SEBI: Objective and Establishment (Overview)

SEBI: Objective and Establishment | Overview

• There are four regional offices of SEBI
• Purpose of establishing SEBI
• Functions of SEBI
• Developmental Functions
• Protective Functions
• Regulatory Functions
• Objectives of SEBI
• Trinity Principles of Securities Regulations
• Report on SEBI Act, 1992
• Authorities and Powers of SEBI

This article discusses the establishment of SEBI. Securities and Exchange Board of India (SEBI) was set up vide notification No. 147 (E) dated 21.02.1992[1] in the form of statutory body. Ministry of Finance, Government of India issued the above-mentioned Notification under Section 3 of Securities and Exchange Board of India Ordinance, 1992 (5 of 1992) on 30. 01. 1992 which was promulgated by president of India.

The Central Government passed the Notification through which the Securities and Exchange Board of India was established with the purpose of giving effect to the Securities and Exchange Board of India Act, 1992. The Board is a corporate body with the above-mentioned name and all the characteristics of a corporation such as a common seal, perpetual succession and to enter into any agreement by the aforesaid name, be sued or sue.

Moreover, with the power that is subject to the provisions of SEBI Act, 1992, the Board is also empowered to acquire, hold and dispose of the property, which is both movable and immovable in nature. The main office of the Board is set up at Mumbai while the Board has the power to establish its regional offices at various places within India as per the requirement under Section 3 of the SEBI Act, 1992.

The head office of SEBI is located in Bombay (also called “Mumbai”) at SEBI Bhavan, Plot No. C-4A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai- 400051.

There are four regional offices of SEBI.

In the present times, the Regional Offices are empowered to deal with “operations of specific areas such as investor education, an inspection of brokers in the region, investor redressal, clearance of offer documents up to the value of Rs. 100 crore and all the other matters which are incidental to them such as court matters of that region or RTI etc.”[2]

Recently, SEBI has given assent to a proposal which was focusing on opening local offices at state capitals as well as on strengthening regional offices in a phased manner.

It is expected that these offices will be focusing primarily on investor assistance, investor education and investor grievances and so on. Not only this but also these offices are expected to shoulder the wide responsibilities and enhanced powers which are delegated to them as a part of the decentralization process.[3]

Purpose of establishing SEBI

The confidence of investors is eroded and the economic growth is impaired as a result of market abuse. Investors are lured into making investment decisions based on the incorrect or misleading information provided leading to the creation of artificial market and inflated results. Huge amounts of money were manipulated with the help of various financial scandals and security scams. Manipulators have a very vast knowledge about the working of the system and henceforth, they take advantage of this opportunity to manipulate the system as well as the investors.

Thus, the primary objective, which has to be achieved with the establishment of SEBI, is the creation of such an environment that helps in effective mobilization as well as the allocation of resources with the help of securities market of India. Such an environment is bundled with policy frameworks, rules and regulations, infrastructures and practices in order to meet the requirements of various class of people which are the main players of the market. Some of them are the investors, the market intermediaries and the companies, which are the issuers of securities.

• For the purpose of investors

The credit for making market active goes to the investors. SEBI has the motive of providing accurate, authentic and adequate information on a regular basis in order to safeguard the interests and rights of the investors. This is done in order to restore the confidence of the investors or the general public, who is willing to invest their money in the market.

• For the purpose of issuers of securities

The demand of the various corporate fields, who are responsible for issuing securities, is a transparent and safe market place where they can look forward to raising the number of funds confidently in an efficient and easy manner. SEBI works with the aim of making such a safe as well as a healthy market place available to the issuers.

• For the purpose of intermediaries

Intermediaries are those people who are entitled to act as middlemen for any transaction or agreement between the investors and the issuers. They are entrusted with the object of providing better services to the issuers and investors. For this purpose, SEBI is empowered to make an ever-expanding, professionalised and competitive market with an efficient and adequate infrastructure available to the intermediaries. Financial transactions become safer and smoother because of the role of intermediaries. They are also known as the brokers of the securities market.

FUNCTIONS OF SEBI

SEBI is entitled to fulfil various functions, which can be divided into the following three parts:

• Developmental functions
• Protective functions
• Regulatory functions

These broad functions can be subdivided into various other functions. Some of them are as follows:

DEVELOPMENTAL FUNCTIONS

There are various developmental functions of SEBI. Some of them are as follows:

• Promoting fair trade: It has made underwriting optional in order to achieve the goal of promotion of fair trade.
• Research: SEBI also makes a publication of the data and information which is necessary for various participants of the market in order to conduct effective research.
• Training of brokers: Intermediaries of the securities market are trained to promote the efficiency of the market.

PROTECTIVE FUNCTIONS

There are various protective functions of SEBI. Some of them are as follows:

• Prevention of various Fraudulent and Unfair Trade Practices: Price ragging and purchase or sale of securities with the help of several misleading statements forms some of the instances of Fraudulent and Unfair Trade Practices. SEBI aims at prohibiting such practices.
• Prohibition of Insider Trading: Promoters, directors and other key managerial personnel of the companies take advantage of the possession of the unpublished price sensitive information for making profits by trading into securities. SEBI aims at preventing such insiders to trade.

The SEBI Act of 2003 provides justification for the regulation of insider trading on the presumption of the fact that such an activity is not at all fair to outsiders investors. Critics always pinpoint that whenever one investor is better informed than another, the trading that takes place always turns out to be unfair.

Though no one has argued in favour of the fact that all trading taking place on the basis of private information is fair and what information is unfair has been the subject of legal arguments. Since there is no commonly accepted definition of unfair, this aspect of insider trading cannot be addressed directly.

Insider Trading will bring new and useful information into asset prices. Decision-makers both portfolio managers and firms making real investment decisions, it can reduce risk and improve performance when prices reflect better information. Because of reduced risk, asset prices will be higher and more real investment will occur.[4]

• Educates Investors: SEBI organizes various campaigns in to order to promote awareness amongst the investors. This is done to protect them, from various fraudulent activities prevalent in the securities market.
• Promotion of Fair Practices: SEBI is also responsible for the promotion of code of conduct and other fair practices in the market of securities in India. For instance, SEBI regularly keeps a check on the interests of debenture holders with respect to any midterm revision of rates of interest and many more.

REGULATORY FUNCTIONS

• Notifications of various Rules and Regulations: SEBI is empowered to issue various rules and regulations to make the functioning of all the intermediaries existing in the securities market smooth.
• Levying of Fees: If any of the players of the market contravenes any order or direction passed by it, SEBI has the power to levy penalties, fees and other charges for the same.
• Registration of Agents and Brokers: For the purpose of making a safe market place for trading into the securities, it is mandatory for all the transfer agents, brokers, merchant banks, sub-brokers and so on to register themselves.
• Prohibition of unfair trade practices: SEBI has been entrusted with the primary duty of protecting the interests of investors. Hence, it prevents various fraudulent and unfair trade practices prevalent in the market to cheat the investors.
• Regulator of Investment Schemes: It has made the registration of mutual funds and collective investment schemes mandatory in order to regulate them.
• Exercising and Performing Powers: SEBI has been delegated various powers under the Securities Contracts (Regulation) Act 1956 by the Government of India. SEBI exercises and performs all such powers.
• Enquiries and Inspection: SEBI conducts various inspections and undertakes audits and enquiries of stock exchanges of India.

OBJECTIVES OF SEBI

There are various objectives of SEBI. Some of them are as follows:

1. Provide protection: It looks forward to guiding and educate the general public, who is willing to invest their money in the securities market. This is done in order to protect their interests.
2. Preventing malpractices: It aims at the prohibition of all kinds of malpractices which are prevalent in the trading market.
3. Professional and Competitive: SEBI has the objective to develop a code of conduct through which it can easily regulate the activities of the intermediaries. Brokers, merchant bankers are some of the intermediaries. The main objective of SEBI is to make these intermediaries professional and competitive.
4. Orderly Functioning: SEBI has been entrusted with the duty of promoting the functioning of the securities industry and stock exchanges in an orderly manner.
5. Establishing balance: SEBI also looks forward to establishing a balance between the regulations provided by various statutes and the regulations made by the securities industry.

TRINITY PRINCIPLES OF SECURITIES REGULATIONS

SEBI is based on the Trinity Principles Of Securities Regulations. The Trinity Principles of Securities Regulations were considered as an indispensable bundle of rights in Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.[5]

These Securities Regulations are in existence only for ensuring the integrity of markets by detecting market frauds on a proactive basis, investigating abusive, manipulative or illegal trading practices in Indian Securities Markets, enabling a safe and sound environment. Some of the characteristics of the Trinity Principles of the Securities Regulations are as follows:

• The continuous flow of information
• Constant check on the fraudulent, manipulative and deceptive practices
• Systematic practice and regulations.

REPORT ON SEBI ACT, 1992

In the Justice MH Kania’s Report, the Group noted that section 12A of the SEBI Act provides for prohibition in respect of manipulative or deceptive devices, insider trading, and acquisition of control of a listed company.

However, in terms of section 11(2A), the Board may undertake the inspection of books and documents of the listed company or the company which intends to get its securities listed only if such company has been indulging in insider trading or fraudulent and unfair trade practices relating to the securities market.

AUTHORITIES AND POWERS OF SEBI

Quasi-judicial: SEBI acts as the judicial organ for matters in relation to the securities market. Basically, it is empowered to grant justice over the matters in connection with the securities market such as misrepresentation, fraud and any other unethical or illegal practices. This guarantees reasonableness, accountability, transparency, and fairness in the market.

Quasi-legislative: SEBI is empowered to frame various rules, regulations and guidelines to ensure that the interests of the investors are not hampered. Insider Trading Regulations, Listing Obligation, and Disclosure Requirements are some of the regulations formed by the SEBI to achieve the goal of safeguarding the investors. These have been adopted as a means to keep acts of neglect or malpractices under control.

Quasi-executive: SEBI is enabled to execute its guidelines and to make a case against those who had violated the regulations. It is additionally empowered to assess books of accounts and different reports of any organization if it has the suspicion of infringement of the prescribed guidelines.

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[1] Issued in Official Gazette No. 131 dated 21.02.1992 c.f. SEBI Annual Report 1991-1992.

[2] Para 1 of the Agenda note for the item no. 4, in respect of 138^th meeting of SEBI Board dated 28.07.2011, available at http://www.sebi.gov.in/boardmeetings/138bmho.html (accessed on 15- 07- 2019).

[3] SEBI Press Release No. 119/2011 dated 28.07.2011

[4] Hayne E. Leland, Insider Trading: Should it be prohibited?, 100 4 J. Pol. Eco., 859(1992).

[5] [1995] 83 Comp Cas 30 (SC)

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1. Insider Trading(Opens in a new browser tab)
2. Regulation of Contracts and Options in Securities(Opens in a new browser tab)