SEBI: Safeguarding Investor Interests in India’s Securities Market
The Securities and Exchange Board of India (SEBI) was established in 1992 as a statutory body, with the objective of regulating the securities market and safeguarding the interests of investors. SEBI oversees stock exchanges, commodity derivative exchanges and depositories.
Currently, the four primary legislations governing the securities market are as follows:
A) The SEBI Act, 1992, which gives SEBI with statutory powers to (i) safeguard the interests of investors in securities, (ii) foster the development of the securities market, and (iii) regulate the securities market.
B) The Companies Act, 2013, outlines regulations for the issuance, allotment and transfer of securities, along with related matters concerning public issues of securities.
C) The Securities Contracts (Regulation) Act, 1956, governs the recognition and regulation of transactions in securities within a stock exchange.
D) The Depositories Act, 1996, facilitates the electronic maintenance and transfer of ownership of demat shares.
Investors’ Guide to Securities and Securities Market
Securities refer to a wide range of investments, including stocks, bonds etc. For instance, equity shares, commonly known as shares, signify ownership in a company, entitling shareholders to dividends and voting rights at company meetings. Debt securities, such as debentures or bonds, represent borrowed capital that must be repaid to investors with interest. Derivatives are financial contracts whose value is derived from an underlying asset, like shares or commodities.
- Primary Market: Primary Market is also known as the new issues market because it is here that securities are created. In this market, companies or institutions float new stocks and bonds to the public for the first time during the primary distribution. The funds raised from these sales primarily go to the issuer. Unlike the secondary market, where investors buy and sell from one another, the primary market allows investors to buy securities directly from the issuer.
- Two primary types of issuers of securities are:
- Corporate Entities: Companies issue shares, bonds, and debentures. These securities represent ownership or debt obligations of the company and are traded in the financial markets.
- Government: Both central and state governments issue debt securities such as dated securities and treasury bills to get funds to finance government operations and manage liquidity.
- Public Issue: Public issue of shares can be categorised as follows:
- IPO: An Initial Public Offering (IPO) means that a company is offering its shares to the public for the first time. IPO can take the following forms:
Fresh Issue: During a fresh issue, the company issues new shares to public investors. These funds are raised and directed to the company.
Offer for Sale: In an offer for sale, existing shareholders (such as promoters or financial institutions) sell their holdings to the public. The funds from investors go to the sellers of the shares, not directly to the company. - Follow on Public Offer: It refers to a subsequent offering by a company that has previously conducted an IPO, issuing new securities to the public.
- IPO: An Initial Public Offering (IPO) means that a company is offering its shares to the public for the first time. IPO can take the following forms:
- Preferential: In this type of issuance, securities are allocated to a specific group of investors, including promoters, strategic investors and employees. Unlike public offerings, preferential issues are not made available to the general public.
Rights: A rights issue occurs when a company offers its existing shareholders the opportunity to buy newly issued shares in proportion to their current shareholding.
Bonus Issue: A bonus issue involves the issuance of additional shares to existing shareholders. These bonus shares are distributed in proportion to their current shareholding, without any additional cost.
Understanding the Role of Market Infrastructure Institutions (MIIs)
To maintain the efficiency, transparency and integrity of the financial ecosystem, there are several market infrastructure institutions. These institutions not only ensure the smooth functioning of the financial system but also ensure compliance with established regulatory norms and standards.
- Stock Exchanges: Stock exchanges serve as platforms where securities, such as stocks, bonds and derivatives, are bought and sold. They provide a regulated marketplace for investors to trade securities, facilitating price discovery and liquidity in the market. The list of SEBI recognised stock exchanges in India is available on the link: https://www.sebi.gov.in/intermediaries.html. The major nationwide stock exchanges in India are BSE Limited (BSE), National Stock Exchange of India Limited (NSE), and Metropolitan Stock Exchange of India Limited (MSE).
- Depositories: Depositories play an important role in the securities market by holding investors' securities in dematerialised or electronic form. They offer demat services to investors through their network of Participants (DPs). In India, there are two main depositories: NSDL and the CSDL. They eliminate the need for physical share certificates, reducing paperwork and operational risks. Each depository has registered DPs, similar to branches of banks. These DPs offer a range of services to investors. These services include opening and maintaining demat accounts, facilitating the demat of shares, and providing other related services to streamline the management of securities holdings.
- Clearing Corporations: Clearing corporations ensure the smooth settlement of trades executed on stock exchanges. Their primary function is to provide a guarantee for the settlement of these trades. In simple words, clearing corporations assure that every buyer will receive the securities they have bought, and every seller will receive payment for the securities they have sold. By acting as intermediaries between buyers and sellers, clearing corporations help reduce counterparty risks and enhance market integrity, thereby fostering confidence in the securities market.
Behind the Scenes: Understanding the Role of Market Intermediaries
- Executing orders for buying or selling securities
- Handling transactions involving securities
- Providing relevant information related to securities trading.
Key intermediaries include stock brokers, depository participants, merchant bankers, share and transfer agents and registrars. All these intermediaries are registered with SEBI and are mandated to adhere to prescribed norms to safeguard investors' interests. A comprehensive list of SEBI-recognised market intermediaries can be accessed on the following link: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognised=yes.