SEBI: Establishment, Objectives, Functions, Departments & Limitations

 Securities and Exchange Board of India – Establishment

The establishment of SEBI marked a significant step by the Government of India to monitor and regulate capital market activities and to ensure the healthy development of the securities market. SEBI was initially constituted as a non-statutory body on April 12, 1988, through a resolution of the Government of India. It was created as the apex authority responsible for developing and regulating the Indian stock market.

Later, SEBI was granted statutory status in 1992, when the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into force on January 30, 1992, after being passed by the Indian Parliament. With this, SEBI became a fully empowered regulatory body aimed at promoting orderly and healthy growth of the securities market, along with protecting the interests of investors.

The Board of SEBI consists of:

1. One Chairman
2. Two members from the Ministry of Finance and the Ministry of Law
3. One member from the Reserve Bank of India (RBI)
4. Two other members appointed by the Central Government, who are professionals with experience or special knowledge in securities markets

The Act also empowers the Central Government to supersede SEBI in case of a grave emergency where the Board is unable to discharge its duties as per the provisions of the Act.

SEBI – Preamble

The preamble of the Securities and Exchange Board of India clearly states its core objective: 

“To protect the interests of investors in securities, to promote the development of the securities market, to regulate the securities market, and to deal with matters connected therewith or incidental thereto.”

Reason for Establishment of SEBI

During the 1980s, the Indian capital market experienced rapid growth with increasing participation from the public. This expansion, however, led to various malpractices by companies, brokers, and merchant bankers. Common issues included:

1. Unofficial private placements
2. Price rigging
3. Insider trading
4. Violation of stock exchange rules and regulations

To curb these irregularities and restore investor confidence, the establishment of SEBI became essential.

Purpose of SEBI

SEBI aims to address the needs of the three main groups in the securities market:

1. Issuers – To raise funds efficiently and at a fair cost
2. Intermediaries – To provide a competitive, professional environment
3. Investors – To ensure protection, transparency, and fair practices

Objectives of SEBI

The primary objective of SEBI is to protect the interests of investors in securities, promote the development of the securities market, and regulate its functioning, along with matters connected or incidental to it. The key objectives of SEBI include:

1. To protect the interests of investors and ensure a steady flow of savings into the capital market.
2. To regulate the securities market and ensure its smooth and orderly functioning.
3. To ensure fair practices by issuers of securities, enabling them to raise funds at the lowest possible cost.
4. To promote efficient and professional services by brokers, merchant bankers, and other intermediaries, making them competitive and accountable.
5. Broad objective: To protect investors and to promote and regulate the securities market effectively.
6. To regulate stock exchanges and the securities industry to maintain transparency and ensure their orderly functioning.
7. To protect the rights and interests of investors, and to guide, educate, and create awareness among them.
8. To prevent trading malpractices and maintain a balance between self-regulation by the market and statutory regulation by SEBI.
9. To regulate and develop a code of conduct for intermediaries such as brokers and merchant bankers, ensuring professionalism and ethical behavior.

Securities and Exchange Board of India – Functions

SEBI performs several important functions to ensure that the securities market operates fairly, efficiently, and transparently. Its key functions include:

1. Regulating the business of stock exchanges and any other securities market.
2. Registering and regulating intermediaries such as stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees, registrars, merchant bankers, underwriters, portfolio managers, and investment advisors.
3. Registering and regulating collective investment schemes, including mutual funds.
4. Promoting and regulating Self-Regulatory Organizations (SROs).
5. Prohibiting fraudulent and unfair trade practices in the securities market.
6. Collecting information, conducting inspections, inquiries, and audits of stock exchanges, intermediaries, and SROs.
7. Promoting investor education and providing training to intermediaries in the securities market.
8. Prohibiting insider trading and taking strict action against offenders.
9. Regulating substantial acquisition of shares and takeovers of companies.

Simplified View: Three Main Functions of SEBI

SEBI’s overall functions can be classified into three major categories:

1. Regulatory Functions
• Regulating stock exchanges
• Registering intermediaries
• Conducting audits and inspections
2. Protective Functions
• Preventing fraud and unfair practices
• Stopping insider trading
• Protecting investor rights
3. Developmental Functions
• Promoting investor education
• Training intermediaries
• Encouraging fair and professional market practices

SEBI – Departments / Market Segments and Their Functions

The Securities and Exchange Board of India (SEBI) plays a crucial role in shaping India’s financial markets. Its regulation of the primary market, secondary market, mutual funds, and foreign institutional investment ensures transparency, fairness, and investor protection. Through its policies and oversight, SEBI strengthens investor confidence, promotes market efficiency, and supports overall economic growth.

1. Primary Market

The primary market is where new securities are issued and sold for the first time (e.g., IPOs). SEBI ensures transparency in this market so companies can raise funds smoothly and investors can participate with confidence.

SEBI’s Role in the Primary Market

1. Regulates and approves public issues such as IPOs and FPOs.
2. Ensures full and fair disclosures in offer documents (e.g., DRHP).
3. Protects investors by enforcing rules on pricing, allotment, and advertisement.
4. Monitors intermediaries like merchant bankers, underwriters, and registrars.

2. Secondary Market

The secondary market is where existing securities are traded (e.g., on NSE and BSE). SEBI ensures orderly, transparent, and fair trading so investors can buy and sell with trust.

SEBI’s Role in the Secondary Market

1. Regulates stock exchanges and registered brokers.
2. Ensures fair trading practices and prevents fraud, including insider trading.
3. Uses surveillance systems to detect manipulation and maintain market integrity.
4. Develops trading infrastructure such as T+1 settlement and online platforms.

3. Mutual Funds

Mutual funds pool investors’ money and invest in diversified portfolios. SEBI’s regulations ensure transparency, safety, and responsible fund management, making mutual funds trustworthy investment options.

SEBI’s Role in Mutual Funds

1. Regulates all mutual fund companies and their schemes.
2. Approves new scheme launches and mandates clear disclosures.
3. Monitors AMCs and trustees to ensure compliance.
4. Protects investors through transparency norms and grievance-redressal systems.

4. Foreign Institutional / Portfolio Investment

Foreign investment plays a vital role in the Indian financial system by increasing liquidity and global participation. SEBI ensures that foreign investment is encouraged while maintaining market stability.

SEBI’s Role in Foreign Portfolio Investment

1. Registers and regulates Foreign Portfolio Investors (FPIs).
2. Monitors foreign capital inflows to avoid excessive volatility.
3. Ensures compliance with sectoral caps and ownership limits.
4. Coordinates with the RBI to maintain macroeconomic and currency stability.

Limitations of SEBI

Despite being the apex regulator of the Indian securities market, SEBI faces several limitations that affect its efficiency and effectiveness. These include:

1. Government Control SEBI’s autonomy is limited because the government exercises significant control over its functioning.
2. Board Dominated by Nominees Many members of SEBI’s Board are government nominees, which may impact independent decision-making.
3. No Power to File Criminal Cases SEBI cannot directly initiate criminal proceedings; it must depend on courts or other agencies, reducing its enforcement strength.
4. A “Paper Tiger” SEBI is often criticized for having strong regulations on paper but limited power to enforce them effectively.
5. Practical Difficulties in Implementation SEBI faces real-world challenges in regulating a vast and dynamic securities market.
6. Limited Transparency There is insufficient openness in some aspects of SEBI’s decision-making and enforcement activities.
7. Lack of Professionalism At times, the functioning of SEBI may lack the high level of expertise and professionalism expected from a financial regulator.
8. Weak Organizational Structure SEBI’s internal structure and resources may not be strong enough to handle all regulatory challenges.
9. Low Accountability There is minimal accountability for certain actions, which can affect the regulator’s credibility.
10. Lengthy and Time-Consuming Procedures Many SEBI processes involve delays, affecting quick decision-making and effective market operations.

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