SEBI: ROLE IN BUSINESS DEVELOPMENT

The importance and contribution of a capital market to an economy is paramount. This happens
through the securing of long-term savings which leads to the investment in for better purposes
which leads to economic growth and development. The capital market is a modern day reality, an
ever-changing and adaptive market proportioning both risk and investment at the same time. In a
country like India, where we possess the gifts of natural resources and extensive human capital,
the only thing lacking is capital to put these resources to use and this gives even more
importance to the capital market. A capital market includes primary and secondary market and in
India it is a well- integrated structure with Issuers, Stock Exchangers, Merchant Bankers,
Investors, Stock Brokers, Depositories, Depository Participants and a Market Regulator. It is
imperative to note that the contribution of the capital market is only possible if the Market
Regulator is effective as this ensure investor interest protection and investor confidence leading
to a growth oriented securities market.

The capital issues control was introduced in India for the first time in May, 1943 under the
Defence of India Act, 1939. This was followed by Capital Issues Control Act, 1947 which was
simultaneously permanently placed in the Statute Book in 1956. The control was administered by
the Finance Ministry’s Department of Economic Affairs through the office of the Controller of
Capital Issues. However this was found ineffective in dealing with the malpractices of the stock
market and simultaneously the economic boom in the Indian Economy during the period of
1980s further expanded the economy. In this period several investors were duped by companies
presenting rosy pictures about the security of investments, high dividends and capital
appreciation. This resulted in low investor confidence and a need to check the unethical
practices, insider trading, market pricing as well as a need for regulation of both the primary and
secondary markets with which SEBI was constituted in 1988 and given statutory powers in
January, 1992 through an ordinance which was passed in the form of an Act by the parliament on
4thApril, 1992. Furthermore, on May 29, 1992 the Government issued an ordinance abolishing
the Capital Issues Control Act, 1947.

The Preamble of the SEBI Act elucidates the objective behind the institution of SEBI which is
essentially investor interest protection, development and regulation of the securities market in
India and other matters concerned therewith. The SEBI’s regulatory jurisdiction extends to the
companies listed on the Stock Exchange, the ones willing to be listed on the Stock Exchange, the
Brokers, Institutions dealing in exchange, purchase and sale of investment securities, Mutual
Funds, International Investors and other intermediaries.

Section 11 of the SEBI Act specifies the functions of SEBI. This is a fairly detailed section and
exhaustively covers all the functions that the SEBI is expected to perform. SEBI has the duty of
regulating the business in stock exchanges and any other securities markets as well as 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 others intermediaries who may be associated with the
securities market in any manner. Further SEBI is also expected to deal with the registering and
regulating the working of depositories, participants, custodians of securities, foreign institutional
investors, credit rating agencies and such other intermediaries as the Board may by specify in
this behalf as well as doing the same with venture capital funds and collective investment
schemes, including mutual funds. SEBI is also expected to promote and regulate self regulatory
organisations, as well as investor’s education and training of intermediaries of securities markets.
SEBI is empowered to prohibit fraudulent and unfair trade practices, insider trading relating to
securities markets, and regulate substantial acquisition of shares and take over of companies. To
achieve this end SEBI has the authority to call for information from, undertake inspection,
conduct inquiries and audits of stock exchanges, mutual funds, and other persons associated with
market securities, intermediaries and self regulatory organisations in the security market as well
as banks or any other authority or board 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.1

These various powers and functions for the purposes of this paper has been condensed in five
major objectives and the manner in which SEBI is tackling these issues to promote a healthy
Business Development.

INVESTOR PROTECTION:
One of the major objectives behind the creation of SEBI was to protect the interests of the
investors so as to increase investor confidence and encourage savings and investment and over
the years since its inception SEBI has taken steps to ensure the same. It is imperative to note here
that this protection is not redemption of losses as investors are aware of the risks involved, rather
it is an attempt at minimizing the losses and ensuring that the investors are not defrauded,
cheated, or misguided.

To ensure this SEBI issued guidelines called the Securities and Exchange Board of India
(Disclosure and Investor Protection) Guidelines, 2000 and various other guidelines over the
years. These guidelines are the regulatory measures employed by SEBI time and again to ensure
better transparency in the dealings of capital market, eliminating investor exploitation, proper
conduct by intermediaries, etc. and entails panel action if the guidelines are not adhered to.

Besides issuance of guidelines, SEBI also goes for public interest advertisements to promote
investor education and make investors aware about the risks of the investments, the information
they are entitled to and their rights and remedies in case they have grievances. It also goes for
publication of booklets to cater to investors. Currently SEBI is doing two monthly publications

1
Section 11, SEBI Act, 1992
for the investors; (a), SEBI-Market Review, (b) SEBI News-letter. Alongside, SEBI has also set
up the Investor Protection and Education Fund (IPEF) apropos investor education and related
activities towards which SEBI has contributed a sum of Rs.10 crore in the initial corpus from the
SEBI General Fund.

For grievance redressal, SEBI entertains complaints from investors on matters like non-receipt
of refund orders, allotment letters, non-receipt of dividend or interest and delays in the transfer of
shares and debentures. Taking this a step further, SEBI has instructed companies to go for half
yearly unaudited company reports. In addition to this, SEBI also formatted the prospectus
released by the Companies to ensure better communication of information to investors and an
abridged prospectus is to accompany every share application for small and medium investors.

In order to protect the interests of investors in situations regarding major decisions in companies
wherein they have no say, SEBI has introduced regulations governing substantial acquisition of
shares and takeovers and lays down the conditions under which disclosures and mandatory
public offers have to be made to the shareholders.

CORPORATE GOVERNANCE:
Corporate Governance is the administration, application and coordination of certain rules and
regulations that create an atmosphere of transparency and accountability in a business
corporation, and at the same time look after the business interests of the stockholders and
shareholders. 2 SEBI has ensured that Corporate Governance is incorporated by the Indian
Companies and for this purpose, has as a part of the Standard Listing Agreement that the
companies signs with the stock exchange, introduced Clause 49. Under this clause, every listed
company shall obey the SEBI codes and guidelines, not only for success in the international
businesses, but also to create uniformity in international corporate behaviour.

The Clause 49 focuses on strengthening the board and providing a better organisational structure
and effective control apropos accountability and transparency. The essential features of Clause
49 are Stress on appointment and allocating powers to independent directors on board;
Composition, appointment and powers of the audit committee, remuneration committee,
grievance redressal committee; Adherence to the internal Code of Conduct by the Board of
Directors and Top Management; Disclosure of Accounting Policies, Contingent Liabilities,
Related Party Transactions and IPO proceeds utilization; Certification by CEO/ CFO on
adequacy of internal control mechanism and correctness of the reported financials as well as a
proper whistleblower policy in place.

Furthermore, a certificate of compliance bearing the signatures of Directors, Auditors and

Company Secretary of the Company is to be annexed to the Annual Report, at the time of listing
2
B.N.Ghosh, Business Environment, Oxford University Press, 2015.
of shares, and at quarterly compliance reports received from listed companies. Listed Companies
are also under obligation to submit a consolidated compliance report to SEBI within 30 days of
the end of each quarter. Till date, Clause 49 remains the cogent reform ensuring the
implementation of a regime of corporate governance in India.

INSIDER TRADING:

One of the biggest forms of exploitation that investors can face is insider trading as they are
oblivious of being duped and it is highly beyond the reach of an individual investor to be aware
of or rather prove insider trading in a particular transaction. Insider refers to any person who
either is or was connected with the company or is deemed to have been connected with the
company, and who is reasonably expected to have access to unpublished price sensitive
information relating to securities of a company. The insiders are people such as Directors and an
Officer or employees of the company or hold a position involving a professional or business
relationship between themselves and the company whether temporary or permanent. Price
sensitive information means any information which relates directly or indirectly to a company
and which if published is likely to materially affect the price of securities of that company. The
price sensitive information includes periodical financial results of a company, intended
declaration of dividends, Issue of securities or buy-back of securities, any major expansion,
amalgamation, mergers and takeover plans, disposal of the whole or substantial part of the
undertaking and any significant changes in policies, plans or operations of a company.3
This information has large implication on the share prices, credit rating and investment and
disinvestment opportunities and prior information can be a game changer in this regard but as
this information is disseminated to a privileged few this becomes highly injurious to the small
and medium investors who apply their savings in the stock markets. It is imperative to note that
although the investors are aware that these securities are subject to market risks, it is the duty of
SEBI to ensure that investors don’t suffer unjust losses.

INTERMEDIARIES:
Intermediaries, which includes brokers and sub-brokers, underwriters, merchant bankers, bankers
to the issue, share transfer agents and registrars to the issue, depositories, participants, portfolio
managers, debentures trustees, foreign institutional investors, custodians, venture capital funds,
mutual funds, collective investments schemes, credit rating agencies, etc., shall be registered
with SEBI and shall be governed by the SEBI regulations pertaining to respective market
intermediary.

3 International Monthly Refereed Journal of Research In Management & Technology 35 Volume II, November’13
ISSN – 2320-0073
A broker is a member of a recognized stock exchange, who is permitted to do trades on the floor
of the exchange. He is enrolled as a member with the concerned exchange and is registered with
SEBI. A sub broker is a person who is registered with SEBI as such and is affiliated to a member
of a recognized stock exchange4. Now, to regulate the dealings of these brokers SEBI issues the
prescribed requisite format of application for the grant of certificate from SEBI for permit to
trade in the securities market. This exercise caters to two purposes, first setting the criterion of
minimum qualifications for dealing in the security market, like the availability of office space,
workforce and other requisites for the effective discharge of the functions, past experience in
dealing in securities, past ethical and disciplinary record which ensures the induction of a reliable
broker. Secondly, after being satisfied with the fulfillment of eligibility criterion by the broker,
SEBI grants the permit certificate and notifies the requisite stock exchange. The same method is
practiced in relation with the sub-brokers to ensure better persons to ensure investor protection in
the market. SEBI also regulates the amount of brokerage permitted to be charged by a broker and
a sub broker in order to further regulate the capital market and increase investor confidence and
savings in the capital market.

MUTUAL FUNDS:
Securities & Exchange Board of India introduced a set of regulations and code of conduct as
SEBI (Mutual Fund) Regulations, 1996 on 9th December 1996 for the smooth conduct and
regulation of mutual funds. Recently, SEBI has issued updated regulations as SEBI (Mutual
fund) (Amendment) Regulations, 2017. These guidelines lay down certain criteria for
investment, disclosure, accountability and distribution of profits to its members. The salient
features of these regulations include various aspects relating to Registration of Mutual Fund,
Constitution and management of mutual fund & rights and obligations of trustees, Constitution
and management of Asset Management Company and custodian, Restrictions on business
activities of AMC and its obligations, Schemes of mutual fund, Investment objectives and
valuation policies, Advertisement code, Code of conduct, Restrictions on investments,
Investment valuation norms, Accounts and Offer documents.

Every mutual fund shall be registered with SEBI and the registration is granted on the fulfillment
of certain conditions laid down in the regulations for efficient and orderly conduct of the affairs
of a mutual fund‘. All mutual funds are bound to publish a scheme-wise annual report or an
abridged summary through an advertisement within six months of the closure of the financial
year. The trustees of mutual funds are bound to convey to the investors any information that has
an adverse impact. A mutual fund is also to publish half-yearly unaudited financial results
through an advertisement. Since Mutual Funds are the oldest form of securities in circulation and
have a diversified risk portfolio it is imperative for the SEBI to ensure efficient regulation of the
Mutual funds.

4
Ibid.