Securities and Exchange Board of India (SEBI) - Study Notes

Lesson summary

The Securities and Exchange Board of India (SEBI) is the apex body that maintains and regulates the Indian capital market and safeguards the interests of investors. It was first set up in 1988 as a non-statutory body, was made an autonomous body on 12 May 1992 and received statutory powers through the SEBI Act 1992. The lesson then explains dematerialization and the demat account.

8.01 Introduction

• 1988: SEBI established as a non-statutory body without statutory powers.
• 12 May 1992: made an autonomous body by the Government of India.
• 1992: statutory powers through the SEBI Act 1992 passed by Parliament.
• Headquarters: Bandra Kurla Complex business district, Mumbai.
• SEBI is managed by its members; the organisation chart has a Director at the top, with Additional, Joint, Deputy and Assistant Directors on the administration and system sides, and Technical Assistants.
• Its role at a glance: monitors mutual funds, restricts illegal practices, protects investors, regulates stock exchanges, conducts audit and inspection, prohibits insider activity.

8.02 Objectives of SEBI

1. Regulation of stock exchanges: so that efficient services are provided to all parties.
2. Protection to the investors: from wrong prospectus information and from delivery and payment risk; the foremost objective.
3. Checking insider trading: dealing by directors, promoters and others who use confidential company information.
4. Control over brokers: supervising brokers and other middlemen.

8.03 Functions of SEBI

SEBI performs three key functions: quasi-legislative (drafts regulations), quasi-judicial (passes rulings and orders) and quasi-executive (investigation and enforcement).

1. Safeguarding investors through education and guidance; handling complaints; issuing booklets for small investors.
2. Regulating business on stock markets; registration of brokers and sub-brokers is mandatory.
3. Inspection and inquiries of stock exchanges, intermediaries and self-regulating organisations.
4. Barring insider trading.
5. Prohibiting deceptive and unfair methods of intermediaries.
6. Registering and controlling brokers, sub-brokers, share transfer agents, bankers, trustees, registrars, merchant bankers, underwriters, portfolio managers and investment advisers.
7. Guidelines on capital issues; research and publication of information.
8. Regulating mergers and acquisitions so they are not at the expense of small investors.
9. Registering and controlling collective investment schemes such as mutual funds.
10. Promoting self-regulatory organisations of intermediaries, since self-regulation is preferable to external regulation.
11. Developing the capital markets.
12. Training financial intermediaries.
13. Levying fees and other charges.
14. Functions assigned by the Central Government.

8.04 Powers of SEBI

1. Stock exchanges and intermediaries: can call for information on their business for inspection.
2. Monetary penalties: on intermediaries for violations, and suspension of registration for a short period.
3. Initiating actions: guidelines to intermediaries and rules to protect investors.
4. Regulating insider trading and merchant bankers.
5. Securities Contracts Act: Finance Ministry notification of 13 September 1994 delegated powers; SEBI nominates three members to the Governing Body of every stock exchange.
6. Business of stock exchanges: intermediaries, mutual funds, unfair trade practices, acquisitions and takeovers.

8.05 Dematerialization (DEMAT)

• Physical certificates are taken back by the company or registrar and destroyed; equivalent electronic securities are credited to the investor's account with his Depository Participant (DP).
• Done at the investor's request; the investor first opens an account with a DP.
• Purchases are credited and sales debited.
• Demat securities are fungible: no distinctive numbers; identical and interchangeable.
• NSE: December 1996, Reliance Industries first traded 100 shares in demat form. BSE: December 1997.

8.06 Benefits of dematerialization

• No risk of loss, theft, forgery or damage of certificates.
• No paperwork, so quicker transactions; trading from any location by computer.
• Shares from mergers credited automatically.
• No need to deal with each company separately.
• No stamp duty on transfer.
• Equity and debt in a single account; trained customer care.
• Any amount of shares can be traded; loans against demat securities.

Demat account

• A demat account is to shares what a bank account is to money; it holds shares, bonds, government securities, mutual funds and ETFs.
• Steps: fill the form with documents, photo and PAN; receive the rules and charges; in-person verification; account number or client ID.
• Fees: annual maintenance fee, transaction fee and a conversion fee.
• No minimum balance of shares is required.
• PAN: unique 10-digit alphanumeric identity allotted by the Income Tax Department under the CBDT.
• Proof of identity: PAN card, voter's ID, passport, driving licence and others. Proof of address: ration card, passport, voter ID, bank passbook and others.

Investor grievance redressal

• Grievance cells at SEBI and stock exchanges; walk-in service at Mumbai and regional offices.
• Complaints: investorcomplaints@sebi.gov.in; assistance: asksebi@sebi.gov.in.