Role Of SEBI In Capital Markets.

Brief Information of SEBI

Set up in 1992 by an act of parliament Main Objective is: To protect the interests of the investors and to promote the healthy development of the capital markets and also ensure its regulation

Brief Explanation of Capital Markets

It provides the institutional mechanism for meeting the requirement of funds for PSUs and the Private Sector. It enables raising of capital through equities, debts and various other types of financial instruments. They can be further segmented into Primary markets, Secondary Markets, Debt Markets and the Derivative Markets.

Role In Primary Markets.

It is mandatory for the company to file an offer document with Sebi, through an eligible merchant banker, at least 21 days prior to its filing with the registrar of companies. It is mandatory for the issuer to enter into an agreement with the depository for issuance of securities in dematerialized form.

Role In Primary Markets (Contd)

QIB Category: SEBI introduced a specific allocation of 5 per cent within the QIB category with effect from September 19, 2005. The mutual funds are also eligible for allotment from the balance available for the QIB category and allotment is done on a proportional basis.

Role In Primary Markets (Contd)

ECS Facility For Refunds: In order to ensure faster and hassle-free refunds, it was decided to extend the facility of electronic transfer of funds to public issue refunds, initially at 15 centers where clearing houses are managed by RBI.

Role In Primary Markets (Contd)

Optional grading of IPOs: With a view to assisting the investors, particularly the retail investors, SEBI has given in-principle approval for grading of IPOs by the rating agencies at the option of the issuers.

Role In Primary Markets (Contd)

In case of a fixed price issue, a company is required to disclose the issue price or the price band in the offer document filed with SEBI. In case of public issue through fixed price route, the company at any time of prior to filing of prospectus with the Registrar of Companies can disclose the issue price.

Role In Secondary Markets

Block Deals: In order to facilitate execution of large trades without impacting the market, the stock exchanges were allowed to provide a separate trading window for block deals. BSE and NSE activated this window with effect from November 14, 2005.

Role In Secondary Markets (Contd)

Dematerialization Charges: In order to enable transfer of beneficiary account, SEBI has advised that no charges be levied when transfer of securities takes place, provided that the account holders are the same.

Role In Secondary Markets (Contd)

In order to prevent the misuse of time gap between allotment of securities and commencement of trading, SEBI advised depositories that, in case of IPOs, the ISINs of securities should be activated only on the date of commencement of trading on the stock exchanges.

Role In Secondary Markets (Contd)

Rationalization Of Disclosure requirements: SEBI has decided to do away with the repetitive disclosures in case of rights issues and public issues by the listed companies which have a satisfactory track record of filing periodic returns with the stock exchanges.

Role In Secondary Markets (Contd)

Further Issue of Shares: SEBI has permitted companies to issue further shares, provided full disclosures as regards the total capital to be raised from such further issues are made in the draft offer document.

Role In Secondary Markets (Contd)

Corporate Governance Of Listed Companies: SEBI has advised listed companies to comply with the revised guidelines on corporate governance, including appointment of the independent directors, maximum gap between two Board meetings, sitting fees of the nonexecutive directors and certification on internal control system by the CEO/CFO.

Role In Debt Markets.

It is mandatory for the issuer of the debt instrument to obtain a rating from a credit agency and disclose it in the offer document, ratings obtained in the last three years also need to be disclosed. FCDs with conversion period over 3 years are allowed provided the conversion is optional with call & put option.

Role In Debt Markets (Contd)

In case of NCD/PCD, the premium to be paid, redemption amount, period of maturity shall be indicated in the prospectus. The issuer can choose to roll over the debentures with or without change in interest rate. In such cases exit option is mandatory for existing debenture holders.

Role In Debt Markets (Contd)

It is mandatory for the issuer to obtain a fresh credit rating from an agency within six months prior to date of redemption. This rating has to be communicated to the holders. It is mandatory that the above communication be vetted by SEBI with respect to the credit rating.

Role In Debt Markets (Contd)

The disclosures contain the long term equity to debt ratio, servicing behaviour with respect to the existing holders. It is also mandatory to obtain a certificate from a financial institution about their no objection to a pari passu charge being created in favour of the trustee to proposed debenture issue.

Role In Derivatives Markets

SEBI has mandated the following conditions for a stock to be included in derivatives: Stock shall be amongst the top 500 in terms of average daily market capitalisation. The market wide position limit in the stock shall not be less than Rs.50 crores.

Role In Derivatives Market

Trading has to take place through a screen trading system. Derivatives Exchange/Segment should capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation. It should have arbitration and investor grievances redressal mechanism.

Role In Derivatives Market (Contd)

It is mandatory for the clearing house to provide guarantee for settlement of trades. Clearing Corporation will monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both. Establishment of electronic funds transfer is mandatory.

Role In Derivatives Markets (Contd)

SEBI has made the following rules for protection of investors: Trading Member is required to provide every investor with a risk disclosure document so that investors can take a conscious decision to trade in derivatives. Investor can demand the trade confirmation slip with his ID in support of the contract note.

Role in Derivatives Markets (Contd)

Money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation. In the event of default of the Trading/Clearing Member the amounts paid by the client towards margins are not utilised towards the default of the member. Losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges.

Effects Of Measures Taken.

The above measures have resulted in some discipline in the workings of the markets and provision of protection of safeguards to investors. This has resulted in control of malpractices in the capital market operations such as rigging of prices, delays in finalizing allotments, manipulation of prices before listing, diversion of funds, delays in delivery of shares, have started to yield some dividends.

Conclusion.
SEBI has taken steps to bring about overall improvement in the functioning of the capital markets, some require attentionSEBIs inability to notify regulations without government approval and prosecute without government sanction.