The securities market in India is governed by four major laws – the Companies Act, 2013, the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Depositories Act, 1996. File | Photo Credit: Reuters
the story So Far: on 10 February The Supreme Court asked the Securities and Exchange Board of India (SEBI) and the government Building on the existing regulatory framework to protect investors from stock market volatility. after the short seller Hindenburg Research published a report in January Adani Group accused of rigging and accounting fraud in the stock marketIts stocks fell And there is news of investors losing lakhs of crores of rupees.
What are the laws governing the market?
The securities market in India is regulated by four major laws – the Companies Act, 2013, the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Depositories Act, 1996. The formulation of laws reflect the growth and development of the capital market in India.
The SEBI Act empowers SEBI to promote the development of the capital/securities market besides regulating it and protecting the interests of the investors. SEBI was given the power to register intermediaries such as stock brokers, merchant bankers, portfolio managers and regulate their functioning by prescribing eligibility criteria, conditions for carrying out activities and periodic inspection. It also has the power to impose penalties such as monetary penalties including suspension or cancellation of registration. The SCRA empowers SEBI to recognize (and devalidate) stock exchanges, lay down rules and bye-laws for their functioning, and regulate trading, clearing and settlement on stock exchanges. As part of the development of the securities market, Parliament passed the Depositories Act and SEBI made rules to implement the provisions. The Act introduced and legalized the concept of dematerialized securities held in electronic form. Today almost all listed securities are held in dematerialized form. SEBI created the infrastructure to do this by registering depositories and depository participants. The Depository Rules empower SEBI to regulate the functioning of depositories and depository participants by prescribing qualification conditions, periodic inspections and powers to suspend or cancel registration as well as impose penalties including monetary penalties.
Can SEBI step in to curb market volatility?
While SEBI does not intervene to curb market volatility, exchanges have circuit filters – upper and lower – to prevent excessive volatility. But SEBI can issue directions to persons who are connected with the market and have the power to regulate trading and settlement on stock exchanges. Using these powers, SEBI can direct stock exchanges to cease trading either completely or selectively. It may also prohibit entities or individuals from buying, selling or dealing in securities, raising funds from the market and being linked to intermediaries or listed companies.
What are the guidelines for fund raising?
The Companies Act, which regulates companies incorporated/registered in India, has empowered SEBI to enforce some of its provisions, including regulation of capital raising, corporate governance norms such as periodic disclosure, board composition, oversight, management and investor relations. resolution is included. Complaints. To regulate fundraising activities, SEBI first brought out a set of guidelines called Disclosure and Investor Protection Guidelines, which were later subsumed into a more comprehensive issue of Capital and Disclosure Requirements Regulations. To ensure that listed companies comply with corporate governance norms, SEBI notified the Listing Obligations and Disclosure Requirements Regulations in 2015.
In addition to these rules, the Collective Investment Regulations define a CIS (Collective Investment Scheme) and provide for penal action against those running unregistered CIS schemes. Entities involved in raising funds through the issue of capital, such as merchant bankers, are also regulated through specific regulations.
What about stock exchanges?
SCRA empowered SEBI to recognize and regulate stock exchanges and later commodity exchanges in India; This was earlier done by the central government. In fact, the term “securities” has been defined in the SCRA and the powers to declare an instrument as a security are vested in SEBI. The rules and regulations made by SEBI under the SCRA relate to the functioning of stock exchanges including control over the listing of securities such as equity shares, their management and administration. These include powers to set settlement methods on stock exchanges (and to keep them in line with times such as T+1) and to recognize and regulate clearing corporations, which are central to the management of the trading system.
An important aspect of the regulation of stock exchanges is also the provision for arbitration of disputes arising between stock brokers trading on stock exchanges and investors who are clients of such stock brokers. The Act seeks to protect the interests of investors by creating an Investor Protection Fund for each stock exchange.
What are the safeguards against fraud?
Fraud undermines regulation and prevents the market from being fair and transparent. SEBI notified the Prohibition of Fraud and Unfair Trade Practices Regulations in 1995 and the Prohibition of Insider Trading Regulations in 1992 to prevent fraud, market manipulation and two major forms of insider trading. These Rules, read with the provisions of the SEBI Act, define the species of fraud an insider is and prohibit such fraudulent activity and provide for penalties including forfeiture of wrongfully earned profits. It is to be noted that contravention of these rules are predicate offenses which may be treated as contravention of the Prevention of Money Laundering Act. SEBI has been given the powers of a civil court to summon persons, seize documents and records, attach bank accounts and property, and conduct investigations. Using these powers, SEBI has taken action against entities and individuals such as Satyam, Sahara India, Ketan Parekh and Vijay Mallya.
Corporate activities include acquisitions of other companies, mergers and buybacks of shares; SEBI has notified Substantial Takeover of Shares and Takeover Regulations to ensure that takeover and change in management is done only after giving public shareholders an opportunity to exit the company. Investors’ funds consist of a portfolio of securities. SEBI ensures the protection of the interests of investors by regulating the listing and trading of equity shares and other securities and by registering and regulating institutions handling public funds. Orders of SEBI and stock exchanges can be appealed to the three-member Securities Appellate Tribunal (SAT). The SAT can be appealed to the Supreme Court.
The writer is a securities lawyer based in Mumbai.