INTERNAL BACKLOG

COMPANY LAW

ROLE OF SEBI IN STOCK EXCHANGE

SUBMITTED TO – Ms. SHUCHITA AGARWAL

SUBMITTED BY – ABHISHEK BASUMATARY

PRN - 15021021007
STOCK EXCHANGE

A stock exchange is an exchange where stock brokers and traders can buy and sell shares of stock,
bonds, and other securities. Stock exchanges may also provide facilities for issue and redemption
of securities and other financial instruments and capital events including the payment of income
and dividends. Securities traded on a stock exchange include stock issued by listed companies,
unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as
"continuous auction" markets with buyers and sellers consummating transactions at a central
location such as the floor of the exchange.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is
a central location at least for record keeping, but trade is increasingly less linked to such a physical
place, as modern markets use electronic networks, which gives them advantages of increased speed
and reduced cost of transactions. Trade on an exchange is restricted to brokers who are members
of the exchange. In recent years, various other trading venues, such as electronic communication
networks, alternative trading systems and "dark pools" have taken much of the trading activity
away from traditional stock exchanges.

The initial public offering of stocks and bonds to investors is by definition done in the primary
market and subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets are driven by various
factors that, as in all free markets, affect the price of stocks.

There is usually no obligation for stock to be issued via the stock exchange itself, nor must stock
be subsequently traded on the exchange. Such trading may be off exchange or over-the-counter.
This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part
of a global securities market.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in
India. It was established in the year 1988 and given statutory powers on 30 January 1992 through
the SEBI Act, 1992.

Securities and exchange Board of India (SEBI) was first established in the year 1988 AQF as a
non-statutory body for regulating the, securities market. It became an autonomous body by The
Government of India on 12 April 1992 and given statutory powers in 1992 with SEBI Act 1992
being passed by the Indian Parliament. SEBI has its headquarters at the business district of Bandra
Kurla Complexin Mumbai, and has Northern, Eastern, Southern and Western Regional Offices in
New Delhi, Kolkata, Chennai and Ahmedabadrespectively. It has opened local offices at Jaipur
and Bangalore and is planning to open offices at Guwahati, Bhubaneshwar, Patna, Kochi and
Chandigarh in Financial Year 2013 - 2014.

Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non-statutory body without any statutory power. However, in 1992, the SEBI
was given additional statutory power by the Government of India through an amendment to the
Securities and Exchange Board of India Act, 1992. In April 1988 the SEBI was constituted as the
regulator of capital markets in India under a resolution of the Government of India. The SEBI is
managed by its members, which consists of following:

The chairman who is nominated by Union Government of India. Two members, i.e., Officers
from Union Finance Ministry. One member from the Reserve Bank of India. The remaining five
members are nominated by Union Government of India, out of them at least three shall be whole-
time members.

Reasons for Establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets
such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation
of rules and regulations of stock exchange and listing requirements. Due to these malpractices the
customers started losing confidence and faith in the stock exchange. So government of India
decided to set up an agency or regulatory body known as Securities Exchange Board of India
(SEBI).

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest
of investors. It was set up to meet the needs of three groups.

1. Issuers:

For issuers it provides a market place in which they can raise finance fairly and easily.

2. Investors:

For investors it provides protection and supply of accurate and correct information.

3. Intermediaries:

For intermediaries it provides a competitive professional market.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives of
SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud
and cheat the investors.

(ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc. These insiders
have sensitive information which affects the prices of the securities. This information is not
available to people at large but the insiders get this privileged information by working inside the
company and if they use this information to make profit, then it is known as insider trading, e.g.,
the directors of a company may know that company will issue Bonus shares to its shareholders at
the end of year and they purchase shares from market to make profit with bonus issue. This is
known as insider trading. SEBI keeps a strict check when insiders are buying securities of the
company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to induce the
sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.

2. Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange
and increase the business in stock exchange. Under developmental categories following functions
are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach
in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such
as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

The Organizational Structure of SEBI:

1. SEBI is working as a corporate sector.

2. Its activities are divided into five departments. Each department is headed by an executive
director.

3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.

4. SEBI has formed two advisory committees to deal with primary and secondary markets.

5. These committees consist of market players, investors associations and eminent persons.

Objectives of the two Committees are:

1. To advise SEBI to regulate intermediaries.

2. To advise SEBI on issue of securities in primary market.

3. To advise SEBI on disclosure requirements of companies.

4. To advise for changes in legal framework and to make stock exchange more transparent.

5. To advise on matters related to regulation and development of secondary stock exchange.

These committees can only advise SEBI but they cannot force SEBI to take action on their advice.
 ROLE OF SEBI IN STOCK EXCHANGE

1. To protect the interests of investors through proper education and guidance as regards their
investment in securities. For this, SEBI has made rules and regulation to be followed by the
financial intermediaries such as brokers, etc. SEBI looks after the complaints received from
investors for fair settlement. It also issues booklets for the guidance and protection of small
investors.
2. To regulate and control the business on stock exchanges and other security markets. For this,
SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory
and they are expected to follow certain rules and regulations. Effective control is also maintained
by SEBI on the working of stock exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock brokers,
sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on the
securities market. In addition, to provide suitable training to intermediaries. This function is
useful for healthy atmosphere on the stock exchange and for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI
has made rules and regulations to be followed by mutual funds. The purpose is to maintain
effective supervision on their operations & avoid their unfair and anti-investor activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers.
However, self-regulation is better than external regulation. Here, the function of SEBI is to
encourage intermediaries to form their professional associations and control undesirable
activities of their members. SEBI can also use its powers when required for protection of small
investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of
investors. For this, SEBI has issued suitable guidelines so that such mergers and takeovers will
not be at the cost of small investors.
7. To prohibit fraudulent and unfair practices of intermediaries operating on securities markets.
SEBI is not for interfering in the normal working of these intermediaries. Its function is to
regulate and control their objectional practices which may harm the investors and healthy growth
of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for
first public issue of new companies, for public issue by existing listed companies and for first
public issue by existing private companies. SEBI is expected to conduct research and publish
information useful to all market players (i.e. all buyers and sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-regulating
organizations and to take suitable remedial measures wherever necessary. This function is
undertaken for orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for avoiding
undesirable activities of brokers and securities scams.