SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

1.Introduction
2.Objectives
3.Functions
4.Powers
5.Powers delegated from SCRA
6.Role of SEBI
7.Organization
8.SEBI and Central Government
9.SEBI Guidelines
1.Guidelines for Primary Market
2.Guidelines for Public Issue
3.Guidelines for Secondary Market
4.Guidelines for Foreign Institutional Investors
5.Guidelines on Bonus Issues
6.Guidelines on Right Issue
7.Guidelines on Underwriters

Introduction

The Government has set up the Securities and Exchange Board of India (SEBI) by a notification of Ministry of Finance issued on 12 April, 1988. SEBI is the apex body for the development and regulation of the stock market in India. After 4 years a separate legislation namely Securities and Exchange Board of India Act, 1992 has been enacted. Till then it was acted as an advisory body performing the following functions:

*To collect information and advise the government on matters relating to stock and capital market.
*Licensing and regulation of merchant bankers, mutual funds, etc.
*To prepare the legal drafts for regulatory and development role of SEBI.
*To perform any other functions as may be authorized to it by the Central Government.

By abolishing the office of Controller of Capital Issues (CCI) and by transferring some of the powers of Securities Contracts (Regulations) Act 1956 to SEBI, it was given statutory powers by an ordinance on 30th January. 1992. Thus, at present SEBI is armed with statutory power of regulating the primary market and supervising the functioning of stock exchanges in the country.

SEBI’s Act 1992 provides for the establishment of a Board to protect interest of the investors in securities and promote the development of ital market and to regulate the security market and for matters connected with or incidental there to. The SEBI Act contains 7 chapters and 28 sections.


Objectives of SEBI

The primary objective of SEBI is to promote healthy and orderly growth -of the securities market and secure investor protection. The objectives of SEBI are as follows:

1.To protect the interest of investors, so that, there is a steady flow of savings into the capital market.
2.To regulate the securities market and ensure fair practices.
3.To promote efficient services by brokers, merchant bankers, and other intermediaries, so that, they become competitive and professional.

Functions of SEBI (Sec. 11)

The SEBI Act, 1992 has entrusted with two functions, they are

1.Regulatory functions and
2.Developmental functions

Chapter 4 of the Act deals with the Regulatory and Developmental functions of SEBI.

a) Regulatory Functions: These include

1.Regulation of stock exchange and self regulatory organizations.
2.Registration and regulation of stock brokers, sub-brokers, Registrars to all issues, merchant bankers, underwriters, portfolio managers etc.
3.Registration and regulation of the working of collective investment schemes including mutual funds.
4.Prohibition of fraudulent and unfair trade practices relating to securities market.
5.Prohibition of insider trading
6.Regulating substantial acquisition of shares and takeover of companies.


b) Developmental Functions: These include

1.Promoting investor’s education
2.Training of intermediaries
3.Conducting research and publishing information useful to all market participants.
4.Promotion of fair practices
5.Promotion of self regulatory organizations

Powers of SEBI

In order to carry out its objectives, the following are the powers exercised by SEBI.

1.Power to call periodical returns from recognised stock exchanges.
2.Power to compel listing of securities by public companies.
3.Power to levy fees or other charges for carrying out the purposes of regulation.
4.Power to call information or explanation from recognised stock exchanges or their members.
5.Power to grant approval to bye-laws of recognized stock exchanges.
6.Power to control and regulate stock exchanges.
7.Power to direct enquiries to be made in relation to affairs of stock exchanges or their members.
8.Power to make or amend bye-laws of recognized stock exchanges.
9.Power to grant registration to market intermediaries.
10.Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act 1956, in any State or area, to grant licenses to dealers in securities.

Powers delegated to SEBI under SCRA

The following are the powers delegated to SEBI under Securities Contract (Regulations) Act, 1956.

1.Power to call for periodical returns from stock exchange.
2.Grant approval to any recognized stock exchange to make bye-laws for the regulation or control of contracts.
3.Power to make or amend bye-laws of recognized stock exchanges.
4.Power to compel a public company to list its shares in any stock exchange.
5.Licensing of dealers in securities in certain areas.
6.Power to appoint any person to make enquiries into the affairs of stock exchange.
7.Power to suspend business of any recognized stock exchange.
8.Power to prohibit contracts in certain cases.


Role of SEBI

The SEBI shall create a conductive atmosphere for the proper functioning of the capital market. The atmosphere includes the rules and regulations, trade practices, customs and relations among institutions, brokers, investors and companies. It shall have to get the trust of the investors in safeguarding their interest. This can be achieved by meeting the needs of persons connected with the securities market and establishing proper co-ordination among the three main groups - investors, corporate sector and intermediaries. SEBI shall create proper infrastructure, so that, the market automatically facilitate expansion and growth of business to middlemen like brokers, jobbers, merchant banks, mutual funds, commercial banks, etc. SEBI shall also create the framework for more open, orderly and un-prejudicial conduct in relation to takeover and mergers of corporate sector to ensure fair and equal treatment of all security holders. SEBI plays the dual role of regulation and development. The major roles of SEBI are discussed below:

1.It shall device laws with unified set of objectives, single administrative authority and an integral frame work to deal with all the aspects of the security market.
2.It shall also play an active role in interacting with institution of Chartered Accountants ·of India in upgrading and making more effective the accounting and auditing standards.
3.It shall introduce a system of two stage disclosure at the time of initial issue and make compulsory for the company to provide detailed information to all the stock exchange journals.
4.It will examine the feasibility of introducing a dealer’s network, by which securities can be bought or sold over the counter like in retail shop. This will smoothen liquidity and investment opportunities.
5.It shall work as an authoritative institution, to see that the intermediaries are financially sound and equipped with professional and competent manpower.
6.It will ensure that the rules are versatile and not rigid to provide automatic and self regulatory growth.

Organization of SEBI

The SEBI Act provides for the establishment of a Statutory Board consisting of six members. The chairman and two members are to be appointed by the Central Government, one member to be appointed by the Reserve Bank and two members having experience of securities market to be appointed by the Central Government.

SEBI has divided the activities into four operational departments. They are primary market department, issue management and intermediary’s department, secondary market department and institutional department. Each department is headed by an Executive Director.


1.Primary Market Department: It deals with all policy matters and regulatory issues relating to primary market, market intermediaries and redressal of investor grievances.
2.Issue Management and Intermediaries Department: This department is concerned with vetting of offer documents and other things like registration, regulation and monitoring of issue related intermediaries.
3.Secondary Market Department: This department looks after all the policy and regulatory issues for the secondary market, administration of the major stock exchanges and other matters related to it.
4.Institutional Investment Department: This department is concerned with framing policy for foreign institutional investors, mutual funds and other matters like publications, membership in international organization etc.

In addition to the above, there are two other departments - Legal Department and Investigation Department.

SEBI has two advisory committees, one each for primary and secondary markets. The committees are constituted from among the market players, recognised investor associations and eminent persons associated with capital market. These committees are non-statutory committees.

SEBI and Central Government

The Central Government has power to issue directions to SEBI Board, supersede the Board, if necessary and to call for returns and reports as and when necessary. The Central Government has also power to give any guideline or to make regulations and rules for SEBI and its operations.

The activities of SEBI are financed by grants from Central Government, in addition to fees, charges etc. collected by SEBI. The fund called SEBI General Fund is set up, to which, all fees, charges and grants are credited. This fund is used to meet the expenses of the Board and to pay salary of staff and members of the body.


SEBI Guidelines

[Guidelines for Primary Market – Guidelines for Public Issue – Guidelines for Secondary Market - Guidelines for Foreign Institutional Investors - Guidelines on Bonus Issues – Guidelines on Right Issue – Guidelines on Underwriters]

I. Guidelines for Primary Market

New company

A new company is one which has not completed 12 months commercial production and doesn’t have audited results or where the promoters do not have a track record. Such companies will have to issue shares only at par.

A new company set up by existing companies with a five year track record of consistent profitability and a contribution of at least 50 % in the equity share of new company, it can issue its shares at premium i.e., it is free to price its issue.

Private and Closely held companies having a track record of consistent profitability for at least three years shall be permitted to price their issues freely. The issue price shall be fixed only after consulting with the lead managers to the issue.

Existing listed companies will be allowed to raise fresh capital by freely pricing expanded capital, provided the promoter’s contribution is 50% on first Rs.loo crores of issue, 40% on next Rs.2oo crores, 30% on next Rs.3oo crores and 15 % on balance issue amount.

In the case of composite issues (rights cum: public issue) by existing listed companies, differential pricing shall be allowed. However, justification for the price difference should be given in the offer document.

Lock in period is five years for promoter’s contribution from the date of allotment or from the commencement of commercial production whichever is later. At present, the lock in period has been reduced to one year.


II. Guidelines for Public Issue

1.Abridged prospectus has to be attached with every application.
2.A company has to highlight the risk factors in the prospectus.
3.Objective of the issue and cost of project should be mentioned m the prospectus.
4.Company’s management, past history and present business of the firm should be highlighted in the prospectus.
5.Particulars regarding the company and other listed companies under the same management which made any capital issue during last three years are to be stated in the prospectus.
6.Justification for premium, incase premium is to be stated.
7.Subscription list for public issues should be kept open for a minimum of 3 days and a maximum of 40 working days.
8.The collection centers should be at least 30 which include all centers with stock exchanges.
9.Collection agents are not allowed to collect application money in cash.
10.The quantum of issue shall not exceed the amount specified in the prospectus. No retention of over subscription is permitted.
11.Minimum number of shares per application has been fixed at 500 shares of face value of Rs.loo/-
12.The allotments have to be made in multiples of tradable lot of 100 shares of Rs.1O each.
13.Issues by way of bonus, rights etc. to be made in appropriate lots to minimize odd lots.
14.If minimum subscription of 90% has not been received, the entire amount is to be refunded to investors within 120 days.
15.The capital issue should be fully paid up within 120 days.
16.Underwriting has been made mandatory.

III. Guidelines for Secondary Market


Stock Exchanges

1.Board of Directors of stock exchange has to be reconstituted so as to include non members, public representatives and government representatives to the extent of 50% of total number of members.
2.Capital adequacy norms have been laid down for members of various stock exchanges depending upon their turnover of trade and other factors.
3.Working hours for all stock exchanges have been fixed uniformly.
4.All the recognized stock exchange will have to inform about the transaction within 24 hours.
5.Guidelines have been issued for introducing the system of market making in less liquid scrips in a phased manner in all Stock Exchanges.

Brokers

1.Registration of brokers and sub-brokers is made compulsory.
2.In order to ensure professional qualification and financial solvency, capital adequacy norms for registration of brokers have been evolved.
3.Compulsory audit of broker’s book and filing of audit report with SEBI have been made mandatory.
4.For greater transparency and accountability in broker-client relationship, SEBI has made it mandatory for brokers to disclose transaction price and brokerage separately in the contract notes issued to the clients.
5.No broker is allowed to underwrite more than 5% of public issues.

IV. Guidelines for Foreign Institutional Investors (FIIs)

1.Foreign Institutional Investors have been allowed to invest in all securities traded in primary and secondary markets.
2.There would be no restriction on the volume of investment for the purpose of entry of Foreign Institutional Investors.
3.The holding of Single Foreign Institutional Investor in a company will not exceed the ceiling of 5 % of the equity capital of the company.
4.Disinvestment will be allowed only through stock exchanges in India.
5.Foreign Institutional Investors have to pay a concessional tax rate of 10% on long term capital gain (to others - 20%) and 30% on short term capital gains. A tax rate of 20% on dividend and interest is prescribed.


V. Guidelines on Bonus Issues

The following are the SEBI guidelines relating to the issue of bonus shares.

1.There should be a provision in the Articles of Association of the company for the issue of bonus shares. If not, the company should pass a resolution for capitalization of reserves and should be recommended by the Board of Directors.
2.The bonus issue is made out of free reserves built out of genuine profits or share premiums collected in cash only.
3.Reserves created by revaluation of fixed assets are not ‘permitted to be capitalized.
4.The declaration of bonus issues in lieu of dividend is not to be made.
5.Bonus issues are not permitted, unless the existing partly paid shares are fully paid.
6.No bonus issues shall be permitted, if the company has defaulted in respect of payment of statutory dues to the employees.
7.No bonus issue can be made within 12 months of any public issue or right issue.
8.No bonus issue will be permitted if the company defaults in payment of principal or interest on fixed deposit or on debentures.
9.When a company announces the issue of bonus shares, it must be implemented within 6 months from the date of such proposal and shall not have the option of changing the decision.
10.The bonus issues after public or right issues shall not dilute the value or rights of the holders of fully or partly convertible debentures.

VI. Guidelines on Right Issues

1.Where composite issues are made by listed companies, they can be issued at different prices.
2.Gaps between the clearance dates of right issues and public issues should not exceed 30 days.
3.If right issues of listed companies exceed Rs.50 lakhs, issue should be managed by an authorized merchant banker.
4.Underwriting of right issues is not mandatory but as per SEBI Rules right issues can be underwritten.
5.No preferential allotment shall be made along with the right issues.
6.If the company doesn’t receive minimum subscription (90% of the issue amount) within 120 days from the date of opening issue, the entire subscription should be refunded within 128 days with interest @ 15 % p.a. for delay. .
7.The proposed right issue should not dilute the value or rights of fully or partly convertible debenture holders.
8.The issue should not exceed the quantum specified in the prospectus i.e., no part of over subscription is retained.
9.Within 45 days of closure of rights issue, a report in the prescribed form along with compliance report duly signed by the statutory auditor should be forwarded to SEBI.
10.All listed companies making rights issue shall issue an advertisement in at least two All India newspapers about the dispatch of letters of offer, opening date, closing date etc.


VII. SEBI Guidelines on Underwriters

1.No person can act as an underwriter, unless he holds certificate of registration granted by SEBI.
2.The certificate of registration is valid for 3 years from the date of issue.
3.The total underwriting obligations shouldn’t exceed 20 times of his net worth.
4.The underwriter should subscribe securities within 30 days of the receipt of the intimation from the company.
5.The underwriter should furnish within six months from the end of the financial year a copy of the Balance Sheet, Profit and Loss Account, the statement of capital adequacy requirement etc. as required by SEBI.
6.The books of accounts should be maintained for a period of 5 years.