Securities Law and Regulations in India

Written by: Aniruddh Singh Raghuvanshi

COLLEGE: Government New Law College (DAVV), Indore

COURSE: BALLB (Hons.)

YEAR: 2nd Year (4th Semester)

❖ Synopsis

1. Introduction

2. Historical Background

2.1 Pre-SEBI Era

2.2 Stock Exchange Regulations

2.3 SEBI ‘s formation

3. Key Components

3.1 Investor Protection

3.2 Market Surveillance

3.3 Issuance and Listing Requirements

3.4 Corporate Governance Guidelines

3.5 Securities litigation and dispute resolution

4. Regulatory Framework

4.1 SEBI Act, 1992

4.2 Securities Contracts (Regulation) Act, 1956

4.3 Companies Act, 2013

4.4 Prevention of Money Laundering Act

5. The Securities and Exchange Board of India (SEBI)

5.1 Key Functions

5.2 Key Regulations

6. Conclusion

Securities Law and Regulations in India

Introduction

With the growing environment of investors investing in financial products and individuals, businesses, and governments gathering funds through dispensing securities; a wide and fine security market has evolved, and the balance and development of an economy are also dependent on the smooth functioning of this market. Thus, it could be derived that, the securities market is a marketplace where, the dealing and trading of securities and financial tools such as stocks, bonds, ETFs, shares, etc. are done. The efficient functioning of the securities market is highly significant for the growth and stability of a country‘s economy. The more systematically a country’s securities market is developed, the greater are its possibilities of growth in GDP and development. But, a lot of fraudulent activities and malpractices related to trading, harm the market integrity and confidence of investors, which leads to an imbalance in the business. Therefore maintaining rules and regulations in the securities market is very much required.Owing to the above requirement, there are various laws and regulations that have been developed over time and guarantee the regulations for the securities market in India.

Historical Background

Certainly, the robust securities market, we are having at the moment has developed gradually in the years. Delving deeper into the historical past:

➢ Pre-SEBI Era: A more unregulated market was observed, before the establishment of the Securities Exchange Board in India. The issuance and pricing of securities was controlled by the Ministry of Finance, through the Controller of Capital Issues. However, a lot of delays and a lack of transparency were seen, which led to market distortions.

➢ Stock Exchange Regulations: India’s oldest stock exchange, the Bombay Stock Exchange (BSE), was founded in 1875. Stock Exchanges were largely self-regulated entities, with no or minimal government oversight, this lack of regulations and directives led to many fraudulent activities and market manipulations.

➢ SEBI’s Formation: SEBI is a statutory regulatory body that was established by the Government of India in 1992, it was tasked with regulating and overseeing the securities market to promote investor confidence and market integrity. SEBI also regulates how the stock market and mutual funds works. Its formation marked a significant moment in the history of India’s securities market.

Some other notable subheadings under, the historical background of the Securities Market could be the recommendation from various committees, for example, the Narasimham Committee (1991) and the Patel Committee (1995), market scandals, globalization, liberalization, technological advancement, all summed up for the liberalization of India’s financial markets.

In a nutshell, the historical background of securities laws and regulations in India reflects a journey from a relatively unregulated market to a structured and transparent system under the purview of SEBI.

Key Components

Securities laws and regulations in India encompass a wide range of rules and provisions designed to ensure the fair, transparent, and efficient functioning of the securities market. There are the following key components regarding the framework:

➢ Investor Protection: Securities Laws in India have a clear objective of protecting the interests of the investors by mandating disclosures, preventing insider trading, and regulating collective investment schemes. In order to enhance this aim, Investor Protection Funds have also been established by SEBI, to compensate the investors in cases of default by market participants.

➢ Market Surveillance: SEBI employs advanced technology for market surveillance to detect and prevent market manipulation, fraud, and insider trading. This ensures a level playing field for all market participants and thus keeps a check on fraudulent activities.

➢ Issuance and Listing Requirements: Securities regulations also provide for the requirements and procedures for companies seeking to issue securities to the public through initial public offerings (IPOs).

➢ Corporate Governance Guidelines: Regulations also lay down the norms for the governance and framework of listed companies. These guidelines are well-defined and also include the board composition, audit committees, and transparency in financial reports.

➢ Securities Litigation and Dispute Resolution: Securities regulations also include provisions for dispute resolution mechanisms and securities litigation to address grievances and disputes between market participants and investors.

All the above-mentioned points are some key objectives and aims, the securities regulation laws tend to accomplish and ensure market integrity and investor confidence.

Regulatory Framework

There are the following regulatory frameworks governing the securities market in India:

• SEBI Act, 1992: An Act providing 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, SEBI Act serves as the primary legislation governing securities markets in India. SEBI‘s powers and functions are also described under this act.

• Securities Contracts (Regulation) Act, 1956: This act recognizes stock exchanges in India and also regulates and controls the securities contracts. It empowers SEBI to regulate stock exchanges and prevent fraudulent and unfair trading practices.

• Companies Act, 2013: This act contains some provisions related to the issuance and transfer of securities, albeit not primarily concerned with the securities market. SEBI and the Ministry of Corporate Affairs collaborate with each other, to enforce these provisions effectively.

• Prevention of Money Laundering Act: The Prevention of Money Laundering Act (PMLA) is a federal law that regulates money laundering and the financing of terrorism in India. This act necessitates, the entities engaged in securities transactions (including brokers and depository participants) to comply with anti-money laundering regulations and to report suspicious transactions to the authorities.

In addition to the above-mentioned regulatory frameworks, a lot of regulatory guidelines and norms have also been issued in India, which control and regulate the securities market and thuskeep a check on the orderly functioning of the securities market.

The Securities and Exchange Board of India (SEBI)

The cornerstone of securities regulation in India is the Securities and Exchange Board of India (SEBI). Established in 1988 as an autonomous body, SEBI has a significant role in promoting investor confidence, ensuring market transparency, and regulating the securities market. SEBI has been established under the SEBI Act, 1992. This act also enables SEBI to derive its power to frame regulations, issue guidelines, and impose sanctions to maintain the integrity of the securities market. Its headquarters are located in Mumbai. Thus envisaging so many aims, let us look at some key functions of the Securities Exchange Board of India.

Key Functions of SEBI:

1. Market Regulation: SEBI regulates stock exchanges, brokers, and other market intermediaries to ensure fair and transparent trading practices.

2. Investor Protection: Safeguarding the interests of investors by enforcing rules on disclosure and transparency, SEBI has a major role in fraud prevention, and also provides for the development of the redressal mechanisms.

3. Regulating Securities: It also keeps a check on the issuance and trading of securities, including equities, bonds, and mutual funds. Thus regulating the securities.

4. Surveillance and Investigation: SEBI conducts surveillance and investigations to identify market manipulations and insider trading, and catch hold of any fraudulent activities carried out by any market participant.

SEBI has played a pivotal role in enhancing and shaping the Indian Securities Market, througheffective regulation and enforcement, it has fostered a vibrant and secured securities market that benefits both investors and the broader economy. SEBI has issued a series of regulations to govern various aspects of the securities market. Some key regulations include:

1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: As the name suggests, these regulations mandate disclosure and corporate governance standards for listed companies.

2. SEBI (Prohibition of Insider Trading) Regulations, 2015: Designed to prevent insider trading, these regulations impose strict controls on the trading activities of company insiders.

3. SEBI (Mutual Funds) Regulations, 1996: These regulations govern the formation and operation of mutual funds in India.

4. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: These regulations regulate the acquisition of substantial shares in listed companies and takeover offers.

Conclusion

Hence, after a lot of deliberation and analysis, taking everything into account, it could be summarized that, Securities laws and regulations in India have evolved significantly to create a robust and investor-friendly environment. SEBI’s proactive role in monitoring and enforcing these regulations has been instrumental in maintaining market integrity, the ongoing evolution continues to shape India’s securities market into a dynamic and attractive investment destination.As India continues to build itself as a global financial hub, these regulations will play an even more critical and crucial role in ensuring the stability, growth, and development of its securities market. Investors in India can now operate in an environment where their rights are safeguarded through stringent regulations against insider trading, market manipulation, and fraudulent practices. Thus ensuring transparency and accountability, and enhancing investor confidence. Investors and market participants can take comfort in the knowledge that the Indian regulatory framework is dedicated to safeguarding their interests and promoting market efficiency.

However, there is a requirement from the other side of the market which is the Investors, market intermediaries, and listed companies, to adhere to the guidelines and regulations to uphold the principles of fairness, transparency, and efficiency that underpin India’s securities market. It should not be their prerogative but a duty to act in all fairness, then only the envisaged goal of securing a fair securities market would be achieved. In essence, the evolution of securities regulation in India reflects the country’s commitment to creating a thriving financial ecosystem.

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