Understanding what is SEBI and its role in the Financial Market: The BSE was founded way back in 1875 but the investing bug bit the country only in the 1970s. But the weak regulations in place and multiple loopholes led to the rise of market operators like Manu Manek and Harshad Mehta leading to multiple scams.

The Indian government saw the desperate need for a strong market regulator in place to reduce these malpractices and protect the interests of investors before it was too late. Hence the Securities and Exchange Board of India (SEBI) was founded in 1988 and given statutory powers in 1992.

In this article, we take a closer look at what the SEBI is and its functions and powers. Keep Reading to find out.

What is SEBI?

Initially, SEBI acted as a watchdog and lacked the authority of controlling and regulating the affairs of the Indian capital market. Nonetheless, in the year 1992, it got statutory status and became an autonomous body to control the activities of the entire stock market of the country.  The statutory status of the SEBI authorized it to conduct the following activities:

  1. SEBI got the power of regulating and approving the by-laws of stock exchanges.
  2. It could inspect the accounting books of the recognized stock exchanges in the country. It could also call for periodical returns from such stock exchanges.
  3. SEBI became empowered to inspect the books and records of financial Intermediaries.
  4. It could constrain companies for getting listed on any stock exchange.
  5. It could also handle the registration of stockbrokers.

SEBI (Securities and Exchange Board of India) is headquartered in Mumbai and having its regional offices in New Delhi, Chennai, Kolkata, and Ahmedabad. You can also find SEBI’s local offices in Jaipur, Guwahati, Bangalore, Patna, Bhubaneswar, Chandigarh, and Kochi.

At present, 7 stock exchanges are currently operating in India, including NSE and BSE. The operations of all these stock exchanges are regulated by the guidelines of SEBI.

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The Objectives of SEBI

SEBI’s responsibility is to ensure that the securities market in India functions in an orderly manner. It is made to protect the interests of investors and traders in the Indian stock market by providing a healthy environment in securities and to promote the development of and regulating the equity market.

Further, as stated earlier, one of the prime reasons for establishing SEBI was to prevent malpractices in the Indian capital market.

The Organizational Structure of SEBI

Mr. Ajay Tyagi is the current chairman of SEBI. He was appointed on the 10th of January, 2017 and took over the charge with effect from 1st March 2017 from Mr. U.K. Sinha.

SEBI consists of one chairman and other board members. The honorable chairman is nominated by the Central Government. Out of the eight board members, two members are nominated by the Union Finance Ministry and one member is nominated by the RBI. The rest five members of the board are nominated by the Union Government.

SEBI’s Main Roles in the Indian Financial Market

In order to achieve its objectives, SEBI takes care of the three most important financial market participants.

— Issuer of Securities. These are the companies listed in the stock exchange which raise funds through the issue of shares. SEBI ensures that the issue of IPOs and FPOs can take place in a transparent and healthy way.

— Players in the Capital Market i.e. The Traders and Investors. The capital markets are functioning only because the traders exist. SEBI is responsible for ensuring that the investors don’t become victims of any stock market manipulation or fraud.

— Financial Intermediaries. They act as mediators in the securities market and ensure that the stock market transactions take place in a smooth and secure manner. SEBI monitors the activities of the stock market intermediaries like brokers and sub-brokers.

The Functions of SEBI

The SEBI carries out the following three key functions to perform its roles.

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1. Protective Functions: SEBI performs these functions for protecting the interests of investors and financial institutions. Protective functions include checking price rigging, prevention of insider trading, promoting fair practices, creating awareness among investors and prohibition of fraudulent and unfair trade practices.

2. Regulatory Functions: Through regulatory functions, SEBI monitors the functioning of the financial market intermediaries. It designs the guidelines and code of conduct for financial intermediaries and regulates mergers, amalgamations, and takeovers takeover of companies.

SEBI also conducts inquiries and audits of stock exchanges. It acts as a registrar for the brokers, sub-brokers, merchant bankers and many others. SEBI has the power to levy fees on the capital market participants. Apart from controlling the intermediaries, SEBI also regulates the credit rating agencies.

3. Development Functions: Among the list of SEBI’s development functions, one of them is imparting training to intermediaries. SEBI promotes fair trading and malpractices reduction. It also educates and makes investors aware of the stock market by utilizing the funds available in IEPF.

Authority and Power of SEBI

As we have understood earlier above SEBI’s primary purpose is to create a healthy environment in the markets where the interests of all the investors are protected. In order to ensure this SEBI has been entrusted with powers that give it the authority to create such an environment. Its 3 most important powers include:

1. Quasi-Judicial Powers

According to this, in the case of frauds or other unethical practices in the Indian securities markets, SEBI has the right to conduct hearings and also the power to deliver judgements. This helps ensure fairness, transparency, and accountability in the securities market.

2. Quasi-Executive Powers

This means that SEBI has the authority to make rules, pass judgements and also take appropriate legal action against the violators. SEBI also has the authority to examine the Books of Accounts and other documents in order to gather evidence.

3. Quasi-Legislative Powers

SEBI also has the authority to create guidelines, rules and regulations for the protection of investor interests. SEBI has made regulations to ensure that disclosure requirements, trading regulations and listing obligations are met.

In addition to this, there are rules put in place to make sure that frauds and other malpractices do not take place in the market. 

Mutual Funds Regulations by SEBI

SEBI has also set guidelines for monitoring and managing mutual funds in India. These guidelines fall under the Securities and Exchange Board of India Regulations, 1996.

For a company to set up a mutual fund it must first be established as a separate AMC and have a fair value of Rs.50,00,000. Mutual funds are held by Asset Management Companies (AMC).

The trustees of these AMCs ensure that the mutual funds comply with these guidelines. If the mutual fund is set up to only deal in the money markets then it is mandatory for them to be registered with SEBI. 

The mutual fund regulations by SEBI include the following:

  • Shareholders are not authorized to hold more than 10% of the shareholding directly or indirectly in the AMC of the mutual fund.
  • A sponsor of a mutual fund, a group of companies or an associate of the AMC’s cannot hold
  • 10% or more of shareholding and voting rights to the AMC or other mutual fund.
  • All new funds must submit their SEBI compliance status prior to launch.
  • For sector or thematic indexes, no single stock can make up a weight of more than 35% of the specified index. The cap for other indicators is set at 25%.
  • The increasing weight of the top 3 index constituents should not be more than 65%.
  • When referring to individual constituents of the index, the trading frequency should be at least 80%.
  • Liquid schemes must hold at least 20% of liquid assets such as treasury loans, government securities, cash, etc.

Conclusion

The stock market is one of the most crucial indicators of a country’s economic health. If people lose faith in the market, the number of participants will go down. Furthermore, the country will also start losing FDIs and FIIs considerably which will substantially hamper the country’s foreign exchange inflows.

Before SEBI was established many scams and malpractices took place in the Indian stock market. One of the famous Indian stock market scams was “Harshad Mehta scam.”

After SEBI came into power, stock market affairs started becoming healthier and more transparent. Nonetheless, some securities mark scams have taken place even after SEBI came into power. One famous such scam was “Ketan Parekh scam

Although unfair activities do happen in the Indian capital market even as of today, their frequency is quite less. Moreover, the security market statutes and regulations are updated time and again. Therefore, day by day, SEBI is getting more and more stringent with its authority.