Regulations of Stock Exchanges -

Securities and Exchange

Board of India

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Chapter Objectives

To know the organization of SEBI

To understand the various functions of SEBI

To understand the role of SEBI in primary and

secondary markets

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Concept of SEBI

SEBI was established in the year 1992.

The three main objectives of SEBI are to:

Protect the interest of the investors

Promote the development of securities market

Regulate the securities market

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Functions of SEBI

The functions performed by the SEBI are:

Regulates the business of stock exchanges

Regulates the working of stock brokers,

sub-brokers, share transfer agents, merchant bankers, etc.

Prohibits unfair trade practices in the stock exchanges

Promotes education and training of investors and

intermediaries

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Organization of SEBI

The different departments of SEBI are:

Primary department: It has the responsibility of looking

after the policy matters related to the primary market.

Issue management department: It has the responsibility

of looking after the issuing of new shares.

Secondary market department: It has the responsibility

of looking after the market price of the shares in the

secondary market.

Institutional investment department: It has the

responsibility of looking after the mutual funds, mergers,

acquisitions, etc.

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SEBI’s Role in

the Primary Market

For protecting the interest of the investors in the

primary market, SEBI performs various

important roles, which are as follows:

Entry norms: The SEBI tightens the entry norms for the

companies entering the capital market.

Promoters’ contribution: The SEBI regulates the

contribution of the promoters by fixing the minimum limit

for their contribution made to the capital issue.

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SEBI’s Role in

the Primary Market (Contd.)

Disclosure: The draft prospectus is made as a public document

in order to promote transparency.

Book building: The SEBI accepts book building as one of themodes of public issue and issues guidelines for book buildingmode.

Allocation of shares: The SEBI makes proportionate allotmentof shares in order to protect the interest of small investors tothe primary market.

Market intermediaries: The merchant bankers are licensed bythe SEBI to carry out their operations in primary market.

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Financial Ratio

It is a ratio that provides a numerical relationship between two relevant financial data.

It is prepared from the balance sheet and profit & loss account.

It is divided into six groups, which are as follows:

Liquidity ratios

Turnover ratios

Leverage ratios

Profit margin ratios

Return on investment ratios

Valuation ratios

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SEBI’s Role in the Secondary Market

SEBI has initiated a number of reforms in the secondary

market for making it more attractive to the investors. These

reforms are as follows:

Governing board: The SEBI has reconstituted the governing board of the stock

exchanges.

Infrastructure: In order to sophisticate the shares trading, SEBI has permitted

all the stock exchanges to expand their online screen-based trading terminals.

Settlement: Rolling settlement was introduced.

Debt market segment: The SEBI has permitted the debt market instruments to

be traded in the stock exchanges.

Price stabilization: A separate division has been set up by the SEBI to look

after the price movements of shares in the market.

Delisting: The norms of delisting of shares has been tightened by the SEBI.

Brokers: The SEBI has laid down a code of conduct for the brokers. 9Dr.PS II Unut

Mutual Funds and SEBITo ensure a smooth functioning of mutual funds, SEBI has laid down following regulations:

Disclosure norms: The companies in their disclosure forms (prospectus) must include all the information about the functioning and nature of the mutual funds.

Investments: The SEBI has tightened the various norms of investments of mutual funds so that the investments can get a better rate of return.

Accountability: The SEBI has issued directives that proper books of accounts must be maintained related to the investments made by the mutual funds.

Dividend: The amount of dividend must not be less than 90% per cent of the profits earned during the year.

Management: Members of the management must have a great deal of experience, professional competence and financial

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SEBI and the Foreign Institutional

Investment The Foreign Institutional Investor (FII) is an entity that is established

outside India and proposes to make investments in India.

A large inflow and outflow of FIIs has a significant bearing on the stock price movement.

The SEBI, in order to regulate the flow of FIIs in the stock market has issued the following directives:

An individual must hold a certificate granted by the SEBI, if S/he has to deal in securities as a foreign institutional investor.

The individual under the provisions of Foreign Exchange Regulation Act (FERA) 1973 has to take permission in order to make investments in India.

A custodian has to be appointed by the FIIs to deal in the securities and reporting.

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Critical Review of SEBI

SEBI has made a great deal of progress in regulating

the exchange market. However, there are certain areas

which need the attention of SEBI. These are:

Disclosures

Settlement

Capital adequacy

Single authority

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Chapter Summary

By now, you should have:

Understood the organization of SEBI

Understood the various functions of SEBI

Understood the role of SEBI in primary and

secondary markets

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