You must have heard about this word a lot of times when anyone talks about stock or multiplying money. SEBI stands for the Securities and Exchange Board of India and was established on 12th April 1992. It is a statutory regulated body that controls and regulates the Indian capital and securities market.
SEBI assures that it safeguards the interest of investors by ensuring that the guidelines and regulations are adhered to. It serves as a watchdog which is an anonymous body that manages the flows of the entire stock market in the country.
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What is SEBI and how it established?
By the end of 1970, the capital market began to emerge as a sensation. As people started trading and it became really popular, various malpractices started to begin such as insider trading, price rigging, and violation of stock exchange rules, price rigging and other such activities.
Once this started happening, then the government realized that they require a body to lessen these malpractices. Also, it was essential to form an authority that could regulate the working of the Indian Securities market so that the trust of people could be built again.
Thus the underlying motive of its establishment was to assure that Indian Capital Market works in a streamlines way and gives the investors a transparent environment for investing their valuable and hard-earned money.
Then the established SEBI to conduct various activities such as:
- Creating and approving the by-laws of stock exchanges
- Inspecting accounting books of various recognized stock exchanges in India
- Inspecting books and records of Financial Intermediaries
- SEBI could also stop companies from getting listed on any stock exchange
- Handling registration of stockbrokers
The Head office of SEBI is Bandra Kurla Complex in Mumbai. It has its regional offices in New Delhi, Chennai, Kolkata and Ahmadabad. Additionally, some of its local offices are situated in Bangalore, Chandigarh, Jaipur, Guwahati, Kochi and Patna.
Structure of SEBI
As of now, 17 exchanges are operating in India, and the guidelines of SEBI regulate all the trades, including NSE and BSE. The current Chairman of SEBI is Ajay Tyagi; he was appointed on 10th January 2017. He took over the charge from U.K Sinha on 1st March 2017.
Just like other corporate forms, SEBI has a hierarchical structure which comprises of various departments that are headed by their department heads. It has one Chairman, 7 boards of members and around 20 departments.
Here is the list of a few departments of SEBI:
- Corporate Finance
- Human Resources Department
- Economic & Policy Analysis
- Foreign Portfolio Investors & Custodians
- Debt & Hybrid Securities
- Information Technology
- Investment Management Department
- Legal Affairs
- Office of International Affairs
- Commodity Derivates market regulation
- National Institute of Securities Market and more
Their respective heads head all of the departments. the senior management consists of a board of directors with the following structure-
- Union Government of India nominates the Chairman.
- Two members from the Union Finance Ministry
- One member from Reserve Bank of India
- Union Government of India nominates the rest five members
It is paramount for you to know that SEBI is responsive to 3 groups that make the market which is the investors, market intermediaries and issuer of securities.
Objectives of SEBI
The primary objective of SEBI is to ensure that the Indian stock market works systematically. Also, it safeguards the interest of traders and investors by giving them healthy in securities. SEBI even works on the development of equity markets and ensures that people adhere to the guidelines.
As mentioned above, one of the objectives of its establishment is to assure that no malpractices are followed in the Indian Capital Market.
Here is a list of the significant objectives of SEBI:
- Monitors important acquisition of shares and takeover of companies
- Protect the interest of investors
- Promoting the development of securities market and regulating the business
- It is also involved in research & development so that the stock market is efficient and updated with the advanced techniques.
- It offers a platform for sub-brokers, registrars, stockbrokers, portfolio managers, investment advisers, bankers, merchant bankers, share transfer agents, trustees of trust deeds, underwriters, and other associated people to register and regulate work.
- They also check that the investors are educated about the intermediaries of the securities market
- They also keep a close check that no fraudulent or unfair practices are done related to the securities market.
- It also controls the operations of participants, credit rating agencies, and custodians of securities, depositories and foreign portfolio investors.
Functions of SEBI
Primarily there are three key functions performed by SEBI:
A. Protective Functions- This function is performed by SEBI to conserve the interest of investors and financial institutions. Its core protective functions are to check:
1. Price Rigging- The primary purpose of SEBI is to prevent manipulated fluctuations in the financial market. Swings are the foundation of trade and earn money for tradesmen or investors in the financial market.
Various people study historical fluctuations on the basis of it numerous theories have also been made to predict the trend. These theories are called Technical Analysis, and a lot of traders study them before investing.
Mostly these fluctuations are normally based on the market, but there are times when unusual variations are made by a group of corporate so that the investors can have a huge loss. These built-up fluctuations are called price rigging.
Hence, the role of SEBI here is to stop these sudden fluctuations. They have introduced circuits for doing it; the circuit is a threshold concerning the previous day closing. In case the security price goes beyond the limit, then the circuit breaker would be used, and trading for that specific security would be stopped for a couple of hours or a day.
2. Prevent insider trading- This can also be said to be a part to stop price rigging. The stock price of any company gets immensely affected by any public announcement or news about the company. There are always some people who are aware of the upcoming news about the company.
Hence, they can take advantage of this news to buy and sell the company’ security before the news comes into action. This is termed as insider trading. To prevent this, SEBI has barred trusts of listed companies and employee welfare schemes so that they cannot purchase their own shares from the secondary market.
SEBI has also requested these listed companies to unveil their employee benefit schemes which should include their stock purchase. They should align them as per ESOS and ESPS guidelines.
3. Financial education for investors- Another primary role of SEBI is to provide online and offline seminars or training by multiple means to train the traders and investors. These seminars include money management and the basics of the financial market.
4. SEBI guidelines- SEBI has made bye-law guidelines so that any unfair practices that can be used by companies to manipulate security markets can be prevented.
B. Development Functions- The primary function of development functions is providing training to the intermediaries. Here, SEBI also works on bringing innovation in Indian Financial Market. Some of the development functions comprise of:
- DEMAT Form of securities
- IPO is permitted through an exchange
- Education of electronic platform for financial market
- Information on discount brokerage
- Underwriting is optional to lessen the cost of issue
- Training for financial intermediaries
The objective of SEBI is to promote fair practices; hence, it educates them about it plus makes the investors aware of the stock market in depth.
C. Regulatory Functions- In the regulatory functions, SEBI does the monitoring of the functioning of financial market go-betweens. The implementation of SEBI bye-laws emissaries and corporate is done. This is a vital step as it ensures that the stock market operates seamlessly with untarnished transparency.
It is the role of SEBI to formulate guidelines and code of conduct for financial intermediaries and regulate amalgamations, alliance and takeovers takeover of companies. Some of its regulatory functions are:
- Registering and regulating functions of mutual funds
- Regulates takeover of companies
- It has to register all share transfer agents, intermediaries, trustees, brokers, sub-brokers and other people involved with the stock exchange
- Conduct inquiries & audit of exchanges
Also, SEBI has the authority to charge a fee on capital market participants. Plus, it also directs the credit rating agencies.
Role of SEBI
SBI caters to the requirement of three parties that operate in the Indian Capital Market. It was founded to improve the financial market of India, hence to obtain its purpose it takes care of the most vital financial market participants:
1. The issuer of Securities- Any firm that issue securities should be listed on the stock exchange. Issuers are entities that help in raising funds from the financial market. The function of SEBI is to confirm that the issue of IPO’s and FPO’s takes place healthily.
2. Investor- They help in keeping the market alive as the capital market functions because the traders exist. Investors earn money from the market, so SEBI assures that no malpractices happen against them in the market. Thus, it’s the role of SEBI to safeguard the interest of investors and prevent them from any unfair trade practice.
3. Financial Intermediaries- They are the mediators in the financial market, and they take care that the stock market transactions happen seamlessly and securely. The role of SEBI is to monitor each activity of financial intermediaries like NBFC’s, broker, sub-broker, etc.
Authority and Power of SEBI
SEBI possesses high authority and power as its primary purpose was to control the market systematically by preventing any fraudulent activity. It has three significant powers:
1. Quasi-Judicial- This includes drafting legislation with respect to the capital markets. With the help of this authority, it has the right to conduct hearing and pass judgments in case any fraudulent activity happens. The benefit of this authority is that it assures that there is fairness, reliability and accountability in the capital market.
2. Quasi-Executive Functions- Implementing legislation also comes under SEBI. This means that SEBI has the absolute authority to build rules and regulations to shield the interest of investors.
For example, there is legislation called SEBI Listing obligation and Disclosure requirements; this was made to consolidate and simplify provisions of the current listing agreements for various segments to financial markets such as equity shares. Such regulations are made to keep any sort of illegal practice at bay.
3. Quasi-Legislative- Under this segment, the role of SEBI is to create guidelines for the security of interest of investors. Few rules and regulations made by SEBI are disclosure requirements, trading regulation and listing obligation.
The primary goal is to methodize and fortify the provision of current listing agreements for various segments of the financial market. Although SEBI has a lot of powers, still, it has to go through the Securities Appellate Tribunal and the Supreme Court of India.
Mutual Funds and SEBI
Asset Management companies run mutual funds, and that needs to be passed by SEBI. A watchdog that is listed with SEBI holds the securities of varied schemes of the fund. The performance of mutual funds is monitored by the trustees of AMC to make sure that they work as per the SEBI guidelines.
A firm needs to be established as a separate AMC if it wants to offer mutual funds. Also, the firm should have a net worth of Rs.50,00,000. In case the mutual funds are exquisitely dealing with the money market, then it is a mandate for them to be registered with RBI.
All the additional funds can be filed with SEBI. A couple of years back a new self-regulation agency for mutual funds has been set up that is called Association of Mutual Funds of India. It aims to enhance operational standards and to ensure that it works with complete professional and ethical qualities.
Method for registering a mutual fund with SEBI
As per the guidelines by SEBI, any appellant who wishes to apply for listing should be done through the Form A which has been laid under Schedule I of SEBI Regulations 1996. A person who has more than or equal to 40% of the Net Worth of the Assets of the company should be presumed as a Sponsor, and only he should apply in Form A.
These are the few things that a person should have to apply for it:
- While filling the Form A, it is mandatory to submit a non-refundable fee of Rs.5 lakh.
- After doing this, SEBI would examine the application as per the eligibility criteria.
- If you meet the criteria, after that, you would have to complete other formalities like executing the trust deed, incorporating the asset management company, setting up a trustee company, etc.
- Once the sponsor meets all the conditions after that SEBI would provide a registration certificate after that, you have to pay a registration fee of Rs.25 lakh.
SEBI guidelines on Mutual Funds Reclassification
- SEBI has suggested 6 classifications for hybrid, 10 classifications for equity funds, 16 for debt funds and 2 for index funds
- Debt fund classification is recommended based on the duration of fund and asset quality mix
- It has also taken over large, mid and small-cap based on the market-related rankings
- Funds should be names as per the core intent of the fund and asset mix. Ensure that it should state the risk associated clearly
Mutual Funds Regulation by SEBI
- Shareholders do not have authority to hold more than 10% of the shareholding directly or indirectly in the AMC of a mutual fund
- The increasing weight of the top three constituents of the index should not be more than 65%
- It is a mandate that every new fund should submit their compliance status to SEBI before launch
- Any investor of the liquid scheme who exits within seven days would have to pay a penalty
- Liquid schemes should hold a minimum of 20% in liquid assets like treasury bills, government securities, cash and rep on government securities.
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The stock market is one of the most significant pointers of the economic health of the country. Thus, it is crucial that people should keep faith in it else the people would stop investing, and the market would go down. Before the establishment of SEBI, many fraudulent and scams took place, but since it came into the picture, the market has become healthier and transparent.