August 18

Genesis and Framework of SEBI

2011 201
SEBI 1992, SCRA 1956, SAT and related provisions

Genesis and Framework - SEBI

The Laws governing Securities Market at Present

Securities Market

SEBI Act 1992

Depository Act 1996

Securities Contract Regulation Act 1956

Companies Act 1956

Before 1992

Securities Market

Controller of Capital Issues 1947

Securities Contract Regulation Act 1956

Companies Act 1956

Framework SEBI Act 1992

The objects/ principles of the act are:are:

Regulate Securities Market Protect the interest of investors in the securities market Promote Development of Securities Market

CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129

SEBI has been formed under SEBI Act 1992 as a corporate with

Separate Property Perpetual Succession Contractual Rights Common Seal Right to Sue and be Sued
The head office of SEBI is at Mumbai with different offices at Delhi, Chennai etc.

Members
The board shall consist of following mem members [Total one chairman + 5 members]

A Chairman appointed by Central Govt. Two Members from the Finance Ministry nominated by CG. 5 members out of which 3 whole time members appointed by C Govt. One Member- nominated by RBI.
The Chairman and other members are of ability, integrity and standing that have the capacity of dealing with the problems related to Securities Market or have special knowledge or experience of Law, Finance, Economics, Accountancy, administration or in any discipline which the central government may think fit.

The Central Government reserves the right to supersede the SEBI Board.

Central Government

SEBI Board
Powers and Functions of SEBI [Section 11]
Chapter IV Section 11 of SEBI Act 1992 says that it shall be the duty of the board to protect the interest of the Investors and would take following measures as it thinks fit. 1. Regulate the Business in securities market including stock exchanges. 2. Registering and regulating the working of Primary and Secondary Market Intermediaries such as Depositories, Participants, Custodian, Underwriter, Merchant Banker, Share Transfer Agent, FIIs, Credit Rating Agencies etc. 3. Registering and Regulating the Self Regulatory Organizations [A self-regulatory regulatory organization (SRO) ) is an organization that exercises some degree of regulatory authority over an industry or profession e.g. Microfinance Institutions Network, Network, Data Security Council of India (DSCI)] CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129

4. Registering and Regulating the working of Capital Venture funds and Collective Investment Schemes including Mutual Funds. 5. Prohibiting Fraudulent and Unfair Trade Practices relating to Securities Market. 6. Prohibiting Insider Trading [The buying and selling of shares of a company on the basis of unpublished news/material] 7. Promoting Investor Education & training of Intermediaries of securities market. 8. Calling for Information through inspection & audit or furnishing information to agencies, levying charges etc. Sebi is vested with the powers of civil court under CPC 1908 and can:1. 2. 3. 4. 5. 6. Summon and enforce attendance of any person. Examination on Oath. Discovery and Production of Documents Accepting Evidence on Affidavit. Dismiss application in case of default. Inspection of any books, register, documents of any person mentioned in the section 12 of the act namely merchant banker, underwriter, stock broker, sub broker, portfolio manager etc.

Specific Powers conferred in the Interest of Investors/Market 1. 2. 3. 4. 5. Suspend trading of any security in the stock exchange. Power to regulate or prohibit Issue of Prospectus, offer documents etc. Restrain/disallow any person from entering the securities market. Right to confiscate & retain proceeds/securities under inquiry. Right to order any person related to securities market not to dispose/alienate the assets under investigation.

Directions [Section 11B] Sebi can issue necessary directions after making enquiry1. In the interest of investors and securities market. 2. To prevent the affairs of any intermediary found unfavorable to the investors interest. 3. Can secure proper management of any person/intermediary by issuing direction to person/class of persons or any company in any matter relating to securities market. Investigations [11C] SEBI can call for investigation of any person or company which it may think necessary1. For the interest of investors and securities market. 2. To protect any unwanted transactions being detrimental to the interest of the investors. 3. For Investigation It can instruct in writing to any person to investigate the affairs of intermediary/person and it is the duty of manager, director, employee of the organization including every person, every intermediary relating to securities market to produce books of CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129

accounts, registers, documents or any other record relating to the company, intermediary or such person which he may think necessary. 4. That the investigating authority shall keep such records, registers, books of accounts for six months and shall return to the respective persons thereafter. 5. Can obtain necessary documents again if required. 6. Can examine any director, employee, manager of any intermediary or any person associated with the stock market in relation to the business matters. 7. Can impose penalty if any person without any reasonable cause refuses to produce required documents, information, records etc, fails to answer or appear before the investigating authority, shall be punishable with imprisonment up to one year or with fine which may extend to one crore rupees and also a further fine of 5 lac rupees everyday during which such default continues. 8. Can issue cease and desist order [an order of a court or government agency to a person, business or organization to stop doing something upon a strong showing that the activity is harmful and/or contrary to law]

Consent Order & Compounding of Offence

SEBI introduced the concept of C.O. with Compounding of Offence through a notification dated 2007. Herein, Consent Order means Consent Order means an order that settles administrative or civil proceedings between the regulator and a person (Party) who may prima facie be found to have violated securities laws. It may settle all issues or reserve an issue or claim, but it must precisely state what issues or claims are being reserved. A Consent Order may or may not include a determination that a violation has occurred.

In the case of M/S Aditya Securities, the company was an unregistered sub-broker and furnished wrong information to the Inspecting Officer & extended margin trading facility to clients in contravention to the Section 12 of SEBI Act. The matter was settled through Consent Order by paying a penalty of Rs. 1 Lac. In another case of M/S Educomp Solutions where the director transferred the shares of the company to his spouse but failed to disclose it to the company as required in the Insider Trading Regulations following which proceedings were initiated. The penalty enforced was of Rs. 3 Lac.

The main objective of the consent order is to reduce the regulatory cost which can further help in saving time and effort of the board.

Further Compounding of Offence is a process whereby an accused pays compounding charges in lieu of undergoing consequences of prosecution. The main objective of compounding of offences is to evade the complex and long process of criminal prosecution and therefore saves time, cost and energy.

CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129

Penalty and Failures [Section 15]

Section 15A

1) Failure to furnish any document, return or report to the board. 2) Failure to file any Return or furnish any information, books within the time limit. 3) Failure to maintain books of accounts, records etc. Any Person Registered as an intermediary & is required to enter into an agreement with his clients, fails to do so. Any Listed Company or any person registered as an intermediary & is required to redress the grievances of the investors, fails to do so.
If a person carrying on the scheme of Mutual Fund or Collective Investment Scheme is supposed to obtain the Certificate of Registration under the prescribed rules & regulations, fails to do so. In addition if he fails to -: a) Comply with the terms & conditions of Registration. b) Make listing of his schemes as prescribed in the regulations. c) Dispatch unit certificates of any scheme d) Refund the application money paid by the investors. e) To invest the money collective by CIS/MF as specified in the regulations. If any AMC registered under the Mutual Fund Regulations, fails to comply with any of the regulations including the restrictions on the activities of AMC.

Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore. Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore. Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore.

Section 15B

Section 15C Section 15D

Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore.

Section 15E

Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore.
a) Penalty of maximum 5 times of the amount for which the contract note is not issued.

Section 15F

Penalty for Stockbroker

If any person is registered as a broker under the Act & he fails to:a) Issue Contract Note in the prescribed format by the stock exchange.

b) b) Deliver the security, to make the payment of the amount paid to Investor. c) c) Charges excess brokerage than the brokerage specified

Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore.
One Lac rupees or 5 times the amount of brokerage charged in excess of specified brokerage.

CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129

Section 15G

Penalty for Insider Trading

If any insider who:a) Either himself or on behalf of any other person deals in the securities of a company on the basis of unpublished price sensitive information. b) Communicates the unpublished price sensitive information with or without his request except as required in the ordinary course of business. Counsels (advice) or procure (get hold of) any other person to deal in the securities of a company on the basis of unpublished price sensitive information. Penalty of twenty five crore

c)

Section 15D

If a person carrying on the scheme of Mutual Fund or Collective Investment Scheme is supposed to obtain the Certificate of Registration under the prescribed rules & regulations, fails to do so. In addition if he fails to -: a) Comply with the terms & conditions of Registration. b) Make listing of his schemes as prescribed in the regulations. c) Dispatch unit certificates of any scheme d) Refund the application money paid by the investors. e) To invest the money collective by CIS/MF as specified in the regulations.

Lesser of the Two: One lac rupees per day during which such default continues or Rs 1 Crore.

On 26 January1995, the government promulgated an ordinance amending the SEBI Act, 1992, and the Securities Contracts (Regulation) Act, 1956. In accordance with the amendment adjudicating mechanism will be created within SEBI and any appeal against this adjudicating authority will have to be made to the Securities Appellate Tribunal, which is to be separately constituted. These appeals will be heard only at the High Courts. The main features of the amendment to the Securities Contract (Regulation) Act, 1956, are:

The ban on the system of options in trading has been lifted. The time limit of six months, by which stock exchanges could amend their bye-laws, has been reduced to two months. Additional trading floors on the stock exchanges can be established only with prior permission from SEBI. Any company seeking listing on stock exchanges would have to comply with the listing agreements of stock exchanges, and the failure to comply with these, or their violation, is punishable.

CS Futurz Home Coaching www.csfuturz.blogspot.com 9783302129