Any financial market or system requires a regulation. This is to ensure that all actors act in good-faith practices. The regulations can be in the form of rules, guidelines, restrictions or requirements. A regulatory body’s job is to ensure that these regulations are adhered to. A regulatory body can be a governmental or non-governmental organisation.
What is SEBI?
SEBI, or Security and Exchange Board of India, is a Government of India run regulatory body which oversees the activities of the securities and commodity markets. It was established in 1988 but given statutory powers only in 1992. SEBI was established to protect the interests of investors and currently has a range of departments that oversee various aspects of the securities market.
What are the Functions of SEBI?
The Preamble of SEBI, states that its main function is "...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". Their charter further emphasises their regulatory responsibilities towards:
· Issuers of securities
· Market intermediaries
SEBI provides a platform and registration for various financial actors which includes stockbrokers, investment advisors, portfolio managers, bankers, and registrars while regulating their work. It is also responsible for regulating the operations of participants, depositories, foreign portfolio investors, custodians of securities, and credit rating agencies. SEBI is responsible for registering and regulating the working of venture capital funds, collective investment schemes, and mutual funds.
SEBI is entrusted with making sure that no unlawful, unfair trade or fraudulent practices take place such as insider trading. It also oversees and monitors any major acquisitions, mergers, or take-overs. They also work to educate investors on intermediates of the market such as stockbrokers, banks, and clearing corporations. One of the crucial roles of SEBI is R&D, inspections, and audits to ensure the efficacy of the securities markets.
SEBI also regulates all documents and advertisements which seek to solicit money for the issue of securities.
How is SEBI Structured?
SEBI is structured with a corporate framework comprising several interlinked departments, each with a departmental head. It has a hierarchical structure with the chairman of SEBI and five other members nominated by the Government of India. It also has two officers from the Union Finance Ministry and one member appointed by the Reserve Bank of India. These members together form the Board of SEBI.
The various departments under SEBI include:
· Division of New Products and Market Policy – This department deals with the approval of new commodity products or contracts which can be traded on recognised stock exchanges.
· Division of Exchange Administration – It deals with the registration, recognition and administration of stock exchanges and clearing corporations with a Commodity Derivative segment. It also reviews rule change proposals relating to all policy issues and supervision.
· Division of Inspection – It conducts inspections, monitors and inspects IT infrastructure, and systems auditing of stock exchanges and clearing corporations.
· Division of Risk Management – Its main function is to prescribe and monitor risk management and settlement practices in clearing corporations.
· Division of Complaints & Division of Investors Awareness – It deals with complaints, investors grievances, investor education pertaining to Commodity Derivatives Segment of stock exchanges.
· Division of Products – The division works on the approval of agricultural as well as non-agricultural commodity products or contracts traded on recognised stock exchanges.
What Powers Does SEBI Have?
SEBI enjoys a range of powers and has significant authority surrounding financial markets, products, and intermediaries. The Board of SEBI has the same powers as a civil court when trying a suit, as stipulated under the Code of Civil Procedure, 1908, in respect to following matters:
· the discovery and production of books of account and other documents
· suspend trading of any security in a stock exchange
· restrain access to the securities market to buy, sell or deal in securities
· suspend any office-bearer of any stock exchange or self-regulatory organisation
· impound and retain the proceeds or securities of any transaction which is under investigation
SEBI has the power to issue directives based on the following:
· in the interest of investors
· to prevent intermediaries from acting in a manner that is detrimental to the securities market or the investors
· to regulate the proper management of intermediaries
The regulatory body also has investigative powers. These powers allow the regulatory body to conduct its own investigations into any fraudulent activity regarding the equities market. The investigative powers are used in the following conditions:
· when transactions are suspected to be detrimental to investors or the securities market
· if any person or intermediary associated with the financial markets is found to be acting in violation of the rules and regulations issued by SEBI
If SEBI deems to open an investigation, then all the persons concerned must provide all the books, registers, other documents and records related to the company or the intermediary, which are relevant to the investigative process. If the persons refuse to comply with these rules, they can be sent to jail or fined or both.
SEBI can issue cease and desist orders if it has found that any person has violated, or is likely to violate any rules or regulations.
Notable Achievements of SEBI
PricewaterhouseCoopers or PwC is one of the Big Four accounting firms and were entrusted with the auditing of Satyam Computer Services. After it emerged that the then Chairman of Satyam had manipulated the company’s accounts to the tune of over Rs 14,000 crore, SEBI barred PwC from auditing any Indian company for a period of two years and placed a fine of Rs. 13 crores as wrongful gains. However, as of 2019, the Securities Appellate Tribunal (SAT) has overturned the ban.
Criticisms of SEBI
Over the years, SEBI has been accused of not being transparent enough and inconsistent with its various functions. It has also been accused by Investors’ Grievances Forum, a body that represents small investors, for faulty practices which led to the financial chaos of 2008-09.
A Joint Parliamentary Committee severely criticised SEBI for its role in the 2001-Ketan Parekh stock market scam. The regulatory body was indicted in its failure to regulate the stock market, lack of alertness and poor risk-management measures regarding the automated lending and borrowing system. According to the report released by the JPC, "There was a nexus between Ketan Parekh, banks and the corporate houses". The report continued to state that SEBI along with other regulatory bodies were responsible for, "waking up late and throughout adopting a lenient attitude". The report also observed that the regulatory bodies should have been even more vigilant after the 1992 Harshad Mehta scam.
SEBI is an important regulatory body which safeguards the investors’ interests. It has proven to be valuable through its many years though it has not been without criticisms. As an investor, SEBI provides many services and references which could help you with your financial planning. It is set up to protect investors from fraudulent schemes and scams. As a potential investor, you should be aware of the scope of the regulatory body and how it can work towards protecting you.
How does the share market work?
What are Mutual Funds? Here's what you should know
Best Tips for Financial Independence
What Is Social Media Management? Benefits & more.