Wbat is SEBI?

OSecurlLles and Lxchange 8oard of lndla SL8l

OlL regulaLes boLh Lhe prlmary and secondary markeLs(explalned ln my prevlous
arLlcle)
OlL proLecLs Lhe lnLeresLs of Lhe lnvesLors ln securlLles
OlL promoLes Lhe developmenL of Lhe securlLles markeL
OSL8l was esLabllshed ln 1988 buL was glven sLaLuLory powers ln 1992 and sLarLed
worklng effecLlvely slnce 1993
Wby did tbe government create SEBI?
s you know LhaL ln lndla Lhe CovernmenL won'L do any ma[or reform or acLlon unless Lhe
Lhlngs geL messed up really bad 1he same was Lhe case why SL8l was glven Lhe power Lo
conLrol boLh prlmary and secondary markeL because Lhey were ln compleLe mess So leLs flrsL
see whaL was Lhe problems ln prlmary and secondary markeLs before SL8l came ln plcLure

1he problemx ln Prlmury murket before SFBI cume
Oprlmary markeL was exLremely resLrlcLlve regulaLlons on Lhe lssuers enforced by
Lhe ConLroller of CaplLal lssues (CCl)
now leLs assume lm Lhe blg buslnessman
O9rlmary markeL ls where l lssue my securlLy for Lhe flrsL Llme
Ol canL flx Lhe prlces of my shares as l llke because lve Lo follow Lhe rules made by
CCl
ObuL LhaL dude always underprlce my lssues
OJhen l puL my equlLy shares for Lhe flrsL Llme ln 9rlmary markeL Lhls ls l9
(lnlLlal publlc offerlng)
ObuL now as you know LhaL l canL flx hlgh prlces for my l9 due Lo CCl dude
Oso my l9 ls very cheap
Oso loLs of people wlll send appllcaLlon Lo buy lL because lLs cheap ( over
subscrlpLlon)
Osolll have Lo glve Lhe l9 shares vla loLLery only Lo a few people
ObuL Lhose who geL my cheap l9 vla loLLery wlll lmmedlaLely go Lo secondary
markeL and sell lL aL hlgher prlce
O l losL money (LhaL l could have made lf CCl dude allowed me Lo sell my l9 [
hlger prlce)
Oand Lhose lucky dudes who won Lhe loLLery made money wlLhouL really dolng
anyLhlng
Os you can see all Lhls ls noL good for lndusLrlal uevelopmenL

1he problemx ln xeconJury murket before SFBI cume

Secondary markeL where you Lrade Lhe securlLles LhaL you purchased from prlmary markeL
lor general undersLandlng Lhe sLock markeLs secondary markeL where you sell/buy shares
So leLs see Lhe

problemx of Stock murketx before SFBI cume

OflrsL organlzed sLock exchange was esLabllshed ln 1873 ln 8ombay (now Mumbal)
OLhere were almosL 20 reglonal sLock exchanges ln 1992
ObuL Lradlng was concenLraLed ln 8ombay SLock Lxchange and lL en[oyed a
monopoly
ODsers from ouLslde 8ombay found lL exLremely dlfflculL Lo Lrade ln 8SL due Lo poor
Lechnology and hlgh cosL of LelecommunlcaLlons (tbey JlJot bove lotetoet ot
cellpbooes wltb ftee locomloq colls lo 1992!)
O8SL lmposed a hlgh enLry barrler so LhaL compeLlLlon among brokers was absenL
O1haL's why servlces provlded by Lhe brokers were Lhus exLremely lnefflclenL and
cosLly (lLs same llke lndlan rallway's sLlnklng LolleLs you can'L complaln because rallway
don'L have much compeLlLlon)
Specific problems in Sbare market before 99
"open outcry" system
Omeans Lradlng used Lo Lake place ln Lradlng rlng where nonbrokers were noL
allowed ln
O1hese Lraders wlll shouL Lhe prlces llke weve ln vegeLable markeLs
O1here wasnL any mechanlsm Lo verlfy Lhe prlces aL whlch Lradlng acLually Look
place
OSo brokers used Lo charge prlces Lo Lhe lnvesLors (buyers and sellers of securlLles)
LhaL were usually dlfferenL from Lhe acLual prlces
Obrokers used Lo reporL hlgher Lhan acLual prlces for buy orders and lower Lhan
acLual prlces for sell orders)
Olf lnvesLors (buyers or sellers) demanded a more accuraLe prlce orders ofLen goL
cancelled (for example Lhe broker could slmply clalm LhaL such a favourable prlce was
noL obLalned ln Lhe markeL)
be settlement system
OpaymenL of money and dellvery of securlLles afLer Lrade by Lhe brokers Lo boLh
parLles (buyer and seller of shares)
OlL favored Lhe brokers and was Lo Lhe dlsadvanLage of Lhe lnvesLors
OLhe seLLlemenL was fuLuressLyle" and was on a forLnlghLly basls
Omeans LhaL Lradlng done durlng a forLnlghL would be seLLled aL Lhe end of Lhe
forLnlghL
OsysLem of badla enabled Lhe brokers Lo carry forward Lhelr llablllLy (of money or
securlLles) Lo nexL seLLlemenL
Oso brokers could posLpone seLLlemenL almosL lndeflnlLely lf Lhe prlces were noL
favorable Lo Lhem
O1hls led Lo a hlgh degree of rlsks Largescale problems arlslng ouL of fallure Lo
make paymenL or dellver shares would lead Lo closure of 8SL for days LogeLher
OLhls used Lo recur aL Lhe raLe of almosL once every oLher year

buJ Jellvery" of Shurex
OLven afLer you buy Lhe shares and geL Lhe paper ln your hands you had Lo send
Lhe shares Lo Lhe reglsLrar of Lhe company Lo reglsLer Lhe ownershlp of LhaL share ln
your name
OL Lhls sLage Lhe problem of bad dellvery arose due Lo a number of problems
Olf Lhe slgnaLure of Lhe seller dld noL maLch wlLh Lhe one malnLalned wlLh Lhe
reglsLrar Lhe shares were senL back
euxonx for lnuccurute xlgnuture
O1he seller of Lhe shares who probably purchased Lhe shares years back mlghL
unwllllngly slgn ln a dlfferenL manner
O8uL ln many cases manlpulaLlons by unscrupulous operaLors were responslble
OcounLerfelL shares (whereln any slgnaLure were puL by Lhe counLerfelLer)
OLnglneerlng bad dellverles by selllng parLy's brokers or by Lhe companles
Lhemselves Lo delay seLLlemenL ln order Lo supporL prlce manlpulaLlon
O1he Llme lag beLween buylng shares and geLLlng lL reglsLered ln Lhe name of Lhe
buyer used Lo Lake anyLhlng beLween 13 monLhs lf everyLhlng was alrlghL
O1he Llme lag normally wenL up Lo slx monLhs on an average ln case of bad dellvery

nyways so above were Lhe problems wlLh prlmary + secondary markeL so CovL made a law Lo
glve powers Lo SL8l Lo conLrol Lhem boLh nd so CCl was abollshed

nSL (naLlonal sLock exchange) was esLabllshed Lo end Lhe monopoly of 8ombay SLock
Lxchange

SE {ational stock excbange]
OnSL was a new exchange promoLed and owned by publlc secLor flnanclal
lnsLlLuLlons (llke lu8l D1l LlC ClC llCl eLc) and banks
OnSL ls professlonallymanaged (as opposed Lo Lhe oLher exchanges LhaL are
managed by brokers or members sLlll Loday)

?ou saw Lhe problems of 8SL ago and Lo curb Lhem
SF cume wlth 4 lnnovutlonx

omputerized trading
OllrsL physlcal floorbased brokersdomlnaLed Lradlng ouLslde Lhe eyes of Lhe
lnvesLors was replaced by anonymous compuLerlzed order maLchlng sysLem
Owhere Lradlng ls done ln fronL of Lhe lnvesLors
O1he ordermaLchlng sysLem ls characLerlzed by sLrlcL prlceLlme prlorlLy
Owhereln an order ls execuLed accordlng Lo Lhe prlce parameLers seL by Lhe
lnvesLors
O1he 1CLl whlch was seL up ln 1992 was Lhe flrsL compuLerlsed exchange ln lndla
OnSL sLarLed operaLlons ln 1994 wlLh elecLronlc Lradlng whlle all oLher exchanges
lnLroduced elecLronlc Lradlng subsequenLly
O8y March 31 1999 all Lhe 23 sLock exchanges ln Lhe counLry had compuLerlsed on
llne screen based Lradlng
Satellite communication
OLo spread Lhe reach of Lhe exchange Lo all over Lhe counLry was aLLempLed
successfully for Lhe flrsL Llme by nSL
O1hls was ln sLark conLrasL Lo Lhe oLher exchanges whlch Llll Lhen had Lhe reach
llmlLed Lo Lhelr clLles of operaLlon for over a cenLury

rofessional managers
OLhe LradlLlonal exchanges were and sLlll are managed by Lhe member brokers
O1hls gave rlse Lo many malpracLlces a confllcL of lnLeresL belng Lhe mosL lmporLanL
one Slnce Lhe brokers Lhemselves were ln charge of enforcemenL of rules and
regulaLlons Lhey never Look a declslon ln favour of Lhe lnvesLors LhaL wenL agalnsL Lhelr
lnLeresL
O1hls gave rlse Lo a confllcL of lnLeresL beLween Lhe members as brokers and
members as responslble for enforcemenL of rules and regulaLlons
OnSL avolded Lhls problem rlghL from beglnnlng because lL was seL up as a llmlLed
llablllLy company wlLh brokers as franchlsees
O1hls led Lo a slLuaLlon where brokers were noL held responslble for enforcemenL of
rules and regulaLlons and
OLhose who were enLrusLed wlLh enforcemenL (professlonal managers) were noL
brokers
Os a resulL nSL's sLaff ls free of pressures from brokers and ls beLLer able Lo
perform regulaLory and enforcemenL funcLlons

Weekly settlement
Olf you buy shares from me you've Lo glve me Lhe money ln 1 week and l've Lo glve
you Lhe shares ln Lhe same 1 week
OLhe LradlLlonal pracLlce of forLnlghLly seLLlemenL cycle + sysLem of badla LhaL
allowed exLenslon of even Lhls forLnlghLly cycle was replaced by a sLrlcL weekly
seLLlemenL cycle wlLhouL badla

exult-BSF Ix buxteJ
OLqulLy Lradlng aL nSL commenced ln november 1994
OJlLhln one year of operaLlon nSL surpassed Lhe 8SL ln Lerms of Lurnover
O8SL was worklng slnce 1873 wlLh monopoly now lL had Lo face compeLlLlon wlLh
nSL
OSo ln March 1993 8SL also adopLed slmllar lnnovaLlon Lo keep up ln Lhe race

ll tbis, lead to good tbings Stock markets

Improved ransparency:
lnvesLors can see wlLh Lhelr own eyes Lhe prlces LhaL are currenLly belng quoLed ln Lhe
markeL and choose Lo Lrade or noL
nonymity= no cartels
O1he elecLronlc Lradlng plaLform makes Lradlng compleLely anonymous
O1radlLlonally lack of anonymlLy ln Lradlng ln Lhe floorbased sysLem
Ogave rlse Lo carLels (of brokers) and made prlce manlpulaLlon easy nSL
Owas a break from Lhls LradlLlon as well and removed much of Lhe scope for
Oprlce manlpulaLlon
ore brokers = competition =good for clients
OnSL Lhrows open Lhe buslness of sLock broklng Lo all and everyone (sub[ecL Lo
fulflllmenL of cerLaln crlLerla)
Oln conLrasL 8SL resLrlcLed new enLry lnLo Lhe brokerage buslness unLll nSL came
lnLo plcLure
Onow More Lhan a Lhousand brokers enLered Lhe markeL wlLh Lhe nSL leadlng Lo
sLeep lncrease ln compeLlLlon and Lhe consequenL fall ln Lhe brokerages* by a very
subsLanLlal amounL
O1hls led Lo a drasLlc fall ln LransacLlon cosLs (*Lhe broker's Commlsslon)
o more bad delivery
uLomaLlon of Lhe Lradlng sysLem ellmlnaLed all Lhe problems assoclaLed wlLh manual Lradlng
(eg bad dellvery/ slgnaLure eLc)
Investors outside umbai can earn money
OlnvesLors from all over Lhe counLry have goL access Lo an exchange on same Lerms
and condlLlons as lnvesLors wlLhln Mumbal for Lhe flrsL Llme
OLarller 8ombay sLock exchange was Lhe predomlnanL one ln Lhe counLry
ObuL lnvesLors ouLslde Lhe clLy found lL exLremely dlfflculL and cosLly Lo do buslness
ln Lhe exchange (no cellphones wlLh free lncomlng!)
O1hus Lrue Lo lLs name nSL Lurned ouL Lo be Lhe flrsL naLlonal sLock exchange
O1hls beneflLed Lhe lnvesLors from ouLslde Mumbal more Lhan perhaps Lhe
lnvesLors wlLhln Lhe clLy


ational Securities learing orporation Limited
{SL]
OlL's a subsldlary of nSL Lo prevenL Lhe counLer parLy rlsk (esLabllshed ln ugusL
1993)
OcounLerparLy rlsk means Lhe rlsk LhaL one of Lhe Lwo parLles ln a LransacLlon may
fall Lo honour Lhelr commlLmenL Lo pay cash buyer or sLock seller on Lhe scheduled
seLLlemenL daLe
Olor every Lrade (buy or sell) done on Lhe nSL nSCCL becomes Lhe counLerparLy
Omeans Lhe seller sells Lhe securlLles Lo Lhe nSCCL and Lhe buyer buys from Lhe
OnSCCL
OLven lf a brokerage flrm falls Lo make paymenL (or dellver securlLles) nSCCL makes
Lhe paymenL (or dellver securlLles)
O1hls has almosL ellmlnaLed counLerparLy rlsk and conLalned Lhe recurrence of
paymenL crlses LhaL characLerlsed lndlan sLock markeLs for almosL a cenLury
emat account

O?ou read above how Lhe 'bad dellvery of shares' was englneerlng by Lhe brokers+
Lhe menace of counLerfelL shares nd Lhe fear of LhefL of shares
O1o curb Lhls problem SL8l came up wlLh Lhe novel ldea LhaL ls 'uemaLerlallzaLlon
of share holdlng'
O1hls means you've Lo geL a uemaL accounL ln Lhe bank and
Owhen you buy shares you don'L geL a 'plece of paper' 1haL share geLs
auLomaLlcally credlLed Lo your demaL accounL
Oln november 1996 Lhe naLlonal SecurlLles ueposlLory LLd (nSuL) Lhe flrsL
deposlLory ln lndla was esLabllshed lor Lhls purpose
OSL8l played an acLlve role ln gradual shlfLlng from physlcal cerLlflcaLes Lo
demaLerlallsed holdlng by lnLroduclng a mandaLory elemenL ln Lhe process
OCurrenLly almosL cenL percenL Lradlng and seLLlemenL are done ln a demaLerlallsed
envlronmenL
O8uL Lhlngs are noL LhaL safe and sweeL Lhanks Lo l9 scamuemaL Cueen 8oopal
9anchal