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Powers of SEBI And its Functions

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Last Updated on February 5, 2024 by G.Durghasree B.A.B.L (Hons)

SEBI represents the Securities and Exchange Board of India. It is a statutory regulatory body that the Indian government established in 1992 to regulate the securities market and protect investors’ interests in securities. SEBI also directs how the stock exchange and mutual funds function.

Objectives of SEBI

The SEBI is held responsible for three groups of market participants:

  1. Issuer
  2. Investor
  3. Market intermediaries

The issuer creates a level playing field for the companies where they can efficiently and fairly raise funds.

The investor Protects and supplies accurate and timely information and ensures companies make appropriate declarations to the investors so that investors may make informed choices.

The market intermediaries Provide a professional and competitive market to brokers, dealers, and other intermediaries.

Over the years, SEBI has expanded its reach to cover various aspects of the investing process that impact the capital markets.

Functions of SEBI

SEBI has the following functions:

  1. Protective Function
  2. Regulatory Function
  3. Development Function

1. Protective Function:

The protective function implies SEBI’s role in protecting the investor interest and others. It provides direction and conducts awareness programs to help financial backers make informed choices. The protective function includes the following activities:

  1. SEBI prohibits insider trading: Insider trading is the practice of a company’s directors, employees, and promoters buying or selling securities. SEBI prohibits companies from purchasing their shares from the secondary market to prevent such trading.
  2. 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, which leads to unexpected losses for the investors. SEBI maintains strict watch to prevent such malpractices.
  3. Promoting fair practices: SEBI supports fair trade practices and works towards prohibiting fraudulent activities related to securities trading.
  4. Financial education provider: SEBI educates investors by conducting online and offline sessions that provide information related to market insights and money management.

2. Regulatory Function:

Regulatory functions involve establishing rules and regulations for financial intermediaries and corporates, which helps efficient market management. The following are some of the regulatory functions:

  1. SEBI has defined the rules and regulations and formed guidelines and codes of conduct that corporations and financial intermediaries should follow—regulating the process of taking over a company.
  2. They are conducting inquiries and audits of stock exchanges.
  3. Regulates the working of stock brokers and merchant brokers.
  4. Regulation of the exercises of custodians, trusts, Vault Members, Registrar and Transfer Agents, FICO assessment organizations, and others working on the market.
  5. They are controlling and monitoring mergers, acquisitions, and investments.

3. Developmental Function:

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

  1. Training of intermediaries who are a part of the security market.
  2. Introduction of trading through electronic means or the internet with the help of registered stock brokers.
  3. By making the underwriting an optional system to reduce the cost of the issue.

Purpose of SEBI

The purpose for which SEBI was set up was to provide an environment that paves the way for mobilization and allocation of resources. It gives practices, framework and infrastructure to meet the growing demand.

Structure of SEBI

SEBI has been established as a corporate entity with a board of members and a designated chairman. There are a total of 9 representatives on the SEBI board of members. They are as follows:

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

  • One Chairman of the Board who is appointed by the Central Government of India
  • One Board member whom the Central Bank appoints that is, the RBI
  • Two Board members who are hailing from the Union Ministry of Finance
  • Five Board members who are elected by the Central Government of India

There are about 20 departments in SEBI, with each head of department (HoD). Some of the departments are:

  • Corporate finance
  • Hybrid and debt securities
  • Human resources
  • Commodity derivatives market
  • Investment management
  • Legal affairs

Powers of SEBI

As the capital market’s apex regulatory body, SEBI has considerable powers. The powers of SEBI are as follows:

1. Quasi-Executive:

SEBI has the power to look at companies’ financial records and articulations. This guarantees that the companies are observing the guidelines and that there is no infringement. SEBI can also carry out the principles and guidelines it figures out and make the essential lawful move against violators.

2. Quasi-Judicial:

The Quasi-Judicial Power permits SEBI to convey decisions if it reveals fake and dishonest practices.

3. Quasi-Legislative:

With this authority, SEBI can enact regulations that ensure investors’ safety and fair-trading practices.

However, SEBI has these abilities; market members can challenge it in a court of law – it is liable to the Supreme Court of India and the Securities Appellate Tribunal.

Mutual Fund Regulations by SEBI

SEBI also governs the mutual fund industry and has prescribed various regulations. Here is a look at some of the most common ones:

  • A group organization, support, or partner of the common asset conspire, including the Asset Management Company (AMC) itself, can hold up to a 10% stake and voting rights in the AMC or any mutual fund scheme.
  • An AMC can’t be named or have any representation on the Board of Directors of any mutual fund company.
  • Either directly or indirectly, a shareholder can own up to 10% of the AMC.
  • A stock cannot account for more than 35% of a sectoral or thematic index. In the case of other types of indices, the maximum weight that a stock can have is limited to 25%.
  • The top three participants in the index should have a cumulative weight of at least 65%.
  • One independent constituent of the index should have a minimum trading frequency of 80%.
  • AMCs are required to ensure compliance with SEBI guidelines. This compliance should be checked quarterly. AMCs should also publish the constituents of their indices on their websites for public use.
  • Before another fund is launched, the organization should present the consistent status of the asset to SEBI.
  • Liquid mutual funds should hold around 20% of the portfolio in liquid assets like cash, T-charges, Government Protections, etc.
  • Debt funds can invest 20% of their portfolio in one area. The limit for investing in Housing Finance Companies is ten per cent, and the limit for securitized debt based on retail and affordable housing portfolios is five per cent.
  • Debt and money market instruments can be evaluated using amortization and mark-to-market methodology.
  • Liquid fund investors will be charged an exit load if they exit the scheme within seven days.
  • Mutual funds can be invested only in listed non-convertible debentures, commercial papers, and equity shares.
  • Liquid and overnight mutual funds cannot be invested in debt, short-term deposits, or money market instruments.
  • If you invest in debt securities with credit enhancements, you should have a minimum security cover of 4 times. A limit of 10% in debt and money market instruments is recommended for such schemes.
  • As a result, SEBI is a significant authority with numerous powers and responsibilities. In addition, it continues to modify existing laws to adapt them to the shifting market dynamics. Therefore, you should be aware of SEBI’s functions and powers so that you can invest knowing that SEBI will safeguard your interests.

G.Durghasree B.A.B.L (Hons)

G Durghasree B.A.B.L (Hons) is a registered trademark attorney with extensive experience as an Advocate for a period of 8 years. She possesses expertise in trademark law, including trademark filing and trademark hearings. Additionally, she is skilled in contract drafting and reviewing, providing legal advice and opinions, particularly in the areas of Company Law, Insolvency and Bankruptcy Code (IBC), and Goods and Service Tax Law (GST). Her experience encompasses both litigation and non-litigation aspects of these laws.