The Securities and Exchange Board of India (SEBI) plays an instrumental role in regulating the securities market in India. SEBI was established in 1988 but was given statutory recognition on 30 January 1992 through SEBI Act 1992. SEBI has its headquarters at the different part of the Country. Before 1992 there was no such legal statute which was binding upon the securities market. There were different regional stock exchanges like Calcutta Stock Exchange, Bombay Stock Exchange. To facilitate better regulation of the securities market, SEBI Act was passed. The act provides us with different purposes like:
- To protect the interest of the investors investing in such markets. Generally, the people investing in such market lacked technical knowledge, which was required so it also wanted to educate such investors so that their knowledge about the market gets enhanced.
- To stop malpractices like Insider Trading, Price Ragging etc. Though such practices are often done by some people it has its impact upon a large group of investors. SEBI imposes a heavy penalty on such people. So that such practices could not be practice in future.
- To promote the development of, and also regulating the securities market and for matters connected therewith or incidental thereto. This is one of the most important purposes for which the Act provides. The capitalist economy is one of the vital tools of the Indian Economy, so it should be regulated efficiently and smoothly.
An Act without Management or proper implementation is useless. Therefore, for better implementation of the Act, a board has been established. Section 4 of the SEBI Act provides for the management of securities and exchange board of India. It states that SEBI shall consist of the following members – namely a Chairman, 2 members amongst the officials of the Ministry of Central Government dealing with Finance and Administration of the Companies Act, 2013, 1 member from amongst the officials of the Reserve Bank, 5 other members of whom at least 3 shall be whole-time members, to be apportioned by Central Government. The Chairman and the other members of the board shall be persons of ability, integrity, and standing who have also shown some capacity on dealing with the problems relating to the securities market or have special knowledge or experience of Law, finance, economics, accountancy or in any other discipline which, in the opinion of the CG, shall be useful to the SEBI. Section 7 provides for the meetings of the board, that how the meeting shall be conducted.
Role of Securities and Exchange Board of India
The Securities and Exchange Board of India plays a very dynamic role it has to perform different roles at different time. With the advent of time Securities Market of India is growing as the market is growing misconducts are also growing like insider trading, delivery of share lately, price ragging and violation of statutes. However, to promote the efficient working of the market and to protect the interest of the shareholders SEBI plays an active role:
- . Insider trading States that no person shall do Act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person as defined under Section 195 of the Companies Act. Now, if a person contravenes such provision, he shall be punishable. To be stricter and to stop such unfair practice, SEBI has its regulation named SEBI (Insider Trading) Regulation,1992. Strict punishment is provided by SEBI in such cases, further chapter 4A of the SEBI act provides for that Section 15(G)(1) if an insider either on its own or on behalf of any person has dealt on the behalf on the company has published any information he may be fined or charged with Rs.25 crores or three times the profit made whichever is higher. Section 15(G)(11) if an insider has given any price sensitive information then he may be fined with 25 crores or 3 times the profit made. Now, according to Section 15(G)(iii) if an insider has procured any other person to deal in Securities of anybody corporate based on published information then he may be fined with 25 crores or three times the profit made whichever is higher. Also, Section 11 of the SEBI act empowers the board to investigate upon the matters which looks doubtful or suspicious. Every Director at the time of his appointment has to furnish the details about his shareholding in the company. Moreover, the director must lay down in the meetings in which they have their interest.
In the case of DilipPendse vs SEBI:
Nishkalpa was a wholly-owned subsidiary of TATA Finance Ltd (TFL) which was a listed company. The Managing Director of TFL ltd. was DilipPendse. On March 31 2001, a huge loss of Rs 79.37 crores was incurred by Nishkalpa and this was going to affect the profits of the company. This was, however, an unpublished price sensitive information of which Pendse was aware of. The information regarding this was published to the public on April 30, 2001. Thus, any further transaction by an insider between March 31, to April 30, 2001, would impliedly fall within the scope of Insider Trading. This information was passed by DilipPendse to his wife who had sold shares of TFL ltd amounting 2,90,000 in her name as well as in the name of the Companies controlled by her father in law.
- SEBI also attempts to prohibit unfair trade practices, for example, it doesn’t allow the company to make misstatements in the prospectus and raise any kind of money from the public. A prospectus needs the approval of the SEBI before hitting the market than only the concerned company can issue its prospectus. The Companies Act 2013 provides for misstatements in prospectus i.e. Section 34 which provides for criminal liability, section 35 provides for civil liability and there is also a general provision for punishment in case of fraud prescribed in section 447.
SEBI Companies (Prospectus and Allotment of Securities) Rules 2014, Rule 3 states contains a prospectus.
Rule 4 of the PAS Rules contains details regarding the reports to be set out in the prospectus which contains the report by auditors concerning profit and losses statement, and also assets and liabilities. If the company has any subsidiary company then statements regarding those companies should also be stated.
- SEBI also takes steps to educate investors to decrease the chances of fraudulent transactions. It also wants the investors before investing to carefully go through the documents of the concerned company in which they are interested.
 Prohibition on insider trading of securities.
- No person including any director or key managerial personnel of a company shall enter into insider trading:Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law.
- If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.
Functioning of SEBI
A dynamic and efficient capital market is a vital and indispensable part of nations financial infrastructure. Capital Market plays an important role in providing direct finance to the corporate sectors which leads to infrastructure development. In India the capital market comprises of debt, equity shares and other derivatives, capital markets in India is growing tremendously and the role played by SEBI is indispensable however there are certain problems which are there in the functioning of SEBI they are:
- Excessive Regulations and Circular: SEBI provides for various regulation for the effective control of the capital market. Frequent amendments and alterations in such rules and regulations adversely affect the transaction which is in process. SEBI is known to issue Circulars under regulations, it is extremely difficult to keep the track of every circular issued by the apex authority. Moreover, the interpretation of regulations and effects of the circular are also sometimes contrary. For instance, in SEBI (Mutual Fund Regulations) 1996, Regulations no 7 states that any person who holds 40% stake in the mutual fund will be deemed to be a sponsor and then he has to comply with criteria of a sponsor. However later on the circular declared 10% stake holders in any mutual funds shall also comply with the criteria of a sponsor.
- An investigation by SEBI: SEBI is empowered under section11 of the SEBI Act to conduct Investigation and is vested with the same power as of Civil Court. But the process of an investigation initiated by SEBI has no time limitation. There is no such provision which provides for limitation hence the investigation can be pending for any number of years.
- Securities Appellate Tribunal:Securities Appellate Tribunal is the adjudicating Authority and it is situated in Mumbai. Any person aggrieved by the decision of SEBI can appeal at Sat, Litigant all over the world have to travel to Mumbai to settle their disputes. In India, the more investor-friendly measure should be adopted and proceedings are not Mumbai centric. Moreover, SEBI doesn’t have the authority to settle monetary disputes but can only impose disciplinary action.
- Composition:SEBI is the apex authority in matters related to the securities market. SEBI is a statutory regulator that has the autonomy to enact a regulatory framework to the whole country, as well as to discharge quasi-judicial functions which affect the fundamental rights of a citizen. It would be prudent that the regulator has at least one full-time member who has had practical experience in the field of law. Generally, a person expert in the field of law will provide a better legal framework. Generally, in every developed country like in the USA the committee knows SEC also have a whole-time legal expert.
- Prospectus Approval:A public company to raise funds from the prospectus of the public issue a prospectus before hitting the market needs prior approval of the SEBI and after SEBI approves it then it reaches the office of ROC for getting subsequent approval and then only the Prospectus hits the general market and is available to the public at large. Still after getting double approval from the Authorities Company Law provides for punishment for Misstatements. There are various instances where after approval also misstatements are found in the prospectus which poses a question upon the authority of SEBI.
- Maintaining a digest of Case Laws:SEBI is a party to all litigations where not only SEBI has passed order but also where the constitutional validity of SEBI has also been challenged. SEBI requires a comprehensive interpretation of its statues and definitions. Maintaining a digest of case law will promote uniformity and will establish some procedures which would help the smooth functioning of the authority.
SEBI has taken the charge since 1992 to control the securities market in India, and from that time onwards it has passed various regulations to facilitate effective control over the market in India. It has an objective for which it works efficiently. Protecting the rights of small investors is one of the main purposes of the SEBI, it also prohibits Insider Trading and also provides for various penalties in the case where there is a breach of any provision. SEBI has two-fold function i.e. Protective as well Progressive. A quasi-judicial body in the name SAT was also established by it which adjudicates matters related to the securities market.
- What is the role of SEBI?
To promote the efficient working of the market and to protect the interest of the shareholders, SEBI plays an active role. SEBI constantly keeps a check upon the insiders who buy securities of the company. Insider Trading is also prohibited by the Companies Act, 2013.
- What is the purpose of the SEBI Act?
The act provides us with different purposes like:
- To protect the interest of the investors investing in such markets.
- To stop malpractices like Insider Trading, Price Ragging etc.
- To promote the development of, and also regulating the securities market and for matters connected therewith or incidental thereto.
- What do mean by Insider trading?
Insider trading States that no person shall do Act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person as defined under Section 195 of the Companies Act.
- What was the judgement of the DilipPendse vs SEBI case?
SEBI made an investigation against DilipPendse and after completion of the investigation, SEBI founded and thought that Pendse has used unpublished price sensitive information and thereby avoided the loss. Thereafter, he was found guilty and punished with a penalty of Rs500000 imposed on each DilipPendse, his wife and also Nalini Properties Limited.
- What are the certain problems related to the functioning of SEBI?
In India the capital market comprises of debt, equity shares and other derivatives, capital markets in India is growing tremendously and the role played by SEBI is indispensable however there are certain problems which are there in the functioning of SEBI they are:
- Excessive Regulations and Circulars
- Under Investigation by SEBI
- Under Securities Appellate Tribunal
- Prospectus Approval
- Maintaining a digest of Case Laws.
Ambuja Cement Corporate Legal Team, Kotak Committee’s Recommendations on Corporate Governance, http://www.legaleraonline.com/articles/kotak-committees-recommendations-on-corporate-governance.