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M.D.COLLEGE T.Y.F.

M ROLE OF SEBI TO STOP SCAMES

UNIVERSITY OF MUMBAI
PROJECT ON

ROLE OF SEBI TO STOP SCAMES

Bachelor of Commerce
Financial Markets
Semester VI
(2015-2016)

Submitted
In partial Fulfillment of the requirement for the
Award of Degree of Bachelor of Commerce – Financial Market.

Submitted By,
MR.TEJAS VILAS BHEKARE.

Roll No. - 03

Under Guidance,
PROF. Priyanka Prasad

MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE &


COMMERCE PAREL, MUMBAI – 400 012.

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES

MAHARSHI DAYANAND COLLEGE


OF ARTS, SCIENCE & COMMERCE
PAREL, MUMBAI – 400 012.

CERTIFICATE

This is to certify that MR.TEJAS VILAS BHEKARE. of B.Com


(Financial Markets) Semester VI (2015-2016) has successfully
completed the project on ROLE OF SEBI TO STOP SCAMES under the
guidance of PROF. Priyanka Prasad

Course Coordinator Principal

Project Guide/Internal Examiner External Examiner

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES

DECLARATION

I am MR. TEJAS VILAS BHEKARE. The student of B. com


(Financial Markets) Semester VI (2015-2016) hereby declares that I
have completed the Project on ROLE OF SEBI TO STOP SCAMES.
The information submitted is true and original to the best of my
knowledge.

Signature of student

Name of Student

MR. TEJAS VILAS BHEKARE.

Roll No. 03

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES

ACKNOWLEDGEMENT

The college, the faculty, the classmates & the atmosphere, in the college
were all the favorable contributory factors right from the point when the
topic was to be selected till the final copy was prepared. It was a very
enriching experience throughout the contribution from the following
individuals in the form in which it appears today. We feel privileged to
take this opportunity to put on record my gratitude towards them.
PROF. KUNAL SONI SIR made sure that the resource was made
available in time & also for immediate advice & guidance throughout
making this project. The principal of our college DR. T.P.GHULE and
our Vice-Principal Mrs. SANJEEVANI PHATAK has always been
inspiring & driving force. We are thankful to Mr. SANTOSH SHINDE
associated with administration part of Financial Markets & Banking &
Insurance section has been very helpful in making the infrastructure
available for data entry.

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES

EXECUTIVE SUMMARY

Since the empowerment of the Securities and Exchange Board of India (SEBI)
through an Act of Parliament in 1992, SEBI has come up with a number of
initiatives aimed at regulating and developing the Indian securities market and
improving its safety and efficiency. These initiatives have made an impact on
nearly every aspect of the market. Some of those initiatives have transformed the
market fundamentally. Particularly noteworthy is the growth in the following:

• Market capitalization

• Number of listed firms

• Trading volumes and turnover both in the spot and futures markets.

There is a growing network of financial intermediaries that operate in a highly


competitive environment while being governed by a tight set of norms. India has
one of the most sophisticated new equity issuance markets. Disclosure
requirements and the accounting policies followed by listed companies for
producing financial information are comparable to the best regimes in the world.

The Indian securities market is among the safest and the most efficient trading
destinations internationally. The Indian corporate governance code is compared to
the Sarbanes Oxley Act of the USA. India has one of the fastest growing and well-
developed asset management businesses in the world, with state-owned as well as
private sector players. That said, the Indian market is often hostage to some scam
or the other from time to time. Effective enforcement of compliance is cited as one
of the reasons for these unsavory episodes.

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES

INDEX

SR.
NO PARTICULARS PG. NO
1 1
INTRODUCTION
STOCK MARKET

SEBI

2 OVERVIEW OF SECURITIES MARKET IN INDIA 6

3 ROLE OF REGULATION 8

4 POWERS AND FUNCTION OF SEBI 12


REGULATION OF STOCK EXCHANGES AND
5 SUBSIDIARIES 15

6 OBJECTIVES 20
ORGANAISATION REGULATING SECURITIES
7 MARKETS IN INDIA 22

8 SECURITIES MARKET REGULATION PRIOR TO SEBI 24


PROMOTION AND REGULATION OF SELF
9 REGULATORY ORGANISATIONS 27

10 ROLE OF SEBI ON INDIAN STOCK MARKET 29

11 LIMITATIONS OF SEBI 35

12 GOVERNANCE OF STOCK EXCHANGES 37


INVESTOR EDUCATION AND THE TRAINING OF
13 INTERMEDIARIES 39
ROLE OF SEBI TO STOP SCAMS
14 40

15 COCLUSION 50

16 BIBLIOGRAPHY 52

B.COM(FINANCIAL MARKETS)
M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
CHAPTER 1

INTRODUCTION

STOCK MARKET

The Financial system constitutes of the money market and capital market.
The capital market facilitates the transfer of small and scattered savings of the
household sector into productive investment. It helps in financing the activities of
corporate entities. Government and Public Sector organization. The capital market
provides liquidity, marketability and the safety of investments to the investors.
Properly organized and regulated capital market provides scope for substantial
development for an economy, through the availability of long term funds, in
exchange of financial securities.

Stock markets refer to a market place where investors can buy and sell
stocks. The price at which each buying and selling transaction takes is determined
by the market forces (i.e. demand and supply for a particular stock).

A stock exchange is a corporation or mutual organization which provides


"trading" facilities for stock brokers and traders, to trade stocks and other
securities. Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the
payment of income and dividends. The securities traded on a stock exchange
include: shares issued by companies, unit trusts, derivatives, pooled investment
products and bonds. To be able to trade a security on a certain stock exchange, it
has to be listed there. Usually there is a central location at least for recordkeeping,
but trade is less and less linked to such a physical place, as modern markets are
electronic networks, which gives them advantages of speed and cost of
transactions. Trade on an exchange is by members only. The initial offering of
stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
most important component of a stock market. Supplyand demand in stock a market
is driven by various factors which, as in all free markets, affect the price of stocks
(see stock valuation).

Let us take an example for a better understanding of how market forces


determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is
an anticipation of an upward movement in its stock price. More and more people
would want to buy this stock (i.e. high demand) and very few people will want to
sell this stock at current market price (i.e. less supply). Therefore, buyers will have
to bid a higher price for this stock to match the ask price from the seller which will
increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers
than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the
market.
In earlier times, buyers and sellers used to assemble at stock exchanges to
make a transaction but now with the dawn of IT, most of the operations are done
electronically and the stock markets have become almost paperless. Now investor’s
don’t have to gather at the Exchanges, and can trade freely from their home or
office over the phone or through Internet.

There is usually no compulsion to issue stock via the stock exchange itself,
nor must stock be subsequently traded on the exchange. Such trading is said to be
off exchange or over-the-counter. This is the usual way that derivatives and bonds
are traded. Increasingly, stock exchanges are part of a global market for securities.

A stock exchange is also known as the share market or the bourse is mutual
organization or a corporation which mainly provides facilities for stock brokers
and for various traders. A stock exchange helps traders or members to trade
company stocks and various other securities. Stock exchange also provides various
facilities for the issue and redemption of different securities. Stock Exchange is a
place where anyone with money in his pockets can trade for shares. The Basic way
of trading on the stock exchange is to open an account with a broker who has a
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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
ticket to trade onbehalf of her customers on stock exchange. You can open your
account with the broker either by submitting the required amount of money or
shares or stocks whatever you call it. Every broker has different requirements for
opening an account with different requirements for amounts of money that can be
deposited.
Broker trade on behalf of you by taking your orders mostly on phone for any
stock you want to trade and in return charges a certain amount of commission.
There are two different kinds of brokers. One who simply trade on behalf of you
and others are called dealers which are also called market makers. a market maker
is a person who at the end of day matches cost at which you purchased your shares
and their day end prices. if day end prices are higher than the cost at which you
purchased your shares, he will issue a margin call for depositing the necessary
funds to level your funds with the price of your shares.

A stock market is a public market for the trading of companystock and


derivatives at an agreed price; these are securities listed on a stock exchange as
well as those only traded privately. The size of the world stock market was
estimated at about $36.6 trillion US at the beginning of October 2008. The total
world derivatives market has been estimated at about $791 trillion face or nominal
value, 11 times the size of the entire world economy. The value of the derivatives
market, because it is stated in terms of notional values, cannot be directly
compared to a stock or a fixed income security, which traditionally refers to an
actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e.,
a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on
the event not occurring.). Many such relatively illiquid securities are valued as
marked to model, rather than an actual market price.

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
THE SECURITIES AND EXCHANGE BORAD OF INDIA
(S.E.B.I)

With the announcement of the reforms package in 1991, the volume of business in
both the primary and secondary segment of the capital market has been increased
enormously till now. A multicrore securities scam rocked the Indian financial
system in 1992(Harshad Mehta scam). The then existing regulatory framework was
found to be fragmented and inadequate and hence, a need for an autonomous,
statutory, and integrated organization to ensure the smooth functioning of capital
market was felt. To fulfill this need, the Securities and Exchange Board of India
(S.E.B.I), which was already in existence since April 1988, was conferred statutory
powers to regulate the capital market.

The SEBI got legal teeth through an ordinance issued on 30 January 1992.
The ordinance conferred wide- ranging powers on the SEBI, including the
authority to prohibit ‗insider trading‘ and ‗regulate substantial acquisition of
shares‘ and ‗takeover of business‘. The function of market development includes
containing risk, board basing, maintaining market integrity and promoting long-
term investment. The SEBI Act, 1992 which establishes the SEBI with four-fold
objectives of protection of the interests of investors in securities, development of
the securities market, regulation of the securities market and matters connected
therewith and incidental thereto.

The capital market, i.e., the market for equity and debt securities is regulated
by the Securities and Exchange Board of India (SEBI). The SEBI has full
autonomy and authority to regulate and develop the capital market. The
government has framed rules under the securities contracts (regulation) Act
(SCRA), the SEBI Act and the Depositories Act.

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The SEBI has framed regulations under the SEBI Act and the Depositories
Act for registration and regulation of all market intermediaries, for prevention of
unfair trade practices, and insider trading. As everyone could know that these i.e.
the Government and the SEBI issue notifications, guidelines and circulars which
need to be complied with by market participants. All the rules and regulations are
administered by the SEBI.

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
CHAPTER 2

Overview of the Securities Market in India

The impressive growth in the number of participants and the volume of activity on
the exchanges starting 1992-933 to-date is evident from Tables I Also notable is the
emergence of activities that were new to the Indian securities market such as
derivatives, venture capital funds and mutual fund management entities in the
private sector, as may be noted from Table II.

The National Stock Exchange (NSE), established in 1994, has a higher turnover in
the cash segment in terms of value as well as trades than the Bombay Stock
Exchange (BSE) established in 1875. Trading activity on the sixteen regional
exchanges has nearly disappeared in nearly all but three of them where trading has
dwindled to negligible levels. Barring taxes on transactions, Indian securities
markets provide one of the least cost trading platforms.

The large number of trades on the two exchanges points out to the importance of
the securities trade to the Indian economy.

As per NSE (2009) about 68.8% of the primary issuance of debt of Rs 6125 billion
during 2008-09 and 99.3 % of the secondary debt market turnover of Rs 62,713
billion was government paper indicating that both in terms of resource
mobilization as well as in terms of trading activity the market for corporate debt
remained insignificant. The corporate bond market in India, comprising mostly
commercial paper and bonds of maturity ranging from one to twelve years is small
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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
by international standards in spite of various policy initiatives such as mandated a
price / order matching of trades in and dematerialisation.
Purchases of securities by foreign institutional investors (FIIs) have steadily grown
from about Rs. 56 billions in 1993-94 to over Rs. 6146 billions in 2008-09, the
cumulative FII flows accounting for nearly 8% of the Bombay Stock Exchange
market capitalization as of March 2009. FIIs have emerged as an important class of
investors for more reason than one, as we will note later in this paper.

Underlying this progress in the securities market have been several noteworthy
institutional developments. SEBI’s role as a regulator in bringing about these
developments is the topic of research in this paper.

The trade in securities in India takes place in a legal system that presents a
somewhat mixed picture. India fares well on the formalism index of DLLS(2003),
but poorly in terms of effectiveness in introducing and enforcing new laws as
developed in Berkowitz, Pistor, and Richard (2003). The judicial infrastructure in
India needs improvement with 23.2 million cases pending at the lower and the
higher courts in India, 63% of civil cases being more than a year old and 31%
more than three years old as pointed out in Hazra and Micevska (2004).

India scores well on the index of disclosure requirement in La Porta (2006), but
that is offset by empirical evidence of earnings management practices. Similarly,
SEBI fares well in terms of the powers of the supervisory authority and autonomy,
but ranks way below the SEC in terms of enforcement powers as pointed out in
Bose (2005).

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
CHAPTER 3

Role of Regulation : A Framework

There are multiple perspectives from which the rationale for regulation may be
examined. The most fundamental and an obvious point of view to examine it
from is what each of the participants identified in the previous section would
expect from the securities market.

Issuers would expect the securities market to (i) help realize a fair price for the
securities they issue and (ii) minimize the direct and indirect costs of issuance of
securities. If mispricing persists issuers will take recourse to other means of
financing or migrate to more efficient markets in other jurisdictions (Nayak
(1999)). Direct costs at the time of issue include the cost of managing and
distributing the issue. Indirect costs include the “discounts” that issuers will have
to offer to ensure successful subscription to the issue. This issue in pricing has
been examined in the huge body of literature on the underpricing of IPOs. Direct
costs in the post issue phase are mainly by way of the costs of listing, complying
with regulations specified by the stock exchange and / or the securities regulators
in that market, including the cost of maintaining the mandated flow of information.
Indirect costs might include the impact of disclosure on the competitive interests of
the business.

Investors would expect (i) that their interests are not short changed by the
opportunistic behavior of the managers of the issuer company (ii) a risk free and
low cost mechanism for transaction in securities and achieving liquidity, and (iii)
availability of risk management products.

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Intermediaries would seek opportunities for designing and offering a whole host of
products and services such as dealing in securities, mobilization of resources and
advisory services for companies. In general intermediaries would seek the freedom
to innovate to enhance efficiencies by minimizing costs and / or through exploiting
arbitrage opportunities in the market.
Stock Exchanges would expect a stable, consistent and transparent policy regime
that would enable them to engage in the activity of providing liquidity to investors
by innovating, competing and responding to emerging developments in the
financial sector.

The government and the community at large would expect that the securities
market function as an important, stable and safe centerpiece of the financial
system, coexisting in a symbiotic relationship with the rest of the financial system.
The failure of the securities market could have a ripple effect on the rest of the
financial system as a whole.

Some of the opportunities above conflict with each other. For example the
existence of arbitrage provides an opportunity for profits for the intermediary but
increases the cost of capital for the issuer or the investor or both. That creates an
incentive for intermediaries to get together and engage in practices that increase
costs for issuers and / or investors. One of the roles of regulation is in minimizing
the conflicts inherent in these expectations.

To perform these roles a number of prerequisites have been identified in Black


(2001). He identifies these as essential for ensuring that investors receive good
quality information and minimize the risk of self dealing. Black defines self
dealing as transactions between a company and its insiders or another firm that
the insiders control. This paper proposes the view that the conditions in Black
(2001), paraphrased below, are necessary but are not sufficient for the

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
11
development of a vibrant securities market.

I. Local Enforcement and Culture comprising an honest, sophisticated securities


agency (and prosecutors for criminal cases), well functioning courts, good civil
discovery rules and a class action or similar procedure and a culture of
compliance with disclosure and self-dealing rules by insiders, reputational
intermediaries and independent directors.

J. Disclosure Rules relating to full disclosure of financial results and self dealing
transactions, accounting and auditing rules, auditing of financial statements
and disclosure of ownership.

K. Inclusion of independent directors on company boards and sophisticated


reputational intermediaries accounting professionals, investment banking
professionals, securities lawyers.

L. A stock exchange with meaningful listing standards and an active insider


trading surveillance operation.

M. Civil liability for insiders who violate the disclosure and self-dealing rules,
and for accountants, investment bankers and for independent directors who
approve gross self-dealing and criminal liability for insiders who

intentionally violate the disclosure and self-dealing rules.

N. Market transparency in terms of trading prices and an enforced ban on market


manipulation

O. Self-Dealing Rules such as (i) procedural controls on self-dealing

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transactions (review by independent directors, non-interested shareholders,
or both) (ii) Accountant review of the disclosure of self-dealing transactions
and (iii) enforced securities or other rules banning insider trading

P. Other Institutions such as an active financial press and security analysis


profession and a good organization to write accounting rules.

Additionally, we identify the following additional requirements for the


development of a healthy securities market.

Safe and efficient securities trading platforms: If trading platforms are not
perceived to be safe, liquid and efficient in terms of costs investors are bound to
avoid the platform for trading, leading to an eventual failure of the market.
Trading platforms encompass the institution of the securitiesexchange, rules of
engagement among traders, and between market intermediaries and their
customers and between issuers and investors so as to minimize agency type
conflicts among various participants, order processing and handling systems,
settlement and clearing systems. The design of the trading platform has to provide
for liquidity at low transaction costs of transactions. Transaction costs comprise
brokerage, stamp duties and so on and bid-ask spreads and impact costs.
Our analysis is based on the two pieces of statute that SEBI draws upon to
discharge its statutory roles, namely, the Securities and Exchange Board of India
Act, 1992 (SEBI Act, hereafter) and the Securities Contract Regulation Act, 1956
(SCR Act) and the rules made thereunder and select provisions of the listing
agreement between the stock exchanges and the issuer.12

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M.D.COLLEGE T.Y.F.M ROLE OF SEBI TO STOP SCAMES
CHAPTER 4

Powers and Functions of the Board (SEBI)

These are detailed in the second chapter of the Act under Section 11(1). The
section points out that it shall be duty of the Board to protect the interests of
the investors in securities and to promote and development of, and to regulate
the securities market by such measures as it thinks fit. In brief the statutory
objectives of the SEBI enshrined in the SEBI Act are fourfold-

1. Protection of investors interests in securities


2. Promotion of the development of the securities market
3. Regulation of the securities market and
4. Matters connected therewith and incidental thereto.

By way of amplification of the above core objectives, the Act enumerates as


under the different powers & functions of SEBI in greater details as under:-

a. regulating the business in stock exchanges and any other securities markets;
b. registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an
issue, merchant bankers, underwriters, portfolio managers, investment
advisers and such other intermediaries who may be associated with securities
markets in any manner.

(Ba) registering and regulating the working of the depositories, participants,


custodians of securities, foreign institutional investors, credit rating agencies
and such other intermediaries as the Board may, by notification, specify in this
behalf.

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c. registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds;
d. promoting and regulating self-regulatory organisations;
e. prohibiting fraudulent and unfair trade practices relating to securities markets;
f. promoting investors' education and training of intermediaries of securities
markets;
g. prohibiting insider trading in securities;
h. regulating substantial acquisition of shares and take-over of companies;
i. calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges, mutual funds and other persons associated with
the securities market and intermediaries and self- regulatory organisations in
the securities market;
j. performing such functions and exercising such powers under the provisions of
Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the
Central Government;
k. levying fees or other charges for carrying out the purpose of this section;
l. conducting research for the above purposes;

(la) calling from or furnishing to any such agencies, as may be specified by


the Board, such information as may be considered necessary by it for the
efficient discharge of its functions;

m. Performing such other functions as may be prescribed.

For the due exercise of its responsibilities under the Act, the Board is vested
with the same powers as are vested in a civil court, in respect of the following
matters, namely:-

i. the discovery and production of books of account and other documents, at


such place and such time as may be specified by the Board;

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ii. summoning and enforcing the attendance of persons and examining them on
oath;
iii. Inspection of any books, registers and other documents of any person referred
to in section 12, at any place.

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CHAPTER 5

REGULATION OF STOCK EXCHANGES AND


SUBSIDIARIES

One of the key functions of the Board is to supervise and monitor the activities of
the exchanges, clearing houses and the settlement system, strengthen market
infrastructure and ensure that appropriate risk management systems are in place.

Inspection of Stock Exchanges:

On-site supervision through inspection of stock exchanges is considered an


effective regulatory tool. Under the policy of risk-based supervision which has
been adopted from the year under review, stock exchanges having a significant
turnover were taken up for on-site inspection. These were The Bombay Stock
Exchange (BSE), Calcutta Stock Exchange (CSE), National Stock Exchange
(NSE), Inter Connected Stock Exchange (ISE), Ludhiana Stock Exchange (LSE),
Hyderabad Stock Exchange (HSE) and Ahmedabad Stock Exchange (ASE).

The objectives of the inspection were to ensure that -

A. The exchange provides a fair, equitable and growing market to investors,

B. the exchange has complied with the conditions, if any, imposed on it at the
time of renewal/ grant of its recognition under section 4 of the SC(R) Act,
1956.

C. The exchange’s organization, systems and practices are in accordance with the
Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed
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thereunder,

D. The exchange has implemented the directions, guidelines and instructions


issued by the SEBI from time to time,

E. There are adequate internal control mechanisms and risk management systems.

A Special inspection of Calcutta Stock Exchange (CSE), Uttar Pradesh Stock


Exchange (UPSE), Ludhiana Stock Exchange (LSE) and Jaipur Stock Exchange
(JSE) was also carried out during the year.

The post inspection follow up was also strengthened through –

A. Increase in periodicity of review of compliance reports.

B. Mandating review of action taken on the report by a sub-committee of the


Governing Board of the stock exchanges atleast twice each quarter and
submission of the review to the Governing Board of the exchange.

C. Issue of letters of displeasure for failure to comply with the previous


inspection reports and unsatisfactory compliance.

D. Personal meetings to discuss the status of implementation of findings of


inspection reports.

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Inspection of Subsidiaries of Stock Exchanges

A. Six subsidiaries of stock exchanges were inspected during the financial


year 2002-03 viz ASE Capital Markets Ltd (ACML – Subsidiary of ASE),
ISE Securities & Services Ltd (ISS - Subsidiary of ISE), LSE Securities Ltd
(LSESL - Subsidiary of LSE), HSE Securities Ltd (HSESL - Subsidiary of
HSE), SKSE Securities Ltd (SKSESL - Subsidiary of Saurashtra Kutch
Stock Exchange) and VSE Securities Ltd (VSL- Subsidiary of Vadodara
Stock Exchange). A special inspection of MPSE Securities Ltd (MPSESL -
Subsidiary of MPSE) was carried out. Follow up action included discussion
with the parent exchanges of the subsidiaries. Letters of displeasure were
issued to the parent stock exchanges of those subsidiaries for which findings
were serious as well as those which failed to comply with
suggestions/observations of inspection reports.

Restructuring of Management of Subsidiaries:

The inspection of the subsidiaries of stock exchanges revealed deficiencies


in their functioning and risk management systems The management
structure of the subsidiaries needed to undergo change in order to enable
them to be able to provide a safe and transparent market and effectively
discharge their responsibilities towards investor protection. A Circular dated
February 11, 2003 has, therefore, been issued to stock exchanges directing
them to carry out the changes in management structure of their subsidiaries.

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Illegal Trading in Securities

It had come to the notice of the SEBI that certain persons were engaging in
trading in securities outside the purview of the stock exchanges (‘illegal
trading in securities’). Such trading particularly in Gujarat has come to be
reports in the media regarding illegal use of terminals provided to the
brokers by the National Stock Exchange in Kolkata and other places. Media
had also reported Kerb trading in the cities of Kanpur, Kolkata, Mathura,
Ahmedabad, Rajkot and Mumbai. Since these activities are illegal and pose
a systemic risk besides luring common investors into the net the Board tool
immediate action by sending teams to some cities of Gujarat viz.
Ahmedabad, Vadodara and Rajkot to conduct surprise inspections. Since it
is not possible to identify the persons who carry on these activities the Chief
Ministers of all the States were requested through letters and reminders to
use the local police force to check these illegal activities. NSE, BSE and
other Stock Exchanges were altered to verify involvement of their members
and take coercive action. The public were also cautioned through a notice
issued in the newspapers in English, Hindi and major regional languages
about the illegal activities and educating them about the perils of such illegal
trades.

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CHAPTER 6

OBJECTIVES

The purpose of the Sebi Act is to provide for the establishment of a


Board called as Securities Exchange Board of India (hereinafter referred to
as Sebi or Board). The preamble of the Act provides for establishment of
Board with a view to achieve the following objectives.

(1) To protect the interest of investors in securities.

(2) To promote orderly and healthy growth of the securities market.

(3) To ensure fair practices by the issuers of securities, namely companies.

(4) To regulate securities market and other incidental matters.

(5) To regulate and develop a code of conduct and fair practice and monitor the
activities of intermediaries like brokers, merchant bankers etc. This is with
view to prohibit unfair trade practices and fraudulent dealings, thereby
making them more competitive and professional.

(6) To prohibit insider trading. Insider means any person who is connected
with the company and who reasonably expected to have access to
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unpublished price-sensitive information in respect of securities of a


company or who has received or has had access to such unpublished price
sensitive information. Any agreement to purchase or sell shares on the basis
of such information is called as insider trading. SEBI Insider Trading
Regulation prohibits a company to deal in securities of another company or
associate.

SEBI is a watch dog of the stock exchanges of India. SEBI has issued a new
set of comprehensive guidelines governing issue of shares and other
financial instruments, and has laid down detailed norms for stock-brokers
and sub-brokers, merchant bankers, portfolio managers and mutual funds.
With a view to regulate functions of stock exchanges in country the
government passed the Securities Contracts (Regulation) Act in 1956. The
act came into force in 1957. SEBI started functioning as an independent
regulator in 1988, when its’ firstChairman S A Dave who picked up six
officers from IDBI and began functioning from IDBI's office itself. The
total head-count of SEBI today exceeds more than 600. Recently SEBI
completed 25 years in its service and celebrated silver jubilee festival. On
the occasion of silver jubilee celebrations, Prime Minister Manmohan Singh
stated that SEBI sought greater powers from government to rein in market
manipulators and said dealing with errant entities that are financially strong
and those collecting money illegally is one of the major challenges before it.
SEBI can also make a vital contribution to the revival of the economy and
increase the investments towards development of infrastructure facilities.

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CHAPTER 7

Organisations Regulating Securities Markets in India

Five agencies have a significant regulatory influence, directly or


indirectly, over the securities markets in India currently.13These are

A. The Company Law Board (CLB for short) which is a quasi judicial body
that exercises some of the quasi judicial and judicial powers under the
Act previously exercised by the High Court and the Central
Government

B. The Reserve Bank of India (RBI) which is primarily


responsible, inter alia, for the supervision of banks and money
markets

C. Securities and Exchange Board of India (SEBI) which is responsible


for the regulation of capital markets and the various participants and
activities therein; and

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D. Department of Economic Affairs (DEA) which is responsible for the


economic management of the country and is the arm of the government
that is concerned with the orderly functioning of the financial markets as
a whole

E. Ministry of Corporate Affairs (MCA) which is at the apex of a three


tier structure that has responsibility for the registration and oversight of
incorporated entities which fall under the regulatory purview of the
Companies Act.

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CHAPTER 8

Securities Market Regulation prior to SEBI

Prior to the establishment of SEBI stock exchanges were under the


administrative control of the Stock Exchange Division of DEA. The stock
exchange division was responsible for the administration of the Securities
Contract Regulation Act, 1956 (SCR Act, 1956 hereafter) which governed
the business of buying, selling and dealing in securities. The mobilization or
issuance of capital through the public securities market or otherwise was
controlled by the Controller of Capital Issues (CCI). The CCI had to fulfill
several social and economic objectives in the discharge of its functions such
as (i) public investor protection (ii) alignment of corporate investments with
plan priorities of the Government of India (iii) ensuring that the capital
structure of companies was sound and in public interest (iv) ensuring that
undue congestion of public issues did not occur in any part of the year; and
(v) regulation of foreign investment. CCI’s means of realizing these
objectives included (i) micro-management of the securities issuance process
(ii) centralised administration and cumbersome procedures and (iii) Tight
controls on quantum of issue, terms (price and non -price) and even timing
of issue. The CCI regime thus represented an extreme instance of “merit
regulation”.

The net result of the CCI regime was that it (i) impeded resource
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mobilization (ii) led to unhealthy administrative practices (iii) resulted in


the inability of the system to cope with the increasing resource
mobilisation load (iv) led to the development of a “grey” market and
consequent unhealthy developments in the capital market and (v) paid
little or no attention to development of market institutions.

While the CCI appears to have suffered from many drawbacks, with the
benefit of hindsight the role of CCI would have to be seen in the context of
the political economy that prevailed at that time, with the government
assuming a large role in the allocation of resources so as to address an
overarching concern with distributive goals and the relatively inadequate
level of development of institutions that could have supported a market
economy.

An optimal corporate law had been identified earlier as an important


prerequisite. The law governing companies in India is the Indian
Companies Act, 1956 (the Companies Act, hereafter).

The Companies Act is a comprehensive piece of statute covering nearly all


aspects of the working of a body corporate in India. Modelled along and
derived substantially from its British antecedents, The Companies Act and
the rules made thereunder are an important element of the regulation of a
company in India and are applicable to all body corporates in India.
According to the MCA, it “enables a statutory platform for essential
Corporate Governance requirements essential for functioning of the
companies with transparency and accountability, recognizing and protecting

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the interests of various stakeholders.” (MCA (2009)). The current Act was
passed in 1956, has been amended twenty five times, including two major
amendments. Companies in certain industries may be exempt from specific
provisions of the Companies Act to address the business needs of that
industry. Banking and electricity generation are two examples of such
industries that enjoy specific exemptions.

The Companies Act is exhaustive in its coverage. A “comprehensive


review” has been on the cards for several years now. The review is intended
to “enable a simplified compact law that would be able to address the
changes in the national and international scenario, enable adoption of
internationally accepted best practices while providing flexibility for
evolution of new arrangements as warranted. “ (MCA (2005)). The
provisions and the amendments are too numerous and complex to warrant a
meaningful elaboration here. We merely note that India has a well
established corporate law statute that has been acknowledged to be adequate
to meet the needs of the corporate sector in India although it is sometimes
criticized as being too laboriously detailed and therefore costly to comply
with.

The provisions of the Act are administered by a three tiered structure with
the MCA at the apex. Some of the provisions of the Companies Act,
identified specifically later in this paper, are administered by SEBI insofar
as they relate to listed companies.

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CHAPTER 9

PROMOTION AND REGULATION OF SELF REGULATORY


ORGANISATIONS

I. Development of Stock Exchanges as Self- Regulatory Organisations

There are 23 stock exchanges recognized under Section 4 of the Securities


Contracts (Regulation) Act, 1956.These exchanges were recognized /set up
over a period of time to stimulate growth of capital market through channe
lising the savings of individuals and small investors. These exchanges are
suitably empowered by the section 9 of SC(R)A, 1956 to make bye laws for
the conduct of business, regulation and control of contracts.

SEBI is contemplating development of Self-Regulatory


Organizations(SROs) for market intermediaries. Stock exchanges are
already acting as SROs and the SRO structure needs to be strengthened
further. The objective for promoting intermediaries like Stock Exchanges as
Self -Regulatory Organizations (SROs) is that since they have a better feel
on the ground reality, they should take care of the micro aspects of
regulation. The other inherent advantages of self regulation are:

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a. Self regulation becomes the responsibility of market professionals and


may result in greater acceptance of rules by the members of SRO.

b. It also provides market players with greater flexibility to respond to


securities market.

c. It avoids duplication of responsibilities: it is observed over years of


experience that if the regulatory body gets into micro regulation, it
loses the sight of fundamentals and lands up in duplication of
responsibilities, besides

d. SROs are expected to have a better understanding of ground realities.

However, for any organization /body like Stock Exchange to effectively


function as an SRO, it is necessary that it has the capacity to enforce
compliance to byelaws, rules and regulations laid down by itself. Further,
these SROs should be able to enforce and establish rules which prevent
fraudulent and manipulative trade practices and promote just and equitable
principles of trade. Presently such powers are conferred to the exchanges by
the section 9 of SC(R)A, 1956 whereby they can make bye laws for the
conduct of business, regulation and control of contracts.

However, developing Stock Exchanges as Self Regulatory Organizations


and enhancing their effective regulatory role puts additional responsibility
on SEBI to ensure that SROs are efficiently carrying out/conducting their
monitoring responsibilities.

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CHAPTER 10

ROLE OF SEBI ON INDIAN STOCK MARKET

Throughout its eighteen-year existence as a statutory body, SEBI has sought


to balance the two objectives by constantly reviewing and reappraising its
existing policies and programmes, formulating new policies and crafting
new regulations in areas hitherto unregulated, and implementing them to
ensure growth of the market. From the above analysis and interpretation as
well as other keen observation details, the researchers find out the following
facts about SEBI, and its role also explained in our Indian capital market.

The SEBI has introduced an array of reforms in the primary and


secondary markets and catalysed modernization of the market
infrastructure to prepare the market for the twenty-first century. India
probably the only country in the world where all the exchanges have
screen-based trading. Computerised trading has led to reduction in the
scope for price-rigging and manipulation, since a paper trail can easily
lead the regulators now to the doorsteps of the guilty.

It is observed that , in recent times, SEBI has, retails investors limit


increased to Rs2,00,000 from Rs. 1,00,000 in Initial Public
Offererings(IPOs).
Dematerialisation has pushed the process further. SEBI has taken
several steps for the smooth-cum-speedy development of both primary

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and secondary markets from time to time for the development of all
areas.
Application of computerisation has also given a boost to surveillance.
The basic surveillance is carried out by the stock exchanges, while the
SEBI monitors the process. Introduction of price caps, price bands,
circuit filters, margins and stock watch are some ways of keeping a
strict are some ways of keeping a strict vigil on the market.
Improvements have been made in the clearance and settlement
settlement system. A major step in this direction has been the
establishment of depositories- NSDL and CDSL—and a clearing
corporation—NSCCL.
For reviving primary markets, the SEBI further streamlined and
simplified the issue procedure, imparted greater flexibility to the
issue process and strengthened the criteria for accessing the securities
market. In recent times SEBI has taken a drastic decision for reduction
of IPOs‘ period from 21 days to12 days (IPOs issue-opening and listing-
period ) . The SEBI introduced the option of making an issue through
book-building and recently it introduced ASBA scheme (in IPOs) for
investment by investors through bankers.
The development of mutual funds was given a major impetus, with the
revision of mutual funds regulations which now provide greater
operational flexibility to the fund managers and increase their
accountability and supervision. Recently, it has introduced KYC
norms and not charging on any entry-load on investments made by
investors on NFOs or on any existing schemes. SEBI is trying its level
best for availability of ULIPs at very normal and cheaper rates.

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Far reaching changes have been made in the SEBI regulations for
substantial acquisition of shares and takeovers. The regulations for
Foreign Institutional Investors (FIIs) were liberalised to provide greater
flexibility and for widening the scope of their investments in the Indian
securities market.

Some merchant bankers were found to be unscrupulous. They had not


performed their duties diligently in scrutinising the prospectus and had
taken advantage of the loopholes by concealing some facts in their
prospects. The SEBI reduced the categories of merchant bankers
from four to one. Moreover, it has prohibited merchant bankers
from undertaking activities such as leasing, bills and discounting.

To empower investors make informed decisions and facilitate fair


dealing, the SEBI introduced online filing and dissemination of time
sensitive price information benchmarking or mutual fund schemes,
valuation norms for unlisted scrips in mutual fund portfolios ,
rationalization of depository participants‘ charges and new
regulation for portfolio managers.

The SEBI revolutionalised the settlement system by introducing


T+2 rolling settlement system scrips across exchanges. It has issued
guidelines for demutualisation and corporatisation of stock exchanges.

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To create an effective regulatory regime in which all stakeholders have


confidence, the SEBI has posted the Securities Appellate Tribunal
(SAT) orders on the SEBI website, initiated consultative process for
framing regulations, and shortened the inquiry process. SAT provides a
grievance redressal platform against the SEBI‘s orders. Public
dissemination of such appellate orders is vital as these act as a
precedent of other similar cases and on the decision-making process of
the SEBI.

The SEBI is trying to bring down various forms of risk (structural,


systematic and operational) that are there in the securities market,

(a) From the structural point, at present our Indian capital market is having
well infra facilities compare with the rest of the world. For
instance, Pre-Market Auction session are opened, and improvement of
Price-discovery mechanism.

(b) From the systematic risk point-wise, these are re-classified in to three
ways. i.e. disclosure standards (at present these are best in the
world), accounting standards (these are by and large aligned
completely with the international accounting standards) and
corporate governance (now many companies have adopting world
best corporate governance practices).

(C) Operational view point, our Indian capital market is the best comparable

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to the rest of the world. At present our Indian stock exchanges are follows
T+2 settlement cycles. Further, every transaction on the trading platform is
guaranteed for settlement by a third party.

SEBI has introduced a number of measures to protect the interests


of investors. To create awareness among issuers and
intermediaries of the need to redress investor grievances‘ quickly,
the SEBI issues fortnightly press releases, publishing the names
of the companies against whom maximum number of complaints
have been received. To ensure that no malpractice takes place in
the allotment of shares, a representative of the SEBI supervises
the allotment process. It has been issuing advertisements from
time-to-time to guide and enlighten investors on various issues
related to the securities market and of their rights and remedies.
Investors trading times also increased.

In order to protect the interest of investors, SEBI took several


measures with a two-pronged approach to discipline and take
action against erring entities and at the same time to educate the
investors about the risks associated with investing in unregulated
schemes. The actions taken by the SEBI included issuing show
cause notices to defaulting entities, initiating court proceedings to
obtain appropriate relief in the interest of investors, conducting a
special audit of the books of accounts of the larger entities,
making credit rating mandatory for existing schemes,
disseminating information to investors through the issue of press
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releases/public notices. Recently, it has allowed Anchor-


investors‘ for making investment in IPOs.

The SEBI has introduced an automated complaints handling


system to with investor complaints. These are classified under
various classes like non-receipt of refund orders/stock invest,
non-receipt of dividend, non-receipt of share certificate/bones
shares/debentures/interest on debenture/redemption amount of
debentures, non-receipt of annual reports and complaints related
to plantation schemes. It is trying utmost to combat eliminations
and reduction of price-rigging. In this connection it had taken
action on Bank of Rajastan towards price-rigging recently.

SEBI has taken some steps for educating investors from 2000-01
onwards, it distributed the booklet titled A Quick Reference
Guide for Investors to investors. It has published a book regarding
‗Investor Grievances-Rights and Remedies‘.

This information has passed to various stock exchanges as well as


advertised through various national news papers, broadcast
messages through Vividh Bharati and Doordarshan also. The
SEBI set up a new institution in 2003 called the ‗Ombudsman‘
for the capital market. It has encouraged forming of
investors‘associations.

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CHAPTER 11

LIMITATIONS OF SEBI

Finally, in our observation as regulator SEBI has playing immense


role for development of capital market from the last more than one and half
decade as a genuine autonomous body.

Though it has started as a watchdog in protecting investors‘ interests,


regulating the working of

Stock Exchanges and promoting capital market, still it faces a number of


problems/ limitations. Some of the these are as follows:

The Central Govt. has authorized SEBI to frame its rules and
regulations for actifely monitoring capital markets. These rules and
regulations will have to be approved by the government first. This will
cause unnecessary delays and interference by the Ministry of Finance.
The bureaucratic delays in clearing the rules will hamper the working
of SEBI. The government should direct SEBI to frame or change the
rules as per the demand of the situation so that it is able to achieve
professional efficiency.

Sometimes SEBI will have to get prior approval for filing criminal
complaints for violations of the regulations. This will again cause
delays at government level.

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The SEBI, as a regulator, proved to be ineffective in the series of


scams that took place in the last decade. The SEBI has been accused
of shutting the stable door after the horse had bolted. For instance, the
SEBI had occasions to review the affairs of CRB capital markets but
took a lenient view and as a result, huge investors lost crores of
rupees.
The SEBI has gone more than half away to help out potential
defaulters to avoid a major payments crisis. Whenever the real
racketeers get up to new tricks, surveillance takes a long time to catch
up.
The SEBI banned badla system in India in 1993, but it banned badla
without providing an alternative mechanism. Of course, various
committees like G.S.Patel Committee, Jayant Verma Committee had
given alternative solution. But these trails were failed. The SEBI
introduced rolling settlement after the ban of Automatic Lending and
Borrowing Mechanism (ALBM) and borrowing and Lending of
Securities Scheme (BLESS). The ban on deferral products killed
liquidity in the markets which, in turn, dampened the market
sentiments.
The SEBI is perceived to be more corporate-friendly than investor-
friendly.It not only failed penalize fraudulent companies, but
remained a spectator when same companies re-entered the market
with new issues.

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CHAPTER 12

GOVERNANCE OF STOCK EXCHANGES

From its early days, SEBI’s approach towards governance of stock


exchanges seems to have been influenced by the findings from the
inspection completed in 1992-93. The principal findings of this inspection
were that the exchanges were not functioning as effective self-regulatory
organizations (SROs), not regulating their members through the enforcement
of bye-laws, rules and regulations, and paid minimal attention to redressal of
investor grievances with long pending arbitration cases. (SEBI, 1993). In
1993-94, SEBI called for numerous amendments to the rules and Articles of
Association of stock exchanges. These amendments mainly had to do with
including public representatives on the governing bodies of stock exchanges
and in the various statutory committees and a forced break before members
could be reelected to the Board. The purpose of these amendments has been
summed up neatly in SEBI’s annual re-port: “It is expected that with this
restructuring, stock exchanges would move away from their ’closed club
character’ and re-orient themselves to function as public institutions.”

SEBI’s most significant initiative to improve the governance of stock


exchanges in India was the move to separate ownership and trading rights,
referred to as corporatization and demutualization (C&D). BSE, the most
prominent Indian stock exchange apart from NSE, was a classic example of
a stock exchange that was owned and managed by members who had trading
rights on the exchange. This was the case with many other regional
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exchanges as well. These exchanges of-ten witnessed payment crises and


were also considered lax in proceeding against erring members. By contrast,
NSE which was owned by financial institutions and managed by a team of
professionals independent of owners and members with trading rights had a
better record of governance. These attributes were among the factors that
enabled the NSE to emerge as a challenger to the BSE (See Shah and
Thomas, 2000 for a discussion on the emergence of the NSE).
Notwithstanding these developments, the stock exchanges did not come
forth with a proposal to demutualize.

The resistance to change from the rentiers who benefitted from the mutual
own-ership structure may have been one of the important reasons for the
lack of interest in demutualization. The principal requirements of C&D was
that all stock ex-changes would be corporatized and not less than 51 per cent
of the ownership of the stock exchanges was to be held by public other than
shareholders having trading rights.16 As of 2008-09, sixteen of nineteen
stock ex-changes had completed the C&D requirements while three
exchanges lost their recognition due to their in-ability to comply with the
requirements (SEBI, 2009).

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CHAPTER 13

INVESTOR EDUCATION AND THE TRAINING OF


INTERMEDIARIES

Securities Market Awareness Campaign:


SEBI, launched the nation-wide Securities Market Awareness Campaign
to empower
investors with education in the securities market in a ceremony held at
VigyanBhawan, New Delhi on January 17, 2003. The campaign was
inaugurated by Shri A.B. Vajpayee, Hon’ble Prime Minister, Republic
of India. Shri Jaswant Singh, Hon’ble Union Minister for Finance and
Company Affairs delivered the keynote address. Several prominent
personalities contributing to the growth of the Indian Securities Market
and other eminent personalities were also present.

The inaugural session of the programme featured a curtain raiser audio-


visual encompassing the theme of the campaign “
Empowering Investors – A SEBI Initiative”. It showed that people in
India have respect for money but treat it with a little knowledge. A
mnemonic especially created by Shri R.K. Laxman, for the SEBI
campaign was also unveiled by Hon’ble Prime Minister. The inaugural
session was followed by three technical sessions wherein discussions
emphasising empowerment of investors through education and the roles
played by intermediaries, issuers and professionals in investor education
were held by eminent personalities. This campaign is expected to sustain
the felt need for investor education and awareness across the country.
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CHAPTER 14

Role of SEBI to stop Scams

Chit fund scam

"Chit means a transaction whether called chit, chit fund, chitty, kuree or by
any other name by or under which a person enters into an agreement with a
specified number of persons that every one of them shall subscribe a certain
sum of money (or a certain quantity of grain instead) by way of periodical
installments over a definite period and that each such subscriber shall, in his
turn, as determined by lot or by auction or by tender or in such other manner
as may be specified in the chit agreement, be entitled to the prize amount".

Supreme Court slams RBI, Sebi over chit fund scams


The Supreme Court on Friday for the first time directly slammed Securities
and Exchange Board of India (Sebi) and Reserve Bank of India (RBI) and
said they were largely responsible for "scams of such magnitude not just
taking birth but flourishing unhindered".

As the Central Bureau of Investigation (CBI) probes into the multi-crore


Saradha and Ponzi schemes gained momentum, the Supreme Court on
Friday for the first time directly slammed Securities and Exchange Board of
India (Sebi) and Reserve Bank of India (RBI) and said they were largely
responsible for "scams of such magnitude not just taking birth but
flourishing unhindered".

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"Even while ordering a CBI probe into Saradha and other scams on May 9
last year, we had touched upon the role of the regulatory authorities like
SEBI, Registrar of Companies and officials of the RBI within whose
respective jurisdictions and areas of operation the scam has been reported.
They should not have turned a blind eye," a bench headed by Justice T.S.
Thakur said.
"All guilty officials who connived have to be investigated. There should be
nothing outside the scope of investigation," the bench said.
The bench read out its last year's order which said "The synopsis of
investigations goes to the extent of suggesting that regular payments towards
bribe were paid through middleman to some of those who were supposed to
keep an eye on such ponzi companies.
"The Regulatory Authorities, it is common ground, exercise their powers
and jurisdiction under Central legislations. Possible connivance of those who
were charged with the duty of preventing the scams of such nature in breach
of the law, therefore, needs to be closely examined and effectively dealt
with. Investigation into the larger conspiracy angle will, thus, inevitably
bring such statutory regulators also under scrutiny".

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THE IPO SCAM 2005/2006

A brief aspect of the IPO scam that had rocked the stock market 2006 and
then the KYC guidelines were bought into the whole juncture and the
concept of disgorgement was bought into the picture. A brief synopsis of
how what happened and then we go ahead with our detailed story.

When the Securities Exchange Board of India (Sebi) started scanning an


entire spectrum of IPOs launched over 2003, 2004 and 2005, it ended
digging up more dirt and probably prevented a larger conspiracy to hijack
the market.

Here is a lowdown on the IPO scam:

>What is the scam?

It involved manipulation of the primary market—read initial public offers


(IPOs)—by financiers and market players by using fictitious or benaami
demat accounts.

While investigating the Yes Bank scam, Sebi found that certain entities had
illegally obtained IPO shares reserved for retail applicants through thousands
of benaami demat accounts.

They then transferred the shares to financiers, who sold on the first day of
listing, making windfall gains from the price difference between the IPO
price and the listing price.

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> What is an IPO?

An IPO is the first sale of an entity’s common shares to public investors.


When an entity wants to enter the market, it makes its share available to
common investors in form of an auction sale.

Each application for an IPO has to be within a cut-off figure, which is


eligible for allotment in the retail investors’ category. But in this case,
financiers and market players illegally cornered these retail investors’
shares.

> When was the scam detected?

The IPO scam came to light in 2005 when the private ‘Yes Bank’ launched
its initial public offering. Roopalben Panchal, a resident of Ahmedabad, had
allegedly opened several fake demat accounts and subsequently raised
finances on the shares allotted to her through Bharat Overseas Bank
branches.
The Sebi started a broad investigation into IPO allotments after it detected
irregularities in the buying of shares of YES Bank’s IPO in 2005.

> What triggered the Sebi probe?

On October 10 last year, an Income Tax raid on businessman Purushottam


Budhwani accidentally found he was controlling over 5,000 demat accounts.
Sebi finds this suspicious.

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On December 15, Sebi declared results of its probe, how a few people
cornered a large chunk of YES Bank IPO shares.

On January 11 this year, Sebi discovered huge rigging in the IDFC IPO.
Roopalben Panchal was found to be controlling nearly 15,000 demat
accounts.
It was found that once they obtained these shares, the fictitious investors
transferred them to financiers.

The financiers then sold these shares on the first day of listing, reaping huge
profits between the IPO price and the listing price. The Sebi report covered
105 IPOs from 2003-2005.

The Sebi probe covered several IPOs dating back to 2005, 2004 and 2003 to
detect misuse. These included the offerings of Jet Airways, Sasken
Communications, Suzlon Energy, Punj Lloyds, JP Hydro Power, NTPC,
PVR Cinema, Shringar Cinema and others. A lot more dubious accounts
across several IPOs are expected to tumble out in the next few days.

It also detected similar irregularities in the IDFC IPO, in which over 8 per
cent of the allotment in the retail segment was cornered by fictitious
applicants through multiple demat accounts.

> Who is Roopalben Panchal?

Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of


the scam. Finance Ministry officials are expected to act against her soon.

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> How is this different from Harshad Mehta’s scam?

The securities scam involved price manipulation in the secondary market,


read stocks. Whereas in this case, the manipulation happened in the primary
market—even before the shares (IPOs) entered the stocks market.
This time, fraudsters targeted the primary market to make a quick buck at
the expense of the gullible small investors.

Direct Participants (DPs) used retail applicants’ shares for reaping benefits
in the stock market.

> How big is the scam?

Apart from the YES Bank fraud, Sebi reportedly has definite data about two
IPOs where retail allotments were rigged, but market observers believe the
scam is far bigger. The Yes Bank and IDFC cases are only a tip of an
iceberg, say analysts.

The Sebi probe has identified more operators and some market
intermediaries involved in the misuse of the initial allotment process in
public offerings dating back to ’04-05.

The Income-Tax Department in Ahmedabad has found that two major


accused, Panchal and Sugandh Investments, have together made Rs 60.62
crore in 18 months.

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Role of Depository Participants

> Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005)


Key operators used 21,692 fictitious accounts to corner 3,23,023 shares
which is equal to 3.74 per cent of the total number of shares allotted to retail
individual investors.
> Jet Airways IPO: Rs 1899.3 crore (Feb 18-24, 2005)
Key operators used 1,186 fake accounts for cornering 20,901 shares which is
equal to 0.52 per cent of the total number of shares allotted to retail
investors.
> National Thermal Power Corporation IPO Rs 5,368.14 crore (Oct 7-14,
2004).
12,853 afferent accounts were used for cornering 27,50,730 shares
representing 1.3 per cent of the total number of shares allotted to retail
investors.
> Tata Consultancy Services IPO: Rs 4,713.47 crore
14,619 ‘benami’ accounts were used to corner 2,61,294 shares representing
2.09 per cent of the total shares allotted to retail individual investors.

Well the story goes that in Ahemdabad , a man can do anything for his 2%
and this is were the crux of whole matter evolves. Ipo financing and dabba
trading are those jargons that we have always heard. But till this scam was
unearthed, we never knew how they use to operate. Some unfortunate things
that I have noticed, that people do all these trading or IPO scam in the name
of their wife, Son, etc.

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Our story this time evolve around Dhaval Mehta and Himani patel , both
have been convicted for cornering of share in IPO of Suzlon and IDFC in
case of Dhaval and Suzlon in case of Himani. The names of the accused
haven’t been changed and are as same as the source i.e SAT order.

In case of Himani Patel , She claims and is a IPO financer, for which is not
registered under any law and or any provisions. She funded 61 benami
applicant who intake had 635 different demat A/c and they made 645
multiple application for 96shares amounting Rs. 48960/- , interestingly the
reason the amount was kept 50,000 is that the formality of giving PAN
CARD can be evaded. The money for the same was routed through 22
different bank accounts in which himani patel was the first holder. On the
basis of the allotment each application got 16 shares total numbering 10160
shares of suzlon. . These These shares were off market transferred to Himani
Patel’s demat a/c prior to listing . the shares were sold for more
than Rs.839/- compared to the ipo price of Rs.510/-. Rs. 33,52,636/- amount
was illegally earned by her.

Sebi post investigation asked her to disgorge the above amount and also
leveled a penalty of 55 lakhs.

In case of Dhaval Mehta , was a bigger than Himani as such .


As stated by him he borrowed a sum of 16 crores from Ashmi Financial
Consulancy pvt ltd at X% rate. ( as I had mentioned earlier its all about this
2% interest , that every person wants to earn in ahemdabad). Well he lent
this money to 4580 applicant out which 3870 applied for shares of Suzlon
and 719 applied for IDFC. In some case 100% funding was arranged and in
some case 50% was arranged and in some case rest was arranged by
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Centurian Bank. Similar, to the earlier case all the applicant applied
below Rs.50,000 so that they don’t need to comply with certain
documentation requirement. Similarly, the shares were off –market
transferred to Dhaval’s account. The illegal gains made by him was
Rs.1,43,67,775/- Well strangely the whole time member of SEBI , asked him
to disgorge Rs.72 lacs. We should really ask him what happened to the rest
of the amount. Wasn’t that illegal too, or he still has reservation.

Well here is similarity and here is some food for thought for SEBI. 1st both
are IPO operators and their preliminarily aim to accumulate as many shares
as possible or retail share holders. They were held guilty on the a/c that there
were cornering shares illegally and that this was against fair market policy.
The worst part was that the transaction were completed in 2005 and 2006
and they realized it in late 2006. Both these people were just intermediaries
and were just out there to make their 2% interest in case of Dhaval Mehta.
Similarly, the irony was that the disgorged amount was nearly 50lacs less in
case of Dhaval. Was this used to betterment of investor, I have no clue on
that. But finally something which was validly argued by appellant side and
that was that there is no explicit law that bars multiple applications. If you
actually read the DRHP all it states that retail applicants can only make 1
application and multiple would be rejected. So on a plain read, what you
understand is that if multiple application is made , they would be rejected.

Still multiple application were made and shares were allotted. This shows
the fact the registrar of the IPO doesn’t have any provision to scrutinize in
case the same address is being repeated. In both the case the Address used
by the benami application were same, the only thing that changed was if her

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name is himani patel. The second application would have H. patel , Himani
P. H.P, etc . So this shows the fact that the registrar has no facility to block
any of the same.

Most of money lending happens on oral contract and the system in


Ahemdabad is intact and no1 messes with the other person. So there is
model code which is existent still and you could see that in the shares of
ATLANTA.

Welcome to post IPO scam Sophistication. Now this happens in much legal
ways and there is no way you can stop the same. Remember the last cycle of
IPO’s like the Rpower of the world. So how does it happen? Big time
financer transfers 1lakh each to the a/c of the multiple applicants. Who in all
terms would apply for the shares in IPO worth 1 lac. Then the deal is simple
to sell on listing or on his request / given price. Once the money is credited
the applicant issues a check and to financer after deducting Rs. 2000/- as his
commission to apply for the same. Now though the shares may list at
premium the financer would be obliged to pay Rs.2000/- to the applicant for
his effort/ risk. This method is fool proof and don’t find any loop hole as
such legally, But as retail applicant I am still losing my shares and there is
till cornering.

The writer has interest in stock market and enjoys reading about various
scams that happen and spread the knowledge to investors. The source of his
blog is SAT orders and SEBI orders. If there is any discrepancy in the may
have happened inadvertently.

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CHAPTER 15

CONCLUSION

The reference point proposed in the paper for examining the regulatory role
played by SEBI may be divided into two broad sets of aspects, namely,
those aspects that fall within the purview of SEBI and those that fall outside.
Aspects that fall outside the purview of SEBI include the court system, civil
discovery rules, the taxation regime governing securities transactions and an
active financial press. The rest of the aspects included in the reference point
have been addressed in one of the following ways: Wherever, there was an
enabling statute SEBI has been given the responsibility for administering
those provisions as in the case of oversight of stock exchanges and certain
provisions of the Companies Act. Many laws needed to be augmented, as in
the case of the disclosure requirements or as in the case of the creation of the
NACAS. Some aspects of the markets functioning had to be completely re-
architected and new regulations or laws enacted for that purpose, as in the
case of market access, governance of stock exchanges and the oversight of
various intermediaries. Some others called for a radical redesign as in the
case of the trading, clearing and settlement systems, which touched many
other laws as well. This range of regulatory responses required a suitably
empowered regulator and a law that provided the basis for such a regulator.
The SEBI Act provides for the creation of such an organization in the form
of SEBI.

This paper intends to deepen the understanding of the regulatory system


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that currently oversees the regulation of securities markets in India. The


analysis of the structure that the GoI has followed provides some other
interesting insights. First, the GoI created an agency that was empowered to
merely administer the statutes that were already in place for regulating the
securities markets, namely the SCR Act and SCR Rules and the Companies
Act. The only major statutory change that accompanied the enactment of
the SEBI Act, 1992 was the scrapping of the
Capital Issues Control Act, 1947, which in turn allowed considerable
freedom in several aspects of issuance of securities and handed over the
authority over the securities market to SEBI.

This strategy may have been prompted by the urgent need to strengthen the
oversight of the securities market that had been necessitated by the stock
market scam that was exposed in 1992. It may also have been guided by
considerations of political economy, as an overhauling of extant securities
laws would have met with stiff resistance from the powerful incumbents, as
the subsequent experience of SEBI at every step of the reforming process
has demonstrated.

However the gradualist approach has not been without its consequences.
First, as an institution SEBI had to struggle with a regulatory legacy that it
inherited from a planned political economic paradigm, bestowed with
neither the authority nor the legal framework necessary to discharge its role.
It took more than a decade for SEBI to complete this redesign during which
a considerable price had to be paid in terms of numerous scams.

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CHAPTER 16

BIBLIOGRAPHY

Books

I.M. Pandey, “Financial Management”, Vikas Publishing, New Delhi.


Prasanna Chandra, “Financial Management – Theory and Practice”,
Tata McGraw Hill,
New Delhi.
M.P. Pandikumar, “Accounting & Finance for Managers”, Excel
Books, New Delhi.
Websites

www.kcgjournal.org/Commerce%20and%20Management/Issue%202/
1%20Dipal.html
www.deccanchronicle.com/130524/news-
businesstech/article/sebi-turns-25-seeks-greater-powers-pm-
warns-insider-trading
www.capitalmarket.com/ magazine/cm1519/mongor.htm
www.thehindubusinessline.com/markets/take-lead-role-in-helping-
fund-infrastructure-pm-tells-sebi/article4746390.ece
www.sebi.com
www.indianstockmark

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