AccountingandFinance

forManagers

LESSON

17
SEBI IN CAPITAL MARKET ISSUES
CONTENTS
17.0AimsandObjectives
17.1Introduction
17.2ObjectivesoftheSEBI
17.3EntityofSEBI
17.4OrganisationalGridoftheSEBI
17.5PowersandFunctionsofSEBI
17.6RoleofSEBI
17.6.1PromotersContribution
17.6.2Disclosures
17.6.3BookBuilding
17.6.4AllocationofShares
17.6.5MarketIntermediaries
17.6.6DebtMarketSegment
17.6.7Brokers
17.6.8SuspensionofaBroker
17.6.9RecentDevelopments
17.7CriticalReviewofSEBI
17.8LetusSumup
17.9LessonendActivity
17.10Keywords
17.11QuestionsforDiscussion
17.12SuggestedReadings

17.0 AIMS AND OBJECTIVES

ThislessonisintendedtodiscusstheroleofSEBIinregulatingtheIndiancapitalmarket.
Afterstudyingthislessonyouwillbeableto:
(i)describeobjectivesbehindinstitutingSEBI
(ii)knowtheorganisationalstructureofSEBI
(iii)understandpowersandfunctionsofSEBI
(iv)examinetheroleofSEBIinIndianfinancialmarket

17.1 INTRODUCTION

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Duringthelate80,theGOIdecidedtoreplacetheControllerofCapitalIssuesAct,by
wayofinductingtheSecuritiesExchangeBoardofIndia,inordertointroducethe
regulatoryenvironmentintheIndiancapitalmarket,topavewayforthepromotionof
congenialandconduciveclimaticconditionfortheinvestingpublic.HencetheGovernment

ofIndiahasinstitutedthesupremeauthoritySEBItomonitorandcontroltheproceedings
ofthecapitalmarketinthecountry.

SEBIinCapitalMarketIssues

17.2 OBJECTIVES OF THE SEBI

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Toreplacetheofficeofthefollowingmajoractsofimplementationandtoattain
thefollowingobjectives:
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ControlofCapitalIssuesAct(1947)

TheCompaniesAct(1956)issue,allotmentofthesecuritiesanddisclosures

SecuritiescontractregulationAct(1956)tocontroloverthestockexchanges

InMay,1992thecontrollerofissueofcapital,pricingoftheissues,fixingpremia
andratesofdebentureswereceasedinoperation,providedtheSEBIwas
promulgated.
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Protectingtheinterestoftheinvestors

Promotingthedevelopmentofthesecuritiesmarket

Regulatingthesecuritiesmarket

17.3 ENTITY OF SEBI

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Itwasregisteredwiththecommonsealandwiththepowertoacquire,holdand
disposeanyproperty
Powertosueortobesuedinitsownname
TheHeadofficeissituatedinMumbai;inadditiontheregionalofficeswere
establishedinthefollowingmetropolitancitiesvizKolkata,ChennaiandDelhi,to
monitorandcontrolthecapitalmarketoperationsacrossthecountry

17.4 ORGANISATIONAL GRID OF THE SEBI

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Sixmembersinthecommittee
Headedbythechairman
OnemembereachfromtheministriesofLawandFinance
OnememberfromtheofficialsofReserveBankofIndia
Twonomineesfromthecentralgovernment
Itcontains4differentdepartmentsvizPrimarydepartment,Issuemanagementand
intermediariesdepartment,SecondarydepartmentandInstitutionalInvestmentdepartment

17.5 POWERS AND FUNCTIONS OF SEBI

Section11oftheActChapterIVhighlightsthePowersandFunctionsofSEBI
Regulatingthebusinessofthestockexchanges
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Regulatingtheroleoftheintermediaries
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Registeringandregulatingofdepositories,participantsandcustodianofsecurities,
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creditratingagencies
Regulatingofmutualfundsandventurecapitalfunds
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Prohibitingtheunfairtradepractices
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Prohibitingofinsidertradeactivities
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Regulatingsubstantialtakeoversandacquisitions
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Frequentconductofresearchactivities
Toconductanyenquirywhichwarrantsthesituationtosafeguardtheinterestof
theinvestors

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forManagers

Civil Court Procedure 1908:TheSEBIhasbeengivenadditionalpowersand

functionswithreferencetoCivilCourtProcedure1908toregulatethecapitalmarketin
additiontotheaboveenlistedpowersandfunctions
Discoveryandproductionofbooksofaccountoftheerrantduringtheinspection
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andenquiry.
Summoningandenforcingtheattendanceofthepersonstostandbeforeforthe
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examinationofoath.
AcctoSec12SEBIisempoweredtoconductInspectionofbooks.
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17.6 ROLE OF SEBI

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Entrynormsforthecompaniesatthemomentofraisingthecapitalfromthe
market:
Thecompaniesareexpectedtoproduce3yearsdividendtrackrecordof
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precedingtheissue.
Attheentrylevel,immediatelyafterlisting,importantpointtobeensuredis
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thatPostissueofnetworthshouldbe5timesgreaterthanthePreissue
networth.
Ifitisamanufacturingcompanywithoutanytrackrecord,wantstoraiseany
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capitalfromthemarket,theappraisalhastobedonethroughdevelopment
banksorcommercialbanks.
Havingthreeyearstrackrecord,theSEBInevervetsofferdocumentofthe
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issueofcapital.

17.6.1 Promoter's Contribution

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Promoter'scontributionshouldnotbelessthan20%andshouldbemadebefore
theissue.
IfthesizeoftheissuesisRs.100cr50%ofthecontributionshouldbemade
beforetheopeningofissueandtheremainingshouldbepaidbeforethecallsare
madetotheinvestors.

17.6.2 Disclosures
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Acc.BhavecommitteeFinancialresultsi.e.,unauditedandauditedfinancialresults
shouldbepublished.
Riskfactorsandpositionsofthecompanyshouldbehighlightedindetailinthe
prospectus.

17.6.3 Book Building

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75%routewasspecifiedattheearlymomentintheprocessofbookbuilding.Then
thebookbuildingprocesswasopenedto100%routetothepublic.

Sufficientopportunitiesaretobefurnishedtotheinvestorstorepresentthroughthe
terminaltotakepartintheprocessofBookbuilding.

Thecompanyduringtheprocessrequires30centersatleastforbookbuildingprocess
toraisethesharecapitalfromthemarket.

17.6.4 Allocation of Shares

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TheMinimumapplicationwas100Nosforsubscribingtheissueofsharecapital.
ThentheMinimumapplicationwashikedto500Nos.ThenSEBIhasfeltthatthe
Minimumapplicationwastoohigh,whichdidnotpavethesmallinvestorstowithin
theavailablesurplus,thentheminimumapplicationbroughtdownto200Nos.

Smallinvestorsarewhohold1000sharesorfewsecurities

Allotmentshouldbedonewithin30daysfromthedateofclosureoftheissue.
Duringthenonallotmentoftheshares,thecompanyshouldrefundtheamountof
theapplicationmoney.

SEBIinCapitalMarketIssues

17.6.5 Market Intermediaries

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Thevariousmerchantbankcategorieswereabolished.Eachcategoryofissue
intermediaryisrequiredtoundergoforspecificregistrationprocess.

LeadmanagerswhomanagetheissueofcapitalshouldhaveanetworthofRs.5cr.

17.6.6 Debt Market Segment

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Depositorysystemforthedebtsecuritieswereintroduced

Dematfacilitywasspecificallyintroducedforthegovernmentsecurities

Listingofdebtsecuritiesneednotrelyupontheequitylistingintherespective
stockexchange

FIIswerepermittedtoinvest100%inthedebtinstrumentsoftheIndiancompanies

Fortheissuanceofdebtinstrumentstheratinghasbeenmandatory

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Minimumtworatingsshouldbeobtainedfortheissueofdebtinstrumentmorethan
Rs.500cr.
Ratingagencyshouldnotbeassociatedwiththefirmofissuingcompany

17.6.7 Brokers
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RegistrationisgivenMemberofanystockexchangekeyfactorsof
registrationofficespace,previousexperience,manpower,sellingorbuyinginsecurities

Codeofconductexecutionoforders,fairnessofdealswiththeinvestors,issueof
contractnote

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Financialstatementsshouldbesubmittedwithin6monthsoftheaccountingperiod
BookofaccountsAminimumof5yearstobepreserved

RegionalofficesEstablishmentonlywithreferencetoattendthecomplaintsof
thesmallinvestorsatspeedyrateKolkata,ChennaiandDelhi

SEBI'sfinalcontrollingmeasureissuspensionandcancellationoftheregistration
subjecttocertainconditions

17.6.8 Suspension of a Broker

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Suspensionpermanentdismissalisleadingtocancellationofregistrationdueto
theproblemcaused
Violationofrulesandregulations
Failstosubmitthetrueandfairinformationaccordingtothenormsofdisclosures
Untowardconductwiththeinvestor
Guiltofmisconduct
Poorfinancialstatusofthebrokersdeterioration
Stockexchangefeesfailtopayontimetotherequirement
Suspensionofthemembership

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forManagers

Indulgesinanyactofinsidertradingofsecurities

Convictedofaanycriminaloffence

SubBroker

Subbrokertoobtaintheregistration

Agreementinbetweenbroker&subbroker

DepositshouldbemadewithBroker

Transferofsecuritieswithoutregistrationofbearingstampsconsideredasbad
deliveriesintheangleofstockexchangesJuly1,1997.

17.6.9 Recent Developments

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RBIapprovalcopyisexempted

FIIsarepermittedtoinvestupto100%indebtmarketfunds

FIIswhichhavesecuritiesworthofRs100crormorethanmandatoryrequirement
istosettlethetransactiononlythroughdematmode

FIIs/NRIs/OCB30%oftheequityofthecompanyinaccordancewiththeunion
budget199798

ItwashikedbytheUnionFinanceMinisterduringthebudget2000
Check Your Progress
WhatstepshavebeentakenbySEBIregardingallocationofshares?

17.7 CRITICAL REVIEW OF SEBI

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DisclosuresTopresentinformationonlyfortheinterestofinvestors
Disseminationprocesstodisclosetheinformationrequiredwhichleadstoundue
delay.TherouteofdisseminationoftheinformationshouldbethroughSEBIto
publicandbyconsideringthetimewastage,thewebsitesweresuggestedfor
facilitatingtheinvestors.

TheSettlementforNSEareWednesdayTuesday,andinthecaseofBSE
MondayFriday

Leadstomorearbitragetransactionswhichleadtogreaterfluctuationsintheopening
andclosingpricesofthesecurities

Badlatradehasbeenbannedduetodetrimentaltotheinvestors

Specialwatchsystemhastobeintroducedtotheinternationalstandards

Capitaladequacy:Thecapitalrequiredtobemaintainedislessthanforintermediaries
butatthesametimethecapitaladequacyshouldbetothetradingvolumeofthem
onlyinordertoavoidthedefaultriskoftheinvestors.

17.8 LET US SUM UP

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TheGovtofIndiahasinstitutedthesupremeauthoritySEBItomonitorandcontrolthe
proceedingsofthecapitalmarketinthecountry.TheSEBIhasbeengivenadditional
powersandfunctionswithreferencetocivilcourtprocedure1908toregulatethecapital
market.RecentDevelopmentsRBIapprovalcopyisexempted.FIIspermittedtoinvest
upto100%indebtmarketfunds.FIIswhichhavesecuritiesworthofRs100crormore

thanmandatoryrequirementistosettlethetransactiononlythroughdematmode,FIIs/
NRIs/OCB30%oftheequityofthecompanyinaccordancewiththeunionbudget
199798.Itwashikedbytheunionfinanceministerduringthebudget2000.

SEBIinCapitalMarketIssues

17.9 LESSON-END ACTIVITY

DiscusscriticallythepowerandfunctionsofSEBI.

17.10 KEYWORDS
Broker:memberofthestockexchange,facilitatestheclienttobuyandsellonbehalfin
thestockmarket
Sub-broker:whoassiststhebrokeranddoesthebuyingandsellingtransactionsforthe
clientthroughthebrokerinthestockexchange
Arbitrage:Buyingthesecurityatlesserpriceatonestockexchangeanddisposingthem
offathigherpriceatanotherstockexchangeduringthesamemoment
Lead manager:Whotakesactiveroleintheprocessofissuemanagement.

17.11 QUESTIONS FOR DISCUSSION

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7.

WhenSEBIwasestablished?Forwhat?
BrieflyhighlighttheobjectivesoftheSEBI.
ExplaintheroleofSEBIinadministeringtheprimarymarket.
Explaintheimportantenactmentsonthemarketintermediariesofthestockmarket.
ElucidatetherecentdevelopmentswiththehelpofSEBImandate.
WhatarethestepstakenbySEBItosuspendtheregistrationofabroker?
Whythecompaniesareexpectedtohighlightabouttheprospectsandriskfactors
oftheissuewithrelevancetotheproject?

17.12 SUGGESTED READINGS

M.P.Pandikumar, Accounting & Finance for Managers,ExcelBooks,NewDelhi.
R.L.GuptaandRadhaswamy,Advanced Accountancy.
V.K.Goyal,Financial Accounting,ExcelBooks,NewDelhi.
KhanandJain,Management Accounting.
S.N.Maheswari,Management Accounting.
S.Bhat,Financial Management,ExcelBooks,NewDelhi.
PrasannaChandra,Financial Management Theory and Practice,TataMcGraw
Hill,NewDelhi(1994).
I.M.Pandey,Financial Management,VikasPublishing,NewDelhi.
NitinBalwani,Accounting & Finance for Managers,ExcelBooks,NewDelhi.

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