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SEBI: The Purpose, Objective and Functions of SEBI

Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market but
initially SEBI was not able to exercise complete control over the stock market transactions.

It was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status.

Section 3- SEBI is a body corporate having a separate legal existence and perpetual succession.

The head office of SEBI is in Mumbai


Can establish branches in different parts of country. it has branch office in Kolkata,
Chennai and Delhi

Reasons for Establishment of SEBI:


With the growth in the dealings of stock markets, lot of malpractices also started in stock
markets such as price rigging, unofficial premium on new issue, and delay in delivery of shares,
violation of rules and regulations of stock exchange and listing requirements. Due to these
malpractices the customers started losing confidence and faith in the stock exchange. So
government of India decided to set up an agency or regulatory body known as Securities
Exchange Board of India (SEBI).

Purpose and Role of SEBI:


Preamble- An Act to provide for the establishment of a Board
to protect the interests of investors in securities and
to promote the development of, and
to regulate, the securities market and
for matters connected therewith or incidental thereto.
3. To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,
etc.

SEBI BOARD:

Composition (.4):

a Chairman;
2 MoF
1 RBI
5 members (at least three shall be the whole-time members) appointed by the Central
Government.

Qualification 4(5)- ability, integrity and standing who have shown

capacity in dealing with problems relating to securities market or

have special knowledge or experience of law, finance, economics, accountancy, administration


or in any other discipline which, in the opinion of the Central Government, shall be useful to the
Board.

Tenure (5)-

As prescribed by C.G.
Can be removed- Prior notice of 3 months, proper opportunity to be heard. or three
months salary and allowances in lieu of
Chairman can relinquish his post
SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992-
Rule 3- Chairman & wholetime members- 5 yr- can be reappointed- retirement age 65yr

Grounds of Removal (6)-

Adjudged insolvent
Unsound mind
Moral turpitude
the opinion of the Central Government, so abused his position as to render his
continuation in office detrimental to the public interest

Meetings ( 7)- both time and place

follow procedure in regard to trans. Of business

Chairman- if cannot attend, another member chosen- preside

Casting vote of chairman.

As Quasi-legislative body

Section 30- Power to make rules

Board can make rules consistent with the Act. (s.30(1))


[s. 30(2)] Can make rule in following matter:
a) Meeting- time, place, procedure and quorum [SEBI (Procedure of Board Meetings)
Regulations, 2001]
b) Terms and conditions for service of officers and employees of the Board. [SEBI
(Employees Service) Regulation, 2001].
c) Matter:
relating to issue of capital,
transfer of securities and
other matters incidental the manner of disclosureby the companies under
section 11A
conditions for issue of CIS
d) Certificate of registration- essential conditions, amt of fees paid, manner of
suspension/ cancellation
Settlement proceedings- terms and procedure.
e) Any other matter

Section 31- Rules and regulations to be laid before Parliament.


Laid down before each House, while it is in session
For a period of 30 days (in same session or successive session)
Modifications can be made by both the Houses
If any modification made, rule/regulation come in effect with that modification.

Approval of Parliament is not necessary if circulars are issued for internal work of the Board

As Quasi-executive body

Section 11B- Power to issue direction-

After making an enquiry or causing to make an enquiry, necessary for-


interest of investors, or orderly development of securities market;
prevent the affairs of any intermediary or other persons- conducted in a manner
detrimental to the interest of investors or securities market;
secure the proper management of any such intermediary or person,
May issue following directions-
to any person or class of persons, or associated with the securities market
to any company
Also, include any person who made profit or averted loss in contravention of the
provisions of this Act or regulations, to disgorge the amount equivalent.

Section 11C- Investigation-

Board ( can give order to investigate- in writing) on reasonable ground believe-


Dealt in manner detrimental to int. of investors or securities market
Violated provisions of the Act/ regulation.
The Investigating Authority may require any manager, intermediary or any person assoc.-
produce to the Investigating Authority or any person authorised, all the books,
registers, other documents and record of, which are in their custody or power.
S. 11C(2)- duty of manager, S.11C(3)- power of investigating authority
Investigating can keep books, register etc for 6 months. (cl. 4)
Can call for copies if needed again. (cl. 4)
Copies should be certified one. (cl. 4)
Person directed to investigate- (cl. 5)
May examine on oath
Administer the oath
Can require to appear personally
If a person refuses to- (cl. 6)
Produce books, register
Furnish information required
Fails to appear, when required
To sign notes of any examination
Punishment-
o Imprisonment- 1 yr
o Fine- 1cr., 5 lakh for every day
Notes of examination taken down in writing (cl. 7)
Seizure of books etc- (cl. 8)
Application to Magistrate or Judge of such designated court
On reasonable ground to believe, it may be destroyed, mutilated, altered, falsified or
secreted.
Investigating Authority by Judges order- (cl. 9)
o To enter places where books are kept
o To search such places
o To seize.
Judge cannot authorize seizure of books etc not allowed in case of public listed co.
except in case of insider trading(cl. 9)
Inv. Authority authorized to keep seized books etc. not later than the conclusion of
the investigation(cl. 10)
Search & seizure acc. To CrPC. (cl. 10)

As Quasi-judicial body-

Chapter VI A- Penalties & Adjudication


Penalty of 1 lakh 1 Cr., 1 lakh per day. In case of
Failure to furnish information etc. ( 15A)-
o Fails to furnish document, report etc
o Fails to furnish info, books, documents etc and fails to file return w/I specified
time
o Fails to maintain books of a/cs or records.
failure by any person to enter into agreement with clients as required by the Act/
regulations. ( 15B)
registered co. listed as intermediary, when asked by the board to redress investors
grievances and failed to do so. (15C)
CIS ( including mutual funds)- (15 D)
o Fails to obtain certificate of registration from board before sponsoring CIS.
o Registered as CIS (including MF) and fails to comply with req. of registration.
o Registered as CIS (including MF) and fails to to make an application for listing of
its schemes under resp. regulation.
failure to observe rules and regulations by an asset management company (15E)
default in case of stock brokers (15F)
contravention where no separate penalty has been provided (15HB)
Penalty of 10 lakh- 25 cr./ 3 times amt of profit made
insider trading. (15 G)
Non-disclosure of acquisition of shares and takeovers (15 H)
Penalty of 5 lakh- 25 cr./ 3 times amt of profit made
fraudulent and unfair trade practices
Power to Adjudicate- (15I)
Officer not below the rank of a Division Chief
He has power to summon and enforce the attendance of any person, to give evidence
or to produce any document
The Board may call for and examine the record of any proceedings (to check whether
it is erroneous or not)
Pass order for enhancing penalty
Factors to be considered while deciding quantum of penalty-(15J)
amount of disproportionate gain or unfair advantage
the amount of loss caused to an investor or group of investors
repetitive nature of the default
Crediting sums realised by way of penalties to Consolidated Fund of India (15JI)

Powers & Functions of the Board-

Section 11- Functions-

Take measures it thinks fit for-( cl 1)


to protect the interests of investors in securities
to promote the development of,
to regulate the securities market
Provide measures for- (cl.2)
regulating the business in stock exchanges and any other securities markets
registering and regulating the working of
o Intermediaries1
o venture capital funds and CIS (including mutual funds)
promoting and regulating SROs
prohibiting fraudulent and unfair trade practices relating to securities markets
promoting investors education and training of intermediaries of securities markets
prohibiting insider trading
regulating substantial acquisition of shares and take over of companies;
calling for information, undertaking inspection, conducting inquiries and audits of-
o stock exchanges,
o mutual funds,
o other persons associated
o intermediaries
o SRO
o bank or any other authority
o board or corporation
functions and powers under the Securities Contracts (Regulation) Act, 1956
1
stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an
issue, merchant bankers, underwriters, portfolio managers, investment advisers, Depositories and DP, custodians
of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may,
by notification, specify in this behalf
levying fees or other charges
conducting research
performing such other functions as may be prescribed
Board may take measures to inspect books, etc of a public listed co. ( if it has reasonable
ground to believe that the co. is involved in insider trading) (cl.2)
Board has same powers as of Civil Court [clause (i) or clause (ia) of sub-section (2) or
sub- section (2A)]- (cl.3)
the discovery and production of books of account and other documents
summoning and enforcing the attendance
inspection of books etc. of co./ person at any place.
examination of witnesses or documents
Board may order following measures (either on pending or completion of investigation)-
(cl.4)
suspend the trading of any security
retain/prohibit any person from assessing securities market
suspend any office-bearer of stock exchange or SRO
impound and retain the proceeds or securities in a trans. Under investigation
Attach bank account(s) of any intermediary or any person associated (by the Judicial
Magistrate of the first class having jurisdiction, for a period not exceeding one month)
Direct any intermediary or any person not to dispose of or alienate an asset forming
part of any transaction
Amount disgorged, pursuant to a direction issued, under section 11B credited to the
Investor Protection and Education Fund established by the Board. (cl.5)

Section 11A- Board to regulate or prohibit issue of prospectus, offer document or


advertisement soliciting money for issue of securities for protection of investors.

11AA- CIS

Any scheme which satisfies the conditions referred to in sub section (2)n (2A)] shall be a collective
investment scheme:

Provided any pooling of funds under any scheme,


which is not registered with the Board or is not covered under sub section 3,

1hundred cr rupees or more shall be deemed to be a collective investment scheme

Any scheme made or offered by any person under which,


the contributions, made by the investors, is utilized for the purposes of the scheme
the contribution are made to such scheme by the investors with a view to receive
profits,
the property, contribution or investment forming part of scheme is managed on
behalf of the investors
The investors do not have control over the management of the scheme.
Any scheme made by any person satisfying the conditions as may be specified in
accordance with the regulations made under this Act.
Following will not be CIS-
made by a co-operative society registered under the Co-operative Societies Act,
being a contract of insurance to which the Insurance Act, 1938
providing for any Scheme, framed under the Employees Provident Fund and
Miscellaneous Provisions Act, 1952
under which deposits are accepted under section 58A of the Companies Act, 1956
under which deposits are accepted by a company declared as a Nidhi or a mutual benefit
society
falling within the meaning of Chit fund business

Section 11B- Power to issue directions

Section 11C- Power to investigate.