CHAPTER.

INTRODUCTION

With the announcement of the reforms package in 1991, the

volume of business in both the primary and secondary segment of the capital
market has been increased enormously till now. A multicrore securities scam
rocked the Indian financial system in 1992(Harshad Mehta scam). The then
existing regulatory framework was found to be fragmented and inadequate and
hence, a need for an autonomous, statutory, and integrated organization to ensure
the smooth functioning of capital market was felt. To fulfill this need, the
Securities and Exchange Board of India (S.E.B.I)1, which was already in existence
since April 1988, was conferred statutory powers to regulate the capital market.
The SEBI got legal teeth through an ordinance issued on 30 January 1992. The
ordinance conferred wide- ranging powers on the SEBI, including the authority to
prohibit insider trading‘ and regulate substantial acquisition of shares‘ and
takeover of business‘.

The function of market development includes containing risk, board

basing, maintaining market integrity and promoting long-term investment. The
SEBI Act, 1992 which establishes the SEBI with four-fold objectives of protection
of the interests of investors in securities, development of the securities market,
regulation of the securities market and matters connected therewith and incidental
thereto.

1
Securities and Exchange Board of India
SIGNIFICANCE OF THE STUDY

The SEBI has framed regulations under the SEBI Act and the
Depositories Act for registration and regulation of all market intermediaries, for
prevention of unfair trade practices, and insider trading. As everyone could know
that these i.e. the Government and the SEBI issue notifications, guidelines and
circulars which need to be complied with by market participants. All the rules and
regulations are administered by the SEBI. The history of the capital market in India
dates back to the 18th century when East India company securities were traded in
the country. It has been a long journey for the Indian capital market. Now the
capital market is organized, fairly integrated, mature, more global and modernised.
The securities market is regulated by various agencies, such as the Department of
Economics Affairs (DEA) 2 , the Department of Company Affairs (DCA), the
Reserve Bank of India (RBI) and the SEBI. The Activities of these agencies are
coordinated by a high level committee on capital and financial markets.

The capital market, i.e., the market for equity and debt securities is
regulated by the Securities and Exchange Board of India (SEBI). The SEBI has full
autonomy and authority to regulate and develop the capital market. The
government has framed rules under the securities contracts (regulation) Act
(SCRA), the SEBI Act and the Depositories Act.

SCOPE OF THE STUDY

This study was mainly planned to evaluate the performance SEBI,

relating to supervision of securities market of various intermediaries registered
with SEBI., its role of stock market,regularization of capital market and to know

2
Department of Economics Affairs (DEA)
what kind of Investor Protection measures taken by SEBI for the benefit/to
safeguard the interest of investors in India since 1992.

OBJECTIVES OF THE STUDY

The objectives of the study are:

 To understand regularization of capital market by SEBI

 To know the investor protection measures taken by SEBI since its inception;
 To know whether the SEBI has been acting as independent organization to
regulate the securities markets properly or not;
 To know the powers and functions implementing properly or not by SEBI;
 Finally to give findings and suggestions towards SEBI relating to its role in
Indian Capital Markets.

REGULARIZATION OF CAPITAL MARKET BY SEBI

SEBI has to be responsive to the needs of three groups, which

constitute the market:

The issuers of securities the investors the market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and
quasiexecutive. It drafts regulations in its legislative capacity, it conducts
investigation and enforcement action in its executive function and it passes rulings
and orders in its judicial capacity. Though this makes it very powerful, there is an
appeals process to create accountability. There is a Securities Appellate Tribunal
which is a three-member tribunal and is presently headed by a former Chief Justice
of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the
Supreme Court. SEBI has enjoyed success as a regulator by pushing systemic
reforms aggressively and successively (e.g. the quick movement towards making
the markets electronic and paperless rolling settlement on T+2 basis).

SEBI has been active in setting up the regulations as required under

law. SEBI has also been instrumental in taking quick and effective steps in light of
the global meltdown and the Satyam fiasco. It had increased the extent and
quantity of disclosures to be made by Indian corporate promoters. More recently,
in light of the global meltdown, it liberalized the takeover code to facilitate
investments by removing regulatory strictures. In one such move, SEBI has
increased the application limit for retail investors to Rs 2 lakh, from Rs 1 lakh at
present. Capital market requires many intermediaries who are responsible to
transfer funds from those who save to those who require these funds for
investments. The efficiency of the markets is dependent on the specialization
attained by these intermediaries. Some of them are as follows: 1. Stock Exchanges.
2. Banks. 3. Investment Trusts and Companies. 4. Specialized Financial
Institutions or Development Banks. 5. Mutual Funds. 6. Non-Banking Financial
Institutions. 7. International Financial Investors and Institutions.

SEBI has three functions rolled into one body quasi-legislative, quasi-
judicial and quasiexecutive. It drafts regulations in its legislative capacity, it
conducts investigation and enforcement action in its executive function and it
passes rulings and orders in its judicial capacity. Though this makes it very
powerful, there is an appeals process to create accountability. There is a Securities
Appellate Tribunal which is a three-member tribunal and is presently headed by a
former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies
directly to the Supreme Court. SEBI has enjoyed success as a regulator by pushing
systemic reforms aggressively and successively (e.g. the quick movement towards
making the markets electronic and paperless rolling settlement on T+2 basis).
SEBI has been active in setting up the regulations as required under law. SEBI has
also been instrumental in taking quick and effective steps in light of the global
meltdown and the Satyam fiasco. It had increased the extent and quantity of
disclosures to be made by Indian corporate promoters. More recently, in light of
the global meltdown, it liberalized the takeover code to facilitate investments by
removing regulatory strictures. In one such move, SEBI has increased the
application limit for retail investors to Rs 2 lakh, from Rs 1 lakh at present.

The Regulator

The Indian economy was liberalized in 1991. In order to achieve the

full potential of liberalization and enable the Indian stock market to attract huge
investments from foreign institutional investors (FIIs), it was necessary to
introduce a series of stock market reforms. SEBI's efforts to boost investments in
the capital markets faced a severe setback in 1992 when Mehta's illegal activities
led to a stock market scam. Mehta had managed to obtain huge funds from top
banks and financial institutions in India, including State Bank of India, Stanchart,
National Housing Bank, Citibank and ANZ Grindlays, to manipulate stock prices,
which rose significantly. Between September 1991 and April 1992, the BSE index
went up by 143%. However, when the prices crashed, several small investors lost
their hard-earned money. The amount involved in this crisis was approximately
Rs.54 bn. SEBI's inefficiency in regulating the markets was brought to light for the
first time. A journalist commented, “Harshad Mehta in 1992 had caught the SEBI
napping

The Reformer

In spite of the setbacks faced by SEBI, it continued its efforts to introduce

more capital market reforms in India, making the markets an attractive investment
destination for FIIs. According to SEBI, a significant increase was witnessed in the
volume and amount of stock transactions done on BSE and NSE. In the fiscal
1993-94, the average amount of total transactions per day was valued at Rs 8 bn,
which had increased ten fold to Rs. 80 bn in 1998-99...

The Crash

SEBI's role as a regulator of Indian capital markets was once again

questioned on March 02, 2001, when the BSE index crashed by 176 points. This
was the result of the large position taken by a stockbroker - Ketan Parikh (KP) in
ten stocks, popularly known as K10. The companies in which KP held high equity
stakes included Amitabh Bachchan Corporation Limited, Mukta Arts, Tips, Pritish
Nandy Communications, HFCL, Global Telesystems, Zee Telefilms, Crest
Communications and PentaMedia Graphics. He had huge exposures in these
stocks, which required a lot of money. Reportedly, KPborrowed from various
companies and banks for this purpose

Restoring InvestorConfidence

In a poll conducted in early 2002 by Equity Master, an equity research

company in India, over 90% of the respondents believed that the regulatory
environment was not sufficient to protect the rights of retail investors in India.
Bajpai realized that SEBI had to change this belief of retail investors. He said,
“Restoring the confidence of retail investors in the market will be an important task
of SEBI." Bajpai decided to achieve this objective by focusing on investor
education, corporate governance, transparency and enforcement of regulations
Abstract. The case discusses the role played by the Securities and Exchange Board
of India (SEBI) as a regulator of Indian capital markets. The case discusses in
depth the capital market reforms initiated by SEBI. In spite of these reforms and
increasing regulatory powers over the years, SEBI has been largely unsuccessful in
controlling capital market scams. The case examines the strengths and weaknesses
of SEBI as a regulatory organization. It describes the recent initiatives by SEBI to
promote investor education and corporate governance, transparency and abidance
of regulations among corporates.

Issues

Examine the roles and responsibilities of a capital market regulator»

Understand the capital market reforms initiated by a regulatory authority and their
benefits to the retail investors» A Identify the loopholes in the financial system that
allows capital market scams to happen and suggest a suitable course of action to
avoid them» Appreciate the complexity of a growing market like China » Discuss
the future of Indian capital market and the role of SEBI » Appreciate the
complexity of a growing market like China » Discuss the future of Indian capital
market and the role of SEBI.

SEBI also undertakes the important tasks like avoid insider trading and
increase transparency in trading to encourage small investors to invest in equities.
Insider means any person who, is or was connected with the company or is deemed
to have been connected with the company, and who is reasonably expected to have
access to unpublished price sensitive information relating to securities of a
company. The insiders are people such as a directors and an officers or an
employees of the company or hold a position involving a professional or business
relationship between themselves and the company whether temporary or
permanent. Price sensitive information means any information which relates
directly or indirectly to a company and which if published is likely to materially
affect the price of securities of that company. The price sensitive information
includes periodical financial results of a company, intended declaration of
dividends, Issue of securities or buy-back of securities, any major expansion,
amalgamation, mergers and takeover plans, disposal of the whole or substantial
part of the undertaking and any significant changes in policies, plans or operations
of a company.

India is the one of the fastest growing economies of the world. The
number of listed companies in the Bombay Stock Exchange has risen from 4,344
in 1985 to 5,133 at end of March 2012. The market capitalization of these
companies was around 74 per cent of India’s GDP at end of March 2012 (SEBI,
2012). It would be interesting to examine the magnitude of EM existing among
firms in the private corporate sector in India as well as in the companies/industries
where it is preponderant. This would provide valuable insights to regulators like
the Securities and Exchange Board of India (SEBI) about the adequacy or changes
in regulation required so that investors (especially unsophisticated investors) can
make the best possible conclusions from financial statements.

Hypothesis

The SEBI can ensure a free and fair market and take India into
league of major global capital markets in the next round of reforms. To enable this,
it has to thoroughly review its structure and functioning. The SEBI has to balance
between the costs of regulation and market developmentThe history of the capital
market in India dates back to the 18th century when East India company securities
were traded in the country. It has been a long journey for the Indian capital market.
Now the capital market is organized, fairly integrated, mature, more global and
modernised. The Indian equity market is one of the best in the world in terms of
technology as well as value- cumvolume of business.
 On 31stAugust, 2010 our Indian equity stocks total market
capitalization value was around Rs.70, 00,000 crores. In recent period drastic
changes has been taken place by SEBI, as a regulator. These are Retail equity
investor limit increased to Rs.2 lakhs from 1 lakh, reduction issue-listing period to
12 days, opening of pre-market auction sessions, increase of stock exchanges
trading time,, improvement price-discovery mechanism, introduction of ASBA in
IPOs, application of smart-technology to trading and allowing of Anchor-investors
in IPOs.etc., Moreover, the fundamental infrastructure for regulation, disclosure,
surveillance and trading are all in place. Hence, the SEBI should stop being pre-
occupied with day-to-day regulations and become more of a visionary