Before the establishment of he Securities ad Exchange Board of India (SEBI), the principal legislations governing the securities market in India were the capital Issues Control Act, 1956 (governing the primary market) and the Securities Contracts (Regulations) Act 1956 (governing the secondary market). The regulatory powers were vested with the Controller of capital Issue (for the primary market) and the Stock Exchange Division (for the secondary market) in the Ministry of Finance, Government of India.
In 1989, SEBI was created by an administrative fiat of the Ministry of finance. Since then, SEBI has gradually been granted more and more powers. With the repeal of the Capital issues Control Act and the enactment of the SEBI Act in 1992, the regulations of the primary market has become the preserve of SEBI. Further, the Ministry of Finance, Government of India, has transferred most of the powers under the Securities Contracts (Regulations) Act, 1956 to SEBI.
SEBI’s principal tasks are to:
1. Regulate the business in stock exchanges and any other securities markets.
2. Register and regulate the working of capital market intermediaries (brokers, merchant bankers, portfolio managers and so on)
3. Register and regulate the working of mutual funds
4. Promote and regulate self regulatory organizations
5. Prohibit fraudulent and unfair trade practices in securities markets
6. Promote investors education and training of intermediaries of securities markets
7. Prohibit insider trading in securities
8. Regulate substantial acquisition of shares and takeovers of companies
9. Perform such other functions as may be prescribed.
SEBI has taken a number of steps in the last few years to reform the India capital market. It has covered the entire gamut of capital market activities through nearly 30 legislations. The important initiatives are mentioned below.
Freedom in Designing and Pricing Instruments: Companies now enjoy substantial freedom in designing the instruments of financing as long as they fully disclose the character of the same. More important, they enjoy considerable latitude in pricing the same.
Introduction of Stock invests: To save investors from the loss of interest on the subscription money locked up with the company, SEBI has introduced the stock invest scheme as an additional facility to the investors.
The financial irregularities of 1992 highlighted the deficiencies of the badla system permitted excessive leveraging. To rectify the defects in trading practices the badla system has been banned.
Screen based Trading: Thanks to the competition posed by the National Stock Exchange and the insistence or prodding done by SEBI, all the exchanges have switched to screen based trading.
Electronic Transfer: The traditional method of transfer by endorsement on security and registration by issuer has been supplanted by electronic transfer in book entry form by depositories.
Risk Management: A comprehensive risk management system that covers capital adequacy limits on exposure and turnover margins based on VAR (value at risk) client level gross margining and online monitoring of positions has been introduced.
Rolling Settlement: The trading cycle, which was previously one week, has been reduced to one day and the system of rolling has been introduced.
Corporate Governance Code: A new code of corporate governance has been defined. It has been made operational by inserting a new clause (clause 49) in the Listing Agreement – the agreement that a listed company enters into with stock exchange where its securities are listed.
Change in Management Structure: Stock exchanges earlier were broker dominated. SEBI now requires 50 percent non-broker directors. Further, it has mandated that a non-broker professional be appointed as the Executive Director.
Registration and Regulation of Intermediaries: Capital market intermediaries such as merchant bankers, under writers, bankers to the issue, registrars to transfer arrangements, brokers and sub brokers are required to be registered with SEBI. Regulations for these intermediaries have been prescribed.