Security exchange board of india (sebi)

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Security exchange board of india (sebi)

  1. 1. Security Exchange Board Of India (SEBI) GROUP 10. Security Exchange Board of India Introduction “…..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” There was a long felt need to monitor the woking of security market in order to protect the interest of the ivestors accordingly the govt. of India set up a body called security exchange board of India in April 1988. However the real beginning of sebi started in 1992’ when sebi act 1992 was passed and assented by the president of India. The act empowered sebi with necessary power to regulate the activities connected with marketing of securities and investment of stock exchange, merchant banking, port folio management, stock brokers and others in India,. All you wanted to know about Sebi The Securities and Exchange Board of India is perhaps the most important regulatory body. Similar to the Securities Exchange Commission in the US, it is the authority that has to always be on its toes. More so, when the markets are doing well and there are a spate of IPOs (initial public offerings) or FPOs (follow-on public offerings) like now. Its main mandate is to protect the interest of investors in the securities markets and to promote the development of and to regulate the securities markets so as to establish a dynamic and efficient securities market. MBA 1ST SEMESTER 1
  2. 2. Security Exchange Board Of India (SEBI) GROUP 10. When investors have complaints against listed companies or registered intermediaries, SEBI acts as the nodal agency for addressing these complaints, if they are not solved directly between the parties concerned, or if the investor is not happy with the response. SEBI has listed certain categories of grievances for which investors can file complaints with it. These include: • Non-receipt of refund order or allotment advice in case of investment in IPO's, FPO's and rights issues • Non-receipt of dividend from listed companies • Non-receipt of share certificates after transfer from listed companies • Non-receipt of debentures after transfer or non-receipt of interest or principal on redemption and non-receipt of interest on delayed repayment • Non-receipt of rights offer letter Collective investment schemes like plantation companies. Investors can send complaints to SEBI regarding non-receipt of invested principal and returns there from. Mutual funds/venture capital funds/foreign venture capital investors/foreign institutional investors/portfolio managers/custodians - Complaints mutual funds like non-receipt or delay in receipt of dividends/redemptions, non-availability of portfolio disclosures, non- receipt of transaction statement, etc. Brokers - This is the most common area of complaints for the average investor. Complaints against brokers stem from disputes over brokerage rates, non-receipt of purchased shares or payments for sold shares, auction of shares sold and delivered timely, but delay at broker's end, etc. Complaints against securities lending intermediaries may arise due to non-receipt of shares lent by the investor or interest thereupon, or non-receipt of funds upon return of borrowed shares or excessive interest charged upon borrowing. Complaints against merchant bankers, registrar and transfer agents, bankers to issues and underwriters generally stem from problems in primary market issues, like non- disclosures, service issues etc. MBA 1ST SEMESTER 2
  3. 3. Security Exchange Board Of India (SEBI) GROUP 10. Complaints against securities exchanges, clearing or settlement houses or depositories - these concern irregularities or failure to act diligently, like the Calcutta Stock Exchange in the last securities scam or the NSDL in the recent IPO scam. Derivative trading - Many investors sign legal papers empowering the broker to trade on their behalf, without proper knowledge and wake up on seeing their margin money eroded due to sustained losses. In other instances, major complaints are against brokers squaring off outstanding derivatives positions due to lack of margins or not giving the client adequate time or notice, leading to huge losses for investors/traders. These happen especially when markets turn volatile of see sustained and large one- way movements. There are other areas such as corporate governance, corporate restructuring, acquisitions, buybacks, delisting and other compliance related issues for which one could approach SEBI. For all this one can • File complaints electronically on the SEBI website • Get a complaint registration number • Track the status of the complaint online • SEBI looks into the merit of the complaint and takes up the matter with the concerned company or intermediary It can also direct intermediaries to redress the investor complaints satisfactorily if the case merits such an order One can also send grievances by post or fax. In other words, there is a wide range of issues that come under the jurisdiction of SEBI. And the onus is entirely on it to keep the stocks markets healthy. MBA 1ST SEMESTER 3
  4. 4. Security Exchange Board Of India (SEBI) GROUP 10. Why Required Stock market indices reflects the economic conditions and the strength of a country’s economy. It is very important that the indices show a true and clear picture about growth and strength of the economy. The indices increases when there is a export surplus or we can say that the exports are more than the imports. So it becomes crucial for every country that the figures shown by the indices are true and accurate. SEBI has a great responsibility in this scenario All modern economies, therefore, recognise the need for sound regulation of securities markets. This is needed not just for proper functioning of these markets, but also for their very survival. It is good regulation that will ensure that markets are safe and perceived to be safe by the public at large. It is good regulation that will ensure that necessary information is available to the public so that they can take informed decisions about investments. It is good regulation that will further ensure that while engines of growth are allowed to move at full speed, there is no space for manipulators in the system. Today securities market regulation has evolved to include three principal objectives: (a) Fair, efficient and transparent markets; (b) Investor protection; (c) Reduction of systemic risk. I am happy to say that SEBI is shouldering the responsibility in all these three areas with great deal of efficiency and commitment. Today, India is experiencing rapid economic growth. If we want to share this prosperity with a large cross-section of our society, we must ensure that the ownership of equity is spread as widely as possible. Individual citizens can participate in the capital market, both directly and indirectly, through financial institutions, such as mutual funds, pension funds and insurance companies. It is the task of the securities regulator to look after the interests of the investor in our country. If the regulator is able to ensure that the price discovery process is both efficient and transparent, with high disclosure and regulatory standards and with sound liquidity and risk management in place, the concerns of individual investors will be adequately addressed. MBA 1ST SEMESTER 4
  5. 5. Security Exchange Board Of India (SEBI) GROUP 10. Organisation chart SHRI M.DAMODARAN CHAIRMAN chairman@sebi.gov.in SHRI G. ANANTHARAMAN, DR T C NAIR, SHRI V.K. CHOPRA, WHOLE TIME MEMBER WHOLE TIME MEMBER WHOLE TIME MEMBER garaman@sebi.gov.in nairtc@sebi.gov.in vkc@sebi.gov.in Shri G Anantharaman, Whole Time Member FUNCTION EXECUTIVE DIRECTOR E-mail I.D Derivatives and New Products Department Direct Integrated Surveillance Department Direct Investigations Department Shri P K Nagpal nagpal@sebi.gov.in Enforcement Department Shri Sandeep P Parekh spp@sebi.gov.in Legal Department Shri Sandeep P Parekh spp@sebi.gov.in Market Regulation Department Shri Manas Ray msray@sebi.gov.in Vigilance Cell Shri R K Nair rkn@sebi.gov.in MBA 1ST SEMESTER 5
  6. 6. Security Exchange Board Of India (SEBI) GROUP 10. Dr.T C Nair, Whole Time Member FUNCTION EXECUTIVE DIRECTOR E-mail I.D Corporation Finance Department Smt. Usha Narayanan ushan@sebi.gov.in Investment Management Department-Division of Foreign Institutional Investors (FIIs) and Custodians, Collective Investment Scheme Smt. Usha Narayanan Research and Training Department Shri RK Nair rkn@sebi.gov.in Investment management Department - Division of Funds Shri RK Nair Regional Offices Shri RK Nair Office of International Affairs Direct Enquiries and Adjudication Department Direct Shri V. K. Chopra, Whole Time Member FUNCTION EXECUTIVE DIRECTOR E-mail I.D Market Intermediaries Regulation and Supervision Department Shri Manas Ray msray@sebi.gov.in Office of Investor Assistance and Education Shri RK Nair rkn@sebi.gov.in Hearing of appeals under RTI Direct MBA 1ST SEMESTER 6
  7. 7. Security Exchange Board Of India (SEBI) GROUP 10. Act(Appellate Authority) General Services Department Shri R.K. NAIR rkn@sebi.gov.in 1. MARKET INTERMEDIARIES REGULATION AND SUPERVISION DEPARTMENT (MIRSD) The Market Intermediaries Registration and Supervision department is responsible for the registration, supervision, compliance monitoring and inspections of all market intermediaries in respect of all segments of the markets viz. equity, equity derivatives, debt and debt related derivatives. The following divisions will perform the functions of the department. 1.1 Division of Registration 1 The Division will handle the work related to Brokers, Sub-brokers and Securities lending intermediaries. 1.2 Division of Registration 2 The division will handle the work related to other Market Intermediaries viz., Merchant Bankers, Registrars and Transfer Agents, Debenture Trustees, Bankers to Issue, Underwriters, Credit Rating Agencies, Depository Participants. 1.3 Division of Policy and Supervision 1 1.4 Division of Policy and Supervision 2 MBA 1ST SEMESTER 7
  8. 8. Security Exchange Board Of India (SEBI) GROUP 10. The above Divisions will handle the policy, compliance monitoring, supervision including inspections of all the market intermediaries registered by Division of Registration 1 and 2. The Division will also handle the work related to action against these intermediaries for regulatory violations. (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division). 1.5 Investor Complaints Cell: The cell would receive complaints relating to the market intermediaries under the purview of the department from the Office of Investor Assistance and Education (OIAE) and take follow up action and report back to the OIAE. If regulatory action is required, the Cell shall inform the Division of Policy and Supervision besides reporting to OIAE. 2. MARKET REGULATION DEPARTMENT (MRD) The Market Regulation Department is responsible for supervising the functioning and operations (except relating to derivatives) of securities exchanges, their subsidiaries, and market institutions such as Clearing and settlement organizations and Depositories. (‘hereinafter collectively referred to as ‘Market SROs) The following Divisions will perform the functions of the Department: 2.1 Division of Policy MBA 1ST SEMESTER 8
  9. 9. Security Exchange Board Of India (SEBI) GROUP 10. The Division will handle the work related to policy and practice relating to Market SROs i.e., securities exchanges, clearing and settlement organizations and depositories; market policy, trading, clearance, settlement issues, risk management, and related areas; Reviewing rules and rule-change proposals of these Market SROs relating to market policy issues (except for listing matters standards in purview of Corporation Finance Department); Procedures for suspending trading of securities. 2.2 Division of SRO Administration The Division will handle the work related to Registration and recognition of the Market SROs; administration of these Market SROs; Demutualization or Corporatization of exchanges; reviewing rule change proposals relating to non-market policy issues; supervision of the market SROs to the extent of compliance with regulatory provisions through periodical reports and regulatory action. (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of databse will be with the Division). 2.3 Division of Market supervision The Division will hand the work related to conducting compliance, examinations and inspections of Market SROs. 2.4 Investor Complaints Cell MBA 1ST SEMESTER 9
  10. 10. Security Exchange Board Of India (SEBI) GROUP 10. The cell would receive complaints relating to the market SROs from the Office of Investor Assistance and Education (OIAE) and take follow up action and report back to the OIAE. If regulatory action is required, the Cell shall inform the Division of SRO Administration besides reporting to OIAE. 3. DERIVATIVES AND NEW PRODUCTS DEPARTMENT (DNPD) 3.1 Division of Policy and Supervision The Division is responsible for supervising the functioning and operations of derivatives exchanges and related market organizations. In order to accomplish its tasks, this division would be responsible for the following:  Derivatives market policy issues.  Approval of new derivative products  Monitoring the functioning of derivatives exchanges including conducting inspections and compliance exams.  Prescribing and Monitoring risk management and settlement practices in derivatives exchanges  Developing the trading and settlement framework for new products. MBA 1ST SEMESTER 10
  11. 11. Security Exchange Board Of India (SEBI) GROUP 10.  Regulatory action were required. As regards action it is clarified that the current practice of issuing show cause notices, appointment of  Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division. 3.2 Investors Complaint Cell The cell would receive complaints relating to the derivatives exchanges and related organizations from the Office of Investor Assistance and Education (OIAE) and take follow up action and report back to the OIAE. If regulatory action is required, the Cell shall inform the Division of Policy and supervision besides reporting to OIAE. 4. CORPORATION FINANCE DEPARTMENT (CFD) The Corporation Finance department is responsible to deal in matters relating to issuance of securities and assuring adequate information is available about securities traded in the public markets and exchanges, corporate governance and accounting/auditing standards and corporate restructuring. The following divisions will perform the functions of the Department. 4.1 Division of Issues and Listing The Division will handle work relating to  Policy related to offerings and listing. MBA 1ST SEMESTER 11
  12. 12. Security Exchange Board Of India (SEBI) GROUP 10.  Issue of observations on draft offering documents.  Review of reports and other filings relating to issues and listing.  Coordingating the working of the Central Listing Authority and matters relating to CLA.  Issues relating to continuous disclosures such as corporate governance, accounting standards, EDIFAR etc., and monitoring of compliance with listing obligations.  Regulatory action where required. (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division). 4.2 Division of Corporate Restructuring: The Division will handle the work relating to:  Policy related to corporate restructuring MBA 1ST SEMESTER 12
  13. 13. Security Exchange Board Of India (SEBI) GROUP 10.  Substantial Acquisition and Takeovers  Buy back of securities  Delisting of Securities  Coordinating with the Takeover Panel  Regulatory action where required. (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division).  Investor complaints relating to corporate restructuring. 5. INVESTMENT MANAGEMENT DEPARTMENT (IMD) The Investment Management department is responsible for registering and regulating mutual funds, including fund distributors, venture capital funds, foreign venture capital investors, collective investment schemes, including plantation schemes, Foreign Institutional Investors, Portfolio Managers and Custodians. The following Divisions will perform the functions of the Department; 5.1 Division of Funds and Collective Investment Scheme: The Division will handle all work related to :  Mutual funds and its distributors MBA 1ST SEMESTER 13
  14. 14. Security Exchange Board Of India (SEBI) GROUP 10.  Venture Capital Funds and Foreign Venture Capital Investors  Portfolio Managers  Collective Investment schemes (including plantation schemes)  Regulatory action where required (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division). 5.2 Division of Foreign Institutional Investors and Custodian The Division will handle all work related to:  FIIs  Custodians  Regulatory action where required (As regards action it is clarified that the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Division. 5.3 Investor Complaints Cell: The cell would receive complaints relating to funds, CIS, FIIs and other entities under the purview of the department from the Office of Investor Assistance and Education (OIAE) and take follow up action and report back to the OIAE. If regulatory action is MBA 1ST SEMESTER 14
  15. 15. Security Exchange Board Of India (SEBI) GROUP 10. required, the Cell shall inform the Division of Issues and listing besides reporting to OIAE. 6. INTEGRATED SURVEILLANCE DEPARTMENT (ISD)  The intergrated Surveillance department is responsible for monitoring market activity through market systems, data from other departments and analytical software. The department would be responsible for:  Developing, maintaining and operating an integrated market surveillance system including monitoring of all segments of the markets.  Methodologies for capturing information from media review, public complaints and tips, other agencies, exchanges, and direct solicitations; assignment of staff to handle functions; method of logging and cataloguing information; criteria for evaluating and distributing information; input into tracking and other systems.  Recognizing potentially illegal activities and referrals to Investigations, Enforcement or other departments 7. INVESTIGATIONS DEPARTMENT (IVD) The Investigations department is responsible for: MBA 1ST SEMESTER 15
  16. 16. Security Exchange Board Of India (SEBI) GROUP 10.  Conducting investigations on potentially illegal market activities.  Providing referrals to the enforcement department.  Assisting the enforcement department in enforcing SEBI action against violators.  (As regards action, the current practice of issuing show cause notices, appointment of Enquiry/Adjudication officers and consequential action up to serving of Chairman’s order and maintenance of database will be with the Department). 8. ENFORCEMENT OF DEPARTMENT (EFD) Enforcement Department is responsible for proceedings related to regulatory action and obtaining redress for violations of securities laws and regulations against all market participants, issuers and individuals and other entities that breach securities laws and regulations. The following Divisions will perform the functions of the Department; 8.1 Division of Regulatory Action MBA 1ST SEMESTER 16
  17. 17. Security Exchange Board Of India (SEBI) GROUP 10.  The division shall enforce action against market misdemeanors through SEBI administrative proceedings. The role of the Division shall commence from the time the hearing before Chairman/Board is proposed. The Division will assist the Chairman/Board in its proceedings, prepare the orders, handle all matters relating to SAT, appeals against SAT orders and Court cases relating to regulatory action. The Division will also frame the procedures relating to the above matters. 8.2 Division of Prosecutions  The division shall handle work related to filing prosecution proceedings through the courts and follow up to obtain conviction. The Division will also frame procedures for cooperation with public prosecutors, other agencies and for making referrals to prosecutors and other government agencies 9. LEGAL AFFAIRS DEPARTMENT (LAD) The Department of Legal Affairs would be responsible to provide legal counsel to the Board and to its other departments, and to handle non-enforcement litigation. The following Divisions will handle the functions of the Department. 9.1 Division of Policy: MBA 1ST SEMESTER 17
  18. 18. Security Exchange Board Of India (SEBI) GROUP 10. The division would work to formulate SEBI’s legislative initiatives and review and comment upon proposed legislation that would affect the securities industry or SEBI’s authority or operation. It would handle testimony and statutory drafting assistance. The division would also be responsible for establishing a clear legal framework and basis for the various categories of SEBI pronouncements (e., regulations, guidelines, circulars, instructions, etc.,); the hierarchy of their force and effect; the procedure for their promulgation, amendment or repeal. 9.2 Division of Regulatory Assistance The division would support other SEBI departments in meeting their objectives by providing assistance and guidance wherever necessary in developing market rules and interpretations. 10. ENQUIRIES AND ADJUDICATION DEPARTMENT (EAD) The Enquiries and Adjudication Department would handle quasi judicial matters and provide timely hearings and initiate adjudication brought by the other Departments against alleged violators who are within SEBI’s disciplinary jurisdiction. The department would directly report to Chairman. 11. OFFICE OF INVESTOR ASSISTANCE AND EDUCATION (OIAE) The Office will support SEBI’s operations by handling investor complaints centrally and be the focal point of SEBI’s investor education effort. The Office would be the single point interface with investors and would receive complaints relating to all departments, forward to the concerned departments, follow up and respond to MBA 1ST SEMESTER 18
  19. 19. Security Exchange Board Of India (SEBI) GROUP 10. investors. The office shall set up necessary systems and procedures to handle his function. The Office will also receive complaints relating to issues, transfer of shares, dividends, compliance with listing conditions, corporate governance issues under the purview of the Corporation Finance department (Division of Issues and Listing) and take follow up action. 12. GENERAL SERVICES DEPARTMENT (GSD) This department would support all of the internal operations of SEBI. The Department will have the following divisions. 12.1 Human Resources Division  The Human Resources Division will perform all the functions in its role as the principal personnel and human resources authority in SEBI. 12.2 Information Technology Division This division would perform its role as the technical support group for SEBI. 12.3 Treasury and Accounts Division MBA 1ST SEMESTER 19
  20. 20. Security Exchange Board Of India (SEBI) GROUP 10. The Division will handle work related to:  Development of SEBI’s internal budget and accounting systems  Presentation of reports and budgets to the SEBI Board  Maintaining internal accounting records, developing internal control systems for collections and disbursements and other financial controls  Managing SEBI’s investments 12.4 Facilities Management Division The division will be responsible for the establishment and maintenance of the physical facility housing the regulator and related needs. 12.5 Official Language Division The Division will handle the work related to compliance with Government’s official language policy and Translation of certain documents into the official language. 12.6 Office of the Secretary to the Board The Office of the Secretary shall coordinate Board meetings, record and maintain Board decisions. 12.7 Communications Division MBA 1ST SEMESTER 20
  21. 21. Security Exchange Board Of India (SEBI) GROUP 10. The division would be responsible for all communications of SEBI. These include:  Media releases and other forms of communication including the publication of SEBI materials.  News conferences and responding to inquiries from the press 13. RESEARCH AND TRAINING DEPARTMENT (RTD) The Department will handle its functions through the following Divisions: 13.1 Division of Research This division would provide market and economic research, analysis and advice to the Board and departments as appropriate. It may produce regular or ad hoc reports on the securities industry and the trading markets. It will also produce SEBI Bulletin, Annual Reports and support other departments with specialized research inputs on request. The Division will also handle the work related to Library/Learning Resources centre. 13.2 Division of Training MBA 1ST SEMESTER 21
  22. 22. Security Exchange Board Of India (SEBI) GROUP 10. This division would develop and administer training programs in coordination with HRD, for staff and officers as also provide assistance for the development of the proposed National Institute of Securities Markets. 14. OFFICE OF THE CHAIRMAN (OCH) 14.1 Office of the Executive Assistant to Chairman The office will be responsible to provide such administrative and other support as the Chairman may require. The functions would include strategic planning and managing new initiatives. 14.2 Office of International Affairs The office would perform the following:  Implement information-sharing initiatives with international regulators  Participate in international regulatory organizations  Handle all matters related to Foreign assisted projects  Establish guidelines for interaction with foreign Government agencies and foreign jurisdictions, including providing technical assistance. 15. THE REGIONAL OFFICES (RO’s) MBA 1ST SEMESTER 22
  23. 23. Security Exchange Board Of India (SEBI) GROUP 10. The Regional Office will handle work as per existing delegation and shall continue to report to functional heads for specific departmental functions while reporting administratively to SEBI Executive Directors. Role SEBI and its Role in the Secondary Market The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental there to. Various departments of SEBI regulating trading in the secondary market: The following departments of SEBI take care of the activities in the secondary market. Sr.No. Name of the Department Major Activities 1. Market Intermediaries Registration and Supervision department (MIRSD) Registration, supervision, compliance monitoring and inspections of all market intermediaries in respect of all segments of the markets viz. equity, equity derivatives, debt and debt related derivatives. 2. Market Regulation Department (MRD) Formulating new policies and supervising the functioning and operations (except relating to derivatives) of securities exchanges, their subsidiaries, and market institutions such as Clearing and settlement organizations and Depositories (Collectively referred to as ‘Market SROs’.) 3. Derivatives and New Supervising trading at derivatives segments of MBA 1ST SEMESTER 23
  24. 24. Security Exchange Board Of India (SEBI) GROUP 10. Products Departments (DNPD) stock exchanges, introducing new products to be traded, and consequent policy changes Products available in the Secondary Market SCOPE Following are the main financial products/instruments dealt in the secondary market: Equity: The ownership interest in a company of holders of its common and preferred stock. The various kinds of equity shares are as follows – Equity Shares: An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc. • Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. • Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years. • Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders. MBA 1ST SEMESTER 24
  25. 25. Security Exchange Board Of India (SEBI) GROUP 10. • Cumulative Preference Shares. A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. • Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. • Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level. • Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation. • Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (upto twenty years). • Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/ charged against the asset of the company in favour of debenture holder. • Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan MBA 1ST SEMESTER 25
  26. 26. Security Exchange Board Of India (SEBI) GROUP 10. amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows- Ø Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Ø Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion Price. • Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for a tenure of 90 days. • Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements. Regulatory requirements specified by SEBI for corporate debt securities The issue of debt securities having maturity period of more than 365 days by listed companies (i.e. which have any of their securities, either equity or debt, offered through an offer document, and listed on a recognized stock exchange and also includes Public Sector Undertakings whose securities are listed on a recognized stock exchange) on private placement basis must comply with the conditions prescribed by SEBI from time to time for getting them listed on the stock exchanges. Further, unlisted companies/statutory corporations/other entities, if they so desire, may get their privately placed debt securities listed on the stock exchanges, by complying with the relevant conditions. Briefly, these conditions are: MBA 1ST SEMESTER 26
  27. 27. Security Exchange Board Of India (SEBI) GROUP 10. Ø Compliance with disclosure requirements under Chapter VI of the SEBI (Disclosure and Investor Protection) Guidelines, 2000, Listing Agreement with the exchanges and provisions of the Companies Act. Ø Such disclosures may be made through the web site of the stock exchanges where the debt securities are sought to be listed if the privately placed debt securities are issued in the standard denomination of Rs. 10 lakhs. Ø The Company shall sign a separate listing agreement with the exchange in respect of debt securities. Ø The debt securities shall carry a credit rating from a Credit Rating Agency registered with SEBI. Ø The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the debt securities. Ø The debt securities shall be issued and traded in demat form. Ø All trades with the exception of spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. Guidelines Policies Affecting market MUTUAL FUNDS Market regulator SEBI is likely to prohibit close-ended MFs from charging up to 6% of the corpus as initial offer expenses, which is then amortised over a period of time. The move is aimed at bringing transparency in the manner in which MFs charge expenses to close-ended schemes. The proposal has implications for investor returns too. As per the proposal under consideration, close-ended funds would only be allowed to MBA 1ST SEMESTER 27
  28. 28. Security Exchange Board Of India (SEBI) GROUP 10. charge a certain entry load upfront, like in open-ended funds. When contacted, the Association of Mutual Funds in India (AMFI) chairman AP Kurian said, “We have received the proposal from SEBI and the industry is examining it in detail.” There is a view that amortisation allows asset management companies (AMCs) to show a higher net asset value (NAV) in close-ended schemes. For example, if you buy 100 units of Rs 10 each of a new close-ended fund, the fund house charges 6% as initial expenses, which means that the NAV should be Rs 9.40, but it is still shown as Rs 10 initially. The Rs 6 charged to the scheme is amortised over a period. Says Dhirendra Kumar of Value Research, “This would bring about transparency. It will make things look the way they are.” In April 2006, Sebi had recast regulations relating to initial issue expenses and banned open-ended schemes from charging 6% initial issue expenses. However, the market regulator allowed close-ended schemes to continue with the practice. The open-ended schemes had to meet sales, marketing and other expenses through entry load, which is usually about 2.25%, and not initial issue expenses. Close-ended schemes were not allowed to levy an entry load. The difference in treatment of expenses between open and close-ended schemes has made the latter attractive for fund houses. Against a 2.25% entry load available in the case of open-ended schemes, an AMC can appropriate as much as 6% of the corpus raised by close-ended schemes for advertising and other related upfront expenses, which is not immediately reflected in NAV. As opposed to this, in the case of open-ended schemes, the 2.25% load starts for investors at that much lower NAV. This gives the erroneous impression to the investor that charges are lower in the case of close-ended schemes, which is not the case. Most close-ended funds actually charge 6%, which is the maximum limit available. This is largely the reason why the fund industry has taken to close-ended schemes in a MBA 1ST SEMESTER 28
  29. 29. Security Exchange Board Of India (SEBI) GROUP 10. big way. In 2005-06, the fund industry launched 119 debt and one close-ended debt schemes, which together mobilised Rs 30,950 crore, according to Amfi data. In 2006-07, when the norms where changed, the fund industry offered 355 debt and 17 equity schemes that raised Rs 121,154 crore. BSE Concerned over large number of companies still being listed despite losing business interest, market regulator, Sebi, said it expected the Bombay Stock Exchange to weed out defunct companies from the bourse. “Challenges before the BSE today is the cleaning-up and exclusion of companies that have lost interest in their business and have no business to stay on the exchange,” Sebi chairman M Damodaran said. Mr Damodaran also reminded BSE of its vast regulatory responsibilities while the exchange and its stakeholders focused on the profits to be made by the corporate entity that was demutualised in May. “BSE has to see that the business responsibilities and regulatory responsibilities don’t come into conflict,” Mr Damodaran said. The market regulator also reminded BSE of the progress made by the National Stock Exchange (NSE) in such a short span of time in terms of market share. Mr Damodaran also asked BSE to recognise the interest and faith shown by domestic and overseas investors in the BSE during the demutualisation process and enable them to reap rewards. BSE celebrated its 133rd anniversary on Monday. The exchange also launched an index for real estate sector companies called “Realty Index” comprising of 11 top real estate companies. The realty index will be the 12th sectoral index on the BSE. BSE MD & CEO Rajnikant Patel dwelling upon the theme ‘Challenges of Change’ faced MBA 1ST SEMESTER 29
  30. 30. Security Exchange Board Of India (SEBI) GROUP 10. by the exchange said, “we look at opportunities, threats, strength and weaknesses that BSE faces today.” Patel said India had become the growth engine of Asia and BSE’s bellweather indices reflected the growth in Indian economy. BSE is the oldest stock exchange in Asia with a rich heritage spanning three centuries in its 133 years of existence. Popularly known as BSE today, it was established as ‘The Native Share and Stock Brokers Association’ in 1875 on this day. BSE was corporatised in 2005 pursuant to the BSE Corporatisation and Demutualisation Scheme, 2005, notified by the Sebi. The demutualisation process was completed in May this year by divesting 51 per cent stake to domestic and foreign investors. LISTING OF COMPANIES Sebi eases disclosure norms for listed cos : Market regulator Securities and Exchange Board of India (Sebi) simplified disclosure norms for listed companies by amending Clause 41 of the Equity Listing Agreement. "The revised Clause 41 of the Equity Listing Agreement shall come into force for all filings made to stock exchanges in respect of accounting periods commencing on or after July 1, 2007", Sebi said in a communication to all stock exchanges. Under the revised norms, the companies furnishing unaudited financial results will be required to file a copy of the limited review report to the stock exchanges within two months from the end of the quarter. With a view to enable investors know the performance as early as possible, companies have the option to furnish either unaudited or audited quarterly and yearly financial MBA 1ST SEMESTER 30
  31. 31. Security Exchange Board Of India (SEBI) GROUP 10. results to the stock exchanges within a month from the end of the quarter. These unaudited results, however, are subject to a limited review. Sebi has also decided to simplify the provisions for explanation for variation between items of unaudited and audited quarterly/yearly annual results by restricting it to net profit, loss after tax and for exceptional/extraordinary items. The regulator, however, has reduced the percentage of variation for revision from '20 per cent or more' to '10 per cent or Rs 10 lakhs, whichever is higher. CHANGE IN INVESTMENT PATTERN THROUGH POLICIE Government and the Securities & Exchange Board of India (Sebi) are finally veering around to encouraging foreign institutional investors (FIIs) to invest directly in the equity markets instead of using participatory notes (PNs). At its board meeting later this month, Sebi is expected to discuss various ways to encourage foreign investors to invest through sub-accounts of FIIs instead of using PNs that are in the nature of IOUs often used to disguise the identity of the ultimate investor. The move comes amidst fears of potential misuse articulated by Reserve Bank of India on a number of occasions in the past as also by high-powered panels like the one on capital account convertibility under S S Tarapore. Over the last few years, the use of PNs by FIIs has been on the rise with the share of the instrument in portfolio investment rising to 43% at the end of April from around 25% at the start of 2005 and nearly 33% at the end of 2006. Equity investment by FIIs at the end of April 2007 was estimated at a little over $52 billion, whose market capitalisation was estimated to be in the region of $150 billion. MBA 1ST SEMESTER 31
  32. 32. Security Exchange Board Of India (SEBI) GROUP 10. While Sebi is yet to finalise the proposed simplification, sources said the idea was to reduce compliance cost and simplify procedures. "A large number of investors like endowment and provident funds have chosen to use PNs to avoid high compliance and certification costs in their home countries. We are looking at easing some of the rules. If they are coming through the window then why not open the door," said a source. While both PNs and sub-accounts provide investors the option to invest in India through FIIs, the latter is seen as more transparent since the identity of the investor is known. Over the last few years, RBI has been worried over the use of PNs but Sebi has countered it by saying that FIIs were following the know-your customer norms and knew the identity of the investor. But sources conceded that at times FIIs know the identity of the investor to whom the PN was issued but the certificate could be sold to another investor who may not disclose his identity. Even the government, which did not want to tamper with the structure with PNs fearing that foreign investors may withdraw investment from India, is now willing to alter the mechanism though banning it immediately is being ruled out. Over the last few months, the government first sought details from Sebi on its regulatory powers and then suggested that the rules for entry through sub-accounts should be eased. CONTROLLING CONTINUES BULL MARKET The Securities and Exchange Board of India (Sebi) will shortly announce its policy on short selling of shares, chairman M Damodaran said on Monday. MBA 1ST SEMESTER 32
  33. 33. Security Exchange Board Of India (SEBI) GROUP 10. “You will soon see a policy statement (on the issue),” Sebi chairman M Damodaran told reporters after inaugurating a week-long independent directors’ programme for senior officers of armed forces organised by the Management Development Institute at Delhi. He, however, did not specify if the new policy had provisions for short selling by institutional investors. At its last board meet in July, the market regulator had discussed issues relating to short selling of shares by institutional investors and those relating to setting up a stock lending and borrowing mechanism. Currently, non-institutional investors can short sell shares, whereby they can sell shares without owning them in the hope of buying back the shares later during the day at lower prices. However, institutional investors are not allowed to do the same. If Sebi does allow institutional investors to short sell shares, it will likely be in the form of covered short sales and not naked short sales like what retail investors are allowed to do. In covered short sales, the institution borrows shares from a Sebi-approved entity for a fee and sells them in the market. It can later on buy those shares from the market at a profit if share prices fall subsequently, and deliver them back to the entity from which it had borrowed the shares. But, for short selling by institutions, a strong stock borrowing system has to be put in place first. Sebi is in the process of formulating guidelines for the same, including the entities which will be allowed to lend shares, and the number of stocks in which short selling will be allowed. While around 3,000 stocks are traded on a daily basis, only the top 25-odd frontline shares have the required liquidity from an institutional investor’s perspective. Short selling by institutions help curb volatility in a raging bull market, essentially by checking the pace of the rise in stock prices. MBA 1ST SEMESTER 33
  34. 34. Security Exchange Board Of India (SEBI) GROUP 10. Learning’s JPC moots 19-point agenda to strengthen Sebi The Joint Parliamentary Committee probing the stock scam has mooted a 19-point agenda to give Sebi more teeth in investigation and enforcement, even though the market watchdog had a poor track record of punishing wrong-doers by utilising the existing powers. In its draft report, the committee said Sebi should have enforcement powers like imposing monetary penalty of Rs 250 million or three times the ill-gotten "profit made" or "loss avoided." JPC also suggested imprisonment of up to 10 years on conviction for violation of Sebi Act 1992. Sebi should be empowered to retain proceeds of securities transaction and suspension of an intermediary pending investigation, powers to issue "cease and desist" orders, powers to disgorge and impound ill-gotten money, it said. The market regulator should also have powers to issue directions debarring persons from dealing and accessing the securities market, JPC said. Emphasising on investor protection, the JPC said the Sebi Act should also provide for specific right for investors to approach courts and claim damages, compensation and interest. It also suggested expeditious measures to attach properties of defaulting promoters, directors and companies. MBA 1ST SEMESTER 34
  35. 35. Security Exchange Board Of India (SEBI) GROUP 10. The committee also prescribed specific power of investigation, power to impound/retain documents pending investigations, and powers to obtain information from banks, corporates, promoters who deal in securities market and authorities like Mahanagar Telephone Nigam Limited. The capital market regulator should also have powers to obtain information about the source of fund and to tender immunity from action for making disclosures of facts relating to contravention of regulation under investigation, the JPC said. The committee also proposed that the Securities Appelate Tribunal be made a multi- member body while mooting a "special court" for securities market. The number of board members in the Sebi should also be suitably enhanced, it said. JPC, however, criticised the market regulator for not being able to punish erring companies under the existing norms. "The track record of Sebi in punishing the wrong doers in stock market has been dismal. Sebi could initiate prosecution proceedings on insider trading in only one case and on fraudulent and unfair trade practices in just cases," it said. JPC further said that only in seven out of 181 cases Sebi resorted to cancellation of registration during the last four years. "All this is indicative of Sebi's reluctance to take severe action against the offenders," it added. Though Sebi's plea for more powers to strengthen its effectiveness cannot be faulted, the report said: "The committee received an impression that Sebi was not fully enforcing the powers already vested with it." It cited the powers to impose Rs 140,000 penalty on a person failing to furnish requisite information and said "rarely has this power been exercised by Sebi." "Similarly, the provision for mandatory punishment of imprisonment, etc. in addition to award of penalty has scarcely been used," it added. LS for more teeth to Sebi; govt to promote demutualisation MBA 1ST SEMESTER 35
  36. 36. Security Exchange Board Of India (SEBI) GROUP 10. The government on Wednesday assured the Lok Sabha that it would 'emphatically' promote demutualisation of trading to prevent abuse of market by brokers and traders as the house passed a bill to provide more teeth to the Securities and Exchange Board of India to restore investors' confidence. "Passage of the Bill will be a move towards restoration of investors' confidence," Finance Minister Jaswant Singh told members while replying to the debate on The Securities and Exchange Board of India (Amendment) Bill, 2002. Cutting across party lines, members supported the Bill aimed at increasing the number of members from six to nine, besides empowering the Sebi to summon persons or institutions, suspending trading of any security at any exchange, prohibiting insider trading and manipulative and deceptive devices as also enhancing the penalties under the original Act. The government was, however, severely criticised for bringing in an ordinance instead of directly coming to Parliament with the legislation which prompted Singh to assure that necessary changes would be made in Sebi or other laws on the basis of the recommendations of the Joint Parliamentary Committee probing the stock scam. He said government took recourse to ordinance due to urgency of the situation and it was not intended to bypass and disrespect Parliament or standing committee but suggested that working of the standing committees be improved to cut down the time taken by these. Participating in a discussion on Sebi (amendment) Bill, the members said empowerment of the regulator was needed as the small investor was the worst hit. Kirit Somaiya (Bharatiya Janata Party) said investors - especially the small ones - have lost millions of rupees due to a series of financial scams during the last decade and there was a need to hold the market regulator accountable in such a scenario. The BJP member wanted the government to appoint a small committee to suggest more amendments to the Act to help protect the small investor. He said long delay in the finalisation of the report by the Takeover Code Committee has resulted in serious violations in the past few years. MBA 1ST SEMESTER 36
  37. 37. Security Exchange Board Of India (SEBI) GROUP 10. Nitish Sengupta favoured amendment in the Sebi Act and asked government to make efforts to revive the 'badla' system, which was abolished suddenly as a step to regulate the capital market effectively. Under the badla system brokers and investors were allowed to carry forward their positions at a particular cost. But the system was lacking proper checks and balances leading to financial scams of different nature. A C Jose (Cong) favored stringent laws and financial penalties against the guilty involved in scams and frauds. Sengupta said government must ensure that small investors, which have virtually disappeared since last few years in the wake of financial scams, should be brought back into the system and hoped that enhancement of powers of Sebi would help in this regard. He asked the government to look into the recommendations of the Deepak Parekh Committee to revive the badla system. M A K Swain (BJP) favored the system of checks and balances while increasing powers of the Sebi saying there were corruption charges against various Sebi officials. He suggested that tenure of Sebi chairman should not be more than three years while favoring a rank of finance secretary for the chairman. Swain said increase in financial penalty to Rs 25 crore (Rs 250 million) from Rs 500,000 would be crucial for protecting the interest of small investors. Sebi to tighten listing, delisting norms The Securities and Exchange Board of India, the nation's capital market regulator, on Friday spelt out a slew of market reform measures including a central listing authority, tighter delisting norms and tracking down of promoters of vanishing companies, to improve sentiment in the market which is slated to witness about 200 IPOs this fiscal. "It is necessary that we have a first-entry-point screening of companies intending to raise funds from the market. The proposed central listing authority will look into listing MBA 1ST SEMESTER 37
  38. 38. Security Exchange Board Of India (SEBI) GROUP 10. agreements and carry out due diligence," Sebi chairman G N Bajpai said at a seminar in New Delhi. He said the proposed authority, which would be different from the National Listing Authority being tried out in the UK, would be an autonomous body separate from the ambit of Sebi and having representation from stock exchanges. Pointing to the need for tightening delisting norms, Bajpai said, "Entrepreneurs should not create a situation where investors cannot exit and nor get the profits of the wealth created by the company." A Sebi committee was looking into the delisting norms and would submit a final report within weeks. "We are working very strongly on various issues including delisting norms for MNCs," he added. Sebi expected the market to chin up this fiscal following the initial public offer of 200 companies, he said. Bajpai said Sebi and the Department of Company Affairs are working together to track promoters of 225 vanishing companies, which raised funds from the capital market and then disappeared. Sebi is in touch with the police to track down the promoters. ''The companies have vanished but the people have not. Sebi and the Department of Company Affairs are taking steps to locate the promoters of these companies,'' Bajpai said. Later, Bajpai told reporters that he had written a letter to the police in different states to track down the promoters, who have perpetrated frauds on the investing public. The search and seizure powers, as being envisaged in the proposed amendments to the Sebi Act, would be used to protect investors with the ''least pain,'' Bajpai said. The law, justice and company affairs ministry and the finance ministry have already resolved their differences and have agreed to empower Sebi with search and seizure powers. The amendments will now be cleared by the Cabinet. MBA 1ST SEMESTER 38
  39. 39. Security Exchange Board Of India (SEBI) GROUP 10. The market regulator is also initiating measures to implement the concept of corporate governance in letter and spirit. Through corporate governance, SEBI wants to ensure wealth creation, wealth management and wealth sharing. It has asked a few credit rating agencies to work out some instrument for measuring the companies on the scale of corporate governance. The Securities and Exchange Board of India (SEBI) is the Indian equivalent of the Securities Exchange Commission (SEC) in the US and was established in 1988 to regulate and develop the growth of the capital Market in India. Among other things, its objectives require it to prohibit fraudulent and illegal trade practices in the securities markets, regulate the working mechanism of the Stock exchanges, mutual funds, venture capital companies and the derivatives markets, registering and regulating brokers, sub-brokers, etc., prohibiting insider trading and promoting investor education on various aspects of the financial markets. As with various other Government bodies, SEBI too was started with a limited set of objectives and an even more constraining set of guidelines to regulate the markets. The now legendary stock market scam triggered by Late Harshad Mehta in 1992 caught the SEBI napping. A lot of committees were formed, their tenures extended, reports running into thousands of pages were submitted and re-submitted with little or no changes and at the end of it all nothing could be done to bring the culprits to book. Exactly ten years later, on March 1, 2001, history repeated itself when the BSE index crashed by an eye- popping 176 points after Mr. Sinha had presented a dream budget. I will not narrate the reasons for that as most of you know it by now. Suffice to say that the SEBI has become like a programmed watchdog. The robbery takes place right under its nose but it barks only the next morning when its owner (the Ministry of Finance) asks it to do so. The follow-up action on the part of SEBI and the Ministry of Finance was a scene-to- scene encore of what happened in 1992. The culprits (bulls/broking entities/bear cartels) were identified, a Joint Parliamentary Committee (JPC) was setup, some heads rolled at the Pherozeshah Jejeebhoy Towers, a lot of fingers were pointed, nobody was willing to MBA 1ST SEMESTER 39
  40. 40. Security Exchange Board Of India (SEBI) GROUP 10. take the blame and at the end of one year, we are exactly in the same position. The SEBIs inability to pro-actively identify holes in the financial markets and plug them satisfactorily has been a hot topic of discussion for the last few years. Agreed that a regulatory authority cannot do much when it comes to protecting investor’s interests in the midst of market booms and crashes but the least it can do is to ensure that all players in this field stick to the guidelines laid down by it. It also needs to be more forceful when it comes to investigating mal-practices in the market and taking punitive action against the marauding parties in question. Mr. D.R. Mehta who was the SEBI Chairman for nearly 7 years shouted himself hoarse all along that SEBI was not being given enough teeth when it came to punishing the guilty parties. SEBI’s laxity in monitoring the secondary markets during the recent stock market scam of March 2001 would be probed in detail by the Joint Parliamentary Committee (JPC) which is also expected to suggest ways and means to strengthen the powers of SEBI. A bold step has already been taken in this direction by mooting the proposal to segregate the trading membership, management and administration functions of the stock exchanges to end the interference of brokers. This is a welcome step and the sooner the stock exchanges are corporatised, the better it will be for all the market participants. However, we still have a long way to go in terms of integrating our local markets with the International markets. Here are some suggestions that might help in establishing SEBIs credentials as a better market regulator: 1. There appears to be a serious deficit in the staffing requirements of SEBI. I came across a report which states that out of the 350 strong staff in SEBI, only about 20 comprise the investigative staff! Even by conservative standards that figure is woefully short of what it ideally should be. Adequate staff should be recruited and given training and exposure. There should also be a clearly demarcated line between the investigation and action enforcement departments to avoid potential conflict of interests. MBA 1ST SEMESTER 40
  41. 41. Security Exchange Board Of India (SEBI) GROUP 10. 2. SEBI has often been caught napping when it comes to continuously monitoring the working of the stock exchanges. A system of online surveillance needs to be setup at SEBI, which would keep ongoing tabs on daily transactions. This would obviate the need to seek information from the concerned stock exchanges whenever any malpractice is observed. 3. The recent stock market scam has highlighted the nexus between bluechip corporates, brokers and banks. The scam revealed that big brokers had impressive war chests running into several thousands of crores provided by companies and banks. Towards this end, RBI should tighten its norms for Bank lending to brokers though I’m not very sure how the flow of funds from companies to brokers can be monitored. 4. The scam also brought out the non-existent guidelines that currently exist with respect to the operational issues of Overseas Corporate Bodies (OCBs). These bodies have been given a free hand and royal treatment because of their NRI status so far. While they were asked to register themselves with RBI, SEBI was entrusted with the task of framing the guidelines. This anomaly needs to be corrected. Simply banning the OCBs from making purchases in the secondary market will not have the desired effect so long as they have millions of shares already picked up in the past. I would not rule out another scam, this time pertaining to the OCBs in the future. 5. SEBI was hitherto only given the responsibility of framing guidelines and ensuring their adherence and this policy. What is now required is to give it the all-round powers to act the lawmaker as well as the law enforcer. To this end, a separate cell could be created within SEBI that gives it ample powers to act the tough policeman as well. What’s the point in laying guidelines and investigating mal-practices when the actual action is taken by another body like the CBI? There’s no point in “distributing” responsibilities among half a dozen agencies as every tom dick and harry knows that nothing will ever come out of it. For its part, the SEBI has done a good job in introducing some radical reforms for MBA 1ST SEMESTER 41
  42. 42. Security Exchange Board Of India (SEBI) GROUP 10. improved transparency, computerisation of the trading and settlement systems, enactments against insider trading, phasing out of the badla system, introducing compulsory rolling settlement, banning naked short sales shortly after the scam, etc. However, the debits in its books far outnumber the credits and that’s what ultimately counts in the final reckoning. Irrespective of whether or not the SEBI was bestowed with wide ranging powers, it has been a clear failure when it came to the task of administering the law. Past instances indicate that whenever a scam or irregularity surfaced, the SEBI stepped in with knee- jerk reactions, blaming system-centric collapse or lack of power in its hands. Mr. Gyanendra Nath Bajpai, previously head of LIC, took over as the new Chairman of SEBI on February 20, 2002 and immediately got the whip cracking in the house. It however remains to be seen whether or not he does a better job than his predecessor. JPC gives clean chit to RBI, NSE Priya Ganapati in Bombay Prakash Mani Tripathi, chairman of the 30-member Joint Parliamentary Committee set up to probe the recent stock market scam, has given the Reserve Bank of India and the National Stock Exchange a clean chit in a preliminary announcement on Wednesday evening. The JPC led by Tripathi met the RBI Governor Dr Bimal Jalan, the two deputy governors, the executive director, the regional director and other senior RBI officials in the morning. "Within the constraints of our system, the RBI has done a good job. But of course, more needs to be done. It is an on-going process," Tripathi said expressing satisfaction with the way the RBI is functioning. MBA 1ST SEMESTER 42
  43. 43. Security Exchange Board Of India (SEBI) GROUP 10. The bulk of the JPC's discussions with the RBI, however, centered on the action taken by the RBI to strengthen the system and plug the loopholes after the 1992-Harshad Mehta scam. "We had posed certain questions pertaining to the RBI's role in the market, the action taken by them after the 1992 scam and what requires to be done further," Tripathi said. Of the 30-member team, 24 officials were in Bombay for two days to probe the role of RBI, the NSE, the BSE and the Securities and Exchange Board of India in the recent scam. The JPC's efforts in Bombay have been directed towards examining the action taken post the 1992 scam. "The aim of the JPC is that no matter how good the recommendations, the speed and efficiency of implementation will decide the efficacy of the committee," Tripathi said. He clarified that the reason why the JPC was looking into the action taken report of the 1992 scam was to make sure that the present system has the safeguards implemented. "It must be remembered that the 1992 scam was heavily bank-oriented and so we talked about the action taken report. We are only keen to find out the speed and the efficiency with which the recommendations then were implemented. This is the only way we can ensure that our recommendations don't just stay on paper," he said. RBI officials have explained their position to the JPC and also presented it with a detailed account of the steps taken by the bank after the 1992 scam was unearthed. Explaining RBI's position on the Madhavpura Mercantile Co-operative Bank case that was a part of the recent scam, Tripathi said, "The RBI has made it clear that in the Madhavpura Bank case greed got the better of the regulations. The rules are there in place but they were circumvented by the guilty." Later in the afternoon, Tripathi and his team visited the NSE building to inspect its systems and software. The JPC was given a technical briefing on the functioning of the NSE and its surveillance systems. MBA 1ST SEMESTER 43
  44. 44. Security Exchange Board Of India (SEBI) GROUP 10. "Unlike the Calcutta Stock Exchange, we found a great deal of transparency at the NSE. Real time information is clearly available. And we do not think that there has been any systemic failure or irregularities there. However, the fund clearing and settlement system is what needs improvement," he said. The JPC also met four broker representatives of the NSE for their views. While the committee has been given till the end of the monsoon session to place its report before the Parliament, Tripathi said that he could not promise delivery on schedule. "This is a dynamic situation. New views keep coming to light every day. So, I am not in a position to tell now about when we will complete the report. We will try to give it on time but whether we can will become apparent only in two weeks," he said. Protesting against any suggestions that political interference could have played a role in the recent scam, Tripathi asserted, "We have no facts to support this view. I believe that this is just a theory held by many, which does not have any supporting evidence. The JPC will not go by views. It will definitely consider this view point but only if there is any evidence to go with it." He clarified that the JPC, so far, has not come across any evidence of political interference or political hand in the recent scam. "There is no evidence to suggest interference by politicians and I believe that the JPC will not go by just viewpoints on this issue," he said, sidestepping pointed queries about the role of a few prominent politicians in the recent scam. On Thursday, the JPC team will go to the Bombay Stock Exchange in the morning and later on summon Sebi officials for a hearing. The Sebi officials are again expected to be quizzed on the action taken after the 1992 scam to plug the system loopholes. Where is the justice after never-ending trials? 17 Apr, 2006 MBA 1ST SEMESTER 44
  45. 45. Security Exchange Board Of India (SEBI) GROUP 10. Consider this: A fast-track court at Jaipur hands out a guilty verdict in the rape of a German girl in exactly 26 days. On the other hand, it takes 14 years for the case that unravelled the massive Securities Scam of 1992 to end in a verdict. This, after the government enacted the Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992, and set up a Special Court in Mumbai and a Custodian to take charge of scam-related assets. That is why, when Special Case 4 of 1996 was decided last week one only felt a sense of dismay. But first some background. On April 23, 1992, I wrote about how stock broker Harshad Mehta, once described as the “Amitabh Bachchan” of the stock market, had siphoned off Rs 500 crore from the State Bank of India’s (SBI) treasury. The amount turned out to be Rs 770 crore and it set in motion the process of unravelling a Rs 5,000 crore Securities Scam that sank two small banks, ensnared the biggest Indian and foreign banks and tarnished innumerable reputations. The government went into a frenzy of action. The Special Courts Act was enacted to ensure swift trial, a special court was set up, all the scam-accused were ‘notified’ and their assets attached by the Custodian appointed under the Act. The Reserve Bank of India (RBI) set up the Janakiraman Committee which came up with a series of investigation reports and a Joint Parliamentary Committee (JPC) began its investigation. The only lesson that has been learnt and applied in subsequent scams is not to follow any part of the drill described above. In fact, even when a JPC was set up following the Ketan Parekh scam, it was packed with political friends of all the accused brokers and their corporate cronies. MBA 1ST SEMESTER 45
  46. 46. Security Exchange Board Of India (SEBI) GROUP 10. In 1992, however, the Central Bureau of Investigation (CBI) went on a rampage and arrested 13 people starting from SBI’s Managing Director to Harshad Mehta, his brother Ashwin and a bunch of their employees. After 107 days of custody, the CBI forgot about the case. The charge-sheet was filed only in 1996 after some uproar and the charges were actually framed in 1999. Those charge-sheeted were carefully chosen to make up a long enough list of accused and keep out everyone with connections. By then SBI’s 1992 Chairman M.N. Goiporia had passed away (he was asked to proceed on leave after the scam), so had C.L. Khemani, SBI’s Managing Director in charge of investments who earned a lot of money for the bank through skilful treasury operations, but was shattered and humiliated. He died a few years later. R.L. Kamath, who headed vigilance and actually went to Pilani to bring back the rouge official R. Sitaraman (who colluded with Harshad Mehta) has also passed away, but not before the mortification of being named the second accused in the case. Since the first accused had to be a big enough name, P.V. Subba Rao, an MD and investment committee member was chosen. He too passed away a couple of years ago, without the chance to have his name cleared. Three other bankers were included as accused (K. Kailasham, A. Padhye and A.N. Bavedekar) along with R. Sitaraman, the rogue banker who actually colluded with Harshad Mehta. In the messy operations of SBI’s treasury, where there wasn’t even an instruction manual, investment decisions were taken at the corporate head-office and relayed to Sitaraman at the investment department at the Main Branch, these three officials were authorised to counter-sign cheques and confirmations which they did on trust. MBA 1ST SEMESTER 46
  47. 47. Security Exchange Board Of India (SEBI) GROUP 10. Last week, Padhye and Kailasham (who had signed fewer documents) were acquitted and Bavdekar was sentenced to five years of rigorous imprisonment and a fine of Rs two lakhs. Since the judgement is not yet available, the reasoning is unknown. Another official, Makarand Shidhaye of UCO bank has similarly been severely punished with a fine of Rs four lakh and five years of rigorous imprisonment for blindly crediting cheques into Harshad’s account on instructions from his seniors. From my investigation of the 1992 Scam, I have learnt that barring R. Sitaraman, the rouge banker who colluded with Harshad Mehta to falsify documents and give him dubious access to over Rs 700 crore of bank funds, none of the others in SBI had a clue about the mischief. Similarly, the late Harshad Mehta had one contact point in UCO Bank. All the short-cuts and conveniences that were practiced by bankers and brokers in order to speed up transactions while dealing with the slow, manual systems at Public Debt Office of the RBI were held as criminal actions, but only if the case went to court. ANZ Grindlays Bank famously argued in its case against National Housing Bank (NHB) that crediting Banker’s cheques to brokers’ current accounts had become an ‘‘accepted market practice’’. The case has been settled without anyone being jailed for crediting cheques to Harshad Mehta’s account. But Shidaye of UCO Bank, who has been living on tuition fee earnings, has been harshly punished and has no means to pay the fine. As the trial trundled through the years, many of the events and situations lost their relevance. The CBI saw several different teams of officials handling the case and it is unclear if they can even relate to the bank’s operations as they happened in 1991-92 or understand the complexities and exigencies of the situation then. After all, automation MBA 1ST SEMESTER 47
  48. 48. Security Exchange Board Of India (SEBI) GROUP 10. and liberalisation has transformed Indian capital market processes beyond recognition in the last decade. Even the judges hearing the case changed repeatedly. The hearings started with Justice Rane, were continued by Justice D.K. Trivedi and Justice Kapadia and judgement was finally delivered last week by Justice S.K. Shah. Now check the contrast. All the bank officials accused of corruption, collusion and conspiracy had to depend on legal aid. Some turned lucky. All the brokers and their employees had the best and most expensive legal brains working for the full 14 years. While Harshad Mehta is no longer here to face the music, his brother Ashwin Mehta was acquitted and another brother Sudhir has received a one-year sentence. Even among their employees, barring one, all others have lower fines and prison terms than the bankers. Doesn’t it make you wonder why it was popularly known as the Harshad Mehta scam? Global controlling bodies There are 118 total no. of regulatory bodies across the globe. The following are few of the stock exchange boards of developed countries. The following is the comparison among SEBI and other regulatory bodies. Parameters SEBI (India) (Securities and Exchange Board Of India) SEC (USA) (securities and exchange commission) FSA (UK) ( SESC (JAPAN) MBA 1ST SEMESTER 48
  49. 49. Security Exchange Board Of India (SEBI) GROUP 10. 1. about regulatory bodies The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “…..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 mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Financial Services Authority (FSA) is an independent non- governmental body, given statutory powers by the Financial Services and Markets Act 2000. We are a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non- executive directors (including a lead non- executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive. A series of so-called securities and financial scandals involving major securities companies in the summer of 1991, had ignited discussions about inspections and surveillance system over securities companies and market intermediaries. the Securities and Exchange Surveillance Commission (SESC) was formally established on July 20, 1992 within the ambit of the Ministry of Finance for the purpose of ensuring fair transactions in both securities and financial futures markets and maintaining the confidence of investors in these markets. In June 1998, the Financial Supervisory Agency and the SESC were split up from the Ministry of Finance. Currently, the SESC is established within the ambit of the Financial Services Agency, which was renamed from the Financial Supervisory Agency. 2.TYPE PRIMARY SECONDARY SECONDARY SECONDARY 3. POWERS AND Found in Chapter IV, this section The SEC oversees the key participants They are an independent body that As a market watchdog independent of MBA 1ST SEMESTER 49
  50. 50. Security Exchange Board Of India (SEBI) GROUP 10. FUNCTIONS defines the role of the Board. It deals with the regulation of the securities market in all its manifestations, and contains wide powers over Companies, Venture Capital Funds, Stock Exchanges and Brokers. FUNCTIONS: Investor protection. Regulation of Security market and Stock Exchanges. Regulation of Intermediaries. To Restrict Insider Trading. in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market- related information, maintaining fair dealing, and protecting against fraud. Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. One of the major sources of information on which the SEC relies to bring enforcement action is investors regulates the financial services industry in the UK. We have been given a wide range of rule- making, investigatory and enforcement powers in order to meet our four statutory objectives. In meeting these, we are also obliged to have regard to the Principles of Good Regulation. The FSA was set up by government. The government is responsible for the overall scope of the FSA’s regulatory activities and for its powers. The FSA regulates most financial services markets, exchanges and firms. It sets the standards that they must meet and can take action against firms if they fail to meet the required standards. supervisory authorities, the SESC is expected to play a primary role in maintaining fair, equitable, transparent, and sound markets through exerting its authority of criminal investigations into securities fraud, administrative civil monetary penalties investigations, disclosure document inspections, inspections of securities companies, market surveillance, etc FUNCTIONS: Functions Five Pillars of the SESC Market Surveillance The Market Surveillance Division can require trading information from securities companies, and conducts market oversight. Compliance Inspection MBA 1ST SEMESTER 50
  51. 51. Security Exchange Board Of India (SEBI) GROUP 10. themselves — another reason that educated and careful investors are so critical to the functioning of efficient markets. To help support investor education, the SEC offers the public a wealth of educational information on this Internet website, which also includes the EDGAR database of disclosure documents that public companies are required to file with the Commission. Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self- regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations. In particular, the Chairman of the The Inspection Division inspects whether securities companies observe laws and regulations, and conduct their business in accordance with market rules. Since July 1, 2005 the scope of the SESC's inspection has been expanded to include securities businesses such as the financial solvency inspection, which was conducted by the Inspection Bureau of the FSA. Also, investment trust management companies and investment advisory companies have become subject to the SESC's inspection. Disclosure Document Inspection The Civil Penalties MBA 1ST SEMESTER 51
  52. 52. Security Exchange Board Of India (SEBI) GROUP 10. SEC, together with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the Commodities Futures Trading Commission, serves as a member of the President's Working Group on Financial Markets. Investigation and Disclosure Documents Inspection Division inspects disclosure documents such as financial statements and registration statements, etc. In case false statements are admitted, the SESC recommends that the Prime Minister and the Commissioner of the FSA should order the submission of amended reports of the disclosure documents. Administrative Civil Monetary Penalties Investigation The Civil Penalties Investigation and Disclosure Documents Inspection Division also conducts investigation on the violations such as disclosure of false MBA 1ST SEMESTER 52
  53. 53. Security Exchange Board Of India (SEBI) GROUP 10. financial statements, spreading rumors on stock markets and deceptive means, market manipulation, as well as insider trading. In case these violations are admitted, the SESC recommends that the Prime Minister and the Commissioner of the FSA should order payment of administrative civil monetary penalty. Enforcement- Investigation and Filing Criminal Charges The investigation Division investigates securities crimes including disclosure of false financial statements, spreading rumors on stock markets, compensation of MBA 1ST SEMESTER 53
  54. 54. Security Exchange Board Of India (SEBI) GROUP 10. losses, market manipulation, as well as insider trading. The Division can conduct a compulsory investigation with a warrant issued by the judge. 4. AIMS & OBJECTIVES 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 common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC's actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth. We summarise our Statutory Objectives and Principles of Good Regulation in three Strategic Aims: Promoting efficient, orderly and fair markets; Helping retail consumers achieve a fair deal; and Improving our business capability and effectiveness SESC’s objective is to maintain fair, equitable, transparent, and sound markets through exerting its authority of criminal investigations into securities fraud, administrative civil monetary penalties investigations, disclosure document inspections, inspections of securities companies, market surveillance, etc If we compare SEBI with regulatory bodies of developed countries we can see that SEBI has more power than other regulatory bodies, but here the problem is that there is lot of interference of RBI. SEBI does have decision taking authority but RBI often comes in between Whereas other regulatory bodies are just like watch dogs where they just examine the situation and give the report to the decision taking authority. Since there is no good coordination between SEBI and RBI therefore SEBI is not able to perform up to the mark, where as other countries are very systematic regarding their decisions and laws. MBA 1ST SEMESTER 54
  55. 55. Security Exchange Board Of India (SEBI) GROUP 10. Global market regulators to discuss hedge fund challenges MUMBAI: India will host for the first time a global market regulators' annual conference here next year that will highlight challenges posed to capital markets by fly-by-night hedge funds. The Securities and Exchange Board of India (SEBI) will host the 32nd annual conference of IOSCO (International Organisation of Securities Commissions) from April 9 to 12, next year, a SEBI release said. The opening session for all participants will be on securities exchange evolution and regulation of trans-national securities exchange. There will also be a full session on accounting and auditing with an international perspective. The crucial session will be on hedge funds - new regulatory challenges as it will be the focus of the meet. Hedge funds usually are vicious to stock markets as they are in the form of hot money with large corpus and they enter and exit capital markets by way of participatory notes through foreign institutional investors, making it difficult to trace the source . Capital markets and economic development where new avenues to finance small and medium enterprises will be another major session. IOSCO's membership of over 100-jurisidictions is responsible for regulating over 90 per cent of the world's securities market. SEBI Chairman Mr M Damodaran was elected IOSCO's Emerging Markets Committee (EMC) chairman in June 2006. EMC has more than 70 countries on its list. - PTI To stop terrorism funding Sebi came up with Anit money laundering act. Introduction 1.1 The Guidelines as outlined below provides a general background on the subjects of money laundering and terrorist financing summarizes the main provisions of the applicable anti-money laundering and anti-terrorist financing MBA 1ST SEMESTER 55
  56. 56. Security Exchange Board Of India (SEBI) GROUP 10. legislation in India and provides guidance on the practical implications of the Act. The Guidelines also sets out the steps that a registered intermediary and any of its representatives, should implement to discourage and identify any money laundering or terrorist financing activities. The relevance and usefulness of these Guidelines will be kept under review and it may be necessary to issue amendments from time to time. 1.2 These Guidelines are intended for use primarily by intermediaries registered under Section 12 of the SEBI Act, 1992. While it is recognized that a “onesize- fits-all” approach may not be appropriate for the securities industry in India, each registered intermediary should consider the specific nature of its business, organizational structure, type of customers and transactions, etc. when implementing the suggestedmeasures and procedures to ensure that they are effectively applied. The overriding principle is that they should be able to satisfy themselves that the measures taken by them are adequate, appropriate and follow the spirit of these measures and the requirements as enshrined in the Prevention of Money Laundering Act, 2002. (PMLA) RBI, SEBI and some regulatory act’s. Reserve Bank of India (RBI) RBI was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 having Central Office at Mumbai since inception Originally it was privately owned, since nationalization in 1949 fully owned by the Government of India The Preamble prescribes the objective as: MBA 1ST SEMESTER 56
  57. 57. Security Exchange Board Of India (SEBI) GROUP 10. "…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Main Functions Monetary Authority: • Formulates, implements and monitors the monetary policy. • Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. Regulator and supervisor of the financial system: • Prescribes broad parameters of banking operations within which the country's banking and financial system functions. • Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. Manager of Foreign Exchange • Manages the Foreign Exchange Management Act, 1999. • Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issuer of currency: • Issues and exchanges or destroys currency and coins not fit for circulation. • Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. Developmental role • Performs a wide range of promotional functions to support national objectives. Related Functions • Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. MBA 1ST SEMESTER 57
  58. 58. Security Exchange Board Of India (SEBI) GROUP 10. Banker to banks: maintains banking accounts of all scheduled banks. OFFICES • Has 22 regional offices, most of them in state capitals. Security Exchange Board of India (SEBI) The Securities and Exchange Board of India, which was set up as an Administrative Body in April 1988 was given statutory status on 30.1.1992 by promulgation of SEBI Ordinance, which has since become an Act of Parliament. The Securities and Exchange Board of India Act, 1992. With its over 15 years of existence has made considerable dent in the capital market through its various development and regulation of the capital market. After it became a statutory body, SEBI restructured and rationalised its organization in line with its expanded range and scope of activities. It has divided its activities in to five operational departments, each headed by an executive director. The objective of setting up SEBI is to protect the interest of investors in securities and to promote the development and to regulate the security market. SEBI has mainly three objectives or duties cast upon it by the Act- (a) to protect the interests of investors in securities. (b) to promote the development of securities market. MBA 1ST SEMESTER 58
  59. 59. Security Exchange Board Of India (SEBI) GROUP 10. (c) to regulate the securities market. THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992 The Securities & Exchange Board of India ("SEBI"), which is the apex regulatory body in India for the securities markets, was established under the SEBI Act to protect the interests of investors in securities and to permit the development of, and to regulate, the securities market. The Act is a comprehensive one. While each and every section in the Act is important, the following sections are the most important ones: • Establishment, incorporation and management of SEBI: Chapter II of the Act prescribes detailed rules as to the creation of SEBI, the members of the Board, their qualifications, credentials and term of office. It also prescribes the rules for conducting board meetings and removal of members from office. • The powers and functions of SEBI: Found in Chapter IV, this section defines the role of the Board. It deals with the regulation of the securities market in all its manifestations, and contains wide powers over Companies, Venture Capital Funds, Stock Exchanges and Brokers. • Provisions relating to Collective Investment schemes: The Board has the power to regulate Collective Schemes and Mutual Funds. This means that Collective Schemes and Mutual Funds fall under the purview of SEBI and have to get approval for floating schemes and tapping funds in the market. With such all- encompassing powers, the Board has impact on a broad spectrum of persons including the small investor. • Registration of an intermediary: Stock brokers, Sub-Brokers, Share Transfer Agents, Bankers to an issue, Trustees of Debentures, Registrars to an issue, Merchant Bankers, Underwriters, Portfolio Managers, Investment Advisers and such other intermediaries need permission from SEBI to set up operations. These MBA 1ST SEMESTER 59
  60. 60. Security Exchange Board Of India (SEBI) GROUP 10. are important powers that enables SEBI to ensure that all securities transactions are subject to some measure of regulation by forcing any intermediary to approach the Board for registration. • Penalties: A detailed list of penalties is listed in Chapter IVA to be imposed upon persons who breach the Act or the rules and regulations under the Act. These include - Penalty for failure to furnish information, documents, returns or reports to SEBI - Penalty for failure by a broker or other intermediary to enter into an agreement with his clients - Penalty for failure of a broker or other intermediary to redress investor’s grievances - Penalty for defaults in case of Mutual Funds and Stock Brokers - Penalty for insider trading For insider trading, the penalty is Rs. 5 lakh and for other offences listed above the penalty is imprisonment for one year or a fine or both. • Dispute mechanism: Under the Act, an Appellate Tribunal has been created to hear appeals arising from the decisions of SEBI and also created a post of an adjudicating officer. These provisions create a level of adjudication between the Board and the High Court. An appeal from the Tribunal lies to the High Court. The Tribunal is not bound by the Code of Civil Procedure, but must follow principles of natural justice. A person is allowed legal representation before the Tribunal. THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 The Securities Contracts (Regulation) Act, 1956 ("SCRA") was enacted to prevent undesirable transactions in securities by regulating the business or dealings therein. The SCRA, as originally enacted, prohibited options in securities. However, with effect from February 25,1995, this prohibition has been removed. This has enabled the establishment of a derivatives market in securities. MBA 1ST SEMESTER 60
  61. 61. Security Exchange Board Of India (SEBI) GROUP 10. Among the important clauses of the SCRA are : • Recognition of Stock Exchanges: Broadly covered by Sections 3, 4 and 5 of the SCRA, these provisions detail the procedure for a Stock Exchange to obtain recognition from the Central Government. This enables the Government to review the rules and byelaws of the Exchange, as well as require the Exchange to confirm to certain additional conditions that the Government may impose as a condition for recognition. Section 5 also gives the Government the power to withdraw recognition after giving the Exchange an opportunity to be heard. • Framing of Stock Exchange rules: The Act, in sections 7A – 10, lays down the basic framework under which an Exchange can frame rules and/or byelaws. The Act allows the Central Government to issue a fiat to the Exchange to draft rules for themselves or send across rules for the Exchange. It also allows SEBI to make or amend byelaws of recognised Stock Exchanges. These sections ensure that there is a semblance of Government control over the internal functioning of Stock Exchanges. • Superceding a Stock Exchange: Under Section 11, the Central Government, can supersede the Governing Board of a Stock Exchange and replace them with a different set of persons to look after the Exchange. • Preventing unauthorised Stock Exchanges: This is a crucial part of the Act, enunciated in section 19. It states that anyone wanting to operate a Stock Exchange should confirm to the regulations and requirements of the Central Government and its agencies such as SEBI. • Prohibition of contracts (other than spot delivery contracts) outside a Stock Exchange: This section states that security transactions can be traded only in a Stock Exchange. By this the Central Government maintains a level of control and regulation over all the transactions taking place in an Exchange. As a result all securities trading (other than spot delivery contracts) have to take place through the members of the particular exchange, over which the Government has control. MBA 1ST SEMESTER 61
  62. 62. Security Exchange Board Of India (SEBI) GROUP 10. • Appeal to the Securities Appellate Tribunal against a refusal of a stock exchange to list the securities of a public company: This allows companies which have been refused listing by a stock exchange the facility to appeal to the Securities Appellate Tribunal against the decision of the Stock Exchange. SECURITIES CONTRACTS (REGULATION) RULES, 1957 The Securities Contracts (Regulation) Rules, 1957 ("the SCRR") were framed pursuant to the provisions of the SCRA. The SCRR clarifies some of the provisions of the SCRA. The SCRR lays down details of: • Granting recognition to a Stock Exchange: The Rules specify the contents of an application, the form of the approval to be granted to such application and the documents to be filed along with the application. Further, the Rules also detail the renewal procedure. • Qualifications to be a member of a recognised Stock Exchange: Detailed in Rule 8, these set out the exact eligibility criteria for obtaining the membership of a recognised Stock Exchange. These rules are laid out for both individuals and companies. The criteria that must be fulfilled by members subsequent to their obtaining membership are also laid down. • SEBI nominees for governing bodies of Stock Exchanges: Rule 10 gives SEBI the power to nominate members to the governing body of Stock Exchanges. A maximum of three members can be nominated to the Exchange. These members have the same powers as other members of the governing body. • Accounting procedures: This section lays down rules on the type of books, accounts, their contents and the time period for which they must be maintained. • Requirements for listing securities on a recognised Stock Exchange: Details for listing a security on a recognised Stock Exchange is laid down in Rule 19. They include documentation, undertakings of the company, statements required to MBA 1ST SEMESTER 62

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