For a growing and dynamic economy like India, capital markets play an important role in not just attracting domestic and foreign investment but also mirror the state of affairs in our country. In order to present the Indian dream most favourably among investors, it is important that our capital markets have a strong and non-manipulative infrastructure and to ensure this, India has its capital market regulator, the Securities and Exchange Board of India – SEBI.
With changing times and while facing newer challenges, SEBI has always taken responsibility for everything that is right or wrong in India’s capital markets. Even now, when SEBI finds itself surrounded by the din of chit funds siphoning off crores of rupees from gullible investors and a need for tightening insider trading norms; the Indian government has happily obliged to SEBI’s demand for more powers. Accordingly the government has promulgated Securities Laws (Amendment) Second Ordinance, 2013 that would amend the SEBI Act, the Securities Contracts (Regulation) Act and the Depositories Act. With these amendments, SEBI will be able to regulate any money pooling scheme worth Rs. 100 crore or more and attach assets in cases of non-compliance. The SEBI Chairman would have the authority to order "search and seizure operations". The amended law would also allow SEBI to seek information, such as telephone call data records, from any persons or entities in respect to any securities transaction being investigated by it. The law would further allow setting up of special courts to speed up SEBI related cases.
SEBI'S ORIGIN AND ITS CURRENT HIERARCHY:The idea of setting up a regulator was first proposed by former Prime Minister, Late Mr. Rajiv Gandhi who was also the Finance Minister in 1987. In his budget speech for 1987-88, Mr. Gandhi had said “For a healthy growth of capital markets, investors’ rights must be fully protected. Trading malpractices must be prevented. Government has decided to set up a separate board for the regulation and orderly functioning of stock exchanges and the securities industry.” Thus, a notification was issued and SEBI was constituted on 12th April 1988 as an interim administrative body under the Finance Ministry. However, it was four years later; on 4th April 1992 that a notification awarding statutory powers to SEBI was finally issued.
SEBI is a quasi-legislative, quasi-judicial and quasi-executive body. It can draft regulations, conduct inquiries, pass rulings and impose penalties. All decisions taken by SEBI are collectively taken by its Board that consists of a Chairman and eight other members. The current Chairman of SEBI is Mr. Upendra Kumar Sinha. Moreover, SEBI appoints various committees, whenever required to look into the pressing issues of that time. Further, a Securities Appellate Tribunal – SAT has been constituted to protect the interest of entities that feel aggrieved by any of SEBI’s decision. SAT, consisting of a Presiding Officer and two other Members, has the same powers as vested in a civil court. Further, if any person feels aggrieved by SAT’s decision or order can appeal to the Supreme Court.
JOURNEY SO FAR:
SEBI, in its short journey of 25 years has made a remarkable impression on investors as well as capital markets. Following are some of the changes introduced by SEBI…..
Settlement system: SEBI introduced rolling settlement on a T+5 basis for domestic as well as foreign institutional investors in 1998. Gradually reducing the settlement time since then, Indian markets have switched to T+2 trading now.
Dematerialization of share certificates: SEBI initiated the process of dematerialization of share certificates in 1999. The need for this initiative was felt to avoid the threat of forgery or theft of share certificates coupled with inordinate delay by transfer agents and post offices.
Fostering mutual funds: SEBI regularly issues revised guidelines for mutual fund industry to help them flourish in India. Till early 90s, Unit Trust of India was the only player in India's mutual fund market. Sebi's efforts not only encouraged hundreds of mutual funds to enter the Indian markets, but also gave an opportunity to not so savvy investors to invest in the markets through a much safer way. To enhance the popularity of mutual funds, SEBI relaxed know your customer (KYC) norms for small investors and widened the distribution network in rural India by roping in postal agents. By banning entry loads for mutual fund schemes in 2009, SEBI curbed mis-selling of mutual fund products.
Rolling out red carpet for FIIs: In order to keep a close eye on FII inflow; the task of giving approvals to FII registrations was handed over to SEBI in 2003 and since then SEBI has been consistently revising the FII investment limit in both corporate as well as government debt. Meanwhile, in order to discourage FII investments made through P-notes, SEBI has imposed sufficient checks and balances to avoid the flow of black money into the Indian markets.
IPO reforms: SEBI had last year notified wide-ranging reforms in Initial Public Offer -IPO market which included a strict vigil on usage of issue proceeds, greater disclosure by companies and their bankers and allotment of a minimum number of shares to retail investors. Keeping with the times, SEBI has also introduced e-IPO procedure for electronic bidding in public offers to help investors bid for shares in a cost-effective manner.
Surveillance and risk management: In 1996-97, SEBI directed all exchanges to fix the daily price band at 10% and a weekly overall limit of 25% to curb undesirable volatility. To bring about a coordinated trading halt in all equity and derivates market nationwide, SEBI introduced an index based circuit breaker system applicable at 10%, 15% and 20% movement either way.
Grievance redressal and investor awareness: SEBI has a web-based centralized grievance redress system called SEBI Complaints Redress System – SCORES for assisting investors to lodge their complaints in a structured way. Further, in its silver jubilee year, SEBI has launched a massive mass media exercise to inform investors about SCORES and its toll free helpline (1800 266 7575 / 1XXX XX 7575, available in 14 languages). To reach rural masses, SEBI has tied up with the department of posts to print cautionary messages on the back of post office passbooks while for urbanites Google India’s Ad Word facility displays pop-up investor awareness messages on its search engine.
CHALLENGES AHEAD:With the advent of new technology, SEBI will have to continuously upgrade its manpower and improve its capacities to deal with situations that can arise. Creating a more robust framework to successfully deal with the menace of insider trading and strict implementation of buyback norms will also play an important role in assuring a sustained investor interest. SEBI would further have to strongly handle the issue of fraudulent collective investment schemes. Although SEBI has approved a proposal to penalize unregistered CIS entities and has decided to declare the illegal mobilisation of funds as a fraudulent and unfair trade practice; the long term results of these steps will only ensure their effectiveness. To ensure that FIIs continue to invest in India and to channelize household savings into the capital market will be another challenge. Moreover, SEBI is currently facing one of its biggest legal battles against two Sahara companies regarding refund of around 24,000 crore rupees.
LEARNING FROM SHORTCOMINGS AND IMPROVING:Winston Churchill had once famously remarked that an optimist sees opportunity in every difficulty. The same can be said for SEBI as it has improved and strengthened its mechanisms after being stuck by difficult and adverse situations every now and then. Just weeks after SEBI was born, the Securities Market Scam led by Harshad Mehta hit Dalal Street leading to the introduction of several regulatory changes in primary and secondary markets. It also brought it a notification prohibiting insider trading and making it a criminal offence. In 1999-2000, after the Ketan Parekh scam broke out, SEBI completely discarded account settlement and rolling settlement was introduced. Forward trading was formally introduced in the form of exchange traded derivatives and short selling in spot markets was banned. Another learning curve for SEBI was the IPO scam, 2005 which further tightened the implementation of KYC norms and made PAN card compulsory for all categories of investors.
Recently, a report published by International Organisation of Securities Commissions- IOSCO under its Financial Sector Assessment Program - FSAP acknowledged that the comprehensive risk management framework prescribed by SEBI is one of the pillars of the Indian securities settlement system. It further said that the Indian capital markets’ regulator has successfully prevented occurrence of any major defaults in the last decade. SEBI has welcomed the report and its many recommendations. SEBI has acknowledged the suggestion that it should focus more on strengthening the supervision of securities market intermediaries including fund managers. It has also agreed to work on strengthening the stress-testing procedures of the central counterparties - CCPs and to improve the liquidity risk management. SEBI has further said that it will try to get legal backing to further improve the clearing and settlement process by addressing the issues of finality and netting at the level of law.
WAY FORWARD:From the outcry system of trading to screen-based trading, from physical share certificates to dematerialised shares, from two-week settlement cycle to T+2 system of settlement, from long-delays in getting refunds in share applications to a facility where IPOs can be applied for, without money leaving the investors’ account; SEBI has to its credit many achievements that are unparalleled in the Indian financial space. Addressing SEBI’s silver jubilee function in Mumbai recently, SEBI Chairman said that it has been an eventful journey despite all the challenges. Proud of the fact that SEBI has been successful in creating world class market infrastructure, Mr. Sinha said that SEBI distinguishes itself from other regulators in India as it is a financially independent regulator with its own sources of revenue. Addressing the same august gathering, the Prime Minister, Dr. Manmohan Singh agreed that regulation of the securities market is a complex exercise and lauded SEBI for evolving into a credible and effective regulator.
-NISHA MOHAN RANEY, REPORTER, MUMBAI