corporate governance-sebi

7/18/2019 Corporate Governance-SEBI

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FUNCTIONING OF SEBI:ENTIRE GAMUT

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It is with profound respect and gratitude that I have immense

pleasure in recording my sincere thanks to my respectful guide,

advisor and teacher Mr. Ajay Kant Chaturvedi our Corporate

Governance Professor.

I am thankful to my parents, teachers and all my friends who

have given me necessary support and motivation since starting

of the study and till the completion of the project report



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INTRODUCTION #

SEBI'S ORIGIN AND ITS CURRENT HIERARCHY $

FUNCTIONS OF SEBI %

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INTRODUCTION

For a growing and dynamic economy like India, capital markets play an important

role in not just attracting domestic and foreign investment but also mirror the state of

affairs in our country. In order to present the Indian dream most favourably among

investors, it is important that our capital markets have a strong and non-manipulative

infrastructure and to ensure this, India has its capital market regulator, the Securities

and Exchange Board of India – SEBI.

With changing times and while facing newer challenges, SEBI has always taken

responsibility for everything that is right or wrong in India’s capital markets. Even

now, when SEBI finds itself surrounded by the din of chit funds siphoning off croresof rupees from gullible investors and a need for tightening insider trading norms; the

Indian government has happily obliged to SEBI’s demand for more powers.

Accordingly the government has promulgated Securities Laws (Amendment) Second

Ordinance, 2013 that would amend the SEBI Act, the Securities Contracts

(Regulation) Act and the Depositories Act. With these amendments, SEBI will be

able to regulate any money pooling scheme worth Rs. 100 crore or more and attach

assets in cases of non-compliance. The SEBI Chairman would have the authority to

order "search and seizure operations". The amended law would also allow SEBI to

seek information, such as telephone call data records, from any persons or entities in

respect to any securities transaction being investigated by it. The law would further

allow setting up of special courts to speed up SEBI related cases. 1

1 http://newsonair.com/SEBI-A-CREDBLE-AND-EFFECTIVE-REGULATOR.asp(Visited on

20/10/2015)

2 http://newsonair.com/SEBI-A-CREDBLE-AND-EFFECTIVE-REGULATOR.asp(visited on



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SEBI'S ORIGIN AND ITS CURRENT HIERARCHY

The idea of setting up a regulator was first proposed by former Prime Minister, Late

Mr. Rajiv Gandhi who was also the Finance Minister in 1987. In his budget speech

for 1987-88, Mr. Gandhi had said “For a healthy growth of capital markets, investors’

rights must be fully protected. Trading malpractices must be prevented. Government

has decided to set up a separate board for the regulation and orderly functioning of

stock exchanges and the securities industry.” Thus, a notification was issued and

SEBI was constituted on 12th April 1988 as an interim administrative body under the

Finance Ministry. However, it was four years later; on 4th April 1992 that a

notification awarding statutory powers to SEBI was finally issued.2

SEBI is a quasi-legislative, quasi-judicial and quasi-executive body. It can draft

regulations, conduct inquiries, pass rulings and impose penalties. All decisions taken

by SEBI are collectively taken by its Board that consists of a Chairman and eight

other members. The current Chairman of SEBI is Mr. Upendra Kumar Sinha.

Moreover, SEBI appoints various committees, whenever required to look into the

pressing issues of that time. Further, a Securities Appellate Tribunal – SAT has been

constituted to protect the interest of entities that feel aggrieved by any of SEBI’s

decision. SAT, consisting of a Presiding Officer and two other Members, has the

same powers as vested in a civil court. Further, if any person feels aggrieved by

SAT’s decision or order can appeal to the Supreme Court.3

2 http://newsonair.com/SEBI-A-CREDBLE-AND-EFFECTIVE-REGULATOR.asp(visited on

20/10/2015)

3 http://universalteacher.com/1/functions-of-sebi(visited on 20/10/2015)



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FUNCTIONS OF SEBI

Functions of SEBI are given under chapter-4 section-11 of the SEBI Act, 1992 Which

States as-

“11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to

protect the interests of investors in securities and to promote the development of, and

to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures

referred to therein may provide for -

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer

agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant

bankers, underwriters, portfolio managers, investment advisers and such other

intermediaries who may be associated with securities markets in any manner;

(ba) registering and regulating the working of the depositories,participants,custodians

of securities, foreign institutional investors, credit rating agencies and such other

intermediaries as the Board may, by notification, specify in this behalf.



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(c) registering and regulating the working of venture capital funds and collective

investment schemes],including mutual funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investors' education and training of intermediaries of securities

markets;

(g) prohibiting insider trading in securities;

(h) regulating substantial acquisition of shares and take-over of companies;

(i) calling for information from, undertaking inspection, conducting inquiries and

audits of the stock exchanges, mutual funds, other persons associated with the

securities market] intermediaries and self- regulatory organizations in the securities

market;

(ia) calling for information and record from any bank or any other authority or board

or corporation established or constituted by or under any Central, State or Provincial

Act in respect of any transaction in securities which is under investigation or inquiry

by the Board;”]

(j) performing such functions and exercising such powers under the provisions of the

Securities Contracts (Regulation) Act, 1956(42 of 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;

(la) calling from or furnishing to any such agencies, as may be specified by the

Board, such information as may be considered necessary by it for the efficient

discharge of its functions;”

(m) performing such other functions as may be prescribed.



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(2A) Without prejudice to the provisions contained in sub-section (2), the Board may

take measures to undertake inspection of any book, or register, or other document or

record of any listed public company or a public company (not being intermediaries

referred to in section 12) which intends to get its securities listed on any recognised

stock exchange where the Board has reasonable grounds to believe that such company

has been indulging in insider trading or fraudulent and unfair trade practices relating

to securities market.”

(3) Notwithstanding anything contained in any other law for the time being in force

while exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-

section (2A)], the Board shall have the same powers as are vested in a civil court

under the Code of Civil Procedure, 1908 (5 of 1908),while trying a suit, in respect of

the following matters, namely :

(i) the discovery and production of books of account and other documents, at such

place and such time as may be specified by the Board;

(ii) summoning and enforcing the attendance of persons and examining them on oath;

(iii) inspection of any books, registers and other documents of any person referred to

in section 12, at any place;

(iv) inspection of any book, or register, or other document or record of the company

referred to in sub-section (2A);

(v) issuing commissions for the examination of witnesses or documents.

(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and(3) and section 11B, the Board may, by an order, for reasons to be recorded in

writing, in the interests of investors or securities market, take any of the following

measures, either pending investigation or inquiry or on completion of such

investigation or inquiry, namely:-

(a) suspend the trading of any security in a recognized stock exchange;



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(b) restrain persons from accessing the securities market and prohibit any person

associated with securities market to buy, sell or deal in securities;

(c)suspend any office-bearer of any stock exchange or self- regulatory

organization from holding such position;

(d)impound and retain the proceeds or securities in respect of any transaction

which is under investigation;

(e)attach, after passing of an order on an application made for approval by the

Judicial Magistrate of the first class having jurisdiction, for a period not exceeding

one month, one or more bank account or accounts of any intermediary or any

person associated with the securities market in any manner involved in violation

of any of the provisions of this Act, or the rules or the regulations made

thereunder:

Provided that only the bank account or accounts or any transaction entered

therein, so far as it relates to the proceeds actually involved in violation of any of

the provisions of this Act, or the rules or the regulations made thereunder shall be

allowed to be attached;

(f)direct any intermediary or any person associated with the securities market in

any manner not to dispose of or alienate an asset forming part of any transaction

which is under investigation:

Provided that the Board may, without prejudice to the provisions contained in sub-

section (2) or sub-section (2A), take any of the measures specified in clause (d) or

clause (e) or clause (f), in respect of any listed public company or a public

company (not being intermediaries referred to in section 12) which intends to get

its securities listed on any recognized stock exchange where the Board has

reasonable grounds to believe that such company has been indulging in insider

trading or fraudulent and unfair trade practices relating to securities market:



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Provided further that the Board shall, either before or after passing such orders, give

an opportunity of hearing to such intermediaries or persons concerned.”4

These Functions Can Also Be Divided Into 3 Categories:-

The SEBI performs functions to meet its objectives. To meet three objectives SEBI

has three important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide

safety of investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of

inflating or depressing the market price of securities. SEBI prohibits such practice

because this can defraud and cheat the investors.

(ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc.

These insiders have sensitive information which affects the prices of the securities.

This information is not available to people at large but the insiders get this privileged

information by working inside the company and if they use this information to make

profit, then it is known as insider trading, e.g., the directors of a company may know

that company will issue Bonus shares to its shareholders at the end of year and they

purchase shares from market to make profit with bonus issue. This is known as insider

4 http://www.sebi.gov.in/acts/act15ac.html(visited on 20/10/2015)



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trading. SEBI keeps a strict check when insiders are buying securities of the company

and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to

induce the sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the

securities of various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking

following steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders whereincompanies cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for

stiff fine and imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated

to market prices.

2. Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock

exchange and increase the business in stock exchange. Under developmental

categories following functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and

adoptable approach in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.



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3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To

regulate the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the

intermediaries such as merchant bankers, brokers, underwriters, etc.

(ii) These intermediaries have been brought under the regulatory purview and private

placement has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, sharetransfer agents, trustees, merchant bankers and all those who are associated with stock

exchange in any manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.



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Objectives of SEBI

The overall objectives of SEBI are to protect the interest of investors and to promote

the development of stock exchange and to regulate the activities of stock market. The

objectives of SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation

of business and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers,

underwriters, etc.



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Role of SEBI in Corporate Governance

Established in 1992, the Securities Exchange Board of India is essential to corporate

governance of India's securities market, as it serves as the central body that ensures

investors are protected and the securities market is regulated.

Governance

•

Corporate governance is the manner in which companies or market systems operate,

including the rules, regulations, policies and standards for accountability,

transparency and general corporate integrity.

Origins

• SEBI was formed after the Indian Parliament passed the Securities and Exchange

Board of India Act, 1992 in response to the Financial Services Assessment

Programme, a program developed by the World Bank and International Monetary

Fund that observes and reports on global financial systems. The Indian government

wanted to establish a strong financial atmosphere and securities market with a

regulator promoting the latest in corporate governance standards.

Functions

•

SEBI sets governance standards in which the securities market must operate,

protecting the rights of issuers and investors. SEBI has power to investigate

circumstances where the market or its players have been harmed and can enforce

governance standards with directives. An appeal process in place ensures

accountability and transparency. SEBI may terminate from the securities list any

company that does not comply with its governance standards and regulations.5

5 http://www.ehow.com/facts_7609058_role-sebi-corporate-governance.html(visited on 20/10/2015)



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Why SEBI Act is Different From other Act?

The SEBI Act, 1992 gives SEBI power to draft regulations in order to regulate the

market and discharge its functions and duties. While the objectives are provided in the

SEBI Act, 1992, the implementation details are left to the regulator. The securities

market is regulated more through regulations than through the SEBI Act, 1992.

This is in marked contrast to other statutes in India, which provides for the regulatory

framework in the parent Act. For example, the Income-Tax Act is a complete self-

sufficient code, and the income tax authorities are required to implement the Act as

against notifying the regulatory framework. They are not expected to notify the

regulatory framework and be policy decision-makers. The government notifies notonly the Act but also the rules. Similarly, the Parliament notifies the Indian

Companies Act, 1956, and the government notifies the rules thereunder.

In the case of SEBI, Parliament has delegated its powers of drafting the regulatory

framework to SEBI. Besides the parent Act, SEBI also has powers under the

provisions of the Securities Contract (Regulation) Act, 1956, (referred as the SCR

Act) to notify the framework to regulate stock exchanges, and transactions on the

stock exchanges, as well as the depositories under the provisions of the Depositories

Act, 1996.

corporate governance-sebi

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