SECURITY ANALYSIS & PORTFOLIO

MANAGEMENT

ASSIGNMENT ON SEBI

MOHIT MALHOTRA
PGDM-IB
TRISEM -IV
OBJECTIVES OF SEBI

Securities and Exchange Board of India (SEBI) was first established in the year 1988 as a non-
statutory body for regulating the securities market. It became an autonomous body in 1992 and
more powers were given through an ordinance Securities and Exchange Board of India Act,
1992. Since then it regulates the market through its independent powers.

The basic objectives of the Board were identified as:

• to protect the interests of investors in securities;

• to promote the development of Securities Market;
• to regulate the securities market and
• for matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the
eligibility criteria, the code of obligations and the code of conduct for different intermediaries
like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, credit rating
agencies, underwriters and others. It has framed bye-laws, risk identification and risk
management systems for Clearing houses of stock exchanges, surveillance system etc. which has
made dealing in securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000. A market Index is a convenient and effective product because of the following
reasons:

• It acts as a barometer for market behavior;

• It is used to benchmark portfolio performance;
• It is used in derivative instruments like index futures and index options;
• It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also
to diversify the trading products, so that there is an increase in number of traders including
banks, financial institutions, insurance, mutual funds, primary dealers etc. to transact through the
Exchanges. In this context the introduction of derivatives trading through Indian Stock
Exchanges permitted by SEBI in 2000.
However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to
include "derivatives" in the definition of securities to enable SEBI to introduce trading in
derivatives. The necessary amendment was then carried out by the Government in 1999. The
Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework
was approved.

Derivatives have been accorded the status of `Securities'. The ban imposed on trading in
derivatives in 1969 under a notification issued by the Central Government was revoked.
Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock
Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE
started trading in the year 2001.
 POWERS AND FUNCTIONS OF THE BOARD

Functions of Board.

Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests
of investors in securities and to promote the development of, and to regulate the securities
market, by such measures as it thinks fit.

Without prejudice to the generality of the foregoing provisions, the measures referred to therein
may provide for -

 Regulating the business in stock exchanges and any other securities markets;

 Registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in any manner;

 Registering and regulating the working of the depositories, participants, custodians of

securities, foreign institutional investors, credit rating agencies and such other
intermediaries as the Board may, by notification, specify in this behalf;

 Registering and regulating the working of venture capital funds and collective investment
schemes],including mutual funds;

 promoting and regulating self-regulatory organizations;

 prohibiting fraudulent and unfair trade practices relating to securities markets;

 promoting investors' education and training of intermediaries of securities markets;

 prohibiting insider trading in securities;

 regulating substantial acquisition of shares and take-over of companies;

 calling for information from, undertaking inspection, conducting inquiries and audits of
the stock exchanges, mutual funds, other persons associated with the securities market]
intermediaries and self- regulatory organizations in the securities market;

 Calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or Provincial Act in
respect of any transaction in securities which is under investigation or inquiry by the
Board;”

 Performing such functions and exercising such powers under the provisions of the
Securities Contracts (Regulation) Act, 1956(42 of 1956), as may be delegated to it by the
Central Government;

 Levying fees or other charges for carrying out the purposes of this section;

 Conducting research for the above purposes;

 Calling from or furnishing to any such agencies, as may be specified by the Board, such
information as may be considered necessary by it for the efficient discharge of its
functions;
  Performing such other functions as may be prescribed.

Without prejudice to the provisions contained in sub-section (2), the Board may
take measures to undertake inspection of any book, or register, or other document or
record of any listed public company or a public company (not being intermediaries
referred to in section 12) which intends to get its securities listed on any recognized stock
exchange where the Board has reasonable grounds to believe that such company has been
indulging in insider trading or fraudulent and unfair trade practices relating to securities
market.

Notwithstanding anything contained in any other law for the time being in force while
exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section (2A)], the
Board shall have the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:

(i) The discovery and production of books of account and other documents, at
such place and such time as may be specified by the Board;

(ii) Summoning and enforcing the attendance of persons and examining them on
oath;

(iii) Inspection of any books, registers and other documents of any person referred
to in section 12, at any place;]

(iv)Inspection of any book, or register, or other document or record of the company referred to
in sub-section (2A);

(v) Issuing commissions for the examination of witnesses or documents.

Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and
section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of
investors or securities market, take any of the following measures, either pending investigation
or inquiry or on completion of such investigation or inquiry, namely:-

(a) Suspend the trading of any security in a recognized stock exchange;

(b) Restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities;

(c) Suspend any office-bearer of any stock exchange or self- regulatory

organization from holding such position;

(d) Impound and retain the proceeds or securities in respect of any transaction
which is under investigation;
 (e) Direct any intermediary or any person associated with the securities market in
any manner not to dispose of or alienate an asset forming part of any transaction which is
under investigation:

Provided that the Board may, without prejudice to the provisions contained in sub-section (2)
or sub-section (2A), take any of the measures specified in clause (d) or clause (e) in respect
of any listed public company or a public company (not being intermediaries referred to in
section 12) which intends to get its securities listed on any recognized stock exchange where
the Board has reasonable grounds to believe that such company has been indulging in insider
trading or fraudulent and unfair trade practices relating to securities market:

Provided further that the Board shall, either before or after passing such orders, give an
opportunity of hearing to such intermediaries or persons concerned.]

Board to regulate or prohibit issue of prospectus, offer document or advertisement

soliciting money for issue of securities.

11A (1) Without prejudice to the provisions of the Companies Act, 1956(1 of 1956), the Board
may, for the protection of investors, -

(a) specify, by regulations –

(i) the matters relating to issue of capital, transfer of securities and other matters incidental
thereto; and

(ii) the manner in which such matters shall be disclosed by the companies;

(b) by general or special orders –

(i) prohibit any company from issuing prospectus, any offer document, or advertisement
soliciting money from the public for the issue of securities;

(ii)specify the conditions subject to which the prospectus, such offer document or
advertisement, if not prohibited, may be issued.

(2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation)
Act, 1956(42 of 1956), the Board may specify the requirements for listing and transfer of
securities and other matters incidental thereto."]
ABOUT SAT-SECURITIES APPELLATE TRIBUNAL

SEBI Act has transformed the securities market into one which can be compared with the
advanced countries. To redress grievances relating to the securities market, SEBI Act framed
regulations and pursuant to S 15K of the Act, SEBI established the Securities Appellate
Tribunal, formerly SEBI Appellate Tribunal and the word `SEBI’ was substituted by the word
`Securities’ in 1995.

Since 1995, all cases concerning securities laws which were to be appealed against came to be
dealt by SAT only. To-day the securities laws constitute the Securities Contracts (Regulation)
Act, 1956 (`SCRA’), the Securities and Exchange Board of India Act, 1992 (‘SEBI ACT’) and
the Depositories Act, 1996 (`DA’). SEBI regulates the securities market and SAT acts as a
watchdog to ensure justice.

Tribunal, SAT and Civil Procedure Code

Article 227 of the Constitution of India defines ‘tribunal’ as a person or a body other than a
Court set up by the State for deciding rights of contending parties in accordance with rules
framed for regulation having force of law. It is a Court or forum of justice; a person or body of
persons having authority to hear and decide disputes to bind disputants. Tribunal, distinguished
from a court, exercises judicial power and decides matters judicially or quasi-judicially.

It does not constitute a court in technical sense. Expression ‘civil court’ includes all courts of
which decide disputed rights between subjects or between a subject and the State would be
matter to be decided by civil courts as opposed to criminal courts where the state indicates
wrongs committed against the public.

SEBI Act provides that no civil court shall have jurisdiction to entertain a suit or proceeding in
respect of any matter in which an adjudicating officer (`AO’) is appointed under the Act or SAT
is empowered by or under the Act to determine and no injunction shall be granted by any court
or other authority in respect of any action taken or to be taken in pursuance of any power
conferred by or under the Act.

S 15Z states that any order of SAT can be appealed before the Supreme Court within a period of
60 days. However, as per S 15 T (2) of the SEBI Act provides that after the commencement of
the Securities Laws (Second Amendment) Act, 1999, no appeal shall lie on orders passed by an
adjudicating officer with the consent of the parties.

As per S 15 T (3) appeal is to be filed before SAT within 45 days from the receipt of the copy of
the order of SEBI or AO accompanied by the prescribed fees. 45 days period time limit may be
extended if the Tribunal is satisfied that there was sufficient cause for not filing the appeal within
the time limit. SAT shall send copy of the order to SEBI, parties to the appeal and concerned
Adjudicating Officer. All appeals filed before SAT is to be disposed of within 6 months of
the filing the appeal.

S 15 U of the Act provides that SAT shall not be regulated by the procedure of the Code of Civil
Procedure, 1908 (‘CPC’). SAT is guided on the principles of natural justice subject to other
provisions of the Act and rules. SAT has the power to frame their own procedure and fix
places of hearing. As regards discharge of functions, SAT has the same powers as vested in a
civil court under the CPC for:

a) summoning and enforcing attendance of any person and examining him on oath; b)
requiring discovery and production of documents; c) receiving evidence on affidavits; d)
issuing commissions for examination of witnesses or documents; e) reviewing its decisions; f)
dismissing an application for default or deciding it ex-parte; g) setting aside any order of
dismissal of any application for default or any order passed by it ex-parte; and h) any other
matter which may be prescribed.
4. Penalties that may be imposed by SEBI for acts and omissions under the Chapter are:

1. S 15A – Penalty for failure to furnish information, return etc., 2. S 15B - Penalty for failure
by any person to enter into agreement with clients; 3. S 15 C- Penalty for failure to redress
investors’ grievances ; 4. S 15 D – Penalty for certain defaults in case of mutual funds; 5. S 15
E – Penalty for failure to observe rules and regulations by an asset management company; 6. S
15 F- Penalty for failure in case of stock brokers; 7. S 15 G – Penalty for insider trading; 8. S
15 H – Penalty for non-disclosure of share and takeovers; 9. S 15 HA - Penalty for fraudulent
and unfair trade practices; 10. S 15 J – Factors to be taken into account by the adjudicating
officer; 11. S 15 JA. – Crediting sums realized by way of penalties to Consolidated Fund of
India.
SEBI shall appoint an AO for holding inquiry who shall not be below the rank of Division Chief.
Reasonable opportunity of being heard shall be given before imposition of penalty.

5. The Depositories (Appeal to Securities Appellate Tribunal) Rules, 2000

The rules were notified vide GSR 143(E) dated 18/2/2000. Violation under the Depositories Act,
1996 is adjudicated by an AO not below the rank of Divisional Chief of SEBI to determine :

i) Penalty for failure to furnish information return etc.( S 19A).ii) Penalty for failure to enter
into an agreement. ( S 19B).iii) Penalty for failure to redress Investors grievances. (S 19C). iv)
Penalty for delay in dematerialization or issue of certificate of securities. (S 19D).v) Penalty for
failure to reconcile records.( S 19E).vi) Penalty for failure with directions issued by Board u/s
19 of the Act.( S 19F).vii) Penalty for contravention where no separate penalty has been
provided. (S 19G). S 19 I states while adjudging the amount of penalty u/s 19H , the AO shall
consider the following factors:
a) amount of disproportionate gain or unfair advantage whenever quantifiable, made as a result
of the default; and
b) the amount of loss caused to an investor or group of as a result of the default.

The Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal)

Rules,2000.

The rules were framed to deal with appeals arising out of decisions taken by SEs particularly
when a SE acting as per the power given to it by its bye-laws, refuses to list securities, the
aggrieved company is entitled to file an appeal before SAT stating the reasons for such refusal
and may:
(a) within 15 days from the date on which the reasons for such refusal are furnished to it, or
(b) where the SE omitted or failed to dispose of, within the time specified in ssc (1A) of
section (1A) of S 73 of the Companies Act,1956 the application for permission for the shares or
debentures to be dealt with on the SE, within 15 days from the date of expiry of the specified
time or within such further period not exceeding 1 month as SAT may on sufficient cause being
shown, allow appeal to SAT having jurisdiction in the matter against such refusal, omission or
failure as the case may be.
Appeal can be filed within 45 days from the date of the order in respect of any security/units or
other instruments of a `collective instrument scheme’ defined under the SEBI Act.

Conclusion

MCA, SEBI and SAT are all working for the emergence of a transparent capital market to
investors. Through investor education, adoption of measures by the Government investor base is
set to increase. To-day household savings have increased manifold and if the savings can be
channelized to the capital market, industrial base of the country will broaden finally signaling
industrial progress.

INSIDER TRADING

Who is an insider?

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992,
say, "insider" is any person who, is or was connected with the company, and who is reasonably
expected to have access to unpublished price-sensitive information about the stock of that
particular company, or who has access to such unpublished price sensitive information.

Information that could be price sensitive includes periodical financial results of a company,
intended declaration of dividend, issue or buyback of securities, any major expansion plans or
execution of new projects, amalgamation, merger, takeovers, disposal of the whole or substantial
part of the undertaking and any other significant changes in policies, plans or operations of the
company.

However, insider trading isn't always illegal. Trading by a company insider in its shares is not
violation per se and is legal. What is illegal is the trading by an insider on the basis of
unpublished price-sensitive information.

Insider trading violations may also include 'tipping' such information and the person using it.

How does insider trading work?

An insider buys the stock (he might also already own it). He then releases price-sensitive
information to a small group of people close to him, who buy the stock based on it, and spread
the information further. This results in an increase in volumes and prices of the stock. The inside
information has now become known to a larger group of people which further pushes up
volumes and prices of the stock.

After a certain price has been reached, which the insider knows about, he exits, as do the ones
close to him, and the stock's price falls. Those who had inside information are safe while the
ordinary retail investor is stuck holding a white elephant as, in many cases, the 'tip' reaches him
only when the stock is already on a boil.

The regular investor gets on the bandwagon rather late in the day as he is away from the buzz
with no direct connection to the 'real' source. He buys the overvalued stock due to imbalance in
the information flow.

Difficult to prove

While it's common knowledge that insider trading takes place, it is very difficult to prove.
Insiders may not trade on their own account. Flow of information is another important factor, but
difficult to track. Regulations are in place to prevent this, but the stock price of a company
invariably tends to move up or down at least a couple of weeks ahead of any price-sensitive
announcement.

Take the case of IFCI. The stock has been on fire since early January 2007. It gained almost 53
per cent in eight trading sessions from Rs 13.45 before the announcement of its 7-per cent stake
sale in NSE was made in January 2007.

The stock also gained 30 per cent in 12 sessions before the announcement to appoint Ernst &
Young for advising the company on induction of a strategic investor in the company was made in
March 2007. From this level, the run up in the stock has been over 210 per cent.

While it is not possible to say that insider trading took place in this case, little else explains the
share price movement.

The expected strategic sale was called off in December 2007, and the stock shed almost 23 per
cent in one session. Investors, who got on the bandwagon at around Rs 70-74 in early September
2007 and did not sell by this time, would have lost all their gains.

Innocent till proven guilty. Considering the sensitivity of the subject and the evidence required to
allege and prove it, the instances of insider trading that get reported are far and few. Says
Bhavesh Shah, vice-president (research), Asit C Mehta Investment Intermediates: "Majority of
the cases that have been reported and acted upon by the exchange and the Sebi has been too few
and the action too late. A study of the reported cases on insider trading in Securities Appellate
Tribunal (SAT) very clearly reflects a complex web of transactions of unusual nature put through
for extraordinary gains by few interested parties. However, in almost all cases the Sebi has not
managed to bring the culprit to book for one or the other reason."

The key is in detecting and preventing

"Although many factors can lead to spikes in trading, deviations of the kind observed by
measured markets (an entity which carries out early warning services for stocks) are among the
data used by regulators in the US to spot insider trading," says a broking industry source. In the
US, of the 90 big mergers that took place in 2007, shares of 37 target companies exhibited
abnormal trading in the days and weeks before the deals were disclosed.

One way to reduce insider trading is to make it more costly and difficult, which calls for strict
surveillance measure and penalties. "Exchanges and the Sebi require professionals from the
market on their payroll for carrying out this function. Good surveillance software would keep
continuously pointing out to unusual trading pattern on a real-time basis," says Shah.

Market regulator Sebi has put in place a comprehensive Integrated Market Surveillance System
to track trading data from all the market participants stock exchanges, depository participants,
custodians as well as data of clearing houses. This system is expected to help it detect potential
and accomplished insider trading and manipulation or fraud violations across financial
instruments and markets. How effective will this system be, is yet to be known.

Market plague

The impact of insider trading on the small investor is negative both from the point of view of
their financial interest and also their confidence in the markets. It is extremely detrimental to the
growth of a healthy capital market where all participants, big and small, can step in with
confidence of a fair play. In an efficient market, even one share traded on insider trading violates
the integrity of the markets.

The efficient market hypothesis asserts that financial markets are "informational efficient". This
means that the share price already reflects all known information and is unbiased. It reflects the
collective beliefs of all investors about future prospects.

In reality, however, there are those who are in the know, and those who get the news too late.

How to safeguard yourself

So, is it that those who are not in the know will always be left high and dry? Investors can
exercise certain precautions so that they don't get caught in this whirlpool of the information
game. Keen observation is needed to remain safe.
You need to be on the alert for strong price movement in the stocks you monitor, increasing
volume but no news flow about those stocks or without any apparent improvement in the
reported numbers. This could be difficult for those who believe in momentum, and while there is
a good chance that they might lose out on some potential gains, the primary aim, however,
should be to protect capital and not get stuck at a higher price with limited scope for capital
appreciation.

If you do buy a scrip based on a tip, try and book early profits. Do not wait to catch the top as the
downfall, when it comes, will be swift and sudden. If it's a company that you have never heard
about, or it's of an industry that you have no idea about, it is best to forego the possibility of a
quick profit and ignore the tip altogether.