The Market Regulator SEBI and Controversies
Final year student, B.A.LL.B. (Honors),
Symbiosis Law School, Pune
The Securities Exchange Board of India (hereinafter referred to as "SEBI") is the regulator of the securities and commodity market of India. It was first enacted by the 1988 Act and later made a statutory autonomous body by the Securities and Exchange Board of India, 1992. SEBI does govern not only the securities market but also commodities market after 2015 by the result of the merger of the Forward Market Commission with SEBI.
SEBI's jurisdiction is not only limited to the listed entities but also to the unlisted companies, even the private companies in certain matters. Thus the importance of SEBI and its regulations are paramount in the capital market.
Why was SEBI established?
The capital issues in India were governed under the Capital Issues (Control) Act, 1947 and the governing body was the Controller of Capital Issues ( hereinafter referred to as "CCI"). There were many controversies under CCI regime, the biggest scandal which led to the establishment of SEBI was Harshad Mehta scandal.
It was one of the biggest scams witnessed by the country, where Harshad Mehta manipulated a total of around Rs 3,500 crore and siphoned off Rs. 1,000 crore under trading in the government of securities, leading to a crash by 72% in the market. He invested the amount by siphoning off funds from interbank transactions in shares, and as he was a renowned broker, his judgments were trusted in the market by other investors. On obtaining a profit, he exited such investments and returning the said amount of government securities to the banks. Later he even forged bank receipts, the scam was busted when it was exposed by Times of India.
Therefore, the Narasimham Committee was established to bring out reforms which recommended the abolishment of CCI and establishment of SEBI as an interim administrative body which had control over the capital market in 1988. Later, the Securities Exchange Board of India Act 1992 (hereinafter referred to as "the Act") was passed making it a statutory body with the following objectives:
(i) Protection of interests of investors
(ii) Promote the development of securities market and,
(iii) Regulate securities market transactions.
What is the structure of SEBI?
SEBI has nine members one chairman appointed by the Central Government, two members from the Finance Ministry, one member from the RBI and five members appointed by Central Government. The current Chairman is Mr Ajay Tyagi.
The appointments done by Government of India for SEBI were challenged in a PIL filed by India Rejuvenation Initiative and an amendment brought in 2012. Furthermore, a letter was written by Dr KM Abraham to the PM about malice in the functioning of Board and the interference and duress of big corporations to influence high profile cases like Sahara, Reliance and MCX. However, the PIL was dismissed in 2016 by the SC on the ground that most of the irregularities objected by the petitioner in the PIL are already amended by subsequent amendments.
What are the Functions of SEBI?
The functions of SEBI are of 3 types, namely, protective, regulatory and development functions and are given u/s 11(1) of the Act.
Protective functions refer to SEBI aiming to protect the interests and investments of investors; this is achieved by enacting various laws prohibiting acts against the interests of the investors like insider trading, fraudulent and unfair activities along with other malpractices. Another such protective measure is the exit option provided to minority shareholders in case of a takeover by virtue of compulsory public offer by the acquirer. SEBI also promotes investors education and training of other intermediaries.
Regulatory functions mean the actions taken by SEBI to regulate the conduct of stock exchanges, intermediaries like brokers, sub-brokers, bankers to an issue, trustees, underwriters, portfolio managers. For every market participant to transact, it is required to be registered with the Board to ensure the Board is conscious of all the transactions that take place. The disclosures, maintain records, inspection, investigation and adjudication on violations are all regulatory functions of SEBI. Apart from these SEBI also establishes for a code of conduct and promotes self-regulation
Development functions refer to SEBI's role in taking measures which aims to improve the general functioning of the market, making it more free and fair and increasing transparency. It also strives to make the transactions easier for the participants; an example of it is the dematerialization of shares.
What are the Powers of SEBI?
Section 11(3) of the Act SEBI has all the powers vested in a civil court under the Code of Civil Procedure, 1908 while adjudicating upon a suit. Broadly these powers are of three types, quasi administrative, quasi-legislative and quasi-judicial.
1. Quasi-Judicial Powers
SEBI has jurisdiction on all matters arising out of violations of the Act or any rules and regulations made therein; it has the following powers:
(i) Power to issue orders to investigate.
(ii) Power to initiate proceedings
(iii) Power to suspend all trading activities for the pendency of the suit.
(iv) Power to impose penalties
(v) And pass any other suitable judgments.
(vi) It can even make an order to cease from committing or causing the impugned violation.
2. Quasi-Legislative Powers
SEBI is empowered to make regulations u/s 30 and to make rules u/r 29 for carrying out any purposes of this Act.
The legislative power of the Board to make Rules is extended to but is not limited to the following:
(i) Term and other employment conditions of office of members
(ii) Functions of the Board as given u/s 11
(iii) Manner of maintaining accounts of Board
(iv) Form of filings of returns and reports to Central Government u/s 18
Form of appeal and inquiry before SAT.
The legislative power of the Board to make Regulations in adherence to the Act includes the following:
(i) The terms and conditions of the employment of its officers and members and functioning of the Board
(ii) Matters related to issue and transfer of securities and matters related therein.
(iii) The registration of entities with the Board
(iv) Collective Investment Scheme
(v) Settlement Proceedings
However, these rules and regulations are to be laid before the Parliament for mandatory ratification for a total of 30 days as given u/s 31 of the Act.
3. Quasi- Administrative Powers
The Board has the power to investigate in the affairs of any intermediary or persons associated with securities market if it has reasonable ground to the entity's transactions in securities are being dealt in a manner against the interest of the investors or is violative of the
Act or rules and regulations.
It can direct the entity to furnish information produce books/registers/ other documents.
It can also examine any person on oath concerning the affairs of his business
Conduct search and seizure of the said documents in the manner as provided under CrPC.
Failure or refusal to comply with these firms shall result in imprisonment up to 1 year or fine extending up to 1 crore rupees or both.
What are the major achievements of SEBI?
Digitalization has transformed every industry, and the Indian capital and securities market is no exception. Since the capital market is a data extensive industry, the digitalization has made the operations faster, more accurate and more efficient.
SEBI being the regulator has played an essential role in such transformation; it allowed the stockbrokers and other intermediaries to trade online and render internet-based services and to provide security trading using wireless technologypost requesting the registration. It also frames regulatory protocol including protection standards of network security, system operations and risk management.
Not only that but the entire process of registration and regulation of the market participants by SEBI is digitalized.
Another critical achievement of SEBI is compulsory dematerialization of shares for share transfer; it aided the companies in substantially reducing the cost of its entire process of issuing and delivering new share certificates in case of a share transfer. It also reduced the fraudulent practices related to issuance and trade of forged certificates. The legal costs like stamp duty etc. have also be eliminated.
(iii) Decrease in frauds
SEBI PFUTP Regulations, 2003 have been efficient in reducing fraudulent practices in the capital market. It prohibits any form of fraudulent practice and unfair trade practices; it protects the market participants, particularly the investor's interest. Other regulations like (Prohibition of Insider Trading) Regulations, 2015 have also paved a long way in the free functioning of the markets and preventing fraudulent activities.
(iv) Investor Grievance Redressal System
SEBI has established an entirely separate cell known as SEBI Investor Complaints Cell dedicated to addressing issues faced by investors.
SEBI Complaints Redress System (SCORES) platform exclusively to ensure investors' grievances are heard and addressed. It is a web-based centralized system, thus making it accessible to even the remotest places.
(v) Strict eligibility criteria where public funding is involved
The eligibility standards for getting listed are given under SEBI LODR Regulations, 2015 this not only ensures that companies with a sound financial position enter the market but also requires them to maintain such a position. The continuous disclosures and strict compliance systems are the main tools to maintain transparency between the investors and the issuers.
What is the interplay between SEBI and Regional Stock Exchanges?
SEBI is the market regulator, and it regulates all the market participants and practices, including the stock exchanges national and regional alike. Stock Exchanges provide a platform for trading of the securities and other instruments, and they directly promote investment culture by enabling trading among the issuer, investor and intermediaries.
De-recognition and Exit
Currently, there are nine stock exchanges operating in India, however, until recently a total of 23 exchanges were registered in India out of which only two were operating at a national level and rest 21 were of regional level. SEBI issued stringent criteria of minimum net worth 100 crore and minimum annual trading 1000 crores in the form of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, to be listed. As a result, 20 regional stock exchanges opted to exit the business.
SEBI issued a circular with an exit policy for all the regional stock exchanges which voluntary wanted to exit the market and not allow regional stock exchanges with little business to be listed. The committee headed by G. Anantharaman recommended that regional stock exchanges should be allowed to be a self list or to bring a strategic partnership with national stock exchanges. Calcutta Stock Exchange tied up with BSE and Madras Stock Exchange with NSE.
The said phenomena were said to be inevitable due to increased reach of countrywide stock exchanges due to online trading and other technological aids, thus there operations are not commercial relevance has subsided.
Disclaimer: Kindly note that the views and opinions expressed are of the author, and not Law Colloquy.
 Section 11 D of Securities Exchange Board of India, (Act No.15 of 1992).  y SEBI Circular No. SMDRP/POLICY/CIR-06/2000 dated January 31, 2000.  SEBI Circular No CIR/MRD/DP/25/2010 dated August 27, 2010, https://www.sebi.gov.in/legal/circulars/jun-2011/review-of-internet-based-trading-ibt-and-securities-trading-using-wireless-technology-stwt-_20005.html