REGULATION OF STOCK MARKETS – ECONOMY
News: How
is the stock market regulated in India?
What's in the news?
● The
Supreme Court asked the Securities and Exchange Board of India (SEBI) and the
government to produce the existing regulatory framework in place to protect
investors from share market volatility.
Laws Governing the Security Markets:
● The
securities market in India is regulated by four
key laws such as
○ 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.
SEBI:
● The
SEBI Act empowers SEBI to protect the interests of investors and to promote the
development of the capital/securities market, besides regulating it.
Powers of SEBI:
1. Register Functionaries:
● SEBI
was given the power to register
intermediaries like stock brokers, merchant bankers, portfolio managers and
regulate their functioning by prescribing eligibility criteria, conditions to
carry on activities and periodic inspections.
2. Recognize Stock Exchanges:
● The
SCRA empowers SEBI to recognize (and derecognize) stock exchanges, prescribe rules and bye laws for their
functioning, and regulate trading, clearing and settlement on stock exchanges.
3. Regulates Depositories:
● The
depository regulations empower SEBI to regulate functioning of depositories and
depository participants by prescribing
eligibility conditions, periodic inspections and powers to impose penalties
including suspending or canceling the registration as well as monetary
penalties.
4. Set up Infrastructure:
● SEBI
set up the infrastructure for doing this by registering depositories and
depository participants.
5. Held in Electronic forms:
● As
part of the development of the securities market, Parliament passed the
Depositories Act and SEBI made regulations to enforce the provisions. This Act
introduced and legitimized the concept of dematerialized securities being held
in an electronic form.
6. Impose Penalties:
● It
also has the power to impose penalties such as monetary penalties, including
suspending or cancelling the registration.
7. SEBI's role in curbing market volatility:
● SEBI
can issue directions to those who
are associated with the market, and has powers to regulate trading and
settlement on stock exchanges.
● Using
these powers, SEBI can direct stock
exchanges to stop trading, totally or selectively.
● It
can also prohibit entities or persons
from buying, selling or dealing in securities, from raising funds from the
market and being associated with intermediaries or listed companies.
8. Regulations and Guidelines on fund-raising:
● The
Companies Act, which regulates
companies incorporated/registered in India, has delegated the authority to
enforce some of its provisions to SEBI, including the regulation of raising
capital, corporate governance norms such as periodic disclosures, board
composition, oversight management and resolution of investor grievances.
● In
order to regulate fund-raising activities, SEBI first brought out a set of
guidelines called the Disclosure and
Investor Protection Guidelines which were thereafter subsumed into a more
comprehensive issue of Capital and
Disclosure Requirement Regulations.
● In
order to ensure that listed companies follow corporate governance norms, SEBI
notified the Listing Obligations and
Disclosure Requirements Regulations in 2015.
● Besides
these regulations, the Collective
Investment Regulations define a CIS (collective investment scheme) and
provide for penal actions against those running unregistered CIS schemes.
● Entities
involved in fund-raising through issues of capital such as merchant bankers are
also regulated through specific regulations.
9. Regulating stock exchanges:
● The
SCRA has empowered SEBI to recognize
and regulate stock exchanges and later commodity exchanges in India, this was
earlier done by the Union government.
● In
fact, the term "securities" is defined in the SCRA and powers to
declare an instrument as a security remain vested in SEBI.
● The
rules and regulations made by SEBI under the SCRA relate to listing of securities like equity shares,
the functioning of stock exchanges including control over their management and
administration.
● These
include powers to determine the manner in which a settlement is done on stock
exchanges (and to keep them with the times for eg. T+1) and recognizing and nulating 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
arbitrating disputes that arise between stock brokers who trade on stock exchanges
and investors who are clients of such stock brokers.
● The
Act also seeks to protect the interests of investors by creating an Investor
Protection Fund for each stock exchange.
10. Safeguards against fraud:
● SEBI
notified the Prohibition of Fraudulent
and Unfair Trade Practices Regulations in 1995 and the Prohibition of Insider Trading Regulations 1992 to prevent the two
key forms of fraud such as market manipulation and insider trading.
11. Power of Civil Courts:
● SEBI
has been given powers of a civil court to summon
persons, seize documents and records, attach bank accounts and property and
to carry out investigations.
● Using
these powers, SEBI has acted against entities and individuals like Satyam,
Salsara India, Ketan Parekh and Vijay Mallya.
12. Protecting Public Shareholders:
● SEBI
has notified the Substantial Acquisition
of Shares and Takeovers Regulations to ensure that acquisitions and change
of management are done only after giving an opportunity to public shareholders
to exit the company if they want to.
● SEBI
ensures protection of investors interests by regulating the listing and trading
of equity shares and other securities, and by registering and regulating
institutions handling public hands.
Appellate Mechanism:
● Appeals
against orders of SEBI and the stock exchanges can be made to the Securities Appellate Tribunal (SAT)
comprising three members.
● Appeals
from the SAT can be made to the Supreme Court.