Security exchange board of india (sebi)

Security Exchange Board Of India (SEBI) GROUP 10.
Security Exchange Board of India
Introduction
“…..to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters connected
therewith or incidental thereto”
There was a long felt need to monitor the woking of security market in order to protect
the interest of the ivestors accordingly the govt. of India set up a body called security
exchange board of India in April 1988.
However the real beginning of sebi started in 1992’ when sebi act 1992 was passed and
assented by the president of India. The act empowered sebi with necessary power to
regulate the activities connected with marketing of securities and investment of stock
exchange, merchant banking, port folio management, stock brokers and others in India,.
All you wanted to know about Sebi
The Securities and Exchange Board of India is perhaps the most important regulatory
body. Similar to the Securities Exchange Commission in the US, it is the authority that
has to always be on its toes. More so, when the markets are doing well and there are a
spate of IPOs (initial public offerings) or FPOs (follow-on public offerings) like now.
Its main mandate is to protect the interest of investors in the securities markets and to
promote the development of and to regulate the securities markets so as to establish a
dynamic and efficient securities market.
MBA 1ST
SEMESTER 1

When investors have complaints against listed companies or registered intermediaries,
SEBI acts as the nodal agency for addressing these complaints, if they are not solved
directly between the parties concerned, or if the investor is not happy with the response.
SEBI has listed certain categories of grievances for which investors can file complaints
with it. These include:
• Non-receipt of refund order or allotment advice in case of investment in IPO's,
FPO's and rights issues
• Non-receipt of dividend from listed companies
• Non-receipt of share certificates after transfer from listed companies
• Non-receipt of debentures after transfer or non-receipt of interest or principal on
redemption and non-receipt of interest on delayed repayment
• Non-receipt of rights offer letter
Collective investment schemes like plantation companies. Investors can send complaints
to SEBI regarding non-receipt of invested principal and returns there from.
Mutual funds/venture capital funds/foreign venture capital investors/foreign institutional
investors/portfolio managers/custodians - Complaints mutual funds like non-receipt or
delay in receipt of dividends/redemptions, non-availability of portfolio disclosures, non-
receipt of transaction statement, etc.
Brokers - This is the most common area of complaints for the average investor.
Complaints against brokers stem from disputes over brokerage rates, non-receipt of
purchased shares or payments for sold shares, auction of shares sold and delivered timely,
but delay at broker's end, etc.
Complaints against securities lending intermediaries may arise due to non-receipt of
shares lent by the investor or interest thereupon, or non-receipt of funds upon return of
borrowed shares or excessive interest charged upon borrowing.
Complaints against merchant bankers, registrar and transfer agents, bankers to issues and
underwriters generally stem from problems in primary market issues, like non-
disclosures, service issues etc.
MBA 1ST
SEMESTER 2

Complaints against securities exchanges, clearing or settlement houses or depositories -
these concern irregularities or failure to act diligently, like the Calcutta Stock Exchange
in the last securities scam or the NSDL in the recent IPO scam.
Derivative trading - Many investors sign legal papers empowering the broker to trade on
their behalf, without proper knowledge and wake up on seeing their margin money
eroded due to sustained losses.
In other instances, major complaints are against brokers squaring off outstanding
derivatives positions due to lack of margins or not giving the client adequate time or
notice, leading to huge losses for investors/traders. These happen especially when
markets turn volatile of see sustained and large one- way movements.
There are other areas such as corporate governance, corporate restructuring, acquisitions,
buybacks, delisting and other compliance related issues for which one could approach
SEBI. For all this one can
• File complaints electronically on the SEBI website
• Get a complaint registration number
• Track the status of the complaint online
• SEBI looks into the merit of the complaint and takes up the matter with the
concerned company or intermediary
It can also direct intermediaries to redress the investor complaints satisfactorily if the
case merits such an order One can also send grievances by post or fax.
In other words, there is a wide range of issues that come under the jurisdiction of SEBI.
And the onus is entirely on it to keep the stocks markets healthy.
MBA 1ST
SEMESTER 3

Why Required
Stock market indices reflects the economic conditions and the strength of a country’s
economy. It is very important that the indices show a true and clear picture about growth
and strength of the economy. The indices increases when there is a export surplus or we
can say that the exports are more than the imports. So it becomes crucial for every
country that the figures shown by the indices are true and accurate. SEBI has a great
responsibility in this scenario
All modern economies, therefore, recognise the need for sound regulation of securities
markets. This is needed not just for proper functioning of these markets, but also for their
very survival. It is good regulation that will ensure that markets are safe and perceived to
be safe by the public at large. It is good regulation that will ensure that necessary
information is available to the public so that they can take informed decisions about
investments. It is good regulation that will further ensure that while engines of growth are
allowed to move at full speed, there is no space for manipulators in the system. Today
securities market regulation has evolved to include three principal objectives: (a) Fair,
efficient and transparent markets; (b) Investor protection; (c) Reduction of systemic risk.
I am happy to say that SEBI is shouldering the responsibility in all these three areas with
great deal of efficiency and commitment.
Today, India is experiencing rapid economic growth. If we want to share this prosperity
with a large cross-section of our society, we must ensure that the ownership of equity is
spread as widely as possible. Individual citizens can participate in the capital market,
both directly and indirectly, through financial institutions, such as mutual funds, pension
funds and insurance companies. It is the task of the securities regulator to look after the
interests of the investor in our country. If the regulator is able to ensure that the price
discovery process is both efficient and transparent, with high disclosure and regulatory
standards and with sound liquidity and risk management in place, the concerns of
individual investors will be adequately addressed.
MBA 1ST
SEMESTER 4

Organisation chart
SHRI M.DAMODARAN
CHAIRMAN
chairman@sebi.gov.in
SHRI G. ANANTHARAMAN, DR T C NAIR, SHRI V.K. CHOPRA,
WHOLE TIME MEMBER WHOLE TIME MEMBER WHOLE TIME MEMBER
garaman@sebi.gov.in nairtc@sebi.gov.in vkc@sebi.gov.in
Shri G Anantharaman, Whole Time Member
FUNCTION EXECUTIVE DIRECTOR E-mail I.D
Derivatives and New Products
Department
Direct
Integrated Surveillance
Department
Direct
Investigations Department Shri P K Nagpal nagpal@sebi.gov.in
Enforcement Department Shri Sandeep P Parekh spp@sebi.gov.in
Legal Department Shri Sandeep P Parekh spp@sebi.gov.in
Market Regulation Department Shri Manas Ray msray@sebi.gov.in
Vigilance Cell Shri R K Nair rkn@sebi.gov.in
MBA 1ST
SEMESTER 5

Dr.T C Nair, Whole Time Member
Corporation Finance Department Smt. Usha Narayanan ushan@sebi.gov.in
Investment Management
Department-Division of Foreign
Institutional Investors (FIIs) and
Custodians, Collective Investment
Scheme
Smt. Usha Narayanan
Research and Training Department Shri RK Nair rkn@sebi.gov.in
Investment management
Department - Division of Funds
Shri RK Nair
Regional Offices Shri RK Nair
Office of International Affairs Direct
Enquiries and Adjudication
Department
Direct
Shri V. K. Chopra, Whole Time Member
Market Intermediaries Regulation
and Supervision Department
Shri Manas Ray msray@sebi.gov.in
Office of Investor Assistance and
Education
Shri RK Nair rkn@sebi.gov.in
Hearing of appeals under RTI Direct
MBA 1ST
SEMESTER 6

Act(Appellate Authority)
General Services Department Shri R.K. NAIR rkn@sebi.gov.in
1. MARKET INTERMEDIARIES REGULATION AND
SUPERVISION DEPARTMENT (MIRSD)
The Market Intermediaries Registration and Supervision department is responsible for
the registration, supervision, compliance monitoring and inspections of all market
intermediaries in respect of all segments of the markets viz. equity, equity derivatives,
debt and debt related derivatives. The following divisions will perform the functions
of the department.
1.1 Division of Registration 1
The Division will handle the work related to Brokers, Sub-brokers and Securities
lending intermediaries.
1.2 Division of Registration 2
The division will handle the work related to other Market Intermediaries viz.,
Merchant Bankers, Registrars and Transfer Agents, Debenture Trustees, Bankers to
Issue, Underwriters, Credit Rating Agencies, Depository Participants.
1.3 Division of Policy and Supervision 1
1.4 Division of Policy and Supervision 2
MBA 1ST
SEMESTER 7

The above Divisions will handle the policy, compliance monitoring, supervision
including inspections of all the market intermediaries registered by Division of
Registration 1 and 2. The Division will also handle the work related to action against
these intermediaries for regulatory violations. (As regards action it is clarified that the
current practice of issuing show cause notices, appointment of Enquiry/Adjudication
officers and consequential action up to serving of Chairman’s order and maintenance
of database will be with the Division).
1.5 Investor Complaints Cell:
The cell would receive complaints relating to the market intermediaries under the
purview of the department from the Office of Investor Assistance and Education
(OIAE) and take follow up action and report back to the OIAE. If regulatory action is
required, the Cell shall inform the Division of Policy and Supervision besides
reporting to OIAE.
2. MARKET REGULATION DEPARTMENT (MRD)
The Market Regulation Department is responsible for supervising the functioning and
operations (except relating to derivatives) of securities exchanges, their subsidiaries,
and market institutions such as Clearing and settlement organizations and
Depositories. (‘hereinafter collectively referred to as ‘Market SROs) The following
Divisions will perform the functions of the Department:
2.1 Division of Policy
MBA 1ST
SEMESTER 8

The Division will handle the work related to policy and practice relating to Market
SROs i.e., securities exchanges, clearing and settlement organizations and
depositories; market policy, trading, clearance, settlement issues, risk management,
and related areas; Reviewing rules and rule-change proposals of these Market SROs
relating to market policy issues (except for listing matters standards in purview of
Corporation Finance Department); Procedures for suspending trading of securities.
2.2 Division of SRO Administration
The Division will handle the work related to Registration and recognition of the
Market SROs; administration of these Market SROs; Demutualization or
Corporatization of exchanges; reviewing rule change proposals relating to non-market
policy issues; supervision of the market SROs to the extent of compliance with
regulatory provisions through periodical reports and regulatory action. (As regards
action it is clarified that the current practice of issuing show cause notices,
appointment of Enquiry/Adjudication officers and consequential action up to serving
of Chairman’s order and maintenance of databse will be with the Division).
2.3 Division of Market supervision
The Division will hand the work related to conducting compliance, examinations and
inspections of Market SROs.
2.4 Investor Complaints Cell
MBA 1ST
SEMESTER 9

The cell would receive complaints relating to the market SROs from the Office of
Investor Assistance and Education (OIAE) and take follow up action and report back
to the OIAE. If regulatory action is required, the Cell shall inform the Division of
SRO Administration besides reporting to OIAE.
3. DERIVATIVES AND NEW PRODUCTS DEPARTMENT (DNPD)
3.1 Division of Policy and Supervision
The Division is responsible for supervising the functioning and operations of
derivatives exchanges and related market organizations. In order to accomplish its
tasks, this division would be responsible for the following:
 Derivatives market policy issues.
 Approval of new derivative products
 Monitoring the functioning of derivatives exchanges including conducting
inspections and compliance exams.
 Prescribing and Monitoring risk management and settlement practices in
derivatives exchanges
 Developing the trading and settlement framework for new products.
MBA 1ST
SEMESTER 10

 Regulatory action were required. As regards action it is clarified that the
current practice of issuing show cause notices, appointment of
 Enquiry/Adjudication officers and consequential action up to serving of
Chairman’s order and maintenance of database will be with the Division.
3.2 Investors Complaint Cell
The cell would receive complaints relating to the derivatives exchanges and related
organizations from the Office of Investor Assistance and Education (OIAE) and take
follow up action and report back to the OIAE. If regulatory action is required, the
Cell shall inform the Division of Policy and supervision besides reporting to OIAE.
4. CORPORATION FINANCE DEPARTMENT (CFD)
The Corporation Finance department is responsible to deal in matters relating to
issuance of securities and assuring adequate information is available about securities
traded in the public markets and exchanges, corporate governance and
accounting/auditing standards and corporate restructuring. The following divisions
will perform the functions of the Department.
4.1 Division of Issues and Listing
The Division will handle work relating to
 Policy related to offerings and listing.
MBA 1ST
SEMESTER 11

 Issue of observations on draft offering documents.
 Review of reports and other filings relating to issues and listing.
 Coordingating the working of the Central Listing Authority and matters
relating to CLA.
 Issues relating to continuous disclosures such as corporate governance,
accounting standards, EDIFAR etc., and monitoring of compliance with
listing obligations.
 Regulatory action where required. (As regards action it is clarified that the
Enquiry/Adjudication officers and consequential action up to serving of
Chairman’s order and maintenance of database will be with the Division).
4.2 Division of Corporate Restructuring:
The Division will handle the work relating to:
 Policy related to corporate restructuring
MBA 1ST
SEMESTER 12

 Substantial Acquisition and Takeovers
 Buy back of securities
 Delisting of Securities
 Coordinating with the Takeover Panel
 Regulatory action where required. (As regards action it is clarified that the
 Investor complaints relating to corporate restructuring.
5. INVESTMENT MANAGEMENT DEPARTMENT (IMD)
The Investment Management department is responsible for registering and regulating
mutual funds, including fund distributors, venture capital funds, foreign venture
capital investors, collective investment schemes, including plantation schemes,
Foreign Institutional Investors, Portfolio Managers and Custodians. The following
Divisions will perform the functions of the Department;
5.1 Division of Funds and Collective Investment Scheme:
The Division will handle all work related to :
 Mutual funds and its distributors
MBA 1ST
SEMESTER 13

 Venture Capital Funds and Foreign Venture Capital Investors
 Portfolio Managers
 Collective Investment schemes (including plantation schemes)
 Regulatory action where required (As regards action it is clarified that the
5.2 Division of Foreign Institutional Investors and Custodian
The Division will handle all work related to:
 FIIs
 Custodians
 Regulatory action where required (As regards action it is clarified that the
Chairman’s order and maintenance of database will be with the Division.
5.3 Investor Complaints Cell:
The cell would receive complaints relating to funds, CIS, FIIs and other entities under
the purview of the department from the Office of Investor Assistance and Education
(OIAE) and take follow up action and report back to the OIAE. If regulatory action is
MBA 1ST
SEMESTER 14

required, the Cell shall inform the Division of Issues and listing besides reporting to
OIAE.
6. INTEGRATED SURVEILLANCE DEPARTMENT (ISD)
 The intergrated Surveillance department is responsible for monitoring
market activity through market systems, data from other departments and
analytical software. The department would be responsible for:
 Developing, maintaining and operating an integrated market surveillance
system including monitoring of all segments of the markets.
 Methodologies for capturing information from media review, public
complaints and tips, other agencies, exchanges, and direct solicitations;
assignment of staff to handle functions; method of logging and cataloguing
information; criteria for evaluating and distributing information; input into
tracking and other systems.
 Recognizing potentially illegal activities and referrals to Investigations,
Enforcement or other departments
7. INVESTIGATIONS DEPARTMENT (IVD)
The Investigations department is responsible for:
MBA 1ST
SEMESTER 15

 Conducting investigations on potentially illegal market activities.
 Providing referrals to the enforcement department.
 Assisting the enforcement department in enforcing SEBI action against
violators.
 (As regards action, the current practice of issuing show cause notices,
appointment of Enquiry/Adjudication officers and consequential action up to
serving of Chairman’s order and maintenance of database will be with the
Department).
8. ENFORCEMENT OF DEPARTMENT (EFD)
Enforcement Department is responsible for proceedings related to regulatory action
and obtaining redress for violations of securities laws and regulations against all
market participants, issuers and individuals and other entities that breach securities
laws and regulations. The following Divisions will perform the functions of the
Department;
8.1 Division of Regulatory Action
MBA 1ST
SEMESTER 16

 The division shall enforce action against market misdemeanors through
SEBI administrative proceedings. The role of the Division shall commence
from the time the hearing before Chairman/Board is proposed. The Division
will assist the Chairman/Board in its proceedings, prepare the orders, handle
all matters relating to SAT, appeals against SAT orders and Court cases
relating to regulatory action. The Division will also frame the procedures
relating to the above matters.
8.2 Division of Prosecutions
 The division shall handle work related to filing prosecution proceedings
through the courts and follow up to obtain conviction. The Division will also
frame procedures for cooperation with public prosecutors, other agencies and
for making referrals to prosecutors and other government agencies
9. LEGAL AFFAIRS DEPARTMENT (LAD)
The Department of Legal Affairs would be responsible to provide legal counsel to the
Board and to its other departments, and to handle non-enforcement litigation. The
following Divisions will handle the functions of the Department.
9.1 Division of Policy:
MBA 1ST
SEMESTER 17

The division would work to formulate SEBI’s legislative initiatives and review and
comment upon proposed legislation that would affect the securities industry or
SEBI’s authority or operation. It would handle testimony and statutory drafting
assistance. The division would also be responsible for establishing a clear legal
framework and basis for the various categories of SEBI pronouncements (e.,
regulations, guidelines, circulars, instructions, etc.,); the hierarchy of their force and
effect; the procedure for their promulgation, amendment or repeal.
9.2 Division of Regulatory Assistance
The division would support other SEBI departments in meeting their objectives by
providing assistance and guidance wherever necessary in developing market rules and
interpretations.
10. ENQUIRIES AND ADJUDICATION DEPARTMENT (EAD)
The Enquiries and Adjudication Department would handle quasi judicial matters and
provide timely hearings and initiate adjudication brought by the other Departments
against alleged violators who are within SEBI’s disciplinary jurisdiction. The
department would directly report to Chairman.
11. OFFICE OF INVESTOR ASSISTANCE AND EDUCATION (OIAE)
The Office will support SEBI’s operations by handling investor complaints centrally
and be the focal point of SEBI’s investor education effort. The Office would be the
single point interface with investors and would receive complaints relating to all
departments, forward to the concerned departments, follow up and respond to
MBA 1ST
SEMESTER 18

investors. The office shall set up necessary systems and procedures to handle his
function.
The Office will also receive complaints relating to issues, transfer of shares,
dividends, compliance with listing conditions, corporate governance issues under the
purview of the Corporation Finance department (Division of Issues and Listing) and
take follow up action.
12. GENERAL SERVICES DEPARTMENT (GSD)
This department would support all of the internal operations of SEBI. The
Department will have the following divisions.
12.1 Human Resources Division
 The Human Resources Division will perform all the functions in its role as
the principal personnel and human resources authority in SEBI.
12.2 Information Technology Division
This division would perform its role as the technical support group for SEBI.
12.3 Treasury and Accounts Division
MBA 1ST
SEMESTER 19

The Division will handle work related to:
 Development of SEBI’s internal budget and accounting systems
 Presentation of reports and budgets to the SEBI Board
 Maintaining internal accounting records, developing internal control
systems for collections and disbursements and other financial controls
 Managing SEBI’s investments
12.4 Facilities Management Division
The division will be responsible for the establishment and maintenance of the
physical facility housing the regulator and related needs.
12.5 Official Language Division
The Division will handle the work related to compliance with Government’s official
language policy and Translation of certain documents into the official language.
12.6 Office of the Secretary to the Board
The Office of the Secretary shall coordinate Board meetings, record and maintain
Board decisions.
12.7 Communications Division
MBA 1ST
SEMESTER 20

The division would be responsible for all communications of SEBI. These include:
 Media releases and other forms of communication including the
publication of SEBI materials.
 News conferences and responding to inquiries from the press
13. RESEARCH AND TRAINING DEPARTMENT (RTD)
The Department will handle its functions through the following Divisions:
13.1 Division of Research
This division would provide market and economic research, analysis and advice to
the Board and departments as appropriate. It may produce regular or ad hoc reports
on the securities industry and the trading markets. It will also produce SEBI Bulletin,
Annual Reports and support other departments with specialized research inputs on
request. The Division will also handle the work related to Library/Learning
Resources centre.
13.2 Division of Training
MBA 1ST
SEMESTER 21

This division would develop and administer training programs in coordination with
HRD, for staff and officers as also provide assistance for the development of the
proposed National Institute of Securities Markets.
14. OFFICE OF THE CHAIRMAN (OCH)
14.1 Office of the Executive Assistant to Chairman
The office will be responsible to provide such administrative and other support as the
Chairman may require. The functions would include strategic planning and managing
new initiatives.
14.2 Office of International Affairs
The office would perform the following:
 Implement information-sharing initiatives with international regulators
 Participate in international regulatory organizations
 Handle all matters related to Foreign assisted projects
 Establish guidelines for interaction with foreign Government agencies and
foreign jurisdictions, including providing technical assistance.
15. THE REGIONAL OFFICES (RO’s)
MBA 1ST
SEMESTER 22

The Regional Office will handle work as per existing delegation and shall continue to
report to functional heads for specific departmental functions while reporting
administratively to SEBI Executive Directors.
Role
SEBI and its Role in the Secondary Market
The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect
the interests of the investors in securities and to promote the development of, and to regulate,
the securities market and for matters connected therewith and incidental there to.
Various departments of SEBI regulating trading in the secondary market:
The following departments of SEBI take care of the activities in the secondary market.
Sr.No. Name of the Department Major Activities
1. Market Intermediaries
Registration and Supervision
department (MIRSD)
Registration, supervision, compliance monitoring
and inspections of all market intermediaries in
respect of all segments of the markets viz. equity,
equity derivatives, debt and debt related
derivatives.
2. Market Regulation
Department (MRD)
Formulating new policies and supervising the
functioning and operations (except relating to
derivatives) of securities exchanges, their
subsidiaries, and market institutions such as
Clearing and settlement organizations and
Depositories (Collectively referred to as ‘Market
SROs’.)
3. Derivatives and New Supervising trading at derivatives segments of
MBA 1ST
SEMESTER 23

Products Departments
(DNPD)
stock exchanges, introducing new products to be
traded, and consequent policy changes
Products available in the Secondary Market
SCOPE
Following are the main financial products/instruments dealt in the secondary market:
Equity:
The ownership interest in a company of holders of its common and preferred stock. The various
kinds of equity shares are as follows –
Equity Shares:
An equity share, commonly referred to as ordinary share also represents the form of fractional
ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial
risk associated with a business venture. The holders of such shares are members of the company
and have voting rights. A company may issue such shares with differential rights as to voting,
payment of dividend, etc.
• Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to
those already held.
• Bonus Shares: Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profits earned in the earlier years.
• Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed
dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be
paid in respect of equity share. They also enjoy priority over the equity shareholders in
payment of surplus. But in the event of liquidation, their claims rank below the claims of
the company’s creditors, bondholders / debenture holders.
MBA 1ST
SEMESTER 24

• Cumulative Preference Shares. A type of preference shares on which dividend
accumulates if remains unpaid. All arrears of preference dividend have to be paid out before
paying dividend on equity shares.
• Cumulative Convertible Preference Shares: A type of preference shares where the dividend
payable on the same accumulates, if not paid. After a specified date, these shares will be
converted into equity capital of the company.
• Participating Preference Share: The right of certain preference shareholders to participate in
profits after a specified fixed dividend contracted for is paid. Participation right is linked
with the quantum of dividend paid on the equity shares over and above a particular
specified level.
• Security Receipts: Security receipt means a receipt or other security, issued by a
securitisation company or reconstruction company to any qualified institutional buyer
pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an
undivided right, title or interest in the financial asset involved in securitisation.
• Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing
instruments which are issued by the Reserve Bank of India on behalf of Government of
India, in lieu of the Central Government's market borrowing programme. These securities
have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are
available in wide range of maturity dates, from short dated (less than one year) to long
dated (upto twenty years).
• Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable
half yearly on specific dates and principal amount repayable on particular date on
redemption of the debentures. Debentures are normally secured/ charged against the asset
of the company in favour of debenture holder.
• Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt
security is generally issued by a company, municipality or government agency. A bond
investor lends money to the issuer and in exchange, the issuer promises to repay the loan
MBA 1ST
SEMESTER 25

amount on a specified maturity date. The issuer usually pays the bond holder periodic interest
payments over the life of the loan. The various types of Bonds are as follows-
Ø Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No
periodic interest is paid. The difference between the issue price and redemption price
represents the return to the holder. The buyer of these bonds receives only one
payment, at the maturity of the bond.
Ø Convertible Bond: A bond giving the investor the option to convert the bond into
equity at a fixed conversion
Price.
• Commercial Paper: A short term promise to repay a fixed amount that is placed on
the market either directly or through a specialized intermediary. It is usually issued by
companies with a high credit standing in the form of a promissory note redeemable at par to the
holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money
market instrument issued normally for a tenure of 90 days.
• Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the
Government as a means of financing its cash requirements.
Regulatory requirements specified by SEBI for corporate debt securities
The issue of debt securities having maturity period of more than 365 days by listed companies
(i.e. which have any of their securities, either equity or debt, offered through an offer document,
and listed on a recognized stock exchange and also includes Public Sector Undertakings whose
securities are listed on a recognized stock exchange) on private placement basis must comply
with the conditions prescribed by SEBI from time to time for getting them listed on the stock
exchanges. Further, unlisted companies/statutory corporations/other entities, if they so desire,
may get their privately placed debt securities listed on the stock exchanges, by complying with
the relevant conditions. Briefly, these conditions are:
MBA 1ST
SEMESTER 26

Ø Compliance with disclosure requirements under Chapter VI of the SEBI (Disclosure and
Investor Protection) Guidelines, 2000, Listing Agreement with the exchanges and provisions of the
Companies Act.
Ø Such disclosures may be made through the web site of the stock exchanges where the debt
securities are sought to be listed if the privately placed debt securities are issued in the standard
denomination of Rs. 10 lakhs.
Ø The Company shall sign a separate listing agreement with the exchange in respect of debt
securities.
Ø The debt securities shall carry a credit rating from a Credit Rating Agency registered with SEBI.
Ø The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the
debt securities.
Ø The debt securities shall be issued and traded in demat form.
Ø All trades with the exception of spot transactions, in a listed debt security, shall be executed only
on the trading platform of a stock exchange.
Guidelines
Policies Affecting market
MUTUAL FUNDS
Market regulator SEBI is likely to prohibit close-ended MFs from charging up to 6% of
the corpus as initial offer expenses, which is then amortised over a period of time. The
move is aimed at bringing transparency in the manner in which MFs charge expenses to
close-ended schemes. The proposal has implications for investor returns too.
As per the proposal under consideration, close-ended funds would only be allowed to
MBA 1ST
SEMESTER 27

charge a certain entry load upfront, like in open-ended funds. When contacted, the
Association of Mutual Funds in India (AMFI) chairman AP Kurian said, “We have
received the proposal from SEBI and the industry is examining it in detail.”
There is a view that amortisation allows asset management companies (AMCs) to show a
higher net asset value (NAV) in close-ended schemes. For example, if you buy 100 units
of Rs 10 each of a new close-ended fund, the fund house charges 6% as initial expenses,
which means that the NAV should be Rs 9.40, but it is still shown as Rs 10 initially. The
Rs 6 charged to the scheme is amortised over a period. Says Dhirendra Kumar of Value
Research, “This would bring about transparency. It will make things look the way they
are.”
In April 2006, Sebi had recast regulations relating to initial issue expenses and banned
open-ended schemes from charging 6% initial issue expenses. However, the market
regulator allowed close-ended schemes to continue with the practice. The open-ended
schemes had to meet sales, marketing and other expenses through entry load, which is
usually about 2.25%, and not initial issue expenses.
Close-ended schemes were not allowed to levy an entry load. The difference in treatment
of expenses between open and close-ended schemes has made the latter attractive for
fund houses. Against a 2.25% entry load available in the case of open-ended schemes, an
AMC can appropriate as much as 6% of the corpus raised by close-ended schemes for
advertising and other related upfront expenses, which is not immediately reflected in
NAV.
As opposed to this, in the case of open-ended schemes, the 2.25% load starts for investors
at that much lower NAV. This gives the erroneous impression to the investor that charges
are lower in the case of close-ended schemes, which is not the case. Most close-ended
funds actually charge 6%, which is the maximum limit available.
This is largely the reason why the fund industry has taken to close-ended schemes in a
MBA 1ST
SEMESTER 28

big way. In 2005-06, the fund industry launched 119 debt and one close-ended debt
schemes, which together mobilised Rs 30,950 crore, according to Amfi data. In 2006-07,
when the norms where changed, the fund industry offered 355 debt and 17 equity
schemes that raised Rs 121,154 crore.
BSE
Concerned over large number of companies still being listed despite losing business
interest, market regulator, Sebi, said it expected the Bombay Stock Exchange to weed out
defunct companies from the bourse.
“Challenges before the BSE today is the cleaning-up and exclusion of companies that
have lost interest in their business and have no business to stay on the exchange,” Sebi
chairman M Damodaran said.
Mr Damodaran also reminded BSE of its vast regulatory responsibilities while the
exchange and its stakeholders focused on the profits to be made by the corporate entity
that was demutualised in May. “BSE has to see that the business responsibilities and
regulatory responsibilities don’t come into conflict,” Mr Damodaran said.
The market regulator also reminded BSE of the progress made by the National Stock
Exchange (NSE) in such a short span of time in terms of market share. Mr Damodaran
also asked BSE to recognise the interest and faith shown by domestic and overseas
investors in the BSE during the demutualisation process and enable them to reap rewards.
BSE celebrated its 133rd anniversary on Monday.
The exchange also launched an index for real estate sector companies called “Realty
Index” comprising of 11 top real estate companies. The realty index will be the 12th
sectoral index on the BSE.
BSE MD & CEO Rajnikant Patel dwelling upon the theme ‘Challenges of Change’ faced
MBA 1ST
SEMESTER 29

by the exchange said, “we look at opportunities, threats, strength and weaknesses that
BSE faces today.”
Patel said India had become the growth engine of Asia and BSE’s bellweather indices
reflected the growth in Indian economy.
BSE is the oldest stock exchange in Asia with a rich heritage spanning three centuries in
its 133 years of existence. Popularly known as BSE today, it was established as ‘The
Native Share and Stock Brokers Association’ in 1875 on this day.
BSE was corporatised in 2005 pursuant to the BSE Corporatisation and Demutualisation
Scheme, 2005, notified by the Sebi. The demutualisation process was completed in May
this year by divesting 51 per cent stake to domestic and foreign investors.
LISTING OF COMPANIES
Sebi eases disclosure norms for listed cos
: Market regulator Securities and Exchange Board of India (Sebi) simplified disclosure
norms for listed companies by amending Clause 41 of the Equity Listing Agreement.
"The revised Clause 41 of the Equity Listing Agreement shall come into force for all
filings made to stock exchanges in respect of accounting periods commencing on or after
July 1, 2007", Sebi said in a communication to all stock exchanges.
Under the revised norms, the companies furnishing unaudited financial results will be
required to file a copy of the limited review report to the stock exchanges within two
months from the end of the quarter.
With a view to enable investors know the performance as early as possible, companies
have the option to furnish either unaudited or audited quarterly and yearly financial
MBA 1ST
SEMESTER 30

results to the stock exchanges within a month from the end of the quarter. These
unaudited results, however, are subject to a limited review.
Sebi has also decided to simplify the provisions for explanation for variation between
items of unaudited and audited quarterly/yearly annual results by restricting it to net
profit, loss after tax and for exceptional/extraordinary items.
The regulator, however, has reduced the percentage of variation for revision from '20 per
cent or more' to '10 per cent or Rs 10 lakhs, whichever is higher.
CHANGE IN INVESTMENT PATTERN THROUGH POLICIE
Government and the Securities & Exchange Board of India (Sebi) are finally veering
around to encouraging foreign institutional investors (FIIs) to invest directly in the equity
markets instead of using participatory notes (PNs).
At its board meeting later this month, Sebi is expected to discuss various ways to
encourage foreign investors to invest through sub-accounts of FIIs instead of using PNs
that are in the nature of IOUs often used to disguise the identity of the ultimate investor.
The move comes amidst fears of potential misuse articulated by Reserve Bank of India on
a number of occasions in the past as also by high-powered panels like the one on capital
account convertibility under S S Tarapore.
Over the last few years, the use of PNs by FIIs has been on the rise with the share of the
instrument in portfolio investment rising to 43% at the end of April from around 25% at
the start of 2005 and nearly 33% at the end of 2006.
Equity investment by FIIs at the end of April 2007 was estimated at a little over $52
billion, whose market capitalisation was estimated to be in the region of $150 billion.
MBA 1ST
SEMESTER 31

While Sebi is yet to finalise the proposed simplification, sources said the idea was to
reduce compliance cost and simplify procedures.
"A large number of investors like endowment and provident funds have chosen to use
PNs to avoid high compliance and certification costs in their home countries. We are
looking at easing some of the rules. If they are coming through the window then why not
open the door," said a source.
While both PNs and sub-accounts provide investors the option to invest in India through
FIIs, the latter is seen as more transparent since the identity of the investor is known.
Over the last few years, RBI has been worried over the use of PNs but Sebi has countered
it by saying that FIIs were following the know-your customer norms and knew the
identity of the investor.
But sources conceded that at times FIIs know the identity of the investor to whom the PN
was issued but the certificate could be sold to another investor who may not disclose his
identity.
Even the government, which did not want to tamper with the structure with PNs fearing
that foreign investors may withdraw investment from India, is now willing to alter the
mechanism though banning it immediately is being ruled out.
Over the last few months, the government first sought details from Sebi on its regulatory
powers and then suggested that the rules for entry through sub-accounts should be eased.
CONTROLLING CONTINUES BULL MARKET
The Securities and Exchange Board of India (Sebi) will shortly announce its policy on
short selling of shares, chairman M Damodaran said on Monday.
MBA 1ST
SEMESTER 32

“You will soon see a policy statement (on the issue),” Sebi chairman M Damodaran told
reporters after inaugurating a week-long independent directors’ programme for senior
officers of armed forces organised by the Management Development Institute at Delhi.
He, however, did not specify if the new policy had provisions for short selling by
institutional investors.
At its last board meet in July, the market regulator had discussed issues relating to short
selling of shares by institutional investors and those relating to setting up a stock lending
and borrowing mechanism.
Currently, non-institutional investors can short sell shares, whereby they can sell shares
without owning them in the hope of buying back the shares later during the day at lower
prices. However, institutional investors are not allowed to do the same.
If Sebi does allow institutional investors to short sell shares, it will likely be in the form
of covered short sales and not naked short sales like what retail investors are allowed to
do. In covered short sales, the institution borrows shares from a Sebi-approved entity for
a fee and sells them in the market.
It can later on buy those shares from the market at a profit if share prices fall
subsequently, and deliver them back to the entity from which it had borrowed the shares.
But, for short selling by institutions, a strong stock borrowing system has to be put in
place first. Sebi is in the process of formulating guidelines for the same, including the
entities which will be allowed to lend shares, and the number of stocks in which short
selling will be allowed.
While around 3,000 stocks are traded on a daily basis, only the top 25-odd frontline
shares have the required liquidity from an institutional investor’s perspective. Short
selling by institutions help curb volatility in a raging bull market, essentially by checking
the pace of the rise in stock prices.
MBA 1ST
SEMESTER 33

Learning’s
JPC moots 19-point agenda to strengthen Sebi
The Joint Parliamentary Committee probing the stock scam has mooted a 19-point
agenda to give Sebi more teeth in investigation and enforcement, even though the market
watchdog had a poor track record of punishing wrong-doers by utilising the existing
powers.
In its draft report, the committee said Sebi should have enforcement powers like
imposing monetary penalty of Rs 250 million or three times the ill-gotten "profit made"
or "loss avoided."
JPC also suggested imprisonment of up to 10 years on conviction for violation of Sebi
Act 1992.
Sebi should be empowered to retain proceeds of securities transaction and suspension of
an intermediary pending investigation, powers to issue "cease and desist" orders, powers
to disgorge and impound ill-gotten money, it said.
The market regulator should also have powers to issue directions debarring persons from
dealing and accessing the securities market, JPC said.
Emphasising on investor protection, the JPC said the Sebi Act should also provide for
specific right for investors to approach courts and claim damages, compensation and
interest.
It also suggested expeditious measures to attach properties of defaulting promoters,
directors and companies.
MBA 1ST
SEMESTER 34

The committee also prescribed specific power of investigation, power to impound/retain
documents pending investigations, and powers to obtain information from banks,
corporates, promoters who deal in securities market and authorities like Mahanagar
Telephone Nigam Limited.
The capital market regulator should also have powers to obtain information about the
source of fund and to tender immunity from action for making disclosures of facts
relating to contravention of regulation under investigation, the JPC said.
The committee also proposed that the Securities Appelate Tribunal be made a multi-
member body while mooting a "special court" for securities market.
The number of board members in the Sebi should also be suitably enhanced, it said.
JPC, however, criticised the market regulator for not being able to punish erring
companies under the existing norms.
"The track record of Sebi in punishing the wrong doers in stock market has been dismal.
Sebi could initiate prosecution proceedings on insider trading in only one case and on
fraudulent and unfair trade practices in just cases," it said.
JPC further said that only in seven out of 181 cases Sebi resorted to cancellation of
registration during the last four years. "All this is indicative of Sebi's reluctance to take
severe action against the offenders," it added.
Though Sebi's plea for more powers to strengthen its effectiveness cannot be faulted, the
report said: "The committee received an impression that Sebi was not fully enforcing the
powers already vested with it."
It cited the powers to impose Rs 140,000 penalty on a person failing to furnish requisite
information and said "rarely has this power been exercised by Sebi."
"Similarly, the provision for mandatory punishment of imprisonment, etc. in addition to
award of penalty has scarcely been used," it added.
LS for more teeth to Sebi; govt to promote demutualisation
MBA 1ST
SEMESTER 35

The government on Wednesday assured the Lok Sabha that it would 'emphatically'
promote demutualisation of trading to prevent abuse of market by brokers and traders as
the house passed a bill to provide more teeth to the Securities and Exchange Board of
India to restore investors' confidence.
"Passage of the Bill will be a move towards restoration of investors' confidence," Finance
Minister Jaswant Singh told members while replying to the debate on The Securities and
Exchange Board of India (Amendment) Bill, 2002.
Cutting across party lines, members supported the Bill aimed at increasing the number of
members from six to nine, besides empowering the Sebi to summon persons or
institutions, suspending trading of any security at any exchange, prohibiting insider
trading and manipulative and deceptive devices as also enhancing the penalties under the
original Act.
The government was, however, severely criticised for bringing in an ordinance instead of
directly coming to Parliament with the legislation which prompted Singh to assure that
necessary changes would be made in Sebi or other laws on the basis of the
recommendations of the Joint Parliamentary Committee probing the stock scam.
He said government took recourse to ordinance due to urgency of the situation and it was
not intended to bypass and disrespect Parliament or standing committee but suggested
that working of the standing committees be improved to cut down the time taken by
these.
Participating in a discussion on Sebi (amendment) Bill, the members said empowerment
of the regulator was needed as the small investor was the worst hit.
Kirit Somaiya (Bharatiya Janata Party) said investors - especially the small ones - have
lost millions of rupees due to a series of financial scams during the last decade and there
was a need to hold the market regulator accountable in such a scenario.
The BJP member wanted the government to appoint a small committee to suggest more
amendments to the Act to help protect the small investor.
He said long delay in the finalisation of the report by the Takeover Code Committee has
resulted in serious violations in the past few years.
MBA 1ST
SEMESTER 36

Nitish Sengupta favoured amendment in the Sebi Act and asked government to make
efforts to revive the 'badla' system, which was abolished suddenly as a step to regulate the
capital market effectively.
Under the badla system brokers and investors were allowed to carry forward their
positions at a particular cost. But the system was lacking proper checks and balances
leading to financial scams of different nature.
A C Jose (Cong) favored stringent laws and financial penalties against the guilty involved
in scams and frauds.
Sengupta said government must ensure that small investors, which have virtually
disappeared since last few years in the wake of financial scams, should be brought back
into the system and hoped that enhancement of powers of Sebi would help in this regard.
He asked the government to look into the recommendations of the Deepak Parekh
Committee to revive the badla system.
M A K Swain (BJP) favored the system of checks and balances while increasing powers
of the Sebi saying there were corruption charges against various Sebi officials.
He suggested that tenure of Sebi chairman should not be more than three years while
favoring a rank of finance secretary for the chairman.
Swain said increase in financial penalty to Rs 25 crore (Rs 250 million) from Rs 500,000
would be crucial for protecting the interest of small investors.
Sebi to tighten listing, delisting norms
The Securities and Exchange Board of India, the nation's capital market regulator, on
Friday spelt out a slew of market reform measures including a central listing authority,
tighter delisting norms and tracking down of promoters of vanishing companies, to
improve sentiment in the market which is slated to witness about 200 IPOs this fiscal.
"It is necessary that we have a first-entry-point screening of companies intending to raise
funds from the market. The proposed central listing authority will look into listing
MBA 1ST
SEMESTER 37

agreements and carry out due diligence," Sebi chairman G N Bajpai said at a seminar in
New Delhi.
He said the proposed authority, which would be different from the National Listing
Authority being tried out in the UK, would be an autonomous body separate from the
ambit of Sebi and having representation from stock exchanges.
Pointing to the need for tightening delisting norms, Bajpai said, "Entrepreneurs should
not create a situation where investors cannot exit and nor get the profits of the wealth
created by the company."
A Sebi committee was looking into the delisting norms and would submit a final report
within weeks. "We are working very strongly on various issues including delisting norms
for MNCs," he added.
Sebi expected the market to chin up this fiscal following the initial public offer of 200
companies, he said.
Bajpai said Sebi and the Department of Company Affairs are working together to track
promoters of 225 vanishing companies, which raised funds from the capital market and
then disappeared. Sebi is in touch with the police to track down the promoters.
''The companies have vanished but the people have not. Sebi and the Department of
Company Affairs are taking steps to locate the promoters of these companies,'' Bajpai
said.
Later, Bajpai told reporters that he had written a letter to the police in different states to
track down the promoters, who have perpetrated frauds on the investing public.
The search and seizure powers, as being envisaged in the proposed amendments to the
Sebi Act, would be used to protect investors with the ''least pain,'' Bajpai said.
The law, justice and company affairs ministry and the finance ministry have already
resolved their differences and have agreed to empower Sebi with search and seizure
powers.
The amendments will now be cleared by the Cabinet.
MBA 1ST
SEMESTER 38

The market regulator is also initiating measures to implement the concept of corporate
governance in letter and spirit. Through corporate governance, SEBI wants to ensure
wealth creation, wealth management and wealth sharing.
It has asked a few credit rating agencies to work out some instrument for measuring the
companies on the scale of corporate governance.
The Securities and Exchange Board of India (SEBI) is the Indian equivalent of the
Securities Exchange Commission (SEC) in the US and was established in 1988 to
regulate and develop the growth of the capital
Market in India. Among other things, its objectives require it to prohibit fraudulent and
illegal trade practices in the securities markets, regulate the working mechanism of the
Stock exchanges, mutual funds, venture capital companies and the derivatives markets,
registering and regulating brokers, sub-brokers, etc., prohibiting insider trading and
promoting investor education on various aspects of the financial markets.
As with various other Government bodies, SEBI too was started with a limited set of
objectives and an even more constraining set of guidelines to regulate the markets. The
now legendary stock market scam triggered by Late Harshad Mehta in 1992 caught the
SEBI napping. A lot of committees were formed, their tenures extended, reports running
into thousands of pages were submitted and re-submitted with little or no changes and at
the end of it all nothing could be done to bring the culprits to book. Exactly ten years
later, on March 1, 2001, history repeated itself when the BSE index crashed by an eye-
popping 176 points after Mr. Sinha had presented a dream budget. I will not narrate the
reasons for that as most of you know it by now. Suffice to say that the SEBI has become
like a programmed watchdog. The robbery takes place right under its nose but it barks
only the next morning when its owner (the Ministry of Finance) asks it to do so.
The follow-up action on the part of SEBI and the Ministry of Finance was a scene-to-
scene encore of what happened in 1992. The culprits (bulls/broking entities/bear cartels)
were identified, a Joint Parliamentary Committee (JPC) was setup, some heads rolled at
the Pherozeshah Jejeebhoy Towers, a lot of fingers were pointed, nobody was willing to
MBA 1ST
SEMESTER 39

take the blame and at the end of one year, we are exactly in the same position. The SEBIs
inability to pro-actively identify holes in the financial markets and plug them
satisfactorily has been a hot topic of discussion for the last few years. Agreed that a
regulatory authority cannot do much when it comes to protecting investor’s interests in
the midst of market booms and crashes but the least it can do is to ensure that all players
in this field stick to the guidelines laid down by it. It also needs to be more forceful when
it comes to investigating mal-practices in the market and taking punitive action against
the marauding parties in question.
Mr. D.R. Mehta who was the SEBI Chairman for nearly 7 years shouted himself hoarse
all along that SEBI was not being given enough teeth when it came to punishing the
guilty parties. SEBI’s laxity in monitoring the secondary markets during the recent stock
market scam of March 2001 would be probed in detail by the Joint Parliamentary
Committee (JPC) which is also expected to suggest ways and means to strengthen the
powers of SEBI. A bold step has already been taken in this direction by mooting the
proposal to segregate the trading membership, management and administration functions
of the stock exchanges to end the interference of brokers. This is a welcome step and the
sooner the stock exchanges are corporatised, the better it will be for all the market
participants. However, we still have a long way to go in terms of integrating our local
markets with the International markets.
Here are some suggestions that might help in establishing SEBIs credentials as a better
market regulator:
1. There appears to be a serious deficit in the staffing requirements of SEBI. I came
across a report which states that out of the 350 strong staff in SEBI, only about 20
comprise the investigative staff! Even by conservative standards that figure is woefully
short of what it ideally should be. Adequate staff should be recruited and given training
and exposure. There should also be a clearly demarcated line between the investigation
and action enforcement departments to avoid potential conflict of interests.
MBA 1ST
SEMESTER 40

2. SEBI has often been caught napping when it comes to continuously monitoring the
working of the stock exchanges. A system of online surveillance needs to be setup at
SEBI, which would keep ongoing tabs on daily transactions. This would obviate the need
to seek information from the concerned stock exchanges whenever any malpractice is
observed.
3. The recent stock market scam has highlighted the nexus between bluechip corporates,
brokers and banks. The scam revealed that big brokers had impressive war chests running
into several thousands of crores provided by companies and banks. Towards this end,
RBI should tighten its norms for Bank lending to brokers though I’m not very sure how
the flow of funds from companies to brokers can be monitored.
4. The scam also brought out the non-existent guidelines that currently exist with respect
to the operational issues of Overseas Corporate Bodies (OCBs). These bodies have been
given a free hand and royal treatment because of their NRI status so far. While they were
asked to register themselves with RBI, SEBI was entrusted with the task of framing the
guidelines. This anomaly needs to be corrected. Simply banning the OCBs from making
purchases in the secondary market will not have the desired effect so long as they have
millions of shares already picked up in the past. I would not rule out another scam, this
time pertaining to the OCBs in the future.
5. SEBI was hitherto only given the responsibility of framing guidelines and ensuring
their adherence and this policy. What is now required is to give it the all-round powers to
act the lawmaker as well as the law enforcer. To this end, a separate cell could be created
within SEBI that gives it ample powers to act the tough policeman as well. What’s the
point in laying guidelines and investigating mal-practices when the actual action is taken
by another body like the CBI? There’s no point in “distributing” responsibilities among
half a dozen agencies as every tom dick and harry knows that nothing will ever come out
of it.
For its part, the SEBI has done a good job in introducing some radical reforms for
MBA 1ST
SEMESTER 41

improved transparency, computerisation of the trading and settlement systems,
enactments against insider trading, phasing out of the badla system, introducing
compulsory rolling settlement, banning naked short sales shortly after the scam, etc.
However, the debits in its books far outnumber the credits and that’s what ultimately
counts in the final reckoning.
Irrespective of whether or not the SEBI was bestowed with wide ranging powers, it has
been a clear failure when it came to the task of administering the law. Past instances
indicate that whenever a scam or irregularity surfaced, the SEBI stepped in with knee-
jerk reactions, blaming system-centric collapse or lack of power in its hands. Mr.
Gyanendra Nath Bajpai, previously head of LIC, took over as the new Chairman of SEBI
on February 20, 2002 and immediately got the whip cracking in the house. It however
remains to be seen whether or not he does a better job than his predecessor.
JPC gives clean chit to RBI, NSE
Priya Ganapati in Bombay
Prakash Mani Tripathi, chairman of the 30-member Joint
Parliamentary Committee set up to probe the recent stock market
scam, has given the Reserve Bank of India and the National Stock
Exchange a clean chit in a preliminary announcement on
Wednesday evening.
The JPC led by Tripathi met the RBI Governor Dr Bimal Jalan, the
two deputy governors, the executive director, the regional director
and other senior RBI officials in the morning.
"Within the constraints of our system, the RBI has done a good job. But of course, more
needs to be done. It is an on-going process," Tripathi said expressing satisfaction with the
way the RBI is functioning.
MBA 1ST
SEMESTER 42

The bulk of the JPC's discussions with the RBI, however, centered on the action taken by
the RBI to strengthen the system and plug the loopholes after the 1992-Harshad Mehta
scam.
"We had posed certain questions pertaining to the RBI's role in the market, the action
taken by them after the 1992 scam and what requires to be done further," Tripathi said.
Of the 30-member team, 24 officials were in Bombay for two days to probe the role of
RBI, the NSE, the BSE and the Securities and Exchange Board of India in the recent
scam.
The JPC's efforts in Bombay have been directed towards examining the action taken post
the 1992 scam.
"The aim of the JPC is that no matter how good the recommendations, the speed and
efficiency of implementation will decide the efficacy of the committee," Tripathi said.
He clarified that the reason why the JPC was looking into the action taken report of the
1992 scam was to make sure that the present system has the safeguards implemented.
"It must be remembered that the 1992 scam was heavily bank-oriented and so we talked
about the action taken report. We are only keen to find out the speed and the efficiency
with which the recommendations then were implemented. This is the only way we can
ensure that our recommendations don't just stay on paper," he said.
RBI officials have explained their position to the JPC and also presented it with a detailed
account of the steps taken by the bank after the 1992 scam was unearthed.
Explaining RBI's position on the Madhavpura Mercantile Co-operative Bank case that
was a part of the recent scam, Tripathi said, "The RBI has made it clear that in the
Madhavpura Bank case greed got the better of the regulations. The rules are there in place
but they were circumvented by the guilty."
Later in the afternoon, Tripathi and his team visited the NSE building to inspect its
systems and software. The JPC was given a technical briefing on the functioning of the
NSE and its surveillance systems.
MBA 1ST
SEMESTER 43

"Unlike the Calcutta Stock Exchange, we found a great deal of transparency at the NSE.
Real time information is clearly available. And we do not think that there has been any
systemic failure or irregularities there. However, the fund clearing and settlement system
is what needs improvement," he said.
The JPC also met four broker representatives of the NSE for
their views.
While the committee has been given till the end of the
monsoon session to place its report before the Parliament,
Tripathi said that he could not promise delivery on schedule.
"This is a dynamic situation. New views keep coming to
light every day. So, I am not in a position to tell now about when we will complete the
report. We will try to give it on time but whether we can will become apparent only in
two weeks," he said.
Protesting against any suggestions that political interference could have played a role in
the recent scam, Tripathi asserted, "We have no facts to support this view. I believe that
this is just a theory held by many, which does not have any supporting evidence. The JPC
will not go by views. It will definitely consider this view point but only if there is any
evidence to go with it."
He clarified that the JPC, so far, has not come across any evidence of political
interference or political hand in the recent scam.
"There is no evidence to suggest interference by politicians and I believe that the JPC will
not go by just viewpoints on this issue," he said, sidestepping pointed queries about the
role of a few prominent politicians in the recent scam.
On Thursday, the JPC team will go to the Bombay Stock Exchange in the morning and
later on summon Sebi officials for a hearing. The Sebi officials are again expected to be
quizzed on the action taken after the 1992 scam to plug the system loopholes.
Where is the justice after never-ending trials?
17 Apr, 2006
MBA 1ST
SEMESTER 44

Consider this: A fast-track court at Jaipur hands out a guilty verdict in the rape of a
German girl in exactly 26 days. On the other hand, it takes 14 years for the case that
unravelled the massive Securities Scam of 1992 to end in a verdict.
This, after the government enacted the Special Court (Trial of Offences relating to
Transaction in Securities) Act, 1992, and set up a Special Court in Mumbai and a
Custodian to take charge of scam-related assets. That is why, when Special Case 4 of
1996 was decided last week one only felt a sense of dismay.
But first some background. On April 23, 1992, I wrote about how stock broker Harshad
Mehta, once described as the “Amitabh Bachchan” of the stock market, had siphoned off
Rs 500 crore from the State Bank of India’s (SBI) treasury. The amount turned out to be
Rs 770 crore and it set in motion the process of unravelling a Rs 5,000 crore Securities
Scam that sank two small banks, ensnared the biggest Indian and foreign banks and
tarnished innumerable reputations.
The government went into a frenzy of action. The Special Courts Act was enacted to
ensure swift trial, a special court was set up, all the scam-accused were ‘notified’ and
their assets attached by the Custodian appointed under the Act. The Reserve Bank of
India (RBI) set up the Janakiraman Committee which came up with a series of
investigation reports and a Joint Parliamentary Committee (JPC) began its investigation.
The only lesson that has been learnt and applied in subsequent scams is not to follow any
part of the drill described above. In fact, even when a JPC was set up following the Ketan
Parekh scam, it was packed with political friends of all the accused brokers and their
corporate cronies.
MBA 1ST
SEMESTER 45

In 1992, however, the Central Bureau of Investigation (CBI) went on a rampage and
arrested 13 people starting from SBI’s Managing Director to Harshad Mehta, his brother
Ashwin and a bunch of their employees. After 107 days of custody, the CBI forgot about
the case. The charge-sheet was filed only in 1996 after some uproar and the charges were
actually framed in 1999. Those charge-sheeted were carefully chosen to make up a long
enough list of accused and keep out everyone with connections.
By then SBI’s 1992 Chairman M.N. Goiporia had passed away (he was asked to proceed
on leave after the scam), so had C.L. Khemani, SBI’s Managing Director in charge of
investments who earned a lot of money for the bank through skilful treasury operations,
but was shattered and humiliated. He died a few years later.
R.L. Kamath, who headed vigilance and actually went to Pilani to bring back the rouge
official R. Sitaraman (who colluded with Harshad Mehta) has also passed away, but not
before the mortification of being named the second accused in the case. Since the first
accused had to be a big enough name, P.V. Subba Rao, an MD and investment committee
member was chosen. He too passed away a couple of years ago, without the chance to
have his name cleared.
Three other bankers were included as accused (K. Kailasham, A. Padhye and A.N.
Bavedekar) along with R. Sitaraman, the rogue banker who actually colluded with
Harshad Mehta.
In the messy operations of SBI’s treasury, where there wasn’t even an instruction manual,
investment decisions were taken at the corporate head-office and relayed to Sitaraman at
the investment department at the Main Branch, these three officials were authorised to
counter-sign cheques and confirmations which they did on trust.
MBA 1ST
SEMESTER 46

Last week, Padhye and Kailasham (who had signed fewer documents) were acquitted and
Bavdekar was sentenced to five years of rigorous imprisonment and a fine of Rs two
lakhs. Since the judgement is not yet available, the reasoning is unknown. Another
official, Makarand Shidhaye of UCO bank has similarly been severely punished with a
fine of Rs four lakh and five years of rigorous imprisonment for blindly crediting cheques
into Harshad’s account on instructions from his seniors.
From my investigation of the 1992 Scam, I have learnt that barring R. Sitaraman, the
rouge banker who colluded with Harshad Mehta to falsify documents and give him
dubious access to over Rs 700 crore of bank funds, none of the others in SBI had a clue
about the mischief. Similarly, the late Harshad Mehta had one contact point in UCO
Bank.
All the short-cuts and conveniences that were practiced by bankers and brokers in order
to speed up transactions while dealing with the slow, manual systems at Public Debt
Office of the RBI were held as criminal actions, but only if the case went to court. ANZ
Grindlays Bank famously argued in its case against National Housing Bank (NHB) that
crediting Banker’s cheques to brokers’ current accounts had become an ‘‘accepted
market practice’’.
The case has been settled without anyone being jailed for crediting cheques to Harshad
Mehta’s account. But Shidaye of UCO Bank, who has been living on tuition fee earnings,
has been harshly punished and has no means to pay the fine.
As the trial trundled through the years, many of the events and situations lost their
relevance. The CBI saw several different teams of officials handling the case and it is
unclear if they can even relate to the bank’s operations as they happened in 1991-92 or
understand the complexities and exigencies of the situation then. After all, automation
MBA 1ST
SEMESTER 47

and liberalisation has transformed Indian capital market processes beyond recognition in
the last decade.
Even the judges hearing the case changed repeatedly. The hearings started with Justice
Rane, were continued by Justice D.K. Trivedi and Justice Kapadia and judgement was
finally delivered last week by Justice S.K. Shah. Now check the contrast. All the bank
officials accused of corruption, collusion and conspiracy had to depend on legal aid.
Some turned lucky. All the brokers and their employees had the best and most expensive
legal brains working for the full 14 years.
While Harshad Mehta is no longer here to face the music, his brother Ashwin Mehta was
acquitted and another brother Sudhir has received a one-year sentence. Even among their
employees, barring one, all others have lower fines and prison terms than the bankers.
Doesn’t it make you wonder why it was popularly known as the Harshad Mehta scam?
Global controlling bodies
There are 118 total no. of regulatory bodies across the globe.
The following are few of the stock exchange boards of developed countries. The
following is the comparison among SEBI and other regulatory bodies.
Parameters SEBI
(India)
(Securities and
Exchange Board
Of India)
SEC
(USA)
(securities and
exchange
commission)
FSA
(UK)
(
SESC
(JAPAN)
MBA 1ST
SEMESTER 48

1. about
regulatory
bodies
The Securities and
Exchange Board of
India was
established on
April 12, 1992 in
accordance with
the provisions of
the Securities and
Exchange Board of
India Act, 1992.
The Preamble of
the Securities and
Exchange Board of
India describes the
basic functions of
the Securities and
Exchange Board of
India as
“…..to protect the
interests of
investors in
securities and to
promote the
development of,
and to regulate
the securities
market and for
matters
connected
therewith or
incidental
thereto”
The mission of the
U.S. Securities and
Exchange
Commission is to
protect investors,
maintain fair,
orderly, and efficient
markets, and
facilitate capital
formation.
The Financial Services
Authority (FSA) is an
independent non-
governmental body,
given statutory powers
by the Financial
Services and Markets
Act 2000. We are a
company limited by
guarantee and
financed by the
financial services
industry. The
Treasury appoints the
FSA Board, which
currently consists of a
Chairman, a Chief
Executive Officer,
three Managing
Directors, and 9 non-
executive directors
(including a lead non-
executive member, the
Deputy Chairman).
This Board sets our
overall policy, but
day-to-day decisions
and management of
the staff are the
responsibility of the
Executive.
A series of so-called
securities and
financial scandals
involving major
securities companies
in the summer of
1991, had ignited
discussions about
inspections and
surveillance system
over securities
companies and market
intermediaries.
the Securities and
Exchange Surveillance
Commission (SESC)
was formally
established on July 20,
1992 within the ambit
of the Ministry of
Finance for the
purpose of ensuring
fair transactions in
both securities and
financial futures
markets and
maintaining the
confidence of
investors in these
markets.
In June 1998, the
Financial Supervisory
Agency and the SESC
were split up from the
Ministry of Finance.
Currently, the SESC is
established within the
ambit of the Financial
Services Agency,
which was renamed
from the Financial
Supervisory Agency.
2.TYPE PRIMARY SECONDARY SECONDARY SECONDARY
3. POWERS
AND
Found in Chapter
IV, this section
The SEC oversees
the key participants
They are an
independent body that
As a market watchdog
independent of
MBA 1ST
SEMESTER 49

FUNCTIONS defines the role of
the Board. It deals
with the regulation
of the securities
market in all its
manifestations,
and contains wide
powers over
Companies,
Venture Capital
Funds, Stock
Exchanges and
Brokers.
FUNCTIONS:
Investor
protection.
Regulation of
Security market
and Stock
Exchanges.
Regulation of
Intermediaries.
To Restrict Insider
Trading.
in the securities
world, including
securities exchanges,
securities brokers
and dealers,
investment advisors,
and mutual funds.
Here the SEC is
concerned primarily
with promoting the
disclosure of
important market-
related information,
maintaining fair
dealing, and
protecting against
fraud.
Crucial to the SEC's
effectiveness in each
of these areas is its
enforcement
authority. Each year
the SEC brings
hundreds of civil
enforcement actions
against individuals
and companies for
violation of the
securities laws.
Typical infractions
include insider
trading, accounting
fraud, and providing
false or misleading
information about
securities and the
companies that issue
them.
One of the major
sources of
information on
which the SEC relies
to bring enforcement
action is investors
regulates the financial
services industry in
the UK.
We have been given a
wide range of rule-
making, investigatory
and enforcement
powers in order to
meet our four
statutory objectives. In
meeting these, we are
also obliged to have
regard to the
Principles of Good
Regulation.
The FSA was set up
by government. The
government is
responsible for the
overall scope of the
FSA’s regulatory
activities and for its
powers.
The FSA regulates
most financial services
markets, exchanges
and firms. It sets the
standards that they
must meet and can
take action against
firms if they fail to
meet the required
standards.
supervisory
authorities, the SESC
is expected to play a
primary role in
maintaining fair,
equitable, transparent,
and sound markets
through exerting its
authority of criminal
investigations into
securities fraud,
administrative civil
monetary penalties
investigations,
disclosure document
inspections,
inspections of
securities companies,
market surveillance,
etc
FUNCTIONS:
Functions
Five Pillars of the
SESC
Market Surveillance
The Market
Surveillance Division
can require trading
information from
and conducts market
oversight.
Compliance
Inspection
MBA 1ST
SEMESTER 50

themselves —
another reason that
educated and careful
investors are so
critical to the
functioning of
efficient markets. To
help support investor
education, the SEC
offers the public a
wealth of
educational
information on this
Internet website,
which also includes
the EDGAR
database of
disclosure
documents that
public companies
are required to file
with the
Commission.
Though it is the
primary overseer
and regulator of the
U.S. securities
markets, the SEC
works closely with
many other
institutions,
including Congress,
other federal
departments and
agencies, the self-
regulatory
organizations (e.g.
the stock
exchanges), state
securities regulators,
and various private
sector organizations.
In particular, the
Chairman of the
The Inspection
Division inspects
whether securities
companies observe
laws and regulations,
and conduct their
business in accordance
with market rules.
Since July 1, 2005 the
scope of the SESC's
inspection has been
expanded to include
securities businesses
such as the financial
solvency inspection,
which was conducted
by the Inspection
Bureau of the FSA.
Also, investment trust
management
companies and
investment advisory
companies have
become subject to the
SESC's inspection.
Disclosure
Document Inspection
The Civil Penalties
MBA 1ST
SEMESTER 51

SEC, together with
the Chairman of the
Federal Reserve, the
Secretary of the
Treasury, and the
Chairman of the
Commodities
Futures Trading
Commission, serves
as a member of the
President's Working
Group on Financial
Markets.
Investigation and
Disclosure Documents
Inspection Division
inspects disclosure
documents such as
financial statements
and registration
statements, etc．
In case false
statements are
admitted, the SESC
recommends that the
Prime Minister and the
Commissioner of the
FSA should order the
submission of
amended reports of the
disclosure documents.
Administrative Civil
Monetary Penalties
Investigation
The Civil Penalties
Investigation and
Disclosure Documents
Inspection Division
also conducts
investigation on the
violations such as
disclosure of false
MBA 1ST
SEMESTER 52

financial statements,
spreading rumors on
stock markets and
deceptive means,
market manipulation,
as well as insider
trading. In case these
violations are
admitted, the SESC
recommends that the
Prime Minister and the
Commissioner of the
FSA should order
payment of
monetary penalty.
Enforcement-
Investigation and
Filing Criminal
Charges
The investigation
Division investigates
securities crimes
including disclosure of
false financial
statements, spreading
rumors on stock
markets,
compensation of
MBA 1ST
SEMESTER 53

losses, market
manipulation, as well
as insider trading. The
Division can conduct a
compulsory
investigation with a
warrant issued by the
judge.
4. AIMS &
OBJECTIVES
to protect the
interests of
investors in
securities and to
promote the
development of,
and to regulate the
securities market
and for matters
connected
therewith or
incidental thereto”
the common interest
of all Americans in a
growing economy
that produces jobs,
improves our
standard of living,
and protects the
value of our savings
means that all of the
SEC's actions must
be taken with an eye
toward promoting
the capital formation
that is necessary to
sustain economic
growth.
We summarise our
Statutory Objectives
and Principles of
Good Regulation in
three Strategic Aims:
Promoting
efficient, orderly and
fair markets;
Helping retail
consumers achieve a
fair deal; and
Improving our
business capability
and effectiveness
SESC’s objective is to
maintain fair,
equitable, transparent,
and sound markets
through exerting its
authority of criminal
investigations into
securities fraud,
monetary penalties
investigations,
disclosure document
inspections,
inspections of
market surveillance,
etc
If we compare SEBI with regulatory bodies of developed countries we can see that SEBI
has more power than other regulatory bodies, but here the problem is that there is lot of
interference of RBI. SEBI does have decision taking authority but RBI often comes in
between Whereas other regulatory bodies are just like watch dogs where they just
examine the situation and give the report to the decision taking authority. Since there is
no good coordination between SEBI and RBI therefore SEBI is not able to perform up to
the mark, where as other countries are very systematic regarding their decisions and laws.
MBA 1ST
SEMESTER 54

Global market regulators to discuss hedge fund challenges
MUMBAI: India will host for the first time a global market regulators' annual conference
here next year that will highlight challenges posed to capital markets by fly-by-night
hedge funds.
The Securities and Exchange Board of India (SEBI) will host the 32nd annual conference
of IOSCO (International Organisation of Securities Commissions) from April 9 to 12,
next year, a SEBI release said.
The opening session for all participants will be on securities exchange evolution and
regulation of trans-national securities exchange. There will also be a full session on
accounting and auditing with an international perspective.
The crucial session will be on hedge funds - new regulatory challenges as it will be the
focus of the meet.
Hedge funds usually are vicious to stock markets as they are in the form of hot money
with large corpus and they enter and exit capital markets by way of participatory notes
through foreign institutional investors, making it difficult to trace the source .
Capital markets and economic development where new avenues to finance small and
medium enterprises will be another major session.
IOSCO's membership of over 100-jurisidictions is responsible for regulating over 90 per
cent of the world's securities market.
SEBI Chairman Mr M Damodaran was elected IOSCO's Emerging Markets Committee
(EMC) chairman in June 2006. EMC has more than 70 countries on its list. - PTI
To stop terrorism funding Sebi came up with Anit money laundering act.
Introduction
1.1 The Guidelines as outlined below provides a general background on the
subjects of money laundering and terrorist financing summarizes the main
provisions of the applicable anti-money laundering and anti-terrorist financing
MBA 1ST
SEMESTER 55

legislation in India and provides guidance on the practical implications of the
Act. The Guidelines also sets out the steps that a registered intermediary and
any of its representatives, should implement to discourage and identify any
money laundering or terrorist financing activities. The relevance and
usefulness of these Guidelines will be kept under review and it may be
necessary to issue amendments from time to time.
1.2 These Guidelines are intended for use primarily by intermediaries registered
under Section 12 of the SEBI Act, 1992. While it is recognized that a “onesize-
fits-all” approach may not be appropriate for the securities industry in
India, each registered intermediary should consider the specific nature of its
business, organizational structure, type of customers and transactions, etc.
when implementing the suggestedmeasures and procedures to ensure that they
are effectively applied. The overriding principle is that they should be able to
satisfy themselves that the measures taken by them are adequate, appropriate
and follow the spirit of these measures and the requirements as enshrined in
the Prevention of Money Laundering Act, 2002. (PMLA)
RBI, SEBI and some regulatory act’s.
Reserve Bank of India (RBI)
RBI was established on April 1, 1935 in accordance with the provisions of the Reserve
Bank of India Act, 1934 having Central Office at Mumbai since inception Originally it
was privately owned, since nationalization in 1949 fully owned by the Government of
India
The Preamble prescribes the objective as:
MBA 1ST
SEMESTER 56

"…to regulate the issue of Bank Notes and keeping of reserves with
a view to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage."
Main Functions
Monetary Authority:
• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.
Regulator and supervisor of the financial system:
• Prescribes broad parameters of banking operations within which the country's
banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors' interest
and provide cost-effective banking services to the public.
Manager of Foreign Exchange
• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
Issuer of currency:
• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and
coins and in good quality.
Developmental role
• Performs a wide range of promotional functions to support national objectives.
Related Functions
• Banker to the Government: performs merchant banking function for the central
and the state governments; also acts as their banker.
MBA 1ST
SEMESTER 57

Banker to banks: maintains banking accounts of all scheduled banks.
OFFICES
• Has 22 regional offices, most of them in state capitals.
Security Exchange Board of India (SEBI)
The Securities and Exchange Board of India, which was set up as an Administrative
Body in April 1988 was given statutory status on 30.1.1992 by promulgation of SEBI
Ordinance, which has since become an Act of Parliament. The Securities and Exchange
Board of India Act, 1992.
With its over 15 years of existence has made considerable dent in the capital market
through its various development and regulation of the capital market.
After it became a statutory body, SEBI restructured and rationalised its organization in
line with its expanded range and scope of activities. It has divided its activities in to five
operational departments, each headed by an executive director.
The objective of setting up SEBI is to protect the interest of investors in securities and to
promote the development and to regulate the security market. SEBI has mainly three
objectives or duties cast upon it by the Act-
(a) to protect the interests of investors in securities.
(b) to promote the development of securities market.
MBA 1ST
SEMESTER 58

(c) to regulate the securities market.
THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992
The Securities & Exchange Board of India ("SEBI"), which is the apex regulatory body
in India for the securities markets, was established under the SEBI Act to protect the
interests of investors in securities and to permit the development of, and to regulate, the
securities market.
The Act is a comprehensive one. While each and every section in the Act is important,
the following sections are the most important ones:
• Establishment, incorporation and management of SEBI: Chapter II of the Act
prescribes detailed rules as to the creation of SEBI, the members of the Board,
their qualifications, credentials and term of office. It also prescribes the rules for
conducting board meetings and removal of members from office.
• The powers and functions of SEBI: Found in Chapter IV, this section defines
the role of the Board. It deals with the regulation of the securities market in all its
manifestations, and contains wide powers over Companies, Venture Capital
Funds, Stock Exchanges and Brokers.
• Provisions relating to Collective Investment schemes: The Board has the power
to regulate Collective Schemes and Mutual Funds. This means that Collective
Schemes and Mutual Funds fall under the purview of SEBI and have to get
approval for floating schemes and tapping funds in the market. With such all-
encompassing powers, the Board has impact on a broad spectrum of persons
including the small investor.
• Registration of an intermediary: Stock brokers, Sub-Brokers, Share Transfer
Agents, Bankers to an issue, Trustees of Debentures, Registrars to an issue,
Merchant Bankers, Underwriters, Portfolio Managers, Investment Advisers and
such other intermediaries need permission from SEBI to set up operations. These
MBA 1ST
SEMESTER 59

are important powers that enables SEBI to ensure that all securities transactions
are subject to some measure of regulation by forcing any intermediary to
approach the Board for registration.
• Penalties: A detailed list of penalties is listed in Chapter IVA to be imposed upon
persons who breach the Act or the rules and regulations under the Act. These
include
- Penalty for failure to furnish information, documents, returns or reports to SEBI
- Penalty for failure by a broker or other intermediary to enter into an agreement
with his clients
- Penalty for failure of a broker or other intermediary to redress investor’s
grievances
- Penalty for defaults in case of Mutual Funds and Stock Brokers
- Penalty for insider trading
For insider trading, the penalty is Rs. 5 lakh and for other offences listed above
the penalty is imprisonment for one year or a fine or both.
• Dispute mechanism: Under the Act, an Appellate Tribunal has been created to
hear appeals arising from the decisions of SEBI and also created a post of an
adjudicating officer. These provisions create a level of adjudication between the
Board and the High Court. An appeal from the Tribunal lies to the High Court.
The Tribunal is not bound by the Code of Civil Procedure, but must follow
principles of natural justice. A person is allowed legal representation before the
Tribunal.
THE SECURITIES CONTRACTS (REGULATION) ACT, 1956
The Securities Contracts (Regulation) Act, 1956 ("SCRA") was enacted to prevent
undesirable transactions in securities by regulating the business or dealings therein.
The SCRA, as originally enacted, prohibited options in securities. However, with effect
from February 25,1995, this prohibition has been removed. This has enabled the
establishment of a derivatives market in securities.
MBA 1ST
SEMESTER 60

Among the important clauses of the SCRA are :
• Recognition of Stock Exchanges: Broadly covered by Sections 3, 4 and 5 of the
SCRA, these provisions detail the procedure for a Stock Exchange to obtain
recognition from the Central Government. This enables the Government to review
the rules and byelaws of the Exchange, as well as require the Exchange to confirm
to certain additional conditions that the Government may impose as a condition
for recognition. Section 5 also gives the Government the power to withdraw
recognition after giving the Exchange an opportunity to be heard.
• Framing of Stock Exchange rules: The Act, in sections 7A – 10, lays down the
basic framework under which an Exchange can frame rules and/or byelaws. The
Act allows the Central Government to issue a fiat to the Exchange to draft rules
for themselves or send across rules for the Exchange. It also allows SEBI to make
or amend byelaws of recognised Stock Exchanges. These sections ensure that
there is a semblance of Government control over the internal functioning of Stock
Exchanges.
• Superceding a Stock Exchange: Under Section 11, the Central Government, can
supersede the Governing Board of a Stock Exchange and replace them with a
different set of persons to look after the Exchange.
• Preventing unauthorised Stock Exchanges: This is a crucial part of the Act,
enunciated in section 19. It states that anyone wanting to operate a Stock
Exchange should confirm to the regulations and requirements of the Central
Government and its agencies such as SEBI.
• Prohibition of contracts (other than spot delivery contracts) outside a Stock
Exchange: This section states that security transactions can be traded only in a
Stock Exchange. By this the Central Government maintains a level of control and
regulation over all the transactions taking place in an Exchange.
As a result all securities trading (other than spot delivery contracts) have to take
place through the members of the particular exchange, over which the
Government has control.
MBA 1ST
SEMESTER 61

• Appeal to the Securities Appellate Tribunal against a refusal of a stock
exchange to list the securities of a public company: This allows companies
which have been refused listing by a stock exchange the facility to appeal to the
Securities Appellate Tribunal against the decision of the Stock Exchange.
SECURITIES CONTRACTS (REGULATION) RULES, 1957
The Securities Contracts (Regulation) Rules, 1957 ("the SCRR") were framed pursuant
to the provisions of the SCRA. The SCRR clarifies some of the provisions of the SCRA.
The SCRR lays down details of:
• Granting recognition to a Stock Exchange: The Rules specify the contents of
an application, the form of the approval to be granted to such application and the
documents to be filed along with the application. Further, the Rules also detail the
renewal procedure.
• Qualifications to be a member of a recognised Stock Exchange: Detailed in
Rule 8, these set out the exact eligibility criteria for obtaining the membership of
a recognised Stock Exchange. These rules are laid out for both individuals and
companies. The criteria that must be fulfilled by members subsequent to their
obtaining membership are also laid down.
• SEBI nominees for governing bodies of Stock Exchanges: Rule 10 gives SEBI
the power to nominate members to the governing body of Stock Exchanges. A
maximum of three members can be nominated to the Exchange. These members
have the same powers as other members of the governing body.
• Accounting procedures: This section lays down rules on the type of books,
accounts, their contents and the time period for which they must be maintained.
• Requirements for listing securities on a recognised Stock Exchange: Details
for listing a security on a recognised Stock Exchange is laid down in Rule 19.
They include documentation, undertakings of the company, statements required to
MBA 1ST
SEMESTER 62

ensure listing. A company wishing to list itself on a recognised Stock Exchange
must fulfil all these.
THE DEPOSITORY ACT, 1996
The Depository Act lays the foundation for dematerialisation of securities and provides
for the regulations of depositories in securities. It allows the creation of the bodies
involved in this process as well as outlining the modalities of the functioning of the
depository process.
The Depository Act provides inter alia for:
• The registration of a depository: The Depository Act requires every depository
to obtain a certificate of commencement of business from SEBI. It also lays down
that such a certificate will only be granted if SEBI is satisfied as to the safety and
security of the systems of the depository.
• The rights and obligations of depositories, participants, issuer and beneficial
owners: Chapter III of the Act lays down the relationship between the various
parties involved in the functioning of a depository. It elaborates the system of
working of the depository with regard to the process of surrender of share
certificates and the creation of beneficial ownership.
• Pledge and hypothecation of securities held in a depository: Since a large
number of transactions involving securities involve the creation of partial interests
through transactions such as a pledge or hypothecation, the Depositories Act
elaborates on the process whereby such an interest can be created in securities
held in a depository.
• Penalties relating to depositories: The penalties for contravention of the
mandate of the Depositories Act can be imposed against any person, including a
company. Hence violation of the Act could lead to the imposition of penalties
even on the company whose security is placed in the depository.
SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 1996
MBA 1ST
SEMESTER 63

The Depository Regulations have been framed by SEBI in accordance with the
Depository Act.
This Act looks at:
• The registration of depositories: The Regulations prescribe the form in which
the sponsor of a depository may apply for its registration (a sponsor being the
person proposing to set up a depository). It also prescribes the credentials of the
sponsor and the conditions under which registration may be granted. Further, the
form in which the certificate of registration is to be granted is also provided.
• The registration of depository participants: Similarly, rules, forms and
conditions are listed for the registration of depository participants with SEBI. The
application must be made through the concerned depository in which the
applicant proposes to act as a participant.
• Process of surrendering certificates of securities: Detailed procedures are laid
down for surrendering a security to the participant, the dematerialization of the
security and the emergence of beneficial ownership. This can be found in
Regulation 54.
Procedure for dematerialisation, creation, pledge and hypothecation of securities:
Details are provided as to how a pledge or hypothecation interest may be marked on
securities that have been dematerialised. It includes the procedure to be followed by the
depository in recording this interest, and the circumstances under which these securities
may be transferred.
MINISTRY OF COMPANY AFFAIRS.
ABOUT MCA.
MBA 1ST
SEMESTER 64

The Ministry is primarily concerned with administration of the Companies Act, 1956,
other allied Acts and rules & regulations framed there-under mainly for regulating the
functioning of the corporate sector in accordance with law. The Ministry is also
responsible for administering the Competition Act, 2002 which will eventually replace
the Monopolies and Restrictive Trade Practices Act, 1969 under which the Monopolies
and Restrictive Trade Practices Commission(MRTPC) is functioning. Besides, it
exercises supervision over the three professional bodies, namely, Institute of Chartered
Accountants of India(ICAI), Institute of Company Secretaries of India(ICSI) and the
Institute of Cost and Works Accountants of India (ICWAI) which are constituted under
three separate Acts of the Parliament for proper and orderly growth of the professions
concerned. The Ministry also has the responsibility of carrying out the functions of the
Central Government relating to administration of Partnership Act, 1932, the Companies
(Donations to National Funds) Act, 1951 and Societies Registration Act, 1980.
MCA has a three tier organizational set-up:
 Headquarters at New Delhi
 Regional Directors (RD) at Mumbai, Kolkata, Chennai and Noida
 Registrar of Companies (RoC) in States and Union Territories
MCA Headquarters handles cases that require approval of the GoI for citizen related
functions. RD supervises the functioning of RoCs and handles the matters delegated by
GoI while the RoC offices handle the bulk of citizen facing functions.
The Official Liquidators (OL) attached to various High Courts functioning in the country
are also under the overall administrative control of the MCA. Its headquarters at Delhi
also includes two Directors of Inspection and Investigation and Director of Research and
Statistics.
MCA21 Program
MBA 1ST
SEMESTER 65

Ministry of Company Affairs (MCA), Government of India (GoI) has initiated MCA21
program, for easy and secure access to MCA services in a manner that best suits the
businesses and citizens.
The program goals have been set as follows keeping in mind stakeholders' needs:
 Business enabled to register a company and file statutory documents quickly and
easily
 Public to get easy access to relevant records and effective grievances redressal
 Professionals to be able to offer efficient services to their client companies
 Financial Institutions to easily find charges registration and verification
 Employees to ensure proactive and effective compliance of relevant laws and
corporate governance
MCA21 is envisioned to provide anytime and anywhere services to businesses. It is a
pioneering program being the first mission mode egovernance project being undertaken
in the country. This program builds on the GoI vision to introduce a Service Oriented
Approach in the design and delivery of Government services, establish a healthy business
ecosystem and make the country globally competitive.
Program Scope
MCA21 program will provide for anytime anywhere electronic services with speed and
certainty to all the stakeholders. It will include:
 Design and development of application system
 Setting up of IT infrastructure
 Setting up the Digital Signature/PKI delivery mechanisms and associated security
requirements
 Setting up of Physical Front Offices (PFOs)
 Setting up of temporary FOs for the peak periods to meet with the requirements and
subsequent shutdown of temporary FOs at the end of such peak periods
 Migrating legacy data and digitization of paper documents to the new system
MBA 1ST
SEMESTER 66

 Providing MCA services to all MCA21 stakeholders in accordance with the Service
Oriented Approach
 Providing user training at all levels and all offices (Front and Back Offices)
The MCA21 is designed to automate processes related to the proactive enforcement and
compliance of the legal requirements under the Companies Act, 1956. However, it does
not include processes related to OL.
Front Office
The implementation of Front Offices (FO) is done in two ways. These can be called as
Virtual Front Office (VFO) and Physical Front Office (PFO).
The VFO is what the citizen has in front while accessing the MCA21 portal. The PFO
will be a replacement to the existing RoC counters. The PFO will also accept paper
documents. However, these will be converted into electronic documents by customer
service agents manning PFO. Also, the authorised person(s) will have to sign these
documents digitally. Consequently the authorised signatories for a given document will
need to appear in person at the PFO for the purpose of digitally signing the document.
The user can avail the following services on MCA21 portal
eFiling
o Viewing public document
o Requesting certified copies
o Registering investor complaint
o Tracking transaction status
Back Office
The back office is what MCA employee has in front which accessing back office portal.
The back office process relates to:
Dynamic routing of documents that have been electronically filed to the concerned
official within MCA based on the type of service request.
MBA 1ST
SEMESTER 67

Electronic workflow systems to support speed and certainty in service delivery
Supporting all routine tasks such as registrations and approvals
Storing of all approved documents of companies as part of electronic records, including
provision of access to electronic records for the stakeholders
Enhancing identification of defaulters
Increasing efficiency of Technical Scrutiny
Ensuring close follow-up on matters related to compliance management including
prosecutions
Enabling quicker responses to investor grievances
Providing alerts when the tasks are not carried out within stipulated period
Key Benefits
MCA21 seeks to fulfill the requirements of the various stakeholders. The key benefits of
MCA21 project are The back office process relates to:
 Expeditious incorporation of companies
 Simplified and ease of convenience in filing of Forms/ Returns
 Better compliance management
 Total transparency through e-Governance
 Customer centric approach
 Increased usage of professional certificate for ensuring authenticity and reliability of
the Forms / Returns
 Building up a centralised database repository of corporate operating
 Enhanced service level fulfillment
 Inspection of public documents of companies anytime from anywhere
 Registration as well as verification of charges anytime from anywhere
 Timely redressal of investor grievances
MBA 1ST
SEMESTER 68

 Availability of more time for MCA employees for monitoring and supervision
The wave of economic reforms initiated by the government has influenced the
functioning and governance of the capital market. The Indian capital market is also
undergoing structural transformation since liberalisation. The chief aim of the reforms
exercise is to improve market efficiency, make stock market transactions more
transparent, curb unfair trade practices and to bring our financial markets up to
international standards. Further, the consistent reforms in Indian capital market,
especially in the secondary market resulting in modern technology and online trading
have revolutionized the stock exchanges. The number of listed companies increased from
5,968 in March1990 to about 10,000 by 1999 and market capitalization has grown almost
11 times during the same period. The debt market, however, is almost non existent in
India even though there has been a large volume of Government bonds trading. Banks
and financial institutions have been holding a substantial part of these bonds as a
statutory liquidity requirement. A primary auction market for Government securities has
been created and a primary dealer system was introduced in 1995. Currently, there are 31
mutual funds, out of which 21are in the private sector. Mutual funds were opened to the
private sector in 1992. Earlier, in 1987, banks were allowed to enter this business,
breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant
position. Recognizing the importance of increasing investor protection, several measures
were enacted to improve the fairness of the capital market. There have been significant
reforms in the regulation of the securities market since 1992 in conjunction with overall
economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI
statutory powers as an apex regulator. And a series of reforms were introduced to
improve investor protection, automation of stock trading, integration of national markets
and efficiency of market operations. SEBI in 1993 initiated a significant move which
involved the shift of all exchanges to screen-based trading being motivated primarily by
the need for greater transparency. The first exchange to be based on an open electronic
limit order book was the National Stock Exchange (NSE), which started trading debt
instruments in June 1994 and equity in November 1994. In March 1995, Bombay Stock
Exchange (BSE) shifted from open outcry to a limit order book market.
MBA 1ST
SEMESTER 69

REVIEW OF REGULATORY ENVIRONMENT
SEBI : Securities and Exchange Board of India (SEBI) was set up as an
administrative arrangement in 1988.In 1992, the SEBI Act was enacted, which gave
statutory status to SEBI. It mandates SEBI to perform a dual function: investor protection
through regulation of the securities market and fostering the development of this market.
SEBI has been vested most of the functions and powers under the Securities Contract
Regulation (SCR) Act, which brought stock exchanges, their members, as well as
contracts in securities which could be traded under the regulations of the Ministry of
Finance. It has also been delegated certain powers under the Companies Act. In addition
to registering and regulating intermediaries, service providers , mutual funds, collective
investment schemes, venture capital funds and takeovers, SEBI is also vested with the
power to issue directives to any person(s) related to the securities market or to companies
in areas of issue of capital, transfer of securities and disclosures. It also has powers to
inspect books and records, suspend registered entities and cancel registration.
RBI : Reserve Bank of India (RBI) has regulatory involvement in the capital market, but
this has been limited to debt management through primary dealers, foreign exchange
control and liquidity support to market participants. It is RBI and not SEBI that regulates
primary dealers in the Government securities market. RBI instituted the primary
dealership of Government securities in March 1998. Securities transactions that involve a
foreign exchange transactions need the permission of RBI.
Stock Exchanges : SEBI issued directives that require that half the members of the
governing boards of the stock exchanges should be non broker public representatives and
include a SEBI nominee. To avoid conflicts of interest, stock brokers are a minority in
the committees of stock exchanges set up to handle matters of discipline, default and
investor-broker disputes. The exchanges are required to appoint a professional, non
member executive director who is accountable to SEBI for the implementation of its
MBA 1ST
SEMESTER 70

directives on the regulation of stock exchanges. SEBI has introduced a mechanism to
redress investor grievances against brokers. Further, all issues are regulated through a
series of disclosure norms as prescribed by SEBI and respective stock exchanges through
their listing agreement. After a security is issued to the public and subsequently listed on
a stock exchange, the issuing company is required under the listing agreement to continue
to disclose in a timely manner to the exchange, to the holders of the listed securities and
to the public any information necessary to enable the holders of the listed securities to
appraise its position and to avoid the establishment of a false market in such listed
securities.
The powers and functions of regulatory authorities for the securities market seem
to be diverse in nature. SEBI is the primary body responsible for regulation of the
securities market, deriving its powers of registration and enforcement from the SEBI Act.
There was an existing regulatory framework for the securities market provided by the
Securities Contract Regulation (SCR) Act and the Companies Act, administered by the
Ministry of Finance and the Department of Company Affairs (DCA) under the Ministry
of Law, respectively. SEBI has been delegated most of the functions and powers under
the SCR Act and shares the rest with the Ministry of Finance. It has also been delegated
certain powers under the Companies Act. RBI also has regulatory involvement in the
capital markets regarding foreign exchange control, liquidity support to market
participants and debt management through primary dealers. It is RBI and not SEBI that
regulates primary dealers in the Government securities market. However, securities
transactions that involve a foreign exchange transaction need the permission of RBI. So
far, fragmentation of the regulatory authorities has not been a major obstacle to effective
regulation of the securities market. Rather, lack of enforcement capacity by SEBI has
been a more significant cause of poor regulation. But since the Indian stock markets are
rapidly being integrated, the authorities may follow the global trend of consolidation of
regulatory authorities or better coordination among them.
After introduction of SEBI Act, participants in the Indian capital market are
required to register with SEBI to carry out their businesses. These include: stock brokers,
sub brokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars
to an issue, merchant bankers, underwriters, portfolio managers, and investment advisers.
MBA 1ST
SEMESTER 71

Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a
certificate granted by SEBI. Each stockbroker is subject to capital adequacy requirements
consisting of two components: basic minimum capital and additional or optional capital
relating to volume of business. The basic minimum capital requirements varies from one
exchange to another. The additional or optional capital and the basic minimum capital
combined have to be maintained at 8 percent or more of the gross outstanding business in
the exchange (the gross outstanding business means the cumulative amount of sales and
purchases by a stock broker in all securities at any point during the settlement period).
Sales and purchases on behalf of customers may not be netted but may be included to
those of the broker.
Most stockbrokers in India are still relatively small. They cannot afford to directly
cover every retail investor in a geographically vast country and in such a complex
society. Thus, they are permitted to transact with sub brokers as the latter play an
indispensable role in intermediating between investors and the stock market. An applicant
for a sub broker certificate must be affiliated with a stockbroker of a recognized stock
exchange. There are two major issues which need to be addressed concerning sub brokers
in the Indian capital market; majority of sub brokers are not registered with SEBI; and the
function of the sub broker is not clearly defined. No sub broker is permitted to buy, sell,
or deal in securities, without a certificate granted by SEBI. SEBI enforced the following
measures in March 1997 to regulate unregistered sub brokers:
[a] initiation of criminal actions on complaints received against unregistered
sub-brokers in suitable cases;
[b] Prohibition of stockbrokers in dealing with unregistered sub brokers.
In spite of these actions, the problem is still at large. There is a need to address the
basic issue of clarifying the role of the sub brokers and to educate the investors about
their role.
SEBI Act of 1992 has introduced self-regulatory organizations [SROs] for
regulating various participants in the securities market. But they are not yet operational.
A clear regulatory framework has yet to be set up, and relevant market participants are
not ready to regulate themselves for professional purposes. The only market related SROs
MBA 1ST
SEMESTER 72

in India whose regulatory frameworks have been well established and which are actually
functioning are the recognized stock exchanges.
Recent Developments & Performance.
In brief the major reforms which have taken place in Indian markets include
screen based trading, electronic transfer of securities, dematerialization, rolling
settlement., risk management practices and introduction of derivative trading and so on.
The net result of these initiatives can be seen in the form of efficient and transparent
trading & settlement processes in our exchanges. If we compare Indian markets today
with some of the internationally developed markets we find that we are not lagging
behind. This judgment is primarily based on the comparative study of two important
ratios, that is market capitalization ratio and the turnover ratio.
Table No. 1
Comparative View of Market Capitalization & Turnover Ratios
RATIO USA UK CHINA
JAPAN INDIA
Market
Capitalization 358.8 130.7 73.6 66.4 54.5
Turnover 200.8 66.6 158.3 69.9 374.7
(Source: S&P Emerging Markets Fact Book, 2001)
The above figure in fact looks quite impressive. Further, India ha s been placed
23rd in world ranking in terms of market capitalization and 14th in terms of value of
trades on stock exchanges by standard.
MBA 1ST
SEMESTER 73

RBI, SEBI need to rethink on rating mechanism
1 Oct, 2007, 1710 hrs IST, Mythili Bhusnurmath, TNN
We could argue endlessly over whether our stock markets have decoupled from the Dow
and the Footsie and so on, but one thing is beyond dispute. We have certainly decoupled
from the rest of the world as far as the debate on the culpability of rating agencies is
concerned.
The issue has seized the western world. In the United States, the President’s Working
Group on Financial Markets that includes representatives from the Federal Reserve and
the treasury has launched a probe into securitization and rating agencies. The SEC is
independently reviewing rating agencies’ policies and looking at potential conflicts of
interest.
Share prices of the two main rating agencies — Moody’s and S&P — have both shown a
sharp decline since the sub prime crisis began a little over two months ago. The decline is
partly a reflection of the fact that business will slow down in the immediate aftermath of
the crisis; but, it is equally a reflection of the realization that it can no longer be a return
to business as usual for these agencies.
However, there’s little or no debate about rating in India. In fact, shares of both Crisil and
ICRA, the two major rating agencies in India in which S&P and Moody’s respectively
have a stake, have shown a sharp increase exactly during the period when the shares of
their overseas partners dipped.
Part of the reason could be that many of the key take-aways from the sub prime crisis —
that independence of central banks is more imagined than real, that dispersion of risk
doesn’t risk-proof the system, that qualified institutional buyers don’t always know
better, that even the most sophisticated mathematical models can and do go wrong, that
securitization has its pluses and minuses — do not have immediate application in the
Indian context, given the stage of development of our financial system.
MBA 1ST
SEMESTER 74

Hence, the mainstream interest has largely been limited to whether, and to what extent,
India will feel the ripple effects of the crisis roiling most of the developed world,
especially what it will mean for interest and exchange rates.
But the issue of ratings has much greater immediacy for us than even the west. The
reason is two-fold. One, we are the only major market in the world to insist on
compulsory rating of initial public offerings (IPOs). And, beginning April 2008, the
amount of capital to be held by banks in India will be determined by the ratings accorded
to their loan assets. So there is much more riding on rating agencies in India than
anywhere else in the world.
By extension, we should be seriously debating the issue of how the present model of
ratings can be improved. Especially since these agencies have clearly failed, and
repeatedly. This is not the first time. Soon after the East-Asian crisis, major rating
agencies came in for a great deal of flak for their failure to give any advance warning of
the impending crises until it was too late. Then we had the Enron and WorldCom fiascos
when again rating agencies were found to have slipped up badly. But unlike auditors who
were severely chastened by the Enron fiasco, rating agencies bounced back each time, in
better fettle than before.
This is the third time in less than 10 years that they have been found wanting. Complex
securitised instruments continued to receive favourable ratings despite the apparent
decline in lending standards and slowing of the housing market
Ratings are about assessing the probability of default. And so like all probabilistic
exercises, they are dependant, among other things, on historical data. The problem is that
whenever there is a new product, as in the case of collateralised debt obligations (CDOs)
and other asset-backed commercial paper (ABCP), etc., there will always be a long lead
time before the rating agency is able to collect the required historical data that is crucial
to its pricing. Hence, it is almost by definition a bit like batting in the dark.
It is not enough that Moody’s has announced it will change the way it rates complex debt
MBA 1ST
SEMESTER 75

products backed by US subprime mortgage bonds to reflect the new realities of risks such
as the gumming or freezing of liquidity. Or that S&P too is reported to be finessing its
ratings procedures. As financial innovation continues apace (as indeed it must) there is
always going to be a new risk that catches rating agencies unawares, simply because no
one has ever seen its like before. This is exactly what happened in the subprime crisis; no
one had ever envisaged that liquidity could dry up like this and so abruptly.
There are numerous other problems — of conflict of interest, of rating agencies being
paid by the rated, lack of follow-up of ratings once the initial assignment is done or lack
of transparency or lack of comprehension of complex financial instruments, and the
oligopolistic nature of the business. These have all been extensively written about. But as
far as rating agencies are concerned, it’s like water off a duck’s back. So we need to think
completely out of the box; a mere tweaking of the existing system to take care of an
added risk here or an added risk there will not do.
In a remarkably prescient paper, “How and why rating agencies are not like other
financial gate-keepers”, Frank Partnoy of San Diego University points to how the present
model is basically flawed. And how suggestions such as allowing more players or using
market-based measures of risk will not really help. The reality is that there were many
rating agencies in the past but there has been consolidation over the years. As for market-
based measures of risk, they are of little use for OTC (over-the-counter) products that are
often illiquid and become more so in times of distress.
The question is not so much how the existing model of ratings needs to be overhauled
(that it doubtless does) but rather whether we should accord such centrality to these
agencies pending a complete overhaul.
In the 1990s, Thomas Friedman, author of the best-selling book The World is Flat,
quipped, “there are only two super-powers in the world, the United States and
Moody’s ...and believe me, it’s not clear sometimes who’s more powerful.” Judging by
the way rating agencies have defied all efforts to tame them, he wasn’t far off the mark.
MBA 1ST
SEMESTER 76

SEBI’s preparing for Global India
The recent decision of the Reserve Bank of India (RBI) to allow foreign investment up to
49 percent in stock exchanges, depositories and clearing corporations is hailed as a good
development for the securities industry.
Reflect on these recent developments:
- Deutsche Boerse, Europe's top stock exchange and transaction service provider has
signed an agreement to buy 5 percent equity in the Bombay Stock Exchange (BSE) for
$43 million. BSE is the oldest bourse in Asia. The deal values the exchange at $910
million on an expanded equity base.
- Singapore Stock Exchange (SGX) says its short listed for BSE stake. It claimed that it
has been short listed to buy a 5 percent stake in the bourse. BSE is understood to have
finalized its plans to have SGX as its second foreign partner.
- US major, NYSE, bought 5 per cent in the National Stock Exchange for $115 million.
This values NSE at $2.3 billion.
- Few weeks back Goldman Sachs acquired five per cent in the National Stock Exchange.
- Goldman Sachs has proposed to buy a stake in the Multi Commodity Exchange (MCX),
India's largest commodity bourse.
- London Metal Exchange and The Tokyo Commodity Exchange have also initiated talks
with MCX.
- NASDAQ Stock Market Inc., London Stock Exchange Group PLC and NYSE Group
Inc. have also been touted as bidders for a stake in BSE.
- NASDAQ has reportedly expressed its keenness to pick up stake in BSE.
- Foreign stock exchanges are now eyeing equity stake in the Over the Counter Exchange
of India (OTCEI). Recently, officials from the China Shanghai Stock Exchange visited
the OTCEI and it is learnt that the Chinese may be willing to buy 5 per cent in the
exchange as permitted under current guidelines.
MBA 1ST
SEMESTER 77

- Sources say that London's AIM and the South Korean stock exchange may be willing to
buy stakes in the OTCEI exchange
-According to sources, the Inter-connected Stock Exchange of India (ISE), an exchange
floated by a group of small exchanges, is attracting global peers like the London Stock
Exchange (LSE), Singapore Stock Exchange (SGX) and some top private equities
players.
Indian exchange business is becoming increasingly global. The consolidation and alliance
wave has reached Indian shores as well. India is currently growing at the rate of 8% per
annum and has been doing so for a few years. Third, India is now the 4th largest country
in the world in terms of purchasing power parity. If the current growth rate continues it
will soon be the third largest, overtaking Japan and just behind the US and China. The
fast growing stock markets in India are attracting major global investors.
The international bourses feel that investments in India's Stock Exchanges (SEs)
compliment their global growth strategy. Through a mutually beneficial partnership, the
foreign groups will extend their global reach. Major global stock exchanges have been
merging and forming alliances in recent years. As companies spread their global
operations, such merged entities and alliances can offer listing possibilities in multiple
markets. Regulatory controls in select markets like the US have also furthered this
consolidation wave.
After completing a round of domestic consolidation, US stock exchanges have stepped
out and are acquiring exchanges in Europe besides forming alliances in Asia where
outsight acquisitions may not be possible.
Though RBI said it will allow up to 49 percent foreign investment in stock exchanges, the
Securities and Exchange Board of India (SEBI) may say no to foreign players from
becoming strategic investors in domestic stock exchanges. The SEBI may allow a foreign
player to invest not more than 5 per cent in an exchange.
According to the de-mutualisation plan laid out by the government, all corporatised stock
exchanges are expected to divest 51per cent of their equity to public investors. The
internal group suggested that of the 51per cent to be divested, 25 per cent could be
MBA 1ST
SEMESTER 78

offered to an Indian strategic partner. The rest could be offered to others, including
foreign players and resident Indian investors, with no investor holding over 5 per cent
each.
In other words, the capital market regulator has capped the individual investment, direct
or indirect, in such exchanges at five per cent. This means many investors need to join
together to have a strategic control.
Under the new rules, foreign direct investment would be limited at 26 percent, while
foreign portfolio investments would be capped at 23 percent in all these entities, the
central bank said. It, however, said portfolio investments would be allowed only through
buying in the secondary market.
Conclusion:
SEBI is gaining more powers and authority but however to perform up to the
expectations it is important that there should be good coordination amongst the regulatory
bodies. If that is possible then the Indian financial markets will definitely touch new
heights and we find no reason why SEBI will lag behind the regulatory bodies of other
countries.
With the help of coordination and framing of systematic rules and laws and
proper implementation of such rules and laws will definitely help SEBI to touch new
heights and perform up to the people’s expectations.
MBA 1ST
SEMESTER 79

Wibliography
1. www.numa.com/links/regulat.htm
2. http://www.thehindubusinessline.com/businessline/blnus/05251009.htm
MBA 1ST
SEMESTER 80

Security exchange board of india (sebi)

More Related Content

What's hot

Viewers also liked

Similar to Security exchange board of india (sebi)

More from Dharmik

Recently uploaded

Security exchange board of india (sebi)