Q. BRIEFLY EXAMINE THE WORKING OF SEBI IN INDIA?
SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is
doing hard work for protecting the interests of Indian investors. SEBI gets education from
past cheating with naive investors of India. Now, SEBI is more strict with those who commit
frauds in capital market. The role of security exchange board of India (SEBI) in regulating
Indian capital market is very important because government of India can only open or take
decision to open new stock exchange in India after getting advice from SEBI.
OVERVIEW OF SEBI
• Securities Exchange Board of India (SEBI) was established in 1988 to regulate the
functions of securities market.
• SEBI promotes orderly development in the stock market.
• SEBI was set up with the main idea to keep a check on malpractices and protect the
interest of investors.
Now, let us gain more insights into the objectives and functions of SEBI.
OBJECTIVES OF SEBI
The objectives of SEBI are:
• To regulate activities in stock exchange and ensure safe investments
• To prevent fraudulent practices by striking a balance between business and its
statutory regulations
FUNCTIONS OF SEBI
The three main functions of SEBI are as follows:
1. Protective function
2. Developmental function
3. Regulatory function
1. Protective functions are performed by SEBI to protect interest of investors and
provide safe investments. This entails:
• Checks on prices rigging: Price rigging refers to manipulating the prices of
securities.
• Prevents insider trading: Insider refers to directors, promoters of the company.
These people have sensitive information which they can use to make profit. SEBI
keeps a stringent check whether insiders are buying securities of the company.
• Prohibits fraudulent and unfair practices: SEBI does not allow companies to make
misleading statements.
PREPARED BY NAMITA BISWAL
FACULTY IN ECONOMICS, SCS, JUNIOR COLLEGE, PURI
2. Developmental functions are performed by the SEBI to develop activities in stock
exchange to increase the business in stock exchange. Under this category, following
functions are performed by SEBI:
• Promoting training of intermediaries of the securities market
• Promote activities of stock exchange by adopting flexible methods such as internet
trading
• Initial public offer of primary market is permitted through stock exchange.
3. Regulatory functions are performed by SEBI to regulate the business in stock
exchange.
• SEBI registers and regulates the working of mutual funds and other investment
options.
• SEBI regulates takeover of the companies.
• SEBI conducts inquiries and audit of stock exchanges.
Now, we explain role of SEBI in regulating Indian Capital Market more deeply with
following points:
1. POWER TO MAKE RULES FOR CONTROLLING STOCK EXCHANGE:
SEBI has power to make new rules for controlling stock exchange in India. For example,
SEBI fixed the time of trading 9 AM and 5 PM in stock market.
2. TO PROVIDE LICENSE TO DEALERS AND BROKERS :
SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that
any financial product is of capital nature, then SEBI can also control to that product and its
dealers. One of main example is ULIPs case. SEBI said, " It is just like mutual funds and all
banks and financial and insurance companies who want to issue it, must take permission from
SEBI."
3. TO STOP FRAUD IN CAPITAL MARKET:
SEBI has many powers for stopping fraud in capital market.
• It can ban on the trading of those brokers who are involved in fraudulent and unfair
trade practices relating to stock market.
• It can impose the penalties on capital market intermediaries if they involve in insider
trading.
4. TO CONTROL THE MERGE, ACQUISITION AND TAKEOVER THE
COMPANIES:
Many big companies in India want to create monopoly in capital market. So, these companies
PREPARED BY NAMITA BISWAL
FACULTY IN ECONOMICS, SCS, JUNIOR COLLEGE, PURI
buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is
for development of business or to harm capital market.
5. TO AUDIT THE PERFORMANCE OF STOCK MARKET :
SEBI uses his powers to audit the performance of different Indian stock exchange for
bringing transparency in the working of stock exchanges.
6. TO MAKE NEW RULES ON CARRY - FORWARD TRANSACTIONS :
Share trading transactions carry forward can not exceed 25% of broker's total transactions.
90 day limit for carry forward.
7. TO CREATE RELATIONSHIP WITH ICAI :
ICAI is the authority for making new auditors of companies. SEBI creates good relationship
with ICAI for bringing more transparency in the auditing work of company accounts because
audited financial statements are mirror to see the real face of company and after this investors
can decide to invest or not to invest. Moreover, investors of India can easily trust on audited
financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are
doing their duty by ethical way or not.
8. INTRODUCTION OF DERIVATIVE CONTRACTS ON VOLATILITY INDEX :
For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to
introduce derivative contracts on Volatility Index, subject to the condition that;
a. The underlying Volatility Index has a track record of at least one year.
b. The Exchange has in place the appropriate risk management framework for such derivative
contracts.
2. Before introduction of such contracts, the Stock Exchanges shall submit the following:
i) Contract specifications
ii) Position and Exercise Limits
iii. Margins
iv. The economic purpose it is intended to serve
v. Likely contribution to market development
vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure
market integrity, protection of investors and smooth and orderly trading.
vii. The infrastructure of the exchange and the surveillance system to effectively monitor
trading in such contracts, and
viii. Details of settlement procedures & systems
ix. Details of back testing of the margin calculation for a period of one year considering a call
and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value
PREPARED BY NAMITA BISWAL
FACULTY IN ECONOMICS, SCS, JUNIOR COLLEGE, PURI
of the underlying. Link
9. TO REQUIRE REPORT OF PORTFOLIO MANAGEMENT ACTIVITIES:
SEBI has also power to require report of portfolio management to check the capital market
performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for
demanding report.
10. TO EDUCATE THE INVESTORS :
Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010
SEBI imposed workshop. If you are investor, you can get education through SEBI leaders by
getting update information on this page.
PREPARED BY NAMITA BISWAL
FACULTY IN ECONOMICS, SCS, JUNIOR COLLEGE, PURI
