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. SEBI plays an important role in regulating the
securities market of India. Thereby it is important to know the purpose and objective of SEBI.

Why was SEBI formed?

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, 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.

Role of SEBI
SEBI acts as a watchdog for all the capital market participants and its main purpose is to
provide such an environment for the financial market enthusiasts that facilitate efficient and
smooth working of the securities market.
To make this happen, it ensures that the three main participants of the financial market are
taken care of, i.e. issuers of securities, investor, and financial intermediaries.

Issuers of securities
These are entities in the corporate field that raise funds from various sources in the market.
SEBI makes sure that they get a healthy and transparent environment for their needs.

Investor
Investors are the ones who keep the markets active. SEBI is responsible for maintaining an
environment that is free from malpractices to restore the confidence of general public who
invest their hard earned money in the markets.

Financial Intermediaries
These are the people who act as middlemen between the issuers and investors. They make the
financial transactions smooth and safe.

Functions of SEBI:
SEBI primarily has three functions-
1. Protective Function
2. Regulatory Function
3. Development Function

Protective Functions
As the name suggests, these functions are performed by SEBI to protect the interest of investors
and other financial participants.

It includes-

Checking 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.

▪
Prevent 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 trading. SEBI keeps a strict check when
insiders are buying securities of the company and takes strict action on insider trading.

▪
Promote fair 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.

▪ Create awareness among investors:

Some of SEBI's investor awareness initiatives:
* SEBI Investor Website: This website serves as a comprehensive resource center. It
provides financial literacy tools, educational materials, and calculators to empower
investors to make informed decisions [SEBI Investor Education & Protection Fund].
* Investor Awareness Programs: SEBI collaborates with various stakeholders to
conduct investor awareness programs across India. These programs cover a wide range
of topics, from basic personal finance to navigating the complexities of the securities
market [SEBI Investor Education & Protection Fund].
By providing practical tools and facilitating educational programs, SEBI empowers
investors to participate confidently in the Indian securities market.

▪ Prohibit 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.
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 wherein
companies cannot change terms in midterm.
▪ (b) SEBI is empowered to investigate cases of insider trading and has provisions for hefty
fines and imprisonment.
▪ (c) SEBI prohibits the practice of preferential allotment of shares at prices significantly
different from market prices to prevent unfair advantages.

Regulatory Functions

(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, share transfer
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. SEBI's takeover regulations aim to ensure fair and
transparent takeover practices to protect the interests of investors.

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

Regular audits uncover any misconduct by listed companies or exchange officials, which can
harm investors.

Levying fees: SEBI has the authority to impose fees on various market participants, including
listed companies, brokers, and investment funds. This revenue helps SEBI fund its regulatory
activities. It can also impose penalties for violations of securities laws and regulations.

Registering and regulating credit rating agencies: SEBI ensures the credit rating agencies
maintain objectivity and integrity in their ratings. It mandates these agencies to adhere to
specific guidelines and enforces strict disclosure requirements.

These functions are basically performed to keep a check on the functioning of the business in
the financial markets.
 Development Functions
SEBI performs certain development functions also that include but they are not limited to-

▪ Imparting training to intermediaries: SEBI conducts training programs for market

intermediaries like brokers, underwriters, and merchant bankers. This equips them with the
necessary knowledge and skills to operate efficiently and ethically.
▪ Carry out research work
▪ Encouraging self-regulating organizations (SROs),which are industry-driven bodies that frame
and enforce fair practices within their respective segments. This promotes self-regulation and
reduces the burden on SEBI.

▪ Buy-sell mutual funds directly from AMC through a broker

▪ SEBI tries to promote activities of stock exchange by adopting flexible and easily-
adaptable 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.

Objectives of SEBI:
1. Protection to the investors
2. Prevention of malpractices
3. Fair and proper functioning

COMPOSITION: The SEBI Board consist of nine members-

1. One Chairman appointed by the Government of India

2. Two members who are officers from Union Finance Ministry
3. One member from Reserve Bank of India
4. Five members appointed by the Union Government of India

Powers of SEBI:
When it comes to stock exchanges, SEBI has the power to regulate and approve any laws
related to functions in the stock exchanges.
It has the powers to access the books of records and accounts for all the stock exchanges
and it can arrange for periodical checks or Inspections into the workings of the stock
exchanges.

It can also conduct hearings and pass judgments if there are any malpractices detected on
the stock exchanges.

When it comes to the treatment of companies, it has the power to get companies listed and
de-listed from any stock exchange in the country.

It has the power of complete regulation w.r.t. all aspects of insider trading and announce
penalties and expulsions if a company is caught doing something unethical.

It can also make companies list their shares in more than one stock exchange if they see
that it will be beneficial to investors.

● Coming to investor protection, SEBI has the power to draft legal rules to ensure the
protection of the general public.

Power to issue directions. (Section-11B)

Under Section 11B of the SEBI Act, SEBI has the authority to issue directions to a variety of entities
involved in the securities market whenever it deems it necessary in the interest of investors or the
orderly development of the market. These directions can be issued to:

| Target | Description |

| Any person or class of persons referred to in Section 12 of the Act | This covers
intermediaries like brokers, underwriters, and merchant bankers |

| Any other person associated with the securities market | |

| Any company, in respect of matters specified in Section 11A | This deals with
issue of capital and disclosure requirements |

This power is instrumental for SEBI to intervene and rectify situations that could be harmful to
investors or the stability of the market.

Investigation- SECTION - 11C.

Section 11C of the SEBI Act empowers SEBI to conduct investigations into the affairs of
intermediaries or any person associated with the securities market. SEBI can initiate an investigation
if it has reasonable grounds to believe that:

* Transactions in securities are being conducted in a manner harmful to investors or the market.

* Any intermediary or associated person has violated the SEBI Act, its rules, regulations, or
directions.

Here's a breakdown of SEBI's investigative powers under Section 11C:

| Power | Description |

|---|---|

| Appointing Investigating Authority | SEBI can appoint any person to act as the Investigating
Authority and investigate the affairs of an intermediary or associated person. The Investigating
Authority then reports its findings to SEBI. |

| Requiring Production of Documents | SEBI can compel relevant individuals and entities to preserve
and produce necessary documents and records related to the investigation. |

| Demanding Information | SEBI can demand information and documents from intermediaries or
associated persons that might be relevant to the investigation. |

| Custodial Powers | SEBI can hold onto seized documents for up to six months before returning
them to the relevant party. |

In essence, Section 11C equips SEBI with the tools to probe potential misconduct within the
securities market and uphold investor protection.

Section 15J of the SEBI Act outlines the factors that an ADJUDICATING OFFICER must consider
when determining the quantum of penalty for a securities market violation. These factors are:

* Disproportionate Gain or Unfair Advantage: The adjudicating officer will assess any quantifiable
profit or unfair benefit gained as a result of the non-compliance.

* Investor Loss: The extent of loss suffered by investors or investor groups due to the violation will
be considered.

* Repetitive Nature of Default: If the violation is a repeated offense, it will likely lead to a stricter
penalty.