More On Share Market

The Securities and Exchange Board of India (SEBI) with headquarter in Mumbai was established in 1988 under the resolution of the government of India. The board was introduced with the primary role of observing the activities of the stock market.

But the increasing fraud and malfunctioning in the stock market in the later years arouse the need to establish a firm that would listen to the grievances of traders and investors.

With the growing years, the government observes the decrease in figures in the share market. On analysis of the reason, the government decided to establish an organization that works as a regulator of the securities market in the country.

Finally, SEBI came into force on January 31, 1992, as the statutory body as per the Securities and Exchange Board of India Act, 1992. With this, the body starts regulating the matters of stock exchanges, mutual funds, etc in the financial market.

To get into a trade, it is essential for brokers to get registered with it.

Currently, the new broker Orril Trade, registered under SEBI to offer the broker services to its customer. It is a discount broker offering the provision to trade in different segments.

SEBI Meaning

SEBI, Securities and Exchange Board of India, is the regulatory body that regulates the flow of stocks in the securities market.

It is analogous to the Securities and Exchange Commission (SEC) operative in the US.

According to the charter, the SEBI is the issuer of the three main groups namely; securities, investors, and market intermediates and play a vital role in regulating them.

SEBI Organizational Structure

There is a total of nine members on the SEBI Board that includes:

  • One chairman appointed by the Government of India.
  • Two members from the Union Finance Ministry.
  • One member from the Reserve Bank of India.
  • Five members are appointed by the Union Government of India. Three of these five members served as whole-time members.

SEBI Act 1992

The Union Government of India passed a SEBI Act 1992 that transformed the non-statutory SEBI into the autonomous body with statutory powers.

According to the SEBI Act, 1992 it has the power to encompass the regulation of the Stock Exchange and other securities markets.

It also regulates and audits the performance of stockbrokers, sub-brokers, registrars, trustees of trust deeds, bankers to an issue, portfolio manager, and other intermediaries.

Along with this it also administers the following

  • registration and regulation of mutual funds,
  • promotion and regulation of self-regulatory organization,
  • preventing fraudulent activities,
  • unfair trade practices,
  • substantial acquisition of shares and takeover of companies,
  • undertaking inspection,
  • conducting audits of stock exchanges, intermediaries, and self-regulatory organizations of the securities market, and
  • performing all those functions as mentioned in the provision of the Capital Issue (Control) Act, 1947 and Securities Contract (Regulation) Act, 1956.

Functions of SEBI

The functions of SEBI are enlisted in the SEBI Act, 1992 after its establishment as the statutory body. Its major role is to cater to the needs of three parties (Securities, Traders & Investors, Intermediaries) in the Capital stock exchange market of India.

The function of SEBI are broadly divided into three parts described below:

1. Protective Functions

The following are some of the major functions of SEBI that help in creating a safe and transparent environment for investors.

  • Safeguard the Interests of Traders and Investors

Since traders are the base of the capital markets, their major responsibility is to protect their interests and make sure that none of the investors become the victim of any trade fraud. For this, it organizes certain seminars and events from time to time that helps in educating both traders and investors.

  • Limit Price Rigging

 Since SEBI came into force to stop manipulated huge fluctuation. Although fluctuation is the trend of the financial market sometimes some of them are already fixed (price rigging) by the corporate or group of corporate. Such fluctuations resulted in the huge loss of money of the investors.

To stop such incidents of price rigging SEBI plays an effective role. It keeps surveillance on such cases. One of the approaches of SEBI to prevent it is the introduction of circuits.

On analysis of the closing figure of the day before, the circuit also called the threshold is defined by the SEBI. If the security price goes down beyond the circuit value, the circuit breaker role comes into play and the trade of that particular security is halted for hours or for the whole day.

  • Prevent Insider Trading

 The company’s stock price fluctuation is highly affected by the pre-announcement or any early news within the company. Coming across such news, some of the employees within the company sell or buy the company security beforehand.

This type of trading is called insider trading. To understand the concept in a much easy way, check Insider Trading Examples and Insider Trading Types

To prevent it, SEBI blocks the trust of the listed companies and the employee welfare schemes that prevent them from purchasing their own shares from the secondary market.

Also, according to the SEBI guidelines, the listed companies need to disclose their employee’s benefits schemes include the stock purchase and make them align as per the ESOS and ESPS guidelines.

  • Financial Intermediates

SEBI is the intermediate body in the stock market whose responsibility is to ensure that all the market transactions take place smoothly and securely. Thus, it played a key role in the capital market and monitor every activity of financial intermediate like broker, sub-broker, etc

2. Developmental Functions

These functions are important as it brings freshness and innovations in the Indian financial market. Many developmental functions are being performed by the SEBI, some of them are:

  • Electronic platform introduction for streamlining processes in the financial market.
  • Introduction of DEMAT form of securities
  • Offering training for financial intermediaries.
  • Permitting IPO through the exchange.

3. Regulatory Functions

This includes the enforcement of SEBI bye-laws to the corporate and financial intermediaries. This function ensures the smooth and transparent functioning of the stock market.

Some of the regulatory functions are:

  • There are defined guidelines and codes of conduct that are enforced to financial intermediaries and corporate.
  • All intermediaries, share market agents, trustees, etc are registered in SEBI.
  • It regulates the functioning of mutual funds and the takeover of companies.

Role of SEBI in Capital Market 

The capital market is part of a financial system that is run to raise funds by dealing with long-term investment.

It includes two types of markets: the primary market and the secondary market.

The primary market deals with the long term flow of funds from surplus to the government & corporate, and to banks and non-banks financial intermediaries.

The secondary market is concerned with outstanding securities. It facilitates the liquidity and marketability of outstanding debt and equity instruments.

It plays a vital role in the capital market. Some of the prominent roles of the body are:

  • Make rules to Control Stock Exchange: In the capital market, SEBI has the complete authority to bring new rules for better control over the stock exchange.
  • Offer License to Dealers and Brokers: The statutory body can offer licenses to dealers and brokers who are part of the capital market.
  • Prevents Frauds in the Capital Market: The major role of SEBI is to stop the occurrence of fraud. It can ban the trading of the brokers who are involved in any kind of malicious activity or in unfair trade method in the stock market.
  • Control Merger, Acquisition, and Takeover: It checks whether the merger of the big firm with other companies of the stock exchange is for development purposes or to harm the capital market. Depending on the scenario it takes necessary action.
  • Audit the Performance of Stock Market: To bring transparency in the functioning of the capital market, SEBI audit the performance of different stock exchanges.
  • Create Relationship with ICAI: For better auditing of the company accounts, it tends to build a good relation with ICAI, the authority that makes new auditors of companies. This helps in identifying the real scenario of the financial trade thus helping investors in making decisions regarding investment.
  • Introduce Derivative Contracts on the Volatility Index: To reduce the risk of investors, SEBI introduces derivative contracts on the Volatility Index in the Stock Exchanges.  

Power of SEBI

The Securities and Exchange Board of India is entitled to the following three powers.

  • Quasi-Judicial:

If the SEBI comes across any of the fraudulent activity in the trade, then it has a right to conduct hearings and passing the judgment as in the case of SEBI PACL. This offers better transparency, fairness, accountability, and reliability to the capital market.

  • Quasi Legislative

It has the power to draft rules and regulations to protect the interest of investors like one of the regulation SEBI LODR.

SEBI LODR focuses on consolidating and streamlining the provision of all the listing agreements of different segments of the financial market including equity shares.

This type of regulation is kept to prevent fraud or any kind of malpractice.

  • Quasi-Executive

It has a full right to file a case against the one who violates the rules and regulations. Along with this, it has the power to check the account books and other details to gather proof of the suspicious activity.

SEBI Guidelines

To bring transparency in the work of stock exchange; NSE, BSE, etc SEBI introduces different guidelines for the primary market, IPOs, investor protection, etc.

Here are the major guidelines for different functions of the stock exchange. 

SEBI Guidelines for IPO

Many companies choose to go public. This could be for several reasons like business expansion, diversification, debt repayment, etc.

To file a company as an IPO, SEBI ICDR has laid down certain guidelines that are discussed below.

1.Entry Norm I: Profitability Route

For making an entry as an IPO, the company must fulfill the norm discussed below:

  • The company must have a net worth of Rs 1 Crore for the last three consecutive years.
  • Minimum net tangible assets of Rs 3 crores of which not more 50% are held in the monetary assets for the three consecutive years.
  • An average profit of 15 crores in the last three to five years.
  • Ensure that the size of the issue must not exceed five times the pre-issue worth.

2. Entry Norm II: QIB Route

  • If the company is willing to expand but fails to accomplish any of the guidelines mentioned above, then the SEBI comes with certain alternatives.
  • According to this guideline, the company can access the public interest via book building process i.e regulated bidding from a shareholder with the specific price band. This helps in determining the share value.
  • 75% of the total net offer of this will be allotted to the Qualified Institutional Buyer (QIBs).
  • If the minimum subscription value of QIB is not accomplished then the company will refund the subscription fee.

3. Other Guidelines

  • To file the company as IPO it is essential for the company to file a draft offer document known as Draft Red Herring Prospectus to SEBI.
  • The draft contains all the essential information like contact information of the company, risks associated, the response of the company towards risks, and the detail of the company’s leadership
  • SEBI reviews the draft and issues the final observation letter from SEBI.
  • In case, the company chooses the alternative way to file IPO i.e. book-building process, the SEBI takes 12 months period to issue the final observation letter.
  • The company filing as IPO must have half the membership of the Board of Directors as an independent investor without any obligation to the promoter or the company itself. This helps in safeguarding the interest of the minority shareholders.
  • A company that files for the issue of up to Rs 100 Crore must file the draft offer document in the regional offices of SEBI.  

SEBI Guidelines for Primary Market 

Following are the SEBI guidelines for the Primary Market:

  • New Company: The new company which has not completed 12 months of commercial operations is not allowed to involved in the issue of share at a premium.
  • New Company Set up by Existing Company: Any old company with a good track record in terms of profit for at least 5 years if promoting any new company, then the new company is allowed to price its issue.
  • Private and Closely Held Companies: The private and closely held companies having a track record of earning profit for at least three years are allowed to price their issues freely. This prices will be determined by the issuer by consulting with the lead manager
  • Existing Listed Companies: The existing listed companies are allowed to freely raise fresh capital to expand market with the promoter contribution of 50% on the first 100 crores, 40% on the next 100 crores i.e. on 200 crores, 30% on the next 100 crores (300 crores) and 15% on the balance issue amount.

*Before a public issue, a draft of the prospectus should be given to the SEBI.

*The new companies’ share should be listed with OTCEI or any other stock exchange.

SEBI Guidelines for Investor Protection

Apart from regulating the stock market, SEBI is also involved in protecting the interest of investors. To meet this objective, certain guidelines are enlisted below:

  • New Issues: SEBI introduces a code of advertisement for public issues to offer fair disclosure. Also, to reduce the cost of issue, underwriting has been made optional.
  • Investor Education: It encourages investor education and therefore has invested in certain investors’ associations.
  • Credit Ratings: Companies that are involved in raising the public deposits must undergo credit ratings by the authorized authority. This gives the transparency of the financial strength of the organization. Some of the credit rating firms are:
    • CRISIL
    • ICRA
    • CARE etc.
  • Disclosure of Information: SEBI takes the responsibility of disclosing fair and adequate information about the stock exchange that helps the investors in making investment decisions.
  • Arrangement for Grievances: The Board makes an arrangement for disclosing investors’ grievances.
  • Promoters’ Information: There should be clear information about the contribution of promoters whose name is enlisted in the prospectus.
  • Presence of SEBI Representative During Allotment: In case of oversubscription of any company issue, the SEBI representative must be presented during the allotment process.
  • Investor Grievance Cell: There should be the investor grievances cell for handling complaints of investors.
  • Attachment of Diligence Certificate: The merchant bankers must attach diligence certificate along with prospectus to extend the accountability to the investors. The certificate is useful to know the detailed position of the issue of the share. This certificate is helpful to an investor in filing the case of the incorrect statement in the prospectus.
  • Advertisement Code: It provides an advertisement code that should be followed by companies or investors.

SEBI Regulations

SEBI enlists laws and regulations according to the SEBI Act, 1992. All the laws should be strictly followed by all who are directly or indirectly linked with the stock market and other securities in India.

These regulations ensure that all the trade over stock exchanges and other securities are done in a secured and flawless manner.

Here is the brief information on some of the highlighted SEBI laws and regulations.

SEBI Regulations on Insider Trading 

The SEBI (Prohibition of Insider Trading) Regulation, 2015 introduces new Insider Trading Regulations and provisions that prohibit the trading of securities by the insiders. In all, it strengthens the legal framework thus bringing more perfection and security in trade.

LODR Regulation 

SEBI Listing Obligations and Disclosure Requirement, LODR Regulation offer the provision of dealing with the mandatory compliances that are being made by the listed companies registered with the stock exchanges of India.

ICDR Regulation 

SEBI ICDR Regulation or Issue of Capital and Disclosure Requirements was introduced in 2009. It governs the provision for dealing with the matter related to capital and disclosures made by the listed companies of India.

This regulation is meant for making the trade secured, flawless and beneficial for both the listed companies and the investors.

SEBI SAST Regulation 

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 is formulated to resolve the issues related to the legal and fair recovery of stock and takeovers.


SEBI was introduced to bring fairness and securities in trading. Since its establishment, it introduces new laws and regulations for bringing improvement. This upgrades the stock market and makes it a more secure and flawless for trading.

The best change occurred in the trading market over the year is the replacement of physical trading with electronic trading.

It strengthens the regulatory system of the stock market. This brings empowerment in the Indian Securities market which attracts more investors towards trading platforms.

Also, its role in the regulation of business involved in stock exchange protects the interests of investors in trade.

In all, SEBI is a powerful body that reduces the risks of fraud in the stock exchanges and capital market.

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