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Securities and Exchange Board of India, SEBI Functions, Powers

06-12-2024

09:30 AM

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1 min read

Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.

Mains: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

The Securities and Exchange Board of India (SEBI) is the key regulatory authority for the Indian securities market, established to protect investor interests, promote market growth, and ensure the fairness and transparency of financial transactions. Initially formed in 1988, SEBI was given statutory powers through the SEBI Act, 1992

Over the years, SEBI has played a pivotal role in transforming India’s securities markets by introducing major reforms like paperless trading, electronic settlements, and the T+1 settlement cycle, which has significantly improved the market’s efficiency and security.

About SEBI 

The Securities and Exchange Board of India (SEBI) is a statutory body responsible for overseeing and regulating the securities markets in India. Established to protect the interests of investors and promote the development and regulation of the securities market, SEBI plays a crucial role in maintaining the integrity of the Indian financial system.

SEBI Historical Background

Before the establishment of SEBI, the Indian securities market was regulated by the Controller of Capital Issues (CCI), a body created under the Capital Issues (Control) Act of 1947. However, by the late 1980s, the Indian securities market had grown significantly, and the CCI's limited regulatory framework became increasingly inadequate to address the complexities of the evolving market.

  • In response to the rising number of market malpractices and investor grievances, the Indian government established the Securities and Exchange Board of India (SEBI) in 1988. 
  • However, SEBI initially lacked statutory powers, which limited its effectiveness in controlling fraudulent activities in the market.
  • The need for a more empowered regulatory authority became evident in the wake of the Harshad Mehta scam in 1992, which exposed significant loopholes in the financial and stock market systems. 
  • In the same year, the SEBI Act, 1992 was passed by the Indian Parliament, giving SEBI statutory powers and the authority to regulate the securities market.

SEBI Objectives

SEBI's primary objectives are to protect the interests of investors, promote the development of the securities market, and regulate its functioning to ensure transparency and fairness. It aims to create an environment where investors feel secure by enforcing rules that prevent fraudulent and unfair trade practices, such as insider trading. 

By maintaining an effective regulatory framework, SEBI seeks to balance investor protection with market growth, ensuring that both corporate participants and investors benefit from a well-regulated securities market.

SEBI Organizational Structure

SEBI is governed by a Board of Directors responsible for ensuring its smooth functioning and effective regulation of the securities market. The board is composed of representatives from various government bodies and experts from the financial sector. The composition of SEBI’s board is as follows:

  • A chairman nominated by the Union Government of India.
  • Two members representing the Union Ministry of Finance.
  • One member representing the Reserve Bank of India.
  • Five members are nominated by the Union Government of India, of which at least three are full-time members.

The Central Government has the authority to remove any member from office under specific conditions, including if the member is adjudicated as insolvent, declared of unsound mind by a competent court or convicted of an offence involving moral turpitude as deemed by the Central Government.

SEBI Powers

SEBI holds extensive powers to regulate and control the securities market in India. These powers are equivalent to those of a civil court under the Code of Civil Procedure, 1908, allowing SEBI to investigate and take necessary actions to protect investor interests and ensure market integrity. SEBI’s powers in this regard include the following:

  • Discovery and production of books of accounts and other documents at a specified place and time.
  • Summoning and enforcing attendance of individuals and examining them under oath.
  • Inspection of any books, registers, or other documents of any person or company involved in the securities market.

Additionally, SEBI can take the following measures to safeguard the market, either during an investigation or after its completion:

  • Suspend trading of any security on a recognized stock exchange.
  • Restrain individuals or entities from accessing the securities market and prohibit them from buying, selling, or dealing in securities.
  • Suspend office-bearers of any stock exchange or self-regulatory organization from holding their positions.
  • Impound and retain proceeds or securities related to transactions under investigation.

SEBI Functions

SEBI plays a vital role in regulating and developing the securities market in India. Its wide-ranging functions ensure market integrity, protect investors, and promote transparency. Some of SEBI's key functions include:

  • Regulating business on stock exchanges and other securities markets.
  • Registering and regulating the functioning of intermediaries like stock brokers, sub-brokers, share transfer agents, merchant bankers, portfolio managers, investment advisers, and others associated with the securities market.
  • Registering and regulating depositories, custodians of securities, foreign institutional investors, credit rating agencies, and other market participants specified by SEBI.
  • Registering and overseeing the functioning of venture capital funds, collective investment schemes, and mutual funds.
  • Preventing and prohibiting fraudulent and unfair trade practices related to the securities market.
  • Promoting investor education and providing training to intermediaries in the securities market.
  • Preventing insider trading and ensuring fairness in securities dealings.
  • Gathering information, conducting inspections, and audits of stock exchanges, mutual funds, market intermediaries, and self-regulatory organizations to ensure compliance.
  • Sharing and receiving information from domestic and international authorities regarding violations of securities laws, subject to agreements approved by the Central Government.
  • Performing functions under the Securities Contracts (Regulation) Act, 1956, as delegated by the Central Government.
  • Levying fees and charges for carrying out its regulatory duties.
  • Conducting research related to the development and regulation of the securities market.
  • Calling for and providing information to relevant agencies for efficient market oversight.

Securities Appellate Tribunals

The Securities Appellate Tribunal (SAT) was established under Section 15K of the SEBI Act to hear appeals against orders issued by SEBI or an adjudicating officer under the SEBI Act. SAT ensures an independent judicial review of SEBI’s decisions. The presiding officer of SAT must either be a sitting or retired Supreme Court judge, a Chief Justice of a High Court, or a High Court judge with at least seven years of service. 

  • Power of a Civil Court: The Securities Appellate Tribunal has the same powers as a civil court when handling cases. 
  • Further Appeal: If a person is dissatisfied with SAT’s ruling, they can appeal to the Supreme Court within 60 days of receiving the order.

SEBI Major Achievements

SEBI has been successful as a regulator by implementing systematic reforms and modernizing the Indian securities market. One of its significant contributions is the move towards a fully electronic and paperless trading system, which improved efficiency and reduced risks like theft, forgery, and delays. SEBI has also played a pivotal role in establishing regulations and addressing major financial challenges. Key achievements include:

  • Paperless Trading: Elimination of physical share certificates through the Depositories Act, 1996, to prevent delays and fraud.
  • Handling Financial Shocks: Swift response to the global financial crisis and the Satyam scandal with effective regulatory actions.
  • Promoting Transparency: Increased corporate transparency by enhancing disclosure requirements for Indian promoters.
  • Takeover Code: Liberalization of the takeover code to encourage investment by removing restrictive regulations.
  • T+1 settlement cycle: The Securities and Exchange Board of India introduced the T+1 settlement cycle in India at the beginning of 2023. The T+1 settlement cycle means that trades are settled in one business day, and the investor receives the money the following day.

SEBI Criticisms

Despite SEBI’s regulatory role, it has faced criticism for its handling of various financial scams and market irregularities. Critics argue that SEBI has not always been proactive in addressing major financial crises and has been slow to take action against fraudulent activities. Key criticisms include:

  • Financial Scandals: Failure to effectively monitor companies involved in financial scandals, such as the Satyam scam, IL&FS crisis, Punjab National Bank scam, and NSE co-location scam.
  • Organizational Apathy: Lack of timely action in detecting and addressing fraudulent activities by market intermediaries, leading to investor losses.
  • Insider Trading: Inability to prevent insider trading, with many cases going undetected for extended periods.
  • Inadequate Regulation of IPOs:  Resulting in overpriced offerings that harm retail investors.
  • Market Manipulation: Susceptibility of small-cap and mid-cap stocks to market manipulation.
  • Hindenburg Allegations: Allegations of conflicts of interest, as seen in August 2024, when Hindenburg Research accused SEBI’s chairperson and her husband of being involved in offshore entities used to inflate Adani Group stocks.

SEBI Way Forwards

To address its shortcomings and improve market regulation, SEBI needs to adopt a more proactive and transparent approach. Strengthening its enforcement mechanisms, enhancing monitoring capabilities, and improving investor education are critical steps for SEBI to regain and maintain public trust. Key areas for improvement include:

  • Enhancing Market Surveillance: Improve market monitoring to detect and prevent fraudulent activities more effectively.
  • Regulating IPOs: Ensure companies do not issue overvalued shares that could harm investors by improving Initial Public Offerings (IPO) regulations.
  • Strengthening Insider Trading Regulations: Tighten insider trading rules and increase penalties for violations.
  • Increasing Transparency: Foster public trust by enhancing transparency in SEBI's operations and decision-making.
  • Investor Education: Develop programs to educate investors about market risks and fraud prevention.
  • Leveraging Technology: Use advanced technology and data analytics to improve market monitoring and enforcement.

SEBI UPSC PYQs

Question 1) The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify. (UPSC Mains 2013)

SEBI FAQs

Q1. What is SEBI and its purpose?

Ans.  SEBI is the regulatory authority for the securities market in India. Its purpose is to protect investor interests, promote market development, and regulate market participants.

Q2. Who controls SEBI?

Ans. SEBI functions as an autonomous body, but its members are appointed by the Union Government of India.

Q3. Where is the headquarter of SEBI?

Ans. SEBI's headquarters is located in Mumbai, India.

Q4. Who appoints the members of SEBI?

Ans. The members of SEBI, including the chairman, are appointed by the Union Government of India.

Q5. What is the difference between SEBI and IRDA?

Ans. SEBI regulates the securities market, while IRDA (Insurance Regulatory and Development Authority) regulates the insurance sector in India.