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Subject Commerce

Paper No and Title 10, Corporate Legal Framework

Module No and Title 24, SEBI Act 1992, Organisation and Objectives of SEBI

Module Tag COM_P10_M24

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction: SEBI Act, 1992
3.Powers and Organization of the Board
3.1 Organization of the Board

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3.2 Powers of the Board

3.3 Functions and Powers of the Board

4. Philosophy and Objectives of SEBI

4.1 Basic Philosophy behind SEBI
4.2 Objectives

5. Functions of SEBI

6. Summary

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1. Learning Outcomes
After studying this module, the student should be able to

 Know about the Securities and Exchange Board of India of India Act, 1992.
 Learn about establishment of the SEBI as per the SEBI Act 1992.
 Identify the composition of the Board and its Powers.
 Conceptualize the objectives of SEBI.

2. Introduction, Securities and Exchange Board of India Act, 1992

The Securities and Exchange Board of India (SEBI) was officially established in the year 1988 by
Government of India when it succeeded the Controller of Capital Issues Act 1947, which was the
only regulatory body operating then. The Parliament granted SEBI, its statutory powers in 1992
through provisions of the Securities and Exchange Board of India Act 1992 which was formed on
the premise of protecting interests of investors in securities, and to promote development and
regulation of the securities market. According to provisions of the Act, “the Board is a body
corporate having perpetual succession, a common seal, with power subject to provisions of this
Act, to acquire, hold and dispose of property both movable and immovable, and to contract, and
shall be by said name, sue or be sued”.

SEBI has its headquarters located in Mumbai and its four regional offices are based in New
Delhi, Chennai, Kolkata and Ahmedabad. SEBI has come up with a number of initiatives aimed
at regulating and developing the securities market in India and to improve its safety and
efficiency, all of which have made an impact on various aspects of our economy. These initiatives
have transformed our Ssecurities Mmarket in terms of market capitalization, number of
companies listed on the Stock Exchanges and trading volume in

spot and futures market. SEBI was formed to cater to the needs of three types of groups operating
in the market namely:

● Issuers of finance – Large joint stock companies in need of long term funds depend heavily on
the Securities Mmarket to meet their requirements. The SEBI serves them by providing a safe
market from where they are in a position to raise sufficient and timely finance.

● Investors – The suppliers of finance include the savers of money who rely heavily on capital
market. SEBI ensures that their funds shall be parked in authentic and protected corporate
destinations.

● Intermediaries- The intermediaries include various brokers, issue houses etc. which act as
bridge between issuers and providers (investors) of finance. SEBI ensures the Ccorporates and
investors a competitive, professional and fair market to trade in.

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3. Organization and Powers of the Board

3.1 Organization of Board

According to the section 4 of the SEBI Act, 1992 Board of SEBI comprises of the following:

a) A Chairman who is formally appointed by the Central Government.

b) Two officials of Central government from Ministry of Finance and Ministry of
Corporate Affairs.
c) One official nominated by the RBI.
d) Five other members nominated by the central government, out of whom at least
three shall be working as whole time members.

 The Chairman and other members constituting the Board (a) and (d)
should be people of high integrity, ability and standing. They are expected
to have sound knowledge and experience in areas related to finance, law,
economics, accountancy and administration so that they are in a position
to take rational decisions for functioning of the SEBI. Also, they must
possess some experience in dealing with the problems related to securities
market or any other thing which may be found useful by the Board.
 The Chairman and members referred in (a) and (d) are appointed by the
Central Government, and members referred in (b) and (c) are appointed by
the Central Government and Reserve Bank of India(RBI) respectively.
 The Board of members manages, supervise and direct the affairs of the
Board, and has all the powers to do things and acts which may be
exercised or done by the Board.
 The Chairman also has powers of general supervision and directing the
Board, and also has power to exercise and do all acts and things which are
within the sphere of influence of the Board.

3.2 Powers of the Board

Section 11 of the SEBI Act provides for the functions and powers of the Board. Some of
the powers of SEBI are enlisted as under:

 The main function of the Board is to protect the interests of the investors
in the securities market and to make provisions for its development and to
regulate malpractices prevalent if any, by taking any measures which it
may feel fit for the purpose.

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 In order to empower SEBI to sustain its

regulatory function efficiently, it has the
power to approve the by-laws of the stock exchange, and to instruct them
to amend their by-laws if required; to periodically call for returns from
stock exchange and inspect their books of accounts; to inspect the books
of accounts of various intermediaries involved in securities market so as to
ensure their proper conduct; compel certain companies to get their shares
listed in one or more stock exchanges; ensure compulsory registration of
brokers and other intermediaries involved in stock exchange; and,
formulate any laws which it feels necessary for smooth and fair conduct of
the securities market.
 The Board has same powers as that of vested in the Civil Court , under
Code of Civil Procedure, while trying a suit, in respect to discovering and
producing books of accounts and other documents for inspection;
summoning and enforcing attendance of persons and examining them on
oath.
 The Board may take any of the measures (to be recorded in writing) to
protect the interests of the investors in the securities market, as suspension
of trading of any security on a recognized stock exchange; restraining any
person from accessing the securities market and prohibiting any person
associated with the securities market from buying, selling or dealing in
securities.
 The Board has the power to give directions to any person associated with
the securities market, or any company, in matters related to protection of
interests of investors, development of the market; prevent affairs of any
entity which are detrimental to the interests of the market; secure proper
management of any such intermediary or entity etc.

3.3 Termination of services of Chairman or any member of the Board

3.3.1 Section 5 of the Act deals with termination of Services of the Chairman and other
members.

 The term of office of Chairman and other members may be as prescribed.

 The Central Government has the right to terminate the services of any member or
Chairman of the Board before expiry of complete term if it feels just by giving a
written notice of at least 3 months or 3 months’ salary and allowances in lieu of
such removal. Also, the Chairman and any other member of the Board have full
right to vacate or relinquish their position before expiry of their term, provided
they give notice of at least 3 months in writing about the same.

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3.3.2 Removal of member from the office:

According to the provisions of Section 6 of the Act, the Central Government has the
power to remove any member from office on the following grounds:

 The member is at present, or at any time has been adjudicated insolvent.

 The member is of an unsound mind and has been declared so by a
competent court.
 She/he has been convicted of an offence which in the opinion of Central
Government involves a moral turpitude.
 She/he in the opinion of the Central Government has abused his position
to as to render his continuation in office detrimental to the public interest.

However, the Act provides that no member shall be removed under this clause, if she/he
has not been given reasonable opportunity of being heard as regards the matter referred
above.

3.4 Meetings of the Board

Section 7 of the Act provides that:

 The Board shall meet for proceedings as regards transaction of business at its
meetings at time and places as prescribed by the Act, and that the full procedure
for conduct of such meetings be followed.
 If for any reason the Chairman is unable to attend any meeting of the Board, the
meeting shall be presided over by any other member who has been chosen by
members present at the meeting from amongst themselves.

Invalidation of Board proceedings

Section 8 of the Act states that the proceedings of the Board can’t be invalidated merely
due to the following reasons as mentioned below:

 If there is any vacancy in the Board or, any defect in constitution of the Board;
 There is any defect in appointment of a person acting as member of the Board:
 If there is any irregularity in the procedure of the Board which do not affect the
merit of the case under discussion.

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4. OBJECTIVES of SEBI

4.1 Basic Philosophy behind SEBI

According to the SEBI Act 1992, SEBI has been described as body corporate which is
based on trifold principles of

 Ensuring transparency and fairness in functioning of the regulatory

mechanism.
 Enforce a mechanism which places due respect and recognition to the
fundamental rights granted under constitution of India and other principles
of natural justice.
 To enforce control of judiciary in the administrative section.

The three functions of SEBI i.e quasi judicial, quasi legislative and quasi executive have
been rolled as one. In its legislative capacity SEBI drafts rules and regulations, conducts
investigation of matters pertinent to securities market and executes them as a part of its
executive function. And, as its judicial function it passes rulings and orders. All this has
made SEBI a powerful entity; however there is an appeal process so as to make it more
accountable for its actions. There is a 3 member tribunal known as Securities Appellate
Tribunal, and the second appeal lies directly to the Supreme Court.

4.2 Objectives of SEBI

The 1980’s witnessed a tremendous growth in Indian capital market due to increased
public participation which also brought with itself numerous malpractices on account of
brokers, merchant bankers etc. who duped the investors of their funds. These fraudulent
practices corroded the confidence of the investors as their grievances could not be
redressed adequately by the Government and the stock exchanges working then.

As a consequence the government established the SEBI as a separate regulatory body

which could protect, preserve and promote the integrity of the securities market, so as to
bring back investor’s faith in the market and bring it at par with the other contemporary
securities market of the world. Its main objectives are:

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4.2.1 Regulation of Stock Exchanges

The primary objective of SEBI is to ensure proper regulation of stock exchanges so that all the
parties (brokers, merchant bankers and other intermediaries) operating in it are provided efficient
services. Its main aim is to ensure fair trade practices and promote professionalism.

4.2 .2Protection of Investors

Investors are the most important channels in securities market as they are the providers of
finance, which forms the foundation of market, so their protection becomes imperative. For this
SEBI ensures that investors are provided with accurate and timely information to rest their
financial decisions on and aims at curbing mal practices associated with the market. It makes
provisions so as to reduce the risk and delay involved in the delivery of shares and payment.

4.2.3 Control over Intermediaries

Intermediaries are the linking pin between the issuers and providers of finance, and play a crucial
role in the market by mobilizing funds from one channel to the other one. Thus, it is very
important to keep a close track of their functioning so that none of the parties involved in the
market is benefitted at the stake of other.

4.2.4 Consumer Education

SEBI educates and guides the investors about various ways and means of investment, procedures,
schemes and malpractices prevalent in the industry so that they park their funds with full caution.

4.2.5 Market Regulation

SEBI aims to curb the mal practices associated with the securities market such as insider trading,
price rigging etc and it frames various provisions to ensure smooth and fair functioning of the
market. These provisions are monitored and amended from time to time to achieve a balance
between corporate statutory regulation and corporate self regulation.

5. Functions of SEBI

Preamble of Securities and Exchange Board of India describe the functions of SEBI as “…. To
protect the interest of investors in ssecurities and to promote development of, and to regulate the

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securities market and for matters connected therewith or

incidental thereto.” To fulfill its objective of securing a fair
and equitable market, the functions of SEBI can be categorized as:

5.1 Developmental Functions

The main reason for establishment of SEBI was development of the Securities Market in India so
as to bring it at par with global cult markets. To perform the role of a developer of the market:

 SEBI tries to promote and develop business in the stock market by adopting a flexible
approach for which it has permitted internet trading through registered brokers and has
made under writing optional to reduce the cost of issue.
 It promotes and undertakes regular training of the intermediaries operating in the market
such as the brokers which ensures smooth, safe and speedy transactions.

5.2 Protective Functions

SEBI acts as a preserver of the securities market and performs the following functions to protect
the interests of its stake holders. As a protector of the market:

 It checks mal practices prevalent in the market such as price rigging, insider trading and
prohibits fraudulent practices by preventing companies from making misleading
statements.
 It undertakes steps to educate the consumers about ways and means of functioning of the
market, so that they may be able to take a rational investment decision.
 It promotes fair practices and ensures adoption of a code of conduct through issuing
guidelines to be followed by all. For example: to protect interest of debenture holders it
has issued guidelines which prevent companies from making any changes in terms of
issue mid-term.
 SEBI has been granted authority to penalize the parties indulged in unfair practices and
can impose strict fines on them along with imprisonment. For example: it has been
empowered to investigate cases of insider trading and has provisions for strict
imprisonment.

5.3 Regulatory Functions

To regulate the business in stock market SEBI performs following functions:

 It frames rules and code of conduct to be followed by intermediaries of the market such
as the merchant bankers.
 It registers and regulated the functioning of stock brokers, trustees, merchant bankers and
all other parties associated with the market.
 It regulates mutual funds and takeover bids by companies.
 SEBI conducts periodical inspection and audit of companies.

In light of the above functions, SEBI has aptly modeled the role of a “Watch Dog” over the Stock
Market. Since its inception, SEBI has been functioning with full zeal and vigour to achieve its

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objectives of protection, preservation and promotion of

interests of all the parties involved in the securities market.
SEBI has also been successful in doing so as risk of default etc. have reduced considerably due to
various advancements as capitalization requirements, margining, establishment of clearing houses
etc.

For reference,

 “Broker” is an entity (individual or a firm) which charges commission known as

brokerage for execution of financial orders to buy and sell securities submitted by an
investor.
 According to SEBI Act 1992, “Merchant Banker” is defined as “ any person who is
engaged in business of issue management either making arrangements regarding selling,
buying or subscribing to securities or acting as manager, consultant, advisor or
rendering corporate advisory service in relation to such issue management.”

 Various “malpractices” associated with securities market are enumerated below:

 Price rigging.
 Unofficial premium on fresh issue of shares.
 Non compliance with provisions of the Companies Act 2013.
 Delay in making delivery of shares.
 Private placement of shares done unofficially.

 Stock Exchange is defined as “a form of exchange or a system which provides services

for intermediaries and traders to trade stocks, debentures, bonds and other type of
securities which may be issued by companies, unit trusts etc. A stock exchange also
provides various facilities by which the securities may be issued and redeemed , and
provisions are made for payment of dividend and income etc.

6. Summary
 SEBI was established by the Government as a statutory body according to the provisions
of the SEBI Act 1992, which has a separate legal entity and perpetual succession.

The basic premise of establishment of SEBI was to regulate and control the functioning
of the securities market, to ensure a fair and efficient trading mechanism.

 The three main areas of focus of the SEBI are the investors, the issuers and the
intermediaries.

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 The headquarters of SEBI are located in Mumbai, and

it has four other regional offices across India.
 The organization of SEBI comprises of a Chairman nominated by the Central
Government, who presides over a Board of members drawn from areas of finance,
economics and general administration.
 The Board has special powers to ensure orderly and just conduct of financial transactions
in the market, and to prevent any malpractices associated with the same.
 The SEBI has brought back lost investor’s confidence in the securities market by
enacting and amending various laws for their protection thereby bringing our capital
market at par with other developed securities market of the world.
 The main objective of formation of SEBI is to protect the interest of investors in the
market so as to ensure smooth and timely availability of finance .
 It aims at securing professionalism among intermediaries so that market efficiency is
ensured.
 There have been recent amendments in the SEBI Act in 2013 to further catalyze the role
played by it in growth of our economy.

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