Stock Market Regulation in India

Context: The Securities and Exchange Board of India (SEBI) has proposed changes in the current definition of unpublished price sensitive information (UPSI) in a bid to bring regulatory certainty and uniformity in compliance by listed entities.

About Stock Markets

  • It is a place where shares of public listed companies are traded. 
  • The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital.
  • Once new securities have been sold in the primary market, they are traded in the secondary market – where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The secondary market or the stock exchanges are regulated by the regulatory authority. 
  • In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).
  • A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India’s premier stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Laws Governing the Market

  • The securities market in India is regulated by four key laws:
    • The Companies Act, 2013
    • The Securities and Exchange Board of India Act, 1992 (SEBI Act)
    • The Securities Contracts (Regulation) Act, 1956 (SCRA)
    • Depositories Act, 1996. 
  • The framing of these laws reflect the evolution and development of the capital market in India.

Securities and Exchange Board of India (SEBI)

  • Structure:
    • Sebi is run by its board of members. The board consists of a Chairman and several other whole time and part time members. 
    • The chairman is nominated by the union government. 
    • The others include two members from the finance ministry, one member from Reserve Bank of India and five other members are also nominated by the Centre.
    • The headquarters of Sebi is situated in Mumbai and the regional offices are located in Ahmedabad, Kolkata, Chennai and Delhi.
  • The SEBI Act empowers SEBI to protect the interests of investors and to regulate and promote the development of the capital/securities market.
    • SEBI was given the power to register intermediaries like stock brokers, merchant bankers, portfolio managers and regulate their functioning by prescribing eligibility criteria, conditions to carry on activities and periodic inspections. 
    • It also has the power to impose penalties such as monetary penalties, including suspending or cancelling the registration. 
  • The SCRA empowers SEBI to recognise (and derecognise) stock exchanges, prescribe rules and bye laws for their functioning, and regulate trading, clearing and settlement on stock exchanges. 
  • As part of the development of the securities market, Parliament passed the Depositories Act and SEBI made regulations to enforce the provisions.
    • This Act introduced and legitimised the concept of dematerialised securities being held in an electronic form. Today almost all the listed securities are held in dematerialised (DEMAT) form. SEBI set up the infrastructure for doing this by registering depositories and depository participants. 
    • The depository regulations empower SEBI to regulate functioning of depositories and depository participants by prescribing eligibility conditions, periodic inspections and powers to impose penalties including suspending or cancelling the registration as well as monetary penalties.
  • Appeals against orders of SEBI and the stock exchanges can be made to the Securities Appellate Tribunal (SAT) comprising a presiding officer and two other members. Appeals from the SAT can be made to the Supreme Court.

Functions Of SEBI

  • Curbing Market Volatility: 
    • While SEBI does not interfere to prevent market volatility, exchanges have circuit filters — upper and lower — to prevent excessive volatility. 
    • However, SEBI can issue directions to those who are associated with the market, and has powers to regulate trading and settlement on stock exchanges.
      • Using these powers, SEBI can direct stock exchanges to stop trading, totally or selectively. 
      • It can also prohibit entities or persons from buying, selling or dealing in securities, from raising funds from the market and being associated with intermediaries or listed companies.
  • Monitor Fund-raising:
    • The Companies Act, which regulates companies incorporated/registered in India, has delegated the authority to enforce some of its provisions to SEBI, including the regulation of raising capital, corporate governance norms such as periodic disclosures, board composition, oversight management and resolution of investor grievances. 
    • Specific regulations are enacted by SEBI from time to time in order to:
      • Regulate fund-raising activities
      • Ensure that listed companies followed corporate governance norms
      • Regulation of entities involved in fund-raising through issues of capital such as merchant bankers.
  • Regulate Stock Exchanges:
    • The SCRA has empowered SEBI to recognise and regulate stock exchanges and later commodity exchanges in India. Powers of SEBI in this regard concerns with:
      • Declare an instrument as a security. 
      • Regulate listing of securities like equity shares, the functioning of stock exchanges including control over their management and administration. 
      • Powers to determine the manner in which a settlement is done on stock exchanges and recognising and regulating clearing corporations.
      • Provision for arbitrating disputes that arise between stock brokers who trade on stock exchanges and investors who are clients of such stock brokers.
      • Protect the interests of investors by creating an Investor Protection Fund for each stock exchange.
  • Safeguards Against Fraud:
    • Fraud undermines regulation and prevents a market from being fair and transparent. 
    • SEBI has been given the powers of a civil court to summon persons, seize documents and records, attach bank accounts and property, and to carry out investigations.
    • SEBI notified Regulations to: 
    • Prevent the two key forms of fraud, market manipulation, and insider trading. 
    • Ensures protection of investors’ interests by regulating the listing and trading of equity shares and other securities, and by registering and regulating institutions handling public funds. 

Challenges In Stock Market Regulations

  • Enforcement process: SEBI has made various regulations and issued orders as a civil court but only making regulations and giving orders is not enough if it is not able to enforce the same.
  • Dearth of human resources: SEBI unable to attract smart bright talent inside SEBI. In 2012 SEBI had 643 employees whereas the US security and exchange commission alone had 1000 people. 
  • Deepening capital market: The total number of DEMAT accounts increased by 37% in the last year, however monthly active users have declined. SEBI has done a lot to encourage people to participate in the capital market such as abolishing entry load on mutual funds, simplifying KYC norms but it needs to take some stronger steps to deepen participation in the capital market.
  • Corporate debt and securitization market: Despite numerous attempts the debt market volume has increased but it has failed to attract sufficient liquidity. 
  • Matching up to global standard: Capital markets are growing and the size of SEBI as compared to the security market is not sufficient to properly regulate the capital market. 
  • Non-transparent recruitment process: SEBI’s appointment process has always been criticised. Allegations of corruption by SEBI staff are frequently heard. The accountability mechanisms that envelope SEBI are quite poor.  
  • Wide legislative and discretionary powers with SEBI
  • Limited and selective prior consultation with the market.
  • Securities offering documents are extraordinarily bulky with little to no substantive disclosures of high quality.
  • Obsolete Regulations: as regulations on merger and acquisition are nearly six years old.

Way Forward

  • SEBI needs to strengthen its surveillance and enforcement needs to ensure that violations do not go unnoticed whether small or large.
  • It also needs to increase its human resource in both quality and quantity. It needs to significantly improve its market intelligence, technology and talent pool in order to improve its performance.
  • SEBI should work deeper participation in equity by pension, superannuation and gratuity funds, developing a vibrant retail debt segment and reducing the cost of transaction.
  • The regulator needs to develop a vibrant corporate debt market and securitization market but these largely remain part of the over the counter market.
  • Like its peers (regulators of US and UK) it needs to establish self-regulatory organisations. They can focus on routine decisions and SEBI can work on more important issues.
  • It is also very important to make the recruitment process fair and transparent.

PYQ 2021: With reference to India, consider the following statements:

1. Retail investors through demat accounts can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in the primary market.

2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India.

3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.

Which of the statements given below is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 2 and 3 only

Scroll down for answer










Answer: (b)

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