In this article, we are going to discuss about Role and Functions of SEBI (Securities and Exchange Board of India). Investing in Stock Market Notes.
SEBI – Securities and Exachange Board of India
Securities and Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of stock market but it was granted legal status in the year 1992. SEBI is a body corporate having a separate legal existence and perpetual succession.
Functions of SEBI:
SEBI is considered to be watch dog of securities market. It plays a significant role in the regulations and development of stock market. Functions of SEBI are mainly divided into three (3) categories:
1. Protective Functions of SEBI:
Protective functions are those which are performed by SEBI to protect the interest of investor and provide safety of investment. It plays a significant role in maintaining faith of investors in stock market. Protective functions of SEBI include:
(i) Prohibition and control Price Rigging: Price rigging refers to an act of manipulation of prices of securities by potential traders with the object of inflating or depressing the market price of securities. This is done to defraud and cheat the small investors. SEBI prohibits such practices and can take actions against those who are found involve in such activities.
(ii) Prohibition of Insider trading: Insider are those person which have connection with the company such as directors, promoters etc. These insiders have sensitive information which is not available to people at large. Such information can affects the price of securities and insiders can took the advantage of such information and if they use this information to make profit in stock market, then it is known as insider trading. SEBI keeps a close eye when insiders are buying securities of the company and takes strict action if anyone in found involved in insider trading.
(iii) Prohibitions of fraudulent and Unfair Trade Practices: Any statement by the company which induces their investors to buy or sale their shares is considered to a fraudulent and unfair trade practices. SEBI does not allow the companies to make misleading statements and can take strict action if companies are found involve in these acts.
(iv) Investor education: SEBI undertakes steps to educate the investors about the securities market so that they are able to evaluate the securities of various companies before investment and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.
2. Developmental Functions:
Development functions are those which are performed by the SEBI to promote and develop activities in stock exchange and increase the trading and investment in stock exchange. SEBI perform the following development functions:
(i) SEBI conducts training of intermediaries of the securities market. SEBI also approved various courses for investors and intermediaries.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:
(a) Now internet based trading through registered stock brokers is permitted by SEBI. Now you can trade at the convenience of your home by simply downloading and registering mobile application of any registered broker.
(b) Underwriting is now made optional by SEBI which reduces the cost of issue of securities.
(c) SEBI now permitted the initial public offer through stock exchange. Previously companies were issuing IPO only in primary market.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to which every intermediary of stock market such as merchant bankers, brokers, underwriters, etc must be adhered to.
(ii) All intermediaries of the stock market are brought under the regulatory purview of SEBI and more restrictions are imposed on private placement of shares.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) Mutual funds institutions are also registered and regulated by SEBI.
(v) Takeover of the companies are also regulated by SEBI.
(vi) Inquiries and audit of stock exchanges are conducted by SEBI at regular intervals.