What is SEBI? How does it regulate the Indian Stock Market?
December 15, 2021 by Vandana S · 4 min read
Securities and Exchange Board of India (SEBI) is a regulatory body established on 12th April 1992. It monitors the Indian securities market and regulates the norms to protect the investors through the formulation of guidelines.
The major functions of SEBI are to promote development and awareness about the Indian Stock Market, a platform for investors, traders, brokers, merchant bankers, foreign institutional investors, advisors, portfolio management, trustees, underwriters and banks, regulation of credit rating agencies, management of regulations to prevent fraudulent activities in the financial markets, and provision of technical support and educational support for Research and Development in the field of stock markets.
Powers of SEBI
SEBI is quasi-judicial when there are fraudulent activities and unethical operations in the financial markets. They aim to inculcate the transparency, fairness, and accountability of the stock market. Thus, they can deliver judgments on things that do not match their aim.
SEBI has the power to check the books of accounts of the companies that are not following the rules and regulations implemented by SEBI. They can take legal action against the violators of the norms. (Quasi Executive)
SEBI has the power to incorporate laws to protect the investors and reduce the fraudulent activities in the organization. They can impose regulations on the disclosure requirements, listing of companies, and obligations of the organizations. (Quasi Legislature)
SEBI Guidelines for new companies issuing shares
• Form of applications and copies of industrial licenses. • Financial projections need to be given • The company should have shares listed in any one of the recognized stock exchanges and the shares need to be issued to the public • Equity shares being issued to the public for the first time, not more than 15% of the shares should be subscribed by friends, family, and promotors. • A 3:1 equity to preference share ratio is allowed. • New companies cannot issue shares at a premium • Allotment of shares is not allowed to NRI without prior permission from RBI. • Capital cost needs to be standardized and be proportionate to the debt-equity ration • All documents should be underwriting agreements.
SEBI Guidelines for Primary Markets for the fresh issue of shares
• Primary markets are the markets where the shares, bonds, and securities are created. They sell these for the first time to the public through Initial Public Offering (IPO). • A new company needs to be registered for more than 12 months to issue shares in premium. • If the existing is promoting a new company via IPO, the existing company for the past 5 years and has consistent profits, they can determine the issue price. • A draft of the prospectors needs to be submitted to SEBI before IPO. • The shares of the new company need to be listed in any stock exchange or OTCEI.
SEBI guidelines for Secondary Markets
• Secondary markets are the markets where investors buy and sell shares, securities, and bonds. • All the companies entering the market for the issue need to submit a statement regarding the utilization of the issue. • The brokers need to have capital adequate positions and funds maintained. • The brokers should follow the capital adequacy norms and bye-laws. • Brokers should submit their audited accounts to SEBI • The brokers should mention the securities that they have traded and the amount of commission earned by them. • The brokers should issue the transaction contract notes to the clients within 24 hours. • The brokers need to be transparent and should show the demarcation between their funds and the client’s funds. • A broker cannot underwrite more than 5% of the public issue. • All transactions in the market need to be reported to SEBI within 24 hours. • The brokers should have a security deposit which is fixed by SEBI.
SEBI also regulates the mutual fund’s markets and ensures that the financial markets are transparent, accountable, and protect the interest of the investors.
What are your thoughts on the regulations of SEBI in the stock market?