ROLE OF SEBI IN CORPORATE GOVERANCE

PRERNA

GALGOTIAS UNIVERSITY
SCHOOL OF LAW
L.L.M

Page | 1

Electronic copy available at: https://ssrn.com/abstract=3880338

INTRODUCTION:

SEBI stands for the Securities and Exchange Board of India and was established on
12th April 1992. It is a statutory regulated body that controls and regulates the
Indian capital and securities market.
SEBI assures that it safeguards the interest of investors by ensuring that the
guidelines and regulations are adhered to. It serves as a watchdog which is an
anonymous body that manages the flows of the entire stock market in the country.
Securities and Exchange Board of India [SEBI] is a regulator of securities market
in India. Initially, it was formed for the purpose of observing the activities
afterward in May 1992, Government of India granted legal status to SEBI.
What is the function of Primary Market under SEBI? What is the role of SEBI?
What is the process of issuance of securities? What is Role of SEBI in eliminating
insider trading?
The capital market started emerging as a new sensation in India at the end of the
1970s. However, with the popularity of stocks, a number of malpractices also
started rising like price rigging, unofficial private placements, non-compliance
with the provisions of the Companies Act, insider trading, violation of stock
exchange rules and regulations, delay in making delivery of shares and many
others.
As this time, the Indian Government realized the need for establishing an authority
to reduce these malpractices and regulate the working of the Indian securities
market as the majority of Indian People started losing their trust in the stock
market.

Soon after, SEBI (Securities and Exchange Board of India) was set up in the year
1988.

Page | 2

Electronic copy available at: https://ssrn.com/abstract=3880338

How Was SEBI established?

By the end of 1970, the capital market began to emerge as a sensation. As people
started trading and it became really popular, various malpractices started to begin
such as insider trading, price rigging, and violation of stock exchange rules, price
rigging and other such activities.

Once this started happening, then the government realized that they require a body
to lessen these malpractices. Also, it was essential to form an authority that could
regulate the working of the Indian Securities market so that the trust of people
could be built again.

Thus the underlying motive of its establishment was to assure that Indian Capital
Market works in a streamlines way and gives the investors a transparent
environment for investing their valuable and hard-earned money.

Then the established SEBI to conduct various activities such as:

• Creating and approving the by-laws of stock exchanges

• Inspecting accounting books of various recognized stock exchanges in
India
• Inspecting books and records of Financial Intermediaries
• SEBI could also stop companies from getting listed on any stock
exchange
• Handling registration of stockbrokers

The Head office of SEBI is Bandra Kurla Complex in Mumbai. It has its regional
offices in New Delhi, Chennai, Kolkata and Ahmadabad. Additionally, some of its

Page | 3

Electronic copy available at: https://ssrn.com/abstract=3880338

local offices are situated in Bangalore, Chandigarh, Jaipur, Guwahati, Kochi and
Patna.

What is SEBI?

Initially, SEBI acted as a watchdog and lacked the authority of controlling and
regulating the affairs of the Indian capital market. Nonetheless, in the year 1992, it
got the statutory status and became an autonomous body to control the activities of
the entire stock market of the country. The statutory status of the SEBI authorized
it to conduct the following activities:-

SEBI got the power of regulating and approving the by-laws of stock exchanges.
It could inspect the accounting books of the recognized stock exchanges in the
country. It could also call for periodical returns from such stock exchanges.
SEBI became empowered to inspect the books and records of financial
Intermediaries.
It could constrain companies for getting listed on any stock exchange.
It could also handle the registration of stockbrokers.

SEBI is headquartered in Mumbai and having its regional offices in New Delhi,
Chennai, Kolkata, and Ahmedabad. You can also find SEBI’s local offices in
Jaipur, Guwahati, Bangalore, Patna, Bhubaneswar, Chandigarh, and Kochi.

At present, 17 stock exchanges are currently operating in India, including NSE and
BSE. The operations of all these stock exchanges are regulated by the guidelines of
SEBI.

Page | 4

Electronic copy available at: https://ssrn.com/abstract=3880338

The organizational structure of SEBI

Mr. Ajay Tyagi is the current chairman of SEBI. He was appointed on the 10th of
January, 2017 and took over the charge with effect from 1st March 2017 from Mr.
U.K. Sinha.

SEBI consists of one chairman and other board members. The honorable chairman
is nominated by the Central Government. Out of the eight board members, two
members are nominated by the Union Finance Ministry and one member is
nominated by the RBI. The rest five members of the board are nominated by the
Union Government.

The objectives of SEBI

SEBI’s responsibility is to ensure that the securities market in India functions in an

orderly manner. It is made to protect the interests of investors and traders in the
Indian stock market by providing a healthy environment in securities and to
promote the development of, and to regulate the equity market.

Further, as stated earlier, one of the prime reason for establishing SEBI was to
prevent malpractices in the Indian capital market.

SEBI’s main roles in the Indian financial market:

In order to achieve its objectives, SEBI takes care of the three most important
financial market participants.

Page | 5

Electronic copy available at: https://ssrn.com/abstract=3880338

— Issuer of securities. These are the companies listed in the stock exchange
which raise funds through the issue of shares. SEBI ensures that the issue of IPOs
and FPOs can take place in a transparent and healthy way.

— Players in the capital market i.e. the traders and investor. The capital markets
are functioning only because the traders exist. SEBI is responsible for ensuring that
the investors don’t become victims of any stock market manipulation or fraud.

— Financial Intermediaries. They act as mediators in the securities market and

ensure that the stock market transactions take place in a smooth and secure
manner. SEBI monitors the activities of the stock market intermediaries like
brokers and sub-brokers.

Role of SEBI

As A Protecting the interest of investors

SEBI ensures that the investors do not get be fooled by misleading and false
advertisements. In return, SEBI issued guidelines so as to protect investors and
also ensured that the advertisement is fair and concise.
Regulation of price rigging: Price rigging refers to manipulation of prices by way
of fluctuating the prices with the object of inflating and depressing the market
price of securities.
SEBI make efforts to educate investors so that they are able to make choices
between the offerings of different companies and choose the most profitable
securities.
SEBI has issued guidelines to investigate cases of fraud and insider trading.
Adding to this the provisions for fine and Imprisonment.

Page | 6

Electronic copy available at: https://ssrn.com/abstract=3880338

 To ensure Development activities in Stock Exchange

E-Trading: Concept of E-trading have been introduced few years back by SEBI to
eliminate the discomfort. It simplifies the process of buying and selling of
securities.
The initial public offering of Primary Market (which is a part of Capital market)
permits through stock exchange.
SEBI promotes training of intermediaries of securities market with the object of
smooth functioning.

Regulate the business of stock exchange and activities of stock exchange

SEBI introduced proper Code of Conduct applicable to everyone who is a part of

the process of buying and selling of securities, stock exchange, etc.
Following are the areas of concern:
Rules & Regulations to regulate intermediaries such as Broker, underwriters,
etc.
Registers and Regulates the working of merchant Bankers, sub-brokers,
stockbrokers, share transfer agent, trustees, etc.
Registers the working of mutual Funds.
SEBI regulates turnover of the companies. It also conducts inquiry and audits.

To Regulate Insider Trading

Insider Trading have been a problem since the introduction of the Market dealing
with buying and selling of securities, stock exchange, etc. An Insider is a person or
a group of people having first- hand knowledge about the internal issues and Ups
and downs of a company. The moment insider gets to know about the loss which is
Page | 7

Electronic copy available at: https://ssrn.com/abstract=3880338

going to occur, the shares under insider’s name are sold immediately. Hence,
company suffers a huge amount of loss.
Process of Issuance of Securities

The prospectus must contain following information:

Name
Address
Registered Office
Names and Addresses of
Company Promoters
Managers
Managing Directors
Director
Company Secretary
Legal Advisor
Auditors
Bankers

It also includes information related to project, plant location, Technology,

collaboration, products, export obligations, etc. Intermediaries includes
underwriters and Brokers are separately appointed by the company to sell the
minimum number of shares. Prospects issued by the company must be approved by
SEBI. A company offers minimum of 49 percent of the amount of shares to the
public.

Page | 8

Electronic copy available at: https://ssrn.com/abstract=3880338

Authority and Power of SEBI:

SEBI possesses high authority and power as its primary purpose was to control the
market systematically by preventing any fraudulent activity. It has three significant
powers:

1. Quasi-Judicial- This includes drafting legislation with respect to the capital

markets. With the help of this authority, it has the right to conduct hearing and pass
judgments in case any fraudulent activity happens. The benefit of this authority is
that it assures that there is fairness, reliability and accountability in the capital
market.

2. Quasi-Executive Functions- Implementing legislation also comes under SEBI.

This means that SEBI has the absolute authority to build rules and regulations to
shield the interest of investors.

For example, there is legislation called SEBI Listing obligation and Disclosure
requirements; this was made to consolidate and simplify provisions of the current
listing agreements for various segments to financial markets such as equity shares.
Such regulations are made to keep any sort of illegal practice at bay.

3. Quasi-Legislative- Under this segment, the role of SEBI is to create guidelines

for the security of interest of investors. Few rules and regulations made by SEBI
are disclosure requirements, trading regulation and listing obligation.

The primary goal is to methodize and fortify the provision of current listing
agreements for various segments of the financial market. Although SEBI has a lot

Page | 9

Electronic copy available at: https://ssrn.com/abstract=3880338

of powers, still, it has to go through the Securities Appellate Tribunal and the
Supreme Court of India.

Functions of SEBI:

In addition to its role in corporate governance, SEBI has protective, regulatory and
developmental functions. The organization protects investors by prohibiting
malpractices related to securities and promoting fair trade practices. Additionally,
it aims to educate them on money management, trading and finances in general.

Its regulatory functions have the role to ensure that corporations and financial
intermediaries alike follow its guidelines and code of conduct. The end goal is to
keep the financial market running smoothly.

The developmental functions of SEBI aim to promote computerized trading and

modernize the market infrastructure. These initiatives have led to a reduction in
fraud and unfair practices. For example, the organization requires companies that
buy or sell stocks to register for a dematerialization (Demat) account online, which
helps reduce bureaucracy and simplifies the process of holding investments. The
Demat system allows traders to work from anywhere and mitigates the risks
associated with paper shares, such as trading delays or thefts.

The SEBI carries out the following three key functions to perform its roles.

1. Protective Functions: SEBI performs these functions for protecting the interests
of the investors and financial institutions. Protective functions include checking
price rigging, prevention of insider trading, promoting fair practices, creating
awareness among investors and prohibition of fraudulent and unfair trade practices.

Page | 10

Electronic copy available at: https://ssrn.com/abstract=3880338

2. Regulatory Functions: Through regulatory functions, SEBI monitors the
functioning of the financial market intermediaries. It designs the guidelines and
code of conduct for financial intermediaries and regulates mergers, amalgamations,
and takeovers takeover of companies.

SEBI also conducts inquiries and audit of stock exchanges. It acts as a registrar for
the brokers, sub-brokers, merchant bankers and many others. SEBI has the power
to levy fees on the capital market participants. Apart from controlling the
intermediaries, SEBI also regulates the credit rating agencies.

3. Development Functions: Among the list of SEBI’s development functions, one

of them is imparting training to intermediaries. SEBI promotes fair trading and
malpractices reduction. It also educates and makes investors aware of the stock
market by utilizing the funds available in IEPF.

SEBI Guidelines for Corporate Governance:

Corporate governance encompasses the mechanisms, rules and practices by which

companies are operated and controlled. It aims to mitigate conflicts of interest
between shareholders and promote ethical decision-making, transparency and
integrity at the executive level. The role of SEBI in corporate governance is to
ensure these rules are implemented and followed by all parties.

For example, the organization ensures that companies issuing securities use fair
practices and disclose relevant information to the shareholders. It also regulates
takeovers, listing agreements of stock exchanges, corporate restructurings and
more. SEBI guidelines for corporate governance are designed to provide a safe,
transparent environment for investors and prohibit fraudulent or unfair practices,
like insider trading.

Page | 11

Electronic copy available at: https://ssrn.com/abstract=3880338

The role of SEBI in ensuring ethical standards among corporations became even
more important in 2018 when the organization imposed additional compliance
conditions. For instance, big firms will be required to have at least one woman
independent director and separate chairpersons and CEOs. Furthermore, listed
companies must disclose related-party transactions and hold a specific number of
annual general meetings. SEBI initiatives in corporate governance are largely
based on the recommendations made by the Kotak committee in March 2018 and
aim to enhance transparency.

Under the chairmanship of Kumar Mangalam Birla, SEBI (Securities and

Exchange Board of India) created a committee on corporate governance in India to
actualize the need of corporate governance and promote good corporate
governance in India.

SEBI has released specific guidelines for auditing and corporate governance in
India based on this committee’s recommendations, which are expected to be
incorporated into the listing agreement between the company and the stock
exchange.

Below, under the relevant heads of the auditing and corporate governance in India,
is a summary of SEBI guidelines that have heightened the need of corporate
governance in India:

(a) Board of Directors:

The following are some points in this regard:
The company’s board of directors shall have an optimal balance of executive
and non-executive directors.
The number of independent directors will depend on the executive or non-
executive nature of the Chairman.

Page | 12

Electronic copy available at: https://ssrn.com/abstract=3880338

(b) Audit Committee:
Some points in this regard are as follows:
The organization shall appoint an independent audit committee, the
constitution of which shall be as follows:
• It shall have at least three members, all of whom shall be non-
executive directors, the majority of whom shall be autonomous, and
at least one of whom shall possess financial and accounting skills.
• An independent director will be the Chairman of the committee.
• The Chairman will be present at the Annual General Meeting to
address questions from shareholders.

The corporation shall name an independent audit committee, and its

constitution shall be as follows:

• It shall have at least three members, all of whom shall be non-

executive directors, the majority of whom shall be independent, and
at least one of whom shall have financial and accounting expertise.
• The Chairman of the committee will be an independent director. At
the Annual General Meeting, the Chairman will be present to answer
concerns from shareholders.

The audit committee’s task should include the following elements:

• Oversight of the company’s financial reporting process and the disclosure of

its financial reports to ensure that the financial statements are accurate,
adequate, and reliable.
• Requesting that an external auditor be appointed and withdrawn.
• Checking the adequacy of the role of internal audit
• Updating the financial and risk management practices of the company.
Page | 13

Electronic copy available at: https://ssrn.com/abstract=3880338

(c) Remuneration of Directors:
In the section on corporate governance of the Annual Report, the following
disclosures on the remuneration of directors are made:
• All managers’ remuneration plan components, i.e., wages, benefits,
incentives, stock options, pensions, etc.
• Descriptions of fixed components and benefits linked to results, along with
performance requirements.

(d) Process of the Board Some of the points set out in this Regard are:
• The board meetings shall be held at least four times a year, with a
maximum period of four months between each of the two meetings.
• A director shall not be a member of more than ten committees, nor shall
he serve as Chairman of more than five committees in all the companies
of which he is a director.

(e) Administration:
A Management Discussion and Appraisal Report should form part of the
shareholders’ annual report, including discussions on the following topics (within
limits defined by its competitive position).
• Risks and opportunities
• Segment-wise or product-wise performance
• Risks and Issues
• Discussion on financial results concerning the performance of operation.
• Front of material growth in human resource / industrial relations.

Page | 14

Electronic copy available at: https://ssrn.com/abstract=3880338

(f) Shareholders:
In this respect, some points are:
In the event of the appointment of a new director or the reappointment of a
director, the following details must be given to shareholders:
• A short resume of the director (summary)
• Nature of his specialist knowledge
• Amount of organizations of which he retains the management and
membership of the Board’s committees.
• A Board Committee shall be formed under the chairmanship of a
non-executive director to examine the redress of shareholder and
investor grievances explicitly.

(g) Corporate Governance report:

A separate section on auditing and corporate governance shall be included in the
Company’s Annual Report. It shall consist of a comprehensive report on corporate
governance.

(h) Compliance:
The company shall acquire a certificate from the company auditors regarding its
auditing and corporate governance compliance conditions. This certificate shall be
appropriated with the Directors’ Report sent to stockholders and also forwarded to
the stock exchange.

Page | 15

Electronic copy available at: https://ssrn.com/abstract=3880338

Conclusion

The stock market is one of the most crucial indicators of a country’s economic
health. If people lose faith in the market, the number of participants will go down.
Furthermore, the country will also start losing FDIs and FIIs considerably which
will substantially hamper the country’s foreign exchange inflows.
Before SEBI was established many scams and malpractices took place in the
Indian stock market. One of the famous Indian stock market scams was “Harshad
Mehta scam.”
After SEBI came into power, stock market affairs started becoming healthier and
more transparent. Nonetheless, some securities mark scams have taken place even
after SEBI came into power. One famous such scam was “Ketan Parekh scam”
Although unfair activities do happen in the Indian capital market even as of today,
their frequency is quite less. Moreover, the security market statutes and regulations
are updated time and again. Therefore, day by day, SEBI is getting more and more
stringent with its authority.

Page | 16

Electronic copy available at: https://ssrn.com/abstract=3880338