Why do we need a regulatory body for Investor protection in India?

• India is an ` Informationally ' weak market

• Boosting capital market demands restoring the confidence of investors who have been beaten down by repeated scams

• Progressively softening interest rates and an under performing economy have eroded investment options, and require enhanced investing skills.

SECURITIES AND EXCHANGE BOARD OF INDIA

It was proved over time that the provisions in the capital issues Act were totally inadequate to regulate the growing dimensions of capital market activity.

The government realized the necessity of creating a broad based and more secure environment for the business to grow. This led to enactment of companies Act and securities contracts (Regulation) Act in 1956.

Then SEBI was set up as a non-statutory body. Securities and Exchange Board of India (SEBI) is a autonomous body created by the Government of India in 1988 and given statutory form in 1992 with the SEBI Act 1992

It took almost four years for the government to bring about a separate legislation in the name of securities and exchange board of India act, 1992 conferring statutory powers.

SEBI ACT 1992

The Securities and Exchange Board of India Act, 4th April, 1992.

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 SEBI Act was amended to meet the requirements of changing needs of the securities market and responding to the development.

The mission of SEBI is to make India as one of the best securities market of the world and SEBI as one of the most respected regulator in the world.

What the Act Includes…?

Introduction and history

Establishment of SEBI

Powers and function of the board

Finance , account, audit

Penalties and adjudication

Establishment, jurisdiction, authority and procedures of appellate tribunal

Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities and control

Miscellaneous

Need for regulation by SEBI

Constitution and organization

• The board consists of:– A Chairman

– Two members from amongst the officials of the ministry of central government dealing with finance and administration of the Companies Act, 1956.

– One member amongst the officials of the Reserve Bank

– Five other members, of whom at least three to be the whole time members, appointed by the central government

VARIOUS DEPARTMENTS UNDER SEBI

• The Primary market

• The Issue management and intermediaries department

• The Secondary Market

• Institutional investment(MF and FII), mergers and acquisition

• Legal department looks after all legal matters

• Investigation department carries out inspection and investigation

HISTORY

Stock market regulation was a pre-independence phenomenon in India.

During the II world war period ,in the defense Rules of India,1943, provisions were made to check to flow of capital into production of essential commodities .These rules ,which were promulgated as a temporary measure continued after the war and culminated in to the capital issues (control) Act ,1947.

Overview Stock Markets

Stock Market is an organized public market set-up with a regulatory body and the members for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. There are mainly two types of Stock Market. Primary and Secondary.

Stock exchange is that place where trading of shares is done in terms of sale and purchase.

Two Major Stock Exchanges

BSE

There are 23 stock exchanges in the India. Mumbai's (earlier known as Bombay), Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the total trading volume in the country. Established in 1875, the exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognized by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognized and it is the only one that had the privilege of getting permanent recognition ab-initio.

NSE

The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid-1994. It was recently accorded recognition as a stock exchange by the Department of Company Affairs. The instruments traded are, treasury bills, government security and bonds issued by public sector companies

OBJECTIVES OF SEBI

1. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents , underwriters……….who may be associated securities market in any manner.

2. Registering and regulating the working of collective investment scheme including mutual funds.

3. Prohibiting insider trading in securities.

4. Regulating substantial acquisition of shares and takeovers of companies.

Contd……

• 5. Calling for information from ,undertaking

inspection ,conducting inquiries and audits of stock exchanges and intermediaries and self regulatory organizations in the securities market.

• 6. Performing such function and exercising such powers under the provisions of the capital issues (control) act 1947 and SCRA 1956 ,as may be delegated to it by the central government.

• 7. Performing such other functions as may be prescribed.

POWERS OF SEBI

Regulating the business in stock exchanges and any other

securities markets

Registering and regulating the working of stock brokers, sub–

brokers etc.

Promoting and regulating self-regulatory organizations

Prohibiting fraudulent and unfair trade practices

Calling for information from, undertaking inspection, conducting

inquiries and audits of the stock exchanges, intermediaries, self –

regulatory organizations, mutual funds and other persons

associated with the securities market.

FUNCTIONS

It shall be the duty of the board to protect the interests of investors in securities and promote the development of, and to regulate the securities market, by such measures as it thinks fit.

The measures may provide for –

1. Regulating the business in stock exchange and any other securities markets;

2. Registering and regulating the working of stock brokers , sub brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;

3. Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the board may, by notification , specify in this behalf;

Contd…

4. Registering and regulating the working of the depositories,

participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the board may, by notification , specify in this behalf;

5. Promoting and regulating self- regulatory organizations;

6. Prohibiting fraudulent and unfair trade practices relating to securities markets;

7. Promoting investors’ education and training of intermediaries of securities markets;

8. Prohibiting insider trading in securities;

9. Regulating substantial acquisition of shares and take- over of companies;

Contd…

10. Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self- regulatory organizations in the securities market;

11. Calling for information and record from any bank or any other authority or board or corporation in respect of any transaction in securities which is under investigation or inquiry by the board;

12. Performing such functions and exercises such powers under the provisions of the securities contracts (regulation) act, 1956 ,as may be delegated to it by the central government ;

13. Levying fees or other charges for carrying out the purposes of this session;

14. Conducting research for the above purposes;

Contd…

15. Calling from or furnishing to any such agencies, as may be specifies by the board, such information as may be considered necessary by it for the efficient discharge of its functions;

16. The board may take measures to undertake inspection of any book, or register, or other document or record of any public listed company, or a public company which intend to get its securities listed on any recognized stock exchange where the board has reasonable grounds to believe that such company has been indulging in under trading or fraudulent and unfair trade practices relating to security market

Tribunals

guidlines

STOCK MARKET SCAMS

• The Securities Scam of 1992

• The IPO Bubble

• Preferential Allotment Rip Off

• CRB’s House of Cards

• Plantation Companies' Puffery

• Mutual Funds Disaster

• The Collapse in 1998

• The K 10 Gimmick

• Satyam Fiasco

Harshad Mehta: India's best-known Scamster

SHORTCOMINGS OF SEBI

No Dent on price manipulation

Poor rate of conviction and very few cases of exemplary penal action

No Due process for framing/ changing regulations

Waking up to trouble spots too late

Turning a blind eye in bullish markets

Implementation of existing disclosure norms inadequate

Regulatory bias towards corporate sector and large investors

Indications of extraneous pressures, including government

No disclosure norms for mergers/ demergers/ asset sell off/ inter-corporate transactions

SEBI INITIATIVES

Major Corporate Governance reforms – Whistle Blower Policy, Audit Committee, Code of conduct and mandatory disclosures as under Clause 49, Section 10 of Listing Agreement.

IPO Grading for investor protection and guidance

Settlement cycle on a T+1 basis.

Transformation to a paperless and transparent trading system.

ECS for settlements and investor refunds

SEBI Guidelines amended to include Government companies to raise funds through IPO’s

Investment limit of Mutual Funds in Foreign Securities raised to USD 4 billion