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Back to Page: 1 Module: 2 - Capital Markets of India The stock exchange is the place where the stocks, shares and other securities are bought and sold. The organisation of stock exchange includes among others authorised stockbrokers. The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as under:
The authorised stockbroker or their authorised agents used to meet at the Stock Exchange hall during business hours to buy or sell securities. However with the advent of electronic trading, brokers can now trade from the comfort of their respective offices from different stations. Only listed securities are traded through the stock exchange. The price of securities are settled through open bids and offered on the floor of the exchange. The first organised stock exchange in India was started in Mumbai, known as Bombay Stock Exchange in 1877. Subsequently the Ahmedabad Stock Exchange was started in 1894. The Calcutta Stock Exchange was started in 1908. At present there are 23 recognised stock exchanges in different parts of the country. The National Stock Exchange (NSC) was started in November 1992. NSC is a nation-wide trading system conforming to international standards. It was set up to provide, fair efficient and transparent security trading system at all India level. It has its central office at Mumbai. Its members all over India are linked via satellite and cables to the system. From 1996 NSC is linked up with the Internet. Another major Stock Exchange is the Bombay Stock Exchange (BSE). BSE and NSE are the leading Stock Exchanges in the country in terms of the number of securities listed and average turnover of business conducted. Control and Regulation of Stock Exchanges - - Securities Contracts (Regulation) Act, 1956 (ACT NO.42 OF 1956) Stock exchanges in India are regulated and controlled under the Securities Contracts (Regulation) Act, 1956 (ACT NO.42 OF 1956). The object clause describes the Act as "An Act to prevent undesirable transactions in securities by regulating the business of dealing therein, by providing for certain other matters connected therewith." The Act deals with
Powers and Functions of SEBI Stock Exchanges in India were regulated directly by the Government of India under powers conferred in terms of the Securities Contract (Regulations) Act 1956 up to the late Eighties. In the year 1988 the Government of India constituted the Securities and Exchange Board of India (Popularly referred as 'SEBI') with Head office at Mumbai through an executive resolution to act as the independent regulator of Stock exchanges, the primary market, Mutual Funds etc. Later SEBI was made into a statutory corporate body in the year 1992 with the passing of the Securities and Exchange Board of India Act in 30th January 1992. The object clause of the Act explained the scope and purpose of the Act in the following words: An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. Subsequently on 13th September 1994, the Government of India through a Gazette Notification delegated the Powers conferred to it under the Securities Contracts (Regulation) Act 1956 to SEBI. The Government in the year 1996 also passed the Depositories Act 1996, which came into retrospective operation from 20 September 1995. SEBI is made the Regulator for monitoring the due compliance and enforcing the provisions of this Act also. The Powers & functions of SEBI are detailed in the second chapter of the Securities and Exchange Board of India Act under Section 11(1). The section points out that it shall be duty of the Board to protect the interests of the investors in securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. In brief the statutory objectives of the SEBI enshrined in the SEBI Act are fourfold-
By way of amplification of the above core objectives, the Act enumerates as under the different powers & functions of SEBI in greater details as under: -
Different intermediaries mentioned above can commence functioning in their respective activities only after registration with SEBI and complying with requirements as stated under specific regulations intended for each. SEBI has issued detailed Rules and Regulations to be adhered to by each of the intermediaries under its jurisdiction. The Central Government has also established an Appellate Tribunal to be known as the Securities Appellate Tribunal to function as Appellate Authority and hear appeals. No civil court shall has jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. However appeals against the decision of Securities Appellate Tribunal can be preferred before a High Court. SEBI since its inception has carried out its functions effectively and brought about immense changes in the environment of the investment market to the benefit of the common investor. These details are discussed in the next page. Primary Market - Public Issues - Regulatory-cum-Promotional Role of SEBI We have already referred to the role of Primary Market in mobilising capital/debt for the Public Limited Company from the investing public. It is primary market that is in the center-stage of the capital market bringing together the investors and the seekers of capital in the market. Regular growth in the economy of the country presupposes a robust and vibrant primary market. The secondary market no doubt affords liquidity to the investment in securities. But it provides restricted dealings between investors among themselves and others who trade/speculate in stock investments. Operations in the secondary market do not result in the accretion of capital resources of the country, but it indirectly promotes savings and investment, by providing the unique quality of liquidity to investment in securities. Similarly the Primary market infuses new listed securities in the market generated through new public issues floated regularly and thus widen the security base to be traded in the secondary market. There is thus inter-dependency between the two markets. The investor faces limited risk in the secondary market, but he needs much more protection and safeguards in the primary market. This is because in an initial public issue, except for the offer documents/prospectus he has no other source of information about the bonafides of the issue-raisers. Instances of vanishing companies and fly-by-night promoters act as a deterrent to investor confidence. Further secondary market deals are isolated transactions involving sale/purchase of individual lots of shares/bonds, while in the primary market news issues are for very large amounts sometimes even hundreds of crores of rupees. Fraudulent promoters may try to dupe the entire community of investors, who opt to invest in a particular issue. The regulation of primary issues poses an acid test for SEBI. On the one hand in view of the leading role of these issues in the development and economic growth of the country, SEBI in view of its responsibility for development of the market has to do every thing to promote new issues and make it easier for bonafide promoters to raise funds for productive ventures, and on the other hand SEBI has to ensure that the interests of the investors are protected to the best possible extent. To fulfill its objectives relating to responsibility for regulation and responsibility for market development, which may not overlap at all times, SEBI has drawn a four-point strategy as under:
SEBI in the year 1992 issued detailed guidelines to standardise disclosure obligations and make it incumbent for corporates floating public issues to disclose all , they were reviewed and revised in the year 2000 and "The Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000" were issued. This was operative and in force until August 2003, when further changes were effected to the guidelines. SEBI constantly reviews its guidelines to make them more market/ investor friendly. In this direction, SEBI has set up two committees to deliberate on the issues pertaining to primary market. One under the chairmanship of Shri Y.H.Malegam, Managing Partner, S B Billimoria & Co. (Referred as Malegam Committee) and the other under the Chairmanship of Shri M S Varma, Chairman, TRAI (referred as Primary Market Advisory Committee (PMAC). These committees comprise of representatives of merchant bankers, investor associations, ICAI, ICSI etc. These reports were received and based on them SEBI revised DIP guidelines extensively in August 2003. The Primary Market Advisory Committee advises SEBI on various issues relating to development of primary Market whereas the Malegam Committee mainly focuses on the disclosure requirements in the offer documents. Besides this, various issues are examined by SEBI internally and given effect by way of amending DIP Guidelines extensively. |
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