Investor’s chaperon – SEBI

Thu, Dec 1, 2011

Biz Arena

With the rising economy and increasing disposable income at hand and in a bid to save taxes , people are thinking about new ways to invest their money and are exploring various avenues for the same. Similarly the brokerage firms are devising new schemes to lure more affluent clients to invest their money with them promising higher returns. But often these schemes are nothing more than a way to milk people‘s hard earned income to serve their own hidden interests.

Thus a need was felt to set up a regulatory body to combat such frauds and protect the innocent investors form getting exploited and not being left at the mere mercy of the brokers.

The objective of such a regulatory body could be underlined as following:

  • Efficient and fair performance of economic functions and at the same time, dealing with the products and institutions through which those functions are performed.
  • Avoiding investor’s entrance into contracts with inappropriate expectations based on imperfect information.
  • Preventing monopoly of capital markets.
  • Avoiding security scams which involve speculative manipulation of funds.

In accordance with the provisions of the Securities and Exchange Board of India Act, 1992,a statutory and autonomous regulatory board with defined responsibilities and independent powers , was set up by the name SEBI. Ultimately, the focus of a regulatory structure must be on the welfare of the end users. Regulatory bodies are present around the world for example the USA have SEC (Security Exchange Commission) while the UK have SIB (Securities Investment Board) and India have SEBI (Securities and Exchange Board of India).

The basic objectives of the Board were identified as:

  • to protect the interests of investors in securities;

An instance to quote is the Rs. 300 Crore Citibank fraud in January 2011, involving big names like Hero group and brokerage firms Religare and Bonanza, where SEBI probed in to protect people caught into fraudulent claims by company’s officials. It was being reported that SEBI is in a much better position to investigate such frauds and has rightly justified its role.

Another such scam which forced GOI to make SEBI is security scam of 1990-91, involving misappropriation of funds to the tune of over Rs.3500 crores and wiped out market value to the tune of Rs.100, 000 crores.

  • to promote the development of Securities Market;

A significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000.

Another event is increase in the number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc and introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in year 2000.

  • to regulate the securities market and
  • to look after matters connected therewith or incidental thereto.

SEBI has appointed to committees, first, L.C. Gupta Committee to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts, and second, J.R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. These committees lead to the introduction of derivatives trading in India beginning with Stock Index Futures, till this time trading in derivatives was ban in India. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started derivative trading in the year 2001.

Securities and Exchange Board of India (SEBI) was constituted under the SEBI Act to administer its provisions.SEBI Act provides that  it is the duty of the Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market . It has given power to the Board to regulate the business in Stock Exchanges, register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., also to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. and they have to register themselves with the board and it has the power to suspend or cancel such registrations.Anyone aggrieved by the Board’s decision is entitled to appeal to the Central Government. Also The Board is obliged to submit a report to the Central Government each year, giving true and full account of its activities, policies and programs.

For the discharge of its functions efficiently, SEBI has been invested with the necessary powers which are:

  1. To approve by−laws of stock exchanges.
  2. To require the stock exchange to amend their by−laws.
  3. Inspect the books of accounts and call for periodical returns from recognized stock exchanges.
  4. Inspect the books of accounts of financial intermediaries.
  5. Compel certain companies to list their shares in one or more stock exchanges.
  6. Delegate powers exercisable by it.
  7. Prosecute and judge directly the violation of certain provisions of the companies Act.
  8. To Control the Merge, Acquisition and Takeover the companies
  9. To make new rules on carry – forward transactions

Measures taken by SEBI to implement its guidelines

  • SEBI is regularly updating its tool to properly watch the market and stay ahead of the accounting fraudsters and market manipulators.
  • Surveillance of markets is the major method of SEBI to tap on the fraudsters.
  • Data Ware Housing and Business Intelligence System (DWBIS), for speedy analysis of data and identification of possible violations like insider trading.
  • SEBI has planned to have its own forensic accounting cell to identify any bungling in the books and regulatory filings of listed firms and market entities.
  • SEBI is also working to put in place a unified regulatory filing system for all listed companies and market entities in a standardized format.
  • SEBI arranges scheduled workshops to educate the investors.


As Indian financial sector is booming and foreign investors are turning towards India, it has become important to save them from frauds for preserving the image of financial system of India. SEBI has done quite well in this regard but due to increasing competition on one hand and slow economic growth on the other hand, bank loan rates are becoming higher and Indian companies are under huge pressure of raising funds through securities. In such an environment, a watchdog has to be more alert and effective in punishing the perpetrators. SEBI has bigger challenge to do its job impressively and as more FIIs are trusting Indian market it is interesting to see how SEBI will keep with challenges of bumping Indian economy coupled with its objectives.


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One Response to “Investor’s chaperon – SEBI”

  1. MCX Free Tips Says:

    SEBI has to be responsive to the needs of three groups, which constitute the market:

    1. The issuers of securities
    2. The investors
    3. The market intermediaries.

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