|
GS Paper II – Statutory Bodies GS Paper III – Capital Market |
Why in News?
Recently, Hindenburg Research has claimed that the Securities and Exchange Board of India’s (SEBI) chairperson had a stake in unidentified offshore companies allegedly involved in the Adani money syphoning scandal.
What is Hinderburg Research?
Hindenburg Research is an investment research firm based in the United States, founded by Nathan Anderson, who describes himself as an activist short seller.
The firm specializes in forensic financial analysis, focusing on uncovering accounting irregularities, unethical business practices, and undisclosed financial issues or transactions.
A key aspect of their work involves short selling, where their reports on specific companies guide their predictions that the market prices of those companies will decline.
The company is named after the 1937 Hindenburg disaster, a man-made, preventable explosion of a German airship.
Their website says, “We search for similar man-made disasters in the market and try to expose them before they deceive more unsuspecting victims.”
Hindenburg Research gained significant attention in India when it published a report on the Adani Group in 2023.
Background:
The situation started in January 2023 when Hindenburg Research released a report accusing the company of corporate misgovernance and other violations.
Charges against Adani:
○ Involvement in large-scale stock price manipulation
○ Falsely inflating the value of their assets
○ Controlling over 75% of their shares through various offshore shell entities managed by the Group
Allegations against Hindenburg:
○ Engaging in short selling (a trading strategy where traders speculate that a stock’s price will fall, allowing them to profit by selling the stock at a high price and buying it back at a lower price to repay their leverage) of domestic stocks outside the country’s jurisdiction to profit from the resulting price crash
○ Potentially violating India’s tax and SEBI regulations, which prohibit such practices
What is SEBI?
The Securities and Exchange Board of India (SEBI) is the primary regulatory authority for the securities market in India.
It functions as a statutory body founded on April 12, 1992, by the provision of the Securities and Exchange Board of India Act, 1992, under the Ministry of Finance, Government of India.
SEBI’s headquarters are situated in Mumbai.
– Additionally, it has four regional offices in Ahmedabad, Kolkata, Chennai, and Delhi.
The main objectives of the Securities and Exchange Board of India are:
– To serve as the watchdog of the Indian capital market
– To safeguard the interests of investors in securities
– To promote, grow and regulate the securities market.
The core responsibilities of the Securities and Exchange Board of India include safeguarding investor interests in securities and overseeing the promotion and regulation of the securities market.
How did SEBI come into Existence?
Before the establishment of SEBI, the regulatory authority for the Indian Securities Market was the Controller of Capital Issues, which derived its authority from the Capital Issues (Control) Act of 1947.
In the late 1980s, with the impending LPG reforms, there was a recognized need for an independent body to serve as a vigilant regulatory authority to safeguard the Indian financial system from external shocks. Consequently, in April 1988, the Securities and Exchange Board of India was formed as the capital market regulator in India through an Executive Resolution of the Government of India.
Initially, SEBI was a non-statutory body without any legal powers.
In 1992, SEBI became autonomous and was given statutory powers by the SEBI Act 1992.
Powers of SEBI:
○ Quasi-judicial powers
○ Quasi-executive powers: examine book of accounts, gather evidence, legal actions
○ Quasi-legislative powers: rules, obligations
Powers Regarding Issuers:
- Requesting information, conducting inspections, and carrying out inquiries and audits of stock exchanges, mutual funds, and other entities associated with the securities market, including intermediaries and self-regulatory organizations.
- Prohibiting insider trading in securities.
Powers Regarding Investors:
- Promoting and regulating self-regulatory organizations.
- – Banning fraudulent and unfair trade practices in the securities markets.
- Regulating significant acquisitions of shares and company takeovers.
- Advancing investor education and training for securities market intermediaries.
Powers Regarding Intermediaries:
- Registering and overseeing the activities of stock brokers, sub-brokers, share transfer agents, issue bankers, trust deed trustees, issue registrars, merchant bankers, underwriters, portfolio managers, investment advisers, and other intermediaries connected to the securities markets.
- Registering and regulating venture capital funds and collective investment schemes, including mutual funds.
Functions of SEBI to meet the needs of three categories:
- Issuers – By offering a marketplace where issuers can raise funds.
- Investors – By ensuring the safety and availability of precise and accurate information.
- Intermediaries – By facilitating a competitive professional environment for intermediaries.
What is the Structure of SEBI?
The Securities and Exchange Board of India (SEBI) is governed by the following members:
- The Union Government of India appoints the chairman.
- Two members are officials from the Union Finance Ministry.
- One member is from the Reserve Bank of India.
- The remaining five members are also nominated by the Union Government of India, with three of them required to be full-time members.
Ms Madhabi Puri Buch is the current chairman of SEBI, having taken office on March 2, 2022, following former chairman Ajay Tyagi. SEBI also establishes various committees as needed to address pressing issues at the time.
Further, a Securities Appellate Tribunal (SAT) has been constituted to protect the interest of EBI and also forms various committees as needed to address pressing issues at the time. Additionally, a Securities Appellate Tribunal (SAT) has been established to protect the interests of entities that feel aggrieved by SEBI’s decisions.
Securities Appellate Tribunal (SAT)
Securities Appellate Tribunal is a statutory body created under the provisions of the Securities and Exchange Board of India Act, 1992. Its purpose is to hear and resolve appeals against orders issued by SEBI or an adjudicating officer under the Act, and to exercise the jurisdiction, powers, and authority granted to the Tribunal by this Act or any other applicable law.
The SEBI Chairman has the power to mandate “search and seizure operations.” Additionally, the SEBI board can request information, such as telephone call data records, from any individuals or entities related to any securities transaction under investigation.
Major Achievements of SEBI :
Since its inception, SEBI has played a crucial role in ensuring a well-functioning securities market in India while also promoting its development. Some of its significant achievements include:
– Dematerialization of shares
– Reducing settlement cycles
– Launching nationwide electronic trading
– Implementing risk management systems
– Establishing clearing corporations
– Supporting the growth of the mutual fund industry.
What are the Issues Associated with SEBI?
- In recent years, SEBI’s role has become more complex, placing the capital markets regulator at a crossroads. There is an excessive emphasis on regulating market conduct, with less focus on prudential regulation.
- Compared to its counterparts in the US and the UK, SEBI has been granted significantly greater legislative and enforcement powers. It has the authority to impose serious restrictions on economic activity based solely on suspicion, which can sometimes result in significant economic harm.
- Its legislative powers are nearly absolute, as the SEBI Act grants it considerable discretion to create subordinate legislation. However, there is a notable lack of prior consultation with the market and a review system for regulations to ensure they fulfil their intended purposes. Consequently, there is widespread fear of the regulator.
- Furthermore, regulation—whether through rules or enforcement—is far from perfect, particularly concerning insider trading. Securities offering documents tend to be excessively lengthy and have largely been reduced to formal compliance, rather than providing high-quality substantive disclosures.
Initiatives Taken for the Effective Functioning of SEBI
Investor Education and Protection Fund (IEPF)
Established under Section 125 of the Companies Act, 2013, the IEPF aims to promote investor awareness and safeguard the interests of investors.
SCORES Portal (SEBI Complaints Redress System)
SEBI has launched the SCORES portal, a web-based centralized grievance redress system. This platform allows investors to submit and follow up on their complaints, as well as track the status of their resolutions from anywhere.
Investor Education and Financial Literacy
SEBI has implemented various initiatives to enhance investor education and financial literacy. These efforts contribute to the better functioning of markets and the economy while protecting investors’ interests. Major initiatives in this area include the Securities Market Awareness Campaign and the Financial Literacy-cum-Counseling Centre, among others.
Conclusion
In summary, the Securities and Exchange Board of India (SEBI) is vital as the market regulator for maintaining stability and promoting growth in the Indian Securities Market. By safeguarding investors, ensuring fair practices, and facilitating market development, SEBI helps create a vibrant and trustworthy financial ecosystem that supports India’s economic goals. As markets become increasingly complex and interconnected globally, its regulatory role will become even more essential. It is important to take the necessary measures to enhance its effectiveness.
Practise Question :
The Securities and Exchange Board of India is a crucial institution for regulating and supervising the securities market in India. Enumerate its importance and the challenges faced by it. (10 Marks)
Explore our courses: https://apnipathshala.com/courses/
Explore Our test Series: https://tests.apnipathshala.com/
