ROLE OF SEBI IN PRIMARY MARKET1

The Indian market is one of the main and promising emerging security market in the world and
therefore is ranked eight among the other world markets. The market in its entirety can be
divided into

 Primary market
 Secondary market, and
 Derivative market

The capital market is a market for long –term funds both equity and debt- and funds raised
within and outside of the country; the primary market refers to the long –term flow of funds from
the surplus sector to the government and corporate sector (through primary issues) and to banks
and non-banks financial intermediaries (through secondary issues).2 The primary market is the
market which provides a conduit for sale of new securities. This market provides chance to
issuers of securities, the government as well as corporate, to raise capital to meet their
requirements of investments or for liberation of their obligations. Securities laws are needed
mainly because of the unique informational needs of the investors because selling securities to
investors in the various capital markets provides the means for corporations, governments and
government agencies to satisfy their need for capital. And to regulate and control various volatile
natured reforms of the market the regulation of the capital market is highly needed. The
securities market is regulated by various agencies, such as the Department of Economics Affairs
(DEA), the Department of Company Affairs (DCA), the Reserve Bank of India (RBI) and the
SEBI3. This project will only deal with role of SEBI in primary market.

SEBI has been delegated with the task of protecting investor’s interest, to encourage
development of securities market as well as regulating it. And to exercise its powers and carry
out its functions, SEBI has set up various departments in diverse markets such as:-

Primary Market Department

Issue Management and Intermediation Department

1
SURBHI SHARMA, 4th year National Law University , Odisha.
2
SHAIK ABUDL MAJEEB PASHA et al., A STUDY ON ROLE OF SEBI IN INDIAN CAPITAL MARKET: AN EMPIRICAL
ANALYSIS, International Journal of Multidisciplinary Research Vol.2 Issue 3 (March 2012); available at
zenithresearch.org.in/.../30_ZEN_VOL2_ISSUE3_MARCH12.pdf
3
Id.
 Secondary Market Department (Policy, Operating and Exchange Administration New
Investment Products, Insider Trading)
Secondary Market Department (Exchange Administration, Inspection and Non-Member
Intermediaries).
Institutional Investment Department (Mutual funds and Foreign Institutional Investment).
The SEBI Act, 1992 establishes SEBI with four-fold objectives of protection of the interests of
investors in securities, development of the securities market, regulation of the securities market
and matters connected therewith and incidental thereto.4

SEBI plays a very important role in primary market; some of its functions are looking after all
policy matters and regulatory Issues for primary market, portfolio management services,
investment advisors, regulation and monitoring of merchant bankers etc. main objective of this
paper is to discuss about the role of SEBI in protecting shareholders interest in primary market
with taking into study four main aspects namely regulation over intermediaries, disclosures in
offer documents ,code of advertisement and insider trading.

Over the years, SEBI has brought about several changes to the issue process which range from
minute details such as the number of centers for receiving applications for public offerings to
events that substantively influence and affect investor welfare. SEBI has synchronized the
primary market by system of rules which could regulate the areas such as issuers’ eligibility to
offer securities to the public, by regulation of information produced at the time of issue; in toto
SEBI looks into regulation of processes and procedures concerning the issuance of securities.
These aspects are basically governed by SEBI (Issuer of Capital and Disclosure Requirements)
Regulations, 2009 (ICDR)5 and a set of regulations which would govern the different
intermediaries such as the merchant banker, registrar to the issue etc.

To manage its affairs, SEBI has a five member board, headed by a chairperson, out of the five
members, one member each is taken from the Law and Finance ministries, one member is from
RBI, and the remaining two members can be eminent members of the industry.6

When the Securities and Exchange Board of India (SEBI) Act was brought into force in 1992 the
forum where SEBI's orders could be challenged was an appellate authority comprising
government officers in the Finance Ministry; in 1995, when SEBI was given the power to impose

4
Supra note 1
5
SEBI has made available on its website a latest version of the SEBI (ICDR) Regulations, 2009 incorporating the
changes made by the SEBI (ICDR) (Amendment) Regulations, 2009, SEBI (ICDR) Amendment Regulations, 2010, SEBI
(ICDR) (Second Amendment) Regulations, 2010 and SEBI (ICDR) (Third Amendment) Regulations, 2010.
6
Siddharth Singh, SEBI – Insights and Functionalities (February 2, 2010); available at
file:///E:/studies/corp%20law/SEBI%20-%20Insights%20and%20Functionalities.htm
monetary penalty, the SAT was set up to decide on appeals against SEBI imposed monetary
penalties, leaving the appellate powers in other matters still with the Central Government. 7

It was in February 2000 that even the remaining appellate powers of the Central Government
were transferred to the SAT; the SEBI Act was amended in 2002 restructuring the constitution of
the Tribunal to a three-member set-up though the prevailing one-member set-up was to continue
till two more members were appointed.8

SEBI derives its powers from sec 55A of companies act. SEBI has been empowered to
administer the provisions of the sections specified in section 55A in relation to mainly three
matters:

(i) issue of securities;

(ii) transfer of securities; and
(iii) Non-payment of dividend.9

This section has been inserted by the Companies (Amendment) Act, 2000 to provide the power
to inspect books of account and other books and papers in respect of issue and transfer of
securities and non-payment of dividend will be managed by the Securities and Exchange Board
of India. In respect of other companies, the said provisions will continue to be administered by
Central Government through the department of Company affairs and ROCs.10 Section 55 A (1)
of the Companies Act requires the SEBI to deal with matters concerning the issue of securities.
In addition to that reference can be made to Section 11-B of the SEBI Act which vests the SEBI
with power to make an inquiry and issue directions to any company in respect of matters
specified in Section 11-A of the SEBI Act.11

A recent judgment by the Delhi high court in Kimsuk Krishna Sinha v. SEBI12 throws interesting
light on the role of SEBI in ensuring Correct Disclosure in offer documents and actions that
SEBI can or should take.
The high court says that
“The purpose of inserting Section 55A in the Companies Act was to empower the SEBI to
take both corrective and preventive action. This is perhaps because as a regulatory body
SEBI gets to see the draft prospectus preceding a public issue by a company even before

7
SAT's commendable role in fine-tuning the capital market, (business)The Hindu; available at
http://www.hindu.com/biz/2003/11/10/stories/2003111000010200.htm (Monday, Nov 10, 2003)
8
Supra note 6.
9
Section 55A, The Companies Act,1956.
10
A. Ramaiya, Guide to the Companies Act , pg 722-724 (17th ed. 2010).
11
Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197.
12
Id.
 the public gets to see the RHP. SEBI is enabled and empowered to examine the DRHP
and insist on complete and truthful disclosure of all relevant facts therein. The very
purpose of having an independent regulatory authority like SEBI, and vesting it with
statutory powers of inquiry, is to enable it to take prompt action in matters relating to
issue and transfer of shares

Besides, section 29A of the Securities Contracts( Regulation) Act, 1956 provides for further
powers there under to be delegated to SEBI by Central Government.

Certain powers under the Securities Contracts (Regulation) Act, 1956 have also been entrusted to
SEBI for regulating the dealings in securities on the stock exchange and outside the stock
exchange

The main subject matter of the paper will revolve around the questions relating to role and
influence SEBI has in primary market in terms of rules and regulation in protecting shareholders
interest in the primary market. We will try to look in brief how does SEBI protects those
shareholders interest with reference to SEBI’s regulation over intermediaries, disclosures in offer
documents, code of advertisement and insider trading. Scope and case laws which will be used in
this project have been limited to Indian context.
Role of SEBI in regulating Disclosures of Offer Documents and Code of
Advertisement

Since the authorization of Securities and Exchange Board of India (from now onwards will be
referred as SEBI), it has come up with numerous set of rules and regulation with an aim to
regulate the emerging Indian securities market and also to improve its safety and efficiency.
These initiatives have made a huge impact on almost every facet of the Indian market rather
some of these initiatives have even changed the market vitally.

“There is a growing network of financial intermediaries that operate in a highly

competitive environment while being governed by a tight set of norms. India has one of
the most sophisticated new equity issuance markets. Disclosure requirements and the
accounting policies followed by listed companies for producing financial information are
comparable to the best regimes in the world.”13

Among many important things one of the most important works of SEBI is to provide safety to
dealings and investment for which transactions are done with adequate transparency along with
strict compliance of rules laid down by SEBI which subsequently provides high degree of
security to transactions at the stock exchange. SEBI also look after the dealing in stock
exchanges in India and as we know a stock exchange allows trading only in securities that have
been listed with it and for listing any security it has to satisfy the standards laid down by SEBI to
see the genuineness and soundness of the company and with that it also has to provide for
disclosure of certain information on regular basis. 14

As part of SEBI’s efforts to protect investors’ interests, it has initiated many primary market
reforms which include improved disclosure standards in public issue documents, introduction of
prudential norms and simplification of issue procedures.15 The SEBI has approved committee

13
G Sabarinathan ; SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments;
Vikalpa Vol 35 No 4 (2010)
14
18 Indian Financial Market; available at http://www.nios.ac.in/srsec319new/319el18.pdf
15
Id.
report by Y.H. Malegaon Committee on accounting standards and issued guidelines in the above
mentioned regard in Jan. 2000. The report suggested that disclosure norms should be widened
and relevant accounting standards should be upgraded to that of internationally acknowledged
standards. With that additional disclosures are required to be given to make them more
meaningful and transparent. As a result of that all listed companies are now indebted to observe
forcibly the clauses of listing Agreement and SEBI has powers to enforce them. 16

As a result of that companies are now required to disclose all material facts and risk factors
associated with their projects while making public issue. All issue documents are to be vetted by
SEBI to ensure that the disclosures are not only adequate but also authentic and accurate.17

The Securities and Exchange Board of India issued the guidelines for disclosure and investor’s
protection in June, 1992 after the Capital Issues (Control), Act, 1947 was repealed. In these
guidelines SEBI requires the issuer (which is here the company) to disclose full facts and
particulars to the intending investors in their offer documents and also prescribe other rules in
connection with the issue of shares.

Chapter V of ICDR deals with the manner of disclosures in the offer documents. Section 57 of
ICDR says that the offer document shall contain all material disclosures which are true and
adequate so as to enable the applicants to take an informed investment decision, it also says that
the letter of offer shall contain disclosures as specified in part e of schedule viii.18

SEBI has issued detailed guidelines for the disclosures of full facts in the Prospectus/offer
documents by the issuer companies. It says that along with unveiling all material facts the
company has to state the risk aspects associate while making public issues. In case of the existing
companies, financial performance of the company for the last five years, along with risk factors
and management insight of risk factors are also requisite to be there in the prospectus/offer
document.19

Chapter VI of Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000 talks about the content of the offer document, Section I contents of the
prospectus which says that other than disclosures specified in Schedule II of the Companies

16
Lesson 17 Securities Exchange Board Of India (SEBI),Security Analysis And Portfolio Management; available at
http://www.psnacet.edu.in/courses/MBA/sapm/lecture-17.pdf
17
Supra note 2
18
section 57 , Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations,
(2009)
19
Unit 10 Regulatory Framework For Capital Market; available at
www.egyankosh.ac.in/ bitstream/ 123456789/ 25899/ 1/ Unit10.pdf
Act, 1956, the prospectus shall contain all the information which shall be true and adequate so as
to facilitate the investors to make an informed decision on the investments in the issue. The
information must be substantial enough for the investor to make an informed choice.20
In addition to regulations regarding the disclosure requirements SEBI also looks into the fact that
investor does not get befooled by misleading advertisement .SEBI has issued guidelines for the
same to ensure that the advertisement is truthful, fair and clear. For e.g. it shall be the
responsibility of the Lead Manager to ensure strict compliance with the code of advertisement by
the issuer company.

Chapter IX of Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000 deals with guidelines on advertisement. It clearly mentions that an
advertisement shall be in a clear, concise and understandable language. Excess use of technical
terminology should be avoided. Along with that it also mentions what amounts to misleading
advertisement. The code mentions that

Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. It should
not contain statements which are false, misleading, biased or deceptive, based on
assumption/projections. It should not be designed as likely to be misunderstood, it should not
contain statements which directly or by implication or by omission may mislead the investor. 21
Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the
investors. No advertisement shall directly or indirectly discredit other advertisements or make
unfair comparisons and it shall be accompanied by a standard warning in legible fonts.

This is all done by SEBI with an aim to protect the investor, in reality the term “Investor
Protection” is a very broad term encompassing a range of measures intended to protect the
investors from malpractices of companies, brokers, merchant bankers, etc. Since all investments
include some risk element, so “Investors Beware” should be the motto of all programs for
enlistment of savings for investment. The investor can suffer the loss either by his own mistake
of carelessness or by malpractice done by the company or by any broker. For the latter part they
have every right to complain. The main purpose of SEBI behind all the above mentioned
regulations is to protect the investor from being befooled. By providing all this information SEBI
is trying to protect the shareholders interest by making him do transactions on the basis of
informed decisions. So we can say that SEBI plays a very important role in protecting
shareholder from getting coned.

20
Securities And Exchange Board Of India (Disclosure And Investor Protection) Guidelines (2000)
21
Sixth Schedule Regulation 30 ,THE GAZETTE OF INDIA EXTRAORDINARY PART – III – SECTION 4 , SECURITIES AND
EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) (AMENDMENT) REGULATIONS (2012)
Preserving the Shareholders’ interests through regulation over intermediaries
SEBI has introduced a number of regulatory measures with the purpose of restructuring the
capital market. These regulations were brought into the market mainly to protect the investors'
interest. Practically if we see it is not always possible that there is direct transaction of securities
h between the issuer and the investor because of many different issues such as different locations
etc. so to help both the parties there are people known as intermediaries who help both the party
in their transaction. Cambridge dictionary defines intermediary as ‘someone who carries
messages between people who are unwilling or unable to meet’. Here in this context also
intermediaries are those persons who are associated with the securities market and act in between
the investors and the issuers of securities. They facilitate the securities transactions, for example,
merchant bankers, brokers, underwriters; Registrar to an issue, depository .participants, etc.22
one of the main objectives of SEBI is ‘Promotion of efficient services by brokers, merchant
Bankers and other intermediaries so that they become competitive and professional.’23

Risks are inherent in any competitive market, and investors benefit from competitive markets so
therefore management of the intermediaries are required to develop and implement effective
processes and management systems commensurate with their business operations and risk
characteristics in accordance with the general principles set out in the regulation. 24

In order to interpose between issuers and investors, regulators recognize various classes of
intermediaries in the capital market. Regulation through intermediaries has been found, perhaps
more effective in certain spheres of activity. SEBI, over the period, has recognized many types of
capital market intermediaries in India.25 Intermediaries such as merchant bankers, underwriters,
debenture trustees, bankers to an issue, registrars to an issue and share transfer agents and
portfolio manager are the intermediaries that function in the inter alia in the primary markets. 26

‘Financial intermediation can improve economic efficiency in at least five ways, by:

1) facilitating transactions;

22
Supra note 7
23
Supra Note 4
24
Regulatory Framework for Intermediaries, Securities and Futures Commission (June 2011); available at
http://www.sfc.hk/sfc/doc/EN/aboutsfc/Regulatoryframework.pdf
25
Part-III Functions of SEBI in Respect of Matters specified in Section 11 of the SEBI Act, 1992; SEBI Annual Report
(2002-2003); available at http://www.sebi.gov.in/cms/sebi_data/commondocs/0203c_p.pdf
26
Id.
2) facilitating portfolio creation;

3) easing household liquidity constraints;

4) spreading risks over time; and

5) reducing the problem of asymmetric information.’ 27

Starting with Section 12 of the SEBI Act28 gives power to grant registration certificates to
intermediaries, this provides for compulsory registration of the various intermediaries associated
with the securities market hence all intermediaries, namely, stock broker, sub-broker, share
transfer agent etc. are required to buy, sell, or deal in securities in accordance with the conditions
of a certificate of registration granted by SEBI.29

SEBI is also empowered to suspend or cancel a certificate of registration after giving the person
concerned a reasonable opportunity of being heard.30The same act confers power to SEBI issue
directives to the intermediaries.

Section 11(2) of SEBI act provides that SEBI shall register and regulate the working of stock
brokers and sub-brokers and In fulfillment of the above, SEBI carries out inspections of the
books and records of stock brokers to verify whether Books of accounts, records and other
documents are being maintained in the manner specified by the Securities Contracts (Regulation)
Rules, 1957 and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.31

For insure that shareholders interest is protected SEBI relies on certification by the merchant
banker and others for ensuring conformity with the regulations set by SEBI. The provisions cast
the responsibility on the issue manager for validating the accuracy of the prospectus as well as
for ensuring that other intermediaries involved in an issue such as the banker and registrar have
the required license and that the underwriter has the financial capacity to provide the service.32

27
CHAPTER 3: The Role of Financial Intermediaries and Financial Markets; available at http://highered.mcgraw-
hill.com/sites/dl/free/.../chapter03sg_5ed.doc
28
Securities and Exchange Board of India Act, 1992
29
Supra note 7
30
Id.
31
PART III FUNCTIONS OF SEBI IN RESPECT OF MATTERS SPECIFIED IN SECTION 11 OF THE SECURITIES AND
EXCHANGE BOARD OF INDIA ACT(1992); annual report 2000-2001; available at
http://www.sebi.gov.in/cms/sebi_data/commondocs/part-34_p.pdf
32
Supra note 1
Incorrect certification would mean that the merchant banker runs the risk of facing stricture or
monetary penalty or even being suspended or losing its license over the time this certification
mechanism has been continuously strengthened (SEBI, 1995; 1996).33

Intermediaries provide many value-adding functions that cannot be easily substituted or

‘internalized’ through direct supplier-buyer dealings, and hence mediating parties may continue
to play a significant role even in the E-Commerce world.34

The regime to regulate them should be such that to protect the interests of investors it should be
recognized that the initial entry barrier cannot be set too high and that investor protection should
also be complemented by the availability of information, facilitating informed choices by
investors and availability to the Commission of inspection, investigatory and disciplinary powers
in respect of the intermediary.35

SEBI has securities and exchange board of India (intermediaries) regulations, 2008 to regulate
the conduct of intermediaries. Chapter I states what an intermediary is, chapter II talks about
registration of intermediaries. SEBI has incorporated certain obligation on the intermediaries and
chapter III talks about the same obligations. And chapter V talks about actions in case of default
and also the manner of suspension and cancellation of license. Schedule III of the same
regulation talks about investor protection and says that every intermediary shall make all
possible efforts to protect the interest of investor. He must ensure that he is giving high standard
of service must be given and exercise due skill and diligence.

Role of SEBI in regulating Insider Trading

Mr. Arthur Levitt, a former Chairman of the Securities and Exchange Commission of the USA
has expressed that insider trading “has utterly no place in any fair-minded law abiding
economy.”36 There has been an increasing recognition that in order to maintain the confidence of
investors in the public securities market, it is essential that some economic agents who possess

33
Supra note 1
34
George M. Giaglis, The Role of Intermediaries in Electronic Marketplaces: Assessing Alternative Hypotheses for
the Future; available at
http://www.eicstes.org/EICSTES_PDF/PAPERS/The%20Role%20of%20Intermediaries%20in%20Electronic%20Mark
etplaces%20%28Giaglis%29.pdf
35
Mr Justice H.C. Nel, The Final Report Of The Commission Of Inquiry Into The Affairs Of The Masterbond Group
And Investor Protection In South Africa Vol 2 Nel Commission (April 2001)
36
Remarks by Arthur Levitt , A Question of Integrity Promoting Investor Confidence by Fighting Insider Trading,
"S.E.C. Speaks" Conference ( February 27, 1998);available at
http://www.sec.gov/news/speech/speecharchive/1998/spch202.txt
an informational advantage over the others do not exploit the same to derive pecuniary gains for
themselves.37

U.S Securities and Exchange Commission describes "Insider trading" as a term which includes
both legal and illegal conduct, the legal version is when corporate insiders—officers, directors,
and employees—buy and sell stock in their own companies.38 Illegal insider trading refers
generally to buying or selling a security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic information about the security.
Insider trading violations may also include "tipping" such information, securities trading by the
person "tipped," and securities trading by those who misappropriate such information.39

‘Company insiders have information unavailable to the public. These individuals have firsthand
knowledge of what the company is doing and better information concerning what the future
might hold. If there are likely problems for the company in the future, such as poor earnings,
slow growth, or lawsuits, then insiders can sell their stock before these events happen. When this
information becomes public, the stock’s price should decrease. However, this price decrease
occurs after the insider has sold his or her shares, thus avoiding the loss. In this case the insider
beat the market. On the other hand, insiders know when their company has a bright future, high
potential earnings, innovative products being developed, etc. When the future looks bright,
insiders can buy shares before the public becomes aware of these facts. The price, later, fully
increases to represent the positive information. In both cases, insiders use private information to
beat the market.’40

Earlier, the concept of insider trading was limited to the aspect of a company insider tipping of
an outsider and the outsider using the tip and trading in the company’s shares, this constitutes a
breach of fiduciary duty owed by the insider to the company’s shareholders; it was called the
classical theory of insider trading.41 Later US Supreme Court in the case US v/s O’Hagan42 in
1997 extended the scope of insider trading by including the misappropriation theory which said
that a person commits insider trading when he obtains material confidential information and uses
it in securities transactions in breach of fiduciary duty or similar relationship of confidence to the

37
Supra note 1
38
U.S. Securities and Exchange Commission; available at http://www.sec.gov/answers/insider.htm
(Modified:04/19/2001)
39
Id.
40
Kris McKinley & Elon College ,Stock Market Efficiency and Insider Trading; available at
org.elon.edu/ipe/mckinley.pdf
41
Neha Mirajgaoker, Insider Trading; available at http://jurisonline.in/2008/09/insider-trading/ (2008)
42
United States v. O'Hagan, 521 U.S. 642, 655 (1997)
source of information but not necessarily to the shareholders of the company whose stocks are
traded.43

It is said that the information captured by insider trading modifies the responsiveness of returns
to annual unexpected earnings and also the information captured by insider training differs from
that captured by annual unexpected earnings.44

Insider trading weakens the confidence of the investor in the fairness and honesty of the
securities markets and this is reason SEBI has treated the recognition and suit of insider trading
violation as one of its main concern. SEBI’s first enactment to restrain insider trading, namely,
SEBI (Prohibition of Insider Trading) Regulations, 1992 did not make much advancement due to
poor enforcement. These regulations, again, have been amended substantially over time. SEBI’s
current approach centers around prevention of insider trading by requiring listed companies,
intermediaries, and advisors to set up internal systems for preventing insider trading and
reporting on compliance or otherwise to SEBI. The insider trading regulations provide for
disclosure of smaller amounts and provides for disclosure on selling shares (something which the
takeover code does not mandate). 45

Regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations defines an ‘insider’ as a

person connected or deemed to be connected and who is reasonably expected to have access to
any unpublished price sensitive information in respect of securities [i.e. shares, debentures etc.]
of a company, or who has received or has had access to such unpublished information. 46The
directors, officer, employers of the company, & persons involving a professional or business
relationship [like CA’s lawyers etc.] are connected person as per regulations 2 (c).47The insider
trading Regulations provide for disclosure of smaller amounts and provides for disclosure on
selling shares (something which the takeover code does not mandate).48 Regulation 3 & 3A
enumerates the various acts that an insider and company are prohibited to do, these regulations
prohibit an insider and a company to ‘deal’ in certain circumstances; the term ‘deal’ is defined
under regulation 2(d) which describe dealing in securities to mean an act of subscribing, buying,
selling or agreeing to do so by any person either as principal or agent.49

43
Id.
44
Steven Allen and Ramachandran Ramanan , Insider Trading, Earning Changes,And Stock Prices, Management
Science Vol. 41, No. 4, Apr., 1995; available at http://www.jstor.org/stable/2632886
45
Supra note 7
46
SEBI on Insider Trading; available at http://www.legalserviceindia.com/article/l268-SEBI-on-Insider-Trading.html
47
Id.
48
Consultative Paper on amendments to SEBI (Prohibition of Insider Trading) Regulations 1992, Securities And
Exchange Board Of India; available at www.sebi.gov.in/commreport/InsiderTrading.pdf
49
Supra note 32
The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 1992
requires that a person who is connected with a listed company and is in possession of any
unpublished price sensitive information likely to materially affect the price of securities of
company, shall not
(i) On his behalf or on behalf of any other person deal in securities or
(ii) Communicate such information to any other person, who while in possession of such
information shall not deal in securities.50

“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 company.
The following shall be deemed to be price sensitive information:—
(i) Periodical financial results of the company;
(ii) Intended declaration of dividends (both interim and final);
(iii) Issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects.
(v) Amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the undertaking;
(vii) and significant changes in policies, plans or operations of the company;51

Apart from this chapter II of the same regulation gives guidelines regarding prohibition on
dealing, communicating or counseling on matters relating to insider trading. Chapter III talks
about power given to the board to make inquiries and inspection. Chapter IV talks about code of
internal procedures and conduct for listed companies and other entities mainly it focuses upon
disclosure requirement and internal procedures which is quite evident from the head note i.e.
‘Policy on disclosure and internal procedure for prevention of insider trading’52.schedule I and
schedule II talks about different model code for the prevention of insider trading for listed
companies well as for other entities; the latter schedule although talks about code of corporate
disclosure practices for prevention of insider trading.

50
Payel Jain ,An insight into SEBI’s Insider Trading Regulations; available at
http://www.vinodkothari.com/tutorials/An%20insight%20into%20Insider%20Trading%20Regulations.pdf
51
section 2 h(ha),Securities And Exchange Board Of India ( [Prohibition Of] Insider Trading Regulations (1992)
{Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-2-2002.}
52
Chapter IV ,Securities And Exchange Board Of India ( [Prohibition Of] Insider Trading) Regulations(1992)
 Conclusion
The Securities and Exchange Board of India Act was passed in 1992, thus giving the regulatory
teeth to the body; SEBI was entrusted with the primary task of protecting the interests of the
investors in addition to that SEBI was also entrusted with the twin objectives of developing and
regulating the stock market.53

Throughout this whole journey of SEBI’s existence from last 18 years it has tried to find a
balance between existing policies and forming new policies and regulation curbing the loopholes
in the existing policies and then implementing them to ensure that securities market is growing.
And it has been successful also in its objective.

The SEBI has framed regulations under the SEBI Act and the Depositories Act for registration
and regulation of all market intermediaries, for prevention of unfair trade practices, and insider
trading.54 In this regard, SEBI has done an excellent job because overall reports show that a lot
of investors have definitely improved due to the policies and steps taken by the regulator.

To empower investors make informed decisions and facilitate fair dealing, the SEBI now has
also introduced online filing and dissemination of time sensitive price information,
benchmarking or mutual fund schemes, valuation norms for unlisted scripts in mutual fund
portfolios , rationalization of depository participants‘ charges and new regulation for portfolio
managers. 55

According to recent reports prepared by the international organization of securities commission,

fairness and efficiency are two parts of the same coin. The report observes:

53
Supra note 5
54
Supra note 1
55
Supra note 1
 If a market is unfair, in the end it is also inefficient. For example if limit order positions
are not protected, they will not enter the market and the overall liquidity of the market
will suffer.56

Securities and Exchange Board of India has brought about reforms in the new issues market by
issuing guidelines for disclosure and Investor Protection, pricing of new issues by companies,
entry norms for new issues; it has also taken various steps for reforms in the primary new issues
market and almost all these measures have been duly discussed in the above chapters. 57 SEBI’s
current approach centers around prevention of insider trading by requiring listed companies,
intermediaries, and advisors to set up internal systems for preventing insider trading and
reporting on compliance or otherwise to SEBI.58

But to have effective investor protection to take place, the regulators need the co-operation of the
people involved, the entities and the government. 59

The whole idea of investor protection can be substantiated by the help of the words said by
Arthur Levitt , the chairman of the SEC, in his recent speech (28 September 1998) as follows:

“The significance of transparent, timely and reliable financial statements and its
importance to investor protection has never been more apparent. The current financial
situations in Asia and Russia are stark examples of this new reality. These markets are
learning painful lessons taught many times before: investors panic as a result of
unexpected or unquantifiable bad news.

If a company fails to provide meaningful disclosure to investors about where it has been,
where it is and where it is going, a damaging pattern ensues. The bond between
shareholders and the company is shaken; investors grow anxious; prices fluctuate for no
discernible reasons; and the trust that is the bedrock of our capital markets is severely
tested..’’60

So to avoid this kind of situation SEBI has put its foot firm and hence is playing its role very
well in protecting the shareholders interest in the security market.

56
Transparency In Secondary Markets: A Synthesis Of IOSCO Debate, International Organization Of Secuirities
Commissions, Milano 1993, p21
57
Supra note 12
58
Supra note 6
59
Supra note 28
60
Arthur Levitt, The Numbers Game.. NYU Center for Law and Business, New York, N.Y.(September 28, 1998)
 Bibliography

Statutes Referred

1. Securities And Exchange Board of India Act,1992

2. Securities And Exchange Board of India (Prohibition Of Insider Trading) regulations,
1992
3. Securities And Exchange Board Of India ( Investor Protection and education fund)
Regulations, 2009
4. Companies Act,1956
5. Securities And Exchange Board Of India (Disclosure And Investor Protection)
Guidelines (2000)
6. Securities And Exchange Board Of India (Issue Of Capital And Disclosure
Requirements) Regulations

7. Securities And Exchange Board Of India (Mutual Funds) (Amendment) Regulations,

2012

Books Referred

1. James D.Cox Et Al.,Securities Regulation (cases and materials),6th ed,2009

2. Taxman’s SEBI manual,17th ed,2011
3. A. Ramaiya, Guide to the Companies Act 722-724 (17th ed. 2010).

Articles Referred
1. Bhave, C. B., Insider Trading and SEBI
( http://www.jstor.org/stable/4399312)
2. Gupta, L. C. , Challenges before Securities and Exchange Board of India,
(http://www.jstor.org/stable/4403941)

3. Allen ,Steven, and , Ramanan, Ramachandran , Insider Trading, Earning Changes,And

Stock Prices, Management Science Vol. 41, No. 4, Apr., 1995;
(http://www.jstor.org/stable/2632886)
4. Overview of Indian security market,
(http://www.niftydirect.com/nsebse/market-gyan/Learning%20Session%205th.pdf)
5. Part-III Functions of SEBI in Respect of Matters specified in Section 11 of the SEBI Act,
1992; SEBI Annual Report (2002- 2003);
(http://www.sebi.gov.in/cms/sebi_data/commondocs/0203c_p.pdf
6. Part III Functions Of SEBI In Respect Of Matters Specified In Section 11 Of The
Securities And Exchange Board Of India Act(1992); Annual Report 2000-2001;
(http://www.sebi.gov.in/cms/sebi_data/commondocs/part-34_p.pdf)
7. Mr Justice H.C. Nel, The Final Report Of The Commission Of Inquiry Into The Affairs
Of The Masterbond Group And Investor Protection In South Africa (April 2001)
8. Giaglis, George M, The Role of Intermediaries in Electronic Marketplaces: Assessing
Alternative Hypotheses for the Future;
(http://www.eicstes.org/EICSTES_PDF/PAPERS/The%20Role%20of%20Intermediaries
%20in%20Electronic%20Marketplaces%20%28Giaglis%29.pdf)
9. Mckinley, Kris, Stock Market Efficiency and Insider Trading
(http://org.elon.edu/ipe/mckinley.pdf)
10. Transparency In Secondary Markets: A Synthesis Of IOSCO Debate, International
Organization Of Secuirities Commissions, Milano 1993, p21
11. Shaik Abudl Majeeb Pasha et al., A Study On Role Of Sebi In Indian Capital Market:
An Empirical Analysis, International Journal of Multidisciplinary Research Vol.2 Issue 3
( zenithresearch.org.in/.../30_ZEN_VOL2_ISSUE3_MARCH12.pdf)
12. Pandey, T N Style of functioning of Securities and Exchange Board of India,
(http://www.claonline.in/DisplayFileDetails.aspx?tble=QXJ0aWNsZXM=&Filename=N
ThfMDMuaHRt)
13. Sabarinathan,G, SEBI’s Regulation of the Indian Securities Market: A Critical Review of
the Major Developments,
(http://www.vikalpa.com/pdf/articles/2010/Vik354-02-ResGSabarinathan.pdf)
14. FICCI Study Suggests Major Role For SEBI In Primary Market Revival, The Financial
Express, (Wed, 15 Feb 2012)
15. Consultative Paper on amendments to SEBI (Prohibition of Insider Trading) Regulations
1992, Securities And Exchange Board Of India
( www.sebi.gov.in/commreport/InsiderTrading.pdf)
16. Singh, Siddharth, SEBI – Insights and Functionalities, (February 2, 2010),
(file:///E:/studies/corp%20law/SEBI%20-%20Insights%20and%20Functionalities.htm)
17. Unit 10 Regulatory Framework For Capital Market,
(www.egyankosh.ac.in/bitstream/123456789/25899/1/Unit10.pdf)
18. SAT's commendable role in fine-tuning the capital market, (business)The Hindu;
(http://www.hindu.com/biz/2003/11/10/stories/2003111000010200.htm )
(Monday, Nov 10, 2003)

19. Chapter 18- Indian Financial Market

(http://www.nios.ac.in/srsec319new/319el18.pdf)
20. Lesson 17- Securities Exchange Board Of India (SEBI),Security Analysis And Portfolio
Management
(http://www.psnacet.edu.in/courses/MBA/sapm/lecture-17.pdf)
21. Regulatory Framework for Intermediaries, Securities and Futures Commission (June
2011); (http://www.sfc.hk/sfc/doc/EN/aboutsfc/Regulatoryframework.pdf)
22. CHAPTER 3: The Role of Financial Intermediaries and Financial Markets;
(http://highered.mcgraw-hill.com/sites/dl/free/.../chapter03sg_5ed.doc)
23. U.S. Securities and Exchange Commission (Modified:04/19/2001)
(http://www.sec.gov/answers/insider.htm )
24. Mirajgaoker Neha, Insider Trading; (2008)
(http://jurisonline.in/2008/09/insider-trading/)
25. SEBI on Insider Trading;
(http://www.legalserviceindia.com/article/l268-SEBI-on-Insider-Trading.html)
26. Payel Jain ,An insight into SEBI’s Insider Trading Regulations; available at
(http://www.vinodkothari.com/tutorials/An%20insight%20into%20Insider%20Trading%
20Regulations.pdf)
27. Arthur Levitt, The Numbers Game.. NYU Center for Law and Business, New York,
N.Y.(September 28, 1998)

Cases Referred
1. Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197.
2. United States v. O'Hagan, 521 U.S. 642, 655 (1997)