Capital Market Regulations

Overview

In keeping with the broad thrust of the ongoing programs of economic reform, the mechanism of administrative controls over capital issues has been dismantled and pricing of capital issues is now essentially market determined. Regulation of the capital markets and protection of investor's interest is now primarily the responsibility of the Securities and Exchange Board of India (SEBI), which is located in Bombay.

Accordingly, SEBI's functions include:

• Regulating the business in stock exchanges and any other securities markets
• Registering and regulating the working of collective investment schemes, including mutual funds.
• Prohibiting fraudulent and unfair trade practices relating to securities markets.
• Promoting investor's education and training of intermediaries of securities markets.
• Prohibiting insider trading in securities, with the imposition of monetary penalties, on erring market intermediaries.
• Regulating substantial acquisition of shares and takeover of companies.
• Calling for information from, carrying out inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self regulatory organizations in the securities market.

Keeping this in view, SEBI has issued a new set of comprehensive guidelines governing issue of shares and other financial instruments, and has laid down detailed norms for stock-brokers and sub-brokers, merchant bankers, portfolio managers and mutual funds.

On the recommendations of the Patel Committee report, SEBI on 27 July 1995, permitted carry forward deals. Some of the major features of the revised carry-forward transactions as directed by SEBI are:

• Carry forward deals permitted only on stock exchanges which have screen based trading system.
• Transactions carried forward cannot exceed 25% of a broker's total transactions on any one day.
• 90-day limit for carry forward and squaring off allowed only till the 75th day (or the end of the fifth settlement).
• Daily margins to rise progressively from 20% in the first settlement to 50% in the fifth.

On 26 January1995, the government promulgated an ordinance amending the SEBI Act, 1992, and the Securities Contracts (Regulation) Act, 1956.

In accordance with the amendment adjudicating mechanism will be created within SEBI and any appeal against this adjudicating authority will have to be made to the Securities Appellate Tribunal, which is to be separately constituted. These appeals will be heard only at the High Courts.

The main features of the amendment to the Securities Contract (Regulation) Act, 1956, are:

• The ban on the system of options in trading has been lifted.
• The time limit of six months, by which stock exchanges could amend their bye-laws, has been reduced to two months.
• Additional trading floors on the stock exchanges can be established only with prior permission from SEBI.
• Any company seeking listing on stock exchanges would have to comply with the listing agreements of stock exchanges, and the failure to comply with these, or their violation, is punishable.

Fraudulent and Unfair Trade Practices

SEBI is vested with powers to take action against these practices relating to securities market manipulation and misleading statements to induce sale/purchase of securities.

Inspection and Enforcement

SEBI has the powers of a civil court in respect of discovery and production of books, documents, records, accounts, summoning and enforcing attendance of company/person and examining them under oath. SEBI can levy fines for violations related to failure to submit information to SEBI / to enter into agreements with clients / to redress investor grievances, violations by mutual funds/stock brokers and violations related to insider trading, takeovers etc.