CHAPTER SEBI AND INVESTOR

PROTECTION 99

SEB0and Investor As aprotectors of the interest of investors and for the development of
stock exchanges SEBI:

7 Protection (a) Regulates the activities of stock exchanges.

(b) Protects the rights of investors by ensuring the safety of their invest
ment.

(c) Prevents fraud and malpractices of brokers and companies.

() Regulates and develops acode of conduct for brokers, underwriters,
merchant bankers and other intermediaries.
LEARNING OBJECTIVES:
you should be able to understand. Trading that occurs outside of general market regulation. Generally
After studying the chapter occurs through computers or telephones after the official exchange
> Investor
protcction - Meaning has closed.
investor protection (e) Informs investors about their purchases, transactions and also the
> SEBI and its role in affairs of the company that they have invested in. The guidelines for
trading
Price rigging and insider the protection of the investors are now enshrined in issue of capital
Development of financial marke and disclosure requirement ([CDR) Regulations 2009.
> Major contributions of SEBI in
The broader objectives of SEBI are as follows:
Market, the inter
To ensure a steady flow of savings into the Capital
Introduction ests of the investors has to be protected.
important factor fa they can raise
Protecting the interest of the investors is the mostmarkets. Malpractiks Ensuring the fair practices by the companies so that
developing confidence and faith in the financial kerb trading, circu
resources at nminimal cost.
merchant bankers and
likeprice rigging, unofficial premium on new issues,
stock exchanges and listi
Promotion of efficient services by brokers,comnpetitive and profes
become
trading and violation of rules and regulations of other intermediaries so that they
investors' confidence in the financial markets I
requirements shake the sional. three
faith and confidence of the investors in thefinancial
markets and mac objective, SEBI has to undertake these
stock market scams. 1 So as to achieve these broader
especially the stock markets get shattered bythe therefore, made important functions:
long felt need for a regulatory and surveillance body,
India (SEBI) Protective functions
Government of India set up Securities Exchange Board ofregulator oftk iü Developmental functions
1988, which was granted legal status in May 1992to act as
financial market in India. iiü Regulatory functions. like
describesthe By checking and
controling the malpractices
attempts
The Preamble of the of India Protective Functions: trading SEBI
basic functions of theSecurities
and ExchangeBoard
Securities andExchange Board of India as
1. trading, front running, insider
pricerigging, circular
promoteth interest of investors.
"...to protect the interests of investors in to to protect the
securities and matt
for ()It Prohibits Price Rigging: prices ofsecurities with the main
devclopment of, and to regulate the securities market and to manipulating the securities. SEBI
connected therewith or incidental thereto Quasi-legislatis
refers
Price rigginginflating depressing the market price of personindulges
Objective of or a
severepenalties.Ifsecurities,
Three important functions of SEBI can be rolled into as byimposing he will
frames prohibitssuchmalpractice practices relating to is
quasi-judicialand quasi-executive.
It conducts In its legislativeecapacityit functis
In any fraudulent
and unfair trade
three times the profits made, whichever

In its judicialinvestigation R25 crore or

executive t
and
capacity passesenforcement
it orders.
action in its Tace a penalty of TAXMANN

98
 SEBIANDINVESTORPROTECTION

imprisonment of up SEBI AND INVESTOR 101

PROTECTION
is used toten yean
100
wouldalso face
techniques which
Apart
higher.fine from this, he
crore. One of
the
of
speculatore quite
ofte SEBI's powers tor search &seizure:
and a of 25 circular trading. Numbergullibleiinvestors
for price riggingtoispush upthestockand
when
39 entities indulges
from sbuy thosg
i Over aperiod of time SEBIhas been empowered, with enough teeth to
take on manipulators and players violating its regulations. For long. the
Crculartradingquietly
SEBI banned
exist. In 2011 scripslike spectacle infotek, marketsto
Gold stong
SEBI had complained about in adequate powers to punish those indulging
in market manipulations and other violations. The Cabinet approved an
shares they circulartradinginthe and containers.
indulgingin
Technologjes, LGS Global
bannedtradingin
Well pack papers
and Kamalakshi finance where33 entities .Sirmilar
driveto check possible wete
Ordinance granting most of the powers sought for by the regulator, atter
a string of scams rocking the market in the last few years.
in 2015SEBI share price as a part of its 2017SEBI misus TheOrdinance has amended the SEBI Act which empowers the regulator
manipulatingits
ramp up the prices.In listed l barred about 15 now to impose the monetary penalties for various offences to either three
of stock market to
manipulatedthe stock prices
of 12 companies. SEB
intwo separate times the undue gains made by a market player or a maximum of 25
entities who"unlawfulgains" totalling over 20croreExelon cases crore. SEBIhas also been granted powers to search and seize the books of
and
impounded
of price rigging involving RuchiSoyaIndustries
conducted by(SEB)found
thatthe Infrastriuctndulugree
entities
had
account and other documents of stockbrokers and intermediaries. It can
also call for information from banks and institutions. Al these changes
Aninvestigation and unfair trading practices and allegedly made profits, address the problems faced by SEBI recently in tackling the misconduct
in manipulative of market players.
trading:
(ii) It Prohibits Insider such as (itt) SEBIprohibits fraudulent and Unfair Trade Practices:
Insider is any person connected with the company
These insiders have an access to sensitiye
diirecton SEBI doesnot allow the companies to make misleading statements which
promoter'sauditors lawyers etc. securities. This information are likely to induce the sale or purchase of securities by any other person.
information which may affect theprices of theget this privilegedinformation wherein companies cannot change terns of the debentures
at large but the insiders (iv) Guidelines
not available topeopleinformation for making profits, it is known as insider have been issued for investors' interest in midterm.
and if they use this prices are not
trading. For example, the directors of a company may know that company (v) Preferential allotment of shares unrelated to market
purchase shares before the
will declareexcellent quarterly results and they by selling the shares when the
permitted anymore.
information is announced and make profits 2. Developmental Functions:
keepsa
price of the share goes up. This is known as insider trading. SEBIand takes The most radical change in the Indian
financial markets during the last
strict check when insiders are buying securities of the company transformation of the trading, clearing and settlement
against them for insider trading. decade is the complete burdened with the problems of paper in
strict action infrastructure. From a market
trading structure where brokers and sub
SEBI compels corporate insiders to surrender any short-term profit thej physical trading and an opaquehas been a dramatic transformation to a
make on trading in their company's shares. SEBI clearly sees all buy-sl brokers ruled the roost, there system. Major changes which
transactions of company insiders as driven by inside information. Insde paperless market and transparent trading develop activities in stock
transactions needlessly rise in the minds of investors a suspicions of tradit have been brought about by SEBI to promote and completely
based on privileged and private information, This has, therefore, advers exchange and increase the business in stock exchanges havedevelopment
market. Under the category of
consequences for a company's reputation and for the market that allo changed the complexion of the following functions are performed by
SEBI:
unbridled insider transactions. SEBI has recently imposedlafine of 100 of the financial markets the
crore on Reliance Industries for insider trading. Reliance Industries hs intermediaries of the securities market.
been banned from equity derivatives market for a year. In this casedating () Training of most profitable
lentitis Educating investors so that they are able to select the
back to 2007, SEBI has found Reliance () securities for investments.
guilty of fraudulent and manipulative Industries and 12 related brokers.
trades. Initiating internet trading through registered stock
2 (ih)
TAXMANN

TAXMANN
 PROTECTION
INVESTOR
SEBIAND
102
the cost of
underwriting optional to reduce public SEBI AND INVESTOR
PROTECTION 103
( ) Making . SEBI conducts inquiries and audit of
()the
Permitting thesubscriptiontoInitial public offer of primary mat
ii SEBIalso controls and regulates the stock exchanges.
investors.

exchanges(secondarymarkets). working of depositories, cus

todians of securities. Foreign Institutional
For thethrough stock
last few years or so, all trades on the National Stock ExXcha agencies etc. Investors, credit rating
doubt,the process of
(paperless mode). Noforced vit. Regulating the working of Venture Capital Funds and mutual funds.
Exclecthaon
settled in demat Bomabay Stock
areadopt
to thisset off bythe NSE,
contemporary but SEBI
trading systems. Cutting downthe settleme ix Seeking information from, undertaking
trading was inspection, conducting n
quiries and audits of mutual funds and other
towards a T+1 intermediaries.
cycle and now planning to go forward
the markets
has madethere
much safer for investors settlement s ystn Seeking intormation and record from any banks which are under
investigation or inquiry by the SEBL.
SEBI
Consequently, is anincrease in number of traders including banl
companies,,mutual funds,, xi Monetary penalties on intermediaries and other participants for a
institutions,
foreign portfolio
financial insurance
investors primarydeale
(FPIs) etc. to transact through the Exchang range of violations can be imposed by SEBI. I can even suspend
their registration for a short period.
markets has been the
trading. Major
stock
Areal landmark in the history ofproportion of the trading on
of the derivative executed through the derivatives market.
iIndian
ntroducig
Stu
SEBI has been provided requisite powers to impose penalties and
adjudication for non-compliance of its various regulations.
Exchanges is now Various penalties which can be imposed by SEBI are -
in 1998 for regulatory framework fo
Committee was appointed by SEBI introduction
phased of derivatives tr 1. Penalty for failure to furnish information, return, etc.- If any person,
derivatives trading. With SEBI's a new land mark in Ib who isrequired under this Act or any rules or regulations made there
in India beginning with Stock Index Futures under,
stock markets was achieved. (a) Fails to furnish the report same, he shall be liable to a penalty
Derivatives have been accorded the status of 'Securities'and the ban impos of one lakh rupees for each day during which such
failure
on trading in derivatives in 1969 by Government was revoked. Derivatie continues or one crore rupees, whichever is less
trading started in India at NSE in 2000 and BSE started trading in te information within
(5) fails to file return or furnish the report orpenalty of one lakh
year 2001with SEBI providing all the requisite support. Risk Containmen the stipulated time he shall be liable toa
Measures (RCM) in the Indian Stock Index Futures Market was also puti failure continues or
rupees for each day during which such
less
place at the behest of SEBI. one crore rupecs, whichever is
maint:ain the books of account or records, he shall be
3. Regulatory Functions: (c) fails to for each day during which
liable to apenalty ofone lakh rupees
To regulate the activities of stock exchange following functions an crore rupees, whichever is less.
performed by SEBI: such failure continues or one
agreement with
any person to enter into an each day during
i Rules and regulations and a code of conduct merchant banken 2. Penalty for failure byfixed as.- one lakh rupees for
brokers, underwriters, etc have been framed by SEBI. clients has also been or one crore rupees,
whichever is less.
which such failure continues investors' grievances also one lakh ru
iü Private placement which was found to be manipulated by mos Penalty for failure to redress
which such failure
continues or one crore
the companies has been made more restrictive. pees for each day during
less.
iii SEBI registers and regulates the working of stock brokers, su rupees, whichever is penalties for certain
kers, share transfer agents, trustees, allths requisite power for imposing
who are associated with stock merchant bankers and 3. SEBI possess
defaults in case of mutual
funds.
rupees for
exchange in any penalty of one lakh
iv. SEBI registers and regulates the working of manner. fund is liable to a
(a) A mutualduring which the activities are being
carried or one
mutualthrough
. SEBI regulates takeover activities of the companies funds evarious each day TAKMANN
regulations under SEBI takeover code,
TAXMANN
104 SERIAND INVESTOR PROTRCTON
SEBIAND
on mutualfunds it it startsthe activities without INVESTOR PROTECTION
certiticate of registration.
(0) itamutual funds, fails tocomply withtheterms and
obtaintng h Major contrlbutlons of SEBI:
After SEBIofcoming to the rescue of
105

rcuoneopees
nditictonoforgre confidence the the
of certificate of registration, a penalty of onelakh domestic internationalfinancial market
Majorcontributions of and
in 2000, the
cach day during which such failure continues or up. SEBI can be investorsas
enumerated
has been bolstered
rupees, whichever is less shall be imposed. 1. SEBIhaslbeen
successful aregulator
SEBI has been active in as byypushingsystemic reforms.
() famutual funds, does not apply for thelisting of its s setting up the regulations
a penalty of one lakh rupees for each day during which
failure continues or one crore rupees, whichever is less shal
schemes law.
2. SEBI has also been quick in
Satyam fiasco.
sas required under
taking and effective steps in light of the
be imposed.
() if a mutual funds,does not follow the rules of investment . SEBI liberalized the takeover code to
moving regulatory strictures. facilitate investments by re
penalty of one lakh rupees for each day during which such A SEBIcame out with a heavy hand on the
failure continues or one crore rupees, whichever is less shel use of participatory notes
be imposed by foreign funds.
(g) it any asset management company is restrained to do cer 5 SEBIis planning to make it compulsory for promoters to disclose the
tain activities but continues to do those activities, such aset end use of funds raised throughpledging their shares with financiers.
management company shall be liable to a penalty of one ak 6. IPO's grading to help investors in taking the decision of investing in
rupees for each day during which such failure continues or astock has been introduced by SEBL.
one crore rupees, whichever is less. 7. Promoters of listed companies can now make offer for sale by selling
their stake directly to the public.
Powers to controlstock brokers: 8. A corpus for investor education in mutual funds has been built up
(a) if a stock broker does not provide a contract note to its client then by SEBI.
such broker shall be liable to a penalty not exceeding five times.the 9. Stock exchanges have to preserve papers for five years as per SEBI
amount for which the contract note was required to be issued by guidelines.
that broker;
10. SEBI has made amendments to the simplified listing agreement for
(b) ifa stock broker fails to deliver any security or fails to make payment debt securities
of the amount due to the investor in the manner within the period 11. Time-frame for listing a share after the public issue to seven days as
specified in the regulations, he shall be liable to apenalty of one lakh per the new SEBI guidelines.
rupees for each day during which such failure continues or one crore follow-on offers
rupees, whichever is less. 12. SEBI has allowed auction for QlBs in
Receipts (DRs) more attractive
(c) if a stock broker is overcharging he shall be liable to a penalty of one 13. SEBI has made Indian Depository investors to IDRs and mandating
lakh rupees or five times the amount of brokerage charged in excess of anchor
by extending the concept investors in such issues.
of the allowed brokerage. a 30 per cent quota for retail in the initial
() An acquirer is supposed to disclose the information take-overs-If he 14. Theregulatorintroduced the conceptof anchor investors a promoter of
investor, who can't be
fails to disclose the aggregate of his shareholding in the company public offer (IPO). The anchor per cent of the
before he acquires any shares; or make a public announcement to issuer company, can be allocated as much as 30(usually 60 per
the institutional buyers
acquire sh¡res at a minimum price or make a public offer by sending portion reserved for qualified
bidding process.
letter of ofer to the shareholders of the concerned company; he shal cent)in an issue through a
be liable to a penalty of twenty-five crore rupees or three times
amount of profits made out of such failure, whichever is higher the TAXMANN
TAXMANN®
 106 SEBIAND INVESTOR PROTECTION SPBAND INVESTOR PROTPCTION 107
governance regulaio improvements in the securities markets
15. SEBI has become stringent for corporate The
margining, and like capitalization requirements,
the regulator chose to push for better compliance by pursuing
compani
establishment of
the market has happened after theclearing
establishment of SEHL.etc. reducing the tisk of
corporations
sending notices to the "biggest and perhaps not the best" SEBIhas,introduced the comprehensive regulatory measuresincluding Prescribcd
norms for disclosure of quarterly unaud
16. SEBI has introduced Registration norms, the eligibility criteria, code of obligations and the code of
results of companies. Conductfor different intermediaries like, bankers to issue, merchant bankers,
(IEPF) has been built .. brokers and sub-brokers, registrars, portfolio managers, credit rating agencies,
17. Investor Education and Protection Fund underwriters and others. It has also created Laws related to risk identification
for educating investors. management systems for clearing houses of
after : stock exchanges ssurveillance
18. SEBI has revived the confidence in the commodity market andrisk
system etc. It gave the approval of trading in stock indices (like S&P CNX Nifty &
was afflicted by the scam in 2013. Sensex) in2000.,
19. SEBIhas launched the Securities Market Awareness programswhich it got a further Shot in the arm when the commodities regulator
and create awareness Very recently,
arè regularly organized by SEBI to educate subjects like por EMCcame
under the banner of SEBI with commodities market's surveillance and
coming
among the investors. The programs cover majorInvestor Protection control also under the regularly eyes of SEBI. Investors may however note
Mutual Funds, tax provisions, that as a regulatory
body SEBI cannot guarantee or undertake responsibility for
folio management, SEBI. repayment of money to the investors. It is SEBI's endeavour to educate the
Fund, Investors' Grievance Redressal system of the
estors of the general riskwhich prevail in the capital market as well as commodity
20. Guidelines for bringing transparency in company's operations have arkets. Thus, an investor who enters the capital market must understand that and it
been issued by SEBI. there are risks which are inherent in the very nature of the financial market
him to take decision after proper assessment of the risks involved
21. SEBI issues public interest advertisemnents to enlighten investors on is necessary for
proposed investment
the basic features of various instrumeDts and minimum precautions and the benefits of the
ic they should take before choosing an investment.
22. The investors can make complaints to SEBI if they face problems
Review Questions
relating to their investment in industrial securities and financial
investors?
assets. 0.1 What is the role of SEBI in protecting the interest of
examples?
0.2 What is insider trading? Explain with the help of of the Indian
of SEBI in the development
0.3 Highlight the major contributions
Summary financial markets?
funds to control the mutual funds?
Indian stock markets has witnessed various frauds and scams by the stock brokers 0.4 What are the powers of mutual
like Harshad Mehta and Ketan Parikh, UTI Scam, merchant bankers, intermedi SEBI.
aries and even corporate like satyam software. The level of confidence amongst Q.5 Explain the developmental functions of the recent past for investor's
taken by SEBI in
investors owing tothis gets shaken up. For a long period of time there was a great Q.6 Explain different measures (B Com Hons, 201)
need of some institution which could take care of the inventor's safety in the stock protection.
markets, bond market, mutual funds and commodity markets. This long-felt need
has been was taken care of with the establishment of the regulator of the financial
markets - Securities exchange Board of India (SEBI).
Securities and Exchange Board of India (SEBI), came into existence in 1988 by
the Government of India for the smooth functioning of the capital markets. SEBI
as a statutory and autonomous regulatory body with defined responsibilities has
been set up. SEBI has performed remarkably well during the past
bolstering up the confidence of the investors in the capital markets. few years in

TAXMANN®