Role of SEBI in Regulating Capital Market

INTRODUCTION
Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges.

Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through open outcry, settlement systems were paperbased, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as brokers clubs as their management was largely composed of brokers. There was no prohibition on insider trading, or fraudulent and unfair trade practices

Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market.

The Securities and Exchange Board of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters.

There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body.

To ensure effective regulation of the market, SEBI Act, 1992 was enacted to establish SEBI with statutory powers for:

(a) Protecting the interests of investors in securities, (b) Promoting orderly and healthy growth of the securities market (c) Regulating the securities market.

Role of SEBI in regulating Indian Capital Market

1. Power to make rules for controlling stock exchange: SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 2. To provide license to dealers and brokers: SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers. One of main example is ULIPs case. SEBI said, It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI."

3. To Stop fraud in Capital Market: SEBI has many powers for stopping fraud in capital market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. It can impose the penalties on capital market intermediaries if they involve in insider trading.

4. To Control the Merger, Acquisition and Takeover the companies: Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merger or acquisition is for development of business or to harm capital market.

5. To audit the performance of stock market: SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. To make new rules on carry - forward transactions: Share trading transactions carry forward cannot exceed 25% of broker's total transactions. 90 day limit for carry forward.

7. To create relationship with ICAI: ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not.

8. Introduction of derivative contracts on Volatility Index: For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that; a. The underlying Volatility Index has a track record of at least one year. b. The Exchange has in place the appropriate risk management framework for such derivative contracts.

Before introduction of such contracts, the Stock Exchanges shall submit the following: i. Contract specifications ii. Position and Exercise Limits iii. Margins iv. The economic purpose it is intended to serve v. Likely contribution to market development

vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading. vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and viii. Details of settlement procedures & systems ix. Details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value of the underlying.

9. To require report of Portfolio Management Activities: SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. 10. To educate the investors: Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI imposed workshop.

Capital Market Reforms and Developments

Over the last few years, SEBI has announced several far-reaching reforms to promote the capital market and protect investor interests. Computerized online trading of securities, and setting up of clearing houses or settlement guarantee funds were made compulsory for stock exchanges. Stock exchanges were permitted to expand their trading to locations outside their jurisdiction through computer terminals. Online trading systems have been introduced in all stock exchanges. Trading is much more transparent and quicker than in the past. Major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994.

The Indian capital market has experienced a process of structural transformation with operations conducted to standards equivalent to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs).

Risk Management System SEBI has taken several measures to improve the integrity of the secondary market. Legislative and regulatory changes have facilitated the corporatization of stockbrokers. Capital adequacy norms have been prescribed and are being enforced. A mark-to-market margin and intraday trading limit have also been imposed.

MARK-TO-MARKET MARGIN AND INTRADAY LIMIT SEBI has introduced a daily mark-to-market margin and intraday trading limit. The daily mark-to market margin is a margin on a brokers daily position. The intraday trading limit is the limit to a brokers intraday trading volume. Every broker is subject to these requirements. The margin system, limits on intra-day, trade and settlement guarantee fund are some of the measures that have been undertaken to ensure the safety of the market. The trading and settlement cycles have been significantly reduced. The cycles were initially shortened from 14 days to 7 days. The settlement cycles were further shortened to T+3 for all securities in 2002. The settlement cycle is now T+2.

CIRCUIT BREAKER SEBI has imposed price limits for stocks whose market prices are above Rs10 up to Rs20, a daily price change limit and weekly price change limit of 25 percent. BSE imposes price limits as a circuit breaker system to maintain the orderly trading of shares on the exchange. BSEs computerized trading system rejects buy or sell orders of a stock at prices outside the price limits.

SHORT SALES AND LONG PURCHASES SEBI regulates short selling in the stock market by requiring all stock exchanges to enforce reporting by members of their net short sale and long purchase positions in each stock at the end of each trading day.

Introduction of Derivatives Trading One of the most noteworthy achievements of the Indian capital markets over the past years has been the development of the derivative market. It has significantly enhanced the sophistication and maturity of the market. In India, derivative trading began in June 2000, with trading in stock index futures. By the fourth quarter of 2001, each of Indias two largest exchanges had four equity-derivative products: futures and options for single stocks, and futures and options for their respective stock indices. The NSE has become the largest exchange in single stock futures in the world, and by June 2007, it ranked fourth globally in trading index futures, a sign of an evolving and maturing market. Market liquidity too has increased greatly since 1992. This was primarily attributed to settlement rules (discussed below) and the introduction of derivatives trading. The move from fixed period to rolling settlements, shortened settlement periods, and a dramatic increase in derivatives trading contributed to steadily increasing market liquidity.

Technology framework The advent of technology to the markets has been largely attributed to the National Stock Exchange (NSE). NSE introduced the screen based trading and settlement system, supported by a state-of-the art technology platform. To fulfill the commitment to adopt global best practices and bring about more transparency to the capital markets functioning, SEBI also assumed the responsibility of monitoring the markets and stock exchanges. A significant step towards that initiative was the launch of the Integrated Market Surveillance System (IMSS) in 2006. The IMSS equipped the regulator to identify doubtful market activity. The IMSSs primary objective is to monitor the market activities across various stock exchanges and market segments including both equities and derivatives. IMSS collects and analyses data not only from

the stock exchanges but also from National Securities Depository, Limited. (NSDL), Central Depository Services (India) Limited. (CDSL), clearinghouses, and clearing corporations. The RBI introduced the electronic funds transfer system, The Reserve Bank of India National Electronic Funds Transfer System" (referred to as "NEFT System" or "System"). The objective of the system is two-fold. First, is to establish an electronic funds transfer system to facilitate an efficient, reliable, secure and economical system to funds transfer and clearing in the banking sector throughout India. Second, is to relieve the stress on the paper based funds transfer and clearing system.

Institutional Investors
MUTUAL FUNDS

Indian investors have been able to invest through mutual funds since 1964, when UTI was established. Since 1993, private sector mutual funds have been allowed, which brought competition to the mutual fund industry. This has resulted in the introduction of new products and improvement of services. The notification of the SEBI (Mutual Fund) Regulations of 1993, brought about a restructuring of the mutual fund industry. An arms length relationship is required between the fund sponsor, trustees, custodian, and Asset Management Company. This is in contrast to the previous practice where all three functions, namely trusteeship, custodianship, and asset management, were often performed by one body, usually the fund sponsor or its subsidiary. FIIs registered with SEBI may invest in domestic mutual funds, whether listed or unlisted. The 1993 Regulations have been revised on the basis of the recommendations of the Mutual Funds 2000 Report prepared by SEBI. The revised regulations require disclosures in terms of portfolio composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors, with the asset management company and trustees

FOREIGN INSTITUTIONAL INVESTORS Regulations were enforced in November 1995, largely based on Guidelines for Foreign Institutional Investment issued by the Government. The regulations require FIIs to register with

SEBI and to obtain approval from the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act to buy and sell securities, open foreign currency and rupee bank accounts, and to remit and repatriate funds. Once SEBI registration has been obtained, an FII does not require any further permission to buy or sell securities or to transfer funds in and out of the country, subject to payment of applicable tax. Investment in Indian securities is also possible through the purchase of GDRs. Foreign currency convertible bonds and foreign currency bonds issued by Indians that are listed, traded, and settled overseas are mainly denominated in dollars. Foreign financial service institutions have also been allowed to set up joint ventures in stock broking, asset management companies, merchant banking, and other financial services firms along with Indian partners.

Regulatory Framework REGULATION OF INTERMEDIARIES Participants in the Indian capital market are required to register with SEBI to carry out their businesses. These include: stockbrokers, subbrokers, share transfer agents, merchant bankers, underwriters, portfolio managers, investment advisers, and other such intermediaries who may be associated with the securities market in any manner;

depositories, participants, custodians of securities, FIIs, credit rating agencies, and other such intermediaries who may be associated with the securities market in any manner

venture capital funds and collective investment schemes, including mutual funds

Stockbrokers

The Indian law defines a stockbroker simply as a member of a recognized stock exchange. Therefore, a registered stockbroker is a member of at least one of the recognized Indian stock

exchanges. Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a certificate granted by SEBI. Each stockbroker is subject to capital adequacy requirements consisting of two components: basic minimum capital and additional or optional capital related to volume of business. The basic minimum capital requirement varies from one exchange to another. A SEBI regulation requires stockbrokers of BSE or NSE to maintain a minimum of Rs500,000 The additional or optional capital and the basic minimum capital combined have to be maintained at 8 percent or more of the gross outstanding business in the exchange (the gross outstanding business means the cumulative amount of sales and purchases by a stockbroker in all securities at any point during the settlement period).
There is no mandatory qualification test for stockbrokers and other market participants in India,
Sub-brokers

Most stockbrokers in India are still relatively small. They cannot afford to directly cover every retail investor in a geographically vast country and in such a complex society. Thus, they are permitted to transact with sub-brokers as the latter play an indispensable role in intermediating between investors and the stock market. An applicant for a sub-broker certificate must be affiliated with a stockbroker of a recognized stock exchange. A sub-broker application may take the form of sole proprietorship, partnership, or corporation. There are two major issues concerning sub-brokers in the Indian capital market: Majority of sub-brokers are not registered with SEBI; and The function of the sub-broker is not clearly defined.

No sub-broker is supposed to buy, sell, or deal in securities, without a certificate granted by SEBI. Nevertheless, number of subbroker registered with SEBI is very less as compared to number of stock brokers. SEBI enforced the following measures for the same: Initiation of criminal actions on complaints received against unregistered sub-brokers in suitable cases; Prohibition of stockbrokers in dealing with unregistered sub-brokers

Merchant Bankers

A merchant banker applicant is required to have a minimum net worth of Rs50 million. The new regulations have drawn a clear-cut line between the merchant banker and the nonbanking finance company (NBFC). Under the old regulations, a merchant banker is permitted to carry out fund based activities such as deposit-taking, leasing, bill discounting and hire-purchasing. The new regulations no longer allow a merchant banker to engage in these fund-based activities except for those related exclusively to the capital market such as underwriting. The merchant banker is required to cease such activities within two years. Correspondingly, an existing NBFC performing merchant banking activities is required to relinquish such activities after a certain period of time.