SEBI: Your Investment’s Personal Bodyguard

Nov 09, 2017 | 06:24 PM IST

The Securities and Exchange Board of India (SEBI) is the official regulatory body for the finance and investment in the equity markets in India. It plays a critical role in maintaining stability and efficiency in the stock market by enforcing the effective regulation. The design and operation of India's SEBI are similar to that of U.S. Securities and Exchange Commission (SEC).

Why Was SEBI Established?

In the mid-80s, as the dealings of stock market started to grow, a lot of trading and investment malpractices like price rigging, delay in delivery of shares and unofficial premium on the new issue started to take place. There were a lot of violations of rules and regulations of the stock exchange and the listing compliances. As these malpractices intensified, investors and traders started losing faith in the stock exchange. So the Government of India stepped in and decided to form an agency as a watchdog authority known as Securities Exchange Board of India (SEBI).

The Role Of SEBI In Equity Investment

SEBI was established in 1988, however, it rose to prominence only after it got regulatory powers on April 12, 1992, through the Securities and Exchange Board of India Act, 1992. It has played a major role in bringing the much-needed stability in the financial markets in India, by drawing foreign investors to India and by protecting the interest of the Indian investors. SEBI, governed by the government of India, has its headquarter in Bandra-Kurla Complex Business District, Mumbai. It also has regional offices.

Here are some of the important roles which SEBI carries out

Looks After The Interest Of The Investors

It protects the interest of investors by providing proper education and guidance in regards to their investment in the stock market. SEBI has made rules and regulation that have to be followed by all the financial intermediaries such as brokerage firms, depository, listed companies, etc. SEBI also looks after the grievances received from investors regarding the fair settlement. It issues booklets for the guidance and protection of small investors.

Keeps A Close Eye On Brokerage Firms & Other Intermediaries

SEBI regulates and controls the business on stock exchanges. SEBI keeps a close watch on brokers and brokerage firms. All the brokers and sub-brokers operating in the Indian securities markets have to register with SEBI and they are expected to adhere to certain rules and regulations prescribed by SEBI. SEBI maintains effective control on the working of stock exchanges.

It is obligatory for all the intermediaries to register with SEBI. It monitors the functioning of stock brokers, sub-brokers, share transfer agents, merchant bankers and other go-betweens working in the securities market. Moreover, it also provides proper training to all its intermediaries. This is useful for the healthy environment on the stock exchange and also the protects and empowers small investors.

Monitoring Mutual Funds

SEBI regulate the working of all types of mutual funds i.e. equity, debt and liquid. SEBI has created a framework which has to be followed by all the asset management companies (AMC). Just like direct equity investment, in mutual fund and a large pool of money of investors is invested in the markets. To protect the interest of the investors, SEBI maintains active supervision of their operations to avoid any unfair and anti-investor activities.

Corporate Activities: Mergers, Demergers Are Scanned By SEBI

One of the key functions of SEBI is to issue guidelines to companies regarding capital issues. For the companies which are preparing for the first public issue, separate guidelines are prepared. It is the responsibility of SEBI to conduct a research of the companies and publish information that will be useful to all the stakeholders i.e. buyers and sellers.

SEBI also plays a vital role in regulating mergers, demergers, takeovers and acquisitions of companies in line to protect the interest of investors. A specific set of guidelines are issued by SEBI for the mergers and takeovers so the small investors don't get treated unfairly.

SEBI monitor's all the corporate activities closely to prevent fraudulent and unfair practices of all the parties operating in securities markets. However, SEBI doesn't interfere with the day-to-day working of the companies. It's a watchdog body that regulates and controls and keeps the malpractices that may harm the investors at the bay.

Regular Audits & Inspections

SEBI has the responsibility to conduct regular inspections, audits and of stock exchanges, intermediaries, and self-regulating organizations to ensure all the operations are working in full adherence to the SEBI guidelines. And it also takes required corrective measures wherever necessary.

The objective of conducting such reviews is to curb insider trading activity and other malpractices which companies might indulge in. This function is beneficial in getting rid of unwanted activities of brokers and to prevent securities scams.

A Journey Of 25 Years: Notable Accomplishments

This year SEBI will complete its silver jubilee. In its glorious 25 years’ run, it has accomplished many feats. Restoring the confidence of the investors and traders in the stock market is one such significant accomplishment. However, there are many other noteworthy changes that SEBI has been instrumental in enforcing. Here are some of them:

Changed The Settlement System: Earlier the settlement process of shares used to extremely tedious. It was lengthy and unorganized. SEBI brought about some revolutionary changes in how the settlement works. In 1998, it started the settlement on a T+5 basis where you used to get the delivery of the share in 5 trading days. These days it has become even quicker as Indian markets have now switched to T+2 settlement pattern.

Making Share Certificates Insignificant: In 1999, SEBI started the process of dematerialization of share certificates. It was one of the necessary reforms as there was a threat of forgery or theft of share certificates. Also, as it was a physical document, investors used to face undue delays due to slow service of post offices and transfer agents. Now SEBI has made it mandatory for all the brokers to issue contract notes for the investors and traders which are sent via email.

Encouraging Private Mutual Funds: SEBI regularly issues revised guidelines for mutual fund industry to help them prosper in India. Till the early 90s, Unit Trust of India (UTI) was the only player in India's mutual fund market. SEBI proactively encouraged hundreds of private mutual funds companies to enter the Indian markets. This was a significant move as it opened the floodgates of opportunities for investors who were looking to invest in equity through a safer route. In its efforts to make mutual funds popular, SEBI has relaxed Know Your Customer (KYC) norms for the retail investors and has worked tirelessly to spread the distribution network in the rural India. In 2009, SEBI took another positive step by banning entry loads for mutual fund schemes.

Welcoming Foreign Institutional Investment (FII): For any country and its economy to grow the business of FIIs is extremely critical. It's an earmark of how the world looks at your country and your economy. When the FIIs start selling, it triggers a negative sentiment while their buying sprees generate positivity amongst investors. SEBI played an important role in creating a gateway for FIIs. In 2003, SEBI was given a task of issuing approvals for FII registrations. This move was to keep a close eye on FII inflow. Since then SEBI has been regularly reviewing the FII investment limit in corporate as well as government debt. Also, to counter the challenge of discouraging FII investments made via P-notes (Participatory notes) by imposing adequate checks and balances to prevent black money from entering the Indian markets.

Reforming the IPO Process: The mid-nineties were tinted with the infamous IPO scams. However, the scene has changed considerably since, thanks to SEBI's intensive reforms. It has enforced strict watch on the important IPO elements like usage of issue proceeds, allotment of a minimum number of shares to the retail investors, etc. These days applying for IPO is extremely easy as SEBI has also started e-IPO procedure where investors can apply for IPO with ASBA (Applications Supported by Blocked Amount) process which is extremely safe, secured and efficient.

Greater Role In Risk Management & Surveillance: In 1996-97, SEBI directed all exchanges to fix the daily price band at 10% and a weekly overall limit of 25% to curb undesirable volatility. To bring about a coordinated trading halt in all equity and derivatives market nationwide, SEBI introduced an index based circuit breaker system applicable at 10%, 15% and 20% movement either way.

Grievance Redressal & Investor Awareness: As the investors base is increasing, naturally there are going to be many queries and complaints from the aggrieved investors. SEBI provides a web-based Complaints Redress System called SCORES. It assists investors to lodge complaints in a systematic manner. Moreover, SEBI is spearheading extensive mass media exercise to inform investors about SCORES and it's utility. In order to spread awareness about investment, in rural areas, SEBI has tie-ups with the Post offices to promote cautionary messages on their merchandises like post office passbooks, letters, envelopes while it is reaching out to urban localities via Google's Adwords platform which displays pop-up investor awareness messages on the search engine.

SEBI Accreditation For Stock Research Firms & Advisory Firms

Apart from all the intermediaries, SEBI also has guidelines for research and investment advisory firms. Any firm which is acting as an advisory in investment has to get itself accredited from SEBI. For advisors, SEBI has set in force some stern rules and regulations. Only upon fulfilling all the formalities does SEBI issue an investment certificate.

Niveza is an equity research firm which is registered with SEBI. It offers various short-term and long-term investment plans and offers Personalised Research Service (PRS) where the investor literally doesn't have to do anything. Just open the lifetime free demat account with SMC (Our broker partner) and you are good to go.

 

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