Securities and Exchange Board of India (SEBI/Board) was established as a statutory authority through an Ordinance promulgated on January 30th, 1992 by the President of India. Later, the ordinance was approved by both the Houses of Parliament on April 1st, 1992 and was assented by the President of India on April 4th, 1992. The statute was deemed to have come into existence from the date on which the Ordinance was promulgated i.e. January 30th, 1992.
SEBI has been established on the lines of Securities & Exchange Commission (SEC) of USA which was set up in terms of the Securities Exchange Act, 1934 with a view to regulate the securities market and check the unfair trade practice on the stock exchange. While SEC was set to restore investors’ confidence post 1929 stock market crash, the urgency to establish SEBI as capital market regulator arose out of the Harshad Mehta Securities Scam.
The primary focus of SEBI is to meet the needs of – Issuers, Investors and Intermediaries associated with Securities Market. As a quasi – legislative and quasi – judicial body SEBI can draft regulations, conduct inquiries, pass rulings and impose penalties.
This article is a clause by clause analysis of the powers of the SEBI/Board.
A preamble to a statute is a preliminary statement of the reasons which have made the passing of the statute. But the preamble of SEBI Act, 1992 is translated into function of Board under sub section (1) of section 11 of SEBI Act, 1992 (Act).
Section 11 is the heart and soul of the Act[1]. SEBI is empowered to take preventive as well as punitive measures so as to protect the investors and to promote the securities market. SAT[2] observed that “SEBI takes measures in the form of circulars, guidelines, schemes, press release, etc. Measures could also be taken, provided the same are in consonance and furtherance of the specified objectives.”
The provisions are meant to arm SEBI with the authority so as to be able to effectively exercise power and achieve the declared objectives of the Act.
The expression ‘measures’ referred to section 11 of the SEBI Act is not defined. Hence, in the absence of any express definition, it is construed as “anything desire or done with a view to accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by a Government”.
Therefore, the measures set out in sub section (2) of section 11 of the SEBI Act are illustrative and not exhaustive of the measures that SEBI is entitled to take for meeting the objectives set out in sub section (1).
Under sub section (2) of Section 11, SEBI has been empowered to take ‘measures’ for regulating the specified matters viz.
Regulating the business of stock exchanges and any other securities market: SEBI has adopted various measures for maintaining the fairness, transparency, integrity and smooth functioning of the stock exchanges viz. registration of brokers, increasing the trading hours, introduction of rolling settlement thereby reducing the trade settlement cycle, mandatory issuing of contract notes by brokers, addressing the investor grievances, introduction of circuit breakers, etc. SEBI has also been delegated the powers by Central Government under Securities Contract (Regulation) Act, 1956 like granting recognition to stock exchanges, supersede the business of stock exchange, withdrawal of the recognition, etc.
Registration and regulating of intermediaries associated with securities market: SEBI issues regulations which provides for registration, eligibility criteria, capital adequacy norms, code of conduct, etc. through the regulations for intermediaries associated with securities market. It is also mandated that no person shall engage himself into the activities that a SEBI registered intermediary can undertake, unless the Certificate of Registration is obtained from SEBI. It ensures that the applicant is a ‘fit and proper person’ before registering them as an Intermediary.
Registration and regulating the working of Venture Capital Fund, Collective Investment Schemes including Mutual Fund: Prior to SEBI Act, the Mutual Funds were governed by a set of guidelines issued by Reserve Bank of India (applicable only to the mutual funds sponsored by banks) and Controller of Capital Issues. SEBI grants Certificate of Registration to the Mutual Fund, governs the constitution & structure of fund, its Asset Management Companies, registration of Trust Deed, regulating various schemes and business of Mutual Funds.
Promoting and regulating self – regulatory organizations (SRO): Self-regulatory organizations for a segment of intermediaries in the securities market would be entrusted with the role of being the first level regulator for such intermediaries, who are its members. SEBI has issued recognitions to SROs, overseeing the activities of SRO like regulating their members, making their members accountable, helping them in maintaining ethical standards. It ensures fairness, accountability and transparency to the investors. The Association of Investment Bankers of India and the Association of Mutual Funds of India are two such self-regulatory organizations.
Prohibiting fraudulent and unfair trade practices relating to securities market: In order to maintain the integrity of the market, SEBI had notified SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. Though SEBI has expressly identified transactions which are deemed to be of fraudulent and unfair trade practices viz. front running, price rigging, circular trading, creating artificial volume, inflating, depressing, maintaining or fluctuating price of securities, publishing any untrue statement or misleading advertisement, etc.
Promoting investor’s education and training of intermediaries of securities market: In order to promote investor education, SEBI has been taking multiple initiatives like issuance of various reading materials in the form of Frequently Asked Questions on various areas of securities market viz. primary & secondary market, mutual funds, share & debenture holders, corporate restructuring, investment advisor, etc. It also conducts workshops and seminars both online and offline though its empanelled & trained Resource Person across India in English, Hindi and vernacular languages. It also regulates the Advertisement Code by the Mutual fund. The famous disclaimer in all mutual funds’ advertisement, “Mutual Fund investments are subject to market risks, read all scheme related documents carefully” is mandated by under SEBI (Mutual Fund) Regulations, 1996. SEBI has also established a centralized web-based system called SCROES (SEBI Complaints Redress System) where investors can lodge its complaint. Further, it has also framed SEBI (Ombudsman) Regulations, 2003 whereunder any person (not restricted to investors) can lodge his compliant against an intermediary or a listed company with ombudsman in respect of specified matters such as non-receipt of allotment letters, dividends, redemption amount, etc.
Prohibiting insider trading in securities: One of the major initiatives by SEBI is taking multiple actions in prohibition of Insider Trading by the participants in the market. SEBI framed its first Prohibition of Insider Trading Regulations in 1992, thereafter replaced it with Prohibition of Insider Trading Regulations, 2015 defining who is an insider, what is unpublished price sensitive information, generally available information, trading, etc. SEBI has set up various committees with the objective of strengthening the integrity of market and boosting investor confidence, where time and again the regulation is amended. Recently, on the recommendation of T.K. Viswanathan Committee Report, multiple amendments were made in the Prohibition of Insider Trading Regulations. It also imposes a stringent penalty of minimum ten lakh rupees which may extend up to Rs. 25 crore or three times the amount of profit made out of insider trading, whichever is higher.
Regulating substantial acquisition of shares and takeover of companies: SEBI through takeover regulations mandates the open offer and disclosure to be made by the acquirer and person acting in concert with such acquirer. It defines who will be an acquirer, person acting in concert with such acquirer, target company, control, etc. It ensures that the entire takeover process is in the fair, transparent and equitable manner. It also mandates adequate disclosures by the acquirer and promoters of listed companies. Earlier the takeovers were governed by Clause 40A and 40B of the listing agreement between the listed companies and stock exchanges. SEBI notified its first regulation on Takeover of Listed Companies on November 4th, 1994. Thereafter, based in the recommendation of Justice Bhagwati Committee report, SEBI notified new takeover regulations in the year 1997. Further, the 1997 regulation was replaced by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SEBI(SAST) Regulations, 2011’) on the recommendation of Achutan Committee.
SEBI has been empowered to make regulations under section 30(2) of the SEBI Act, 1992. Regulations have been notified for securities market intermediaries, mutual funds, collective investment scheme, alternative investment fund, venture capital fund, REITs, InvITs, foreign portfolio investors, issue & delisting of securities, insider trading, takeover, and other matters relating to securities market. However, the rules under the Act are framed by the Central Government under section 29. The rules and regulations framed by SEBI under this Act, are laid before each house of Parliament within 30 days. If both the houses agree that such rule or regulation is not to be made, it ceases to be operative. Therefore, SEBI regulations are legislative in nature and statutory in character.
Rules and Regulations cannot be declared to be ultra vires on the ground that the period of 30 days prescribed in the section was not complied with[3].
One of the significant mechanisms taken by SEBI in exercise of its power under Section 11(1) is to have devised an Informal Guidance Scheme through SEBI (Informal Guidance) Scheme, 2003. The following persons may make a request for informal guidance under the scheme:
1. Any listed company or any company which intends to get its securities listed and which has filed either a listing application with any stock exchange or filed a draft offer document with SEBI
2. Any intermediary registered with SEBI under section 12
3. Any mutual fund, trustee company or asset management company
4. Any acquirer or prospective acquirer under SEBI (SAST) Regulations, 2011
The scheme merely addresses the anxieties of market participants by providing clarity on legal framework rather than acting as a consultant or adviser to resolve their legal and business problems.
INVESTIGATION POWERS OF SEBI:
SEBI is indisputably an expert body. But when it exercises its quasi – judicial functions, its decisions are subject to appeal. The duties and functions of the Board, thereunder, run counter to the doctrine of separation of power. Integration of power by vesting legislative, executive and judicial powers in the same body, in future, may raise a several public law concerns as the principle of control of one body over the other was the central theme underlying the doctrine of separation of power. The Board exercises its legislative power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating dispute in the implementation thereof. The only check upon exercise of such wide-ranging power is that it must comply with the Constitution and the SEBI Act[4].
Where SEBI has reasonable grounds to believe that a “transaction” in securities is detrimental to the investors or securities market or if any person associated with securities market has violated any provisions of the Act, Rules or Regulations, it may order for investigation for the affairs of such person.
Though SEBI is not a court, but under section 11(3) of SEBI Act, 1992, it has been given the powers of a civil court that can be exercised while trying a suit. It can summon and enforce the attendance of person, examine them on oath, require the discovery & production of books of accounts, inspect them.
SEBI in the interest of investors or securities market can restrain any person or prohibit them to access the securities market. Interestingly, such an order can be passed by SEBI even when the investigation or inquiry is pending (ad-interim orders). This acts as a preventive measure but principle to natural justice has to be followed.
SEBI has also been empowered to recover the illegal gains made by a person by any unlawful conduct by issue of disgorgement order. “Disgorgement proceedings cannot be treated as separate and independent proceedings, but are in fact a continuation of the earlier proceedings under which a person has been held guilty of violating the regulatory framework and had benefited illegally.”[5]
Another tool to avoid market manipulation practices and insider trading is “cease & desist proceedings”. If SEBI finds, after causing investigation finds that any person has violated or is likely to violated any provision of SEBI Act, or Rules or Regulations made thereunder, it can also pass an order calling for such person to “cease & desist” from committing or causing such violation. With this, SEBI can crack down on illegal schemes floated by companies to raise money from retails investors, restrict any person acting as intermediary like research analyst, investment advisor, portfolio manager etc, not to solicit or undertake any activity in securities market directly or indirectly.
SECURITIES APPELLATE TRIBUNAL: Every order of SEBI is appealable under section 15T to SAT – Securities Appellate Tribunal. SAT is an expert body. It can exercise its discretionary jurisdiction in the same manner as SEBI.4 Any order made by SAT can be enforced in the same manner as if it was a decree made by a Civil Court in a suit before it, and the Tribunal may send it for execution to the Court within the local limits of whose jurisdiction the registered office of the company is situated in case the order is against the company or where the person voluntarily resides or carries on business, in case is against any person.
An aggrieved person can file an appeal to the Supreme Court under regulation 15Z only on a question of law arising out of any decision or order of SAT. It may be noted that even though a right of appeal to the Supreme Court is provided, a writ petition under Article 226 to High Court or under Article 32 to Supreme Court against the order of SAT continues to be maintainable invoking for enforcing the fundamental rights.
CONCLUSION:
With almost 3 decades of its existence, the journey of SEBI has been one of struggle and fighting for its existence in its initial years. However, now it has a pivot role in the Indian Financial system. Even though, the role & jurisdiction of SEBI has been challenged & reviewed before the apex court. The powers of SEBI have been enhanced by Parliament of India from time to time.
Today, SEBI has now become one of the most powerful regulators not just in India but also in the world.
[1] Karvy Stockbroking Ltd. v. SEBI [2004] 73 SCL 261 (SAT)
[2] Bank of Baroda v. SEBI (2000) 26 SCL 532 (SAT)
[3] Veneet Agarwal v. Union of India (2008) 146 Com Cases 344 (SC)
[4] Clariant International Ltd. v. SEBI [2004] 62 CLA 96 (SC)
[5] Shailesh S. Jhaveri v. SEBI [2013] 117 SCL 210.
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