What is SEBI and it’s roles? Rules, Regulations and policies

SEBI, short for Securities and Exchange Board of India, is the principal governing authority in India looking after as well as regulating the securities market in India. It was set up in 1988, and was given statutory powers in 1992 to protect investors and ensure the orderly functioning of the securities market. SEBI is essentially a watchdog, who ensures that companies, stock exchanges, brokers, and investors play by the fair and regulated playbook. The core functions of SEBI are to ensure transparency, prevent frauds and build the confidence in the financial system such that more and more people invest their earnings out of belief and not out of a compulsion. To ensure this, SEBI frames the Rules, Regulations, and Policies that would govern the functioning of stock markets and related participants. As part of this, it provides guidance to companies as they issue shares, prevents insider trading, regulates Mutual Funds, supervises market intermediaries (namely brokers), and protects the small investor from anti-social, exploitable practices. To put it simply, SEBI protects and promotes a fair, orderly, and stable framework for the functioning of the financial market, through its Rules and Policies.

What is SEBI?

India’s Securities and Exchange Board (SEBI) is the regulatory body for the securities market in India, established by the SEBI Act, 1992. Its main aim is protecting investors, promoting the development of the securities market, and ensuring that the securities market is stable financially. Additionally, SEBI regulates financial markets, including stock exchanges, brokers, mutual funds, and listed companies, to promote transparency, fairness, and efficiency.

Roles and Objectives of SEBI

Protecting Investors:

The objective of protecting investors at SEBI is to prevent anyone from being fraud or misled in the stock market. It monitors the disclosure of relevant, accurate, and transparent information about companies and their shares prior to public offering so that investors can make informed decisions about where to invest. SEBI warily polices against fraud, insider trading, or any other unfair practices that can disadvantage smaller investors. Additionally, if any company or broker is found in violation of the rules, SEBI can take very stringent action against them. Therefore, SEBI establishes confidence and offers investors a safe and equitable marketplace for their capital.

Regulating the Market:

SEBI regulates the market to ensure that the stock market operates in a controlled, equitable, and smooth manner. It creates and implements rules for companies, stock exchanges, brokers, and the variety of market participants to ensure all are abiding by the same standards. SEBI oversees daily trading operations, prevents manipulation and other unfair trading practices, and guarantees that the purchase and sale of securities occurs in an adequate manner whereby sufficient transparency has been introduced. The regulation helps produce discipline in the markets and stability for investors and issuers alike.

Promoting Market Development:

SEBI’s objective of “market development” is to establish a modern, safe, and investor-friendly Indian securities market. It introduces new products (derivatives, mutual funds, and exchange-traded funds) and develops processes (online trading and speedier settlement of transactions). SEBI is also working to increase awareness about financial literacy and investment amongst the investing public so that more members of society can invest with confidence. By doing these things, SEBI contributes to the development of the market, improved efficiency, and global harmonization.

Key Rules, Regulations, and Policies

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR):

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) are rules issued by SEBI which govern how companies can raise capital from the public via the issuance of equity or other types of securities. The guidelines require companies to present investors with “clear, true, and adequate disclosure” of the company’s financial position, business development, risk factors, and how the funds raised will be used prior to selling shares. The IFR regulations are applicable to both the IPO (Initial Public Offer) and other ways to raise capital such as rights issues, bonus issues, and preferential allotments. In short, the regulations allow investors to hold companies accountable for raising funds in a transparent and fair manner.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003:

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 are designed to prohibit fraudulent and unfair practices in the stock market. They prohibit practices such as giving false or misleading information to affect the price of a security(a practice known as “market manipulation”), insider trading, creating a false or misleading appearance of market activity by artificially creating demand or supply for a security, and misleading persons. The primary purpose of these regulations is to promote honest, fair, and transparent securities markets, and to protect investors from fraud. In sum, it protects the public against dishonest and unfair practices, and requires trading to take place in a legitimate and honorable manner.

Investor Protection and Education Fund (IPEF):

The Investor Protection and Education Fund (IPEF) is an account set by SEBI to protect investors’ money and develop financial literacy. The fund collects money to reimburse investors in specific situations, promote investor protection activities, and educate investors on how to make informed investment decisions. IPEF funds awareness programs, workshops, and campaigns that promote investors’ knowledge of their rights, risks, and smart investment knowledge. In short, IPEF can be thought of as a safety net and an educational tool used by SEBI to protect investors and assist them with financial decision-making.

SEBI (Foreign Portfolio Investors) Regulations, 2019:

The SEBI (Foreign Portfolio Investors) Regulations, 2019 were introduced to regulate and govern investment into the stock markets in India by foreign nationals. A Foreign Portfolio Investor (FPI) is defined as any overseas individual, corporation, or fund that invests in share, bond, or other securities issued in India. The SEBI regulations, among other things, facilitate registration for foreign investment, simplify the categorization of foreign investors, and encourage transparency of foreign investments. The primary goal of the regulations, ultimately, is to encourage foreign funds to flow to India, while ensuring that the capital markets are protected from misuse or illegal activity. In essence, the regulations will ensure that foreign investors have the ability to make investments into India’s capital markets in a smooth and fair manner, while also protecting the market.

SEBI (Share Based Employee Benefits) Regulations, 2021:

The SEBI (Share Based Employee Benefits) Regulations, 2021 are rules that regulate issuances of shares or stock options to employees. Various companies incentivize employees through some form of benefit, for example, Employee Stock Option Plans (ESOPs), stock purchase schemes, or sweat equity shares, that makes an employee feel engaged or an employee-owner in the growth of the company. The regulations ensure that such plans are administered in a fair, transparent, and well-regulated manner and not abused. In short, it ensures that a bona fide benefit that utilizes shares of a company is provided to employees while safeguarding interests of employees and shareholders.

Corporate Governance Norms:

Corporate Governance Norms established by SEBI are standards that ensure companies operate in a fair, transparent, and responsible manner. These norms focus on areas like independent directors, adequate disclosure of financial performance, the protection of minority shareholders, and the avoidance of conflicts of interest. The aim is to ensure that companies are working not only for the benefit of the promoters, but also for investors, employees, and the public as a whole. In other words, these norms are the accepted principles of good management practice, which are considered honest, accountable, and trustworthy.

SEBI (Alternative Investment Funds) Regulations, 2012:

The SEBI (Alternative Investment Funds) Regulations, 2012 govern alternative investment funds in India, which do not come under traditional categories such as mutual funds. These funds are termed Alternative Investment Funds (AIFs), which can invest in private equity, hedge funds, real estate funds, and other investment mechanisms. The regulations identify AIFs by requiring that they be registered with SEBI, operate transparently, and abide by disclosure norms for investor protection. The regulations also categorize AIFs by investment strategy and risk tolerance. Put simply, these regulations protect sophisticated investors and provide an organized framework for investing in diversified investment opportunities while maintaining fair and transparent markets.

SEBI (Mutual Funds) Regulations, 1996:

The regulations that govern the conduct of mutual funds in India are referred to as the SEBI (Mutual Funds) Regulations, 1996. A mutual fund takes money from many investors and invests this pool of money in stocks, bonds, or other securities. These regulations ensure that mutual funds engage in proper conduct, transparency, and accurate disclosures on risks, returns, and fees. They also establish standards for management, disclosures, and investor protections. In other words, they ensure their mutual fund investors experience the investment in a safe, fair, and secure manner.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) are regulations for companies whose shares are listed on Indian Stock Exchanges. The LODR requires companies to make timely disclosures about their financial performance, financial results, changes in management personnel, shareholding patterns, etc., as well as any other material events to investors and the stock exchanges. The aim is to guarantee fairness, trust, and transparency in the markets, and to enable investors to make informed decisions. In summary, the LODR serves to ensure each listed company does not withhold information which is important to an investor.

SEBI Act, 1992:

SEBI Act of 1992 is the legislation that formally established the SEBI (Securities and Exchange Board of India) as the authority regulating India’s securities market. The Act assigns SEBI the mandate to safeguard investor interests, supervise stock exchanges and market intermediaries as well as advance the development of the securities market. It also enables SEBI to enact regulations, investigate, and enforce against offenders of market law. To put it differently, the SEBI Act, 1992, charges SEBI with the responsibility to ensure that the stock market is fair, safe, and transparent on behalf of all investors.

SEBI (Prohibition of Insider Trading) Regulations, 2015:

The SEBI (Prohibition of Insider Trading) Regulations, 2015, are regulations that prevent individuals from utilizing undisclosed or unpublished information about a company to profit from the stock market. For instance, if a person trades shares based on advance knowledge of a company’s significant deal or financial outcome before the public is aware of it, that is insider trading, is prohibited. These regulations define who is an insider, define insider information, and the penalties for violating the regulations. Simply put, they establish that all individuals in the market trade fairly and with respect to the same information, protecting regular investors from being taken advantage of.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code):

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, or the Takeover Code, are regulations that govern how a natural or legal person can acquire a substantial number of securities in another company or acquire control of the company. The Takeover Code regulates that whenever a person acquires a substantial number of shares in a company, they must make a bid to acquire shares from existing shareholders at a price that is deemed fair. The importance of the Takeover Code is to protect minority shareholders and to ensure fairness and transparency in the takeover process. In essence, the Takeover Code ensures that acquisitions of large quantities of shares or changes in control must take place in an open, fair and equitable manner and that no investor is taken advantage of.

Conclusion

In charge of the oversight of the securities market in India, is the Securities and Exchange Board of India (SEBI), which is mandated to protect the interests of investors in general and promote healthy and orderly development of securities market in India. In fulfilling this, SEBI makes rules for transparent processes and takes action against unfair practices like fraud and insider trading, it governs rules for registered companies and registered fund managers as to their business practices, and educates investors, coordinates resolution of investor complaints through SCORES, and many other functions. By enforcing compliance with its secondary market regulations, such as rules surrounding initial public offerings (IPO), regulation of registered mutual fund managers, and corporate governance policies, SEBI makes the market efficient and reliable which ultimately enables investors and companies to flourish.

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