Chapter II: Market Participants in the Securities Market (Part 2)
1. Key Regulators in the Indian Financial Market
The regulatory framework of the Indian financial market is structured to ensure that all market participants behave in a transparent and desired manner, safeguarding market integrity and investor interest. The primary regulators supervising different sectors include:
- Securities and Exchange Board of India (SEBI): Regulates both the securities market and the commodities market.
- Reserve Bank of India (RBI): The authority to regulate and monitor the banking sector.
- Insurance Regulatory and Development Authority of India (IRDAI): Regulates the insurance sector.
- Pension Fund Regulatory and Development Authority (PFRDA): Regulates the pension fund sector.
- Ministry of Finance (MoF): Oversees the broader economic policies, fiscal operations, and financial systems of the country.
- Ministry of Corporate Affairs (MCA): Administers corporate governance, company administration, and compliance under corporate law.
2. Role and Functions of SEBI
The Securities and Exchange Board of India (SEBI) plays a central role in supervising capital markets. Its primary duties and statutory functions include:
- Investor Protection: Protecting the interests of investors in securities.
- Market Development: Promoting the development of the securities market.
- Market Regulation: Regulating the business in stock exchanges and any other securities markets.
- Intermediary Registration: Registering and regulating the working of stockbrokers, sub-brokers, and other market intermediaries.
- Fraud Prevention: Prohibiting fraudulent and unfair trade practices.
- Oversight & Investigation: Calling for information from, undertaking inspections, and conducting inquiries and audits of stock exchanges, intermediaries, self-regulatory organizations (SROs), mutual funds, and other persons associated with the securities market.
3. Regulatory Framework for the Securities Market
The legal skeleton of the Indian securities market is built upon several parliamentary acts designed to prevent market abuse and ensure seamless operations.
I. SEBI Act, 1992
- Objective: Enacted to empower SEBI with statutory powers to protect investor interests, promote market development, and regulate the securities market.
- Jurisdiction: Extends over corporates (who list or propose to list their securities) in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with the securities (specifically capital) market.
II. Securities Contracts (Regulation) Act, 1956 (SCRA)
- Objective: Focuses on preventing undesirable transactions in securities by providing direct and indirect control over virtually all aspects of securities trading and the running of stock exchanges.
- Jurisdiction of Central Government: Under SCRA, the Central Government exercises oversight over:
- Stock Exchanges (through a process of recognition and continued supervision).
- Contracts in securities.
- Listing of securities on recognized Stock Exchanges.
III. Depositories Act, 1996
- Objective: Enables the setting up of multiple depositories in India to ensure healthy competition and choice in services.
- Timeline: Passed by the Parliament, received the President's assent on August 10, 1996, and was officially notified in a Gazette on August 12, 1996.
- Key Highlights:
- Facilitated the creation of the two depositories in India: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
- Eligibility: Only a company registered under the Companies Act, 2013 (or the erstwhile Companies Act, 1956) and sponsored by a specified category of institutions can set up a depository in India.
IV. Companies Act, 2013
- Objective: Governs the issue, allotment, and transfer of securities, along with various aspects relating to company management.
- Key Areas Regulated:
- Standard of Disclosure: Mandates disclosure standards in public issues of capital (covering company management, projects, related companies under the same management, and management's perception of risk factors).
- Corporate Actions & Operations: Regulates underwriting, the application of premiums and discounts on issues, rights and bonus issues, interest and dividend payments, and the provision of annual reports and other information.
4. Specialized SEBI Regulations
To maintain operational integrity and enforce a code of conduct across diverse intermediaries, SEBI has enacted targeted regulations:
| SEBI Regulation | Core Objective & Key Provisions |
|---|---|
| SEBI (Stock Broker) Regulations, 1992 | Lays down rules and regulations for the registration of stockbrokers. It prescribes the registration fees applicable to be paid to SEBI and the General Code of Conduct to be adhered to by brokers holding stock exchange membership. |
| SEBI (Intermediaries) Regulations, 2008 | Provides comprehensive guidelines on the registration process of intermediaries, general obligations (including redressal of investor grievances and appointing a Compliance Officer), rules for offering investment advice, codes of conduct, and procedures for inspections and disciplinary proceedings. |
| SEBI {KYC (Know Your Client) Registration Agency} Regulations, 2011 | Introduced the concept of the KYC Registration Agency (KRA) to eliminate duplicate KYC processes for investors across different intermediaries, establishing a uniform KYC process. Details registration criteria, functions, and obligations of KRAs and associated intermediaries. |
| SEBI (Prohibition of Insider Trading) Regulations, 2015 | Protects market integrity from asymmetric information trading. It defines "Insiders", restricts the communication of non-public price-sensitive information, details disclosure norms, and mandates systemic provisions for listed companies and intermediaries. |
| SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP) | Empowers SEBI to investigate cases of market manipulation and unfair trade practices. Under Regulation 2(1)(c), "fraud" is defined broadly to include any act, expression, omission, or concealment committed to induce someone to deal in securities. Proving actual wrongful gain or loss is not a prerequisite for establishing fraud. |
| Prevention of Money Laundering Act, 2002 (PMLA) | Formulated to prevent money laundering activities and provide legal powers for the confiscation of property derived from, or involved in, money-laundering offenses. |
Key Takeaways
- Statutory Regulators: Capital markets are regulated under distinct statutory heads (SEBI, RBI, IRDAI, PFRDA) under the oversight of MoF and MCA.
- Depositories Act Timeline: Assented on 10 August 1996, Gazetted on 12 August 1996.
- Concept of Fraud under PFUTP: Broadly defined under Regulation 2(1)(c) as an act or concealment inducing trade in securities; proving actual wrongful gain or loss is not required.
- KYC Centralization: The KRA system (established in 2011) eliminates duplicate compliance and creates an inter-usable KYC framework across intermediaries.