SEBI: Role In Business Development

Presented By: Nagendra Kumar Ram (B.A. LLB, 4TH Year)

Sandeep Kumar (B.A. LLB, 4TH Year)

Chanakya National Law University

INTRODUCTION

Securities market in India emerged from the advent of East India Company. Loan securities
of the East Indian Company used to be traded towards close of the 18th century. By 1830s,
the trading in shares of banks started. The trader by the name of broker emerged in 1830
when 6 persons called themselves as share brokers. This number grew gradually. Till 1850,
they traded in shares of banks and securities of the East India Company in Mumbai. In 1850,
the Companies Act introducing limited liability was enacted heralding the era of modern joint
stock company which propelled trading volumes.

The great and sudden spurt in wealth produced by cotton price propelled setting up
companies for every conceivable purpose after the American Civil War broke out in 1861and
exports increased from India. Between 1863 and 1865, the new ventures raised nearly Rs.30
crore in the form of paid up capital. The subscription for shares was in large numbers and the
people woke up only when the American Civil war ended. Then all rushed to sell their
securities but there were no buyers. They were left with huge mass of unsaleable paper. The
depression was so severe that it paved way for setting up of a formal market.

On 3rd December 1887, the brokers affected from the depression established a stock
exchange called Native Share and Stock Brokers Association. This laid the foundation of
the oldest stock exchange in India. The word native indicated that only natives of India
could be brokers of the Exchange. In 1880s a number textile mills came up in Ahmedabad.
This created a need for trading of shares of these mills. In 1894, the brokers of Ahmedabad
formed The Ahmedabad Share and Stock Brokers Association.

The 1870s saw a boom in jute prices, 1880s and 1890s saw boom in tea prices, then followed
coal boom. When the booms ended, there were endless differences and disputes among
brokers in eastern India which was home to production of jute, tea and coal. This provoked
the establishment of The Calcutta Stock Exchange Association on June 15, 1908.

Control of capital issues was introduced through the Defence of India Rules in 1943 under
the Defence of India Act, 1939 to channel resources to support the war effort. The control
was retained after the war with some modifications as a means of controlling the raising of
capital by companies and to ensure that national resources were channelled to serve the goals
and priorities of the government, and to protect the interests of investors. The relevant
provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of
Control) Act in April 1947. Though the stock exchanges were in operation, there was no
legislation for their regulation till the Bombay Securities Contracts Control Act was enacted
in 1925. This was, however, deficient in many respects. Under the constitution which came
into force on January 26, 1950, stock exchanges and forward markets came under the
exclusive authority of the central government. Following the recommendations of the A. D.
Gorwala Committee in 1951, the Securities Contracts (Regulation) Act, 1956 was enacted to
provide for direct and indirect control of virtually all aspects of securities trading and the
running of stock exchanges and to prevent undesirable transactions in securities.

In 1980s and 1990s, it was increasingly realized that an efficient and well developed
securities market was essential for sustenance of economic growth. A major initiative of
regulation was establishment of a statutory autonomous agency, called SEBI, to provide
reassurance that it is safe to undertake transactions in securities. It was empowered
adequately and assigned the responsibility to (a) protect the interests of investors in securities,
(b) promote the development of the securities market, and (c) regulate the securities market.
Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities market. All
market intermediaries are registered and regulated by SEBI. They are also required to appoint
a compliance officer who is responsible for monitoring compliance with securities laws and
for redressal of investor grievances.

SEBI AS A REGULATOR

The Securities and Exchange Board of India also known as SEBI is the designated regulatory
body for the finance and investment markets in India. The board plays a vital role in
maintaining stable and efficient financial and investment markets by creating and enforcing
effective regulation in Indias financial marketplace.
It was established in 1988 by the Government of India and is established and incorporated
through Section 3 of SEBI Act, 1992. Controller of Capital Issues was the regulatory
authority before SEBI came into existence which derived its authority from the Capital Issues
(Control) Act, 1947. It plays a key role in ensuring the stability of the financial markets in
India, by attracting foreign investors and protecting Indian investors. Its headquarters is
located at the Bandra Kurla Complex Business District found in Mumbai. It also has
northern, eastern, southern and western regional offices.

SEBI's management is composed of its own members. Its management team consists of a
chairman nominated by the Union Government of India, two members who are officers from
the Union Finance Ministry, one member from the Reserve Bank of India and five other
members who are also nominated by the Union Government of India. The Preamble of the
Act states An Act to provide for the establishment of a Board to protect the interests of
investors in securities and to promote the development of, and to regulate, the securities
market and for matters connected therewith or incidental thereto. The main duty of the
Security Board is to protect the interests of investors in securities and to promote the
development of and to regulate the securities market by such steps and merchant as it thinks
fit. SEBI has power to make new rules for controlling stock exchange in India. It has power
to provide license to dealers and brokers of capital market. If SEBI sees that any financial
product is of capital nature, then SEBI can also control to that product and its dealers. One of
main example is ULIPs case. In this case, SEBI said, It is just like mutual funds and all
banks and financial and insurance companies who want to issue it, must take permission from
SEBI.

It also control the Merger, takeover and acquisitions of Companies. Many big companies in
India want to create monopoly in capital market. So, these companies buy all other
companies or deal of merging. SEBI sees whether this merge or acquisition is for
development of business or to harm capital market.

ICAI is the authority for making new auditors of companies. SEBI creates good relationship
with ICAI for bringing more transparency in the auditing work of company accounts because
audited financial statements are mirror to see the real face of company and after this investors
can decide to invest or not to invest. Moreover, investors of India can easily trust on audited
financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are
doing their duty by ethical way or not.
 SEBIS REGULATIONS ON MARKET SECURITIES

The primary market is the market which provides a conduit for sale of new securities. This
market provides chance to issuers of securities, the government as well as corporate, to raise
capital to meet their requirements of investments or for liberation of their obligations.
Securities laws are needed mainly because of the unique informational needs of the investors
because selling securities to investors in the various capital markets provides the means for
corporations, governments and government agencies to satisfy their need for capital. And to
regulate and control various volatile natured reforms of the market the regulation of the
capital market is highly needed.

The multi crore securities scam that rocked the Indian financial system in 1992 (Harshad
Mehta, The 1992 Security Scam) had the existing regulatory framework to be fragmented and
inadequate and hence, a need for an autonomous, statutory, and integrated organization to
ensure the smooth functioning of capital market was felt. To fulfil this need, SEBI which was
already in existence since April 1988, was conferred statutory powers to regulate the capital
market.

The SEBI got legal teeth through an ordinance issued on 30 January 1992. The ordinance
conferred wide ranging powers on the SEBI, including the authority to prohibit insider
trading and regulate substantial acquisition of shares and takeover of business. The function
of market development includes containing risk, board basing, maintaining market integrity
and promoting long-term investment. The SEBI Act, 1992 which establishes the SEBI with
four-fold objectives of protection of the interests of investors in securities, development of
the securities market, regulation of the securities market and matters connected therewith and
incidental thereto. The capital market, i.e., the market for equity and debt securities is
regulated by the Securities and Exchange Board of India (SEBI). The SEBI has full
autonomy and authority to regulate and develop the capital market. The government has
framed rules under Securities Contracts (Regulation) Act, 1956, Securities and Exchange
Board of India Act, 1992 and Depositories Act, 1996. The SEBI has framed regulations under
the SEBI Act and the Depositories Act for registration and regulation of all market
intermediaries, for prevention of unfair trade practices, and insider trading. As everyone
could know that these i.e. the Government and the SEBI issue notifications, guidelines and
circulars which need to be complied with by market participants. All the rules and regulations
are administered by the SEBI.

The main role of SEBI is to protect the interests of investors through proper education and
guidance as regards their investment in securities. For this, SEBI has made rules and
regulation to be followed by the financial intermediaries such as brokers, etc. SEBI looks
after the complaints received from investors for fair settlement. It also issues booklets for the
guidance and protection of small investors.

It keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory

and they are expected to follow certain rules and regulations. Effective control is also
maintained by SEBI on the working of stock exchanges. It make registration and to regulate
the functioning of intermediaries such as stock brokers, sub-brokers, share transfer agents,
merchant bankers and other intermediaries operating on the securities market. In addition, to
provide suitable training to intermediaries. This function is useful for healthy atmosphere on
the stock exchange and for the protection of small investors. SEBI has made rules and
regulations to be followed by mutual funds. The purpose is to maintain effective supervision
on their operations & avoid their unfair and anti-investor activities. It is given wide statutory
powers. However, self-regulation is better than external regulation. Here, the function of
SEBI is to encourage intermediaries to form their professional associations and control
undesirable activities of their members. It can also use its powers when required for
protection of small investors.

SEBI is not for interfering in the normal working of these intermediaries. Its function is to
regulate and control their objectional practices which may harm the investors and healthy
growth of capital market.

It issue guidelines to companies regarding capital issues. Separate guidelines are prepared for
first public issue of new companies, for public issue by existing listed companies and for first
public issue by existing private companies. It conduct inspection, inquiries & audits of stock
exchanges, intermediaries and self-regulating organizations and to take suitable remedial
measures wherever necessary. This function is undertaken for orderly working of stock
exchanges & intermediaries.

CONCLUSION
Forces of demand and supply regulate the prices of shares as well. When people buy the
shares of a particular company from the stock market, the price of the shares of that company
increases. Similarly, it decreases when people sell the shares.

A major initiative of regulation was establishment of a statutory autonomous agency, SEBI,

to provide reassurance that it is safe to undertake transactions in securities. It was empowered
adequately and assigned the responsibility to protect the interests of investors in securities,
promote the development of the securities market, and regulate the securities market. Its
regulatory jurisdiction extends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities market.

In a nutshell, SEBI has been created to encourage orderly and sound growth of the securities
market as well as to offer adequate investors protection further to promote fair and healthy
practice which results in business development. It aspires to do away with of the unhealthy
practices prevalent in the capital market in India.