Name- Khusboo Kharbanda

Class- Ba. Llb 4

Roll No- 91

Subject- Investment & Securities

Teacher Incharge- Mr. Nikhil Kulkarni

Topic- SEBI (An Overview, Powers & Functions)

Contents:

I. Background

II. Introduction

III. Organizational Structure

IV. Current Composition

V. Powers of SEBI

VI. Functions of SEBI

VII. Role of SEBI in Securities Market

VIII. Regulations

IX. Informal Guidance

X. Registration of Intermediaries

XI. Check & Balance of Powers

XII. Changes introduced over the years

XIII. Landmark Cases

XIV. Conclusion
Background

At the end of the 1970s and during 1980s, capital markets were emerging as the new
sensation among the individuals of India. Many malpractices started taking place such as
unofficial self- styled merchant bankers, unofficial private placements, rigging of prices, non-
adherence of provisions of the Companies Act, violation of rules and regulations of stock
exchanges, delay in delivery of shares, price rigging, etc. Due to these malpractices, people
started losing confidence in the stock market. The government felt a sudden need to set up an
authority to regulate the working and reduce these malpractices. As a result, the Government
came up with the establishment of SEBI.

The Securities and Exchange Board of India (SEBI) was officially appointed as the authority
for regulating the financial markets in India on 12th April 1988. It was initially established as
a non-statutory body, i.e. it had no control over anything but later in 1992, it was declared an
autonomous body with statutory powers.  Headquartered in Mumbai, India, SEBI has
regional offices in New Delhi, Chennai, Kolkata and Ahmedabad along with other local
regional offices across prominent cities in India. SEBI plays an important role in regulating
the securities market of India.

Introduction

The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for
(a) protecting the interests of
investors in securities,
(b) promoting the development of the securities market, and
(c) regulating the securities
market.

The SEBI regulates the securities market and the SAT (Securities Appellate Tribunal) acts as
a watchdog to ensure justice. Controller of Capital Issues was the regulatory authority before
SEBI came into existence; it derived authority from the Capital Issues (Control) Act, 1947. In
short, it has been given necessary autonomy and authority to regulate and develop an orderly
securities market.

Organizational Structure of SEBI

Section 4(1) of the SEBI Act provides that the SEBI shall consist of the following members
namely:

Current Composition

Chairman- Shri Ajay Tyagi

Whole-Time Members- Shri G. Mahalingam, Ms. Madhabi Puri Buch, Shri S.K. Mohanty,

Shri Ananta Barua

Part-Time Members- Shri Tarun Bajaj, Shri K.V.R. Murty, Dr. V. Ravi Anshuman.

Powers of SEBI

Chapter IV of the SEBI Act, 1992 deals with the powers and functions of SEBI. The
Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as “…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”. Securities and Exchange Board of India is
a  quasi-judicial, quasi-executive body and quasi-legislative. It can draft regulations, conduct
inquiries, pass rulings and impose penalties.

 Quasi-judicial powers: In cases of frauds and unethical practices pertaining to the

securities market, SEBI India has the power to pass judgements. The said power
facilitates to maintain transparency, accountability and fairness in the securities
market.
 Quasi-executive powers: SEBI has the power to examine the Book of Accounts and
other vital documents to identify or gather evidence against violations. If it finds one
violating the regulations, the regulatory body has the power to impose rules, pass
judgements and take legal actions against violators. It can also make companies list their
shares in more than one stock exchange if they see that it will be beneficial to investors.
 Quasi-Legislative powers: To protect the interest of investors, the authoritative body
has been entrusted with the power to formulate suitable rules and regulations. Such
rules tend to encompass the listing obligations, insider trading regulations and essential
disclosure requirements. The body formulates such rules and regulation to get rid of
malpractices that are prevalent in the securities market.
Government has promulgated Securities
Laws (Amendment) Second Ordinance, 2013 that would amend the Securities and
Exchange Board of India Act, the Securities Contracts (Regulation) Act and the
Depositories Act. With these amendments, Securities and Exchange Board of India 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 Securities and
Exchange Board of India 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.

Functions of SEBI

The functions of SEBI are enlisted in the SEBI Act, 1992 after its establishment as the
statutory body. Its major role is to cater to the needs of three parties (Securities, Traders &
Investors, Intermediaries) in the Capital stock exchange market of India.
The function of SEBI are broadly divided into three parts described below:

1. Protective Functions:
The following are some of the major functions of SEBI that help in creating a safe and
transparent environment for investors.

 Safeguard the Interests of Traders and Investors

Since traders are the base of the capital markets, their major responsibility is to protect their
interests and make sure that none of the investors become the victim of any trade fraud. For
this, it organizes certain seminars and events from time to time that helps in educating both
traders and investors.

 Limit Price Rigging

Since SEBI came into force to stop manipulated huge fluctuation. Although fluctuation is the
trend of the financial market sometimes some of them are already fixed (price rigging) by the
corporate or group of corporate. Such fluctuations resulted in the huge loss of money of the
investors.

To stop such incidents of price rigging SEBI plays an effective role. It keeps surveillance on
such cases. One of the approaches of SEBI to prevent it is the introduction of circuits.
On analysis of the closing figure of the day before, the circuit also called the threshold, is
defined by the SEBI. If the security price goes down beyond the circuit value, the circuit
breaker role comes into play and the trade of that particular security is halted for hours or for
the whole day.

 Prevent Insider Trading

The company's stock price fluctuation is highly affected by the pre-announcement or any
early news within the company. Coming across such news, some of the employees within the
company sell or buy the company security beforehand. This type of trading is called insider
trading,

To prevent it, SEBI blocks the trust of the listed companies and the employee welfare
schemes that prevent them from purchasing their own shares from the secondary market.

Also, according to the SEBI guidelines, the listed companies need to disclose their
employee's benefits schemes include the stock purchase and make them align as per the
ESOS and ESPS guidelines.

 Financial Intermediates

SEBI is the intermediate body in the stock market whose responsibility is to ensure that all
the market transactions take place smoothly and securely. Thus, it played a key role in the
capital market and monitor every activity of financial intermediate like broker, sub-broker,
etc.
2. Developmental Functions:
These functions are important as it brings freshness and innovations in the Indian financial
market. Many developmental functions are being performed by the SEBI, some of them are:

 Electronic platform introduction for streamlining processes in the financial market.

 Introduction of DEMAT form of securities.
 Offering training for financial intermediaries. 
 Permitting IPO through the exchange.
 Imparting training to intermediaries.
 Promotion of fair trading and reduction of malpractices.
 Carry out research work.
 Encouraging self-regulating organizations.
 Buy-sell mutual funds directly from AMC through a broker.

3. Regulatory Functions:
These functions are basically performed to keep a check on the functioning of the business in
the financial markets which includes the enforcement of SEBI bye-laws to the corporate and
financial intermediaries. This function ensures the smooth and transparent functioning of the
stock market.

These functions include-

 Designing guidelines and code of conduct for the proper functioning of financial
intermediaries and corporate.
 Regulation of takeover of companies.
 Conducting inquiries and audit of exchanges.
 Registration of brokers, sub-brokers, merchant bankers etc.
 Levying of fees.
 Performing and exercising powers.
 Register and regulate credit rating agency.

Role of SEBI in Securities Market

Securities market- Securities market is a component of the wider financial

market where securities can be bought and sold between subjects of the economy, on the
basis of demand and supply. Securities markets encompasses stock markets, bond
markets and derivatives markets where prices can be determined and participants both
professional and non-professional can meet.

Securities markets can be split into two levels: primary markets, where new securities are
issued, and secondary markets where existing securities can be bought and sold. Secondary
markets can further be split into organised exchanges, such as stock exchanges and over-the-
counter, where individual parties come together and buy or sell securities directly. For
securities holders knowing that a secondary market exists in which their securities may be
sold and converted into cash increases the willingness of people to hold stocks and bonds and
thus increases the ability of firms to issue securities.

There are a number of professional participants of a securities market and these

include; brokerages, broker-dealers, market makers, investment managers, speculators as well
as those providing the infrastructure, such as clearing houses and securities depositories.

A securities market is used in an economy to attract new capital, transfer real assets in
financial assets, determine prices which will balance demand and supply and provide a means
to invest money both short and long term.

Power to make regulations of SEBI

(1) The Board may, by notification, make regulations consistent with this Act and the rules
made thereunder to carry out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing Power, such
regulations may provide for all or any of the following matters, namely:

(a) the times and places of meetings of the Board and the procedure to be followed at such
meetings under Section 7(1) including quorum necessary for the transaction of business;

(b) the terms and other conditions of service of officers and employees of the board under
Section 9(2);

(c) the matters relating to issue of capital, transfer of securities and other matters incidental
thereto and the manner in which such matters shall be disclosed by the companies under
Section 11A;

(ca) the utilisation of the amount created under sub-section (5) of Section 11;

(cb) the fulfilment of other conditions relating to collective investment scheme under sub-
section (2A) of Section 11AA;
(d) the conditions subject to which certificate of registration is to be issued, the amount of fee
to be paid for certificate of registration and the manner of suspension or cancellation of
certificate of registration under Section 12;

(da) the terms determined by the Board for settlement of proceedings under sub-section (2)
and the procedure for conducting of settlement proceeding under sub-section (3) of Section
15JB;

(db) any other matter which is required to be, or may be, specified by regulations or in
respect of which provision is to be made by regulations. (Section 30).

SEBI- Informal Guidance

In its effort to have better regulation and orderly development of the securities market, SEBI
issued a scheme for Informal Guidance called “Securities and Exchange Board of India
(Informal Guidance) Scheme 2003”. The said scheme was of contemporary importance as
SEBI receives a number of requests from various market participants for advance guidance
on the interpretation of the provisions of SEBI Act, Rules, Regulations, and Circulars. It was
a “formal” scheme launched by SEBI in the name of providing “informal guidance.” As the
name suggests the guidance provided is ‘informal’ and is not to be construed as a conclusive
decision of any question of law or fact by SEBI. Moreover, such letter giving informal
guidance cannot even be construed as an order of the Board under section 15T of the SEBI
Act and as such will not be appealable. The Scheme which came into operation with effect
from 24th June, 2003, provides that only an intermediary registered with SEBI or a listed
company is eligible for seeking informal guidance under the said Scheme.

The Scheme provides that SEBI would give informal guidance in two forms :-

a) No action letter- In such a letter the concerned department of SEBI would indicate that
the said department may or may not recommend any action under any Act or rules,
regulations, guidelines, circulars or other legal provisions administered by SEBI.

b) Interpretive letter- The other category of letters that could be issued by a department of
SEBI would provide an interpretation of a specific provision of any Act, rules, regulations,
guidelines, circulars, etc. administered by SEBI. The interpretation would be given in the
context of a proposed transaction in securities or a specific factual situation.
Conditions for seeking informal guidance:

 One who seeks informal guidance will have to state that he is seeking informal guidance
under the said Scheme. He will have to mention that he is requesting for a no action letter
or an interpretive letter.
 The request has to be accompanied with a fee of Rs. 25,000/-.

 The request has to be addressed to the concerned department of SEBI. In other words,
before making a request under the Scheme, it would be advisable for the requestor to
ascertain the correct name of the department to which the request may be addressed.

 It must be ensured that there is a clear description of the nature of request. All the
material facts and circumstances involved along with the necessary analysis should be
mentioned. In addition, applicable legal provisions need to cited affecting his request.

Period of disposal as per the Scheme, SEBIs department will have to respond within a period
of 60 days from the date of the receipt of the request. It may even give a hearing to the
requestor.

Grounds for rejection of request:

It is not that the SEBI will accept each and every request received by it seeking informal
guidance. According to Clause 8 of the said Scheme, SEBI can reject the request in the
following circumstances: -

 If the request is general in nature and does not adequately describe the factual situation;
 If the request involves hypothetical situations;

 If the request has no direct or proximate cause with the requestor;

 If applicable legal provisions are not mentioned;

 If the request involves a similar question that has already been entertained by the same or
any other department of the SEBI;

 Cases in which investigation, enquiry or other enforcement action has already been
initiated;

 Cases which are pending before any Tribunal or Court; and

 Cases where the department cannot respond due to policy concerns. When a request under
the Scheme is rejected by SEBI, it will deduct an amount of Rs. 5,000/- towards
processing fees. In the ordinary course, as per Clause 11 of the Scheme, any such request
responded by the department would be put on the SEBI website and will be available to
the public. But it should be noted that such confidentiality will be restricted to a
maximum period of 90 days.

Registration of Intermediaries:

A person in the following capacity shall buy, sell or deal in securities after obtaining a
certificate of registration from SEBI, as required by Section 12:

(1) stock-broker; (2) sub-broker; (3) share transfer agent: (4) Banker to an issue; (5) Trustee
of Trust deed; (6) Registrar to an issue: (7) Merchant Banker: (8) Underwriter: (9)
Portfolio manager: (10) Investment adviser: (Il Depository: (12) Depository participant;
(13) Custodian of securities: (14) Foreign institutional investor; (15) Credit rating agency;
or (16) Collective Investment Schemes: (17) Venture Capital Funds: (18) Mutual Funds;
and (19) Any other intermediary associated with the securities market.

Check and Balance of SEBI’s Powers

Appeal before SAT

 Every order of SEBI is appealable to the SAT.

 Appeal to be made within 45 days of the date of receiving the order.

 SAT can confirm, modify or set aside the order appealed against.

 Endeavour to be made to dispose of the appeal within six months.

Appeal before the Supreme Court

 Appeal against the SAT’s order can be filed with the Supreme Court.
 Appeal to be made within 60 days.

 Appeal only on any question of law.

 Graphical Representation of scams in the Financial Market over the years: There was a
gradual increase in the number of scams held in our country since 1990’s and it was a
common phenomenon every year in those days. However, the number of scams has also
come down gradually in the last few years

Here’s a quick overview of the number of major scams held in our country-

SEBI has till date played a significant role in maintaining efficiency and transparency in the
economy and has also introduced various products fulfilling the need of market participants.

Changes Introduced by SEBI in capital market:

 T+2 trading settlement system.

 De-materialization of share certificates (1999).

 Banned entry loads for mutual fund schemes in 2009.

 The task of giving approvals to FII registrations was handed over to SEBI in 2003. In
order to discourage FII investments made through P-notes, Securities and Exchange
Board of India has imposed sufficient checks and balances to avoid the flow of black
money into the Indian markets.

 Strict vigil on usage of IPO issue proceeds, greater disclosure by companies and their
bankers and allotment of a minimum number of shares to retail investors. Keeping with
 the times, SEBI has also introduced e-IPO procedure for electronic bidding in public
offers to help investors bid for shares in a cost-effective manner.

 In 1996-97, Securities and Exchange Board of India directed all exchanges to fix the daily
price band at 10% and a weekly overall limit of 25% to curb undesirable volatility. To
bring about a coordinated trading halt in all equity and derivatives market nationwide,
Securities and Exchange Board of India introduced an index based circuit breaker system
applicable at 10%, 15% and 20% movement either way.

 Securities and Exchange Board of India has a web-based centralized grievance redress
system called SEBI Complaints Redress System – SCORES for assisting investors to
lodge their complaints in a structured way.

 International Organisation of Securities Commissions- IOSCO under its Financial Sector

Assessment Program – FSAP acknowledged that the comprehensive risk management
framework prescribed by SEBI is one of the pillars of the Indian securities settlement
system.

 Securities and Exchange Board of India distinguishes itself from other regulators in India
as it is a financially independent regulator with its own sources of revenue. At its board
meeting on August 21, 2019, SEBI has approved amendments to the SEBI (Prohibition of
Insider Trading) Regulations, 2015 ('PIT Regulations') establishing an informant
mechanism.

 In April 2019, SEBI amended the PIT Regulations and introduced a requirement for the
'Board of Directors' to maintain a structured digital database containing details of persons
with whom information is shared under the PIT Regulations.

Landmark Case laws:

1. Sahara India Real Estate Vs. SEBI, 2012

This case is about optional fully convertible debentures (OFCD) that the two of Sahara
Group’s unlisted companies – Sahara India Real Estate and Sahara India Housing Investment
– issued during 2008–2011, collecting more than Rs. 24,000 Cr. from 30 million investors. A
convertible debenture entitles the holder to become a shareholder in the company at a later
stage, if he so chooses.
In 2011, SEBI ordered Sahara to refund this amount with interest to the investors, as the issue
was not in compliance with the requirements applicable to the public offerings of securities.
The Company issued convertible debentures and secured Rs. 24,000 Cr. from retail investors.
Sahara Appeals in Supreme Court that SEBI has no jurisdiction for the proposed issue.
Supreme Court asks Sahara to approach Securities Appellate Tribunal(SAT). SAT upholds
SEBI orders. Later, the case was heard in the Supreme Court where the SAT orders were
upheld and Subrata Rao was sent to jail.

2. NSEL SCAM, 2013

National Spot Exchange Ltd (NSEL) is a company that was promoted by Financial
Technologies Indian Ltd and the NAFE. Two individuals named Jignesh Shah and Shreekant
Javalgekar were held guilty for this scam. The Funds that were procured from the ignorant
investors were siphoned off. This is because most of the underlying commodities did not
have any existence at all. The transactions of commodities were being carried out only on the
paper.

NSEL attracted the attention of the retail investors by offering them fixed returns on paired
contracts in commodities. Around 300 brokers have been alleged roles in the ₹5,500-crore
NSEL scam in 2013.

3. SATYAM SCAM, 2003

The Chairman of  Satyam Computer Services Limited (SCSL), Mr. Ramalinga

Raju confessed to SEBI of the manipulation done by him in the accounts of the Company.
This corporate scandal was carried on from 2003 till 2008. It is estimated that the fraud took
place for around Rs five thousand crores of cash balances as the company by falsifying
revenues, margins. He cooked the company’s book by overstating its revenue, profit and
profit margins for every single quarter over a period of 5 years. The intention was to show a
rosy picture of the company to the investors, employees and analysts and to try and convince
them that the company was far bigger as an enterprise than it actually was. To achieve this,
the accountants generated fake invoices to record sales that didn’t exist. Profit figures were
also manipulated in the same manner. On January 07, 2009, Raju sent his resignation to the
company’s board and confessed to a US $1.5 billion fraud.
4. M/S. MCX BIZ SOLUTIONS AND MR SYED SADAQ, 2013

In the matter of M/s. MCX Biz Solutions (hereinafter referred to as “MBS”) SEBI noticed
that the entity was soliciting and collecting money from public and was promising high
returns. Therefore, SEBI undertook preliminary inquiries into the matter and it was observed
that MBS is maintaining a website wherein it has claimed to be active in stock trading and
commodities trading. It was further observed that on its website MBS had displayed a sub-
broker registration certificate showing it to have been issued by SEBI. The certificate was
fake and MBS was observed to be not registered with SEBI as represented. Hence vide Order
dated November 18, 2013, MBS and its sole proprietor Mr. Syed Sadaq were inter-alia
restrained from accessing the securities markets and further prohibited from buying, selling
or otherwise dealing in securities, directly or indirectly, or being associated with the
securities market in any manner till further directions.

5. PUNJAB NATIONAL BANK SCAM, 2018

The latest and the largest banking fraud in the history of Indian markets, Nirav Modi
defrauded PNB (Punjab National Bank- Second largest public sector bank) more than 11,300
crores. Billionaire jeweller Nirav Modi pulled this scam by acquiring fraudulent LOUs
(Letters of Undertaking) from one of PNB’s branches in Mumbai. These LOUs were
eventually used for overseas credit from other Indian lenders. PNB’s core banking system
was bypassed such that payment notes were raised to overseas branches of other Indian banks
(Allahabad Bank, Axis Bank, and Union Bank of India to name a few). This was carried out
by using the international financial communication system, SWIFT. Nirav Modi is said to
have learned the tricks of the trade from Mehul Choksi, his uncle and also CMD of jeweller
brand Gitanjali Gems.

After years of mastering this trade and using LOUs, PNB in March 2018, informed the
exchanges, SEBI and CBI that it had detected some fraudulent and unauthorized transactions
in one of its branches. This was done to benefit only a few selected account holders. Based on
transactions, other banks were involved too as they had paid these account holders money
abroad. As soon as the amount was disclosed, the whole market turned bearish and PNB
shares saw its worst hit. The sad part to the story is that the guilty, Nirav Modi and Mehul
Choksi fled the country before the scam came to light. They still not have been brought back
to India.

Conclusion

The SEBI has a very wide range of powers. Some of these powers are of discretionary in
nature. These discretions is often being questioned by the aggrieved. Few contend that the
power to issue directions is arbitrary, few says that it is not constitutionally valid. But often
the Supreme Court stands on the side of SEBI Act saying that, the discretionary power is
subjected to the scope in the act. The preamble clearly says what, when and how. The powers
to issue directions of the SEBI alone is a vast power conferred up on it. The above mentioned
judicial decisions clarifies the scope of the power. Since its establishment in 1992, a lot of
initiatives have been taken to protect the interests of the investors. Thus, SEBI under the
SEBI Act, 1992 has been empowered to frame subordinate legislation and to investigate
wrong doing, impose relevant penalties and to conduct search and seizure operations.