Guide to Securities and Exchange Board of India (SEBI) Act 1992

CA Shubhi Khandelwal , Last updated: 24 October 2022
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The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act,1992. It was a non-statutory body established to regulate the securities market. The headquarters of the board is situated in Bandra Kurla Complex, Mumbai.

The first statutory regulatory body that the government of India set up post the reforms of 1991 was the Securities and Exchange Board of India (SEBI)

1. Objectives of SEBI

Protection of investors: The primary objective of SEBI is to protect the rights and interests of the people in the stock market by guiding them to a healthy environment and protecting the money involved in the market.
Prevention of malpractices: The main objective for the formation of SEBI was to prevent fraud and malpractices related to trading and to regulate the activities of the stock exchange.
Promoting fair and proper functioning: SEBI was established to maintain the functioning of the capital market and to promote functioning of the stock exchange. They are ordered to keep eyes on the activities of the financial intermediaries and regulate the securities industry efficiently.
Establishing Balance: SEBI has to maintain a balance between the statutory regulation and self-regulation of the securities industry.
Establishing a code of conduct: SEBI is required to develop and regulate a code of conduct to avoid frauds and malpractices caused by intermediaries such as brokers, underwriters and other people.

Guide to Securities and Exchange Board of India (SEBI) Act 1992

2. Composition of SEBI

The members of the Security and Exchange Board of India are:

The Chairman who is appointed by the Central Government of India.
Two members from amongst the officials of the Ministry of Central Government dealing with Finance and administration of the Companies Act, 2013.
One member from amongst the officials of the Reserve Bank of India.
Five other members from amongst the Central Government of India, out of five three must be whole-time members.

3. Duty of SEBI

It shall be the duty of the SEBI:

To protect the interests of investors in securities.
To promote the development of the securities market.
To regulate the securities market.
In order to discharge above duties, SEBI may take such measures as it thinks fit.

4. Functions of SEBI

The functions of the Security and Exchange Board of India can primarily be categorized into three parts:

Protective Function

They are used to protect the interest of investors and other financial participants. These functions are:

Prevent insider trading in securities.
Checks price rigging
Promotes fair trade practices
Providing awareness/financial education for investors

Regulatory Function

Regulatory functions are generally used to check the functioning of the financial business in the market. They establish rules to regulate the financial intermediaries and corporates for the efficiency of the market. These functions are:

Designing guidelines and code of conduct for efficient working of financial intermediaries and corporate.
Establishing rules for taking over a company.
Conducting regular inquiries and audits of stock exchanges.
Regulating the process of mutual funds.
Registration of brokers, sub-brokers, and merchant bankers is controlled by SEBI.
Levying of fees is regulated by SEBI.
Restrictions on private placement.

Development Function

The development functions are the steps taken by SEBI to improve the security of the market through technology. The functions are:

Providing training sessions to the intermediaries of the market.
Promoting fair trading and restrictions on malpractices of any kind.
Introducing the DEMAT format.
Promoting self-regulating organizations.
Introducing online trading through registered stock brokers.
Providing discount brokerage.

5. Power of SEBI

Quasi-Judicial: In cases of frauds and unethical trade practices, SEBI is allowed to conduct hearings and pass judgments.
Quasi-Legislative: To protect the interest of investors, SEBI is allowed to draft legislatures with respect to the capital market and to get rid of malpractices that are prevalent in the securities market.
Quasi-Executive: SEBI has the power to inspect all the books and records and other vital documents to check for wrongdoings. If it finds one violating the regulations, they are allowed to file a complaint against violators.

6. Registration of Intermediaries

Following intermediaries are required to obtain a registration certificate from the SEBI to buy, sell or deal in securities:

Stock-Broker
Sub-Broker
Share Transfer Agent
Banker to an issue
Trustee of Trust Deed
Registrar to an Issue
Merchant Banker
Underwriter
Portfolio Manager
Investment Adviser
Depository
Depository Participant
Custodian of Securities
Foreign Institutional Investor
Credit Rating Agency
Such other intermediary associated with securities market

Application: Every application for registration would in such manner and on payment of such fees as may be determined by the SEBI Regulations

Suspension/Cancellation: SEBI may suspend/cancel the certificate of registration after giving a reasonable opportunity of being heard to a concerned person.

7. Penalties for Failures

S.No.	Contravention	Penalty
1	Failure to furnish information, return, etc.	Penalty of at least 1 lakh rupees but may extend to 1lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees.
2	Failure by any person to enter into agreement with clients.	Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees.
3	Failure to redress investors’ grievances.	Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees.
4	Certain defaults in case of mutual funds.	Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees
5	Failure to observe rules and regulations by an asset management company.	Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees.
6	In case of alternative investment funds, infrastructure investment trusts and real estate investment trusts fails to comply with the regulations made by the SEBI or directions issued by the SEBI.	Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees or 3 times the amount of gains made out of such failure, whichever is higher.
7	In case investment adviser and research analyst fails to comply with the regulations made by the SEBI or directions issued by the SEBI.	Penalty of at least 1 lakh rupees but may extend to 1lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees.
8	Default in case of stock brokers.If any stock broker- fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in regulations charges an amount of brokerage which is in excess of the brokerage specified in the regulations	Penalty of at least 1 lakh rupees but which may extend to 1 crore rupees for which the contract note was required to be issued by that broker. Penalty of at least 1 lakh rupees but may extend to 1 lakh rupees per day during which such failure continues, subject to a maximum of 1 crore rupees Penalty of at least 1 lakh rupees but which may extend to five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.
9	Insider Trading. If any insider who,— either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stockexchange on the basis of any unpublished price-sensitive information; or communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information	Penalty of at least 10 lakh rupees but which may extend to 25 crore rupees or 3 times the amount of profits made out of insider training, whichever is higher.
10	Non-disclosure of acquisition of shares and takeovers.	Penalty of at least 10 lakh rupees but which may extend to 25 crore rupees or 3 times the amount of profits made out of such failure, whichever is higher
11	Fraudulent and unfair trade practices	Penalty of at least 5 lakh rupees but which may extend to 25 crore rupees or 3 times the amount of profits made out of such failure, whichever is higher
12	Alteration, destruction, etc., of records and failure to protect the electronic database of Board.	Penalty of at least 1 lakh rupees but which may extend to 10 crore rupees or 3 times the amount of profits made out of such act, whichever is higher
13	Contravention where no separate penalty has been provided	Penalty of at least 1 lakh rupees but which may extend to 1 crore rupees

All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India

8. Adjudications

The SEBI may appoint any of its officers not below the rank of Division Chef to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty

The adjudicating officer has powers to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions, he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.

The SEBI may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify

However, no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter. Further, nothing contained in this section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal whichever is earlier

Factors to be Taken into Account while Adjudging quantum of penalty

SEBI or the adjudicating officer shall have due regard to the following factors while laying the quantum of penalty

The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default.
The amount of loss caused to an investor or group of investors as a result of the default.
The repetitive nature of the default

The author can also be reached at shubhikhandelwal30@yahoo.com