order against 14 insurance companies under the discretionary power of SEBI of investigation.

SEBI laid a condition that these 14 companies have to obtain the required registration certificate and prior permission from SEBI otherwise,

They will be kept debarred from publishing any document, advertisement, brochure soliciting money from investors or raise money from investors by way of new or additional subscriptions including ULIP’s.

Unit linked insurance plan (ULIP) refers to investments made on behalf of policyholders in the capital markets where the policyholder bears the entire risk in the investment portfolio.

As per SEBI (Mutual Funds) Regulations, 1996 and SEBI (Collective Investment Scheme) Regulations, 1999, any person running a scheme about mutual funds should be registered and obtain prior permission from SEBI which these companies lacked to do.

On the other hand, IRDA (Insurance regulatory and development authority of India), established by the IRDA Act 1999, gets powers to regulate the business of insurance companies and re-insurance under section 14 of the act.

It stated that SEBI does not have any powers or jurisdiction related to ULIP’s which IRDA approves. Therefore, they were valid and outside the purview of SEBI.

An ordinance, Securities and Insurance Laws (Amendment and Validation) Ordinance, 2010 was passed by the parliament of India, which later got passed as an act having retrospective effect from the date of Sebi’s order.

This ordinance nullified Sebi’s decision and put ULIPS out of the jurisdiction of SEBI.

The Supreme Court upheld the ordinance.

Conclusion

The securities market has substantive importance in the development of our economy. It channels funds from small investors to the development of various sectors of the country.

To prevent undesirable, fraudulent trade practices in the securities market, various legislation got required to regulate this market and keep a check on substantial acquisition of shares, manipulative practices or any other sort of violation.

SEBI Act 1992 played a significant role in curbing malpractices in the securities market and protecting the interests of investors.

These investors are the backbone of the market, and their capital is substantial in corporate governance.

An awareness of these securities laws provides smooth market practices and prevents minority investors from exploitation.