Capital Market Regulation

In India, Securities and Exchange Board of India (SEBI) is the chief regulatory authority for the capital markets. Additionally, the Ministry of Finance, RBI, and other bodies play roles for specific aspects.

Securities and Exchange Board of India (SEBI) – The Apex Regulator

SEBI was established in 1988 (initially as a non-statutory body) and given statutory powers through the SEBI Act, 1992. It was created in response to malpractices in the securities markets and a need for an authority to regulate and develop these markets. SEBI’s mandate is protecting the interests of investors in securities, promoting the development of the securities market, and regulating it – for matters connected therewith.

Powers

Under the SEBI Act, SEBI has powers to:

• Regulate and approve by-laws of stock exchanges.
• Regulate the business of stock exchanges and other securities market intermediaries.
• Register and regulate the working of intermediaries like brokers, sub-brokers, merchant bankers, registrars, foreign portfolio investors, mutual funds, etc.
• Levy fees or other charges for carrying out its functions.
• Conduct inspections, audits, and inquiries of intermediaries and exchanges.
• Make and enforce regulations on a wide range of market activities.
• Pass orders like suspending trading of securities, restraining persons from accessing market, imposing monetary penalties, and in cases of fraud or insider trading, it can even bar individuals or companies from markets or impose disgorgement (return of ill-gotten gains).

Structure

SEBI is headquartered in Mumbai. It’s governed by a board comprising a Chairman (appointed by GOI) and several members (one from RBI, two from Ministry of Finance/GOI, and others appointed by GOI). It has various departments for specialized functions (like Market Regulation, Corporation Finance for IPOs, Enforcement, Legal, Economic and Policy Analysis, Commodities, etc.). SEBI has regional offices as well.

Important Functions and Regulations:

• Primary Market: SEBI regulates IPOs and new issue processes (through guidelines like ICDR – Issue of Capital and Disclosure Requirements). It ensures companies disclose sufficient information, have minimum promoter contribution and lock-in, and follow fair allotment processes. It also introduced the ASBA system for IPOs to make it efficient.
• Secondary Market: Regulates stock exchanges and trading. SEBI mandates things like margin requirements, circuit breakers (it introduced index-based circuit breakers after 2001 for overall market volatility control), trading rules, settlement cycles (moving to T+2 then T+1), etc. It also has regulations to curb insider trading (SEBI (Prohibition of Insider Trading) Regulations) and fraudulent and unfair trade practices (PFUTP regulations).
• Intermediaries: Each class of intermediary has SEBI regulations: e.g., SEBI (Stock Brokers) Regulations, (Merchant Bankers) Regulations, (Mutual Funds) Regulations, etc. SEBI grants licenses, prescribes net worth, qualification, codes of conduct, etc., and can suspend or cancel registration if rules are violated.
• Mutual Funds: SEBI made detailed MF Regulations 1996 – covering how funds can be structured, their obligations to investors, investment restrictions (like no more than certain % in one company, etc.), disclosure of NAVs, etc. It also pushed reforms like all mutual funds must provide an option of direct plan with lower expense.
• Corporate Governance: SEBI enforces corporate governance norms for listed companies. Clause 49 of listing agreement (now embodied in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 – LODR). This covers things like composition of Board (half should be independent directors in certain cases), formation of audit committees, disclosure of related party transactions, etc. It has also mandated CEO/CFO certification of accounts, expanded responsibilities of auditors through regulations, etc.
• Takeover Code: SEBI’s Takeover Regulations require that if an entity acquires beyond a threshold (25% of voting rights or control) in a listed company, they must make an open offer to minority shareholders to give them an exit opportunity at a fair price. This ensures fairness in case of change of control.
• Buyback and Delisting: SEBI regulates buyback of shares (ensuring it’s done equitably) and delisting process (to protect investors when a company wants to go private).
• Investor Education and Protection: SEBI maintains an IEPF (Investor Education and Protection Fund) funded by fines and penalties, used for educating investors. SEBI conducts awareness workshops and has a toll-free helpline. It also took initiatives like simplifying account opening (KYC) and mandating Key Information Memorandum for mutual funds, etc., to help investors make informed decisions.
• Grievance Redressal: SEBI runs SCORES (SEBI Complaints Redress System), an online portal where investors can lodge complaints against listed companies or intermediaries. SEBI monitors and pushes for resolution.
• Surveillance and Enforcement: SEBI, along with exchanges, monitors trading for suspicious activity (insider trading, price manipulation like circular trading, pump-and-dump schemes in small stocks, etc.). It passes orders against wrongdoers with punishments (monetary penalties, market bans). Post major scams (e.g., Harshad Mehta 1992, Ketan Parekh 2001, etc.), SEBI greatly tightened systems – like requiring all trading to be on exchange (no more unofficial forward trading), implementing T+2 rolling settlement (versus earlier account period settlement that allowed games), and ban of cash flows like third-party cheque in public issues (to avoid benami).
• SEBI and Commodity Markets: Since merging with FMC, SEBI also oversees commodity derivatives. It introduced new regulations like commodity position limits, allowed new products (options in commodities), and took action in cases like the NSEL payment crisis (though NSEL was under govt exemption, SEBI later tightened norms for commodity spot exchanges and brokers).

Other Regulatory Aspects and Bodies

• Ministry of Finance (DEA – Dept of Economic Affairs, Capital Markets Division): They make broad policy decisions, like FDI policy, deciding when to open new segments (like allowing new exchanges, merging regulators). SEBI being autonomous still coordinates with MoF on major policy changes. The DEA’s Capital Markets Division handles legislation (like amendments to SCRA, SEBI Act), institutional reforms, etc.
• RBI (Reserve Bank of India): RBI regulates money markets and some parts of debt markets (especially government securities and interest rate/currency derivatives). While corporate bonds and stock markets are SEBI domain, RBI’s role in overall financial stability means it monitors capital flows (like FPI debt limits, ECB policy). RBI also co-regulates certain entities (e.g., Merchant bankers if they are banks, banks also come under RBI’s prudential norms for their broking subsidiaries).
• Stock Exchanges and Clearing Corporations: They also act as front-line regulators for trading members. For example, exchanges watch members for compliance, and have rules to suspend a broker for violations. But they operate under SEBI’s gaze.
• Depository oversight: Depositories (NSDL, CDSL) are regulated by SEBI. For example, after a scam (like the IPO demat scam of 2006 where multiple demat accounts were used), SEBI tightened KYC and depository oversight.
• Securities Appellate Tribunal (SAT): If any entity or person is aggrieved by a SEBI order, they can appeal to SAT, which is a specialized tribunal. SAT can uphold, overturn, or modify SEBI’s orders. Further appeal from SAT goes to Supreme Court.
• Company Law & Ministry of Corporate Affairs (MCA): Overlaps with SEBI in corporate governance. The Companies Act, 2013 has provisions on public offers, prospectus, fraud, etc., which MCA can enforce. Serious Fraud Investigation office (SFIO) under MCA may probe corporate frauds. But SEBI specifically handles those related to securities.

Investor Protection through Law

The legal framework includes:

• Securities Contracts (Regulation) Act, 1956 (SCRA): Provides framework for stock exchanges, declares what is a security, gives government/SEBI power to recognize or derecognize exchanges.
• SEBI Act, 1992: Constitutes SEBI and defines its powers.
• Depositories Act, 1996: Enabled electronic maintenance and transfer of ownership of securities.
• Companies Act, 2013: Contains provisions like Section 24 which says matters related to issue and transfer of securities and non-payment of dividend are administered by SEBI for listed or to-be-listed companies. It also covers punishment for fraud (section 447), etc.
• FEMA, 1999: RBI’s domain, but relevant for foreign investor rules.

Market Development

A regulator also has mandate to develop the market. SEBI has taken initiatives like allowing new instruments (e.g., Real Estate Investment Trusts (REITs) and Infrastructure InvITs regulations in 2014, Innovators Growth Platform for startups listing, etc.), improving market infrastructure (like promoting electronic trading in corporate bonds via exchanges), and implementing global best practices (like IFRS accounting convergence, etc.).

Some Landmark Regulatory Changes/Reforms

• 1992: Post Harshad Mehta scam, SEBI got teeth; introduced disclosure-based regulation instead of control of issue prices by Controller of Capital Issues.
• Late 90s: Introduction of IPO book building, rolling settlement (1998 on optional basis, compulsory in 2001), ban on badla (an unofficial carry forward mechanism) replaced by formal futures & options (equity derivatives started in 2000).
• Early 2000s: Enforcement of corporate governance via Clause 49, creation of SAT, tightening insider trading rules (1992 regs replaced in 2015 by a stronger prohibition of insider trading regulation).
• 2005: Banning of entry load on mutual funds (later in 2009 entry loads removed; to protect investors from being mis-sold high commission products).
• 2010: Takeover code updated to increase open offer trigger from 15% to 25% and offer size from 20% to max possible (so if you buy 26%, you must offer to buy additional 26% from public, could take you to 52% if fully tendered).
• 2015: Merger of FMC with SEBI after commodities issues. LODR Regs introduced consolidating listing obligations. New norms for insider trading and research analysts.
• 2020s: Implementation of T+1, new margin pledge system for client securities (to stop broker misuse after Karvy episode), tighter regulations for investment advisers to avoid conflict, and more.

Role of Courts and Enforcement Agencies

In big security frauds, SEBI coordinates with police/Central Bureau of Investigation (CBI) or Enforcement Directorate (for money laundering angle). For example, in Sahara case (raising money via OFCDs deemed illegal), SAT and Supreme Court intervened and directed Sahara to refund money, with SEBI overseeing it. The courts generally back SEBI’s investor protection role.