SEBI: As a Whole

“Laws should be like clothes. They should be made to fit the people they are meant to serve.”

Clarence Darrow

INTRODUCTION

The SEBI Act, 1992[i], which formed SEBI, also known as the Security and Exchange Board of India, was passed on April 12, 1992. This non-statutory organisation was created to oversee the securities industry. The board’s administrative centre is located in Mumbai’s Bandra Kurla Complex. By defending investors’ interests and establishing rules and regulations for the growth of the capital market, SEBI aids in the regulation of the Indian capital market.

ABOUT

• The Securities and Exchange Board of India’s primary responsibilities are to safeguard the interests of investors in securities and to promote and oversee the securities market. SEBI is a statutory body established on April 12, 1992,
• In accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

BACKGROUND

• Before SEBI was established, the regulating body was the Controller of Capital Issues, which received its power from the 1947 Capital Issues (Control) Act.
• In April 1988, the Government of India passed a resolution designating the SEBI as the country’s capital markets’ regulator.
• Initially, SEBI was a non-statutory organisation with no statutory authority.
• The SEBI Act of 1992 gave it legal authority and autonomy.
• Mumbai serves as SEBI’s administrative centre. Delhi, Chennai, Kolkata, and Ahmedabad house SEBI’s regional offices.

FUNCTIONS OF SEBI 

In essence, SEBI encourages the growth of the security market, protects the interests of investors there, and controls operations. The Security and Exchange Board of India’s duties can be broadly divided into three categories:

1. Protective Function: In order to safeguard the interests of investors and other financial actors, protective functions are implemented. These tasks include:

• Prevent Insider Trading: Insider trading occurs when market participants, such as directors, promoters, or employees working for the company, begin to buy or sell stocks because they have access to confidential prices that have the potential to alter the price of the asset. Companies are not allowed to purchase their own shares on the secondary market, and SEBI supervises routine audits to stop insider trading and other wrong-doing.
• Prevents price rigging: Price rigging refers to illegal acts that cause irrational changes in the price of securities by raising or lowering the stock market price, which causes a significant loss for investors or traders. In order to stop price rigging, SEBI actively monitors the conditions that can encourage it.
• Encourages ethical business practises: To prevent dishonest and unfair business practises in the securities market, SEBI developed rules, regulations, and a code of conduct.
• Raising investor awareness and educating them about finances: SEBI holds seminars for investors both offline and online to teach them about money management and insights into the financial market.

2. Regulatory Function 

• Regulatory activities are typically employed to monitor how the market’s financial businesses are operating. They create regulations to control businesses and financial intermediaries to ensure market efficiency. • SEBI created guidelines and a code of conduct for the effective operation of financial intermediaries and corporations.
• Specified guidelines for acquiring a business.
• Regularly investigates and audits stock exchanges.
• Controls the operation of mutual funds.
• SEBI regulates the registration of brokers, sub-brokers, and merchant bankers.
• SEBI controls the imposition of fees.
• Limitations on placement in private homes.

3. Development Function

The actions performed by SEBI to increase market security through technology are called development functions. The following are the purposes:

• By offering market intermediaries training sessions.
• By supporting ethical business practises and enforcing laws against fraud of any form.
• By making the DEMAT format available.
• By encouraging autonomous organisations.
• By making online trading available through licenced stock brokers.
• By offering affordable brokerage services.

POWERS AND FUNCTIONS OF SEBI

• SEBI is a quasi-legislative and quasi-judicial agency with the authority to create rules, launch investigations, make decisions, and apply sanctions.
• It serves to meet the criteria for three categories:
• Issuers – By giving them access to a market where they can raise more money.
• Investors – By supplying clear and accurate information while maintaining safety.
• Intermediaries – By promoting an intermediaries’ competitive professional market.
• By virtue of the Securities Laws (Amendment) Act of 2014, SEBI is now empowered to control any money pooling scheme with a value of at least Rs. 100 crore and to seize assets in the event of non-compliance.
• The SEBI Chairman is able to issue “search and seizure operations” orders. In relation to any securities transaction that it is looking into, the SEBI Board may also ask anyone for information, such as call logs.
• SEBI strives to promote and regulate self-regulatory organisations, outlaw unfair trade practises related to the securities markets, and register and regulate the operation of venture capital funds and collective investment schemes, including mutual funds.

FEATURES OF SEBI

In order to regain the trust of the general public, who put their hard-earned money into the market, Sebi is tasked with maintaining an environment free from fraud. Every stock exchange’s bylaws in the nation are under the jurisdiction of SEBI. To look for irregularities, SEBI monitors all of the financial intermediaries’ and the stock exchange’s books of accounts. The Security and Exchange Board of India’s characteristics are listed below:

• Quasi-Judicial 

SEBI has the authority to hold hearings and render decisions in matters involving unethical behaviour and dishonest business practises. The transparency, accountability, dependability, and fairness in the capital market are all protected by this SEBI feature.

• Quasi-Legislative

SEBI is permitted to create laws pertaining to the capital market. In order to safeguard investors’ interests, SEBI develops rules and regulations. Listing Obligation and Disclosure Requirements, for instance, are SEBI LODR. This aids in the consolidation and simplification of the clauses in the listing agreements that are currently in place for various financial market categories, such as equity shares. This aids in shielding the market from unethical and dishonest trading practises that take place at the harbour.

• Quasi-Executive

SEBI is responsible for carrying out the law. They have the right to lodge a complaint against anyone who disobeys their rules and laws. In order to look for wrongdoings, they also have the authority to examine all the books and documents.

SEBI’S ACHIEVEMENTS

• According to Prime Minister Manmohan Singh, maintaining constant monitoring is necessary for market stability and expansion. The regulator has maintained its credibility during its 25-year journey, during which it has steadily increased its authority to regulate India’s capital markets.
• Dematerialization of shares, shortened settlement cycles, the start of nationwide electronic trading, the introduction of risk management systems, the establishment of clearing organisations, the support of the mutual fund industry, and other market developments have all been made possible by this.
• Investors domestic and outside praise the regulator for increasing the market’s effectiveness, and for good reason. Since 2001, there haven’t been any broker defaults.
• Its credibility with stakeholders has also increased since the procedure of consultation papers before crafting regulations was started.
• The Indian capital market can currently be compared favourably with developed markets.
• In order to combat market volatility, SEBI has recently made new efforts to tighten surveillance and risk management, improve analytical capabilities, and promote research.

ISSUES WITH SEBI

• The financial markets regulator, SEBI, is at a crossroads due to the complexity of its role in recent years.
• The regulation of market behaviour is overemphasised, whereas prudential regulation is given less attention.
• As it is equipped with much more capacity to cause substantial economic harm, SEBI’s statutory enforcement powers are larger than those of its counterparts in the US and the UK.
• It can severely restrict economic activity and is based on suspicion; as with preventive detention, those who are affected must have the burden of proving the suspicion is unfounded.
• As a result of the SEBI Act’s broad discretionary authority to create subordinate legislation, its legislative authority is almost total.
• The element of prior market consultation and a method of evaluating rules to evaluate if they have achieved the stated objective are notably absent. As a result, many people fear the regulator.
• Rules and enforcement for regulation are far from flawless, especially in areas like insider trading.
• The Securities offering materials are incredibly thick and have largely been confined to formal compliance rather to producing in-depth, high-quality disclosures.

SUGGESTIONS

• There is a need for an attitude adjustment; in fact, hundreds of comments about how the market is rife with thieves and calls for harsh intervention are expected.
• SEBI need a thorough examination and investigation into how it might be improved. The amount of money raised cannot ever serve as a gauge of how well this area of market regulation is working.
• Cleaning up the policy space in this market segment ought to be SEBI’s top priority.
• SEBI must pay particular attention to organisational issues and human resources. To attract the top personnel, SEBI must promote lateral entrance.
• The alignment and fitting of senior workers following the Forward Markets Commission and Sebi merger remain unfinished business.
• Continuous monitoring and improved market intelligence can boost enforcement. This calls for a large talent pool.
• India’s financial markets continue to be divided. When the jurisdiction over a financial product overlaps, one regulator cannot be held accountable for another’s failure.
• In order to eliminate overlap and excluded boundaries, a single financial regulator makes great sense in this situation.

SEBI v. Sahara[ii]

BACKGROUND

Initially, Sahara India Real Estate Corporate Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated-issued Optionally Fully Convertible Debentures (OFCDs), which had an impact on the collective subscription from April 25, 2008, to April 13, 2011. During this time, the company made about Rs. 17,656 crore. This entire sum was obtained from 30 million investors under the guise of a “Private Placement” without meeting the criteria necessary to adhere to public offers of securities. As a result, on June 23, 2011, the Whole Time Member of SEBI issued a directive ordering the refund of investor funds and prohibiting company promoters, including Mr. Subrata Roy, from entering the securities market. Sahara appealed the Whole Time Member’s rulings to the Securities Appellate Tribunal (SAT), which dismissed the appeal in a judgement dated October 18, 2011. In the end, Sahara appealed the SAT order before the Supreme Court.

ISSUES

While the Supreme Court was interpreting the various clauses of the SEBI Act, the Companies Act, and the Securities Contract (Regulation) Act, 1956, a number of problems were brought up. The problems were:

• The first question was whether SEBI had jurisdiction over this problem under Sections 11, 11A, and 11B of the SEBI Act and Section 55A of the Companies Act, or whether the Ministry of Corporate Affairs was in charge of it.
• The second question was whether the hybrid Optionally Fully Convertible Debentures fell under the definition of “Securities” as used in the Companies Act, SEBI Act, and SCRA to provide SEBI the authority to look into the matter.
• The third concern was whether or not the people’s subscriptions to OFCDs were part of a private placement. If not, who has authority over the situation?
• The fourth question concerned whether or not the provisions under Section 73 of the Companies Act applied to the situation.
• The Public Unlisted Companies, 2003 regulations’ applicability to this situation was the sixth point of contention.

ARGUMENTS AND SUPREME COURT JUDGMENTS

The Supreme Court ruled in this case that SEBI lacks jurisdiction to look into or decide on this issue since the SEBI Act gives SEBI exclusive authority to safeguard investors’ interests. Since the interests of investors are at stake, SEBI must respect the provisions of other laws and avoid confrontation with the Ministry of Corporate Affairs by not exceeding the authority granted to it by other laws. In order to give SEBI specific authority over matters relating to the transfer of securities, the Supreme Court also established goals for the SEBI Act’s enactment and added Section 55A to the Companies Act. Accordingly, the Supreme Court ruled that SEBI has the authority to oversee listed public corporations in situations involving the transfer of securities as well as those public firms where it is planned to acquire securities that are listed on the Stock Exchange of India.

According to the Supreme Court, the OFCDs that the businesses have issued are “hybrid” instruments rather than “security” as that term is defined under the Companies Act, SEBI Act, and SCRA. Due to the inclusion of “marketable security” rather than “hybrid instruments” in the definition of “Securities” specified under Section 2(h) of SCRA. As a result, the Court is unable to contest the instrument’s marketability because it was made available to millions of people, and because debentures qualified as security under the terms of the SEBI Act, the Companies Act, and SCRA.

The Supreme Court stated that although the firms intended to present OFCDs as a public offering, they don’t behave that way when they are made available to more than 50 persons. According to Section 67(3), any security that is offered and subscribed for by more than 50 people is deemed to be a public offer, giving SEBI control over the situation and requiring the businesses to abide by all applicable regulatory requirements.

Sahara contended that the Firms Act is inapplicable since it only applies to companies that are listed on a stock market and no company can be compelled to do so. This argument was rejected by the Supreme Court, which ruled that the law is impartial and explicit. The Supreme Court further noted that every business proposing to offer shares and debentures to the public is subject to a restriction under Section 73(1) of the Act.

CONCLUSION

Therefore, SEBI firmly believes that in order for the capital market to thrive, investors’ interests must be protected because they are the heart and soul of the securities market. All market policies and regulations are handled by SEBI. Additionally, SEBI entered into a relationship with the International Organization of Securities Commission that permitted its members to regularly monitor their home jurisdictions for cross-border misbehaviour. Due to its role in averting a conflict between MCA and SEBI, this case is seen as a turning point in corporate law in India.

REFERENCES

• https://www.legitquest.com/case/sahara-india-real-estate-corporation-limited-others-v-securities-and-exchange-board-of-india/7C581
• https://www.drishtiias.com/important-institutions/drishti-specials-important-institutions-national-institutions/securities-and-exchange-board-of-india-sebi
• https://blog.ipleaders.in/features-of-sebi/
• https://www.elearnmarkets.com/blog/sebi-purpose-objective-functions-sebi/#mutual-fund-regulations-by-sebi
• https://www.indiacode.nic.in/handle/123456789/1890?sam_handle=123456789/1362

[i] https://www.sebi.gov.in/legal/acts/jan-1992/securities-and-exchange-board-of-india-act-1992-as-amended-by-the-finance-act-2021-13-of-2021-w-e-f-april-1-2021-_3.html

[ii] (Sahara India Real Estate Corpn. Ltd. V. SEBI, (2013) 1 SCC 1 : (2013) 1 SCC(Civ) 1 : (2013) 1 SCC (Cri) 257 ). Sahara India Real Estate Corporation Limited & Others v. Securities and Exchange Board of India & Another.