Role of SEBI in regulatory environment of securities

market in INDIA
The Securities and Exchange Board of India was enacted on April 12, 1992 in accordance
with the provisions of the Securities and Exchange Board of India Act, 1992. The Preamble
of the Securities and Exchange Board of India describes the basic functions of SEBI as
"...to protect the interests of investors in securities and to promote the development of,
and to regulate the securities market and for matters connected therewith or incidental
thereto". It was established to strengthen the securities market in India in the wake of
securities scan that happened in 1992. Since its inception it has come up with lot of
initiatives to develop Indian securities market and improving its safety and efficiency which
is reflected in the growth of securities market in terms of volume of transactions as shown
in Exhibit 1 and also the number of new types of market participants and the increase in
the number of players in each category as shown in Exhibit 2. Few measures taken have
transformed the market fundamentally. India has one of the most sophisticated new equity
issuance markets and also Indian securities market is among the safest and the most
efficient trading destinations for many foreign countries. Disclosure norms and the
accounting standards followed are one among the best regimes in the world. The Indian
corporate governance code is compared to the Sarbanes Oxley Act of the USA.
Important aspects of SEBIs regulatory activities in major areas like (i) Primary
market and issuance of securities (ii) Disclosure requirements (iii) Corporate governance
have been prominent in the recent past along with the regulation of venture capital funds
and credit rating agencies.

PRIMARYMARKETANDISSUANCEOFSECURITIES:
SEBI regulates the primary market through regulations on issuers eligibility to offer
securities to the public, regulations on the information production at the time of issue,
processes and procedures relating to the issuance of securities. Significant institutional

developments the transformed the primary markets fundamentally are (i) guidelines for
book-building that enabled issuers to price securities based on investor interest and market
conditions prevailing at the time of the offer to the public, subject to the floor price that is
announced in the prospectus and a 20 percent band above the floor (ii) Dematerialization
and electronic book-building which made it possible to reduce the issue time from the opening of
the issue to listing and trading from a mean of 122 days and a maximum of 991 days.
Dematerialization allowed quick and efficient allotment of securities and provided liquidity to the
investor immediately on the completion of issue, which helped bring down the investors cost of
applying to a public issue (iii) All these improvements have lead to larger participation by
institutional investors in public offerings.

DISCLOSURE:
SEBIs disclosure standards are not limited to accounting information presented in the prospectus.
It extends to other issue-related communications such as advertisements. SEBI, in 2000-2001 has
directed to mandate a more detailed presentation on the performance of the company and with
the introduction of open electronic limit order books in all the exchanges increased the
transparency of trades. Thereby exchanges have improved the flow of trade related information by
taking advantage of technology and minimized the instances of gaps in flow of information as in
case of off market transactions.

CORPORATEGOVERNANCE:
SEBI had constituted two Committees on Corporate Governance under the Chairmanship
of Mr. N R. Narayana Murthy and Mr. Kumar Mangalam Birla. Based on the
recommendations of the Committee and public comments received, certain amendments
were made in Clause 49 of the Listing Agreement, which covered
(i)
Ensuring independence of the Board and disclosure of their compensation
(ii) Ensuring correctness, sufficiency, and credibility of disclosures
(iii) Requirement of financial literacy among members of the audit committee and
expertise in accounting/financial management among them
(iv) Whistle-blower policy
(v) Requirement of a formal risk management policy

(vi)

Certification of financial and cash flow statements by the CEO/CFO to the Board;
and
(vii) Quarterly reporting to the stock exchanges on compliance with the requirements
of every provision of Clause 49 to ensure true independence of the Board and raise
the standards of governance.
Apart from the above areas, regulations by SEBI on Market for corporate
control, Trading mechanisms, Settlement systems, Institutionalization of trading and
ownership of securities, Market integrity and insider trading, Ownership and governance
of stock exchanges and Compliance enforcement allowed SEBI to ensure that the accounting
policies of a listed firm are robust enough to provide reliable information to investors, the cost of
transaction and the risk of settlement have been minimized, making Indian stock exchanges one of
the safest and the lowest cost securities markets in the world. The Indian mechanism for securities
issuance is among the more sophisticated in the world with the introduction of the guidelines for
book building of issues. Many of the agency problems that affected the securities trade have been
addressed through the corporatization and demutualization of securities exchanges.

COMPARISONOFSEBIWITHSEC
AND

CSRC

SEBI has all the powers necessary at a regulators command- powers that are even greater
than those wielded by the SEC, which has to marshall compelling facts and satisfy a court
about its version of the story before taking action, not after having taken action. Take
the Raj Rajaratnam case itself. The SEC has had to file a complaint before a court asking the
court to pass orders to disgorge the alleged gains earned by way of insider trading, to
restrain the accused from acting as officers or directors of any issuer of securities, and to
pay civil monetary penalties under the US securities laws. In India, SEBI itself is armed
with powers to take each of the aforesaid actions in absolute terms-not just as interim

measures. SEBI issues directions under Sections 11 and 11B of the SEBI Act asking people
not to deal in securities or to access capital markets or to be associated with capital markets.
Chapter VIA of the SEBI Act, 1992 empowers SEBI to inflict monetary penalties directly
without the intervention of any court. Adjudicating Officers have the power to impose civil
monetary penalties as high as Rs.25 crore or three times the benefit gained due to the
violation.
The only area where SEBI does not have powers for direct action without an intervention of
a court is the ability to send people to jail. Section 24 of the SEBI Act requires SEBI to file a
complaint before a criminal court to get an accused convicted and jailed for contravention
of any provision of the SEBI Act, or rules or regulations made under it. Judicial intervention
of any nature can come into play only after SEBI has taken action. This led SEBI enjoy the
privilege of not going for wrongful regulatory action and significant injury has been done
to that person before court rectifies it that SEC does not enjoy.

23. A few general preconditions for the effective regulation of securities markets requires further
strengthening. There are no significant barriers to entry and exit for market participants.
Foreign ownership of securities intermediaries is allowed, but investment by foreign investors
in Indian issuers and mutual funds must be done through FIIs, which are required to register
with SEBI. Since August 2011, SEBI has allowed foreign investors who meet know your
customer requirements to invest in equity and debt schemes of mutual funds. The Companies
Act contains a basic framework for the constitution and operation of corporations that has served the
country well but could usefully be updated. In particular, market participants commented that the
insolvency regime requires a major overhaul since protracted insolvency proceedings are mentioned as a
key weakness of the system. The authorities informed that a Companies Bill 2011 has already been tabled
in parliament. Criminal enforcement in the courts is also a challenge, with protracted procedures
mentioned as the main problem. The country is moving toward convergence with (rather than adoption of)
IFRS. IFRS equivalent standards have been notified by the central government and ICAI has suggested
April 2013 for implementation. Some differences with IFRS remain, and the authorities intention is to
initiate a dialogue with the International Accounting Standards Board to address such differences. Market
participants expressed concerns about the taxation framework, in particular the existence of a securities

transaction /2 tax with different percentages for different asset classes, which can distort the natural
development of the markets. The authorities informed that the MoF has initiated a review of such tax with
a view toward rationalization of securities transaction tax percentages. Finally, there are general concerns
about the level of corruption in the country. The creation of an independent anticorruption agency is
currently being discussed in parliament.