Securities and Exchange Board of India

Securities and Exchange Board of India

The Securities and Exchange Board of India (SEBI) is the regulatory authority overseeing the securities and commodity markets in India. Established in 1988, SEBI operates under the SEBI Act, aiming to protect the interests of investors and promote the development and regulation of securities markets. As a key financial regulator, SEBI’s mandate includes ensuring fair and transparent market practices, preventing fraudulent activities, and fostering investor education. SEBI plays a crucial role in maintaining market integrity, regulating various market segments such as equities, derivatives, and mutual funds, and enforcing compliance with its regulations to uphold the stability and efficiency of India’s financial markets.

Objectives of SEBI

  1. Investor protection
  2. Market development
  3. Ensuring fair practices
  4. Regulating intermediaries
  5. Enhancing investor education
  6. Monitoring and surveillance
  7. Encouraging innovation

Composition of SEBI

  1. Chairperson: The head of SEBI, responsible for providing leadership and direction to the regulatory initiatives.

  2. Members: Appointed members, including representatives from the government and experts in finance and securities, contributing to the decision-making process.

  3. Roles and Committees: SEBI operates through various roles and committees, including the Board, executive committees, and advisory groups, each serving specific functions.

  4. Appointment: Members are appointed by the government based on their expertise and experience in financial markets.

Duties of SEBI

  1. Regulatory Oversight: SEBI oversees and regulates the securities and commodity markets, ensuring compliance with established norms and standards.

  2. Issuer Compliance: The regulatory body enforces compliance with listing and disclosure requirements, ensuring transparency for companies issuing securities.

  3. Investor Grievance Redressal: SEBI provides a platform for the redressal of investor grievances, working to resolve disputes and protect investor interests.

  4. Market Surveillance: Conducting market surveillance is a crucial duty, detecting and preventing market manipulation, insider trading, and other irregularities.

  5. Policy Formulation: SEBI formulates policies and regulations, adapting to evolving market dynamics and addressing emerging challenges.

  6. Educational Initiatives: Initiatives are undertaken for investor education and awareness, contributing to enhanced financial literacy among market participants.

  7. Enforcement Actions: SEBI takes enforcement actions, including penalties and disciplinary measures, against entities violating securities laws, maintaining market integrity.

  8. Market Development: The regulatory body actively promotes market development by introducing innovative financial products and fostering a competitive environment.

  9. International Cooperation: SEBI collaborates with international regulatory bodies for information exchange and aligning regulatory practices with global standards.

  10. Advisory Role: SEBI plays an advisory role, providing recommendations and guidance to ensure effective regulatory oversight and market functioning.

Functions of SEBI

  1. Regulates securities and commodity markets
  2. Enforces issuer compliance and transparency
  3. Safeguards investor interests
  4. Conducts market surveillance and inquiries
  5. Formulates policies and regulations
  6. Promotes investor education
  7. Takes enforcement actions
  8. Actively contributes to market development

Powers of SEBI

  1. Quasi-Executive Powers of SEBI:

    • Enforce compliance with securities regulations
    • Conduct inspections and investigations
    • Ensure market integrity through proactive measures

    Quasi-Judicial Powers of SEBI:

    • Conduct hearings, inquiries, and investigations
    • Issue rulings and impose penalties
    • Ensure fair and impartial adjudication in securities-related matters

    Quasi-Legislative Powers of SEBI:

    • Formulate rules, regulations, and guidelines
    • Establish frameworks for market operations
    • Adapt regulatory measures to address evolving market dynamics

Registration of Intermediaries

  1. Application Submission:

    • Intermediaries, such as brokers, sub-brokers, and merchant bankers, initiate the registration process by submitting a comprehensive application to SEBI.
  2. Due Diligence:

    • SEBI conducts a thorough due diligence process, examining the financial soundness, integrity, and competency of the intermediary seeking registration.
  3. Verification of Documents:

    • SEBI verifies the submitted documents, ensuring that all required information, including financial statements and compliance records, is accurate and complete.
  4. Background Check:

    • A background check is conducted to assess the track record, professional competence, and regulatory history of the intermediary applying for registration.
  5. Fit and Proper Criteria:

    • SEBI assesses whether the key personnel of the intermediary meet the “fit and proper” criteria, ensuring that individuals involved have the necessary qualifications and experience.
  6. Approval or Rejection:

    • Based on the findings of the due diligence process, SEBI makes a decision to either approve or reject the registration application.
  7. Conditions and Obligations:

    • If approved, SEBI may impose specific conditions and obligations that the intermediary must adhere to during its operations.
  8. Continuous Monitoring:

    • Intermediaries are subject to continuous monitoring by SEBI to ensure ongoing compliance with regulatory requirements and to address any emerging concerns.
  9. Renewal and Review:

    • Registration is typically granted for a specified period, and intermediaries must undergo a renewal process periodically. SEBI conducts reviews to assess ongoing compliance and may renew, modify, or revoke the registration based on performance.
  10. Communication of Decisions:

    • SEBI communicates its decisions regarding registration approval or rejection to the intermediary in a transparent manner, providing reasons for any adverse decisions.

Penalties & Adjudication

Penalty for failure to furnish information, return etc. [Section 15A]

A person shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if he fails –

(a) To furnish any document, return or report to the SEBI.

(b) To file return or furnish information, books or other documents within specified time.

(c) To maintain books of account or records.

Example: Blue Star Custodian Ltd., an intermediary registered with SEBI failed to furnish information which was called by the SEBI. As per order passed by the SEBI the company has to furnish information on or before 30th September, 2021. The company defaulted and not submitted the information to SEBI within prescribed time. Finally the company furnished information to the SEBI on 1st February, 2022. What is the minimum and maximum fine that can be imposed by the SEBI on Blue Star Custodian Ltd. under the provisions of the SEBI Act, 1992?

As per Section 15A of the SEBI Act, 1992, a person shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if he fails furnish information within specified time. Thus, penalty that can be imposed on the company is as follows:

Minimum Penalty: ` 1 lakh

Maximum Penalty: Lower of the following –

    • ` 1 lakh for each day (123 days × 1 lakh) = ` 1.23 Crore
    • Amount specified = ` 1 Crore

Thus, maximum penalty that can be imposed by the SEBI will be ` 1 Crore.

Penalty for failure enter into agreement with clients [Section 15B]

If any registered intermediary fails to enter into an agreement with his client, it shall be liable to a penalty which shall not be less than INR 1 lakh but which may extend to INR 1 lakh for each day during which such failure continues subject to a maximum of INR 1 Crore.

Penalty for failure to redress investors grievances [Section 15C]

If any listed company or registered intermediary fails to redress grievances of investors within the time specified by the SEBI, such company or intermedi

Penalty for certain defaults in case of mutual funds [Section 15D]

A Mutual Fund and Collective Investment Schemes shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if it fails –

(a) To obtain a certificate of registration from the SEBI for sponsoring or carrying on any collective investment scheme.

(b) To comply with the terms and conditions of certificate of registration.

(c) To make an application for listing of its schemes as provided for in the regulations governing such listing.

(d) To despatch unit certificates of any scheme in the manner provided in the regulation governing such despatch.

(e) To refund the application monies paid by the investors within the period specified in the regulations.

(f) To invest money collected by collective investment schemes in the manner or within the period specified in the regulations.

Penalty for failure to observe rules and regulations by AMC [Section 15E]

Where any Asset Management Company (AMC) of a mutual fund fails to comply with any of the regulations providing for restrictions on the activities of the AMCs, such AMC shall be liable to a penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day during which such failure continues subject to a maximum of ` 1 Crore.

Penalty for default in case of AIF, IIT & REIT [Section 15EA]

Alternative Investment Funds (AIF), Infrastructure Investment Trusts (IIT) and Real Estate Investment Trusts (REIT) shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of  ` 1 Crore or 3 times the amount of gains madewhichever is higher, if it fails –

(a) To comply with the regulations made by the SEBI.

(b) to comply with the directions issued by the SEBI.

Penalty for default in case of stock brokers [Section 15F]

A registered stock broker shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if it fails –

(a) To issue contract notes in the form and manner specified by the stock exchange;

(b) To deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations;

(c) Charges an amount of brokerage which is in excess of the brokerage specified in the regulations.

Example: An investor has complained to SEBI that he has not received the payment due to him from the stock-broker registered with Calcutta Stock Exchange Association Ltd. The complainant has requested SEBI to take appropriate action against the stock-broker.

You are required to state with reference to the provisions of SEBI Act, 1992 the answer to the following:

(i) What action SEBI can take against the stock-broker on the complaint as stated above?

(ii) What is the procedure to be adopted and what are the factors that will be taken into account while taking such action?

As per Section 15F of the SEBI Act, 1992, a registered stock broker shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore or 3 times the amount of gains madewhichever is higher.

For the purpose of adjudging any default, SEBI shall appoint any of its officers not below the rank of Division Chief to be an Adjudicating Officer for holding the enquiry in the prescribed manner after giving the person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

Section 15J enumerates following factors that shall have to be taken into account by the adjudicating officer while adjudging the quantum of penalty.

(a) Amount of disproportionate gain or unfair advantage (if quantifiable) made as a result of the default.

(b) Amount of loss to an investor or group of investors as a result of the default.

(c) Repetitive nature of the default.

Penalty for Investment Adviser and Research Analyst [Section 15EB]

Where an investment adviser or a research analyst fails to comply with the regulations made by the Board or directions issued by the Board, such investment adviser or research analyst shall be to a penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day during which such failure continues subject to a maximum of  ` 1 Crore.

Penalty for insider trading [Section 15G]

For the following defaults, an insider shall be liable to penalty which shall not be less than ` 10 lakh but which may extend to ` 25 Crore or 3 times of profits out of insider trading, whichever is higher:

(a) Where he deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information or

(b) Where he communicates any unpublished price-sensitive information to any person except as required in the ordinary course of business or under any law; or

(c) Where he counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information.

Penalty for non-disclosure of acquisition of shares and takeovers [Section 15H]

For the following defaults, a person shall be liable to penalty which shall not be less than ` 10 lakh but which may extend to ` 25 Crore or 3 times of profits made out of insider trading, whichever is higher:

(i) Failure to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or

(ii) Failure to make a public announcement to acquire shares at a minimum price; or

(iii) Failure to make a public offer by sending letter of offer to the shareholders of the concerned company; or

(iv) Failure to make payment of consideration to the shareholders who sold their shares pursuant to letter of offer.

Inspection of listed companies by SEBI [Section 11(2A)]

    • SEBI may take measures to undertake inspection of any book, register, or other document or record of:

–  Any listed public company.

–  A public company which is in process of listing its securities in recognised stock exchange.

    • Such inspection can be made by the SEBI if it has reasonable grounds to believe that company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.

Companies Act 2013

The Companies Act 2013 is a comprehensive legislation in India that governs the functioning and regulation of companies. Enacted to replace the Companies Act 1956, it outlines legal provisions related to company incorporation, corporate governance, financial disclosures, and regulatory compliance. The Act sets the framework for the management and operation of companies, covering aspects such as board structure, shareholder rights, financial reporting, and corporate social responsibility. Specific sections, such as Section 62, govern issues related to employee stock options and their administration.

SEBI Regulations 2014

SEBI (Securities and Exchange Board of India) Regulations 2014 pertain to the regulation and oversight of securities markets in India. These regulations are established by SEBI, the regulatory body for securities and commodity markets in the country. The regulations cover various aspects, including the issuance and listing of securities, insider trading, takeovers, and share-based employee benefits. In the context of Employee Stock Option Plans (ESOPs), SEBI regulations, particularly the SEBI (Share Based Employee Benefits) Regulations 2014, provide guidelines for the issuance and administration of ESOPs, ensuring transparency, fairness, and investor protection in the process.

Mutual fund regulations by SEBI

SEBI also governs the mutual fund industry and has prescribed various regulations with regards to the same. Here is a look at some of the most common ones:

  1. A group company, sponsor or associate of the mutual fund scheme, including the Asset Management Company (AMC) itself, is not allowed to hold more than 10% stake and voting rights in the AMC or in any mutual fund scheme
  3. An AMC cannot be appointed or have any representation on the Board of Directors of any mutual fund company
  5. A shareholder cannot hold more than a 10% stake in the AMC, either directly or indirectly
  7. In the case of a sectoral or thematic index, a single stock cannot have more than 35% weight in it. In the case of other types of indices, the maximum weight that a stock can have is limited to 25%
  9. The top three participants of the index should not have more than 65% weight in the index cumulatively
  11. One independent constituent of the index should have a minimum of 80% trading frequency
  13. AMCs are required to ensure that they comply with SEBI guidelines. This compliance should be checked quarterly. They should also publish the constituents of their indices on their website for public use
  15. Before a new fund is launched, the company should submit the compliance status of the fund to SEBI
  17. Liquid mutual funds should hold at least 20% of the portfolio in liquid assets like cash, T-bills, Government Securities and the like
  19. Debt funds can invest a maximum of 20% of their portfolio in one sector. For investing in Housing Finance Companies, the limit is 10% and for securitized debt that is based on retail and affordable housing portfolios, the limit is 5%
  21. For evaluation of debt and money market instruments, amortization and mark-to-market methodology can be used
  23. Liquid fund investors would be charged an exit load if they exit the scheme within 7 days
  25. Mutual funds are allowed to invest only in listed non-convertible debentures, commercial papers and equity shares
  27. Liquid and overnight mutual funds cannot invest in debt, short-term deposits or money market instruments
  29. If you are investing in debt securities that have credit enhancements, you should have a minimum security cover of 4 times. A limit of 10%, in debt and money market instruments, is recommended for such schemes

SEBI, therefore, is an important authority, enjoys a lot of powers, and discharges various duties. It also keeps on making amendments to existing laws to adapt them to the changing dynamics of the market. So, know about SEBI, its functions, and powers so that you can invest with the knowledge that SEBI would protect your interests.

An Asset Management Company (AMC) is a financial institution responsible for managing and overseeing investment funds. Its primary role is to make investment decisions on behalf of clients, ensuring the growth and effective management of their assets. AMCs design and administer various mutual funds, providing investors with diversified portfolios. These companies play a crucial role in financial markets by offering professional expertise, risk management, and investment options to individuals and institutional clients.

G Akshay Associates