How is the Stock Market Regulated in India?

What’s in today’s article?

• Why in News?
• About Indian Stock Market
• Trading Mechanism of India’s Stock Market
• What are the Laws Governing the Market?
• About Securities and Exchange Board of India (SEBI)
• Why was SEBI formed?
• Powers of SEBI
• Can SEBI step in to curb Market Volatility?
• News Summary

 

Why in News?

• On February 10, the Supreme Court asked the Securities and Exchange Board of India (SEBI) and the Union Government to produce the existing regulatory framework in place to protect investors from share market volatility.

 

About Indian Stock Market

• A stock market is a platform where one can invest in various financial instruments, including shares, bonds, futures and derivatives.
• Most of the trading in the Indian stock market takes place on the following two stock exchanges –
  • Bombay Stock Exchange (BSE) and
  • National Stock Exchange (NSE)
• The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994.
  • However, both exchanges follow the same trading mechanism, trading hours, and settlement process.
• Almost all the significant firms of India are listed on both the exchanges.

 

Trading Mechanism of India’s Stock Market

• Trading at both the exchanges takes place through an open electronic limit order book in which order matching is done by the trading computer.
• The entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders.
  • As a result, buyers and sellers remain anonymous.
• The advantage of an order-driven market is that it brings more transparency by displaying all buy and sell orders in the trading system.
• All orders in the trading system need to be placed through brokers, many of which provide an online trading facility to retail customers.

 

What are the Laws Governing the Market?

• The market in India is regulated by four key laws —
  • Companies Act, 2013,
  • Securities and Exchange Board of India Act, 1992 (SEBI Act),
  • Securities Contracts (Regulation) Act, 1956 (SCRA) and
  • Depositories Act, 1996.
• The overall responsibility of development, regulation, and supervision of the stock market rests with the Securities and Exchange Board of India (SEBI).

 

About Securities and Exchange Board of India (SEBI)

• The SEBI is a statutory regulatory body established by the Government of India in 1992. It was given statutory powers through the SEBI Act, 1992.
  • Objective: To regulate the securities market in India and protect the interests of investors in securities.

 

Why was SEBI formed?

• 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.

 

Powers of SEBI

• Quasi-judicial powers – 
  • In case of frauds and unethical practices pertaining to the securities market, SEBI has the power to pass judgments.
  • The said power facilitates to maintain transparency, accountability and fairness in the securities market.
• Quasi-executive powers –
  • SEBI has the power to examine the Book of Accounts and other vital documents to identify or gather evidence against violations.
  • If it finds one violating the regulations, the regulatory body has the power to impose rules, pass judgements and take legal actions against violators.
  • The SCRA empowers SEBI to recognise (and derecognise) stock exchanges, prescribe rules and bye laws for their functioning, and regulate trading, clearing and settlement on stock exchanges.
• Quasi-legislative powers –
  • To protect the interest of investors, the authoritative body has been entrusted with the power to formulate suitable rules and regulations.
  • Such rules tend to encompass the listing obligations, insider trading regulations and essential disclosure requirements.
    • The body formulates such rules and regulation to get rid of malpractices that are prevalent in the securities market.

 

Can SEBI step in to curb Market Volatility?

• While SEBI does not interfere to prevent market volatility, exchanges have circuit filters — upper and lower — to prevent excessive volatility.
• But SEBI can issue directions to those who are associated with the market, and has powers to regulate trading and settlement on stock exchanges.
• Using these powers, SEBI can direct stock exchanges to stop trading, totally or selectively.
• It can also prohibit entities or persons from buying, selling or dealing in securities, from raising funds from the market and being associated with intermediaries or listed companies.

 

News Summary

• The Supreme Court recently asked the Securities and Exchange Board of India (SEBI) and the government to produce the existing regulatory framework in place to protect Indian investors.
• The Supreme Court did this in the backdrop of a report published by US-based Hindenburg Research which led to sudden market volatility following a meltdown in the Adani Group shares.
  • This volatility led to Indian investors losing several lakhs of crores in the past two weeks.
• The Supreme Court flagged its concern for Indian investors and highlighted the need to protect them from such sudden market volatility in the future.
• The court has asked SEBI to submit a note detailing the legal and factual aspects of the existing regulatory framework for the securities market.

 

 

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Q1) What are Derivatives in simple terms?

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset.

 

Q2) What is the meaning of Futures Contract?

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.

 

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Source: Explained | How is the stock market regulated in India?  | Investopedia