Understand what is Securities and Exchange Board of India: Hello, fellow investors and welcome to FinGrad. Have you ever read news reports where publicly listed companies make headlines for falsifying their financial statements? Or have you come across articles where certain traders were involved and prosecuted for insider trading?
If you look closely at these reports and articles, you will observe that there is one common denominator – SEBI i.e., the Securities and Exchange Board of India. Some of the biggest scams in India have revolved around the capital markets and exchanges. It is for this reason that SEBI is known as the watchdog of the Indian stock market which we will cover in detail below.
You can read our take on the recent NSE Scandal on Trade Brains. When such instances become public knowledge, the opinion and beliefs of the markets and listed companies shifts towards the negative. This in turn creates a downward spiral in the market.
Retail investors lose trust in the exchanges and shift towards conservative forms of investments. To protect investors, and to avoid the emergence of irregularities in the stock exchanges in India, a regulatory body was introduced. This regulatory body is SEBI.
What is SEBI?
SEBI is a regulatory body established by the Government of India on April 12th, 1992. Its headquarters is located at the Bandra-Kurla Complex, Mumbai. The purpose of SEBI is to protect the interests of investors in the capital market and promote securities exchanges in the country.
This would include market regulation, fraud investigation and monitoring of exchanges. By regulating the market, it makes the exchanges fair and transparent to investors, large and small.
Structure of Securities and Exchange Board of India (SEBI)
SEBI’s corporate structure consists of 9 Head Officers –
- The Chairman gets nominated by the Union Government of India.
- Two members of the Finance Ministry of India.
- One Member belonging to the RBI.
- Five Members nominated by the Union Government of India.
Powers of Securities and Exchange Board of India (SEBI)
- By regulating the market, they create a safe environment for investors and their funds.
- Overlook and regulate the business operations of the stock market.
- Monitor and observe the inner workings of BSE and NSE.
- Promoting investors‘ education and training of intermediaries of securities markets.
- Monitor acquisitions and take-overs by companies.
- Protect investors from fraudulent activities and illegal trade practices within the exchanges.
- Serve as a mediary platform for brokers, investment advisors, mutual fund companies, and merchant bankers.
- Prohibit market manipulation and insider trading of securities.
- Impose penalties on an individual(s) for illegal activities including and not limited to unfair trade practices, insider trading, and non-disclosure of information.
Functions of Securities and Exchange Board of India (SEBI)
1. Quasi-Legislative: It drafts regulations in its legislative capacity.
SEBI has the power to formulate suitable rules and regulations to protect the interests of investors. This includes trading regulations, documentation and other obligatory documents. The purpose of this function is to limit the possibility of market manipulation and fraudulent practices.
2. Quasi-Executive: It conducts investigation and enforcement action. SEBI has the authority to examine the accounting books and related documents to investigate any potential violations.
3. Quasi-Judicial: It has the authority to pass judgments in cases pertaining to fraud and unethical practices.
While SEBI has the above-mentioned powers, the decisions made by them must first be passed through the Supreme Court of India and the Securities Appellate Tribunal.
SEBI also decides the guidelines to be followed by mutual fund and asset management companies. All mutual funds in India must be registered under the Trusts Act, 1882.
By sheer scale and volume, India is one of the largest markets for securities in the world, with tens of thousands of crores of rupees involved. A majority of investors are not privy to company information to protect themselves against securities frauds and manipulation.
These investors have to be protected and regulated to prevent corporate crimes and illegal trading practices. India presently has two listed exchanges – NSE and BSE. Both are enormous in terms of trading volume and indices.
Both need to be regulated and monitored to safeguard the securities markets as well as their investors. SEBI’s role is imperative in maintaining the stability of the securities market and preventing the listing of fraudulent companies and potential threats to the general public.
These threats could be domestic or international. Both have a severe impact on the stability of the capital markets and the economy of the country. When gigantic scams make headlines, investors lose immense funds and potentially go bankrupt.
On the other hand, the public loses trust in the capital market, and subsequently listed companies bear the brunt of the fallout. This makes SEBI’s existence all the more important!
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