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SEBI's Role In Capital Market


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The report encapsulates the study of a proper understanding of SEBI and its regulations which are actually practiced in the market. Along with a thorough study of the basic concepts of SEBI and its policies with respect to the Capital Markets, the report also enlightens on a few cases which made a considerable impact on the governance of SEBI.

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SEBI's Role In Capital Market

  1. 1. THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT PUNE A PROJECT REPORT ON Basic Financial Management: “ SEBI’s Role In the Capital Market”A Report submitted in partial fulfillment of the requirement forthe award of the degree of Master of Business Administration. Under the Esteemed Guidance of Dr. Vivek Divekar Faculty IIPM, PUNE Project Analyzed & Documented By • DixitaPorwal, PGP/FW/10-12/ISBE-A • Pratik Gandhi, UGP/FW/09-12/IIPM • Rajwin Patel, UGP/FW/09-12/ISBE • Sagar A. Agrawal, UGP/FW/09-12/IIPM
  2. 2. SEBI’s  Role  in  Capital  Market       SEBI’s Role in Capital Market    
  3. 3. SEBI’s  Role  in  Capital  Market       AcknowledgementWe heartily thank our Project in-charge, Prof. Vivek Divekar, Faculty IIPM,Pune. Whose encouragement; guidance and support from the initial to the finallevel enabled me to develop an understanding of the subject. We are grateful forSir’s contribution towards the execution of our project.Lastly, we offer our regards and blessings to all of those who supported us in anyrespect during the completion of the Project.    
  4. 4. SEBI’s  Role  in  Capital  Market         EXECUTIVE SUMMARY    The report encapsulates the study of a proper understanding of SEBI and itsregulations which are actually practiced in the market. Along with a thoroughstudy of the basic concepts of SEBI and its policies with respect to the CapitalMarkets, the report also enlightens on a few cases which made a considerableimpact on the governance of SEBI.        
  5. 5. SEBI’s  Role  in  Capital  Market       INDEXSr.NO PARTICULARS PAGE-NO 1 Objective & Scope of the Project 6 2 Introduction – to the SEBI 7 3 Establishment of SEBI 9 4 Board Management 12 5 Functions & Powers of SEBI 14 6 Introduction – To the Capital Market 17 • Capital Market In INDIA • Importance of Capital Market 7 Role of SEBI in Capital Market 21 8 Primary Market 24 • SEBI & Primary Market • Role of SEBI with respect to public issues • Different kinds of Issues 9 Secondary Market 31 10 SEBI & Central Government. 34 11 SEBI & FII 35    
  6. 6. SEBI’s  Role  in  Capital  Market       12 Amendments 37 13 Consent Order 41 14 Advantages & Limitations of SEBI 44 15 The Story of Two Scams 45 16 Regulation – Criticism 47 17 Recommendation 51 18 Conclusion 54 19 Bibliography 56        
  7. 7. SEBI’s  Role  in  Capital  Market         OBJECTIVE AND SCOPE OF PROJECT    OBJECTIVEThis study was mainly planned to evaluate the performance SEBI, relating tosupervision of securities market of various intermediaries registered with SEBI.,and to know what kind of Investor Protection measures taken by SEBI for thebenefit/to safeguard the interest of investors in India since 1992.SCOPE OF THE PROJECT • To know the investor protection measures taken by SEBI since its inception; • To know whether the SEBI has been acting as independent organization to regulate the securities markets properly or not; • To know the powers and functions implementing properly or not by SEBI; • Finally to give findings and suggestions towards SEBI relating to its rolein IndianCapital Markets.    
  8. 8. SEBI’s  Role  in  Capital  Market       INTRODUCTION    The SEBI, that is, the Securities and the Exchange Board of India, is the nationalregulatory body for the securities market, set up under the securities and ExchangeBoard of India act, 1992, to “protect the interest of investors in securities and topromote the development of, and to regulate the securities market and for mattersconnected therewith and incidental too.” SEBI has its head office in Mumbai and it has now set up regional offices inthe metropolitan cities of Kolkata, Delhi, and Chennai. The Board of SEBIcomprises a Chairman, two members from the central government representing theministries of finance and law, one member from the Reserve Bank of India and twoother members appointed by the central government. As per the SEBI act, 1992, the power and functions of the Board encompassthe regulation of Stock Exchanges and other securities markets; registration andregulation of the working stock brokers, sub-brokers, bankers to an issue (a publicoffer of capital), trustees of trust deeds, registrars to an issues, merchant bankers,under writers, portfolio managers, investment advisors and such otherintermediaries who may be associated with the stock market in any way;registration and regulations of mutual funds; promotion and regulation of self-regulatory organizations; prohibiting Fraudulent and unfair trade practices andinsider trading in securities markets; regulating substantial acquisition of sharesand takeover of companies; calling for information from, undertaking inspection,    
  9. 9. SEBI’s  Role  in  Capital  Market      conducting inquiries and audits of stock exchanges, intermediaries and self-regulatory organizations of the securities market; performing such functions andexercising such powers as contained in the provisions of the Capital Issues(Control) Act,1947 and the Securities Contracts (Regulation) Act, 1956, levyingvarious fees and other charges, conducting necessary research for above purposesand performing such other functions as may be prescribes from time to time. SEBI as the watchdog of the industry has an important and crucial role in themarket in ensuring that the market participants perform their duties in accordancewith the regulatory norms. The Stock Exchange as a responsible Self RegulatoryOrganization (SRO) functions to regulate the market and its prices as per theprevalent regulations. SEBI and the Exchange play complimentary roles toenhance the investor protection and the overall quality of the market.SECURITIES AND EXCHANGE BOARD OF INDIA: – SEBI:-What does Securities and Exchange Board of India - SEBI Mean?The regulatory body for the investment market in India.The purpose of this boardis to maintain stable and efficient markets by creating and enforcing regulations inthe marketplace.Investopedia explains Securities and Exchange Board of India - SEBIThe Securities and Exchange Board of India is similar to the U.S. SEC. The SEBIis relatively new (1992) but is a vital component in improving the quality of thefinancial markets in India, both by attracting foreign investors and protectingIndian investors    
  10. 10. SEBI’s  Role  in  Capital  Market       ESTABLISHMENT OF SEBIThe Securities and Exchange Board of India (SEBI) was established in 1988. It gota legal status in 1992. SEBI was primarily set up to regulate the activities of themerchant banks, to control the operations of mutual funds, to work as a promoterof the stock exchange activities and to act as a regulatory authority of new issueactivities of companies. The SEBI was set up with the fundamental objective, "toprotect the interest of investors in securities market and for matters connectedtherewith or incidental thereto."With the announcement of their forms package in1991, the volume of business inboth the primary and secondary segment of the capital market has been increasedenormously till now. A multi-crore securities scam rocked the Indian financialsystem in 1992 (Harshad Mehta scam). The then existing regulatory frameworkwas found to be fragmented and inadequate and hence, a need for an autonomous,statutory, and integrated organization to ensure the smooth functioning of capitalmarket was felt. To fulfill this need, the Securities and Exchange Board of India(S.E.B.I), which was already inexistence since April 1988, was conferredstatutory powers to regulate the capital market.The SEBI got legal teeth through an ordinance issued on 30 January 1992. Theordinance conferred wide ranging powers on the SEBI, including the authority toprohibit insider trading‘and regulate substantial acquisition of shares ‘and takeoverof businesses. The function of market development includes containing risk; boardbasing, maintaining market integrity and promoting long-term investment. TheSEBIAct,1992 which establishes the SEBI with four-fold objectives of protectionof the interests of investors insecurities, development of the securities market,regulation of the securities market and matters connected there with and incidental    
  11. 11. SEBI’s  Role  in  Capital  Market      thereto.The Securities and Exchange Board of India (SEBI) regulate the capital market,i.e., the market for equity and debt securities. The SEBI has full autonomy andauthority to regulate and develop the capital market. The government has framedrules under the securities contracts (regulation) Act (SCRA), the SEBI Act and theDepositories Act.The SEBI has framed regulations under the SEBI Act and the Depositories Act forregistration and regulation of all market intermediaries, for prevention of unfairtrade practices, and insider trading. As everyone could know that these i.e. theGovernment and the SEBI issue notifications, guidelines and circulars which needto be complied with by market participants. All the rules and regulations areadministered by the SEBI.    
  12. 12. SEBI’s  Role  in  Capital  Market       MISSION OF SEBISecurities & Exchange Boardof India (SEBI) formed under the SEBI Act, 1992with the prime objective of – Protecting the interests of investors in securities, – Promoting the development of, and – Regulating, the securities market and for matters connected therewith or incidental thereto.’Focus being the greater investor protection, SEBI has become a vigilantwatchdog PREAMBLE The Preamble of the Securities and Exchange Board of India describes thebasic functions of the Securities and Exchange Board of India as ‘…to protect theinterests of investors in securities and to promote the development of, and toregulate the securities market and for matters connected therewith or incidentalthereto”    
  13. 13. SEBI’s  Role  in  Capital  Market         BOARD MANAGEMENT  (1) The Board shall consist of the following members, namely: -(a) A Chairman;(b) Two members from amongst the officials of the [Ministry] of the CentralGovernment dealing with Finance [and administration of the Companies Act,1956(1 of 1956)];(c) One member from amongst the officials of [the Reserve Bank]; [(d) five othermembers of whom at least three shall be the whole-time members] To be appointedby the central Government. (2) The general superintendence, direction and management of the affairs of theBoard shall vest in a Board of members, which may exercise all powers and do allacts and things which may be exercised or done by the Board. (3) Save as otherwise determined by regulations, the Chairman shall also havepowers of general superintendence and direction of the affairs of the Board andmay also exercise all powers and do all acts and things which may be exercised ordone by that Board. (4) The Chairman and members referred to in clauses (a) and (d) of sub-section(1) shall be appointed by the Central Government and the members referred to inclauses (b) and (c) of that sub-section shall be nominated by the CentralGovernment and the Reserve Bank] respectively. (5) The Chairman and the other members referred to in clauses (a) and (d) ofsub-section (1) shall be persons of ability, integrity and standing who have showncapacity in dealing with problems relating to securities market or have specialknowledge or experience of law, finance, economics, accountancy, administrationor in any other discipline which, in the opinion of the Central Government, shall beuseful to the Board.    
  14. 14. SEBI’s  Role  in  Capital  Market      MEMBERS OF BOARD: As on March 21, 2011(Source: SEBI Annual Report 11-12) Name Designation As per CHAIRMAN (S.4(1)(a) of theShri. U.K Sinha Chairman SEBI SEBI Act, 1992) Members nominated underDr.Thomas Mathew Joint Secretary, Ministry of Finance Section 4(1)(b) of the SEBI Act, 1992 (15 of 1992) Members nominated under Secretary, Ministry of CorporateShri.NaveedMasood Section 4(1)(b) of the SEBI Act, Affairs 1992 (15 of 1992) Members appointed under SectionT. V. MOHANDAS Director Infosys Technologies Limited 4(1)(d) of the SEBI Act, 1992 (15PAI Bangalore of 1992) Members appointed under SectionDr. K.M. Abraham Whole Time Member, SEBI 4(1)(d) of the SEBI Act, 1992 (15 of 1992) Members appointed under SectionPrashant Saran Whole Time Member, SEBI 4(1)(d) of the SEBI Act, 1992 (15 of 1992) Member (S.4(1)(d) of the SEBIM .S .SAHOO Whole Time Member, SEBI Act, 1992) Retd. Principal Secretary (Industry) Members appointed under SectionV .K. JAIRATH Government of Maharashtra 4(1)(d) of the SEBI Act, 1992 (15 Mumbai of 1992) Member nominated under SectionANAND SINHA Deputy Governor 4(1)(c) of the SEBI Act, 1992 (15 Reserve Bank of India of 1992)    
  15. 15. SEBI’s  Role  in  Capital  Market       FUNCTIONS AND POWERS OF SEBISection 11 of the Act Chapter IV highlights the Powers and Functions of SEBIFUNCTIONS OF SEBI: -The SEBI Act, 1992 has entrusted with two functions, they are • Regulatory functions And • Developmental functions A. Regulation Of Business In The Stock Exchanges B. Registration and Regulation Of The Working Of Intermediaries C. Registration and Regulation Of Mutual Funds, Venture Capital Funds & Collective Investment Schemes D. Promoting & regulating self regulatory organizations E. Prohibiting fraudulent and unfair trade practices in the securities market. F. Prohibition of insider trading G. Investor education and the training of intermediaries H. Inspection and inquiries I. Regulating substantial acquisition of shares and take-overs J. Performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 as may be delegated to it by The Central Government; K. Levying fees or other charges for carrying out the purposes of this section L. Conducting research for the above purposes    
  16. 16. SEBI’s  Role  in  Capital  Market       DEVELOPMENTAL FUNCTIONS A. Promoting investor’s education B. Training of intermediaries C. Conducting research and publishing information useful to all market participants. D. Promotion of fair practices E. Promotion of self regulatory organizations POWERS OF SEBI A. Power to call periodical returns from recognized stock exchanges. B. Power to compel listing of securities by public companies. C. Power to levy fees or other charges for carrying out the purposes of regulation. D. Power to call information or explanation from recognized stock exchanges or their members. E. Power to grant approval to byelaws of recognized stock exchanges. F. Power to control and regulate stock exchanges. G. Power to direct enquiries to be made in relation to affairs of stock exchanges or their members.    
  17. 17. SEBI’s  Role  in  Capital  Market       H. Power to make or amend byelaws of recognized stock exchanges. I. Power to grant registration to market intermediaries. J. Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act 1956, in any State or area, to grant licenses to dealers in securities.    
  18. 18. SEBI’s  Role  in  Capital  Market       CAPITAL MARKET: -The capital market is a market for long–term funds both equity and debt-and fundsraised within and outside of the country. The primary market refers to the long–term flow of funds from the surplus sector to the government and corporate sector(through primary issues) and to banks and non-banks financial intermediaries(through secondary issues). A primary issue of the corporate sector leads to capitalinformation (creation of net fixed assets and incremental change in inventories).The secondary market is a market for outstanding securities. Unlike primary issuesin the primary market which result in capital information, the secondarymarket facilitates only liquidity and marketability of outstanding debt andequity instruments.    
  19. 19. SEBI’s  Role  in  Capital  Market       HISTORYThe history of the capital market in India dates back to the 18th century when EastIndia company securities were traded in the country. It has been a long journey forthe Indian capital market. Now the capital market is organized, fairly integrated,mature, more global and modernized. The Indian equity market is one of the bestin the world in terms of technology as well as value- cum-volume of business. On31stAugust, 2010 our Indian equity stocks total market capitalization value wasaround Rs.70, 00,000 crores. CAPITAL MARKET IN INDIAAfter the securities are issued in the primary market, they are traded in thesecondary market by the investors. The stock exchanges along with a host of otherintermediaries provide the necessary platform for trading in secondary market andalso for clearing and settlement. The securities are traded, cleared and settledwithin the regulatory framework prescribed by the Exchanges and the SEBI. Tillrecently, it was mandatory for the companies to list their securities on the regionalstock exchange nearest to their registered office, in order to provide an opportunityto investors to invest/trade in the securities of local companies. However,following the withdrawal of this restriction, the companies have an option tochoose from any one of the existing stock exchanges in India to list their securities.Due to the earlier regulation requiring companies to get listed first at the regionalstock exchange, there are in all 23 exchanges operating today in the country.    
  20. 20. SEBI’s  Role  in  Capital  Market      With the increased application of information technology, the trading platforms ofall the stock exchanges are accessible from anywhere in the country through theirtrading terminals.However, the trading platform of NSE is also accessible through Internet andmobile devices. In a geographically widespread country like India, this hassignificantly expanded the reach of the exchanges to the homes of ordinaryinvestors and assuaged the aspirations of people to have exchanges in theirvicinity. As a result of the reforms/initiatives taken by the Government and theRegulators, the market microstructure has been refined and modernized. Theinvestment choices for the investors have also broadened.The securities market moved from T+3 settlement periods to T+2 rollingsettlement with effect from April 1, 2003. Further, straight through processing hasbeen made mandatory for all institutional trades executed on the stock exchange.RBI to settle inter-bank transactions online at real time mode has also introducedreal time gross settlement. These developments in the securities market providethe necessary impetus for growth and development, and thereby strengthen theemerging market economy in India.    
  21. 21. SEBI’s  Role  in  Capital  Market       IMPORTANCE OF CAPITAL MARKET: -The capital market serves a very useful purpose by pooling the capital resources ofthe country and making them available to the enterprising investors well developedcapital markets augment resources by attracting and lending funds on the globalscale.A developed capital market can solve this problem of paucity of funds. For anorganized capital market can mobilize and pool together even the small andscattered savings and augment the availability of investible funds. While the rapidgrowth of capital markets, the growth of joint stock business has in its turnencouraged the development of capital markets.A developed capital market provides a number of profitable investmentopportunities for small savers.    
  22. 22. SEBI’s  Role  in  Capital  Market       ROLE OF SEBI IN THE CAPITAL MARKET: 1. Power to make rules for controlling stock exchange: - SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 2. To provide license to dealers and brokers: - SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers. One of main example is UPIL’S case SEBI said, " It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI." 3. To Stop fraud in Capital Market: - SEBI has many powers for stopping fraud in capital market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. It can impose the penalties on capital market intermediaries if they involve in insider trading. 4. To Control the Merger, Acquisition and Takeover the companies: - Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. 5. To audit the performance of stock market: - SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges.    
  23. 23. SEBI’s  Role  in  Capital  Market       6. To make new rules on carry - forward transactions: - Share trading transactions carry forward can not exceed 25% of brokers total transactions.90 day limit for carry forward. 7. To create relationship with ICAI:- ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not. 8. Introduction of derivative contracts on Volatility Index: - For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that; – The underlying Volatility Index has a track record of at least one year. b. The Exchange has in place the appropriate risk management framework for such derivative contracts. – Before introduction of such contracts, the Stock Exchanges shall submit the following: a. Contract specifications b. Position and Exercise Limits c. Margins d. The economic purpose it is intended to serve e. Likely contribution to market development    
  24. 24. SEBI’s  Role  in  Capital  Market       f. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading. g. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and h. Details of settlement procedures & systems i. Details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value of the underlying. 9. To Require report of Portfolio Management Activities: - SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. 10. To educate the investors: - Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI imposed workshop. If you are investor, you can get education through SEBI leaders by getting update information on this page.    
  25. 25. SEBI’s  Role  in  Capital  Market       PRIMARY MARKET: -INTRODUCTION: -Primary market provides opportunity to issuers of securities, Government as wellas corporate, to raise resources to meet their requirements of investment and/ordischarge some obligation. The issuers create and issue fresh securities inexchange of funds through public issues and/or as private placement. They mayissue the securities at face value, or at a discount/premium and these securities maytake a variety of forms such as equity, debt or some hybrid instrument. They mayissue the securities in domestic market and/or international market throughADR/GDR/ECB route. SEBI & PRIMARY MARKET: -  Measures undertaken by SEBI: - A. Entry norms B. Promoters’ contribution C. Disclosure D. Book building E. Allocation of shares F. Market intermediaries    
  26. 26. SEBI’s  Role  in  Capital  Market      – Entry norms: - 1. Track record of dividend payment for minimum 3 yrs preceding the issue. 2. Already listed companies - when post-issue net worth becomes more than 5 times the pre-issue networth. 3. For Manufacturing company not having such track record – appraise project by a public financial institution or a scheduled commercial bank. 4. For corporate body – 5 public shareholders for every Rs.1 lakh of the net capital offer made to the public 5. Banks – 2 yrs of profitability for issues above par.Offer documents to companies.– Promoters’ contribution: - 1. Should not be less than 20% of the issued capital. 2. Receiving of promoters’ contribution. 3. Lock in period as per SEBI. 4. Cases of non-under written public issues.– Disclosure: - 1. Draft prospectus 2. Un audited financial results    
  27. 27. SEBI’s  Role  in  Capital  Market      – Book building: - 1. SEBI recommends two-tier under writing system. 2. One of the modes of public issue thru prospectus. 3. Role of syndicate members and book runners. 4. Minimum 30 centers.– Allocation of shares:- 1. Minimum application of shares. 2. Reservation for small investors. 3. Allotment of securities.– Market intermediaries:- 1. Licensing of merchant bankers 2. Licensing of underwriters, registrars, transfer agents, etc., 3. Merchant bankers net worth – Rs.5 crores 4. Segregate fund based from fee based activities.    
  28. 28. SEBI’s  Role  in  Capital  Market       Role of SEBI with respect to Public IssuesThe Securities and Exchange Board of India (SEBI) govern the rules, regulationsand procedures relating to public issues in India.Any company going public in India should get approval from SEBI before openingits IPO. Issuer companys lead managers submit the public issue prospectus toSEBI, provide clarification, make changes to the prospectus suggested by SEBIand get it approve.In simple words SEBI validate the IPO prospectus and make sure all thedeclaration made in this document are correct and also make sure that documenthas enough information to help investors to take decision before applying shares inan IPO.    
  29. 29. SEBI’s  Role  in  Capital  Market       What are the different kinds of Issues?Primarily issues can be classified as a Public, Rights or preferential issues (also known as privateplacements). When public and rights issues involve a detailed procedure, private placements orpreferential issues are relatively simpler. The classification of issues is illustrated below; Issues   Public                      Private  Placement   Rights   Private  Placement       Preferential  Issue                                                                 (for  unlisted   (for  listed   Qualified  Institutions   companies)   companies)   Placement    (for  listed   companies)   Initial  Public  Offering   Further  Public  Offering   (for  unlisted  companies)   (For  listed  companies)     Fresh  Issues   Offer  for  Sale   Fresh  Issue   Offer  for  sale  Public issues can be further classified into initial Public offerings and furtherpublic offering. In a public offering, the issuer makes an offer for new investors toenter its shareholding family. The issuer company makes detailed disclosures as    
  30. 30. SEBI’s  Role  in  Capital  Market      per the DIP guidelines in its offer document and offers it for subscription. Thesignificant features are illustrated below:Initial Public Offering (IPO)is when an unlisted company makes either a freshissue of securities or an offer for sale of its existing securities or both for the firsttime to the public. This paves way for the listing and trading of the issuer’ssecurities.A Further Public Offering (FPO)is when already listed company makes either afresh issue of securities to the public or an offer for sale to the public, though anoffer document. An offer for sale is such scenario is allowed only if it is made tosatisfy listing or continuous listing obligations.Rights Issue (RI)is when a listed company which proposes to issue fresh securitiesto its existing shareholders as on a record date. The rights are normally offered in aparticular ratio to the number of securities held prior to the issue. This route is bestsuited for the companies who would like to raise capital without diluting stake ofits existing shareholder unless they do not intend to subscribe to their entitlements.A private placement is an issue of shares or of convertible securities by acompany to a selected group of persons under section 81 of the companies Act,1956, which is neither a right issue nor a public issue. This is a faster way for acompany to raise equity capital.A private placement of share or of convertible securities by a listed company isgenerally known by name of preferential allotment. A listed company going forpreferential allotment has to comply with the requirements contained in ChapterXlll of SEBI (DIP) Guidelines pertaining to preferential allotment in SEBI (DIP)guidelines which inter-alia include pricing disclosures in notice etc, in addition tothe requirements specified in the Companies Act.    
  31. 31. SEBI’s  Role  in  Capital  Market      A Qualified Institutions Placementis a private placement of equity shares orsecurities convertible in to equity shares by listed company to qualified institutionsBuyers only in terms of provision of chapter XlllA of SEBI (DIP) guidelines. TheChapter contains provision relating to pricing, disclosures, currency of instrumentsetc.    
  32. 32. SEBI’s  Role  in  Capital  Market       SECONDARY MARKETINTRODUCTIONSecondary market is the place for sale and purchase of existing securities. Itenables an investor to adjust his holdings of securities in response to changes in hisassessment about risk and return. It also enables him to sell securities for cash tomeet his liquidity needs. It essentially comprises of the stock exchanges, whichprovide platform for trading of securities and a host of intermediaries who assist intrading of securities and clearing and settlement of trades. The securities aretraded, cleared and settled as per prescribed regulatory framework under thesupervision of the Exchanges and oversight of SEBI.LISTING OF SECURITIES: -Listing means admission of securities of an issuer to trading privileges on a stockexchange through a formal agreement. The prime objective of admission todealings on the Exchange is to provide liquidity and marketability to securities, asalso to provide a mechanism for effective management of trading.    
  33. 33. SEBI’s  Role  in  Capital  Market         SEBI & SECONDARY MARKET:  Reforms in the secondary market: - A. Governing board B. Infrastructure C. Settlement & clearing D. Debt market E. Price stabilization F. Delisting G. Brokers H. Insider Trading– Governing board 1. Brokers and non-brokers representation made 50:50 2. 60% of brokers in arbitration, disciplinary & default committees 3. For trading members 40% representation– Infrastructure 1. On-line screen based trading terminals– Settlement & clearing 1. Weekly settlements 2. Auctions for non-delivered shares within 80 days of settlement 3. Advice to set up clearing houses, clearing corporation or settlement guarantee fund. 4. Warehousing facilities permitted by SEBI.    
  34. 34. SEBI’s  Role  in  Capital  Market      – Debt market segment 1. Regulates thru SEBI (depository & participants) regulation Act 1996. 2. Listing of debt instruments 3. Investment. Range for FIIs 4. Dual rating for above Rs.500 million– Price stabilization 1. Division to monitor the unusual movements in prices. 2. Monitor prices of newly listed scrip from the first day of trading. 3. Circuit breaker system and other monitoring restrictions could be applied 4. Imposing of special margins of 25% on purchase in addition to regular margin. 5. Price filters 6. Price bands– Delisting 1. On voluntary de-listing from regional stock exchanges – buy offer to all share holders 2. Promoters to buy or arrange buyers for the securities 3. 3 yrs listing fees from companies and be kept in Escrow A/c with the stock exchange.    
  35. 35. SEBI’s  Role  in  Capital  Market       SEBI & CENTRAL GOVT– 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.    
  36. 36. SEBI’s  Role  in  Capital  Market       SEBI and FIIs– Union Govt. allowed- 1. Foreign Institutional Investors (FIIs) 2. Non-Resident Indians (NRIs), and 3. Persons of Indian Origin (PIOs)To enter into both Primary & Secondary market in India through the portfolioinvestment scheme (PIS), under liberalized policy regime. Under this scheme,FIIs/NRIs can acquire shares/debentures of Indian companies through the stockexchanges in India.– Implications: - 1. Affects the sensex movements 2. Determines the market indications 3. Guidelines announced in 1992 4. In 1993, 12 FIIs got registered 5. At the end of 1996-97, 439 FIIs were registered 6. Can trade in securities of listed companies including OTCEI.– The ceiling for overall investment for FIIs:- 1. 24% of the paid up capital of the Indian company 2. 10% for NRIs/PIOs. 3. 20% of the paid up capital in the case of public sector banks, including the State Bank of India.    
  37. 37. SEBI’s  Role  in  Capital  Market      – Modifications in ceilings:- 1. The ceiling of 24 % for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. 2. The ceiling of 10 % for NRIs/PIOs can be raised to 24% subject to the approval of the general body of the company passing a resolution to that effect.– Monitoring Foreign Investments: - 1. The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. 2. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings.– SEBI guidelines for FIIs: - 1. According to the 1995 regulations, FIIs should hold certificate granted by SEBI to trade in Indian stock market.To grant the certificate the applicant should – a) Have track record, professional & competence record, financial soundness general reputation of fairness and integrity. b) Regulated by an appropriate foreign regulatory authority. c) Permission under the provisions of FERA Act 1973.(FEMA - 2006)    
  38. 38. SEBI’s  Role  in  Capital  Market       Valid up to 5 yrs.    
  39. 39. SEBI’s  Role  in  Capital  Market       AMENDMENTS 1. Amendments to the SEBI: - (Issue of capital and disclosure requirement) Regulation, 2009 SEBI (Issue of capital and disclosure requirement) Regulation, 2009 were amended on April 13, 2010. The important changes made by this amendment are as follows: a. Fees for filing draft letter of offer in right issues have been rationalized. b. All types of investors including qualified to bring in 100 percent of the application money as margin along with the application for securities in public c. Reservation for employees in public/rights issues have been made available to employee of subsidiaries and material associates of the issuer whose financial statements is consolidated with issuer’s financial statements. Also, as regard to reservation made by issuer on competitive basis, the same can be done in the case of a new issuer, to persons who are in the permanent and full time employment of the promoting companies excluding the promoters and immediate relatives of the promoter of such companies.    
  40. 40. SEBI’s  Role  in  Capital  Market       2. Amendments to the SEBI: - (Issue of Capital and Disclosure Requirement) Regulations, 2009 SEBI(Issue of Capital and Disclosure Requirement) Regulations 2009 were amended on November 12, 2010. The important changes made by this amendment are as follows: a. A director shall disclose in the offer document the details of directorship if any, of the companies whose shares have been/were suspended from trading, for more than three months by a stock exchange in the five years period preceding the date of filing the draft offer document. Such disclosure is also to be made by the director of the companies whose shares were delisted when he was director of such delisted companies. b. Insurance funds set up by the department of post life insurance fund and rural postal life insurance fund are accorded status of a qualified institutions buyer (QIB). c. The need to make public announcement by issuers on the same day or the next day after filing draft offer document with SEBI. d. In case or preferential issues where any promoter or any promoter group entity has previously subscribed to the warrants of the company but failed to excise the warrants, the promoters and promoter group shall be ineligible for issue of equity shares or convertible securities or warrants for a period of one year from the date of expiry of the currency/cancellation of the warrants. e. Merchant bankers are to submit a compliance certificate as to whether the content of the new reports of the new reportthat appears after filing of draft offer document.    
  41. 41. SEBI’s  Role  in  Capital  Market       f. Only one payment option to be given to investors i.e. either part payment on application with balance money to be paid in calls, or full payment on application. g. Limit on retail individual investor application increased from 1,00,000/- to 2,00,000/- across all public issues. h. Companies are mandated to have a preannounced fixed pay date for the payment of dividends and for credit of bonus shares. 3. Amendments to the SEBI (Merchant Bankers) Regulations, 1992 By SEBI(Issue of capital and disclosure requirement) (Third Amendments) Regulations, 2010 Chapter XA was inserted which prescribed procedures for issuance of specified securities by small and medium enterprise (SME’s). By this amendment, merchant bankers were enabling to market making in accordance with Chapter XA of SEBI (Issue of capital and disclosure requirements) regulations, 2009. Further, the merchant banker, alone or jointly associated with the issue, is required to underwrite at least 15 percent of the issue size.    
  42. 42. SEBI’s  Role  in  Capital  Market       CONSENT ORDER: -SEBI has brought the concept of consent order/compounding of offence into forcefor resolving the disputes in smoother manner through negotiation and discussionsinstead of lengthy litigations.Consent order means an order settling administrative or civil proceedings betweenthe regulatory and a person (party) who may prima facie be found to have violatedsecurities laws. Here, administrations/civil enforcement actions include issuingdirections, suspensions or cancellations of certificate of registration, imposition ofmonetary penalty, pursuing suits and appeals in court and securities appellatetribunal (SAT). It may settle all issues or claims are being reserved. Consent orderprovides flexibility of wider array of enforcement and remedial actions, which willachieve the twin goals of an appropriate sanction, remedy and deterrence withoutresorting to litigation, length proceedings and consequent delays.Compounding of offence can take place after filing criminal complaint by SEBI.Compounding is a process whereby an accused pays compounding charges in lieuof undergoing consequences of prosecution. Prosecution includes filing of criminalcomplaints before various criminal courts by SEBI for violation of provision ofsecurity laws, which may lead to imprisonment and/or fine. Compounding ofoffence allows the accused to avoid a lengthy process of criminal prosecution,which would save cost, time, mental agony, etc in return for payment ofcompounding charges    
  43. 43. SEBI’s  Role  in  Capital  Market       Case study:Dr. WELLMAN’S HOMOEOPATHIC LABORATORY LIMITED(CONSENT APPLICATION NO. 2144/2010)1.Dr. Wellman’s Homoeopathic Laboratory Limited (hereinafter referred toas ‘the applicant’) having its registered office at A - 23, Mandakini Enclave,Alaknanda G K-II, New Delhi – 110019 voluntarily filed an application forconsent, vide letter dated October 05, 2010 in terms of the SEBI CircularNo. EFD/ED/Cir-1/2007 dated April 20, 2007, proposing the settlement, through aconsent order, for delayed compliance of the provisions of regulation 13(6) of theSecurities and Exchange Board of India (Prohibition of Insider Trading)Regulations, 1992 (hereinafter referred to as “the Regulations”) for the years 1996,2009 and 2010.2. The applicant, has submitted that for the years 1996, 1997, 2009 and2010, its promoters had made the requisite disclosures to it, in pursuanceregulation 13 of the Regulations. However, for the aforesaid years, the applicantmade the requisite disclosures to the stock exchanges under regulation 13(6) of theRegulations with delays ranging from 182 days to5217 days.3. The applicant, vide letter dated December 22, 2010 has proposed the revisedconsent terms to settle the said delay in compliance on payment of `3,60,000/-(Rupees Three Lakh and Sixty Thousand Only) towards settlement charges.4. The High Powered Advisory Committee, constituted by SEBI, considered theconsent terms proposed by the applicant, vide letter dated December22, 2010 and recommended the case for settlement on payment of 3,60,000/-(Rupees Three Lakh and Sixty Thousand Only) towards settlement charges. SEBIaccepted the said recommendations of the Committee and communicated the sameto the applicant, vide letter dated    
  44. 44. SEBI’s  Role  in  Capital  Market      March 13, 2012.5. Accordingly, the applicant, vide demand draft no. “126082” datedMarch 19, 2012 drawn on Axis Bank Ltd., NOIDA and payable at Mumbai,remitted a sum of `3,60,000/- (Rupees Three Lakh and Sixty Thousand Only)towards the settlement charges.6. In view of the above, the said delay in compliance of the provisions ofregulation 13(6) of the Regulations, as enumerated in the aforementioned consentapplication, is settled as per above consent terms and theSecurities and Exchange Board of India shall not initiate any enforcement actionagainst the applicant for the said delay in compliance.7. This order is without prejudice to the right of the Securities and ExchangeBoard of India to initiate enforcement actions against the applicant for the abovementioned delay in compliance, if: a. any representation made by the applicant inthis consent proceeding is subsequently discovered to be untrue; or b. the applicantbreaches any of the consent terms or undertakings filed in this consent proceeding.8. This consent order is passed on this the 17th day of May, 2012 and shall comeinto force with immediate effect.PRASHANT SARANWHOLE TIME MEMBERRAJEEV KUMAR AGARWALWHOLE TIME MEMBER    
  45. 45. SEBI’s  Role  in  Capital  Market       ADVANTAGES OF SEBI A. It promotes healthy and orderly growth of securities market and protects investors. B. It helps in maintaining stedy flow of savings into capital market. C. It helps in regulating security market and ensures fair practice by issuers to help them rais resources at minimum cost. D. It promotes efficient services by brokers, merchant bankers and other intermediaries to make them professional and competitive. E. It helps and contributes in promoting investor education, training of intermediaries and it conducts research and provide information to market participants. F. SEBI operated to develop the capital market. LIMITATIONS OF SEBI A. No dent on price manipulation. B. Poor rate of conviction and very few cases of exemplary penal action. C. No due process for framing/changing regulations. D. Waking up to trouble spots too late in the day. E. Turning a blind eye in bullish market. F. Implementation of existing disclosure norms inadequate. G. No warning on US-64, MIPs, collective investment and finance schemes H. Regulatory bias towards corporate sector and large investors. I. Indications of extraneous pressures, including government. J. No disclosure norms for mergers, demergers, asset sell-offs, inter-corporate transactions.    
  46. 46. SEBI’s  Role  in  Capital  Market       The Story of Two Scams• The story is quite similar. Only the starcast has changed. In the 1992 scam, it wasHarshad Mehta, now it’s Ketan Parekh.• Both are big Bulls.• Both Bulls used to buy stocks at rock-bottom prices and then push it up.• Although both are of Gujarati origin, Ketan Parekh belong to a family where hisfather and grandfather were also traders in the stock market, but Harshad Mehtahad no such background.• Harshad Mehta was very much media savvy while KP kept away from mediapublicity despite his big investments in media companies includingAmitabhBachchanm Corporation, Mukta Arts, Tips Industries, PritishNandyCommunications, Mid-Day, Zee Telefilms, Crest Communication, Penta MediaGraphics and TV 18 India.• In both these scams, banks were involved.• In the Harshad Mehta scam, the controversy was related to bankers’ receipts,while it was pay order in the Ketan Parekh scam.• In both these scams, promoters of companies and certain close cronies wereinvolved.Harshad operated through a close network of brokers while Ketan had a widernetwork of brokers, even those located in Calcutta.• In the Hashad Mehta scam, foreign banks including Citibank, Standard Charteredand ANZ Grindlays were involved. In the Ketan Parekh scam, foreign institutionalinvestors including Credit Suisse First Boston and JM Morgan Stanley areinvolved.• Both these scams occurred in spite of presence of SEBI.    
  47. 47. SEBI’s  Role  in  Capital  Market      • In the case of Harshad Mehta scam, the State Bank of India suffered the loss ofRs. 660 crore while Ketan Parekh owes around Rs 130 crore to the Bank of India.• Favorite stocks of Harshad Mehta were “Old Economy” stocks such as ACC,Apollo Tyres, Reliance and Tisco. While Ketan Parekh, was playing with “NewEconomy” stocks such as HFCL, Aftek Infosys, Global Trust Bank and Pentasoft.• After the scam, Harshad Mehta was not legally allowed to trade but he carried outtrading through his front companies. One does not know yet the fate of KetanParekh.• A JPC probe was ordered into Harshad Mehta scam by the then government.Now another JPC will probe into KP scam. The JPC report on Harshad Mehtascam is gathering dust; one does not know the fate of this JPC report.The official response: bolting the stable doors after the horses has fled:Smelling deliberate price rigging, the Ministry of Finance asked the SEBI tolaunch investigations into the matter. The SEBI is investigating the books of some20 big players to find out whether unwarranted deals were carried out. As the newsof higher exposure of private banks and cooperative banks to stock markets cameto light, the RBI also initiated parallel investigations.    
  48. 48. SEBI’s  Role  in  Capital  Market      After the market crash, the SEBI has launched a series of measuresto halt the decline in the financial markets. Some of the measuresare listed below.1. All brokers acting as directors and other office bearers of the Bombay StockExchange have been suspended for alleged insider trading. In order to preventmisuse of sensitive information by broker-directors, stock markets will becorporatized soon.2. To contain volatility, SEBI has imposed an additional 10 per cent volatilitymargins on all the A Group shares and additional margins on stocks in AutomatedLending and Borrowing Mechanism (ALBM) and Borrowing and Lending ofSecurities Scheme (BLESS).3. The SEBI has also imposed volatility margins on net outstanding sale positionsof FIIs, financial institutions, banks and mutual funds.4. On March 8, 2001, the SEBI banned naked short sales. In simple words, itmeans that all short sales have to be covered by an equal amount of longpurchases.5. Cutting gross exposure limit for brokers to 10 times the base capital in the caseof National Stock Exchange (NSE) and to 15 times in case of other stock    
  49. 49. SEBI’s  Role  in  Capital  Market      exchanges.6. Rolling settlements (which ensures that the settlement takes place five days aftertrading) will now be compulsory.7. In order to increase liquidity, SEBI has allowed banks to offer collateralizedlending only through BSE and NSE.8. Launching of trade guarantee fund to guarantee all transactions.    
  50. 50. SEBI’s  Role  in  Capital  Market       Regulation: To little and Too lateAll the above-mentioned instances of frauds and manipulations reveal the weakregulatory and supervisory framework in India. It also points out the lax attitude ofthe regulatory authorities to prevent such frauds. The surveillance system ofregulatory authorities is in such a bad state that they had absolutely no clue whilethe frauds were being committed.Unfortunately, in most of the instances, the response of the regulatory agencies hasbeen reactive rather than proactive. Like popular Indian movies, the regulatoryagencies came into the picture when the damage had already been done. This isdespite the fact that regulatory authorities have an armory of instruments at theirdisposal to prevent such frauds. According to L CGupta, former member of SEBI Board, even when actions are taken, they aregenerally ad hoc in nature. Because of these reasons, there is a growing feeling thatthe regulatory authorities, particularly the SEBI, tend to protect the interests of bigplayers rather than small investors.It is common knowledge that there are not only bear cartels but also bull cartelsplaying their games in the Indian financial markets. Why SEBI has not taken anyaction against such cartels in the past? What about insider trading, which is sorampant in the Indian markets? What about circular trading (a group of brokers buyand sell shares to generate volumes in specific stocks basically to lure otherinvestors) so prevalent in the Indian markets? Why the proposal forUniform settlement cycle across different exchanges has not been implemented forthe past five years? Why didn’t SEBI take early action to prevent the nexus of the    
  51. 51. SEBI’s  Role  in  Capital  Market      brokers and directors running the stock exchanges? Why SEBI has not taken anyaction regarding the Indian money routed through the FIIs? Why the SEBI turned ablind eye to the illegal business transactions in Calcutta Stock Exchange? Theseare some of the questions SEBI has so far not answered.These questions not only expose the incompetence of SEBI but also the lack ofpolitical will among our policy makers. Although our policy makers are keen toadopt the Anglo-Saxon system of running the domestic financial sector, they haveignored the fact that such financial frauds would have attracted tough punitivemeasures even in the so-called “free market” economies such as the US and HongKong. In these countries, insider trading and short selling are serious offences.Further, there is a speedy investigation mechanism in place and the culprits arequickly booked. Not long ago, the junk bond trader Michael Milken spent severalyears in jail besides paying nearly $1 billion in penalties. Further, he was debarredfrom entering stock markets for the whole life. The notorious manipulator, IvanBoesky, was also jailed for his involvement in insider trading. Likewise, twofinancial journalists were jailed in the US for 18 years on the charge of insidertrading.On the contrary, the situation in India is completely different. Scamsters andfraudsters are well-respected public figures in India, whose advice is frequentlysought by financial markets and the media. Instead of spending their lifetime injail, scamsters lead a lavish lifestyle and write newspaper columns. The casesagainst Harshad Mehta and his associates in the securities scam of 1992 are stillpending in the court. Almost ten years have passed; still no one has any clue whenthese culprits will finally be punished.    
  52. 52. SEBI’s  Role  in  Capital  Market       RECOMMENDATIONA.Enhancing disclosures: - 1. In most case only the minimum information required under the Companies Act is made available 2. The manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted. 3. Valuation reports are made available for inspection, but access is not easy for all investors.B. Inability To Utilize The Existing Powers Effectively:- 1. SEBI could initiate prosecution proceedings on insider trading only in one case and seven cases on fraudulent and unfair practices. 2. Only in seven of the 181 cases, SEBI resorted to cancellation of registration during the last four years. 3. Though SEBI has the power to impose a penalty of Rs 1.50 lakhs every time a person fails to furnish the requisite information, but rarely has this power has been exercised by it. 4. The provision for mandatory punishment of imprisonment in addition to award for penalty has scarcely has been used.    
  53. 53. SEBI’s  Role  in  Capital  Market      C.Quality Of Decisions: - 1. What is worrying is the poor rate of conviction in major cases. Virtually every SEBI decision involving major cases — such as Sterlite, BPL, Videocon, AnandRathi and Associates and Hindustan Lever — has been overturned by the appeals process (or the Securities Appellate Tribunal).D.Accounting, audit quality: - 1. The plethora of inter-corporate investments, intra-company and intra-group transactions, guarantees and contingent liabilities are areas where there is room for considerable concern.E - Price Manipulation — No Dent: - 1. Price manipulation, informed trading and insider trading with key operators/investors is now routine. This is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI has taken action on such price manipulation in just two cases (Bayer ABS and Amara Raja Batteries). Here, too, the penal action has hardly been stringentF – Enticing ads and investor risk: -    
  54. 54. SEBI’s  Role  in  Capital  Market       1. Advertisement sans indication of performance by mutual funds has continued regardless of the SEBI guidelines on this. 2. The Securities and Exchange Board of India (Sebi) is being blamed for lack of alertness and poor risk-management measures with regard to the automated lending and borrowing mechanism..    
  55. 55. SEBI’s  Role  in  Capital  Market       CONCLUSIONReforms in the securities market, particularly establishment and empowerment ofSEBI, allocation of resources by market, screen based nation-wide trading,dematerialization and electronic transfer of securities, availability of derivatives ofsecurities, etc. have greatly improved the regulatory framework and efficiency andsafety of issue, trading clearing and settlement of securities. However, efforts areon to improve working of the securities market further. The main change, whichhas witnessed the Indian securities market, is that earlier trading in both primarymarket and secondary market was done physically and is now replaced byelectronic systems available for trading. With an strengthening of the regulatory system and introduction of variousActs has empowered the Indian securities market and therefore has become a betteroption for investing the resources, we can also see that no of people investing insecurities be it Mutual Funds, Derivatives, in Equity Market, in Debt Market is onincrease and will also further increase with more sophistication of technology andnot to forget legislation authorities protecting rights of investors. Securityexchange board of India SEBI have been playing an important role in regulatingthe business in stock exchanges and any other securities markets and to protect theinterests of investors. The emergence of the securities market resulted as a major source of financefor trade and industry across India. A growing number of companies are accessingthe securities market rather than depending on loans from FIs/banks. Moreover theIndian securities market is contributing to Indian GDP growth immensely. The    
  56. 56. SEBI’s  Role  in  Capital  Market      capital mobilization in both primary market and secondary market has beenwitnessing phenomenal growth over the years. Indian securities market is getting increasingly integrated with the rest of theworld. Indian companies have been permitted to raise resources from abroadthrough issue of ADRs, GDRs, FCCBs and ECBs. ADRs/GDRs have two-wayfungibility. Indian companies are permitted to list their securities on foreign stockexchanges by sponsoring ADR/GDR issues against block shareholding.    
  57. 57. SEBI’s  Role  in  Capital  Market       BIBLOGRAPHYREFERENCE BOOKS:-1] Investments and securities market in India,by Dr. V.A. Avadhani-( Himalaya publishing House 1999).2] Securities Market and Products,by IIBI (Taxman publication 2009).3] Financial Market Operations,by Dr. AlokGoyal, MridulaGoyal-(F K Publications).4] Capital markets of India: an investors guide,by Alan R. Kanuk-(Wiley Publications)