What is the Securities and Exchange Board of India (SEBI) – Meaning, Formation, Functions and Structure
When you invest in the stock market, you trust that the system is fair and transparent. This trust exists because of SEBI—the Securities and Exchange Board of India. Established to regulate the securities market, SEBI ensures investor protection, monitors market practices, and promotes financial stability. This blog will delve into what SEBI is, its history, and the objectives that guide its operations.
What is SEBI?
To begin with, SEBI stands for the Securities and Exchange Board of India, a statutory body entrusted with regulating and developing India’s securities market. But what is SEBI in practice? It is an enabler and a protector of the financial landscape. SEBI’s primary responsibility is to shield investors from malpractices, ensure market integrity, and promote the development of the securities market.
The SEBI Chairman, currently tasked with steering this vital institution, oversees its functioning alongside a board that comprises members from the government, Reserve Bank of India, and the securities market. By enforcing laws, crafting policies, and educating market participants, SEBI serves as a critical pillar for the stability of India’s financial market.
History of SEBI
The history of SEBI is closely tied to the need for an efficient regulatory framework in India’s burgeoning financial markets. Before SEBI’s establishment, the securities market operated with minimal regulation, leading to widespread malpractices such as insider trading and price manipulation. Recognising the urgency for a structured approach, SEBI was established in 1988 as a non-statutory body, primarily to oversee and regulate the securities market.
However, it was in 1992, with the enactment of the SEBI Act, that the Securities and Exchange Board of India gained statutory powers. This marked a transformative phase, enabling SEBI to operate as an autonomous body with the authority to regulate the stock exchanges, register intermediaries, and enforce rules to safeguard investor interests.
Objectives of SEBI
The objectives of SEBI are designed to foster a robust and trustworthy securities market in India. At its core, SEBI aims to:
- Protect Investors: Safeguarding investors’ interests is paramount, ensuring they are shielded from fraudulent and unfair practices.
- Promote Transparency: By enforcing strict disclosure norms and ensuring fair play, SEBI fosters trust among market participants.
- Regulate Intermediaries: SEBI oversees brokers, mutual funds, depositories, and other intermediaries, ensuring they operate within the legal framework.
- Develop the Securities Market: Beyond regulation, SEBI works actively to develop the securities market by introducing innovative products and ensuring market efficiency.
These objectives align with SEBI’s vision of creating a transparent and investor-friendly environment in India. Its initiatives have not only improved market confidence but also contributed significantly to the country’s economic growth.
Organisational Structure of SEBI
The Securities and Exchange Board of India (SEBI) operates under a structured framework designed to ensure effective regulation and development of the securities market. At the helm is the SEBI Chairperson, a position currently held by Madhabi Puri Buch, who assumed office in March 2022. Notably, she is the first woman and the first individual from the private sector to lead SEBI.
The SEBI Board comprises the following members:
- Chairperson: Madhabi Puri Buch
- Two members from the Ministry of Finance: Including the Secretary of the Department of Economic Affairs.
- One member from the Reserve Bank of India (RBI): Currently, M. Rajeshwar Rao, Deputy Governor of RBI.
- Five other members appointed by the Central Government: Among these, at least three are Whole-Time Members.
This diverse composition ensures that SEBI benefits from a wide range of expertise, facilitating comprehensive oversight of the securities market.
SEBI’s organisational structure is segmented into various departments, each focusing on specific functions such as market regulation, enforcement, legal affairs, and investor education. Additionally, SEBI maintains regional offices in New Delhi, Kolkata, Chennai, and Ahmedabad, ensuring its regulatory presence across the country.
This structured approach enables SEBI to effectively execute its mandate of protecting investor interests, promoting market development, and ensuring fair practices within India’s securities market.
Functions and Powers of SEBI
The functions of SEBI are pivotal in maintaining the integrity and efficiency of India’s securities market. As a statutory body, SEBI operates under the authority of the SEBI Act, 1992, which grants it extensive powers to regulate, develop, and oversee the market. Here’s a closer look at what does SEBI do:
Functions of SEBI
- Regulatory Role: SEBI regulates intermediaries such as stockbrokers, mutual funds, and depositories. It ensures adherence to norms, ethical conduct, and operational transparency.
- Protecting Investors: One of the primary roles of SEBI is to safeguard investors’ interests by curbing malpractices like insider trading and misleading advertisements.
- Developmental Role: SEBI facilitates the growth of the securities market by introducing innovative products, promoting financial literacy, and encouraging investments.
- Monitoring Stock Market: To answer the question, what is SEBI in the stock market?—SEBI ensures that stock exchanges operate seamlessly, maintaining market stability and trust among participants.
Powers of SEBI
SEBI is empowered to take decisive actions to maintain market discipline. Key powers of SEBI include:
- Quasi-Legislative: SEBI formulates regulations, such as insider trading rules and listing obligations, to govern market behaviour.
- Quasi-Judicial: SEBI can investigate and adjudicate cases of market manipulation or fraud, imposing penalties as needed.
- Quasi-Executive: It enforces compliance by conducting audits, inspections, and inquiries into market operations.
These functions and powers enable SEBI to address preventive and corrective market regulation aspects. The role of SEBI in fostering a fair and efficient securities market is thus multifaceted, making it a key pillar of India’s financial ecosystem.
SEBI Guidelines for Issuing of Shares
The Securities and Exchange Board of India (SEBI) plays a crucial role in regulating the issuance of shares to ensure transparency, fairness, and investor protection. Companies looking to raise capital through the public or private issuance of shares must adhere to a comprehensive set of guidelines prescribed by SEBI. These guidelines apply to Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), and private placements. Here’s an overview of the key aspects of SEBI’s guidelines:
Eligibility Criteria
- Profitability Requirements: Companies must meet minimum profitability thresholds to be eligible for a public offering. For example, they should have reported profits for at least three years out of the last five.
- Minimum Net Worth: The company should have a minimum net worth and tangible assets as specified by SEBI regulations.
- Promoter Contribution: Promoters must contribute at least 20% of the post-issue capital and hold it for a specified lock-in period, ensuring their commitment to the company.
Disclosure Requirements
SEBI mandates comprehensive disclosures to ensure investors have adequate information to make informed decisions:
- Draft Red Herring Prospectus (DRHP): Companies must file the DRHP with SEBI, detailing financials, risks, objectives of the issue, and promoter details.
- Material Information: Any material changes in the company’s operations, litigation status, or financial position must be disclosed promptly.
- Pricing and Valuation: SEBI requires transparent methods for pricing shares, with clear justification for the valuation.
Allotment Guidelines
- Reservation for Retail Investors: A portion of the shares in IPOs must be reserved for retail investors, ensuring their participation.
- Qualified Institutional Buyers (QIBs): SEBI sets a specific quota for QIBs such as mutual funds and banks to ensure stability in the subscription process.
- Minimum Subscription: SEBI guidelines stipulate that at least 90% of the issue must be subscribed for the offering to be considered successful.
Lock-In Period
To prevent speculative trading and ensure stability, SEBI enforces a lock-in period for:
- Promoters’ Shares: Promoters are required to hold their share allocation for a period ranging from 6 months to 3 years, depending on the issue type.
- Employee Stock Options (ESOPs): In certain cases, shares allotted to employees under ESOPs are also subject to a lock-in period.
Pricing and Underwriting
- Book Building Process: SEBI encourages the use of the book-building process for pricing shares, which involves demand-based price discovery.
- Underwriting Obligations: All public issues must be fully underwritten to ensure that companies raise the desired funds, even if there is limited investor participation.
Investor Safeguards
- Refund Timelines: If an issue is undersubscribed, SEBI ensures refunds are processed within a stipulated time.
- Grievance Redressal: Investors can approach SEBI for redressal of complaints related to share allocation or issuer malpractices.
SEBI Regulations for Mutual Funds
Mutual funds have emerged as a popular investment option for Indian investors due to their accessibility and potential for wealth creation. To ensure investor protection, transparency, and the smooth functioning of the mutual fund industry, the Securities and Exchange Board of India (SEBI) has established a comprehensive regulatory framework under the SEBI Act, 1992. The SEBI (Mutual Funds) Regulations, 1996, along with subsequent amendments, lay down the guidelines governing mutual fund operations in India. Here’s an overview of these SEBI regulations and how they shape the mutual fund landscape.
Uniformity in Scheme Names
SEBI mandates that mutual fund schemes be named based on their core characteristics and asset allocation to eliminate confusion and ensure consistency. This standardisation assists investors in easily identifying the nature and objective of a scheme, facilitating better investment choices.
Single Scheme per Category
SEBI’s guidelines restrict Asset Management Companies (AMCs) to offering only one scheme per category, with exceptions for Index Funds, ETFs, Sectoral/Thematic Funds, and Fund of Funds. This measure prevents the proliferation of similar schemes, simplifying the selection process for investors and promoting healthy competition among fund houses.
Net Asset Value (NAV) Disclosure
Under SEBI new rules, mutual funds must disclose the Net Asset Value (NAV) of their schemes daily. This ensures that investors have real-time information to track the performance of their investments.
Investor Protection Measures
SEBI mandates that AMCs implement robust systems for investor grievance redressal. Furthermore, it prohibits fund managers from misusing investor funds and ensures that all transactions are conducted transparently.
Recent SEBI New Rules for Mutual Funds
With the evolving financial landscape, SEBI continually updates its guidelines to protect investors and enhance the efficiency of the mutual fund industry. Key amendments to the SEBI (Mutual Funds) Regulations, 1996 include:
- Expense Ratio Cap: SEBI has capped the total expense ratio (TER) that fund houses can charge, making mutual funds more cost-efficient for investors.
- Risk-o-Meter: To enhance transparency, SEBI requires mutual funds to publish a “risk-o-meter” that categorises schemes based on their risk levels, from low to high.
- Side-Pocketing Mechanism: SEBI has introduced side-pocketing for debt mutual funds to segregate distressed assets, protecting unaffected investments from default risks.
Transparency and Compliance
SEBI regulations mandate full disclosure of:
- Portfolio Details: AMCs must publish their portfolio holdings monthly, allowing investors to understand where their money is invested.
- Performance Metrics: Mutual funds are required to benchmark their performance against indices to enable investors to evaluate returns effectively.
To Wrap It Up…
The Securities and Exchange Board of India (SEBI) is central to ensuring transparency, fairness, and growth in SEBI India’s financial markets. Beyond its regulatory role, SEBI meaning lies in fostering trust and stability while protecting investors and promoting market development. As markets evolve, SEBI remains a cornerstone of India’s financial ecosystem.
SEBI regulates the securities market to protect investors and ensure transparency. It also monitors market practices to prevent fraud.
The current SEBI chairman is Madhabi Puri Buch, appointed in March 2022. She is the first woman to head SEBI.
SAT is a tribunal that handles appeals against SEBI’s orders and decisions. It ensures fairness in securities market disputes.
The new SEBI rules for F&O trading focus on increasing margin requirements and enhancing risk management. Traders must now maintain upfront margins for all positions, ensuring better capital adequacy and reducing speculative risks in the derivatives market.
Investors can file complaints via SEBI’s SCORES platform online. Physical grievances can also be submitted to SEBI’s regional offices.
All About Investment Concepts on smallcase –
smallcase offers you a quick view to the different finance related concepts to help you on your investment journey to achieve the financial freedom you have always dreamt of –
