Power and Functions of SEBI

Chapter IV of SEBI Act, 1992 deals with the powers and functions of SEBI. Section 11 of the Act lays down that it shall be the duty of SEBI to protect the interests of the investors in securities and to promote the development of, and to regulate the securities markets by such measures as it thinks fit.

Section 11(2) provides that these measures would include:

• Regulating the business in stock exchanges and any other securities markets;
  
  
• Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
  
  
  • registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf;
    
    
• registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;
  
  
• promoting and regulating self-regulatory organisations;
  
  
• prohibiting fraudulent and unfair trade practices relating to securities markets;
  
  
• promoting investors’ education and training of intermediaries of securities markets;
  
  
• prohibiting insider trading in securities;
  
  
• regulating substantial acquisition of shares and takeover of companies;
  
  
• calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;
  
  
  • calling for information and records from any person including any bank or any authority or board or corporation established or constituted by or under any central or state Act, which in the opinion of SEBI, shall be relevant to any investigation or inquiry by SEBI in respect of any transaction in securities.
    
    
  • calling for information from or furnishing information to other authorities. Whether in India, or outside India having functions similar to those of SEBI, in the matters relating to the prevention or detection of violation in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard.
    
    
    However, SEBI for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with approval of the Central Government.
    
    
• 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;
  
  
• levying fees or other charges for carrying out the purposes of this section;
  
  
• conducting research for the above purposes;
  
  
  • calling from or furnishing to any such agencies, as may be specified by SEBI, such information as may be considered necessary by it for the efficient discharge of its functions;
    
    
• performing such other functions as may be prescribed.

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Following are the powers of SEBI

Recognition of Stock Exchanges

Stock exchanges are granted recognition for operations in securities markets by SEBI under Section 4 of SCRA, 1956.

As on March 31, 2015 there were 13 stock exchanges in India, of which six have been granted permanent recognition, one stock exchange, the Metropolitan Stock Exchange Ltd. (earlier MCX-SX), has been granted renewal of recognition while the remaining six stock exchanges have not been granted recognition.

Among the 13 stock exchanges, the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Metropolitan Stock Exchange (MSEI) have been granted permission for carrying out trade in four segments – equity, equity derivatives, currency derivatives and interest rate derivatives.

Grant of Recognition to Clearing Corporations

SEBI has by exercising its powers granted recognition to the National Securities Clearing Corporation Ltd. (NSCCL), the Indian Clearing Corporation.

Registration and regulation of working of intermediaries associated with securities markets

Regulation of market intermediaries has three objectives: protecting client assets from insolvency of the intermediaries and guarding against defaults and sudden disruptions in the market, ensuring that the intermediaries are fair and diligent in dealing with their clients and reducing conflicts of interest.

Regulation, therefore, sets qualifying standards, prudential standards, internal controls and risk management standards and enforces a code of conduct. In order to enhance investor confidence, it is necessary that all the intermediaries maintain high standards of integrity and fairness and also act with due skill, care and diligence in the conduct of their business with high levels of compliance.

Various intermediaries’ regulations have been framed under the SEBI Act, 1992 and the Depositories Act, 1996 for the registration and regulation of all market intermediaries.

Under these Acts, the Government and SEBI issue notifications, guidelines and circulars that the market intermediaries need to comply with. SEBI ensures the standard and quality of services to clients and investors, fair and sound conduct and compliance practices.

Promotion and regulation of self-regulatory organisations

SEBI (Self-Regulatory Organisations), 2004 was notified on February 19, 2004 with the objective of promoting organisation of intermediaries representing a particular segment of the securities market as a self regulated entity/organisation.

For recognition of an organisation of intermediaries as SROs, SEBI held discussions with various bodies like the Association of Merchant Bankers of India (AMBI), the Association of NSE Members of India (ANMI) and the Registrars Association of India (RAIN).

SEBI has decided to have a single SRO for distributors of mutual fund products and a two-stage procedure for granting recognition as SRO for distributors of mutual fund products, that is, grant of in-principle approval and grant of recognition

Fraudulent and unfair trade practices

To protect investor interests and to promote fair and orderly securities market, SEBI ensures the integrity of markets by detecting market frauds on a proactive basis, investigating abusive, manipulative or illegal trading practices in securities markets and taking punitive steps to punish the manipulators.

Market surveillance helps in ensuring the integrity of markets by enabling a safe and sound environment where buyers and sellers are willing to participate confidently.

Investor education and training of intermediaries

Section 11(2)(f) of the SEBI Act empowers SEBI to promote investors’ education and foster training for intermediaries in securities markets. Along with investor education and training, SEBI has also actively pursued investor grievance redressal with a view to protecting investor interests, enhancing their confidence and increasing their participation.

Investor Grievance Redressal

SEBI has been taking various regulatory measures to expedite the redressal of investor grievances. The grievances lodged by investors are taken up with the respective listed company or intermediary and are continuously monitored.

Grievances pertaining to stock brokers and depository participants are taken up with the concerned stock exchange and depository for redressal and monitored by the concerned department through periodic reports obtained from them. Grievances pertaining to other intermediaries are taken up with them directly for redressal and continuously monitored by the concerned department at SEBI.

Issuing No Objection Certificates

Companies raising capital through public issues of securities are required to deposit one percent of the issue amount with the designated stock exchange. This deposit is released by the stock exchange only after No objection certificate is received. SEBI issues NOCs to companies after satisfactory redressal of complaints received by SEBI against the companies.

Information called from, inspections undertaken, inquiries and audit of stock exchanges and intermediaries

Regulation of intermediaries is an essential part of the framework for regulation of securities markets. The basic objective of prudential supervision of market intermediaries is to safeguard the stability of the financial system, protect client interests from undue risks of losses that may arise from failure, fraud or any opportunist behaviour on the part of the intermediaries, promote the efficient performance of intermediaries and markets and ensure compliance by market intermediaries.

Supervision of intermediaries through on-site and off-site inspections, enquiries and adjudications in case of violations of rules and regulations and administrative and statutory actions are essential features of effective enforcement by SEBI. SEBI conducts inspections of market intermediaries directly as well as through institutions like stock exchanges and depositories.

Inspections were conducted during the year to verify the compliance levels of intermediaries. Special purpose (theme-based) inspections were also conducted on the basis of investor complaints, references, surveillance reports and specific concerns. Special purpose inspections of major stock exchanges, as well as the depositories, were also carried out in order to examine the effectiveness and quality of their audits/inspections and action-taking processes.

Delegated powers and functions

Section 29A of SCRA, 1956 permits the central government to delegate powers exercisable by it under any provision of SCRA, 1956 to SEBI also by order published in the official Gazette except the power to make rules. The Central Government has delegated certain powers to SEBI with respect to regulation of contracts in securities and stock exchanges and clearing corporations.

The delegated powers with respect to contracts in securities include the power to notify permissible contracts in securities and the power to prohibit contract in securities in certain cases.

Investigation

• Timely completion of investigation cases and effective, proportionate and dissuasive action in case of violations of securities laws are important for the protection of investors’ interests and ensuring fair, transparent and orderly functioning of the markets.
  
  It is also vital for improving the confidence in the integrity of securities markets. SEBI is therefore constantly striving to upgrade its investigative skills by making use of information technology (IT) and other latest investigative tools.
  
  The importance of effective and credible use of investigations has also been underscored by IOSCO in its ‘Principles for the Enforcement of Securities Regulation’.
  
  
• Keeping these objectives and principles of securities regulations in view, SEBI initiates investigations to examine alleged or suspected violations of laws and regulations relating to securities markets. Possible violations may include price manipulation, creating an artificial market, insider trading, capital issue related irregularities, takeover related violations, non-compliance of disclosure requirements and any other misconduct in securities markets.
  
  
• The Board may, by an order in writing, direct any person to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board.
  
  
• It shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary to preserve and to produce to the Investigating Authority all the books, registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power.
  
  
• The Investigating Authority may require the concerned persons to furnish such information to, or produce such books, or registers, or other documents, or record before him.
  
  
• The Investigating Authority may keep in its custody any books, registers, other documents and record for six months and thereafter shall return the same to the concerned persons by whom or on whose behalf the books, registers, other documents and record are produced.
  
  The Investigating Authority may call for any book, register, other document and record if they are needed again.
  
  
• The Investigating Authority may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose, may require any of those persons to appear before him personally.
  
  
• If any person fails without reasonable cause or refuses to produce to an Investigating Authority any book, register, other document and record or to furnish any information which it is his duty or to appear before the Investigating Authority personally when required to do so or to answer any question which is put to him by the Investigating Authority or to sign the notes of any examination he shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to one crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues.
  
  
• The Investigating Authority may, pursuant to an order made on an application by the Judicial Magistrate of the first class having jurisdiction-enter the place or places where such books, registers, other documents and record are kept; search that place or those places in the manner specified in the order; and seize books, registers, other documents and record it considers necessary for the purposes of the investigation.

Enforcement of regulations

Effective enforcement lies at the heart of ensuring integrity, transparency and fairness in the market. It not only leads to a better compliance culture, but also underscores the point that market misconduct and abuse will not go unpunished. A credible enforcement strategy underpins the importance of consistent, timely and transparent regulatory outcomes, which are proportionate, dissuasive and effective.

Under the SEBI Act, 1992, SCRA, 1956 and the Depositories Act, 1996, SEBI broadly pursues two streams of enforcement actions: administrative/civil or criminal. Administrative/civil actions include issuing directions such as remedial orders, cease and desist orders, suspension or cancellation of certificates of registration and imposition of monetary penalty under the respective statutes.

Proceedings of a criminal nature involve initiating prosecution proceedings against violators by filing criminal complaints before a competent court.

Enquiry Proceedings

SEBI may suspend or cancel the certificate of registration of an intermediary through enquiry regulations on the recommendation of the enquiry officer/designated authority appointed for that purpose. It may also issue a warning to an intermediary if it considers that the violations committed by the intermediary do not warrant suspension or cancellation of registration.

Prosecution

Section 24 of the SEBI Act, 1992 empowers SEBI to launch prosecution against any person for contravention of any provision of the SEBI Act, 1992 or any rules or regulations made there under before a court of criminal jurisdiction.

Cease and Desist proceedings

• If the Board finds, after causing an inquiry to be made that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder, the Board may pass an order requiring such person to cease and desist from committing or causing such violation.
  
  
• Board shall pass such order in respect of listed public company or a public company which intends to get its securities listed on any recognized stock exchange only if such company has indulged in insider trading or market manipulation.

Prohibition of Manipulative and Deceptive Devices, Insider Trading and Substantial Acquisition of Securities or Control

The following activities have been prohibited:

• use or employment of any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under;
  
  
• employment of any device, scheme or artifice to defraud in connection with issue or dealing in securities;
  
  
• engaging in any act, practice, course of business which operates or would operate as fraud or deceipt upon any person, in connection with the issue, dealing in securities in contravention of the provisions of this Act or the rules and the regulations made there under;
  
  
• engaging in insider trading;
  
  
• dealing in securities while in possession of material or non-public information or communicating such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules and the regulations made there under;
  
  
• acquiring control of any company or securities more than the percentage of the equity share capital of a listed company in contravention of the provisions of this Act or the rules and the regulations made there under.