SEBI: An Overview

SEBI: An Overview

An Overview Of SEBI
The Securities and Exchange Board of India (SEBI) plays an instrumental role in regulating the securities market in India. SEBI was established in 1988 but was given statutory recognition on 30 January 1992 through SEBI Act 1992. SEBI has its headquarters at different part of the Country. Before 1992 there was no such legal statute which was binding upon the securities market. There were different regional stock exchanges like Calcutta Stock Exchange, Bombay Stock Exchange In order to facilitate better regulation of the securities market SEBI Act was passed. The act provides us with different purposes like:
To protect the interest of the investors investing in such markets. Generally, the people investing in such market lacked technical knowledge, which was required so it also wanted to educate such investors so that their knowledge about the market gets enhanced. 
To stop malpractices like Insider Trading, Price Ragging etc. Though such practices are often done by some people but it has its impact upon large group of investors. SEBI imposes heavy penalty on such people. So that such practices could not be practice in future.
To promote the development of, and also regulating the securities market and for matters connected therewith or incidental thereto. This is one of the most important purpose for which the Act provides for. The capital economy is one of the vital tools of the Indian Economy, so it should be regulated in an efficient and smooth manner. 
An Act without Management or without proper implementation is useless. Therefore, for better implementation of the Act a board has been established. Section 4 of the SEBI Act provides for the management of securities and exchange board of India. It states that SEBI shall consist of the following members - namely a Chairman, 2 members amongst the officials of the Ministry of Central Government dealing with Finance and Administration of the Companies Act, 2013, 1 member from amongst the officials of the Reserve Bank, 5 other members of whom at least 3 shall be whole time members, to be apportioned by Central Government.
The Chairman and the other members of the board shall be persons of ability, integrity, and standing who have also shown some capacity on dealing with the problems relating to the securities market or have special knowledge or experience of Law, finance, economics, accountancy or in any other discipline which, in the opinion of the CG, shall be useful to the SEBI. Section 7 provides for the meetings of the board, that how the meeting shall be conducted.

Powers of SEBI
SEBI is vested with the powers of civil court in respect of discovery and production of books, documents, records, accounts, summoning and enforcing the attendance of persons company and examine them on oath. SEBI may take the following measures in the interest of investors or securities market: 
  1. Suspends the trading of any security in stock exchange.
  2. Retain or prohibit any person from accessing the market.
  3. Suspend any officer of stock exchange.
  4. SEBI can levy fines for violation relating to failure to submit information to SEBI. 
Securities Appellate Tribunal
Establishment of SAT the Central Government may by notification establish one or more appellate tribunal which is known as SAT. Tribunal shall consists of one presiding officer, and two other members both theses members shall be appointed by central government. For the purpose of discharging the function SEBI Act, the SAT shall also have the same powers as vested upon civil courts. The main function of SAT is to adjudicate matters related to SEBI and pass orders related to it. Any person aggrieved by decision of the SAT may file an appeal to the Supreme Court of India, it should be noted that an appeal can only be made on point of Law, not on point of fact. appeal shall be filled within 60 days from receiving the order of SAT.
In Sterlite Industries v. Union of India:  It was held in this case that SEBI has wide and discretionary powers to regulate the securities market and protect the interest of the investor.
In Dalmia Securities v. G.S. Reddy: It was held in this case SEBI can put some restrictions and conditions registration or renewal. However, such conditions must be fair, reasonable and abide the principle of natural justice as SEBI is a Public Authority.

The Change in the Method after SEBI
The law pertaining to trading and regulating of Securities and exchange market in India was passed in the year 1992 but the concept of trading in securities was much before that earlier there were different regional stock exchanges in India like Bombay stock exchange Calcutta stock exchange Madhya Pradesh Stock Exchange etc. Following the recommendations of A.D. Gorwala Committee the Securities Contracts (Regulation) Act, 1956 was passed to provide for direct and indirect control of virtuality in all aspects of Securities trading and running of stock exchanges and to prevent fraudulent transactions. Different companies were listed in such regional stock exchanges and people used to trade in such different commodities and securities listed in such talks stock exchanges.
The main change which has occurred in the trading of the stock exchanges was in the method prior to 1992. The physical share concept was there the investors used to gather in such regional stock exchanges and followed the Public Outcry method which was a primitive method. Actually, the e shares concept was introduced by Depositories Act Of 1996 the primitive method was replaced by the method of Online Trading of shares and securities which resulted into nonfunctional of many regional stock exchanges. This is a classic example of technical obsolescence but the Bombay Stock Exchange moved with the time and followed the method of online trading of shares and securities and has evolved as one the recognized stock exchange.
National Stock Exchange is also a recognized stock exchange of India. Both these stock exchanges have their own software NSE uses the software named National Exchange Automated Trading and BSE uses BOLT BSE Online Trading. Earlier trading in securities didn’t have much options but concept of online trading has provided for various options to the investors. This method was also appreciated by Companies because it was more convenient to them and also helped in expanding the horizons of their business. 

Role of Securities and Exchange Board Of India 
The Securities and Exchange Board of India plays a very dynamic role it has to perform different roles at different time. With the advent of time Securities Market of India is growing as the market is growing misconducts are also growing like insider trading, delivery of share lately, price ragging and violation of statutes. However, in order to promote the efficient working of the market and to protect the interest of the shareholders SEBI plays an active role.

Protective Role
SEBI constantly keeps a check upon the insiders who buy securities of the company. Insider Trading is also prohibited by the Companies Act, 2013. Insider trading States that no person shall do Act of counselling about procuring or communicating directly or indirect any non-public price sensitive information to any person as defined under Section 195 of the Companies Act. Now, if a person contravenes such provision, he shall be punishable. In order to be stricter and to stop such unfair practice SEBI has its own regulation named SEBI (Insider Trading) Regulation, 1992. Strict punishment is provided by SEBI in such cases, further chapter 4A of the SEBI act provides for that Section 15(G)(1) if an insider either on its own or on behalf of any person has dealt on the behalf on the company has published any information he may be fined or charged with Rs.25 crores or three times the profit made whichever is higher. Section 15(G)(11) if an insider has given any price sensitive information then he may be fined with 25 crores or 3 times the profit made. Now, according to Section 15(G)(iii) if an insider has procured any other person to deal in Securities of anybody corporate on the basis of published information then he may be fined with 25 crores or three times the profit made whichever is higher. Also, Section 11 of the SEBI act empowers the board to investigate upon the matters which looks doubtful or suspicious. Every Director at time of his appointment has to furnish the details about his shareholding in the company. Moreover, it is the duty of the director to lay down in the meetings in which they have own interest.

In the case of Dilip Pendse v. SEBI:
Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd (TFL) which was a listed company. The Managing Director of TFL ltd. was Dilip Pendse. On March 31 2001, a huge loss of Rs 79.37 crores was incurred by Nishkalpa and this was going to affect the profits of the company. This was however an unpublished price sensitive information of which Pendse was aware of. The information regarding this was published to the public on April 30, 2001. Thus, any further transaction by an insider between March 31, to April 30, 2001 would impliedly fall within the scope of Insider Trading. This information was passed by Dilip Pendse to his wife who had sold shares of TFL ltd amounting 2,90,000 in her own name as well as in the name of the Companies controlled by her father in law. 
SEBI made an investigation against Dilip Pendse and after completion of the investigation, SEBI founded and was of the opinion that Pendse has used unpublished price sensitive information and thereby avoided loss. Thereafter, he was found guilty and punished with a penalty of Rs500000 imposed on each Dilip Pendse, his wife and also Nalini Properties Limited. 
SEBI also makes attempt to prohibit unfair trade practices for example is doesn’t not allow the company to make misstatements in prospectus and raise any kind of money from the public. A prospectus needs the approval of the SEBI before hitting the market than only the concerned company can issue its prospectus. The Companies Act 2013 provides for misstatements in prospectus i.e. Section 34 which provides for criminal liability, section 35 provides for civil liability and there is also a general provision for punishment in case of fraud prescribed in section 447.
SEBI Companies (Prospectus and Allotment of Securities) Rules 2014, Rule 3 states about contains of a prospectus.
Rule 4 of the PAS Rules contains details regarding the reports to be set out in the prospectus      which contains the report by auditors with respect to profit and losses statement, and also assets and liabilities. If the company has any subsidiary company then statements in regard to those companies should also be stated. 
SEBI also takes steps to educate the investors in order to decrease the changes of fraudulent transactions. It also wants the investors before investing to carefully go through the documents of the concerned company in which they are interested.

Functioning of SEBI
It is very clear that a dynamic and efficient capital market is vital and indispensable part of nations financial infrastructure. Capital Market play an important role in providing direct finance to the corporate sectors which leads to infrastructure development. In India the capital market comprises of debt, equity shares and other derivatives, capital markets in India is growing tremendously and role played by SEBI is indispensable however there are certain problems which are there in the functioning of SEBI they are:
1. Excessive Regulations and Circulars: SEBI provides for various regulation for the effective control of capital market. Frequent amendments and alterations in such rules and regulations adversely affects the transaction which are in process. SEBI is known to issue Circulars under regulations, it is extremely difficult to keep the track of every circulars issued by the apex authority. Moreover, the interpretation of regulations and effects of the circular are also sometimes contrary. For instance, in SEBI (Mutual Fund Regulations) 1996, Regulations no 7 states that any person who holds 40% stake in the mutual fund will be deemed to be a sponsor and then he has to comply with criteria of sponsor.  However later on the circular declared 10% stake holders in any mutual funds shall also comply with the criteria of sponsor.
2. Investigation by SEBI: SEBI is empowered under Section 11 of the SEBI Act to conduct Investigation and is vested with the same power as of Civil Court.  But the process of investigation initiated by SEBI has no time limitation. There is no such provision which provides for limitation hence the investigation can be pending for any number of years. 
3. Securities Appellate Tribunal: Securities Appellate Tribunal is the adjudicating Authority and it is situated in Mumbai. Any person aggrieved by the decision of SEBI can appeal at Sat, Litigant all over the world have to travel to Mumbai to settle their disputes. In India more investor friendly measure should be adopted and proceedings are not Mumbai centric. Moreover, SEBI doesn’t have the authority to settle monetary disputes but can only impose disciplinary action.
4. Composition: SEBI is the apex authority in matters related to securities market. SEBI is a statutory regulator that has the autonomy to enact a regulatory framework to the whole country, as well as to discharge quasi-judicial functions which affects the fundamental rights of a citizen. It would be prudent that the regulator has at least one full time member who has had practical experience in the field of law. Generally, a person expert in the field of law will provide better legal framework. Generally, in every developed country like in USA the committee knows SEC also have a whole-time legal expert. 
5. Prospectus Approval: A public company in order to raise funds from the public issues prospectus a prospectus before hitting the market needs a prior approval of the SEBI and after SEBI approves it  then it reaches the office of ROC for getting subsequent approval and then only the Prospectus hits the general market and is available to public at large. Still after getting double approval from the Authorities still Company Law provides for punishment for Misstatements. There are various instances where after approval also misstatements are found in the prospectus which poses a question upon the authority of SEBI.
6. Maintaining a digest of Case Laws:  SEBI is party to all litigations where not only SEBI has passed order but also where the constitutional validity of SEBI has also been challenged. SEBI requires a comprehensive interpretation of its statues and definitions. Maintaining a digest of case law will promote uniformity and will establish some procedures which would help the smooth functioning of the authority.

Deciding the Future of SEBI: Uday Kotak Committee Report on Corporate Governance 
In order to facilitate better Corporate Governance amongst the officials who are running their respective heads in their listed firms, SEBI has constituted a panel consisting of about 21-member committee which is headed by the leading banker Mr. Uday Kotak and has entrusted upon them to submit a report within 4 months regarding the recommendations on Corporate governance. Proper Governance structure and ethical principles helps in identifying and distributing rights and responsibilities among different participants in the corporation. SEBI has identified that a proper structure of Corporate Governance is needed in a country like India as it helps in reducing the conflict of interests between the different stakeholders of the company. Corporate Governance also focus upon Disclosure and Transparency. Recommendations provided by the said committee are as follows; 
  1. Composition of the Board of Directors - The Committee recommended that there shall be 6 directors minimum on board and this recommendation shall be effective from April 1, 2019 for top 1,000 listed entities and from April 1,2020 it shall be applicable to top 2000 entities. In the listed company at least one independent director shall be a woman director and this recommendation shall be valid from April 1 2019 to top 500 listed entities and from April 1 2020 will be applicable to top 1000 listed entities. The committee also provided recommendation in connection to maximum number of directorships it has reduced the number of directorships to eight from 2019 and has further reduced it to seven from the year 2020.
  2. Role of Board Of Directors - The Chairperson of the  Company shall be a non-executive director and shall be not related to MD or CEO of the company as per definition of related party transactions, company in  which more than 40% is of public shareholding this recommendation shall be binding from April 1 2020 and shall be applicable to top 500 listed entities. Furthermore, the Committee has increased the quorum of the Board meetings. Quorum refers to the minimum number of members required to be present physically to constitute a valid meeting, quorum provided is higher of one-third or three Directors including one independent director. It shall be applicable from 1 April 2019 to top 1000 listed entities. There shall also be disclosure about the expertise/ skills of the director. 
  3. Role of an Independent Director has also been enlarged by the recommendations provided by the Uday Kotak Commission Report. At least half of the board members to be Independent Director in listed companies. Criteria for a person to be qualified as an Independent Director has also been revised, further appointment of an Alternate Director for an Independent Director would not be permitted. When he resigns before the contract period a detail as regards to that should to be given. 
Some other recommendations are:
  • Enhancing the Role of Audit Committee, Nomination and Remuneration Committee, and Risk Committee provided to certain conditions.
  • Disclosures of Auditors credentials, audit fee, reasons for resignation of Auditors.
  • Enhanced disclosure about the Related Party Transaction and related parties to be permitted to vote against Related Party Transactions. 
  • Increasing the responsibility’s and obligations upon the listed entities with respect to their subsidiaries.
  • Top 100 listed entities to hold Annual General Meetings within 5 months after the end of the financial year 2018-2019 which is by 31 August 2019. Webcast of Annual General Meetings will be compulsory for top 100 listed entities by market capitalization. 
  • Shareholders’ approval regarding royalty, brand payments to the related party transaction exceeding 2% of consolidated turnover though the committee provided for 5%. 
  • Disclosure about the Utilization of Fund from preferential issues. 
Effects of the Committee 
If the recommendation regarding minimum Director was to be implemented: 256 companies (15 per cent) would have to increase the size of their board which must be beyond 5. At present, a board of 5 directors are there for 154 companies (9 per cent), 4 directors on their board for 82 companies (5 percent), for 19 companies (1 percent) 3 directors are there on their board and 1 company has just 2 directors on their board. As a result of which, a number of 379 new directors shall have to be appointed in these companies. If there is a recommendation regarding Independent Director will be implemented: As many as 326 companies (20 per cent) would have to change the composition of the board to ensure that at least 50 per cent of the total number of directors are independent.
There is 1 company which would need to appoint 7 independent direct out of these 326 companies further if there are 3 companies they would need to appoint 5 independent directors each, if the number of companies are 4 than would need to appoint 4 independent directors each, if 18 companies than they would need to appoint 3 independent directors each and in case of 59 companies, 2 independent directors each would need to be appointed and in case of 241 companies they would need to appoint 1 independent director each, hence a total of 451 independent directorship positions. If the recommendation regarding Chairperson being a non-executive director to be implemented: At present, in more than even half i.e. 860 companies (51per cent), the chairperson is considered as an executive director.
However, all these companies would need to change this. If the recommendation regarding the Annual General Meetings is to be implemented: The companies which got listed before 1st April 2017 and whose financial year ended on 31st March 2017, out of 1567 only 626 such companies had their AGM within 5 months viz. before 1st of September 2017. The remaining 941 companies (or a huge 60 per cent) had their AGM after 5 months from end of financial year. Further, if the recommendation related to maximum number of directorships to be implemented: The courtesy of the Companies Act and SEBI regulations already in place, there are presently not more than 2 persons who are holding more than 8 directorships.

SEBI has taken the charge since 1992 to control the securities market in India, and from that time onwards it has passed various regulations to facilitate effective control over the market in India. It has an objective for which it works efficiently. Protecting the rights of small investors is one of the main purposes of the SEBI, it also prohibits Insider Trading and also provides for various penalties in case where there is a breach of any provision. SEBI has two-fold function i.e. Protective as well Progressive. A quasi-judicial body in the name SAT was also established by it which adjudicates matters related to the securities market.