CHAPTER 2

BASIC CONCEPT OF STUDY AND FUNCTIONING OF

THE STOCK MARKET AND SEBI

2.1 WHAT IS A STOCK MARKET?

A place where stocks are traded is called a stock market. Before understanding the stock
market and its functioning it is necessary to know what a stock is.
Stock is a term which symbolizes an investor’s ownership in a company. Those who own
a stock essentially hold a part of the ownership of the company, they are generally called
as stockholders or shareholders. The Shareholders theoretically own a percentage of
everything a company owns or owes. The company’s profitability or a lack of it thereof,
determines whether its stock is traded at a higher or at a lower price.
The Stock market basically is to the collection of markets and exchanges where standard
exercises of buying, selling and issuance of shares of publicly-held companies take place.
The financial activities are conducted through the stock exchanges or over-the-counter
(OTC)1 marketplaces which generally operate under a defined set of regulations in that
country. There can be different stock exchanging venues in a country or a region which
allow transactions in stocks and other forms of securities. It is also known as Capital
Market. Capital markets comprises of both the primary and secondary market.

2.2 WHAT IS A STOCK EXCHANGE?

The Securities Contracts (Regulation) Act of 1956 defines a stock exchange as:
(a) any body of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether
under a scheme of corporatisation and demutualisation or otherwise, for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in securities.2
Stock Exchange is an entity, firm or organization which provides an avenue for trading
stocks through providing services such as listing of stocks on the stock exchange and it
also provides services to the individual investors, large investors and brokers which help
them to trade securities in the market. It provides a platform where the buyers and sellers
meet and comprises of such systems where one can see the prices and volumes of the
stock.

1
Over-the-counter (OTC) refers to the process of how securities are traded for companies that are not listed on a formal
exchange such as the New York Stock Exchange (NYSE). Securities that are traded over-the-counter are traded via
a broker-dealer network as opposed to on a centralized exchange.
2
“ SEBI Act, 1992 Section 2(j)” https://www.sebi.gov.in/acts/contractact.pdf
2.2 History of Indian Stock Exchanges

The Indian Stock market is one of the seasoned as well as one of the oldest stock market
in Asia. It goes back towards the end of the 18th century when the East India Company
used to transact loan securities. Also trading on corporate stocks and shares in Bank and
Cotton presses used to take place in Bombay back in the 1830s. India has a long history
of organized trading. In the year 1836, the Calcutta Newspaper “English Men” quoted
share price of Bank of Bengal (bid/offer Rs. 5000/7500). Bank stocks viz. Commercial
Bank, Chartered Mercantile Bank, Oriental Bank, Agra Bank etc. were traded in Bombay
and the trading was concentrated to Bank shares. The enactment of Companies Act, 1870
has brought in India the concept of limited liability in India.
The very first organized stock exchange in India was started in 1875 at Bombay and it is
stated to be the oldest in Asia3. Its history dates back to 1855 when 22 stockbrokers4
would gather under banyan trees in front of Mumbai’s Town Hall. The location of these
meetings changed many times to accommodate an increasing number of brokers. The
group eventually moved to Dalal Street in 1874 and became an official organization
known as “The Native Share & Stock Brokers Association” in 1875. The Bombay Stock
Exchange is also the first to be granted permanent recognition under the Securities
Contract Regulation Act, 1956.
After the formation of Bombay Stock Exchange it was followed by the Ahmedabad Stock
Exchange in 1894, it focused on trading in shares of textile mills. The Calcutta Stock
Exchange then started its operations in 1908 and began trading the shares of plantations
and jute mills. The Madras stock exchange was later on set up in 1920.
During the two world wars, Indian stock market had undergone several prolong rallies,
which brought about the growth of manufacturing activities due to the fact that India was
at the helm of the supply base. In spite of the fact that the stock exchanges were in
operation, there was no legislation or guidelines till the Bombay Securities Contracts
Control Act was enacted in 1925. This was however, deficient in many respects. Under
the Constitution of India which came into force on January 26, 1950, stock exchanges and
forward markets were under the complete authority of the Central Government. The
Government then appointed a committee which was named as A.D Gorwala Committee
in 1951 to formulate legislation for the regulatory measures of the stock exchange and of
contracts in securities. After the recommendations of the Committee, The Securities
Contract (Regulations) Act, 1956 was enacted the aim of which was to provide for the
immediate control of virtually all aspects of the securities trading and the running
mechanism of stock exchanges and to prevent undesirable transactions in securities. It has
undergone several modifications since its enactment.
From 1956 to 1980, Indian markets grew at a moderate pace. The most significant event
which affected the securities market during this period was the enactment of Foreign
Exchange Regulation Act.
During the period from 1980-1999, Indian Stock Exchanges witnessed a total revamp,
automation, modernization and on-line trading and strict surveillance were the hallmarks
of this period. Expansion of the stock exchanges also took place during this period and it
3
Dr. Priya Rawal (16 April 2015). Indian Stock Market and Investors Strategy. Dr Priya Rawal. pp. 12-. ISBN
978-1-5053-5668-7.
4
 Mishra, Ashish K. (23 May 2015).  "Livemint: Business news, financial news, current affairs and
analysis of stock markets and Indian economy". livemint.com/. Retrieved  17 June 2017.
also led to the formation of National Stock Exchange (NSE) it was established as the first
dematerialized electronic exchange in the country and also is now the leading stock
exchange in India.
The daily turnover in Indian stock markets was up from Rs. 30 crores in 1980-81 to Rs
450 crores in 1992-93. The market capitalization also zoomed from Rs 5,000 crores to Rs
2, 50,000 crores which was equivalent to 40% of the gross national product against the
5% earlier. Subsequently the number of shareholders also increased from 2million to 30
million. By the end of the year 2018, Indian stock market emerged as the 7th biggest stock
market in the world which is the sign of rapid growth of Indian stock market, the previous
ranking in 2017 was 9th. The market capitalisation was in the same year was $2.4 trillion.

2.3 STOCK EXCHANGE REGULATION IN INDIA

The Constitution of India envisages the legislative jurisdiction of the stock exchanges on
the Union Government. By the power envisaged under the same it came up with the
Securities Contract (Regulation) Act, 1956 for the recognition of stock exchanges.
Securities Contract (Regulation) Act, 1956 provides for recognition of the stock
exchanges and regulates their functioning , licensing dealer, controlling speculations and
also deals with the listing of securities on the stock exchanges.5 For carrying out the
objectives of the legislation, Central government promulgated the Securities Contract
(Regulation) Rules, 1957.
The authorities have been quite sensitive to the requirements of the development of
securities market, so much so that the decade of 1992-2003 witnessed nine special
legislative interventions, including two new enactments namely the Securities and
Exchange Board of India (SEBI) Act, 1992 and the Depositories Act, 1996. During that
same period the acts were also amended regularly. The developmental need was as such
that the same decade also witnessed five ordinances relating to the securities laws.
Besides a number of other legislations (The Income Tax Act, The Companies Act, The
Indian Stamp Act, The Benami Transactions (Prohibition) Act etc.) having bearing on
securities markets have been amended in the past to complement amendments in the
securities laws.
The legal reforms of the markets began with the enactment of the SEBI Act 1992, which
established SEBI with statutory responsibilities to (i) protect the interest of investors in
securities, (ii) promote the development of the securities market, and (iii) regulate the
securities market.6
The Securities Laws (Amendment) Act in 1995 followed next, which extended SEBI’s
jurisdiction over corporate in the issuance of capital and transfer of securities, which was
in addition to all intermediaries, and persons associated with securities market. It
empowered SEBI to appoint adjudicating officers to adjudicate wide range of violations
and impose monetary penalties and provided for establishment of Securities Appellate
Tribunal (SATs) to hear appeals against the orders of the adjudicating officers.
The Depositories Act was enacted in the year 1996. The aim of the act was to provide for
establishment of depositories in securities which would then ensure free transferability of
securities with great speed, accuracy and security. The act made securities of public
limited companies freely transferable but they were subject to certain exemptions; the
depositories dematerialized the securities in the depository mode and they also provided
for maintenance of ownership records which was done in a book entry form. With the

5
H.R. Machiraju, "The working of Stock Exchanges in India", New age International Publishers, 2009
6
“About SEBI” SEBI. Archived from https://www.sebi.gov.in/
introduction of The Depositories Related Laws (Amendment) Act, 1997 various
legislations relating to facilitation of dematerialization of securities was amended.
It was followed by the Securities Laws (Amendment) Act, 1999 which was enacted to
provide for a legal framework for trading derivatives of securities and units of CIS. The
act was enacted to so as to empower the Securities Appellate Tribunal (SAT) to deal with
the appeals against the orders of SEBI under the Depositories Act and the SEBI Act, and
also under SCRA during the refusal of stock exchanges to list securities.
The process of reform in the securities market was carried forward during by the SEBI
consistently since its establishment in 1988. The thrust has been on investor protection
and transparency in the market. A beginning in establishing a code of corporate
governance was made by changing the listing norms at the stock exchanges. Regulations
for rating agencies have been framed. In order to promote new entrepreneurs and
knowledge-based industries through venture capital route, the SEBI has been made the
single nodal agency. Legal restrictions in respect of derivative trading were removed by
enacting the Securities (Amendment) Act, 1999. The BSE and the NSE, commenced
trading in stock index futures in June 2000.

2.4 BOMBAY STOCK EXCHANGE (BSE)

Bombay Stock Exchange (BSE) was established in the year 1875. It was formed with the
name Bombay Stock Exchange Ltd. Subsequently the name was changed to BSE. It was
the first stock exchange of India and also Asia, BSE has played a vital role in the
development of the capital market of India. Taking the Market Capitalization as a base,
BSE was the 10th largest stock exchange all over the world in April 2018 with a market
capitalization of $2.3 trillion.7
In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took
place in Bombay. Though the trading was broad but the brokers were hardly half dozen
during 1840 and 1850. An informal group of 22 stockbrokers had stock broker meetings
and began trading under a banyan tree opposite the Town Hall of Bombay from the mid-
1850s, each investing a princely amount of Rupee 1. This banyan tree presently stands in
the Horniman Circle Park, Mumbai In 1860, the exchange flourished with 6 brokers. In
fact the ‘Share Mania’ in India began when the American Civil War broke and the cotton
supply from the US to Europe stopped. Further the number of brokers increased to 250.
The informal group of stockbrokers organized themselves as the “The Native Share and
Stockbrokers Association” which in 1875 was formally organized as the Bombay Stock
Exchange (BSE)
A decade later with the increase in number of broker members, brokers moved their
venue to another public place, this time under a banyan tree at the junction of Meadows
Street, which is now known as Mahatma Gandhi Road. BSE was shifted to an old
building near the Town Hall. In 1928 the plot of land on which the BSE building now
stands was acquired, and a building was constructed and occupied in 1930. Premchand
Roychand was a leading stock broker of that time and he assisted in setting out traditions,
conventions, and procedures for trading of stocks.
In the year 1956, BSE became the first stock exchange being recognized by the
Government of India under the Securities Contract Regulation Act.

7
“Equity Market Capitalisation by BSE”
https://www.bseindia.com/markets/keystatics/Keystat_maktcap.aspx
In 1986, BSE came up with the BSE Sensex8, BSE Sensex was the collective group of
about 30 companies being selected on the prescribed parameters. It became an Index and
shows the overall performance of the stock exchange, this index comprises of 30
companies being listed on the trading terminal. With this index gaining success and came
up as a good indicator of market performance, BSE in 2000, used this index to open its
derivatives market, trading Sensex futures contracts. Derivative market was first
introduced in India by BSE. Derivatives such as futures and option, index futures and
options, weekly options. Based on the sensex, the BSE equity market has grown
significantly since 1990.
BSE is also actively involved with the development of retail debt market. The debt
market in India is majorly comprised of Wholesale debt market wherein participants are
Banks, Government or other corporate and financial institutions.
In 1995, a historical open floor trading exchange, the Bombay Stock Exchange switched
to electronic trading system.
In the aftermath of a major scandal with market manipulation involving a BSE member
named Harshad Mehta, BSE responded to calls for reform with intransigence. The foot-
dragging by the BSE helped radicalise the position of the government, which encouraged
the creation of National Stock Exchange (NSE).

2.5 NATIONAL STOCK EXCHANGE OF INDIA LIMITED (NSEIL)

National Stock Exchange of India Limited (NSE) was established in 1992. It was based
on the Pherwani Report9, NSE has been established with a diversified shareholding which
comprises of both domestic and global investors. The key domestic individuals include
Life Insurance Corporation of India (LIC), IDFC Limited and Stock Holding Corporation
of India Limited and the key global investors are Gagil FDI Limited, GS Strategic
Investments Limited, Aramda Investments Pre Limited and PI Opportunities Fund.
NSE was mainly incorporated with the aim to infuse transparency, to provide an efficient
system to eliminate all the deficiencies of stock exchanges prevailing at that time and to
satisfy the requirement of the large scale investors. Earlier the stock exchanges prevailing
were driven by the stock brokers usually had a tendency to work in the interest of the
members only and so the NSE came up with a view that anyone who was qualified,
experienced and met the minimum financial requirements was allowed to trade.
Currently, it is the largest Financial Market of India.10
NSEIL was promoted by the leading Financial Institution on the behest of the
Government of India. It was the first taxpaying stock exchange of the country. In April
1993, when P.V Narsimha Rao was the Prime Minister of India and Manmohan Singh
was the Finance Minister of India, NSE was recognized by the Government of India
under the Securities Contract (Regulation) Act, 1956 as the stock exchange and it
commenced operations in June 1994 with the launch of the wholesale debt market,
followed shortly after by the launch of the cash market segment. It started its operations
in Capital Market segment in November 1994 and operations in the Derivative segment in
June 2000.

8
The BSE SENSEX is a free-float market-weighted stock market index of 30 well-established and financially
sound companies listed on Bombay Stock Exchange.
9
“Pherwani committee report on New Financial Instruments”
https://eparlib.nic.in/handle/123456789/41331
10
“Monthly Reports – World Federation of Exchanges” WFE
Within a few years of its operations only, NSE became the largest stock exchange in
India.
In 1996, NSE launched S&P CNX Nifty11 and CNX Junior Indices that comprised of 100
most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25
different economy sectors. The indices are owned and managed by India Index Services
and Products Ltd (IISL)
NSE was also the first exchange in the country to provide a modern fully automated
screen based electronic trading system which offered easy trading facility to the investors
spread across the length and breadth of the country which is operated through a vast
network. It used satellite communication that connects traders from more than 350 Indian
cities.

NSE GROUP INCLUDES12

NSE Clearing Limited (formerly known as National Securities Clearing Corporation

Limited), NSE Clearing, a wholly owned subsidiary of NSE is responsible for clearing
and settlement of all trades executed on NSE and deposit and collateral management and
risk management functions. NSE Clearing was the first clearing corporation to be
established in India. It commenced clearing operations in April 1996, NSE Clearing has
maintained a credit rating of “AAA” from CRISIL since 2008.

NSE Investments Limited (NSE Investments), a subsidiary of NSE, was incorporated to,
inter alia, make or hold all strategic investments in the equity shares and/or other
securities of various companies, including NSE group companies.

NSE Academy Limited. a subsidiary of NSE Strategic Investment Corporation Limited

was setup in March 12, 2016 to promote financial literacy as a necessary life skill and
provide training and certifications in Banking, Insurance and Financial Markets. It
promotes development of a pool of human resources having right skills and expertise in
each segment of the industry to provide quality intermediation to market participants.

NSE Indices Limited (formerly known as India Index Services & Products Limited) or
NSE Indices, owns and manages a portfolio of 67 indices under NIFTY brand as of
September 30, 2016, including NIFTY 50, NIFTY indices are used as benchmarks for
products traded on NSE. NIFTY indices served as the benchmark index for 38 ETFs
listed in India and 12 ETFs listed abroad as of September 30, 2016. Derivatives
benchmarked to NIFTY indices were also available for trading on four international stock
exchanges as of November 30, 2016, pursuant to cross-listing arrangements and license
agreements with the Singapore Exchange, The Chicago Mercantile Exchange, The
Taiwan Futures Exchange and the Osaka Securities Exchange.
Times estimated that as of April 2018, 60 million (6 crore) retail investors had invested
their savings in stocks in India, either through direct purchases of equities or through
mutual funds. Earlier, the Bimal Jalan Committee report estimated that barely 1.3% of
11
“NSE India- Nifty 50 Fact Sheet” (PDF). NSE India.
12
“NSE – Our Group” https://www1.nseindia.com/NSE25Years/index.htm
India’s population invested in the stock market, as compared to 27% in USA and 10% in
China.

2.6 FINANCIAL MARKET13

Financial markets are the place where buyers and seller participate in trading of assets
such as shares, bonds, currencies and other financial instruments. Financial market
provides efficient means to transfer resource from those having excess of funds to those
in pressing need of capital. Stating formally, financial market provide channel for
allocation of savings to investments. They provide various instruments to raise funds and
thus double the act of savings and investments.
Financial Markets have two major components – Money Market and Capital Market

Money Market: It can be defined as a market for short term funds with maturities ranging
from overnight to one year and it includes financial instruments which are close substitute
of money. Central Bank i.e. Reserve Bank of India (RBI) in case of India is highly
influential on both quantum and the cost of liquidity. Money market is close substitute of
money. Indian money consists of both organised and unorganised sector. The organised
sector includes State Bank of India, Reserve Bank of India, Public Sector as well as
Private sector banks, Regional Rural Bank, Commercial Banks and other Non – Banking
Financial intermediaries such as LIC, GIC and UTI etc. On the other side, unorganised
sector comprised of indigenous bankers, money lenders and other Non – Banking
financial intermediaries. The Money Market is one of the primary mechanism through
which the Central Bank influences liquidity and general level of interest rate in the
economy.
It is the primary funding source for the Government of India, banks, financial institution
and sometimes for the corporate. It facilitates efficient transfer or deployment of fund for
short term period between investors and borrower. Corporate can raise funds through
money market instruments such as commercial papers, certificate of deposits, etc. to
satisfy their short term working capital requirements.
Government is the active player of the money market and it is considered as biggest
borrower in money market. Reserve Bank of India (RBI) issues securities like G-sec and
Treasury Bills (T-Bills) on behalf of the central government to satisfy the latter’s
financial fiscal deficit. Apart from being Banker to the government the central bank also
regulates money market and also issues guidelines for functioning of the money market.
The money market functions as a wholesale debt market for the low risk, highly liquid
and short term instruments. Here volume of transaction is very large and they are settled
on daily basis. There are large number of participants such as Mutual funds, Banks,
Financial institutions and other investment institutions.

13
“Capital Markets and Securities Laws” by The Institute of Company Secretaries of India (ICSI)
TYPES OF INSTRUMENTS IN MONEY MARKET

Treasury Bills: It is a money market instrument issued by the Central Bank on behalf of
the Government of India to satisfy the short term requirement of the latter. They are
issued at a discount and are redeemed at face value. The difference between the two
figures is the gain of the investor. They are issued at a predetermined date and for fixed
amount and carries the lowest risk. Treasury bills can be 14 days T bills, 91 days T bills,
182 days T bills and 364 days T bills.

Certificate of Deposits: It is a negotiable money market instrument and is issued in

dematerialized form or issued as a promissory note against the funds deposited with bank
or other eligible financial institution. It is issued for a specific period of time. Issuance of
Certificate of Deposits is regulated through the guidelines of Reserve Bank of India.
Minimum amount of CD is 1, 00,000/- Rs. It is issued for minimum period of 7 days and
cannot exceed tenure of 1 year of Banks accepting deposits.

Commercial Paper: It is unsecured form of money market instrument and is issued in the
form of a Promissory note. It paved way for big reputed corporate to raise fund through
CP also provide means to diversify the investment to the investors. It enables borrower to
satisfy its short term requirement. Public dealers and All India financial institutes are also
allowed to raise fund through CP. Minimum amount of CP is 5,00,000/- Rs. It is issued
for minimum period of 7 days and cannot exceed tenure of 1 year from date of issue.

2.6.1 CAPITAL MARKET

Capital Market is a financial market for long term debt securities, issued for the period of
redemption exceeding 1 year and equity backed securities are bought and sold. Capital
market channelize the excess fund of investor by making it available for the needy
borrower. Against the mobilisation of the fund, the investor fetches good returns from the
borrower. The demand for the long term fund requirement usually comes from private
business houses, public corporation and government.
Understanding in wider sense, it includes all borrowing and lending whether or not
through negotiable instrument. Investment in capital market is made to claim capital,
unlike as money market where securities are traded for short tenure, here capital
requirement of medium long term and long term are being satisfied. Capital markets not
only permit fund raising for the first time from primary market but also provides liquidity
to the investor already holding stock through secondary market mechanism, thus
securities outstanding are transferred here.
Capital Market and in particular Stock Exchange is referred as a Barometer of the
economy14. Capital market reflects the position of corporate sector as it considers the
performance of companies on stock exchanges.

14
“Stock Exchange as an economic Barometer”
https://economictranscript.wordpress.com/2017/02/03/stock-exchange-as-an-economic-barometer/
2.6.2 SECURITIES MARKET

The Securities market comprises of the primary and the secondary markets. While the
corporate entities raise capital through issue of long-term instruments in the primary
market, the secondary market provides liquidity to these instruments, enabling the
investors to adjust their portfolios. The depth of the secondary market however depends
upon the primary market. From the investors’ point of view, the movements in both the
markets are important for the investors.

The securities market had undergone tremendous changes in the recent past. There were
ups and downs. The rapidity of growth can easily be established by the fact that as against
an annual average amount of Rs. 900 million raised from the primary market in the 70s,
an amount of Rs 64.73 billion was raised during 1989-90. The figure rose to Rs. 198.25
billion in 1992-9315. This has been possible because of abundant investor confidence and
participation. But a reversal set upon the market and only a sum of Rs 73.53 billion was
raised during 2001-02.16

The secondary market echoed the developments in the primary market. The daily
turnover on the Indian stock markets shot up from about Rs 250 million in 1979-80 to
about Rs. 613.54 billion in BSE during 2001-02.17

Bearish sentiment however dominated the stock market through 2001-02. Almost all
major stock market indicators like market capitalisation, turnover, P/E ration showed
trend during 2001-02.

The market revived in 2002-03, led by a rally in scrips of Public Sector Undertakings
(PSUs) with the announcement of disinvestments initiatives by the Government. By
October 2003, the secondary market showed remarkable gain aided by Foreign
Institutional Investment and return of retail investors.

Over the past decade, India’s GDP has almost trebled from $414 billion in 2001 to $1.3
trillion in 2010. The growth in the size of the country’s economy has been more than
complimented by a dramatic 8-fold surge in the market capitalization of the Indian
companies from $165 billion in 2001 to $1.3 trillion in 2010.

2.6.3 PRIMARY MARKET

Primary market referred as the market of new issues or market for the mobilisation of
resources by the companies and government undertakings for new projects as well as for
15
CMIE Report, October 1992 cited in “Personal Financial Management” ICFAI Study materials, Institute
of Chartered Financial Analysts of India, Hyderabad, Vol I, 1993, p.288
16
SEBI Annual Report, 2001-02, p.3
17
SEBI Annual Report, 2001-02, p.16
the expansion, diversification, modernisation and up-gradation. The primary market
operations included new issue of shares, debentures, bonds by new entrants or by the
existing ones. It can termed as a fresh market of issues and therefore there is no element
of trading, Investors apply through application and subscribe directly to the equity debt of
a company.
The company invites the people to invest in their business through prospectus to buy their
shares, debentures etc. and contribute in their capital; In return the companies give
dividend or interest to such shareholders/debenture holders respectively. The companies
also get financing through banks, financial companies etc. The cost of debt being high in
India companies resort to primary market to mobilise the resources as it involves low
servicing cost.
The companies reach its prospective investors through its market intermediaries viz
Merchant Banker, underwriters, advisers, etc. The emergence of Globalization,
liberalisation and privatisation has increased the competition in the market tremendously
as a result of which survival in the market require proper functioning which is possible
when the life line of the industry & capital reaches the end users on time. Moreover with
the introduction of these three concepts, the market has witnessed a tremendous growth in
terms of number of industries, volume of shareholding etc. Thus capital being so
imperative element in the market it becomes necessary to create a confidence in
prospective investors and to maintain the same in the existing investors. The tremendous
expansion of market attracted unfair practices in the market which tremendously affects
the interest of the investors.
To curb the unfair practices of the market it is necessary to introduce strict surveillance
system in the market and therefore SEBI has introduced several measures in the form of
rules, regulations, bye-laws for proper regulations of the marker as the market is highly
affected by over-pricing, price rigging, misleading advertisement or disclosure in offer
documents etc.

2.6.4 SECONDARY MARKET

Secondary market is highly volatile and active market where scrips are traded. This
market provides liquidity to the scrips issued in the primary market. Thus both are
correlated. The growth on one market is dependent on the other marker viz – more the
number of companies entering the primary market the greater are the volumes of the trade
at the secondary market. Similarly, if the secondary market functions smoothly and
effectively the companies will be encouraged to introduce new issues for expanding,
diversifying, upgrading and modernising their business.
The trading activities in the market are done through recognized stock exchanges. The
secondary market operations involve buying and selling of securities in the stock
exchanges through its members/intermediaries such as brokers, member of stock
exchanges, share transfer agents, portfolio managers etc. The companies hitting the
primary marker are mandatory required to list their shares on one or more stock
exchanges in India. Listing of scrips provides liquidity and offers an opportunity to the
investors to buy or sell the scrips.

2.7 ORGANIZATIONS REGULATING SECURITIES MARKET IN

INDIA
Five agencies have a significant regulatory influence, directly or indirectly, over the
securities market in India. These are

National Company Law Tribunal (NCLT)

The National Company Law Tribunal (NCLT) was formed under the section 408 of the
Companies Act, 2013 and the tribunal acts as a quasi-judicial body. Earlier some of its
power vested with the High Court and the Central Government.

The Reserve Bank of India (RBI)

The Reserve Bank of India is primarily responsible, inter alia, for the supervision of
banks and the money markets.

The Securities and Exchange Board of India (SEBI)

SEBI is the regulator for the securities market in India owned by the Government of
India. It is responsible for the regulation of capital markets and the various participants
and activities therein.

Department of Economic Affairs (DEA)

DEA is responsible for the economic management of the country and is the arm of the
government that is concerned with the orderly functioning of the financial markets as a
whole.

Ministry of Corporate Affairs (MCA)

MCA which is at the apex of a three tier structure that has the responsibility for the
registration and oversight of incorporated entities which fall under the regulatory purview
of the Companies Act, 2013.

2.8 PROBLEMS AND LIMITATIONS IN THE FUNCTIONING OF

INDIAN CAPITAL MARKET
Indian capital market structure is a complex structure. It suffers from various problems
and constrains, which hampers its smoother functioning and also affects the interest of
shareholders and other stakeholders.

Insider Trading

Insider trading has become an inevitable practice in capital market in India. In the
organizational structure, there are some persons who have access to price sensitive
information by virtue of their position in the company. If these people use this sensitive
information for their own advantage, it results in Insider trading, SEBI has introduced
SEBI (Prohibition of Insider Trading) Regulation 2015 to take action against insider
trading but still it is difficult to entirely eliminate activities by insider for their self-
interest and detrimental to stakeholders. In the market operators, it is commonly argued
that preventing insider trading is as difficult as controlling black money.
According to SEBI (Prohibition of Insider Trading) Regulation 2015, “Insider” means
any person who is: i) a connected person, or ii) is in possession of or having access to
Unpublished Price Sensitive Information (UPSI).18
UPSI means that information which are not generally available to public at large. It can
be either related to management activities or operations and functional or otherwise. An
outsider i.e. a person who is not a ‘connected person’ would qualify as an ‘insider’ if such
person was in possession of or having access to UPSI. These regulations have
strengthened the definition of “Insider” by expanding the definition of connected person.
“Connected person” means any person who is or has during the six months prior to the
Regulations been associated with a company, directly or indirectly, in my capacity
including by reason of frequent communication with its officers or by being in any
contractual, fiduciary or employment relationship or by being a director, officer or an
employee of the company or holds any position including a professional or business
relationship between himself and the company whether temporary or permanent, that
allows such person, directly or indirectly, access to UPSU or is reasonably expected to
allow such access.
The persons falling within the following categories shall be deemed to be connected
persons unless the contrary is established.
(a) an immediate relative of connected person; (b) a holding company or associate
company or subsidiary company; (c) an intermediary or an employee or director thereof;
(d) an investment company, trustee company, asset management company or an
employee or director thereof; (e) ab official of a stock exchange or of clearing house or
corporation; (f) a member of board of trustees of a mutual fund or a member of the board
of directors of the asset management company of a mutual fund or is an employee thereof
(g) a member of the board of directors or an employee of a public financial institution; (h)
an official or an employee of a self-regulatory organization recognized or authorized by
the SEBI; (i) a banker of the company; or (j) a concern, firm, trust, Hindu undivided
family, company or association of persons wherein a director of a company or his
immediate relative or banker of the company, has more than 10% of the holding or
interest;

18
SEBI (Prohibition of Insider Trading) Regulations
Price Rigging

These types of activities are generally encountered when companies come up with capital
issue in the primary market. The share prices of shares are artificially pulled up by
creating artificial demand of the shares before issue of securities by companies. Price
rigging is common in secondary market as well. Parties conspire or agree to fix or inflate
prices to achieve higher profits.
Also known as “price fixing” or “collusion” price rigging can be found in any industry.
This artificial increase in price is done by some buyers and sellers among themselves or
among group which engages itself in such type of activities. This price rigging activities
result into bull movement in the market and after the issue the price of the share may
again drop down to its original value, this causes serious damages to investors. These
activities are against the market forces (demand and supply). It is at the cost of the
investors. It is a form of market manipulation.

Lack of Transparency

In Indian capital market investors suffers due to the lack of information and data
regarding the scrips. Presently, SEBI is working hard to infuse corporate governance
among the companies which requires companies to maintain more transparency regarding
operational and information of the company. In spite of all this efforts made SEBI for
increasing transparency in the capital market, things are somehow the same as prevailing
earlier and SEBI is not getting the required success like it should get.
Today many brokers are carrying on activities which are in violation of corporate
governance and are indulging in unethical practices. Data in relation to high and low,
opening, closing prices are reported but the details regarding the best price an investor
can fetch are not disclosed to the fullest. Lack of transparency also involves the activities
of manipulation of accounts, accounts drafting, window dressing of other financial details
of the company which generally attract investors are also tampered for the personal
interest at the cost of the investors.

Cost of Capital Issues

In capital market, the funds are issued generally issued through two ways: Equity issue or
Debt securities. Debt securities are considered as cheaper by the fund raising companies.
The reason is cost to incur before the issue and the amount of dividend to be paid to the
equity owners and the payment of tax on distribution of dividend by the company. For
raising debt funds may not be required to approach public at large, which may not be an
expensive task compared to equity issue. The cost involved for the issue involved in the
primary market for debt and equity includes high expense of prospectus printing and
distributing, commission and brokerage of intermediaries, arranging firm investors,
approaching various sites and hiring various expert professional to conduct the whole task
of fund raising.
After the issue expenses are also different for both sources. In case of equity share
dividend pay off, company is required to pay tax on it as DDT however in case of debt,
interest paid is taken as expense and tax deduction is allowed for such expense, the cost
involved in the primary market like prospectus printing and distributing, arrangement and
collection of subscription, commission and brokerage are also important cost
considerations.

Volatility

In recent past, Indian capital markets have evidenced high volatility. In last few years,
there has been constant and speedy increase in the market indices like Sensex or Nifty.
But in the meanwhile, there have been large amount of fluctuations. This volatility is
because of two important reasons.
Firstly increasing influence of foreign institutional investors (FIIs) in the market which is
permitted during this phase only. Another thing which is associated with this is that the
delivery-based-trading is speculative and hedging in nature. With the increase in the
intraday trading activities like volatility in the capital market is increasing as it is not
delivery based and investment, instead only speculation. In the recent past, the banks and
financial institutions, foreign institutional investors and domestic mutual funds have
pumped in huge funds in the market. But whenever there are negative sentiments, all such
finds are withdrawn which make the markets even more volatile and unpredictable.

Risk of Rumours

Most of the time market is driven by rumours about a particular company or overall
market. Rumours may get floated in the market by websites, news agencies, brokers
associated with the market and financial newspaper or even by word of mouth. It may
happen that management if of the company with the help of the brokers spread rumours in
the market. This influences the investors’ perception about valuation of securities.
The brokers or even promoters of a company may get undue advantage out of such
rumours. It is expected that the investors should keep themselves away from the rumours,
they should desist from acting on rumours. For the verification of the rumours, the stock
exchange disseminates the details to public at large. However, if company is not
responding, it issues Show cause notice (SCN) to company to take necessary action as it
deems fit.

System Risk

During the trading sessions at a particular time, there are high volumes of trade. At the
time of opening or at the closing, the trading volume is high. These high volumes may
cause delays in execution of orders and confirmation of the same.

During the volatile trade activities, participants, continuously modify/cancel the orders.
Therefore there are delays in execution of order. When there is high volatility, some
circuit filters are imposed to prohibit unusual trading. When circuit filters are active, it is
difficutl or even impossible to liquidate a position in the market. Sometimes, the market
operations have to be suspended for sometimes due to extreme volatility. This risk is an
important factor emerging from volatility and unusual trade.

Unethical Practices

Various participants in the market viz. existing companies, new companies,

entrepreneurs, brokers and other intermediaries are sometimes involved in unethical
practices in various ways.

Mergers and acquisitions through malpractices, entering into insider trading, rigging up of
price before a new issue, spreading misinformation or rumours, promoting fake shares are
some unethical practices prevailing in the market. In spite of SEBI’s continuous check
against such practices, total control on such activities is remote. To some extent, SEBI
has been successful in controlling unethical practices, but still a lot needs to be done to
control these practices.

Thin and Restricted Trading

In the stock exchanges, the number of hours for which trading is open for participants, is
very less. On an average only six hours of trade per day is permitted in the stock
exchanges.
Apart from this, there are number of holiday due to which an investor finds it difficult to
have liquidity throughout a month. A study has observed that about 64% of the listed
scrips were not traded at all on BSE during 1995-97.

Speculation

Speculation means the forming of a theory without firm evidence of its existence or
nonexistence. An excessive speculation in the stock exchanges has now become a well
settled/established fact. Share prices in the market are determined by the speculative
forces and these prices have very low references of fundamentals or performance of
economy, industry or company.
The dealers, merchants, insiders, fund managers etc. try to speculate the price of share.
Speculation prices are dealt to get more profit on investment. As this has nothing to do
with the performance of company/industry, a genuine and studied investor tries to be
aloof from the trading. This reduces the presence of genuine investors and thereby
increases the speculative motive among the other market participants also. Due to
excessive speculative motive among the other market participants also. Due to excessive
speculative business beyond manageable resources, the market has experienced payment
crisis frequently, Monitoring and controlling these speculative transactions has become
difficult even for the regulators. Due to this the settlement in turn have also been delayed
many times.
Underdeveloped Debt Markets

The shares issued in the primary market are later traded in the secondary markets i.e.
stock exchanges. But a primary market also involves debenture financing. The debentures
are issued in the primary market.
But in stock exchanges there is no room for trading in debentures. The secondary market
in industrial debentures remained underdeveloped over the years. Even though the equity
market has developed rapidly throughout the last two decades, the debentures market has
remained underdeveloped. This results into less enthusiasm of long term investors in the
market.

Imbalanced Growth

There has been considerable growth in terms of companies, capital raised, number of
intermediaries in the capital market, but this growth has remained lopsided. Only 2
exchanges viz. NSE and BSE account for the major trading activities of the market
throughout the country. The stock markets are almost urban oriented with a very little
relation with the vast rural economy.
Most of these stock exchanges are in metropolitan cities while no stock exchange is
located at any rural location. The rules, restrictions and legal compulsions are such that
the rural entrepreneurs find it difficult to get the benefit of capital market. This structural
and organizational imbalance in the growth of stock markets keeps the majority of
population away from the markets.

2.9 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities and Exchange Board of India (SEBI) has been established for the development
and regulation of the capital marker and it has also been entrusted with the responsibility
of protecting the interest of the investors.
SEBI was established as a non-statutory regulatory body in 1988, but it was not given
autonomous, statutory powers until January 30, 1992, when the Securities and Exchange
Board of India Act was passes by the Parliament of India. SEBI has its headquarters
located in Mumbai but also at the same time possesses Northern, Eastern, and Southern
and Western regional branch offices in the cities of New Delhi, Kolkata, Chennai, and
Ahmedabad, respectively. SEBI also has offices in Bangalore, Jaipur, Guwahati,
Bhubaneshwar, Patna, Kochi, and Chandigarh which are its small local branch offices.
SEBI consists of one chairman and the others are designated as board members. The
honourable chairman is nominated by the Central Government.
According to the SEBI charter, SEBI is expected to be responsible for three main groups:
the issuers of securities, investors, and market intermediaries. SEBI has three functions
rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It drafts
regulations in its legislative capacity, it conducts investigation and enforcement action in
its executive function and it passes rulings and orders in its judicial capacity. SEBI has
taken a very proactive role in streamlining disclosure requirements to international
standards.19

The stock market is one of the most crucial indicators of a country’s economic health. If
the people are not confident about the markets and lose faith in them, the number of
participants of the market will go down. Also, due to this the country will also start losing
FDIs and FIIs considerably which will have a huge impact on the foreign exchange
inflows and will substantially hamper it. Before the establishment of SEB.I number of
scams and malpractices had transpired in the Indian stock market, one of those scams was
the “Harshad Mehta scam”20 which had a huge impact on the market and it led to quite a
substantial loss for the entire economy.

After SEBI came into power, stock market affairs have started becoming more beneficial
and progressively straightforward. Despite that, there have been some securities market
scams which have still taken place. One such famous scam was the “Ketan Parekh
scam”21 Even though there are unfair activities still prevailing in the Indian capital market
even as of today, but their frequency has been reduced and is quite less. As a regulatory
measure, the security market statutes and regulations are updated time and again.
Therefore, day by day, SEBI is getting increasingly more stringent with its power and
authority.

2.10 AMENDMENTS IN SCRA22

 "Cyril Shroff Managing Partner Mumbai & National Capital Market head
19

Amarchand". http://barandbench.com/
20
The Harshad Mehta Scam in India (1992) https://www.managementstudyguide.com/harshad-mehta-
scam.htm
21
https://www.indiatoday.in/magazine/cover-story/story/20091228-2001-ketan-parekh-scam-stock-and-
bull-story-741568-2009-12-18
22
Securities Contract Regulation Act, 1956
All the powers under the SCRA were excersied by Central Governement. The SEBI Act,
however, created a Board to regulate the securities market. In the interest of integrated
regulation of the securities market, it was felt that only one agency (SEBI) as far as
possible, should regulate the securities market.

In order to do so, the SEBI Act transferred some of the powers of the Central Government
under SCRA to SEBI and empowered Central Government to delegate other powers,
except power to make rules, under the SCRA to SEBI. In exercise of this power, Central
Government has delegated almost all the powers under the SCRA by notification issued
in 1992 and 1994. All the powers under the Securities Contracts (Regulation) Rules, 1957
have also been transferred to SEBI in 1996

Trading of government securities was not subject to any regulatory framework as these
were not ‘securities’ under the SCRA. In order to develop the market for government
securities, the definition of ‘securities’ was amended to include government securities
within its ambit23 so that the whole regulatory framework applicable to trading of
securities could apply to trading government securities also. Further, in order to avoid
frequent amendments, which is time consuming, the SCRA was amended to empower
Central Government to declare any other similar instruments to be consider or taken
under the purview of securities.

2.11 FUNCTIONS OF THE BOARD

The functions of the Board as per the Act are all pervasive which can deal with the
securities market in very effective manner to protect the interest of investors and
shareholders.
It is the duty of the Board to take such measures as it thinks fit in order to carry out its
functions of protection of the interests of investors as well as promotion, development and
control the securities market.
As per section 11of the SEBI Act 1992 the functions of SEBI are as follows:24

a. “regulating the business in stock exchanges and any other securities markets;

b. registering and regulating the working of stockbroker, sub-brokers, share

transfer mediators, bankers to an issue, trustees of faith deeds, registrars to an
issue, portfolio managers, underwriters, investment advisers, merchant bankers,
and such other intermediaries who may be associated with securities markets in
any manner; registering and regulating the working of the depositories,
custodians of securities, overseas institutional investors, participants, credit
rating agencies and such other intermediaries as the Board may, by notification,
specify in this behalf;

23
Section 2 (h) (ii) Substituted by Act 15 of 1992, (w.e.f. 30-01-1992)
24
SEBI Act, 1992 Section 11 https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf
 c. registering and regulating the working of venture capital funds and collective
savings schemes, including mutual funds;

d. promoting and regulating self-regulatory organizations;

e. promoting investors’ education and training of intermediaries of securities

markets;

f. prohibiting insider trading in securities;

g. regulating substantial acquisition of shares and take-over of companies in the

securities market;

h. calling for information from, undertaking assessment, conducting inquiries and

audits of the mutual funds, stock exchanges, other persons related with the
securities market intermediaries and self-regulatory organisations, information
and record from any bank or any other authority or board or 19 corporation
established or constituted by or under some Central, State or Provincial Act with
reference to any transaction in securities which is under investigation or inquiry
by the Board;

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

j. levying fees or other charges for carrying out the purposes of this section;

k. conducting research for the above purposes;

l. calling from or furnishing to any such agencies, as may be stipulated by the

Board, such information as may be regarded as crucial by it for the efficient
discharge of its functions;

m. performing such other functions as may be prescribed;

n. the Board may take measures to undertake inspection of any register, book, or
other document or record of any listed public company or a public company (not
being intermediaries referred to in section12 of the Act) which intends to get its
securities listed on any recognised 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”.

2.12 AUTONOMY AND ACCOUNTABILITY

The Central Government which is accountable to Parliament, had been granted the
powers of last resort by the SEBI Act. It obliged SEBI, in exercise of its powers and
performances of its functions, to be bound by the directions of the Central Government on
question of policy.

Whether a question is one policy or not shall be decided by the Central Government.
Also, the Central Government was empowered to supersede the Board, if it is of the
opinion that the board is not discharging its functions properly and is not doing well with
the duties. The power is granted for a period which is exceeding six months. The reason
behind the incompetency of the board may be on the account of grave emergency, or the
Board has persistently defaulted in complying with any direction issued by the Central
Government under the Act and as a result of such default the financial position or the
administration of the Board has determined, or there are circumstances which make it
necessary to do so in public interest. The Board was obligated to furnish to the Central
Government such returns and statements and such particulars in regard to any proposed or
existing program which may lead to the promotion and development of the securities
market, as the Central Government may, require it from time to time. The Board was also
obligated to submit to Central Government a report in the prescribed form giving a true
and full account of its activities, policy and programs during the previous year within 60
days (increased to 90 days by 1995 amendment) of the end of each financial year. A copy
of this report shall be laid before each house of parliament. While the Act empowered
Central Government to make rules for carrying out the purposed of the Act, it empowered
SEBI to make regulations, with the previous approval of Central Government, consistent
with the Act and the rules, to carry out the purposes of the Act.

In order to ensure accountability, it was provided that all the rules and regulations made
under the Act shall be laid before the Lok Sabha and the Rajya Sabha. It was also
provided that any person who was aggrieved by the order of the Board under the Act may
prefer an appeal to the Central Government. The Act empowered Central Government to
exempt, in public interest, interest, any person or class of persons dealing in securities
from the requirements of registration.

In order to protect the autonomy of SEBI, it was empowered to levy fees or other charges
for carrying on the purposes of the Act. This power to levy fees have been upheld by the
Supreme Court in the matter of BSE Brokers’ Forum and others v. SEBI and Others.25

It was provided that no court shall take cognizance of any offence punishable under the
Act or any rules or regulations made there under except on a complaint made by the
Board with the approval of Central Government. It was further provided that no suit,
prosecution or other legal proceedings shall lie against central government or any other
officer of Central Government or any member, officer or other employee of the Board for
anything which is done under good faith or which is intended to be done under this Act or
under the rules and regulations made.

2.13 ROLE OF SEBI IN THE CAPITAL MARKET

25
B.S.E. Brokers Forum, Bombay & ... vs Securities & Exchange Board Of ... on 1 February, 2001
https://indiankanoon.org/doc/749233/
Since Securities and Exchange Board of India became a statutory body in 1992, a number
of steps have been taken to strengthen Securities and Exchange Board of India and
reinforce its autonomy. SEBI has been playing a very active role in the capital market to
achieve its objectives as enumerated.

With a view to develop and regulate the capital market, SEBI has notified bankers from
issue, portfolio managers, registrars and share transfer agents, underwriters, debentures
trustees etc. SEBI has issued guidelines for Disclosure and Investor Protection and as
many as seventeen clarifications on same so far, to be followed by the company making
public issues of the capital. These guidelines/clarifications, contain a number of
disclosures to be made in prospectuses of companies making issues of capital, to enable
the prospective investors to be well informed before subscribing to the issue.

Introduction of stock invest instruments by SEBI has been another welcome step for the
investors at large. To protect further the interest of investors, SEBI has framed SEBI
(Prohibition of Insider Trading) Regulations and SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to Securities Markets) Regulations. While the former set
of regulations ban insider trading and treat it as a serious offence, the latter prohibits
manipulation of prices in Stock market, making misleading statements to induce sale or
purchase of securities and unfair trade practices relating to securities.

Besides, SEBI has initiated several measures in conjunction with the stock exchanges to
increase investor protection in the secondary market and to ensure that the transparency
and efficiency of markets increase.

2.14 NEED FOR INVESTOR PROTECTION

To protect the interest of the Investors, Parliament passed The Securities and Exchange
Board of India Act, 199226

Investors are a heterogeneous group. Amongst these retail individual investors are
considered to be in the weakest segment in the securities market. The reason being they
are naive, easily swayed by the guarantees of post listing gains and speedy market
appreciation. They are not well informed like an institutional investor as they are not
financially literate and get the information last. They do not understand the working and
technicalities of the securities market. The bulk investors are better aware and educated as
regards the security market mechanism is concerned.

The retail investors27 are high potential savers and investors but they do not prefer to
invest in the security market due to lack of understanding and cheating and manipulations
by the intermediaries. A great many times they suffer due to lack the understanding and
interpretation of the financial statements and not being able to read in between the lines or
26
Act 15 of 1992
27
Section 2(zf) of SEBI (ICDR) Regulations, 2009 “An individual investor or retail investor or small investor
is an individual who purchases securities for his or her own personal account rather than for an
organization or company”
the fine print as it said. Furthermore the small 4 investors cannot compete with their
institutional counterparts in terms of decisions of the entity. Retail investor protection has
assumed an important role in the economic development of a country. Retail investors are
very important organs of the capital market and thus their investments as well as their
interest in the market should be protected.

The rise in the value of the equity market in the 80s had been made possible by the
increased participation of investors in the capital market which was encouraged by the
growth in savings with the household sector, improved awareness about the capital
market activities and willingness to take risks rather than investing in risk-free
investment. Liberalisation measures of the government and the resultant entry of Foreign
Institutional Investors (FII) into Indian stock markets have also led to the tremendous
flow of funds into the capital market.

The devil creeps in wherever and whenever possible. Lot of malpractices got perpetuated
by certain players in the securities market. Some companies, merchant bankers, brokers
and the like involved in the issue of securities indulged in certain malpractices to the
detriment of the average and small investors. Operation of fly-by-night operators and
push through of unworthy issues prevailed. In the secondary market, certain malpractices
like price rigging, tainted securities, fake scrips, prevailed.

The stock market scandal of 1992 is undoubtedly the worst that had happened in India.
There have been scandals in the earlier years but they generally were related to forger
certificates, irregular transactions, etc. The mega scam of 1992 involved deliberate
siphoning of funds from banks for manipulative deals in the stock market. The second
interim report of the Janakiraman Committee estimated the total loss due to scam at Rs
3,542.78 crores.28 This is the price that has to be paid for system failure, ineffective
monitoring and inspection, lack of facilities etc.

Another scam happened in 2001, which resulted in payment crisis in Calcutta stock
exchange. In this case, a broker invested heavily in Information Technology (IT) stocks
way back in 1998 and when price of IT stocks started falling due to September 11, 2001
bomb blasts in USA, bear cartels hammered his stocks. The broker has been cornered by
bear operators and prices fell down. A huge payment crisis occurred.29

Even though the Securities and Exchange Board of India (SEBI) was established to
regulate the securities market and to protect the interest of the investors, it is yet to reach
100% success in its chosen activities. Hence the need for accelerated investor protection
measures is a must.

2.15 ROLE OF SEBI IN PROTECTION OF THE INVESTOR

SEBI aims to protect investor through different modes/mechanism which are summarized
as under30
28
Hallaya M, “Scams in India”, B.R. Publcations (P) Ltd., Jaipur, 1992 p.98
29
The Editor, Cover Feature column, Business India, March 19 – April, 1, 2001, p.53
30
Source: Research paper of “SEBI and investor protection” By Dr. Dipti Triphati, “International Indexed &
Refereed Research Journal, February, 2013
  Workshops
At those workshops, the aim is to acclimatize the investor with the functioning of the
securities market, the basic fundamentals of investment and risk management and their
rights and responsibilities.

 Advertisement
SEBI has prepared a sample “dos and don’ts” for investors relating to various aspects of
the securities market. Till date, over 700 advertisements relating to various aspects of
Securities Market have appeared in 48 different newspapers/magazines, covering
approximately 111 cities and 9 regional languages, apart from English and Hindi.

 Educative Materials
SEBI has prepared a standardized reading material and presentation material for the
workshops. All India Radio programme with regards to educating investors through the
mediums of radio, SEBI officials, regularly participate in programme aired by All India
Radio.

 Website
SEBI comments a website dedicated to Investor Education ‘http://investor.SEBI.gov.in’
‘Cautionary Message’ on television with a view to use the electronic media to reach out
to a large number of investors, a short cautionary message, in the form of a 40 seconds
film that has been prepared and the same is being aired on television.

 SEBI Ombudsman Scheme

SEBI in order to protect investors’ interest through an extended arm, has made a move
towards creating separate and specialized machinery by passing on some of its quasi-
judicial powers as well as for the purpose of reducing its own workload to deal directly
with the investors. The scheme, known as the ombudsman scheme, is proposed to be
empowered and sort out grievances of investors against any: listed public companies,
mutual funds, financial institutions and, companies involved in collective invest schemes.
The scheme would be highly transparent, informal and investor-friendly. Under the
scheme, the ombudsman would be empowered to hear and dispose of complaints through
mutual settlements between parties, where it is necessary to pass an appropriate award
after hearing the parties. The ombudsman may determine his own procedure by following
the principles of equity and natural justice.

2.16 INVESTOR PROTECTION AND EDUCATION FUND (IEPF)

To protect the interest of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto,
the central government (GOI) has established a fund to be called Investor Education and
Protection Fund [IEPF]. The provisions of sub section (5) (6) and (7) of section 125 of the
Companies Act, 2013 are effective from 13th January 2016, vide MCA Notification issued
by Central Government.

For administration of Investor Education and Protection Fund Government of India has
on 7th September, 2016 established Investor Education and Protection Fund Authority
under the provisions of section 125 of the Companies Act, 2013. The Authority is
entrusted with the responsibility of administration of the Investor Education Protection
Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures
etc. to investors and to promote awareness among investors.

SEBI in exercise of the powers conferred by section 30 of SEBI Act, 1992, SEBI made
the SEBI (Investor Protection and Education Fund) Regulations, 2009.31
Regulation 3 of the Act lays down the establishment of the fund which shall be called the
Investor Protection and Education Fund.
Regulation 4 provides for the amounts to be credited to the Fund. The following amounts
shall be credited to the Fund:
(a) Contribution as may be made by SEBI to the Fund;

(b) grants and donations given to the Fund by the Central Government, State
Government or any other entity approved by SEBI for this purpose;

(c) Proceeds in accordance with the sub-clause (ii) of clause (e) of sub-regulation (10)
of regulation 17 and the sub- regulation (3) of regulation 21 of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011;

(d) Security deposits, if any, held by stock exchanges in respect of public issues and
rights issues, in the event of de-recognition of such stock exchanges;

(e) amounts in the Investor Protection Fund and Investor Services Fund of a stock
exchange, in the event of de-recognition of such stock exchange;

(f) Amounts forfeited for non-fulfilment of obligations specified in regulation 15B of

the SEBI (Buy-back of Securities) Regulations, 1998;

(g) Monies transferred in accordance with sub-regulation (9) of regulation 45 of the

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009;

(h) Amounts disgorged under section 11B of the Act or section 12A of the Securities
Contracts (Regulation) Act, 1956 or section 19 of the Depositories Act, 1996

(i) Interest or other income received out of any investments made from the Fund;

(j) such other amount as SEBI may specify in the interest of investors.

2.17 INVESTOR GRIEVANCE REDRESSAL MECHANISM AT SEBI

31
SEBI (Investor Protection and Education Fund) Regulations, 2009
https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-investor-protection-and-education-fund-
regulations-2009-last-amended-on-march-6-2017-_34705.html
There will be occasions when an investor has a complaint against, a listed company or an
intermediary registered with SEBI. In the event of such complaint, the investor should
first approach the concerned company/ intermediary against whom there is a complaint.
Sometimes the response received may not be satisfactory. Therefore, investors should
know as to which authority they should approach, to get their complaints redressed.

SCORES is a web based centralized grievance redress system of SEBI. 32 SCORES

enables investors to lodge and follow up their complaints and track the status of redressal
of such complaints online from the above website from anywhere. This enables the
market intermediaries and listed companies to receive the complaints online from
investors, redress such complaints and report redressal online. All the activities starting
from lodging of a complaint till its closure by SEBI would be online in an automated
environment and the complainant can view the status of his complaint online. An
investor, who is not familiar with SCORES or does not have access to SCORES, can
lodge complaints in physical form at any of the offices of SEBI. Such complaints would
be scanned and also uploaded in SCORES for processing.

Complaints arising out of activities that are covered under SEBI Act, 1992; Securities
Contract Regulation Act, 1956; Depositories Act, 1996 and Rules and Regulations made
there under and provisions that are covered under Section 55A of Companies Act, 1956
are handled by SEBI. Entities against which complaints are handled by SEBI: *Listed
companies *Stock Brokers/Sub-brokers *Stock Exchanges *Depository *Depository
Participants *Registrars to an Issue / Share Transfer Agent *Mutual Funds *Portfolio
Managers *Bankers to an Issue *Collective Investment Schemes *Credit Rating Agencies
*Custodians of Securities *Debenture Trustees * Merchant Bankers *Underwriters

SEBI also has a separate department to look into market irregularities. If any irregularities
are found in trading in shares or manipulation in price or violation of Insider trading
regulations, the same can be reported to SEBI.

To make efficient complaints redressal mechanism through SCORES, it is mandated by

SEBI to all stock brokers and DPs that they shall redress the complaints within 15 days
from the date of receipt of compliant. In case of additional information required from the
complainant, then it should be redress within 7 days from the date of receipt of compliant,
the period of 15 days shall be count from the receipt of additional information.
Sometimes a complaint is successfully resolved and the entity is advised to send reply to
complainant. But in certain cases, the entity or company denies wrongdoing, and it
remains unclear as to who is wrong or whether any wrongdoing occurred at all. If this
happens, SEBI cannot act as a judge or an arbitrator and force the entity or company to
resolve the complaint. Further,

SEBI cannot act as personal representative or attorney of the complainant. Securities laws
and other laws provide important legal rights and remedies if an investor has suffered
wrongdoing. On their own, investors can also seek to resolve their complaint through the
courts, consumer courts, or arbitration.

2.18 INVESTOR PROTECTION MEASURES BROUGHT FORWARD

BY SEBI

32
SEBI Complaints Redress System https://scores.gov.in/
SEBI has brought about a great transformation in the Indian securities market, it has
worked tirelessly for the past decade or so as to make trading an efficient, transparent and
smooth experience keeping the interest of the investor 88 uppermost.

SEBI works in co-ordination with the Government and the investors to bring innovation
in products offered so that it meets the changing needs of market participants. SEBI with
its dynamic form is vying to be an internationally acclaimed regulator so that other
regulators could emulate its model of security market.

Some of the initiatives on which SEBI is working are:

 “Set up a national institute to build a cadre of professionals to man the specialised

functions in the securities market. They are also working on nationwide
certification to ensure that any person or agent working with a market
intermediary has the necessary knowledge and skill to render quality
intermediation.

 Corporatize and demutualise exchanges where the possession, management and

trading rights would be with three diverse sets of people in order to evade clash of
interest.

 Initiate market wide straight through processing from trade commencement to

settlement.

 Migrate to T+1 rolling settlement.

 Continuously review and upgrade accounting standards, disclosures, corporate

governance practices in the interest of investors.

 Continuously review and amend the various regulations to bring them in tune with
dynamics of market requirements.

 Introduce new products in the market to meet all kinds of needs of market
participants33

33
Historical Perspective of the Securities Market Reforms in India, p5, http://www.sebi.gov.in/
cms/sebi_data/pdffiles/2975_t.pdf.