SEBI

Background : Capital markets began to gain popularity in India towards the 1970s. However, this
further led to a rise in many misconducts, for example, price rigging, violation of policies of the stock
exchange, and so on. As a result of these misdeeds, the government established a body to supervise
the workings of the stock exchange and prevent these malpractices, leading to establishing the
Securities and Exchange Board of India (SEBI) on 12 April 1988 given statutory powers in 1992 under
the SEBI Act.

Definition Of SEBI And Its Importance

Securities and Exchange Board of India, commonly called SEBI, can be called the statutory regulatory
body set up by the Indian government in 1992 to oversee the securities market and protect the
interests of investors. It was initially formed as a non-statutory body on 12 April 1988, with no
authority over anything, but later in 1992, it was accepted as an independent agency with statutory
powers. The board of SEBI usually consists of 9 members and more than 25 departments, some of
them being the Corporation Finance Department, Investment Management Department, etc. As for
the board members, The Central Government of India appoints one Chairman of the Board, one
member Board is appointed by the Reserve Bank of India (RBI), two members of the board are from
the Union Ministry of Finance, and the Central Government of India elects five members to the
board.

Thus SEBI is an important institution because it fulfils the role of a watchdog for all capital market
players and seeks to create an atmosphere that allows the securities market to operate efficiently
and smoothly for financial market participants. It further plays a crucial role in the economy of India
by protecting the investors’ interests, monitoring how the intermediaries function, and preventing
malpractices. Now we look further at SEBI functions and objectives.

1. Safeguarding the Interest of Investors

One of the main objectives of SEBI is to educate investors on the methods to take necessary
precautions. Along with that, SEBI facilitates investors to make informed decisions related to
investments. SEBI has adopted measures such as the dematerialization of securities, T+2 rolling
settlement, screen-based trading system. It has also framed regulations for regulating intermediaries,
corporate restructuring, as well as the issue and trade of securities.

2. Facilitating Redressal of Investor Grievances

SEBI has a comprehensive mechanism for the redressal of the grievances of investors against listed
companies and intermediaries. In case a company or intermediary does not redress the grievances of
investors, SEBI sends reminders and also holds meetings. Appropriate enforcement actions are taken
as per the law.

There is a comprehensive arbitration mechanism in the stock exchange and depositories for the
resolution of investors’ disputes. The investor protection fund helps in compensating investors if a
broker is declared to be a defaulter. The depository repays the investors for loss due to negligence of
the depository.

3. Regulating the Stock Market

• Regulating Capital markets through preventive measures

• Encouraging the formation of self-regulatory organizations

• Regulating the functions of stock exchange and security markets

• Formulating rules to prevent malpractices within the system

• Managing and controlling complaints division

• Promoting learning opportunities for investors

Functions of SEBI

SEBI has the following functions

1. Protective Function

2. Regulatory Function

3. Development Function

The following functions will be discussed in detail

Protective Function: The protective function implies the role that SEBI plays in protecting the
investor interest and also that of other financial participants. The protective function includes the
following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the
insiders of a company, which includes the directors, employees and promoters. To prevent such
trading SEBI has barred the companies to purchase their own shares from the secondary market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of
securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.

c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.

Regulatory Function: Regulatory functions involve establishment of rules and regulations for the
financial intermediaries along with corporates that helps in efficient management of the market.

The following are some of the regulatory functions.

a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.

b. Regulating the process of taking over of a company.

c. Conducting inquiries and audit of stock exchanges.

Developmental Function: Developmental function refers to the steps taken by SEBI in order to
provide the investors with a knowledge of the trading and market function. The following activities
are included as part of developmental function.

1. Training of intermediaries who are a part of the security market.

2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.

3. By making the underwriting an optional system in order to reduce cost of issue.

Purpose of SEBI

The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.

It meets the needs of the following groups:

1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.

2. Investors: It provides protection and supply of accurate information that is maintained on a

3. Intermediaries: It provides a competitive market for the intermediaries by arranging for proper
infrastructure.

Structure of SEBI

SEBI board comprises nine members. The Board consists of the following members.

1. One Chairman of the board who is appointed by the Central Government of India

2. One Board member who is appointed by the Central Bank, that is, the RBI

3. Two Board members who are hailing from the Union Ministry of Finance

4. Five Board members who are elected by the Central Government of India