SECURITY ANALYSIS & PORTFOLIO MANAGEMENT ASSIGNMENT ON SEBI

MOHIT MALHOTRA PGDM-IB TRISEM -IV

bankers to issue. financial institutions. Two broad approaches of SEBI is to integrate the securities market at the national level. establishment of clearing corporations etc. risk identification and risk management systems for Clearing houses of stock exchanges. credit rating agencies. to promote the development of Securities Market. It can be used for passive fund management as in case of Index Funds. A market Index is a convenient and effective product because of the following reasons: • • • • It acts as a barometer for market behavior. surveillance system etc. and also to diversify the trading products. the eligibility criteria. which has made dealing in securities both safe and transparent to the end investor. It has framed bye-laws. Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. so that there is an increase in number of traders including banks. primary dealers etc. It is used in derivative instruments like index futures and index options. margining. insurance. Since then it regulates the market through its independent powers. It became an autonomous body in 1992 and more powers were given through an ordinance Securities and Exchange Board of India Act. . 1992. brokers and sub-brokers. registrars. SEBI has introduced the comprehensive regulatory measures. prescribed registration norms. the code of obligations and the code of conduct for different intermediaries like. to regulate the securities market and for matters connected therewith or incidental thereto. underwriters and others. The basic objectives of the Board were identified as: • • • • to protect the interests of investors in securities. The improvements in the securities markets like capitalization requirements. reduced the risk of credit and also reduced the market. mutual funds. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. It is used to benchmark portfolio performance. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000. merchant bankers.OBJECTIVES OF SEBI Securities and Exchange Board of India (SEBI) was first established in the year 1988 as a nonstatutory body for regulating the securities market. to transact through the Exchanges.

. The Securities Laws (Amendment) Bill. Derivatives have been accorded the status of `Securities'. In December 1999 the new framework was approved. The necessary amendment was then carried out by the Government in 1999. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001.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. 1999 was introduced. 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.

merchant bankers. underwriters. share transfer agents. 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 venture capital funds and collective investment schemes]. credit rating agencies and such other intermediaries as the Board may. by such measures as it thinks fit. custodians of securities.  Registering and regulating the working of the depositories. bankers to an issue. sub-brokers. participants. it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of. Without prejudice to the generality of the foregoing provisions. trustees of trust deeds.POWERS AND FUNCTIONS OF THE BOARD Functions of Board. by notification. foreign institutional investors.  promoting and regulating self-regulatory organizations. specify in this behalf.  promoting investors' education and training of intermediaries of securities markets. investment advisers and such other intermediaries who may be associated with securities markets in any manner.including mutual funds.  Registering and regulating the working of stock brokers. registrars to an issue.  prohibiting fraudulent and unfair trade practices relating to securities markets. . and to regulate the securities market. portfolio managers. Subject to the provisions of this Act.

 calling for information from.  Levying fees or other charges for carrying out the purposes of this section. .regulatory organizations in the securities market. such information as may be considered necessary by it for the efficient discharge of its functions. undertaking inspection.  Conducting research for the above purposes. as may be specified by the Board. 1956(42 of 1956). conducting inquiries and audits of the stock exchanges. State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board. prohibiting insider trading in securities.  Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central.  regulating substantial acquisition of shares and take-over of companies. other persons associated with the securities market] intermediaries and self. as may be delegated to it by the Central Government. mutual funds.”  Performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act.  Calling from or furnishing to any such agencies.

by an order. for reasons to be recorded in writing. in respect of the following matters. Performing such other functions as may be prescribed. namely: (i) The discovery and production of books of account and other documents. (2). or register. at any place. take any of the following measures. namely:(a) Suspend the trading of any security in a recognized stock exchange. sell or deal in securities. registers and other documents of any person referred to in section 12. 1908 (5 of 1908). the Board may. the Board may take measures to undertake inspection of any book. (c) Suspend any office-bearer of any stock exchange or self. (v) Issuing commissions for the examination of witnesses or documents. (iii) Inspection of any books. at such place and such time as may be specified by the Board. or other document or record of the company referred to in sub-section (2A). in the interests of investors or securities market.regulatory organization from holding such position. 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)].] (iv)Inspection of any book. (2A) and (3) and section 11B. (b) Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy. either pending investigation or inquiry or on completion of such investigation or inquiry. . (ii) Summoning and enforcing the attendance of persons and examining them on oath. the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure. (d) Impound and retain the proceeds or securities in respect of any transaction which is under investigation. Without prejudice to the provisions contained in sub-sections (1). Without prejudice to the provisions contained in sub-section (2). or register. while trying a suit.

"] . 1956(42 of 1956). without prejudice to the provisions contained in sub-section (2) or sub-section (2A). offer document or advertisement soliciting money for issue of securities. (2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act.] Board to regulate or prohibit issue of prospectus. (b) by general or special orders – (i) prohibit any company from issuing prospectus.(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. any offer document. if not prohibited. for the protection of investors. and (ii) the manner in which such matters shall be disclosed by the companies. (a) specify. by regulations – (i) the matters relating to issue of capital. give an opportunity of hearing to such intermediaries or persons concerned. 11A (1) Without prejudice to the provisions of the Companies Act. or advertisement soliciting money from the public for the issue of securities. 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. the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto. the Board may. transfer of securities and other matters incidental thereto. (ii)specify the conditions subject to which the prospectus. such offer document or advertisement. may be issued. 1956(1 of 1956). either before or after passing such orders.

1992 (‘SEBI ACT’) and . Since 1995. SEBI Act framed regulations and pursuant to S 15K of the Act. To-day the securities laws constitute the Securities Contracts (Regulation) Act. the Securities and Exchange Board of India Act. formerly SEBI Appellate Tribunal and the word `SEBI’ was substituted by the word `Securities’ in 1995.ABOUT SAT-SECURITIES APPELLATE TRIBUNAL SEBI Act has transformed the securities market into one which can be compared with the advanced countries. 1956 (`SCRA’). all cases concerning securities laws which were to be appealed against came to be dealt by SAT only. To redress grievances relating to the securities market. SEBI established the Securities Appellate Tribunal.

S 15Z states that any order of SAT can be appealed before the Supreme Court within a period of 60 days. However.the Depositories Act. a person or body of persons having authority to hear and decide disputes to bind disputants. as per S 15 T (2) of the SEBI Act provides that after the commencement of the Securities Laws (Second Amendment) Act. 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. parties to the appeal and concerned Adjudicating Officer. b) requiring discovery and production of documents. Tribunal. no appeal shall lie on orders passed by an adjudicating officer with the consent of the parties. SAT is guided on the principles of natural justice subject to other provisions of the Act and rules. g) setting aside any order of dismissal of any application for default or any order passed by it ex-parte. 1908 (‘CPC’). It is a Court or forum of justice. distinguished from a court. c) receiving evidence on affidavits. 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. It does not constitute a court in technical sense. f) dismissing an application for default or deciding it ex-parte. S 15 U of the Act provides that SAT shall not be regulated by the procedure of the Code of Civil Procedure. 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. 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. SEBI regulates the securities market and SAT acts as a watchdog to ensure justice. SAT has the power to frame their own procedure and fix places of hearing. exercises judicial power and decides matters judicially or quasi-judicially. e) reviewing its decisions. As regards discharge of functions. . 1996 (`DA’). 1999. d) issuing commissions for examination of witnesses or documents. 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. 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. SAT shall send copy of the order to SEBI. Tribunal. and h) any other matter which may be prescribed. All appeals filed before SAT is to be disposed of within 6 months of the filing the appeal.

allow appeal to SAT having jurisdiction in the matter against such refusal. (S 19C). . made as a result of the default. S 15B . the AO shall consider the following factors: a) amount of disproportionate gain or unfair advantage whenever quantifiable. S 19 I states while adjudging the amount of penalty u/s 19H . 9. S 15 J – Factors to be taken into account by the adjudicating officer. 2.. – Crediting sums realized by way of penalties to Consolidated Fund of India.2000. 2000 The rules were notified vide GSR 143(E) dated 18/2/2000.( S 19E). S 15 H – Penalty for non-disclosure of share and takeovers.Penalty for failure by any person to enter into agreement with clients. omission or failure as the case may be. 11. 6. Penalties that may be imposed by SEBI for acts and omissions under the Chapter are: 1. iv) Penalty for delay in dematerialization or issue of certificate of securities. S 15 D – Penalty for certain defaults in case of mutual funds. within the time specified in ssc (1A) of section (1A) of S 73 of the Companies Act.( S 19A).1956 the application for permission for the shares or debentures to be dealt with on the SE.Penalty for fraudulent and unfair trade practices. 7. 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.( S 19F).Penalty for failure in case of stock brokers. The Depositories (Appeal to Securities Appellate Tribunal) Rules. (S 19D). S 15 C. S 15 G – Penalty for insider trading. 5. (S 19G).ii) Penalty for failure to enter into an agreement. 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. 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. S 15A – Penalty for failure to furnish information. The Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules. 10. 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.vi) Penalty for failure with directions issued by Board u/s 19 of the Act.v) Penalty for failure to reconcile records. 3.iii) Penalty for failure to redress Investors grievances. 5. S 15 HA . refuses to list securities. or (b) where the SE omitted or failed to dispose of. 4. return etc. ( S 19B). Violation under the Depositories Act. 8.Penalty for failure to redress investors’ grievances .4. S 15 JA. SEBI shall appoint an AO for holding inquiry who shall not be below the rank of Division Chief.vii) Penalty for contravention where no separate penalty has been provided. and b) the amount of loss caused to an investor or group of as a result of the default. Reasonable opportunity of being heard shall be given before imposition of penalty. S 15 E – Penalty for failure to observe rules and regulations by an asset management company. S 15 F.

Conclusion MCA. However. or who has access to such unpublished price sensitive information. To-day household savings have increased manifold and if the savings can be channelized to the capital market. INSIDER TRADING Who is an insider? The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations. 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. issue or buyback of securities. amalgamation. merger. Insider trading violations may also include 'tipping' such information and the person using it. takeovers. plans or operations of the company.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. industrial base of the country will broaden finally signaling industrial progress. adoption of measures by the Government investor base is set to increase. 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. Information that could be price sensitive includes periodical financial results of a company. insider trading isn't always illegal. disposal of the whole or substantial part of the undertaking and any other significant changes in policies. say. intended declaration of dividend. any major expansion plans or execution of new projects. SEBI and SAT are all working for the emergence of a transparent capital market to investors. "insider" is any person who. Through investor education. How does insider trading work? . 1992.

little else explains the share price movement. Take the case of IFCI. 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. Difficult to prove While it's common knowledge that insider trading takes place. From this level. and spread the information further. the instances of insider trading that get reported are far and few. The inside information has now become known to a larger group of people which further pushes up volumes and prices of the stock. who buy the stock based on it. It gained almost 53 per cent in eight trading sessions from Rs 13. 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. A study of the reported cases on insider trading in Securities Appellate . He then releases price-sensitive information to a small group of people close to him. While it is not possible to say that insider trading took place in this case.An insider buys the stock (he might also already own it). the run up in the stock has been over 210 per cent. vice-president (research).45 before the announcement of its 7-per cent stake sale in NSE was made in January 2007. This results in an increase in volumes and prices of the stock. Insiders may not trade on their own account. would have lost all their gains. who got on the bandwagon at around Rs 70-74 in early September 2007 and did not sell by this time. Says Bhavesh Shah. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as. he exits. but difficult to track. After a certain price has been reached. which the insider knows about. Flow of information is another important factor. Considering the sensitivity of the subject and the evidence required to allege and prove it. 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. Regulations are in place to prevent this. as do the ones close to him. Investors. and the stock's price falls. it is very difficult to prove. The expected strategic sale was called off in December 2007. 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. and the stock shed almost 23 per cent in one session. the 'tip' reaches him only when the stock is already on a boil. He buys the overvalued stock due to imbalance in the information flow. Innocent till proven guilty. in many cases. The stock has been on fire since early January 2007.

" says Shah. In the US. depository participants. can step in with confidence of a fair play." says a broking industry source. 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 reflects the collective beliefs of all investors about future prospects. shares of 37 target companies exhibited abnormal trading in the days and weeks before the deals were disclosed. big and small." The key is in detecting and preventing "Although many factors can lead to spikes in trading. However. there are those who are in the know. custodians as well as data of clearing houses. Keen observation is needed to remain safe. 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. of the 90 big mergers that took place in 2007. In an efficient market. is yet to be known.Tribunal (SAT) very clearly reflects a complex web of transactions of unusual nature put through for extraordinary gains by few interested parties. even one share traded on insider trading violates the integrity of the markets. This system is expected to help it detect potential and accomplished insider trading and manipulation or fraud violations across financial instruments and markets. and those who get the news too late. Market regulator Sebi has put in place a comprehensive Integrated Market Surveillance System to track trading data from all the market participants stock exchanges. How effective will this system be. This means that the share price already reflects all known information and is unbiased. Good surveillance software would keep continuously pointing out to unusual trading pattern on a real-time basis. however. "Exchanges and the Sebi require professionals from the market on their payroll for carrying out this function. How to safeguard yourself So. . in almost all cases the Sebi has not managed to bring the culprit to book for one or the other reason. The efficient market hypothesis asserts that financial markets are "informational efficient". which calls for strict surveillance measure and penalties. It is extremely detrimental to the growth of a healthy capital market where all participants. In reality. One way to reduce insider trading is to make it more costly and difficult. 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.

or it's of an industry that you have no idea about. increasing volume but no news flow about those stocks or without any apparent improvement in the reported numbers.You need to be on the alert for strong price movement in the stocks you monitor. Do not wait to catch the top as the downfall. If it's a company that you have never heard about. when it comes. however. try and book early profits. will be swift and sudden. and while there is a good chance that they might lose out on some potential gains. 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. it is best to forego the possibility of a quick profit and ignore the tip altogether. . This could be difficult for those who believe in momentum. the primary aim.

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