SEBI-THE INDIAN CAPITAL MARKET REGULATOR

Securities and Exchange Board of India (SEBI) – ensures corporate behavior in alignment with the best global practices. In the context of globalization, if Indian corporate have to attract large capital and technology to survive fierce international competition, it is imperative that they adopt governance standards acceptable to global institutional investors

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Phenomenal Growth of Indian Capital Market

An appreciable growth in the capital market in the post-independence era.

By 1990, the Indian capital market was one of the fastest growing markets in the world. The number of companies listed on the stock exchange, close to 6000, was the second highest after the USA and by 1995, the number rose to 8593.

Presently, there are more than 10,000 listed companies in the country’s 25 stock exchanges. The shareholding public is estimated at 20 million.

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Deficiencies in the Indian Capital Market

Lack of diversity in the financial instruments.

Lack of control over fair disclosure of financial information.

Poor growth in the secondary market.

Prevalence of insider trading and front running.

Manipulation of security prices.

Existence of unofficial trade in the primary market, prior to the issue coming into the market.

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Deficiencies in the Indian Capital Market

Existence of unofficial trade in the primary market, prior to the issue coming into the market.

Absence of proper control over brokers and sub- brokers.

Passive role of public financial institutions in checking malpractice.

High cost of transactions and intermediation, mainly due to the absence of well-defined norms for institutional investment.

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Impact of Globalisation

Power shift as domestic institutions are forced to compete with the Foreign Institutional Investors (FIIs) who control the floating stock and are also in control of the Global Depository Receipts (GDR) market.

Structural issues will come to the fore with a plain message: “Either reform or despair.”

The individual investor in his own interest will refrain from both primary and secondary market; he will be better off investing in mutual funds

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Abolition of Controller of Capital Issues and Emergence of SEBI

Prior to the setting of SEBI, the Capital Issues (Control) Act, 1947 governed capital issues in India.

The Narasimham Committee on the Reform of the Financial System in India recommended the abolition of the CCI. It suggested that SEBI set up in1988 should be entrusted with the “task of a market regulator to see that the market is operated on the basis of well-laid principles and conventions.” SEBI has been empowered to control and regulate the new issue and old issues market, namely, the Stock Exchange.

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Objectives of the Board

The statutory objectives of the SEBI as per the Act Protection of investors’ interests in securities

Promotion of the development of the securities market

Regulation of the securities market; and

Matters connected therewith and incidental thereto.

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Powers of the Board

To carry out its responsibilities under the Act, the Board is clothed with the same powers as are vested in a Civil Court with respect to the following matters:

The discovery and production of books of account and other documents at such place and such time as may be specified by the Board;

Summoning and enforcing the attendance of persons and examining them on oath;

Inspection of any books, registers and other documents of stockbrokers, sub-brokers, and share transfer agents. 8Dimple Grover

Power to Issue Directions The Board is empowered to issue directions to the following intermediaries:

Stock-brokers, sub-brokers, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market;

Depository, depository participant, custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market;

Sponsors of venture capital funds, or collective investment schemes including mutual funds;

And to any company with regard to matters to be disclosed by the companies as specified in section 11A.

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Establishment of Securities Appellate Tribunals The Board is empowered to issue directions to the following intermediaries:

Stock-brokers, sub-brokers, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market;

Depository, depository participant, custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market;

Sponsors of venture capital funds, or collective investment schemes including mutual funds;

And to any company with regard to matters to be disclosed by the companies as specified in section 11A.

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SEBI (Amendment) Bill, 2002

Search and Seizure Powers

Freeze Bank Accounts

Greater Monetary Penalties

More Board Strength

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SEBI’S ROLE IN PROMOTING CORPORATE GOVERNANCE

According to SEBI’s Chairman: “The Securities and Exchange Board of India has been focusing on the following areas to improve corporate governance:

Ensuring timely disclosure of relevant information,

Providing an efficient and effective market system,

Demonstrating reliable and effective enforcement,

Enabling the highest standards of governance.

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SEBI’s Role in the New Era

The SEBI has made progress in a number of areas:

Abolition of capital issues control and retaining the sole authority for new capital issues;

Regulation and reform of the capital market by arming itself with necessary authority and powers;

Regulating stock exchanges under Securities contracts Regulation Act;

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SEBI’s Role in the New Era

Bringing all primary and secondary market intermediaries under the regulatory framework;

Enforcing companies to disclose all material facts and specific risk factors associated with projects while going in for public issues.

The SEBI has made progress in a number of areas:

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Primary Market Reforms

Relating to New Issues:

SEBI has introduced various guidelines and regulatory measures for capital issues. Companies issuing capital in the primary market are now required to disclose all material facts and specific risk factors regarding the projects; they should also give information regarding the basis of calculation of premium.

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Primary Market Reforms

Relating to New Issues:

Freedom to Fix Par Value of Shares: SEBI has dispensed with the requirement to issue shares with a fixed par value of Rupees 10 and Rupees 100 and has given the freedom to companies to determine the par value of shares issued by them.

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Primary Market Reforms

Guidelines for Tightening the Entry Norms: Accordingly, a company should have a track record of dividend for a minimum 3 years out of the immediate preceding 5 years. Relating to IPOs: SEBI has let companies determine the par value of shares issued by them. SEBI has permitted issues of IPOs to go for “book building”, i.e., reserve and allot shares to individual investors.

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Primary Market Reforms

Investor Protection Measures: On June 15 1998, SEBI advised investors to exercise a greater deal of caution while investing in plantation companies. Plantation companies and other collective investment schemes were directed to obtain credit rating from accredited agencies prior to the issue of advertisement.

Cost Reduction Measures: SEBI has made underwriting of issue optional, subject to the condition that if an issue was not underwritten and was not able to collect 90 percent of the amount offered to the public, the entire amount collected should be refunded to the investors.

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Primary Market Reforms

Relating to Private Placement Market: Private placement

market has become popular with issuers because of stringent entry and disclosure norms for public issues.

Banker to the Issue under SEBI’s Purview

Regulations on Acquisitions and Takeovers: SEBI has raised the minimum application size and also the proportion of each issue allowed for firm allotment to institutions such as mutual funds.

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Primary Market Reforms

Merchant Banking under SEBI’s Jurisdiction:

Merchant banking has been statutorily brought under the regulatory framework of SEBI.

Permission to Set up Private Mutual Funds. The market regulator has issued fresh guidelines for advertising by mutual funds.

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Primary Market Reforms

Making Companies Provide Authentic Information: SEBI has advised stock exchanges to amend the listing agreements to ensure that a listed company furnishes annual statement to the stock exchange showing the variations between financial projections and the projected utilisation of funds in the offer documents and the actual utilisation.

Making Companies Comply with Issue Norms: SEBI has

advised stock exchanges to collect from companies making public issues a deposit of one percent of the issue amount. This could be forfeited in case of non-compliance of the provisions of the listing agreement and non-dispatch of refund orders and share certificates by registered post within the prescribed time.

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Primary Market Reforms

Scrutiny of Offer Documents

Access to International Capital Market:

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Secondary Market Reforms

Registration of Intermediaries

Reconstitution of Stock Exchange Governing Bodies Measures to Speed up Settlements Regulations on Insider Trading Simplification of Procedures Regulation of Collective Investment Schemes

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Secondary Market Reforms

Introduction of Compulsory Rolling Settlement

One Point Access to Investors

Introduction of Takeover Codes

Trading of Government Securities through Order-driven Screen-based System

De-listing Guidelines

Central Listing Authority

Derivative Trading

Demutualization and Corporatisation of Regional Stock Exchanges

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SEBI’s SHORTCOMINGS

Lack of Adequate Required Power

Buckles Under Pressure

The Legacy of Nehruvian Socialism Dies Hard

Mammoth Size of the Market and Inefficient handling

Inefficient Standard Regulatory Model

SEBI should Identify Delinquents Speedily and Penalize Problems that SEBI has not Tackled

There is a long way to go

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SUGGESTIONS FOR SEBI’s IMPROVEMENT

To monitor effectively the working of stock exchanges;

To insist on companies for the supply of extensive information on a regular basis;

To penalize members of stock exchanges who were found to violate securities laws;

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SUGGESTIONS FOR SEBI’s IMPROVEMENT

To debar the wrong-doers from any activity in the stock market and impose on them civil penalties and initiate criminal proceedings;

To make rules about the manipulative practices;

To move court for checking insider trading; and

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SUGGESTIONS FOR SEBI’s IMPROVEMENT

To prosecute a company and its directors suo moto, even without receiving complaints by an aggrieved investor in respect of supplying inadequate, incomplete and incorrect information.

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