E- MODULE ON SEBI AS FAILURE TO PERFORM ITS DUTY
SUBMITTED BY
KAJAL PURI
ASSTT. PROF. IN COMMERCE & MANAGEMENT
INTRODUCTION
SEBI was established in 1988, as an administrative body, through a government resolution to promote orderly and healthy growth of the securities market and for investors’ protection. The board so established was assigned the task of monitoring the activities of stock exchanges, mutual funds and merchant bankers.
Section 11 of the ACT that defines the primary functions of the SEBI echoes the preamble and reads, "Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit."
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The Securities and Exchange Board of India (SEBI) is the primary regulator for the securities and commodities markets in India. SEBI exercises power provided under the SEBI Act 1992 (the Act), and various rules and regulations issued in exercise of the powers granted under the Act. The orders and directions issued by the SEBI in exercise of its power could be first challenged in the Securities Appellate Tribunal (SAT) and then in the Supreme Court of India.
The challenges of SEBI, therefore, begin right from the preamble of the Act. The function of protecting investors, development the securities market and regulating the market are self-conflicting in many cases. More often than not, SEBI is faced with the situation where meeting one objective would jeopardise the other.
There has been various instances where SEBI has failed to perform its duty as the regulator of securities markets in India.
In the past 27 years of its operations, SEBI has been often censured by the SAT and the Supreme Court for a variety of reasons. The securities market participants, viz., self-regulatory organisations such as stock exchanges and depositories, intermediaries like stockbrokers, service providers like asset management companies, portfolio managers, merchant bankers, and investors and traders in securities, etc, have all been more critical of SEBI than appreciative.
SEBI has been recently accused of being "callous", "overreaching", "inert" in performance of its duties and in exercising its power.
Besides, the regulator has often been accused of being inconsistent and lacking transparency in its conduct. Without delving into specific cases and instances where SEBI might have erred in performing its duties to highlight a fundamental issue that may be responsible for below-par performance of SEBI.
KEY POINTS OF FAILURE AND JUSTFICATION
A major initiative of liberalisation was the repeal of the Capital Issues (Control) Act, 1947 in May 1992. With this, Government’s control over issue of capital, pricing of the issues, fixing of premia and rates of interest on debentures etc. ceased and the market was allowed to allocate resources to competing uses. In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) guidelines. The guidelines allow issuers, complying with the eligibility criteria, to issue securities the securities at market determined rates. The market moved from merit based to disclosure based regulation.
A major initiative of regulation was establishment of a statutory autonomous agency, called SEBI, to provide reassurance that it is safe to undertake transactions in securities. It was empowered adequately and assigned the responsibility to (a) protect the interests of investors in securities, (b) promote the development of the securities market, and (c) regulate the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for redressal of investor grievances.
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A major developmental initiative was a nation-wide on-line fully-automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cut down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allowed faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets.
It enabled market participants to see the full market on real-time, making the market transparent. It allowed a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market – over 10,000 terminals creating waves by clicks from over 400 towns / cities in India. It provided full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provided a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety.
The trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. Often this cycle was not adhered to. This was euphemistically often described as T+ any thing. Many things could happen between entering into a trade and its performance providing incentives for either of the parties to go back on its promise. This had on several occasions led to defaults and risks in settlement. In order to reduce large open positions, the trading cycle was reduced over a period of time to a week initially. Rolling settlement on T+5 basis was introduced in phases. All scrips moved to rolling settlement from December 2001. T+5 gave way to T+3 and T+2. Now the new basis is T+1.
Settlement system on Indian stock exchanges gave rise to settlement risk due to the time that elapsed before trades are settled. Trades were settled by physical movement of paper. This had two aspects. First, the settlement of trade in stock exchanges by delivery of shares by the seller and payment by the purchaser. The process of physically moving the securities from the seller to the ultimate buyer through the seller’s broker and buyer’s broker took time with the risk of delay somewhere along the chain.
The second aspect related to transfer of shares in favour of the purchaser by the company. The system of transfer of ownership was grossly inefficient as every transfer involved physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer took much longer, and a significant proportion of transactions ended up as bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant, and in addition the issuer had the right to refuse the transfer of a security. All this added to costs, and delays in settlement, restricted liquidity and made investor grievance redressal time consuming and at times intractable.
To assist market participants to manage risks better through hedging, speculation and arbitrage, SCRA was amended in 1995 to lift the ban on options in securities. The SCRA was amended further in December 1999 to expand the definition of securities to include derivatives so that the whole regulatory framework governing trading of securities could apply to trading of derivatives also. A three-decade old ban on forward trading, better known as BADLA, which had lost its relevance and was hindering introduction of derivatives trading, was withdrawn. Derivative trading took off in June 2000 on two exchanges.
A variety of measures were taken to address the risk in the market. Clearing corporations emerged to assume counter party risk. Trade and settlement guarantee funds were set up to guarantee settlement of trades irrespective of default by brokers. These funds provide full novation and work as central counter party. The Exchanges /clearing corporations monitor the positions of the brokers on real time basis.
Road Ahead
SEBI is working continuously and in close co-ordination with the regulated and the government, to improve market design to bring in further efficiency and transparency to market and make available newer and newer products to meet the varying needs of market participants, while protecting investors in securities. The aim is to make Indian securities market a model for other jurisdictions to follow and make SEBI the most dynamic and respected regulator globally. Some of the initiatives on which SEBI is working are:
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