Purpose and Role of SEBI

SEBI acts as a watchdog for all the capital market participants and its
main purpose is to provide such an environment for the financial market
enthusiasts that facilitate efficient and smooth working of the securities
market.

To make this happen, it ensures that the three main participants of the
financial market are taken care of, i.e. issuers of securities, investor, and
financial intermediaries.

Issuers of securities

These are entities in the corporate field that raise funds from various
sources in the market. SEBI makes sure that they get a healthy and
transparent environment for their needs.

Investor

Investors are the ones who keep the markets active. SEBI is responsible
for maintaining an environment that is free from malpractices to restore
the confidence of general public who invest their hard earned money in
the markets.

Financial Intermediaries

These are the people who act as middlemen between the issuers and
investors. They make the financial transactions smooth and safe.
Role Functions of SEBI

 To protect the interests of investors through proper education and

guidance as regards their investment in securities. For this, SEBI
has made rules and regulation to be followed by the financial
intermediaries such as brokers, etc. SEBI looks after the
complaints received from investors for fair settlement. It also
issues booklets for the guidance and protection of small investors.

 To regulate and control the business on stock exchanges and other

security markets. For this, SEBI keeps supervision on brokers.
Registration of brokers and sub-brokers is made compulsory and
they are expected to follow certain rules and regulations. Effective
control is also maintained by SEBI on the working of stock
exchanges.

 To make registration and to regulate the functioning of

intermediaries such as stock brokers, sub-brokers, share transfer
agents, merchant bankers and other intermediaries operating on the
securities market. In addition, to provide suitable training to
intermediaries. This function is useful for healthy atmosphere on
the stock exchange and for the protection of small investors.

 To register and regulate the working of mutual funds including

UTI (Unit

 Trust of India). SEBI has made rules and regulations to be

followed by mutual funds. The purpose is to maintain effective
supervision on their operations & avoid their unfair and anti-
investor activities.
 To promote self-regulatory organization of intermediaries. SEBI is
given wide statutory powers. However, self-regulation is better
than external regulation. Here, the function of SEBI is to
encourage intermediaries to form their professional associations
and control undesirable activities of their members. SEBI can also
use its powers when required for protection of small investors.

 To regulate mergers, takeovers and acquisitions of companies in

order to protect the interest of investors. For this, SEBI has issued
suitable guidelines so that such mergers and takeovers will not be
at the cost of small investors.

 To prohibit fraudulent and unfair practices of intermediaries

operating on securities markets. SEBI is not for interfering in the
normal working of these intermediaries. Its function is to regulate
and control their objectional practices which may harm the
investors and healthy growth of capital market.

 To issue guidelines to companies regarding capital issues. Separate

guidelines are prepared for first public issue of new companies, for
public issue by existing listed companies and for first public issue
by existing private companies. SEBI is expected to conduct
research and publish information useful to all market players (i.e.
all buyers and sellers).

 To conduct inspection, inquiries & audits of stock exchanges,

intermediaries and self-regulating organizations and to take
suitable remedial measures wherever necessary. This function is
undertaken for orderly working of stock exchanges &
intermediaries.
 To restrict insider trading activity through suitable measures. This
function is useful for avoiding undesirable activities of brokers and
securities scams.
An Overview to the Primary Market
The primary market is the part of the capital market that deals with
issuing of new securities. Companies, governments or public sector
institutions can obtain funds through the sale of a new stock or bond
issues through primary market. This is typically done through an
investment bank or finance syndicate of securities dealers.

The process of selling new issues to investors is called underwriting. In

the case of a new stock issue, this sale is an initial public offering (IPO).
Dealers earn a commission that is built into the price of the security
offering, though it can be found in the prospectus. Primary markets
create long term instruments through which corporate entities borrow
from capital market. This is the market which deals in new securities.
That is why new share or debentures are offered for the first time.
Therefore it is also referred to as the new issue market (NIM). Here the
buyers obtain new securities. In other words companies issue securities
directly to the investors. Companies obtain money & in turn issues
certificates. Issue made of this type is known as primary issue.

Once issued the securities typically trade on a secondary market such as

a stock exchange, bond market or derivatives exchange.
 ROLE OF SEBI IN PRIMARY AND SECONDARY MARKET
The Indian market is one of the main and promising emerging security market in
the world and therefore is ranked eight among the other world markets. The market
in its entirety can be divided into

 Primary market
 Secondary market, and
 Derivative market

The capital market is a market for long –term funds both equity and debt- and
funds raised within and outside of the country; the primary market refers to the
long –term flow of funds from the surplus sector to the government and corporate
sector (through primary issues) and to banks and non-banks financial
intermediaries (through secondary issues).

The primary market is the market which provides a conduit for sale of new
securities. This market provides chance to issuers of securities, the government as
well as corporate, to raise capital to meet their requirements of investments or for
liberation of their obligations. Securities laws are needed mainly because of the
unique informational needs of the investors because selling securities to investors
in the various capital markets provides the means for corporations, governments
and government agencies to satisfy their need for capital. And to regulate and
control various volatile natured reforms of the market the regulation of the capital
market is highly needed. The securities market is regulated by various agencies,
such as the Department of Economics Affairs (DEA), the Department of Company
Affairs (DCA), the Reserve Bank of India (RBI) and the SEBI.

SEBI has been delegated with the task of protecting investor’s interest, to
encourage development of securities market as well as regulating it. And to
exercise its powers and carry out its functions, SEBI has set up various
departments in diverse markets such as:-
 Primary Market Department
Issue Management and Intermediation Department
Secondary Market Department (Policy, Operating and Exchange
Administration New Investment Products, Insider Trading)
Secondary Market Department (Exchange Administration, Inspection and
Non-Member Intermediaries).
Institutional Investment Department (Mutual funds and Foreign Institutional
Investment).

The SEBI Act, 1992 establishes 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.

SEBI plays a very important role in primary market; some of its functions are
looking after all policy matters and regulatory Issues for primary market, portfolio
management services, investment advisors, regulation and monitoring of merchant
bankers etc. main objective of this paper is to discuss about the role of SEBI in
protecting shareholders interest in primary market with taking into study four main
aspects namely regulation over intermediaries, disclosures in offer documents
,code of advertisement and insider trading.

Over the years, SEBI has brought about several changes to the issue process which
range from minute details such as the number of centers for receiving applications
for public offerings to events that substantively influence and affect investor
welfare. SEBI has synchronized the primary market by system of rules which
could regulate the areas such as issuers’ eligibility to offer securities to the public,
by regulation of information produced at the time of issue; in toto SEBI looks into
regulation of processes and procedures concerning the issuance of securities. These
aspects are basically governed by SEBI (Issuer of Capital and Disclosure
Requirements) Regulations, 2009 (ICDR) and a set of regulations which would
govern the different intermediaries such as the merchant banker, registrar to the
issue etc.

To manage its affairs, SEBI has a five member board, headed by a chairperson, out
of the five members, one member each is taken from the Law and Finance
ministries, one member is from RBI, and the remaining two members can be
eminent members of the industry.
When the Securities and Exchange Board of India (SEBI) Act was brought into
force in 1992 the forum where SEBI's orders could be challenged was an appellate
authority comprising government officers in the Finance Ministry; in 1995, when
SEBI was given the power to impose monetary penalty, the SAT was set up to
decide on appeals against SEBI imposed monetary penalties, leaving the appellate
powers in other matters still with the Central Government.

It was in February 2000 that even the remaining appellate powers of the Central
Government were transferred to the SAT; the SEBI Act was amended in 2002
restructuring the constitution of the Tribunal to a three-member set-up though the
prevailing one-member set-up was to continue till two more members were
appointed.

SEBI derives its powers from sec 55A of companies act. SEBI has been
empowered to administer the provisions of the sections specified in section 55A in
relation to mainly three matters:

(i) issue of securities;

(ii) transfer of securities; and
(iii) Non-payment of dividend.

This section has been inserted by the Companies (Amendment) Act, 2000 to
provide the power to inspect books of account and other books and papers in
respect of issue and transfer of securities and non-payment of dividend will be
managed by the Securities and Exchange Board of India. In respect of other
companies, the said provisions will continue to be administered by Central
Government through the department of Company affairs and ROCs. Section 55 A
(1) of the Companies Act requires the SEBI to deal with matters concerning the
issue of securities. In addition to that reference can be made to Section 11-B of the
SEBI Act which vests the SEBI with power to make an inquiry and issue directions
to any company in respect of matters specified in Section 11-A of the SEBI Act.

A recent judgment by the Delhi high court in Kimsuk Krishna Sinha v. SEBI
throws interesting light on the role of SEBI in ensuring Correct Disclosure in offer
documents and actions that SEBI can or should take.
The high court says that
“The purpose of inserting Section 55A in the Companies Act was to
empower the SEBI to take both corrective and preventive action. This is
perhaps because as a regulatory body SEBI gets to see the draft prospectus
 preceding a public issue by a company even before the public gets to see the
RHP. SEBI is enabled and empowered to examine the DRHP and insist on
complete and truthful disclosure of all relevant facts therein. The very
purpose of having an independent regulatory authority like SEBI, and
vesting it with statutory powers of inquiry, is to enable it to take prompt
action in matters relating to issue and transfer of shares

Besides, section 29A of the Securities Contracts( Regulation) Act, 1956 provides
for further powers there under to be delegated to SEBI by Central Government.

Certain powers under the Securities Contracts (Regulation) Act, 1956 have also
been entrusted to SEBI for regulating the dealings in securities on the stock
exchange and outside the stock exchange

The main subject matter of the paper will revolve around the questions relating to
role and influence SEBI has in primary market in terms of rules and regulation in
protecting shareholders interest in the primary market. We will try to look in brief
how does SEBI protects those shareholders interest with reference to SEBI’s
regulation over intermediaries, disclosures in offer documents, code of
advertisement and insider trading. Scope and case laws which will be used in this
project have been limited to Indian context.
Role of SEBI in regulating Disclosures of Offer Documents and Code
of Advertisement

 Since the authorization of Securities and Exchange Board of India (from now onwards
will be referred as SEBI), it has come up with numerous set of rules and regulation with
an aim to regulate the emerging Indian securities market and also to improve its safety
and efficiency. These initiatives have made a huge impact on almost every facet of the
Indian market rather some of these initiatives have even changed the market vitally.

 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.”

 Among many important things one of the most important works of SEBI is to provide
safety to dealings and investment for which transactions are done with adequate
transparency along with strict compliance of rules laid down by SEBI which
subsequently provides high degree of security to transactions at the stock exchange. SEBI
also look after the dealing in stock exchanges in India and as we know a stock exchange
allows trading only in securities that have been listed with it and for listing any security it
has to satisfy the standards laid down by SEBI to see the genuineness and soundness of
the company and with that it also has to provide for disclosure of certain information on
regular basis.

 As part of SEBI’s efforts to protect investors’ interests, it has initiated many primary
market reforms which include improved disclosure standards in public issue documents,
introduction of prudential norms and simplification of issue procedures. The SEBI has
approved committee report by Y.H. Malegaon Committee on accounting standards and
issued guidelines in the above mentioned regard in Jan. 2000. The report suggested that
disclosure norms should be widened and relevant accounting standards should be
upgraded to that of internationally acknowledged standards. With that additional
disclosures are required to be given to make them more meaningful and transparent. As a
result of that all listed companies are now indebted to observe forcibly the clauses of
listing Agreement and SEBI has powers to enforce them.

 As a result of that companies are now required to disclose all material facts and risk
factors associated with their projects while making public issue. All issue documents are
to be vetted by SEBI to ensure that the disclosures are not only adequate but also
authentic and accurate.
 The Securities and Exchange Board of India issued the guidelines for disclosure and
investor’s protection in June, 1992 after the Capital Issues (Control), Act, 1947 was
repealed. In these guidelines SEBI requires the issuer (which is here the company) to
disclose full facts and particulars to the intending investors in their offer documents and
also prescribe other rules in connection with the issue of shares.

 Chapter V of ICDR deals with the manner of disclosures in the offer documents. Section
57 of ICDR says that the offer document shall contain all material disclosures which are
true and adequate so as to enable the applicants to take an informed investment decision,
it also says that the letter of offer shall contain disclosures as specified in part e of
schedule viii.

 SEBI has issued detailed guidelines for the disclosures of full facts in the
Prospectus/offer documents by the issuer companies. It says that along with unveiling all
material facts the company has to state the risk aspects associate while making public
issues. In case of the existing companies, financial performance of the company for the
last five years, along with risk factors and management insight of risk factors are also
requisite to be there in the prospectus/offer document.

 Chapter VI of Securities and Exchange Board of India (Disclosure and Investor

Protection) Guidelines, 2000 talks about the content of the offer document, Section I
contents of the prospectus which says that other than disclosures specified in Schedule II
of the Companies Act, 1956, the prospectus shall contain all the information which shall
be true and adequate so as to facilitate the investors to make an informed decision on the
investments in the issue. The information must be substantial enough for the investor to
make an informed choice.

 In addition to regulations regarding the disclosure requirements SEBI also looks into the
fact that investor does not get befooled by misleading advertisement .SEBI has issued
guidelines for the same to ensure that the advertisement is truthful, fair and clear. For e.g.
it shall be the responsibility of the Lead Manager to ensure strict compliance with the
code of advertisement by the issuer company.

 Chapter IX of Securities and Exchange Board of India (Disclosure and Investor

Protection) Guidelines, 2000 deals with guidelines on advertisement. It clearly mentions
that an advertisement shall be in a clear, concise and understandable language. Excess
use of technical terminology should be avoided. Along with that it also mentions what
amounts to misleading advertisement. The code mentions that

 Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. It
should not contain statements which are false, misleading, biased or deceptive, based on
 assumption/projections. It should not be designed as likely to be misunderstood, it should
not contain statements which directly or by implication or by omission may mislead the
investor.
 Advertisements shall not be so framed as to exploit the lack of experience or knowledge
of the investors. No advertisement shall directly or indirectly discredit other
advertisements or make unfair comparisons and it shall be accompanied by a standard
warning in legible fonts.

 This is all done by SEBI with an aim to protect the investor, in reality the term “Investor
Protection” is a very broad term encompassing a range of measures intended to protect
the investors from malpractices of companies, brokers, merchant bankers, etc. Since all
investments include some risk element, so “Investors Beware” should be the motto of all
programs for enlistment of savings for investment. The investor can suffer the loss either
by his own mistake of carelessness or by malpractice done by the company or by any
broker. For the latter part they have every right to complain. The main purpose of SEBI
behind all the above mentioned regulations is to protect the investor from being befooled.
By providing all this information SEBI is trying to protect the shareholders interest by
making him do transactions on the basis of informed decisions. So we can say that SEBI
plays a very important role in protecting shareholder from getting coned.
Preserving the Shareholders’ interests through regulation over
intermediaries
SEBI has introduced a number of regulatory measures with the purpose of restructuring the
capital market. These regulations were brought into the market mainly to protect the investors'
interest. Practically if we see it is not always possible that there is direct transaction of securities
h between the issuer and the investor because of many different issues such as different locations
etc. so to help both the parties there are people known as intermediaries who help both the party
in their transaction. Cambridge dictionary defines intermediary as ‘someone who carries
messages between people who are unwilling or unable to meet’. Here in this context also
intermediaries are those persons who are associated with the securities market and act in between
the investors and the issuers of securities. They facilitate the securities transactions, for example,
merchant bankers, brokers, underwriters; Registrar to an issue, depository .participants, etc. one
of the main objectives of SEBI is ‘Promotion of efficient services by brokers, merchant Bankers
and other intermediaries so that they become competitive and professional.’

Risks are inherent in any competitive market, and investors benefit from competitive markets so
therefore management of the intermediaries are required to develop and implement effective
processes and management systems commensurate with their business operations and risk
characteristics in accordance with the general principles set out in the regulation.

In order to interpose between issuers and investors, regulators recognize various classes of
intermediaries in the capital market. Regulation through intermediaries has been found, perhaps
more effective in certain spheres of activity. SEBI, over the period, has recognized many types of
capital market intermediaries in India. Intermediaries such as merchant bankers, underwriters,
debenture trustees, bankers to an issue, registrars to an issue and share transfer agents and
portfolio manager are the intermediaries that function in the inter alia in the primary markets.

‘Financial intermediation can improve economic efficiency in at least five ways, by:

 facilitating transactions;
 facilitating portfolio creation;
 easing household liquidity constraints;
 spreading risks over time; and
 reducing the problem of asymmetric information.
Starting with Section 12 of the SEBI Act gives power to grant registration certificates to
intermediaries, this provides for compulsory registration of the various intermediaries associated
with the securities market hence all intermediaries, namely, stock broker, sub-broker, share
transfer agent etc. are required to buy, sell, or deal in securities in accordance with the conditions
of a certificate of registration granted by SEBI.

SEBI is also empowered to suspend or cancel a certificate of registration after giving the person
concerned a reasonable opportunity of being heard. The same act confers power to SEBI issue
directives to the intermediaries.

Section 11(2) of SEBI act provides that SEBI shall register and regulate the working of stock
brokers and sub-brokers and In fulfillment of the above, SEBI carries out inspections of the
books and records of stock brokers to verify whether Books of accounts, records and other
documents are being maintained in the manner specified by the Securities Contracts (Regulation)
Rules, 1957 and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.

For insure that shareholders interest is protected SEBI relies on certification by the merchant
banker and others for ensuring conformity with the regulations set by SEBI. The provisions cast
the responsibility on the issue manager for validating the accuracy of the prospectus as well as
for ensuring that other intermediaries involved in an issue such as the banker and registrar have
the required license and that the underwriter has the financial capacity to provide the service.

Incorrect certification would mean that the merchant banker runs the risk of facing stricture or
monetary penalty or even being suspended or losing its license over the time this certification
mechanism has been continuously strengthened (SEBI, 1995; 1996).

Intermediaries provide many value-adding functions that cannot be easily substituted or

‘internalized’ through direct supplier-buyer dealings, and hence mediating parties may continue
to play a significant role even in the E-Commerce world.

The regime to regulate them should be such that to protect the interests of investors it should be
recognized that the initial entry barrier cannot be set too high and that investor protection should
also be complemented by the availability of information, facilitating informed choices by
investors and availability to the Commission of inspection, investigatory and disciplinary powers
in respect of the intermediary.

SEBI has securities and exchange board of India (intermediaries) regulations, 2008 to regulate
the conduct of intermediaries. Chapter I states what an intermediary is, chapter II talks about
registration of intermediaries. SEBI has incorporated certain obligation on the intermediaries and
chapter III talks about the same obligations. And chapter V talks about actions in case of default
and also the manner of suspension and cancellation of license. Schedule III of the same
regulation talks about investor protection and says that every intermediary shall make all
possible efforts to protect the interest of investor. He must ensure that he is giving high standard
of service must be given and exercise due skill and diligence.
Role of SEBI in regulating Insider Trading
Mr. Arthur Levitt, a former Chairman of the Securities and Exchange Commission of the USA
has expressed that insider trading “has utterly no place in any fair-minded law abiding
economy.” There has been an increasing recognition that in order to maintain the confidence of
investors in the public securities market, it is essential that some economic agents who possess
an informational advantage over the others do not exploit the same to derive pecuniary gains for
themselves.

U.S Securities and Exchange Commission describes "Insider trading" as a term which includes
both legal and illegal conduct, the legal version is when corporate insiders—officers, directors,
and employees—buy and sell stock in their own companies. Illegal insider trading refers
generally to buying or selling a security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic information about the security.
Insider trading violations may also include "tipping" such information, securities trading by the
person "tipped," and securities trading by those who misappropriate such information.
‘Company insiders have information unavailable to the public. These individuals have firsthand
knowledge of what the company is doing and better information concerning what the future
might hold. If there are likely problems for the company in the future, such as poor earnings,
slow growth, or lawsuits, then insiders can sell their stock before these events happen. When this
information becomes public, the stock’s price should decrease. However, this price decrease
occurs after the insider has sold his or her shares, thus avoiding the loss. In this case the insider
beat the market. On the other hand, insiders know when their company has a bright future, high
potential earnings, innovative products being developed, etc. When the future looks bright,
insiders can buy shares before the public becomes aware of these facts. The price, later, fully
increases to represent the positive information. In both cases, insiders use private information to
beat the market.’

Earlier, the concept of insider trading was limited to the aspect of a company insider tipping of
an outsider and the outsider using the tip and trading in the company’s shares, this constitutes a
breach of fiduciary duty owed by the insider to the company’s shareholders; it was called the
classical theory of insider trading. Later US Supreme Court in the case US v/s O’Hagan in 1997
extended the scope of insider trading by including the misappropriation theory which said that a
person commits insider trading when he obtains material confidential information and uses it in
securities transactions in breach of fiduciary duty or similar relationship of confidence to the
source of information but not necessarily to the shareholders of the company whose stocks are
traded.

It is said that the information captured by insider trading modifies the responsiveness of returns
to annual unexpected earnings and also the information captured by insider training differs from
that captured by annual unexpected earnings.

Insider trading weakens the confidence of the investor in the fairness and honesty of the
securities markets and this is reason SEBI has treated the recognition and suit of insider trading
violation as one of its main concern. SEBI’s first enactment to restrain insider trading, namely,
SEBI (Prohibition of Insider Trading) Regulations, 1992 did not make much advancement due to
poor enforcement. These regulations, again, have been amended substantially over time. SEBI’s
current approach centers around prevention of insider trading by requiring listed companies,
intermediaries, and advisors to set up internal systems for preventing insider trading and
reporting on compliance or otherwise to SEBI. The insider trading regulations provide for
disclosure of smaller amounts and provides for disclosure on selling shares (something which the
takeover code does not mandate).

Regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations defines an ‘insider’ as a

person connected or deemed to be connected and who is reasonably expected to have access to
any unpublished price sensitive information in respect of securities [i.e. shares, debentures etc.]
of a company, or who has received or has had access to such unpublished information. The
directors, officer, employers of the company, & persons involving a professional or business
relationship [like CA’s lawyers etc.] are connected person as per regulations 2 (c). The insider
trading Regulations provide for disclosure of smaller amounts and provides for disclosure on
selling shares (something which the takeover code does not mandate). Regulation 3 & 3A
enumerates the various acts that an insider and company are prohibited to do, these regulations
prohibit an insider and a company to ‘deal’ in certain circumstances; the term ‘deal’ is defined
under regulation 2(d) which describe dealing in securities to mean an act of subscribing, buying,
selling or agreeing to do so by any person either as principal or agent.

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 1992
requires that a person who is connected with a listed company and is in possession of any
unpublished price sensitive information likely to materially affect the price of securities of
company, shall not
(i) On his behalf or on behalf of any other person deal in securities or
(ii) Communicate such information to any other person, who while in possession of such
information shall not deal in securities.

“Price sensitive information” means any information which relates directly or indirectly to a
company and which if published is likely to materially affect the price of securities of company.
The following shall be deemed to be price sensitive information:—

(i) Periodical financial results of the company;

(ii) Intended declaration of dividends (both interim and final);
(iii) Issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects.
(v) Amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the undertaking;
(vii) and significant changes in policies, plans or operations of the company;

Apart from this chapter II of the same regulation gives guidelines regarding prohibition on
dealing, communicating or counseling on matters relating to insider trading. Chapter III talks
about power given to the board to make inquiries and inspection. Chapter IV talks about code of
internal procedures and conduct for listed companies and other entities mainly it focuses upon
disclosure requirement and internal procedures which is quite evident from the head note i.e.
‘Policy on disclosure and internal procedure for prevention of insider trading’.schedule I and
schedule II talks about different model code for the prevention of insider trading for listed
companies well as for other entities; the latter schedule although talks about code of corporate
disclosure practices for prevention of insider trading.
Conclusion
The Securities and Exchange Board of India Act was passed in 1992, thus giving the regulatory
teeth to the body; SEBI was entrusted with the primary task of protecting the interests of the
investors in addition to that SEBI was also entrusted with the twin objectives of developing and
regulating the stock market.

Throughout this whole journey of SEBI’s existence from last 18 years it has tried to find a
balance between existing policies and forming new policies and regulation curbing the loopholes
in the existing policies and then implementing them to ensure that securities market is growing.
And it has been successful also in its objective.

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. In this regard, SEBI has done an excellent job because overall reports show that a lot of
investors have definitely improved due to the policies and steps taken by the regulator.

To empower investors make informed decisions and facilitate fair dealing, the SEBI now has
also introduced online filing and dissemination of time sensitive price information,
benchmarking or mutual fund schemes, valuation norms for unlisted scripts in mutual fund
portfolios , rationalization of depository participants‘ charges and new regulation for portfolio
managers.

According to recent reports prepared by the international organization of securities commission,

fairness and efficiency are two parts of the same coin. The report observes:

If a market is unfair, in the end it is also inefficient. For example if limit order positions are not
protected, they will not enter the market and the overall liquidity of the market will suffer.

Securities and Exchange Board of India has brought about reforms in the new issues market by
issuing guidelines for disclosure and Investor Protection, pricing of new issues by companies,
entry norms for new issues; it has also taken various steps for reforms in the primary new issues
market and almost all these measures have been duly discussed in the above chapters. SEBI’s
current approach centers around prevention of insider trading by requiring listed companies,
intermediaries, and advisors to set up internal systems for preventing insider trading and
reporting on compliance or otherwise to SEBI.

But to have effective investor protection to take place, the regulators need the co-operation of the
people involved, the entities and the government.

The whole idea of investor protection can be substantiated by the help of the words said by
Arthur Levitt , the chairman of the SEC, in his recent speech (28 September 1998) as follows:
“The significance of transparent, timely and reliable financial statements and its importance to
investor protection has never been more apparent. The current financial situations in Asia and
Russia are stark examples of this new reality. These markets are learning painful lessons taught
many times before: investors panic as a result of unexpected or unquantifiable bad news.

If a company fails to provide meaningful disclosure to investors about where it has been, where
it is and where it is going, a damaging pattern ensues. The bond between shareholders and the
company is shaken; investors grow anxious; prices fluctuate for no discernible reasons; and the
trust that is the bedrock of our capital markets is severely tested..’’

So to avoid this kind of situation SEBI has put its foot firm and hence is playing its role very
well in protecting the shareholders interest in the security market.
Functions Of Primary Market Under SEBI

 Primary Market facilitates capital growth by encouraging

individuals to convert savings into investments.
 Primary Market being the part of Capital market also issues new
securities.
 Government or Public sector institutions and companies can
obtain funds in exchange of a new stock or bond issues via an
investment Bank or financial Syndicate of securities dealers.
 It encourages Initial Public Offerings [IPO]
Powers of SEBI
1. Powers relating to stock exchanges & intermediaries

SEBI has wide powers regarding the stock exchanges and intermediaries dealing in
securities. It can ask information from the stock exchanges and intermediaries
regarding their business transactions for inspection or scrutiny and other purpose.

2. Power to impose monetary penalties

SEBI has been empowered to impose monetary penalties on capital market

intermediaries and other participants for a range of violations. It can even impose
suspension of their registration for a short period.

3. Power to initiate actions in functions assigned

SEBI has a power to initiate actions in regard to functions assigned. For example,
it can issue guidelines to different intermediaries or can introduce specific rules for
the protection of interests of investors.

4. Power to regulate insider trading

SEBI has power to regulate insider trading or can regulate the functions of
merchant bankers.

5. Powers under Securities Contracts Act

For effective regulation of stock exchange, the Ministry of Finance issued a

Notification on 13 September, 1994 delegating several of its powers under the
Securities Contracts (Regulations) Act to SEBI.

SEBI is also empowered by the Finance Ministry to nominate three members on

the Governing Body of every stock exchange.
6. Power to regulate business of stock exchanges

SEBI is also empowered to regulate the business of stock exchanges,

intermediaries associated with the securities market as well as mutual funds,
fraudulent and unfair trade practices relating to securities and regulation of
acquisition of shares and takeovers of companies.
Separation of Power Principle of Constitutionalism
 Legislates
 Investigator
 Police power
 Quasi judicial authority – Judge
 Executioner

Statutes Available
 Sebi Act, 1992
 Depositories Act, 1996
 Securities Contract (Regulation) Act, 1956 - delegated powers
 Companies Act –Delegated powers
 Repeal of Forward Contract Regulation Act & Merger of FMC with
SEBI, September 29, 2015

Guiding principles of Sebi Act

 Preamble of Sebi Act
 Protect the interest of investors
 Regulate the securities market
 Develop the securities market
 Charging section of Sebi Act-Sc 11
 Section 11 of the Sebi Act casts a duty to carry out the above
3 objectives by such measures as it thinks fit.

Jurisdiction of Sebi
Section 2(h) of SC(R)Act defines” securities”as,-

 Shares, scripts, bonds, debentures or other marketable securities of

a like nature in or of any incorporated company or other body
corporate:
 Units of mutual fund or collective investment scheme:
 Security receipt under Sarfesi Act:
 Government Securities :
 Any instrument declared by the Central Government as Security.
Regulation of Primary Market -Companies
SEBI ACT

Section 11A of the Act empowers Sebi to specify matters relating to, -

 Issue of capital,
 Offer document,
 Advertisements soliciting money from public for issue of securities
and
 Transfer of securities.

Regulation of Companies Companies Act

 Section 55 A of Companies Act 1956 delegates to SEBI the power
to administer sections of Companies Act relating to ,-
 Prospectus, allotment, refund, listing,
 Buy-back of securities
 Transfer of securities,
 Debentures &
 Dividend

Regulation of Companies Primary market

 Limited to listed companies or companies intending to get
listed;
 Not available vis-a vis,

Private companies:

Legal entities other than companies:

Entities not issuing securities.

Primary Market Intermediaries

Regulates all the intermediaries in the primary market i.e.
  Merchant Bankers
 Bankers to an issue
 Share Transfer Agents
 Registrar to issue
 Debenture Trustees

The Regulation of Intermediaries enables Sebi to regulate securities market,

ensure investor protection, fair market practises, due diligence, true and fair
disclosures.

Investor Protection
 Individual complaints with Sebi v/s SEC USA
 Systematic changes in the primary market
 Shorten the period of listing & allotment
 Shorten the period of refund

Case of Roopalben Panchal

Regulation of Depositories
 DEPOSITORIES ACT ,1996
 Securities are dematerialized
 No physical share certificate
 No numbering of share certificate
 Depository is the registered owner
 Optional
 Tri –partite Agreement
 International Experience

Investor Protection
 Maintaining physically the share certificates
 Non receipt of Share certificates
 Forged share certificate
 Delay in Transfers
 Corporate Practices

SC (R ) Act
 Regulation of Secondary market
  Regulation of stock exchanges
 Regulation of transaction in securities market
 Regulation of intermediaries in the Secondary Market e.g. stock brokers
(SEBI Act)

Stock- exchanges
 Self Regulatory Organizations
 Sections 4, 7A & 9 of the Act empowers stock exchanges to frame its own
rules and bye-laws.
 Power of Sebi to direct amendments to be made.
 Examples inter-alia are,-

Re-constitution of the Stock-Exchange

Reconstitution of Governing Board.

Regulation of transactions in securities

 Capital adequacy of brokers
 Margin
 Trade Guarantee fund
 Fully computerized system
 Shortening of Settlement cycles
 Surveillance of Transactions
 Transactions in notified areas other than thru stock – exchange -illegal

Listing agreement
 Is a Statutory Agreement which is part of the Regulations of Stock Exchange
 SEBI can direct amendment of listing agreement
 Agreement consists of continuous obligations of the listed company to stock
exchange, shareholders and public e.g.

Disclosures regarding Board practices,

Corporate Governance,

Information regarding Company.

Regulation of securities market

 SEBI Regulates activities like -
 Substantial Acquisition of shares &Take-over
  Collective Investment schemes including mutual funds and venture capital
funds. -
 Market manipulation and unfair Trade Practice
 Prohibition of Insider Trading

SEBI -Investigator
 Sebi is empowered to carry on investigations when Transactions in
Securities are being dealt with in a manner detrimental to the investors or
Securities Market or
 Any intermediary or any person associated with the Securities Market and
has violated the Provision of the Act, Rules and the Regulations
 Also has the power of search and seizure and impounding of documents and
assets.
 Hence jurisdiction of SEBI over Private Companies, other legal entities and
investors during investigation.

SEBI-Quasi-judicial authority
 Monetory Penalty
 An officer of Sebi (designated as adjudicating officer) not below the rank of
Division Chief can impose mometary penalty upto 25 corers for violating
Sebi Act and regulations.
 Before imposing monetary penalty, prior approval of Sebi Board or member
is not required.
 Mutual Fund Regulations by SEBI
Some of the regulations for mutual funds laid down by SEBI are:
(1) A sponsor of a mutual fund, an associate or a group company which includes
the asset management company of a fund, through the schemes of the mutual
fund in any form cannot hold:

(a) 10% or more of the shareholding and voting rights in the asset management
company or any other mutual fund

(b) An asset management company cannot have a representation on a board of

any other mutual fund

(2) A shareholder cannot hold 10% or more of the shareholding directly or

indirectly in the asset management company of a mutual fund

Mutual Funds and SEBI

According to SEBI guidelines, mutual funds must register as trusts under the
Trusts Act, 1882. Then a firm must be set up as a separate asset management
company (AMC) to run a mutual fund. The net worth of the parent firm or AMC
must be Rs. 50,000,000. Mutual funds must also register with the SEBI. There also
exists a self-regulation agency for mutual funds, Association of Mutual Funds of
India (AMFI).

The Association of Mutual Funds in India (AMFI) is focused on developing the

Indian Mutual Fund Industry with professional and ethical qualities. AMFI aims to
enhance the standards in all areas with a view to protect and promote mutual funds
and the stakeholders.

As of now, all the 43 Asset Management Companies that are registered with SEBI,
are members of AMFI.
Role of SEBI

Protecting the interest of investors

 SEBI ensures that the investors do not get befooled by misleading

and false advertisements. In return, SEBI issued guidelines so as to
protect investors and also ensured that the advertisement is fair
and concise.
 Regulation of price rigging: Price rigging refers to manipulation of
prices by way of fluctuating the prices with the object of inflating
and depressing the market price of securities.
 SEBI make efforts to educate investors so that they are able to
make choices between the offerings of different companies and
choose the most profitable securities.
 SEBI has issued guidelines to investigate cases of fraud and insider
trading. Adding to this the provisions for fine and Imprisonment.

To ensure Development activities in Stock Exchange

 E-Trading: Concept of E-trading have been introduced few years

back by SEBI to eliminate the discomfort. It simplifies the process
of buying and selling of securities.
  The initial public offering of Primary Market (which is a part of
Capital market) permits through stock exchange.
 SEBI promotes training of intermediaries of securities market with
the object of smooth functioning.

Regulate the business of stock exchange and activities of stock

exchange

SEBI introduced proper Code Of Conduct applicable to everyone who is

a part of the process of buying and selling of securities, stock exchange,
etc. Following are the areas of concern:

 Rules and Regulations to regulate intermediaries such as Broker,

underwriters, etc.
 Registers and Regulates the working of merchant Bankers, sub-
brokers, stock-brokers, share transfer agent, trustees, etc.
 Registers the working of mutual Funds.
 SEBI regulates turnover of the companies.
 It also conducts inquiry and audits.

To Regulate Insider Trading

Insider Trading have been a problem since the introduction of the

Market dealing with buying and selling of securities, stock exchange,
etc. An Insider is a person or a group of people having first- hand
knowledge about the internal issues and Ups and downs of a company.
The moment insider gets to know about the loss which is going to occur,
the shares under insider’s name are sold immediately. Hence, company
suffers a huge amount of loss.
Process of Issuance Of Securities

Preparation of Prospectus

The prospectus must contain following information:

 Name
 Address
 Registered Office
 Names and Addresses of
 Company Promoters
 Managers
 Managing Directors
 Director
 Company Secretary
 Legal Advisor
 Auditors
 Bankers

It also includes information related to project, plant location,

Technology, collaboration, products, export obligations, etc.
Intermediaries includes underwriters and Brokers are separately
appointed by the company to sell the minimum number of shares.
Prospects issued by the company must be approved by SEBI. A
company offers minimum of 49 percent of the amount of shares to the
public.

Following mentioned are the ways of issuing stocks in Market,

1. Initial Public Offering [IPO]

When a company make public issue of shares for the very first time it is
referred to as Initial Public Offering. Process of Initial public offering as
per the guidelines of SEBI includes: Firstly, issuance of prospectus is the
first and foremost task, the prospectus must include every detail about
the company and about the issue; Secondly, issuance of share
Application Forms by the intermediaries (underwriters and brokers);
Thirdly, brokers make a list of orders collected from clients and then
place orders with the company; Fourthly, company then begins with the
allotment of Shares with the help of stock exchange. After the Allotment
procedure share certificates are delivered to the investors or credited to
their respective Demat Accounts. Investors Must be vigilant about
additional offers and tempting IPO which company offers.

Factors must be kept in mind while studying an IPO offer document

 Promoter
 Performance
 Prospects
 Price

2. Private Placement

The securities are offered for sale privately to some specific individuals
and other institutions. No prospectus is issued to cut the cost and time
involved in the process of allotment and issuance. This method is very
popular among investors these days. This way, shares are concentrated
in few hands only. Thus this increases the price temporarily and is sold
to the small and common investors.

3. Offer For Sale

Process of offer for sale is somewhat similar to private placements.

Stock Brokers negotiate with companies regarding the price and terms
and conditions bsed of which the shares are being issued. After
negotiation, intermediaries buy shares from the company. Securities are
then sold to the investors at a higher price to earn some extra profit. This
method is adopted to save time and cost of the process.

4. Bought out deals

Bought out deals are those deals wherein a company in order to

introduce its shares to the market sells all its equity shares to a single
broker. The sale under Bought out deals is similar to that of Offer for
sale.

5. Right Issue
Right issue is made by a company to its existing shareholders in
proportion to the number of shares that they posses.

Guidelines by SEBI,

 Only Listed company can make right issue.

 Right can be made only in respect of fully paid up shares.
 Company will have to make announcement before such issue and
this cannot be withdrawn.
 The right issue should be open for minimum period of 30 days,
and maximum up to 60 days.
 Company will have to make an agreement with the depository to
issue the shares in Demat form.

6. Bonus Issue

Extra Bonus received is treated as a part of Profit under Share Capital

and thus it is divided between the shareholders of a company.

7. Book- Building

Under normal circumstances, brokers are the intermediaries through

which shares are allotted whereas under book building process
feedbacks of the investors are taken for the fixation of price of the shares

Conclusion

SEBI in one of the important body which regulates both Primary as well
as Secondary Market. Above written Article is based on Primary market
which deals with issuance of new securities and deals with certain issues
related to Primary market. SEBI encourages both growth and
development of the security market and act as a watchdog.