REGULATIONS OF CAPITAL

MARKET

SOUMENDRA ROY
 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.
SECURITIES CONTRACTS (REGULATION)
ACT, 1956
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.
FEATURES SECURITIES CONTRACT
(REGULATION) ACT, 1956
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.
SECURITIES CONTRACTS REGULATION ACT
(SCRA)
In addition, under Section 28A of the Securities
Contracts Regulation Act (SCRA) inserted by the
SEBI Act, the Government may delegate powers
exercisable by it also to the SEBI, subject to such
limitations/condition as may be stipulated by the
Government.
While delegating the powers to the SEBI, the
Government may retain the power in relation to
any matter under the Act.
 SEBIs POWER UNDER THE SCRA
In respect of the following matters, the SEBI has been
authorized to exercise powers under the SCRA which were
formerly exercised by the Government:
1. Call of periodic returns stock exchanges;
2. Prescribe maintenance of certain documents by the
exchanges.
3. Call upon the exchange/any member(s) to furnish
explanation/information relating to the affairs of the
exchange/any member(s) and appoint any person to
conduct an inquiry into the affairs of the governing body of
any exchanges/any member of the exchange.
4. Approve byelaws of the exchange (s) for regulation and
control of contracts;
5. Licensing of dealers in securities in certain areas; and
6. Compel a public company to, list its shares.
 SECTION 29A OF THE SCRA
In the exercise of its powers under Section 29A of the SCRA,
the Government delegated the following powers to the SEBI
with effect from July 30, 1992:
1. Amendment of rules relating to matters specified in Section
3(2) of the Act;
2. Furnishing of annual report by recognized stock exchanges.
3. Directions to stock exchanges in general or a stock exchange
in particular to make rules or to amend rules;
4. Superseding the governing body of a recognized stock
exchange.
5. Suspension of business of a recognized stock exchange and
6. Prohibit contracts in certain cases
 MORE POWERS OF SCRA
More powers have been delegated with effect from
September 13, 1994. These powers are:
1. Submission of applications of the recognition of
stock exchanges;
2. Grant of recognition to stock exchanges;
3. Withdrawal of recognition of stock exchange;
4. Making or amending rules or articles of association
of a stock exchange regarding voting rights of
members of a stock exchange at any meeting;
 MORE POWERS OF SCRA
5. Issue of notification declaring Section 13 to apply to
an area, consequent upon with contracts issued in
that area, otherwise than between members of a
recognized stock exchange or through or with such
members would be illegal;
6. Regulations and control of the business of dealing in
spot delivery contracts;
7. Hearing appeals submitted by companies against
refusal of a stock exchange to list their securities and
8. Issue of a notification specifying any class of contracts
as contracts to which the SCRA or nay provision
contained therein would not apply.
 REGISTRATION OF INTERMEDIARIES
All intermediaries dealing in securities are
compulsorily registered with the SEBI in accordance
with the regulations made under the SEBI Act.
The certificate of registration contains the
conditions/rules and regulations for conduct of
business by the security market intermediaries.
The SEBI prescribes regulations for the application
form and the manner of making an application as
well as the fee payable.
 REGISTRATION OF INTERMEDIARIES
The SEBI can suspend/cancel a certificate of a
registration granted to the intermediaries in
accordance with the regulations made by it on this
behalf.
An intermediary/person aggrieved by an order of
the SEBI, suspending/canceling registration can
prefer an appeal to the Government.
By various regulations notified from time to time,
the SEBI has prescribed the procedure for
registration of various intermediaries associated
with the securities market.
 DIRECTIONS FROM GOVERNMENT
The Government of India can issue directions to the
SEBI on questions of policy in writing from tem to time.
It is bound to follow and observe such directions in the
exercise of its powers/the performance of its functions.
The government has absolute discretion to determine
whether a question is one of policy or not.
Its inability to discharge its functions/duties, or non-
compliance to follow and act upon direction given by
the Government or requirements in the public interest
may lead to its super-session by the Government.
POWER TO MAKE RULES AND
REGULATIONS
The government is authorized to make rules for
carrying out the purpose of the SEBI Act.
The important matter for which rules may be framed,
include,
the additional functions to be performed by it and its
constitution
maintenance of its accounts
manner of inquiry to impose penalty for defaults
constitution of the Securities Appellate Tribunal (SAT)
the forms of appeal and fee before the SAT
the form in which reports have to be submitted to the
government
 OBJECTIVES OF SEBI
The primary objective of SEBI is to promote
healthy and orderly growth -of the securities
market and secure investor protection. The
objectives of SEBI are as follows:
To protect the interest of investors, so that,
there is a steady flow of savings into the
capital market.
To regulate the securities market and ensure
fair practices.
To promote efficient services by brokers,
merchant bankers, and other intermediaries, so
that, they become competitive and
professional. 14
 FEATURES OF SEBI
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.
Functions of SEBI

The SEBI Act, 1992 has entrusted

with two functions, they are
Regulatory functions And
Developmental functions

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 REGULATORY FUNCTIONS
Regulation of stock exchange and self regulatory
organizations.
Registration and regulation of stock brokers, sub-brokers,
Registrars to all issues, merchant bankers, underwriters,
portfolio managers etc.
Registration and regulation of the working of collective
investment schemes including mutual funds.
Prohibition of fraudulent and unfair trade practices relating
to securities market.
Prohibition of insider trading
Regulating substantial acquisition of shares and takeover of
companies. 17
 DEVELOPMENTAL FUNCTIONS
Promoting investors education
Training of intermediaries
Conducting research and publishing
information useful to all market participants.
Promotion of fair practices
Promotion of self regulatory organizations

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 POWERS OF SEBI
Power to call periodical returns from recognized
stock exchanges.
Power to compel listing of securities by public
companies.
Power to levy fees or other charges for carrying out
the purposes of regulation.
Power to call information or explanation from
recognized stock exchanges or their members.
Power to grant approval to bye-laws of recognized
stock exchanges.
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 Powers of SEBI continue..
Power to control and regulate stock exchanges.
Power to direct enquiries to be made in relation to
affairs of stock exchanges or their members.
Power to make or amend bye-laws of recognized
stock exchanges.
Power to grant registration to market intermediaries.
Power to declare applicability of Section 17 of the
Securities Contract (Regulation) Act 1956, in any
State or area, to grant licenses to dealers in
securities.
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VARIOUS DEPARTMENTS UNDER SEBI
S. No.
Name of Dept.
1. MARKET INTERMEDIARIES REGULATION AND SUPERVISION
DEPARTMENT (MIRSD)

2. DERIVATIVES AND NEW PRODUCTS DEPARTMENT (DNPD)

3. INVESTMENT MANAGEMENT DEPARTMENT (IMD)

4. INVESTIGATIONS DEPARTMENT (IVD)

5. LEGAL AFFAIRS DEPARTMENT (LAD)

6. OFFICE OF INVESTOR ASSISTANCE & EDUCATION (OIAE)

7. DEPARTMENT OF ECONOMIC & POLICY ANALYSIS (DEPA)

8. INFORMATION TECHNOLOGY DEPARTMENT (ITD)

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VARIOUS DEPARTMENTS UNDER SEBI
S. No.
Name of Dept.
9. MARKET REGULATION DEPARTMENT (MRD)

10. CORPORATION FINANCE DEPARTMENT (CFD)

11. INTEGRATED SURVEILLANCE DEPARTMENT (ISD)

12. ENFORCEMENT OF DEPARTMENT (EFD)

13. ENQUIRIES & ADJUDICATION DEPARTMENT (EAD)

14. GENERAL SERVICES DEPARTMENT (GSD)

15. OFFICE OF THE CHAIRMEN (OCH)

16. THE REGIONAL OFFICES (ROs)

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 SEBI & CENTRAL GOVT.
The Central Government has power to issue directions
to SEBI Board, supersede the Board, if necessary and to
call for returns and reports as and when necessary.
The Central Government has also power to give any
guideline or to make regulations and rules for SEBI and
its operations.
The activities of SEBI are financed by grants from
Central Government, in addition to fees, charges etc.
collected by SEBI.
The fund called SEBI General Fund is set up, to which,
all fees, charges and grants are credited.
This fund is used to meet the expenses of the Board and
to pay salary of staff and members of the body.
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 REGULATION BY SEBI: RECENT CASES
VEDANTA-CAIRN ISSUE
SEBI has not yet cleared Vedanta group's open offer for Cairn
India, a mandatory requirement for conclusion of London-
based mining group's $9.6 billion acquisition to foray into oil
sector.
London-listed Vedanta had in August last year agreed to buy
up to 51 per cent stake in Cairn India from Cairn Energy Plc.
Following the acquisition, its group firm Sesa Goa was to
make an open offer for buying an additional 20 per cent in the
company that owns India's largest on land oil field.
But the company could not make the open offer following an
oil ministry intervention with SEBI. The ministry said the deal
was contingent upon government approval, which is still
under process.
SEBI is holding back the approval for the open offer as the
government is yet to give its go ahead.
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 REGULATION BY SEBI: RECENT CASES
DECCAN-CHRONICLE HOLDINGS Ltd. ISSUE
Sebi allowed the Deccan Chronicle Holdings Ltd to buy-back 3.45
crore shares or 14.17 per cent equity from the market at an estimated
cost of Rs 270 crore.
This will be the second time the Deccan Chronicle would come out
with an offer to buy-back its shares, following which the equity of the
promoters in the company could go up to 73.83 per cent from 63.37
per cent currently.
SEBI, while exempting Deccan Chronicle from making the mandatory
public announcement before coming out with the buy-back offer, has,
however, asked the company "not of seek any further exemption
pursuant to any further buy-back".
Referring to the general issue of companies buying back their own
shares, Sebi order said, "repeated buy-back offers by a company is not
something that Sebi, as a regulator, would like to encourage, given the
fact that it would be misused by entities to consolidate their holding
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at
the expense of the company.
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