MCom I Semester Business Environment Securities Exchange Board India ( SEBI ) Study Material Notes
Table of Contents
MCom I Semester Business Environment Securities Exchange Board India ( SEBI ) Study Material Notes : Securities and Exchange Board of India ( SEBI ) Objectives of SEBI Functions of SEBI Powers of SEBI Organisation of SEBI and Central Government Guidelines of SEBI Exercise Questons Long Answer Questions Short Answer Quesitons Objective Questions :
BCom 1st Year Books Notes Study Material in Hindi
Securities and Exchange Board of India (SEBI)
The Second World War saw great speculative activity in the country. The Capital Issue (Control) Act, 1947 governed capital issues in India so as to ensure sound capital structure for corporate enterprise, to promote rational and healthy expansion of the Joint Stock Companies in India and to protect the interests of the investing public from the fraudulent practices of fast operators. The capital issue control was administered by the Controller of Capital Issues according to the principles and policies laid down by the Central Government. The Government of India repealed the Capital Issue (Control) Act, 1947. SEBI was given the power to control and regulate the new issue market as well as the old issues market.
The law relating securities in India is contained in different enactments like Companies Act, 1956, Securities Contracts (Regulation) Act, 1956 and the Capital (Control) Act, 1947 (which has now been repealed).
It was found that the legislation in this regard was scattered in different laws and the administrative agencies did not have proper manpower or expertise to ensure a fair deal to investors. There was no monitoring or prosecuting machinery to check malpractices, insider trading, uncontrolled market pricing etc.
There was also a need to regulate mutual funds and venture capital. Realising the need to promote a healthy and growth-oriented securities market the Government of India in 1988 constituted an interim body. It was proposed that this administrative body would be a precursor to the Statutory Board with which it would be ultimately merged.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The functioning of stock exchanges in India has shown many weaknesses. To counter these shortcomings and deficiencies and to regulate the capital market, the government of India set up the Securities Exchange Board of India in 1988. Initially, SEBI was set up as non-statutory body but in 1992 it was made statutory body. SEBI was authorised to regulate all merchant banks on issue activity, lay guidelines and supervise and regulate the working of mutual funds and oversee the working of stock exchange in India. SEBI, in consultation with the government, has taken a number of steps to introduce improved practices in the capital markets in the interest of the investing people and the healthy development of the capital markets.
OBJECTIVES OF SEBI
The statement, of objects and reasons appended to SEBI Bill, 1992 states that SEBI which was first established in 1988 through a Government resolution to promote orderly and healthy growth of the security market and for investor’s protection has been now monitoring the activities of stock exchanges, mutual funds and merchant bankers etc. to achieve these goals.
The Securities and Exchange Board of India was set up to achieve the following objectives:
1 To promote fair dealings by the issuers of securities and ensure a market place where they can raise funds at a relatively low cost.
2. To provide a degree of protection to the investors and safeguard their rights and interests so that there is a steady flow of savings into the market.
3. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc. with a view to make them competitive and professional.
FUNCTIONS OF SEBI
Functions of SEBI are as follows:
1 Regulating the business in stock exchanges and any other securities markets.
2. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, merchant bankers, underwriters, portfolio managers, investment advisors, and such other intermediaries who may be associated with securities markets in any manner.
3. Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds.
4. Prohibiting fraudulent and unfair trade practices relating to securities markets.
5. Prohibiting insider trading in securities.
6. Regulating substantial acquisition of shares and take-over of companies.
7. Promoting investor’s education and training of intermediaries of securities markets.
8. Conducting research and calling for information from persons associated with the self-regulatory organizations in the securities market.
POWERS OF SEBI
SEBI has the following powers :
1 Levy fees or other charges for carrying out regulations.
2. To make an announcement related to Sec. 17 of Securities Contract (Regulation) Act.
3. To register the intermediaries of the markets.
4. To control and regulate stock exchanges.
5. SEBI has been empowered to require any company for a listing of its securities on any recognised stock exchange.
6. Any recognised stock exchange may make by-laws for the regulation and control of contracts with the previous approval of the SEBI.
7. SEBI may make bye-laws or amend any bye-laws made by recognised stock exchange.
8. SEBI will receive from every stock exchange such periodical returns relating to its affairs as may be prescribed by SCRA rules.
9. SEBI may call upon recognised stock exchange or any member thereof to furnish information relating to affairs of stock exchanges.
ORGANISATION OF SEBI SEBI
has been established as a body corporate by notification of the Central government. The Board shall consist of the chairman, two members from amongst the officials of the Ministry of the Central Government, one member Trom amongst the officials of the Reserve Bank and five other members of whom at least three shall be the whole-time members. The chairman and two members shall be appointed by the Central Goverment and one member by the Reserve Bank. The chairman and the other members shall be the person of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge in the opinion of the Central Government, that they shall be useful to the Board.
SEBI has divided its activities in four departments-Primary market department, Issue department, Intermediate department and Institutional department etc.
SEBI AND CENTRAL GOVERNMENT
The Central Government has power to guide SEBI. The Central Government has power to make rules and regulations to guide SEBI. All the activities of SEBI are performed by the grants financed by the government. Fees and charges collected by SEBI are called general funds of SEBI. The fund is applied for meeting salaries and allowance of members, officers and employees of the SEBI.
GUIDELINES OF SEBI
Some of the guideline principles of SEBI are as follows:
1 For primary market: SEBI has introduced a number of measures to reform the primary market. Companies raising capital in the primary market are now required to disclose all material facts and specific risk factors with their projects. The new companies should issue their share at par value.
2. For subsidiary market: Board of directors of stock exchange should be restructured which would include 50 percent of non-members, public representating and government representative. Adequate capital norms should be formed which depend on total business and other factors.
3. Composite issue: A listed company making a composite issue of capital may issue securities at differential prices in its public and right issues. In the public issue which is a part of composite issue differential pricing is also permissible. Justification for the price difference shall be given in the other documents.
4. Foreign Institutional Investors (FII): The government has allowed foreign institutional investors to invest in the Indian capital market provided they are registered with SEBI, FIIs may not invest in any company more than 5%.
5. Bonus Issue : A number of modifications have been made regarding issue of bonus shares. The guidelines of SEBI in this regard are as follows:
A listed company proposing to issue bonus shares shall comply with the following:
(1) No company shall, pending conversion of FCDs/PCDs, may issue any shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares in proportion to such convertible part of FCDs/PCDs.
Securities and Exchange Board of India (SEBD) 335
(ii) The bonus issue shall be made out of free reserve built out of the genuine profits or share premium collected in cash only.
(iii) The bonus share are not issued unless partly paid share, if any, existing are not made fully paid up.
6. Right issue : “Right issue” means an offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said purpose.
Guidelines of SEBI in this regard are as follows:
(i) Composite issue : As a composite issue, public issues and right issues may be made by a company. An unlisted company issuing its securities first time shall not make composite issue at discriminating price.
(ii) Appointment of merchant banker : The issuer shall appoint one or more merchant bankers to carry out the obligations relating to the issues.
(iii) Filing of offer document: No issuer shall make a right issue, where the aggregate value of the specified securities offered is fifty lakh rupees or more, unless a draft offer document, alongwith fees has been filed with the Board through the lead merchant bankers at least 30 days prior to registering the prospectus, red herring prospectus or self-prospectus with the Registrar of the companies.
(iv) Minimum subscription: The minimum subscription to be received in an issue shall not be less than ninty percent of the offer through offer document. In the event of non-receipt of minimum subscription all application money’s received shall be refunded to the applicants.
(v) Allotment: The issuer and merchant bankers shall ensure that specified securities are alloted and or application money refunded. Where specified securities are not allotted and/or application moneys are not refunded within stipulated period, the issuer shall undertake to pay interest at such rate and within such time as described in the offer document.
(vi) Presentation in prospectus : Every application form must be accompanied by a memorandum containing salient features of a prospectus.
7. Debentures : The amount of issue of debentures in the case of working capital requirements shall not exceed 20% of the gross current assets, loans and advances. Debt-equity ratio shall not normally exceed 2:1 for this purpose.
8. Investor Protection : It shall be the duty of the SEBI to protect the interests of investors in securities and to promote the development of securities market. The object of SEBI is to promote the fair dealings by the issuer of securities.
9. Investor Education Protection Fund : The Central Government established a fund to be called Investor Education and Protection Fund. The object of the government is to educate investors about their rights and to protect the interests of investors. The fund shall be utilised for promotion of investor awareness and protection of the interests of investors in accordance with such rules as may be prescribed.
10. Book-building: SEBI guidelines define book building as follws : Book building means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and price for such securities assessed for the determination of quantum of such securities to be issued by means of notice, circular, advertisement or information memoranda or offer document.
11. Buy back of shares : The Companies (Amendment) Act, 1999 has introduced the concept of buy back of shares and allowed the companies to purchase their own shares, Major reasons for buy back of their own shares may be one or more of the following:
(i) to return surplus cash to shareholders;
(ii) to increase the underlying share value;
(iii) to support share price during period of temporary weakness;
(iv) to achieve and maintain a target capital structure;
(v) to prevent or inhibit unwelcome takeover bids.
A company shall, after the buy-back under Section 77 file with the Registrar and SEBI, a return containing such particulars relating to buy-back within 30 days of such completion, as may be prescribed.
SEBI (Amendment) Act, 2002: SEBI Act was amended to empower SEBI to punish culprits.
In November 2002, SEBI approved the establishment of Central Listing Authority’ which would centralise the listing function that earlier on took place at the exchange level.
In order to provide an additional route for raising funds in the domestic market, SEBI permitted listed companies in May 2006 to raise funds in the form of Qualified Institutional Placement (QIP).
In August 2007, SEBI issued guidelines for overseas investment by VCF (Venture Capital Funds).
In SEBI (Amendment) June, 2007, new rules have been framed for information technology companies. Under it companies capability maturity model integration, renewal is necessary once in every three years.
In 2007, SEBI allowed the National Stock Exchange of India Ltd (NSE) to set up and maintain a corporate bond reporting platform to capture all information relating to trading in corporate bonds as accurately as close to execution as possible.
During the year 2007-08, the investment limit for FII (Foreign Institutional Investors) in government securities was enhanced from $2 billion to $2.6 billion.
With effect from January 8, 2008, entry load by mutual funds was waved for investors making applications for investment in mutual fund scheme directly.
EXERCISE QUESTIONS
Long Answer Questions
1 What do you understand by Securities and Exchange Board of India ? Explain its functions and rights.
2. What is SEBI? Explain the guidelines of Securities and Exchange Board
Short Answer Questions
1 Write the functions of SEBI.
2. What is Investors’ Education and Protection Fund ?
3. What is primary allocation ?
Objective Questions
(1) Select the Correct Alternatives :
1 SEBI may provide to stock exchanges to make by-laws :
(a) promise
(b) acceptance
(c) right
(d) none of these
2. Under SEBI, the registration of intermediaries is made :
(a) double
(b) equivalent
(c) compulsory
(d) all of above
3 . Buy-back of shares increases :
(a) capital
(b) functions
(c) equality
(d) none of these
4. Bonus shares may be issued in place of:
(a) dividends
(b) stock
(c) capital
(d) all of above
[Ans.: 1. (b), 2. (c), 3. (a), 4. (a)]
(II) Write True or False :
1 SEBI was established in 2000.
2. The main function of the SEBI is the organization and regulating of the business in stock exchanges.
3. The Chairman and two members in SEBI are appointed by the Central Government.
4. SEBI has divided its activities in five parts.
[Ans. : 1. False, 2. True, 3.True, 4. False)
(III) Fill in the Blanks :
1 Under Section 77 of the Companies Act, 1999, a company may buy back its shares from the …………..
2. SEBI has been vested with wide-ranging powers by the
3. According to the preamble to the SEBI Act, the primary objective of SEBI is to help and to promote the development of ………….. and to protect the interests of investors.
4. SEBI (Amendment) Act, June 2007 formulated new rules for ………………. companies.
[Ans. : 1. Investors, 2. SEBI (Amendment) Act, 2000, 3. the securities market, 4. information technical]
