Chapter 8

Securities and Exchange

Board of India
 Chapter Objectives

 To know the organization of SEBI

 To understand the various functions of SEBI
 To understand the role of SEBI in primary and
secondary markets
 Concept of SEBI
 SEBI was established in the year 1992.

 The three main objectives of SEBI are to:

 Protect the interest of the investors

 Promote the development of securities market

 Regulate the securities market

 Functions of SEBI
The functions performed by the SEBI are:
 Regulates the business of stock exchanges
 Regulates the working of stock brokers,
sub-brokers, share transfer agents, merchant bankers, etc.
 Prohibits unfair trade practices in the stock exchanges
 Promotes education and training of investors and
intermediaries
 Organization of SEBI
The different departments of SEBI are:
 Primary department: It has the responsibility of looking
after the policy matters related to the primary market.
 Issue management department: It has the responsibility
of looking after the issuing of new shares.
 Secondary market department: It has the responsibility
of looking after the market price of the shares in the
secondary market.
 Institutional investment department: It has the
responsibility of looking after the mutual funds, mergers,
acquisitions, etc.
 SEBI’s Role in
the Primary Market

For protecting the interest of the investors in the

primary market, SEBI performs various
important roles, which are as follows:
 Entry norms: The SEBI tightens the entry norms for the
companies entering the capital market.
 Promoters’ contribution: The SEBI regulates the
contribution of the promoters by fixing the minimum limit
for their contribution made to the capital issue.
 SEBI’s Role in
the Primary Market (Contd.)
 Disclosure: The draft prospectus is made as a public document
in order to promote transparency.
 Book building: The SEBI accepts book building as one of the
modes of public issue and issues guidelines for book building
mode.
 Allocation of shares: The SEBI makes proportionate allotment
of shares in order to protect the interest of small investors to
the primary market.
 Market intermediaries: The merchant bankers are licensed by
the SEBI to carry out their operations in primary market.
 Financial Ratio
 It is a ratio that provides a numerical relationship
between two relevant financial data.
 It is prepared from the balance sheet and profit & loss
account.
 It is divided into six groups, which are as follows:
 Liquidity ratios
 Turnover ratios
 Leverage ratios
 Profit margin ratios
 Return on investment ratios
 Valuation ratios
 SEBI’s Role in the Secondary Market
SEBI has initiated a number of reforms in the secondary
market for making it more attractive to the investors. These
reforms are as follows:
 Governing board: The SEBI has reconstituted the governing board of the stock
exchanges.
 Infrastructure: In order to sophisticate the shares trading, SEBI has permitted
all the stock exchanges to expand their online screen-based trading terminals.
 Settlement: Rolling settlement was introduced.
 Debt market segment: The SEBI has permitted the debt market instruments to
be traded in the stock exchanges.
 Price stabilization: A separate division has been set up by the SEBI to look
after the price movements of shares in the market.
 Delisting: The norms of delisting of shares has been tightened by the SEBI.
 Brokers: The SEBI has laid down a code of conduct for the brokers.
 Mutual Funds and SEBI
To ensure a smooth functioning of mutual funds, SEBI has laid
down following regulations:
 Disclosure norms: The companies in their disclosure forms
(prospectus) must include all the information about the
functioning and nature of the mutual funds.
 Investments: The SEBI has tightened the various norms of
investments of mutual funds so that the investments can get a
better rate of return.
 Accountability: The SEBI has issued directives that proper
books of accounts must be maintained related to the investments
made by the mutual funds.
 Dividend: The amount of dividend must not be less than
90% per cent of the profits earned during the year.
 Management: Members of the management must have a great
deal of experience, professional competence and financial
soundness in all their business transactions.
 SEBI and the Foreign Institutional
Investment
 The Foreign Institutional Investor (FII) is an entity that is established
outside India and proposes to make investments in India.
 A large inflow and outflow of FIIs has a significant bearing on the
stock price movement.
 The SEBI, in order to regulate the flow of FIIs in the stock market has
issued the following directives:
 An individual must hold a certificate granted by the SEBI, if S/he has to deal in
securities as a foreign institutional investor.
 The individual under the provisions of Foreign Exchange Regulation Act
(FERA) 1973 has to take permission in order to make investments in India.
 A custodian has to be appointed by the FIIs to deal in the securities and
reporting.
 Critical Review of SEBI
SEBI has made a great deal of progress in regulating
the exchange market. However, there are certain areas
which need the attention of SEBI. These are:
 Disclosures

 Settlement

 Capital adequacy

 Single authority
 Chapter Summary

By now, you should have:

 Understood the organization of SEBI

 Understood the various functions of SEBI

 Understood the role of SEBI in primary and

secondary markets