The Securities and Exchange Board of India (SEBI) is the regulatory authority that oversees and regulates the securities market in India. During the 1980s, various scams and malpractices contaminated the Indian market. As there was no regulatory body to control the shares of the Listed Company, the Government of India established SEBI in 1998 to ensure that the financial markets operate with transparency, fairness, and integrity. SEBI plays a vital role in protecting the interests of investors. The SEBI Act of 1992 empowered the SEBI to regulate and develop the securities market. For market players, including stock exchanges, brokers, and listed firms, SEBI has the authority to establish regulations and recommendations. In order to assist people in making wise investment choices, it also seeks to raise investor awareness and education. To preserve the integrity of the market, SEBI also looks into and takes enforcement action against market infractions.
In this blog, we will explore SEBI’s main function, how it operates, and its significance in India’s financial ecosystem.
What is SEBI?
The Securities and Exchange Board of India (SEBI) was established in 1988. It is a regulatory body that works under the Ministry of Finance, Government of India. The SEBI Act of 1992 gave it statutory powers to make rules, regulate the securities market, and ensure that it functions efficiently and transparently.
Objectives of SEBI
- Protect the interests of investors
- Formulate rules and guidelines to regulate and develop the security market
- Prohibit unfair and fraudulent trade practices
- Prevent insider trading
- Promote fair trade practices and code of conduct
Functions of Security and Exchange Board of India (SEBI)
SEBI is regulated by the Board of Members, which consists of a chairperson, two members from the Ministry of Finance, and five other members. The Board, under Section 11 of the SEBI Act, 1992, is authorized to perform the following functions:
1. Regulatory Functions
SEBI’s regulatory function is the most important. It involves formulating rules and regulations that govern the securities market. These rules ensure that the market operates in a fair and orderly manner. It includes:
- Regulate Stock Exchanges: SEBI makes sure that the exchange’s organisation, systems and practices are in accordance with the SEBI Act, 1992. The SEBI Act of 1992 has empowered the SEBI to conduct an inspection of the stock exchanges in India, i.e., the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). After the inspection, exchanges have to send a compliance report to SEBI within one month.
- Regulate Market Intermediaries: SEBI regulates intermediaries like brokers, merchant bankers, and mutual funds in the primary and secondary market through laws. SEBI is empowered to inspect the functions of these intermediaries. It ensures they operate within legal boundaries, maintaining fairness and transparency.
- Prevent Insider Trading: One of the most critical functions of the SEBI is to prevent insider trading. Insider trading in the stock market refers to a practice in which a person makes extra gains in the market by using some undisclosed information such as expected dividends, expected decline or rise in profits, etc. The practice is usually based on non-public information about a company. SEBI enforces strict regulations to detect and penalise insider trading activities. SEBI introduced the Prohibition of Insider Trading (PIT) Regulations of 2015 to penalize insider trading with a fine of Rs. 10 lakhs extendable to 25 crores or 3 times the profit made out of insider trading, whichever is higher. The PIT Regulations of 2015 mandated that companies establish countermeasures to prevent the disclosure of sensitive information. SEBI, in 2021, amended its Prohibition of Insider Trading (PIT) Regulations of 2015 to expand the scope of the relatives covered under the securities law. It replaces the word “immediate relative” with “relative” to include the spouse, parents, in-laws, siblings, siblings’ spouses, child, child of souse, and children’s spouses of a person.
- Regulate of Takeovers and Mergers: SEBI ensures that mergers, acquisitions, and takeovers in the securities market are carried out fairly. It requires the acquirers to make an open offer to buy shares from minority shareholders at a fair price. SEBI is authorized to demand full transparency during the process, with detailed disclosures on the deal and financials
2. Developmental Functions
SEBI plays a vital role in the development of India’s securities market, and it includes:
- Promote Investor Awareness: SEBI actively works to educate investors. It promotes financial literacy and organises campaigns and initiatives to inform the public about the risks associated with investing in the market and educate them on their rights as investors.
- Develop New Financial Products: SEBI encourages the introduction of innovative financial products such as derivatives, futures, and options. These new products expand investment opportunities for both individual investors and companies, allow more diversification in the Indian market, and help companies raise capital in different ways.
- Facilitate Capital Formation: SEBI works to facilitate the raising of capital in the market. By establishing a favourable investment climate, SEBI enables businesses to raise funds through the issuance of securities like stocks and bonds.
3. Protective Functions of SEBI
SEBI’s protective functions are all about keeping the securities market fair and secure for investors; it includes:
- Investor Protection: SEBI closely monitors the market and the companies, brokers, and intermediaries to ensure they follow fair practices. It ensures that investors get accurate and timely information.
- Enforce Regulations: Section 11A of the SEBI Act, 1992 authorizes SEBI to make regulations for companies, intermediaries, and other market players to successfully out the provisions of the Act.
- Handling Investor Complaints: SEBI provides a platform for investors to file complaints against companies, brokers, or other market players.
Other than these functions, SEBI also monitors trading activities, sets the disclosure requirements, and regulates the public offers:
- Monitoring Trading Activities: SEBI is responsible for monitoring the stock trading activities to detect irregularities and signs of manipulation. It uses an advanced surveillance system to track trading activities across the stock exchanges in India. It works closely with the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) to ensure that they conduct activities within the regulation and stay compliant with laws. SEBI also has a system for real-time alerts that help detect suspicious activities in the market.
- Setting Disclosure Requirements: Under the SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, the listed companies are mandated to disclose their financial performance, including annual reports and auditor’s regularly. Furthermore, companies have to immediately disclose any price-sensitive information that could influence the stock price of SEBI.
- Regulating Public Offers: SEBI regulates Initial Public Offerings (IPOs) to ensure that the companies that raise funds from the public maintain transparency and follow fair practices and that the investors are not misled by false or incomplete information during IPOs.
Conclusion
As a quasi-judicial organisation, SEBI oversees Indian financial institutions to maintain their efficiency, transparency, and reliability. Because of its protective, developmental, and regulatory roles, it fosters an atmosphere in which investors can make wise choices with the assurance that the system is safe and equitable.
Apart from enforcing the regulations, it identifies insider trading, encourages financial literacy, and actively investigates market offenders. It ensures that India’s financial ecosystem is safe and compliant with regulations. As India’s economy expands, it positions SEBI as a crucial actor in defending investor interests and fostering market stability.
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FAQs
1. What is SEBI, and why was it created?
SEBI (Securities and Exchange Board of India) was established in 1988 to regulate and oversee India’s securities market. It was created in response to scams and market manipulations in the 1980s, with the goal of ensuring fairness and transparency and protecting investor interests.
2. What are the main functions of SEBI?
SEBI’s primary functions include regulating stock exchanges, monitoring market intermediaries like brokers and mutual funds, preventing insider trading, and ensuring fair practices in takeovers and mergers. It also focuses on investor education and market development.
3. How does SEBI prevent insider trading?
SEBI strictly monitors insider trading, which involves using non-public information to gain unfair profits. The authority imposes heavy fines and penalties on those found guilty and requires companies to have measures in place to protect sensitive information.
4. What is SEBI’s role in mergers and acquisitions?
SEBI ensures that mergers, acquisitions, and takeovers are transparent and fair. It mandates that acquirers offer to buy shares from minority shareholders at a fair price and requires full disclosure of all deal-related details.
5. How does SEBI regulate stock exchanges?
SEBI regulates exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) by ensuring their operations comply with its rules. It conducts inspections and ensures that these exchanges maintain a fair and transparent environment for traders.
6. How does SEBI promote investor awareness?
SEBI actively educates investors through campaigns, seminars, and partnerships to increase financial literacy. It helps investors understand their rights, the risks involved in investing, and how to avoid fraudulent schemes.
7. How does SEBI handle complaints from investors?
SEBI provides a platform for investors to file complaints against companies, brokers, or market players. It investigates these complaints to ensure that the involved parties follow proper regulations and address grievances fairly.
8. What role does SEBI play in public offerings like IPOs?
SEBI regulates Initial Public Offerings (IPOs) to ensure companies raising capital are transparent about their financial status and disclose accurate information. This protects investors from misleading information and ensures a level playing field.
9. What measures does SEBI take to monitor trading activities?
SEBI uses sophisticated surveillance systems to monitor trading on stock exchanges in real-time. It looks for signs of market manipulation or irregular activities and works with exchanges to maintain fair trading practices.
10. How does SEBI contribute to the growth of India’s financial market?
SEBI plays a key role in developing new financial products like derivatives, futures, and options, which provide more investment choices. It also helps businesses raise capital efficiently by creating a transparent and stable investment environment.