How does The Securities and Exchange Board of India (SEBI) regulate the stock market?
The Securities and Exchange Board of India referred to as SEBI, is the main regulatory body for looking into a smooth functioning of the securities market in India. It was established on 12th April, 1988, by passing a resolution by the government.
SEBI is run by the board of members. The Board of members has several part-time and full-time members with a Chairman. The chairman of SEBI is nominated by the Central Government. The other members include two from the finance ministry, one member from the Reserve Bank of India and the other five members are nominated by the Central Government.
The headquarter of SEBI is located in Mumbai. However, its regional offices are situated in Ahmedabad, Chennai, Kolkata, and Delhi.
History of SEBI
Earlier, the Controller of Capital Issues was the regulating authority in India. When SEBI was formed in the year 1988, it was a non-statutory body working for the regulation of the Indian capital market. But after the scam of Harshad Mehta in the year 1992, SEBI got statutory and regulatory power in India.
Functions of SEBI
• SEBI regulates the activities of stock exchanges.
• It protects the rights of all the shareholders and ensures the security of their investment.
• SEBI keeps a check on the market to guarantee that there is no fraud.
• They give rules and regulations.
• One of the most important functions is that SEBI has provided a marketplace for investors to increase their finances
• It ensures that accurate information is shared
• SEBI controls the stockbrokers, agents, etc.
• It gives education as well, regarding the market, to enhance and make the public aware about the securities market.
How does SEBI regulate the stock market?
For regulation of Stocks and Securities, SEBI has adopted various steps to ensure fair and smooth functioning of the market. The steps are discussed as below :
• Abolishing insider trading: The biggest loophole of the stock market was insider trading which means leaking inside information of the market. To abolish it, the SEBI regulation Act, 1992 was introduced to ensure honesty in the market.
• Deciding Premium and Share Prices: All listed Indian companies have a chance to determine premium and share prices but SEBI ensures that it is applied equally to everybody without any bias.
• Control on Mutual funds: In the year 1993, SEBI announced the SEBI Mutual Fund Regulations Act which gave the power to take over the direct control of mutual funds of both the private sector and government. As per the act, any company who wants to float a mutual fund should mandatorily have net assets of INR 5 crores and a contribution of a promoter of at least 40%.
• Foreign Institutional investors known as FII needs to be registered with SEBI before entering the Indian capital market.
• SEBI has fixed the minimum asset limit of INR 20 lakhs for working as an underwriter. It holds the power to cancel their registration as well, if something irregular is found.
These are some major steps and decisions taken by SEBI to regulate honest, fair, and transparent exchange in the market.
Powers of SEBI
• To keep a check on accounts and records of recognized stock exchanges;
• SEBI can call for periodical records as well;
• To ensure fair regulation and approval of by laws of the stock exchange;
• Compel companies to be listed;
• SEBI can delist companies too if it finds something unusual.
Mutual Fund and SEBI
Asset Management Company (AMC) manages mutual funds which have to be approved by SEBI. A registered custodian with SEBI holds the securities.
The trustees of AMC look after the performance of Mutual funds and ensure that it works according to regulations of SEBI.
SEBI has also laid down a few guidelines and policies for mutual funds to protect the rights and interests of investors.
Guidelines have helped in bringing uniformity in the working of mutual funds. For the same, SEBI has categorized mutual funds into five broad categories :
• Debt schemes
• Equity schemes
• Hybrid schemes
• Solution-oriented schemes
• Other schemes
Some other guidelines of SEBI regarding Mutual funds are as follows :
• Specified lock-in period for solution-oriented schemes;
• Except for Index funds, exchange-traded funds, and Thematic funds, only one scheme in each category is allowed.
SEBI plays a very significant role in the functioning of the Indian Capital Market. With time, it has made various amendments to ensure a smooth and honest stock exchange. One of the biggest agendas of SEBI is to balance day to day stock exchange.
As a statutory body, SEBI has ensured that the market works without any fraud or loopholes.
After understanding the functioning and powers of SEBI, we can conclude that SEBI is playing a major part in regulating the stock market.
A Statutory body, Securities Appellate Tribunal, has been established under section 15k of Securities and Exchange Board of India Act, 1992, to hear appeals against SEBI, Pension Fund Regulatory and Development Authority known as PFRDA, and Insurance Regulatory Development Authority of India known as IRDAI.
But as an investor, you need to understand the mechanism of the stock market. You should deal with the companies or brokers registered with SEBI.