LONG ANSWER – SEBI
INTRODUCTION
The SEBI of India was established in April 1988. It has been functioning the full
administrative control of the Government of India. It works under the guidance of Ministry of
Finance. It is the agent of the Central Government in capital market. It is established for the
regulation and orderly functioning of the stock exchanges. It also works for protecting the
investor’s rights, prevents malpractices in security trading and promotes healthy growth of
the capital markets. It was granted statutory status in 1992 under SEBI Act. It has the full
authority to control, regulate, monitor and direct the capital markets. It is the watchdog of the
securities market. It is the most powerful organ of the Central Government in the capital
market. After the repeal of the Capital Issue Control Act and abolition of the
CCI the SEBI was given full powers on the new issue market and stock market. It has been
issuing guidelines since April 1992 for all financial intermediaries in the capital market. The
guidelines have been issued with the objective of investor protection. The guidelines also
include the obligations of merchant bankers in respect of free pricing, disclosure of all correct
and true information and to incorporate the highlights and risk factors in investment in each
issue through the prospectus. It has been established for the healthy development and
regulation of the capital market.
OBJECTIVES OF THE SEBI:
The main objectives of the SEBI are
To save the rights and interests of investors particularly individual investors and to guide
and educate them.
To prevent trading malpractices like rigging the price, insider trading, misleading
statements in prospectus, etc.
To regulate stock exchanges and the securities market to promote their orderly functioning.
To registering and regulating the working of stock brokers, sub-brokers etc
To promote the development of Securities Market;
To Promoting and regulating self-regulatory organizations.
COMPOSITION OF SEBI
The Central Government has been constituted by a Board by the name of SEBI under Section
3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other
places in India. SEBI constitutes of the given members, as follows :
Section 4(1)
(a) Chairman
(b) Two members which are selected from the officials of the Ministry of the Central
Government. These people are dealing with Finance and administration of Companies Act,
1956;
(c) One member from the officials of the Reserve Bank of India;
(d) five other members of which at least three will be full time members. These are appointed
by the Central Government.
The Chairman and the other members shall be persons of ability, integrity and standing who
have shown capacity in dealing with problems relating to securities market or have special
knowledge or experience of law, finance, economics, accountancy, administration or in any
other discipline which, in the opinion of the Central Government, shall be useful to SEBI.
The terms and conditions of service of Chairman and members are determined in the rules
framed by Government in this regard.
The management, general supridentant and direction of the affairs of SEBI lie in a Board of
Members. It exercises all powers and do all acts and things which may be exercised or done
by SEBI. The Chairman also has powers of general superintendence and direction of the
affairs of the Board and may also exercise all powers and do all acts and things which may be
exercised or done by the Board.
FUNCTIONS OF SEBI
Chapter IV of SEBI Act, 1992 deals with the powers and functions of SEBI. Section 11 of the
Act lays down that it shall be the duty of SEBI to protect the interests of the investors in
securities and to promote the development of, and to regulate the securities markets by such
measures as it thinks fit.
SEBI has the responsibility to safeguard the interests of the investors in securities and to
enhance the development of, and regulation of the securities market by such measures as it
thinks fit. The measures referred to therein may provide for:-
Protective Functions:
It stops and bans unfair trade practices in the securities market, e.g., price rigging, market
misleading statements in prospectus manipulations etc.
It controls insider trading and imposes penalties for such practices.
It undertakes steps for investors protection
It promotes fair practices and code of conduct in securities market.
Regulatory Functions:
It involves regulation of the business in security markets and other stock exchanges;
It involves registration and regulation of the working of a variety of agents such as stock
brokers share transfer agent, bankers and sub brokers to a given issue, trustees belonging to
trust deeds, registrars for a particular issue, underwriters, merchant bankers, portfolio
managers, investment advisers and many other intermediaries who may be associated with
securities markets in any manner;
Registration and regulation of participants working, depositories, custodians of securities,
FNIS, credit rating agencies and many other intermediaries for example SEBI may, by
notification, specify in this behalf;
Registration and regulation in the working of venture capital funds and collective
investment schemes which includes mutual funds; regulating substantial acquisition of shares
and take-over of companies;
promoting and regulating self-regulatory organizations;
Development Functions:
Promotion of the education of investors' and their training of intermediaries of securities
markets;
Banning any company to issue prospectus, any offer document, or advertisement soliciting
money from the public for the issue of securities,
For conducting research and publication of information that is useful to all market
participants.
The Powers of SEBI:
Section 11(2) The powers have been given to the SEBI with the enactment of SEBI Act,
1992:
1. Regulating the business activities in the capital market.
2. Power to grant registration to financial intermediaries.
3. Register and regulate how the depositories work. Working of custodians, FIIs, credit rating
agencies is also seen
4. Registering and regulating the working of venture capital funds and mutual funds.
5. Power to grant approval to bye-laws of recognized exchanges.
6. Power to prohibit insider trading.
7. Power to compel listing of securities by public companies.
8. Power to control and regulate stock exchanges.
9. Power to call for any information or explanation from recognized stock exchanges or its
members.
10. Power to levy fee.
11. Power to regulate substantial acquisition of shares and takeover of companies.
12. Power to promote and regulate self regulatory bodies.
13. Stopping fraud and unfair trade practices which relate to the securities markets.
14. Promotion of investors, education and training.
15. Performing any other functions as may be assigned by the government from time-to-time.
Section 11(2A) prescribed that SEBI may take measures to undertake inspection of any book,
or register, or other document or record of any listed public company or a public company
(not being intermediaries referred to in section 12) which intends to get its securities listed on
any recognised stock exchange where SEBI has reasonable grounds to believe that such
company has been indulging in insider trading or fraudulent and unfair trade practices
relating to securities market. Section 11(3) of SEBI Act provides that for carrying out the
duties assigned to it under the Act, SEBI has been vested with the same powers as are
available to a Civil Court under the Code of Civil Procedure 1908.
PENALTIES FOR FAILURES
Chapter VIA of SEBI Act deals with penalties which can be imposed under the Act for
various failures, defaults, non-disclosure and other offences. It may be recalled that Section
11(2)(i) empowers SEBI to call for information and conduct enquiries and audits
of the stock exchanges, mutual funds, other persons associated with securities markets,
intermediaries and self regulatory organisations in the security market. Also Section 11(ia) of
the Act requires calling for information and record from any bank or any other authority or
board or corporation established or constituted by or under any central, state or provincial Act
in respect of any transaction in securities which is under investigation or inquiry by
SEBI.
Penalty for failure to furnish information, return, etc.
Section 15A lays down that if any person who is required under SEBI Act or any rules or
regulations made thereunder, he shall be liable to a penalty of one lakh rupees for each day
during which such failiure continues or one crore rupees whichever is less, if :
(a) to furnish any document, return or report to SEBI, fails to furnish the same;
(b) to file any return or furnish any information, books or other documents within the time
specified therefor in the regulations, fails to file return or furnish the same within the time
specified therefor in the regulations;
(c) to maintain books of accounts or records, fails to maintain the same.
Penalty for failure by any person to enter into agreement with clients
Section 15B lays down that if any person who is registered as an Intermediary and is required
under this Act or any rules or regulations made thereunder, to enter into an agreement with
his client, fails to enter into such agreement, he shall be liable to pay a penalty of one lakh
rupees for each day during which such failure continues or one crore rupees whichever is
less.
Penalty for failure to redress investors’ grievances.
Section 15C lays down that if any listed company or any person who is registered as an
Intermediary, after having been called upon by SEBI in writing to redress the grievances of
Investor, fails to redress such grievances within the time specified by SEBI, such company or
intermediary shall be liable to pay a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees whichever is less.
Penalties for Default
Section 15D and 15F provide for penalties for default in case of mutual funds : Section 15D
lays down that in case of mutual funds, if any person who is:
(a) required under this Act or any rules or regulations made thereunder to obtain a certificate
of registration from SEBI for sponsoring or carrying on any collective investment scheme,
including mutual funds, sponsors or carries on any collective investment scheme, including
mutual funds, without obtaining such certificate of registration, he shall be liable to a penalty
of one lakh rupees for each day during which he sponsors or carries on any such collective
investment scheme, including mutual funds, or one crore rupees, whichever is less;
(b) registered with SEBI as a collective investment scheme, including mutual funds, for
sponsoring or carrying on any investment scheme, fails to comply with the terms and
conditions of certificate of registration, he shall be liable to a penalty of one lakh rupees for
each day during which such failure continues or one crore rupees, whichever is less;
(c) registered with SEBI as a collective investment scheme, including mutual funds, fails to
make an application for listing of its schemes as provided for in the regulations governing
such listing, he shall be liable to penalty of one lakh rupees for each day during which such
failure continues or one crore rupees, whichever is less;
(d) registered as a collective investment scheme, including mutual funds, fails to dispatch unit
certificates of any scheme in the manner provided in the regulation governing such despatch,
he shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less;
(e) registered as a collective investment scheme, including mutual funds, fails to refund the
application
Penalty for Insider Trading
Section 15G lays down that if any insider:
(i) either on his own behalf or on behalf of any other person, deals in securities of a body
corporate listed on any stock exchange on the basis of any unpublished price sensitive
information; or
(ii) communicates any unpublished price sensitive information to any person, with or without
his request for such information except as required in the ordinary course of business or
under any law; or
(iii) counsels, or procures for any other person to deal in any securities of any body corporate
on the basis of unpublished price sensitive information, he shall be liable to a penalty of
twenty five crore rupees or three times the amount of profits made out of insider
trading, whichever is higher.
Penalty for Non-Disclosure of Acquisition of Shares and Takeovers
Section 15H lays down that if any person fails to:
(i) disclose the aggregate of his shareholding in the body corporate before he acquires any
shares of that body corporate; or
(ii) make such a public announcement to acquire shares at a minimum price; or
Penalty for fraudulent and unfair trade practices
Section 15HA provides that If any person indulges in fraudulent and unfair trade practices
relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times
the amount of profits made out of such practices, whichever is higher.
Penalty for contravention where no separate penalty has been provided
Section 15HB Whoever fails to comply with any provision of this Act, the rules or
regulations made or directions issued by SEBI thereunder for which no separate penalty has
been provided, shall be liable to a penalty which may extend to one crore rupees.
ADJUDICATIONS
Section 15-I & J deal with SEBI’s power to adjudicate and factors to be taken into account by
the adjudicating officer.
(1) For the purpose of adjudging the penalties for failure, SEBI appoints any of its officers
not below the rank of Division Chief to be an adjudicating officer for holding an inquiry in
the prescribed manner after giving any person concerned a reasonable opportunity of being
heard for the purpose of imposing any penalty.
(2) While holding an inquiry, the adjudicating officer has powers to summon and enforce the
attendance of any person acquainted with the facts and circumstances of the case to give
evidence or to produce any document which in the opinion of the adjudicating officer, may be
useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is
satisfied that the person has failed to comply with the provisions, he may impose such penalty
as he thinks fit in accordance with the provisions of any of those sections.
(3) SEBI may call for and examine the record of any proceedings under this section and if it
considers that the order passed by the adjudicating officer is erroneous to the extent it is not
in the interests of the securities market, it may, after making or causing to be made such
inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the
circumstances of the case so justify:
However, no such order shall be passed unless the person concerned has been given an
opportunity of being heard in the matter. Further that nothing contained in this sub-section
shall be applicable after an expiry of a period of three months from the date of the order
passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is
earlier.
Factors to be taken into account by the adjudicating officer
Section 15J lays down that while adjudging the amount of penalty, the adjudicating officer
shall have due regard to the following factors viz.,
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a
result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
Section 15JA provides that all sums realised by way of penalties under this Act shall be
credited to the consolidated fund of India.
SECURITIES APPELLATE TRIBUNAL (SAT)
In order to afford proper appellate remedies, Chapter VIB of SEBI Act provides for the
establishment of the Securities Appellate Tribunals to consider appeals against SEBI’s orders,
of penalties. As per Section 15K, the Central Government is empowered to establish by
notifications one or more Appellate Tribunals, to be known as the Securities Appellate
Tribunals to exercise the jurisdiction, power and authorities conferred on such Tribunal by
SEBI Act or under the Act or any other law for the time being in force. The Central
Government has set up a tribunal at Mumbai.
Composition of SAT
According to Section 15L, which deals with the composition of the Tribunal, the Securities
Appellate Tribunals shall consist of a Presiding Officer and two other members to be
appointed by the Central Government by notification.
Qualification for Appointment as Presiding Officer or Member
Section 15M prescribes that a person shall not be qualified for appointment as the Presiding
Officer of Securities Appellate Tribunals unless he is a sitting or retired Judge of the Supreme
Court or a sitting or retired Chief Justice of a High Court or is a sitting or retired Judge of a
High Court who has completed not less than seven years of service as a Judge in a High
Court. It has also been prescribed that the presiding officer of the Securities
Appellate Tribunal shall be appointed by the Central Government in consultation with chief
justice of India or his nominee. A person shall not be qualified for appointment as a member
of Securities Appellate Tribunal unless he is a person of ability, integrity and standing who
has shown capacity in dealing with problems relating to securities
market and has qualification and experience of corporate law, securities laws, finance,
economics or accountancy.
A member of SEBI or any person holding a post at senior management level at SEBI cannot
be appointed as presiding officer or member of Securities Appellate Tribunal during his
service or tenure as such with SEBI or within two years from the date on which he ceases to
hold office as such in SEBI.
Tenure of Officer of Presiding Officer and Other Members
Section 15N lays down that the Presiding Officer and every other member of Securities
Appellate Tribunal shall hold office for a term of five years from the date he enters upon his
office and is eligible for reappointment. It has also been provided that the person attaining the
age of sixty eight years cannot hold office as the presiding officer of Securities Appellate
Tribunal. Also a person who has attained the age of sixty two years cannot hold
office as member of Securities Appellate Tribunal.
POWERS OF SECURITIES APPELLATE TRIBUNAL
The Securities Appellate Tribunals shall have, for the purposes of discharging their functions
under this Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908, while trying a suit, in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed by it
ex parte;
(h) any other matter which may be prescribed.
POWERS OF CENTRAL GOVERNMENT
(a) To issue directions
Section 16 empowers Central Government to issue directions in writing to SEBI on questions
of policy as it may deem fit from time to time. However the Central Government shall as far
as practicable, give an opportunity to SEBI to express its views before any such directions is
given by the Central Government. The decision of the Central Government as to whether a
question is one of policy or not shall be final.
(b) To Supercede SEBI
Section 17 lays down that if at any time the Central Government is of opinion that:
(a) on account of grave emergency, SEBI is unable to discharge the functions and duties
imposed on it by or under the provisions of this Act; or
(b) SEBI has persistently made default in complying with any direction issued by the Central
Government under this Act or in the discharge of the functions and duties imposed on it by or
under the provisions of this Act and as a result of such default the financial position of SEBI
or the administration of SEBI has deteriorated; or
(c) circumstances exist which render it necessary in the public interest so to do,
it may, by notification, supersede SEBI for such period, not exceeding six months, as may be
specified in the notification.
