SEBI – Securities and Exchange Board of India

Securities and Exchange Board of India

SEBI was formed in 1988 and was given statutory powers through SEBI act 1992, the year in which the Rs.5,000 crore Harshad Mehta securities scam hit Indian stock markets.  It is the regulator of tradable financial assets (securities) market in India.

It is headquartered in Mumbai, Maharashtra and has regional offices in Delhi, Chennai, Kolkata and Ahmedabad.  Controller of Capital issues was the regulatory body before SEBI came into existence. Initially, SEBI was not given statutory powers.

What does SEBI do?

To answer this question one needs to read the preamble of SEBI which says the core function of SEBI is “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental there to”.

SEBI is a very powerful body which has done a good job in streamlining disclosure requirements to international standards. This, it has been able to do because of the powers bestowed on it. SEBI has Judicial, Legislative and Executive powers. However, these powers are partial in nature but still make the organization fast and swift in its functioning.

In order to instill accountability and transparency there exist an appeal mechanism.  Securities Appellate Tribunal has been established to listen to appeals against the judgments of SEBI. There is also an option to file an appeal directly to the Supreme Court.

Powers

1. Powers relating to stock exchanges & intermediaries – SEBI has powers over the stock exchanges and intermediaries dealing in securities. It can exercise this power to ask information of the business transactions of the stock exchanges and intermediaries for scrutiny.
2. Power to impose monetary penalties – SEBI can penalize market intermediaries and other participants by imposing a monetary penalty and suspending their licenses for a shot period.
3. Power to initiate actions in functions assigned – SEBI can initiate actions in regard to functions assigned.
4. Power to regulate insider trading – SEBI can regulate insider trading or can regulate the functions of merchant bankers.
5. Powers under Securities Contracts Act – For effective regulation of stock exchange, the Ministry of Finance delegated several of its powers under the Securities Contracts (Regulations) Act to SEBI. SEBI also nominates three members on the Governing Body of every stock exchange.
6. Power to regulate business of stock exchanges – SEBI also regulates the business of stock exchanges, intermediaries associated with the securities market as well as mutual funds, fraudulent and unfair trade practices relating to securities and regulation of acquisition of shares and takeovers of companies.

Organization Structure –

SEBI consists of a Chairman who is nominated by Union Government of India. Two members who are officers from un – ion finance ministry. One member is from the Reserve Bank of India.  The remaining five members are nominated by Union Government of India; out of them at least three shall be whole-time members.

Achievements –

1. Dematerialization of shares: In 1996, SEBI dematerialized the share market by doing away with physical certificates that were prone to postal delays, forgery, duplication, theft etc. this enabled electronic trading which made the lives of investors and traders easier.
2. Faster settlement process –  SEBI reduced the settlement cycle from T+5 days period to T+2 days period in 2003. This essentially means that a trade transaction gets completed effectively in 2 days. . Demat, T+2 settlements and the development of electronic markets are major achievements of SEBI.
3. Stronger and clearer regulations, orders – During the initial years the powerful broker’s lobbies could afford to ignore SEBI’s guidelines and instructions. This is a thing of the past now as the quality of regulations and orders passed by SEBI have neutralized these lobbies significantly.
4. Augmenting mutual fund industry – The mutual fund industry has been growing manifolds while earlier it used to be a monopoly with Unit Trust of India being the sole and major player. Unit Trust of India does not have a very wide reach, with its major presence being in Top 20 cities of the country. SEBI has prevented the mis-selling and has increased the popularity of mutual fund products. It relaxed KYC norms and roped in Postal agents to widen the rural network of mutual funds.

Key Challenges –

1. Laxity in enforcement processes – SEBI holds statutory powers similar as that of a civil court, but SEBI has not used its powers properly. The regulator needs t exhibit greater consistency when it comes to enforcement in order to instill confidence among investor.

2. Talent pool and market intelligence – The regulator needs to significantly improve its market intelligence, and talent pool in order to make the enforcement more reliable and transparent, protect investors, and allow the launch of more investment products without raising concerns regarding its ability to manage the resulting risks.
3. Matching up to global standards – The capital markets are growing at an exponential rate and hence a need arises to make SEBI large enough to deal with these surges. It needs to stay in touch or maybe ahead of global standards. Establishment of a Self-Regulatory Organization is the need of the hour.

At times SEBI has also found itself surrounded by controversies and has been criticized at others. On one hand, Cases such as Unit-linked Insurance Plan battle with Insurance Regulatory and Development Authority and an order to scrap agent commission in distribution of financial assets have attracted severe criticism but on the other hand cases such as the recent Sahara Scandal have proved and vindicated the importance of SEBI as the regulator of financial markets and also as the protector of investors’ interests.