SEBI (Securities and Exchange Board of India) was set up in 1988 for the regulation of the functions of securities market. It promotes orderly and healthy development in the stock market. However, initially, SEBI did not have complete control over the stock market transactions. It was just left as a watchdog for observing the activities, but could not regulate and control them. As a result, in May 1992, SEBI was granted legal status and is now a body corporate that has a separate legal existence and perpetual succession.
Reasons for the establishment of SEBI
When the dealings of stock markets grew, it also gave rise to a lot of malpractices in the stock market like price rigging, delay in delivery of shares, violation of rules and regulations of stock exchange, etc. The existence of these malpractices made the customers lose faith and confidence in the stock exchange. Therefore, the Government of India decided to set up a regulatory body or an agency known as SEBI(Securities and Exchange Board of India).
Purpose and Role of SEBI
The main purpose of the formation of SEBI was to keep a check on malpractices and protect the interest of investors. Simply put, SEBI was set up to fulfil the needs of three groups, which are:
- Issuers. SEBI provides a marketplace for issuers in which they can raise finance easily and fairly.
- Investors. SEBI provides protection for investors and supplies accurate and correct information.
- Intermediaries. SEBI provides a competitive professional market for intermediaries.
Objectives of SEBI
The main objective of SEBI is protection of the interest of investors, promotion of the development of stock exchange, and regulation the activities of stock market. The objectives of SEBI are as follows:
- Regulation of the activities of stock market.
- Protection of the rights of investors and ensuring safety of their investment.
- Prevention of fraudulent and malpractices by having a balance between self-regulation of business and its statutory regulations.
- Regulation and development of a code of conduct for the intermediaries like underwriters, brokers, etc.
Functions of Securities and Exchange Board of India (SEBI)
To meet the three objectives SEBI performs the three main functions; namely, Protective Functions, Developmental Functions, and Regulatory Functions.
1. Protective Functions
The functions performed by SEBI to protect the interest of investors and provide safety of investment are protective functions. The functions performed by SEBI as protective functions are as follows:
i) Check a Price Rigging
Manipulation of price of securities to inflate or depress the market price of securities is known as Price Rigging. SEBI through protective functions prohibits these kinds of practices as it can cheat and defraud the investors.
ii) Prohibits Insider Trading
Any person who is connected with the company such as promoters, directors, etc., is an insider. They have all the sensitive information about the company which can affect the price of the securities. However, this sensitive information is not available to the people at large, and if the insiders use this privileged information to make profit, it is known as Insider Trading. SEBI to protect the interest of investors, keep a strict check on the insiders when they buy securities of the company and takes strict actions against them on insider trading.
For example, the directors of a company know that the company will be issuing Bonus Shares to the shareholders at the end of the financial year and they use this information to make profit by purchasing shares from the market. This purchase of shares by the directors will be considered insider trading.
iii) SEBI prohibits fraudulent and unfair trade practices
SEBI does not allow the companies to make any statement that can mislead the people and induce the sale or purchase of securities by any other person.
iv) Educate Investors
SEBI undertakes various steps to educate the investors so that they can easily evaluate the securities of different companies and select the most profitable security.
v) SEBI under protective functions, promotes fair practices and code of conduct in the security market.
To do so, SEBI takes the following steps:
- It has issued guidelines for the protection of the interest of debenture holders wherein the company cannot change the terms in the mid-term.
- It empowers investigating cases of insider trading and also has provisions for imprisonment and a stiff fine.
- It has also stopped the practice of making preferential allotments of shares that are unrelated to market prices.
2. Developmental Functions
SEBI performs developmental functions to promote and develop the activities in stock exchange and to increase the business in stock exchange. The functions performed by SEBI under developmental functions are as follows:
i) It promotes the training of intermediaries of the securities market.
ii) It tries to promote the activities of the stock exchange. To do so, it adopts a flexible and adaptable approach in the following ways:
- SEBI has given permission for internet trading through registered stock brokers.
- In order to reduce the cost of issue, SEBI has also made underwriting optional.
- Lastly, it has permitted initial public offer of primary market through stock exchange.
3. Regulatory Functions
SEBI performs regulatory functions to regulate the business in stock exchange. The functions performed by SEBI under regulatory functions are as follows:
- To regulate the intermediaries like underwriters, brokers, etc., SEBI has framed a set of rules and regulations and a code of conduct.
- It also conducts inquiries and audits of stock exchanges.
- SEBI registers and regulates the working of mutual funds, etc.
- SEBI has brought the intermediaries under the regulatory purview and has made private placement more restrictive.
- SEBI regulates the takeover of companies.
- Ultimately, it registers and regulates the working of stock brokers, share transfer agents, sub-brokers, merchant brokers, trustees, and everyone who is associated with the stock exchange in any manner.
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