The Securities and ExchangeBoard of India (SEBI)
INTRODUCTION SEBI(Securities and Exchange Board of India) was constituted on April 12,1988 as a non-statutory body It is an apex body to develop and regulate the stock market in India SEBI is the regulator for the securities market in India, originally set up by the Government of India in 1988,it acquired statutory form in 1992 with SEBI Act 1992 being passed by the Indian Parliament.
OBJECTIVES To protect the interest of investors so that there is a steady flow of savings in to the capital market. To regulate the securities market Ensure fair practices by the issuers of securities so that they can raise resources at minimum cost. To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional.
FUNCTIONSSection 11 of the SEBI Act , there are mainly two types of functions. They are;1.Regulatory Functions2.Developmental FunctionsRegulatory Functions(a). Regulation of stock exchange and self regulatory organisations.
(b). Registration and regulation of stock brokers,sub-brokers,registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market.(c). Registration and regulation of the working of collective investment schemes including mutual funds.(d). Prohibition of fraudulent and unfair trade practices relating to securities market.(e). Prohibition of insider trading in securities.f). Regulating substantial acquisitions of shares and take over of companies.
Developmental Functions(a). Promoting investor’s education.(b). Training of intermediaries.(c). Conducting research and published information useful to all market participants.d). Promotion of fair practices. Code of conduct for self- regulatory organizations.(e). Promoting self-regulatory organizations.
POWERS SEBI has been vested with the following powers:1.Power to call periodical returns from recognized stock exchange.2.Power to control and regulate stock exchange.3.Power to call any information or explanation from recognized stock exchanges or their members.4. Power to levy fees or other charges for carrying out the purpose of regulation.5. Power to grant registration to market intermediaries.
6.Power to direct enquiries to be made in relation to affairs of stock exchanges or members.7. Power to grant approval to bye-laws of recognized stock exchanges.8. Power to make or amend bye-laws of recognized stock exchanges.9. Power to compel listing of securities by public companies.10. Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act is any state or area to grant licenses to dealers in securities.
ORGANISATION Chapter 2 of the SEBI Act deals with establishment, incorporation, administration and management of the Board of Directors The SEBI Act provides for the establishment of a statutory board consisting of six(6) members. The chairman and two members are to be appointed by the Central Government, one member to be appointed by the Reserve Bank and two members having experience of securities market to be appointed by the Central Govt.
SEBI has divided its activities in to four operational departments, each headed by an Executive Director.1.Primary Market Department: It deals with all policy matters and regulatory issues relating to primary market.2.Issue Management and Intermediaries Departments: This department is concerned with inspection of offer documents and other things like registration, regulation and monitoring of issue related to intermediaries.3.Secondary Market Department: It looks after all the policy and regulatory issues for the secondary market; administration of the major stock exchanges and other matters related to it.4.Institutional Investment Department: It concerned with framing policy for foreign institutional investors.
In addition to this, there are two other departments: They are; Legal Department and Investigation Department, also headed by officials of the rank of Executive Directors. SEBI has two Advisory Committees, one each for primary and secondary markets. They provide advisory inputs in framing policies and regulations. These committees are non-statutory in nature and SEBI is not bound by the committees.
SEBI and CentralGovernment The Central Government has power to issue directions to SEBI Board, supersede the Board, if necessary and to call for returns and reports as and when necessary. The Central Government has also power to give any guideline or to make regulations and rules for SEBI and its operations.
The activities of SEBI are financed by grants from Central Government, in addition to fees, charges etc. collected by SEBI. The fund called SEBI General Fund is set up, to which, all fees, charges and grants are credited. This fund is used to meet the expenses of the Board and to pay salary of staff and members of the body.
SEBI GUIDELINESSEBI has brought out a number of guidelines separately, from time to time, for primary market, secondary market, mutual funds, merchant bankers, foreign institutional investors, investor protection etc.1. Guidelines for Primary Market. (a). New Company: Anew company is one, which has not completed 12 months commercial production and does not have audited results. And the promoters do not have a track record. These companies have to issue shares only at par. (b). New Company set-up by Existing Company: When a new company is being set-up by existing companies with a five year track record of consistent profitability and a contribution of at least 50% in the equity of new company,it can issue its shares at premium.
Conti…………. (c). Private and closely held companies: These having a track record of consistent profitability for at least three years, shall be permitted to price their issues freely. The issue price shall be determined only by the issues in consultation with lead managers ton the issue. (d). Existing Listed companies: It will be allowed to raise fresh capital by freely pricing expanded capital provided the promoter’s contribution is 50%on first Rs.100crores of issue, 40% on next Rs.200 crores, 30% on next Rs 300 crores and 15% on balance issue amount.2. Guidelines for Secondary Market: Stock Exchange(a) Board of Directors of stock exchange has to be reconstituted
so as to include non-members, public representatives, government representative to the extent of 50% of total number of members.(b)Capital adequacy norms have been laid down for members of various stock exchanges depending upon their turnover of trade and other factors.(c). Working hours for all stock exchanges have been fixed uniformly.(d). All the recognized stock exchanges will have to inform about the transaction within 24 hours. Brokers(a). Registration of brokers and sub-brokers is made compulsory.(b). Compulsory audit of broker’s book and filing of audit report with SEBI have been made mandatory.(c). In order to ensure that brokers are professionally qualified and financially solvent, capital adequacy norms for registration of brokers have been evolved.
Conti…….(d). To bring about greater transparency and accountability in the broker-client relationship, SEBI has made it mandatory for brokers to disclose transaction price and brokerage separately in the contract notes issued to client.(e). No broker is allowed to underwrite more than 5% of public issue.
3.Foreign Institutional Investors(FII) (a). Foreign institutional investors have been allowed to invest in all securities traded in primary and secondary markets. (b). There would be no restriction on the volume of investment for the purpose of entry of FIIs. Holding of single FII will not ecxeed the ceiling of 5% of equity capital Tax rate – 10% on large capital gain , 30% on short term capital gains 20 % on dividend
4.Guidelines to issue of Bonus Shares (a).Issue of bonus shares after any public/rights issue is subject to the condition that no bonus shall be made which will dilute the value or rights of holders of debenture, convertible fully or partly. (b). There should be a provision in the Articles of Association of the company for issue of bonus shares.
c). The bonus is made out of free reserves built out of the genuine profits or share premiums collected in cash only. (d). No bonus issue can be made within 12 months of any public issue/rights issue. (e). A company which announces bonus issue after the approval of the Board of Directors must implement the proposals within a period of six months from the date of such proposal and shall not have the option of changing the decision
5.Guidelines for Rights Issue Where composite issues are made by listed companies, they can be issued at different prices. Gaps between the clearance dates of right issues and public issues should not exceed 30 days. If right issues of listed companies exceed Rs.50 lakhs, issue should be managed by an authorized merchant banker.
Underwriting of right issues is not mandatory but as per SEBI Rules right issues can be underwritten. No preferential allotment shall be made along with the right issues. If the company doesn’t receive minimum subscription (90% of the issue amount) within 120 days from the date of opening issue, the entire subscription should be refunded within 128 days with interest @ 15 % p.a. for delay. .
Within 45 days of closure of rights issue, a report in the prescribed form along with compliance report duly signed by the statutory auditor should be forwarded to SEBI.
(c). Companies making rights issues are now permitted to dispatch an abridged letter of offer, containing disclosures as required in the abridged prospectus. However, such companies may provide the detailed letter of offer to any shareholder upon request. (d). Again, companies that have filed a draft offer document with full disclosures can now come out with further capital issues even before the shares pertaining to the document are listed on the brochures.
All listed companies making rights issue shall issue an advertisement in at least two All India newspapers about the dispatch of letters of offer, opening date, closing date etc.
6. Guidelines to Debentures (a).The amount of working capital debenture should not exceed 20% of the gross current asset. (b). The debt equity ratio should not exceed 2:1. (c). The rate of interest can be decided by the company. (d). Normally debentures above seven years cannot be issued. (e). Debentures issued to public have to be secured and registered. (f) credit rating is compulsory for all the debentures except those issued by public sector companies
7.Guidelines for protection of the Debenture Holders (a). Servicing of Debentures (b). Protection of interest of Debenture Holders4 Guidelines for underwriters• Hold certificate of registration granted by SEBI• Certificate is valid for 3 yrs from the date of issue• Total underwriting obligations should not exceed 20 times of his networth• Furnish all statements within 6 months from the end of financial year• Books of account to be maintained for a period of 5yrs
9. Investor protection New issues Prohibition of unfair trade practices Investor education Grievance cell Stock invest10. Book building Usual methods of fixing share price doesn’t take into consideration the investors demands So goes for book building
Steps in book bulding1. Company approaches merchant banker, intimates about the no of shares to be issued and other information on the company2. MB invites its own investors to bid for the share3. Investors are asked to indicate the no of shares4. Allocation is made on the highest bid price5. If company agrees, shares are allocated6. Company can cancel if the price is too low7. Trading commences from the next day
Retail investor Qualified Institutional buyer Red herring prospectus Green shoe option Floor price Cap price Cut off price
11. Buy back of shares Popular in USA & UK Company can buy back its own shares and other securities to the extent of 25 % of the paid up capital and free reserves It is a method of cancellation of the share capital It leads to reduction in the share capital of the company
AdvantagesInvestors Investors can sell back the shares instead of going through secondary market Increase EPSCompanies offers flexibility to the company to reorganise the capital structure Helps to eliminate discontended share holders
SEBI Amendment bill ( 2002) More powers Fine of 25 crores for insider trading Suspend governors of SE Power to appoint investigating agency