Tavagapedia

SEBI

SEBI Meaning

  • SEBI full form is Securities and Exchange Board of India
  • SEBI is a statutory regulatory body established by the Government of India to regulate the securities market in India and protect the interests of investors in securities.
  • It also regulates the functioning of the stock market, mutual funds, etc.

What is SEBI and its functions?

The Securities and Exchange Board of India (Sebi) is a statutory regulatory body established by the Government of India in 1992 to regulate the securities market in India and protect the interests of investors in securities.

SEBI has the power to regulate and perform functions such as check the books of accounts of stock exchanges and call for periodical returns, approve by-laws of stock exchanges, inspect the books of financial intermediaries such as banks, compel certain companies to get listed on one or more stock exchanges, and handle the registration of brokers.

Why is SEBI formed?

Purpose of SEBI

SEBI was established to keep a check on unfair and malpractices and protect the investors from such malpractices. The organization was created to meet the requirements of the following three groups:

  • Issuers: SEBI works toward providing a marketplace to the investors where they can efficiently and fairly raise their funds.
  • Intermediaries: SEBI works towards providing a professional and competitive market to the intermediaries 
  • Investors: SEBI protects and supplies accurate information to investors.

SEBI Bhavan – SEBI Office

SEBI Building
Source: sebi.gov.in; Tavaga Research

Objectives of SEBI

The fundamental objective of SEBI is to safeguard the interest of all the parties involved in trading. It also regulates the functioning of the stock market. SEBI’s objectives are:

· To monitor the activities of the stock exchange.

· To safeguard the rights of the investors

· To curb fraudulent practices by maintaining a balance between statutory regulations and self-regulation.

· To define the code of conduct for the brokers, underwriters, and other intermediaries. 

Powers of SEBI

SEBI carries out the following tasks to meet its objectives: Protective functions, Regulatory functions, and developmental functions.

Functions that SEBI performs as a part of its protective functions are:

· It checks price manipulation

· It bans Insider trading

· It prohibits unfair and fraudulent trade practices

· It promotes a fair code of conduct in the security market

· It takes efforts to educate the investors regarding ways to evaluate the investment options better

As a part of its regulatory functions, SEBI performs the following role:

· It has designed a code of conduct, rules, and regulations to regulate the brokers, underwriters, and other intermediaries.

· SEBI also governs a company’s takeover.

· It regulates and registers the workings of share transfer agents, stockbrokers, merchant bankers, trustees, and others who are linked with the stock exchange.

· It regulates and registers the mutual funds as well.

· It conducts audits and inquiries of stock exchanges.

As a part of its developmental functions, SEBI performs the following role:

· It facilitates the training of the intermediaries.

· It aims at promoting activities of the stock exchange by having an adoptable and  flexible approach.

Structure of SEBI

The Board of SEBI comprises of nine members. The Board is an aggregate of the following:

  1. One Chairman of the board – appointed by the Central Government of India
  2. One Board member – appointed by the Central Bank, that is, the RBI
  3. Two Board members – hailing from the Union Ministry of Finance
  4. Five Board members – elected by the Central Government of India

The Chairman of SEBI, in addition to overseeing the Board, also looks over the Communications, Vigilance, and Internal Inspection Department.

There are four whole-time members in the organizational structure. The whole-time members are allocated a number of departments that they have to oversee. Each department is individually headed by an executive director. The executive directors report to specific whole-time members.

The organizational structure of SEBI consists of more than 25 departments, such as Foreign Portfolio Investors and Custodians (FPI&C), Corporation Finance Department (CFD), Information Technology Department (ITD), Department of Economic and Policy Analysis (DEPA-I,II, & III), Investment Management Department, Legal Affair Department,  Treasury and Accounts Divisions (T&A), and National Institute of Securities Market (NISM)

SEBI Act and SEBI Guidelines

In 1988, SEBI was founded as a non-statutory organization with the responsibility of monitoring stock market activity. The SEBI Act of 1922 made SEBI a statutory body with independent jurisdiction. The Act gave SEBI the power to oversee and actively enforce regulations governing the capital markets.

The SEBI Act 1992 covers the following areas:

  • Composition and actions of the SEBI Board members
  • Powers and Functions of the Board
  • Fund sources of SEBI, as in grants made available by the Union Government
  • Rules on Penalties and legal pathways
  • Defines the judicial authority of SEBI
  • The extent of powers of the Union Government to supersede SEBI

SEBI also has to adhere to a list of SEBI guidelines, pertaining to areas such as:

  • Employee Stock Option schemes
  • Disclosure and Investor Protection norms
  • Legal Proceedings
  • Anti-money laundering norms
  • Listing and delisting of securities
  • Opening of trading terminals overseas

SEBI LODR regulations 2015

Listing Obligations and Disclosure Requirements (LODR) regulations for SEBI form one of the most important mandates. The regulation covers the extent of transparency and disclosures that listed companies have to abide by. In addition to the compulsory disclosure norms, the regulation also refines the listing agreement, which has to be entered between the stock exchange and the companies being listed.

The agreement consists of terms and conditions on governance, disclosures, and terms to maintain the listing status of the company. However, the new regulation in 2015 on LODR intends to consolidate all the previous amendments into one single document, making the document uniform across different segments of the capital market.

The SEBI (LODR) Regulations, 2015 entails the following:

  • Disclosures and obligations that have to be acknowledged by the compliance officers of the listed company
  • Listing down obligations uniform to all listed companies
  • Distinct obligations for certain types of securities
  • Segregating initial issuance and post-IPO norms
  • Communication of the companies’ fundraising activities
  • Establishing timelines for notifying the exchanges of certain events
  • Bringing SMEs under the ambit of the SEBI (LODR) Regulations

For a complete list of regulations that govern the market regulator, click here.

SEBI New Margin Rules

In September 2020, SEBI implemented new rules on margin pledge. The rule is expected to bring transparency and prevent misuse of clients’ securities by brokerage firms. The new margin rules were directed to come into effect from June 1, but were delayed due to pandemic pushing the implementation date to September 1.

In this entire exercise of the peak margin system, SEBI’s primary goal was to curb market speculation in order to prevent losses for individual investors in volatile markets.

The new margin rules by SEBI mandate the following:

  • The stock, being pledged, is to remain in the investor’s de-mat account. As the stock is not changing accounts, the benefits from corporate events accrue directly to the investors
  • Upfront collection of margins by brokers for any purchase or sale of securities, penalizing any sort of failure to do so. Clients could meet the margin requirements by the end of the day, which is now changed to the beginning of the day
  • Power of Attorney (POA) cannot be assigned in the favor of the brokers for pledging. As under the old system, brokers could demand POA from the investors to execute decisions on their behalf
  • Margin pledge created separately for investors requiring margin
  • Buy Today Sell Tomorrow (BTST) not allowed anymore for shares bought on margin. Investors are required to honor the delivery of share (T+2 days is the usual settlement period). Typically, investors would use intraday realized profits to meet the margin requirements, which is now amended by the new regulations. For a BTST trade, it can be initiated only if the net available margin is equal to or greater than 20 percent of the transaction value.