CHAPTER 1- INTRODUCTION

The Government has set up the Securities & Exchange Board of India
(SEBI) in April 1988. For more than three years, it has no statutory powers.
Its interim functions during the period were (i) To collect information and
advice the Government on matters relating to Stock and Capital Markets (ii)
Licensing and regulation of merchant banks, mutual funds etc. (iii) To
prepare the legal drafts for regulatory and development role of SEBI and
(iv) To perform any other functions as may be entrusted to it by the
government. The Securities and Exchange Board of India (SEBI) is the
designated regulatory body for the finance and investment markets in India.
The board plays a vital role in maintaining stable and efficient financial and
investment markets by creating and enforcing effective regulation in India's
financial marketplace. India's SEBI is similar to the U.S. Securities and
Exchange Commission (SEC).

The SEBI was established in 1988 but was only given regulatory powers on
April 12, 1992, through the Securities and Exchange Board of India Act,
1992. It plays a key role in ensuring the stability of the financial markets in
India, by attracting foreign investors and protecting Indian investors the
government of India built SEBI. Its headquarters is located at the Bandra
Kurla Complex Business District found in Mumbai. It also has northern,
eastern, southern and western regional offices.
SEBI's management is composed of its own members. Its management
team consists of a chairman nominated by the Union Government of India,
two members who are officers from the Union Finance Ministry, one
member from the Reserve Bank of India and five other members who are
also nominated by the Union Government of India.

SEBI's Preamble describes in detail the functions and powers of the board.
Its Preamble states that SEBI must "protect the interests of investors in
securities and to promote the development of, and to regulate the securities
market and for matters connected there with or incidental there to." In this
light, as a board, SEBI must be responsive and proactive to the needs and
interest of the groups that constitute India's financial and investment
  1  
  
markets: the investors, the market intermediaries and the issuers of
securities.
SEBI is allowed to approve by-laws of stock exchanges. It is its job to
require the stock exchange to follow its by-laws. SEBI also inspects the
books of accounts of financial intermediaries and asks for regular returns
from recognized stock exchanges. SEBI's role covers compelling particular
companies to list their shares in stock exchanges. Aside from these, SEBI is
tasked to manage the registration of brokers.
Ultimately, the board has three powers: quasi-judicial, quasi-legislative and
quasi-executive. SEBI has the right to draft regulations under its legislative
capacity, conduct investigations and impose action under its executive
function, and pass new rules and orders under its judicial capacity. Despite
these powers, the results of SEBI's functions still have to go through the
Securities Appellate Tribunal and the Supreme Court of India.

The preamble of SEBI Act, 1992 states its objectives as:

“An Act to provide for 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.”
The primary objective of SEBI is to promote healthy and orderly growth of
the securities market and secure investor protection.

The need for setting up independent Govt. agency to regulate and develop
the Stock and Capital Market in India as in many developed countries was
recognized since the Sixty Five Year Plan was launched (1985) when some
major industrial policy changes like opening up of the economy to outside
world and greater role to the Private Sector were initiated. The rampant
malpractices noticed in the Stock and Capital Market stood in the way of
infusing confidence of investors, which is necessary for mobilization of
larger quantity of funds from the public, and helps the growth of the
industry. The malpractices were noticed in the case of companies, merchant
bankers and brokers who are all operating in the Capital Market. The need
to curb these malpractices and to promote healthy Capital Market in India
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was felt. The security industry in India has to develop on the right lines for
which a competent Govt. agency as in U.K. (SIB) or in U.S.A. (SEC) is
needed.

As referred to earlier, malpractices have been reported in both the primary

market and secondary market. A few examples of malpractices in the
primary market are as follows:

A. Too many self style Investment Advisors and Consultants.

B. Grey Market or unofficial premiums on new issue.

C. Manipulation of market prices before new issues are floated.

D. Delay in allotment letters or refund orders or in dispatch of share

certificate

E. Delay in listing and commencement of trading in shares.

A few examples of malpractices in the secondary Market are as follows:

• Lack of transparency in the trading operations and prices charged to

clients.
• Poor services due to delay in passing contract notes or not passing
contract notes, at all.
• Delay in making payments to clients or in giving delivery of shares.
• Persistence of odd lots and refusal of companies to stop this practice of
allotting shares in old lots.
• Insider trading by agents of companies or brokers rigging and
manipulating prices.
• Take over bids to destabilize management

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Overview of SEBI

Ø Securities Exchange Board of India (SEBI) was established in 1988 to

regulate the functions of securities market.
Ø SEBI promotes orderly development in the stock market.
Ø SEBI was set up with the main idea to keep a check on malpractices
and protect the interest of investors.

Unit Trust of India was the first mutual fund set up in India in the year
1963. In early 1990s, Government allowed public sector banks and
institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was
passed. The objectives of SEBI are – to protect the interest of investors in
securities and to promote the development of and to regulate the securities
market.
As far as mutual funds are concerned, SEBI formulates policies and
regulates the mutual funds to protect the interest of the investors. SEBI
notified regulations for the mutual funds in 1993. Thereafter, mutual funds
sponsored by private sector entities were allowed to enter the capital
market. The regulations were fully revised in 1996 and have been amended
thereafter from time to time. SEBI has also issued guidelines to the mutual
funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector

entities including those promoted by foreign entities are governed by the
same set of Regulations. There is no distinction in regulatory requirements
for these mutual funds and all are subject to monitoring and inspections by
SEBI. The risks associated with the schemes launched by the mutual funds
sponsored by these entities are of similar type. It may be mentioned here
that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund
(as on January 15, 2002).

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SEBI has introduced the comprehensive regulatory measures, prescribed
registration norms, the eligibility criteria, the code of obligations and the
code of conduct for different intermediaries like, bankers to issue, merchant
bankers, brokers and sub-brokers, registrars, portfolio managers, credit
rating agencies, underwriters and others. It has framed bye-laws, risk
identification and risk management systems for Clearing houses of stock
exchanges, surveillance system etc. which has made dealing in securities
both safe and transparent to the end investor. Another significant event is
the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in
2000.

Two broad approaches of SEBI is to integrate the securities market at the

national level, and also to diversify the trading products, so that there is an
increase in number of traders including banks, financial institutions,
insurance companies, mutual funds, primary dealers etc. to transact through
the Exchanges. In this context the introduction of derivatives trading
through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real
landmark.

SEBI has three functions rolled into one body quasi-legislative, quasi-
judicial and quasi-executive. It drafts regulations in its legislative capacity,
it conducts investigation and enforcement action in its executive function
and it passes rulings and orders in its judicial capacity. Though this makes
it very powerful, there is an appeals process to create accountability. There
is a Securities Appellate Tribunal which is a three member tribunal and is
presently headed by a former Chief Justice of a High court - Mr. Justice NK
Sodhi. A second appeal lies directly to the Supreme Court.

Market intermediaries play a very important role in development of the

market by providing a variety of services. Market intermediaries can be
classified on the basis of the services provided by them. Typically, they are
classified as: merchant bankers, stock brokers, bankers to issues, debenture
trustees, portfolio managers, registrars to issues, share transfer agents,

5  
  
function in inter alia in the primary markets. These entities are regulated by
SEBI.

Implementation of the Regulations entails a multi-stage process of

supervision through on-site and off-site inspections, enforcement through
initiation of adjudication, enquiry against violations of rules and
regulations, and prosecutions. Inspections of intermediaries are carried out
directly by SEBI or by stock exchanges, depositories, etc. SEBI conducts
inspections on a periodic basis to verify the compliance levels of
intermediaries. It also conducts specific/ limited purpose inspections on the
basis of complaints, references, surveillance reports, specific concerns etc.
SEBI also directs stock exchanges and depositories to carry out
periodic/specific purpose inspections of their members/participants. Under
various regulations, SEBI seeks information from the stockbrokers, sub
brokers, and other intermediaries.

A Brief Historical Perspective of the Securities Market

Reforms in India

Loan securities of the East Indian Company used to be traded towards close
of the 18th century. By 1830’s, the trading in shares of banks started. The
trader by the name of broker emerged in 1830 when 6 persons called
themselves as share brokers. This number grew gradually. Till 1850, they
traded in shares of banks and securities of the East India Company in
Mumbai. In 1850, the Companies Act introducing limited liability was
enacted heralding the era of modern joint stock company, which propelled
trading volumes.
The great and sudden spurt in wealth produced by cotton price propelled
setting up companies for every conceivable purpose after the American
Civil War broke out in 1861and exports increased from India. Between
1863 and 1865, the new ventures raised nearly Rs.30 crore in the form of
paid up capital.

6  
  
The subscription for shares was in large numbers and the people woke up
only when the American Civil war ended. Then all rushed to sell their
securities but there were no buyers. They were left with huge mass of
unsalable paper. The depression was so severe that it paved way for setting
up of a formal market.
On 3rd December 1887, the brokers affected from the depression
established a stock exchange called ‘Native Share and Stock Brokers’
Association’. This laid the foundation of the oldest stock exchange in India.
The word ‘native’ indicated that only natives of India could be brokers of
the Exchange.
In 1880s a number textile mills came up in Ahmedabad. This created a need
for trading of shares of these mills. In 1894, the brokers of Ahmedabad
formed “The Ahmedabad Share and Stock Brokers’ Association”.
The 1870s saw a boom in jute prices, 1880s and 1890s saw boom in tea
prices, then followed coal boom. When the booms ended, there were
endless differences and disputes among brokers in eastern India, which was
home to production of jute, tea and coal. This provoked the establishment
of “The Calcutta Stock Exchange Association” on June 15, 1908.
Control of capital issues was introduced through the Defense of India Rules
in 1943 under the Defense of India Act, 1939 to channel resources to
support the war effort. The control was retained after the war with some
modifications as a means of controlling the raising of capital by companies
and to ensure that national resources were channeled to serve the goals and
priorities of the government, and to protect the interests of investors. The
relevant provisions in the Defense of India Rules were replaced by the
Capital Issues (Continuance of Control) Act in April 1947.
Though the stock exchanges were in operation, there was no legislation for
their regulation till the Bombay Securities Contracts Control Act was
enacted in 1925. This was, however, deficient in many respects. Under the
constitution, which came into force on January 26, 1950, stock exchanges
and forward markets came under the exclusive authority of the central
government. Following the recommendations of the A. D. Gorwala
Committee in 1951, the Securities Contracts (Regulation) Act, 1956 was
enacted to provide for direct and indirect control of virtually all aspects of
7  
  
securities trading and the running of stock exchanges and to prevent
undesirable transactions in securities.
In 1980s and 1990s, it was increasingly realized that an efficient and well-
developed securities market was essential for sustenance of economic
growth. A major initiative of regulation was establishment of a statutory
autonomous agency, called SEBI, to provide reassurance that it is safe to
undertake transactions in securities. It was empowered adequately and
assigned the responsibility to (a) protect the interests of investors in
securities, (b) promote the development of the securities market, and (c)
regulate the securities market. Its regulatory jurisdiction extends over
corporates in the issuance of capital and transfer of securities, in addition to
all intermediaries and persons associated with securities market. All market
intermediaries are registered and regulated by SEBI. They are also required
to appoint compliance officer who is responsible for monitoring compliance
with securities laws and for redressal of investor grievances.

The multi crore securities scam that rocked The Indian financial system in
1992 (Harshad Mehta, The 1992 Security Scam) had the existing regulatory
framework to be fragmented and inadequate and hence, a need for an
autonomous, statutory, and integrated organization to ensure the smooth
functioning of capital market was felt. To fulfill this need, the Securities
and Exchange Board of India (S.E.B.I), which was already in existence
since April 1988, was conferred statutory powers to regulate the capital
market.

Importance Of SEBI

1. Restricts illegal practices: It forbids illegal and fraudulent practices

of the firm, which operate in the securities market.

2. Safeguards investor’s interests: It protects investor’s interest in the

capital market through guidance and proper education. So if you have

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any complaint about anything related to capital market, you can simply
visit sebi.gov.in to register your complaint.

3. Regulate working of exchanges: It regulates and keeps a check on

the workings of stock exchanges and other aspects of the securities
market.

4. Monitor the workings of mutual funds: It monitors and regulates the

working of mutual funds. It keeps a tight supervision on their business
operations and protects investors from any unfair practices.

5. Conducting audit: It conducts audit, inspection and other suitable

measures to keep a check on the workings of stock exchanges and
other intermediaries. SEBI has played a really important role in
regulating the capital markets and in the development of our overall
economy. If you see the market value of NSE-listed companies
combined together, it stands at Rs 92,09,386 crore as on January 2016
as compared to Rs 3,63,350 crore as on 1994-1995 (as shown in the
chart below)

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6. Regulate takeovers and acquisitions: They issue guidelines to
regulate takeovers, mergers, and acquisition of firms to protect
investor’s interest.

7. Prohibition of insider activity: It prohibits insider activity and also

restricts undesirable practice of brokers and other agents in the capital
market.

8. Monitor the functioning of intermediaries: Keeps a tight check on

the functioning of the intermediaries like merchant bankers,
stockbrokers and other intermediaries present in the capital market.

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices
and protect the interest of investors. It was set up to meet the needs of three
groups.

1. Issuers: For issuers it provides a market place in which they can raise
finance fairly and easily.

2. Investors: For investors it provides protection and supply of accurate

and correct information.

3. Intermediaries: For intermediaries it provides a competitive

professional market.

Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to
promote the development of stock exchange and to regulate the activities of
stock market. The objectives of SEBI are:
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1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their

investment.

3. To prevent fraudulent and malpractices by having balance between

self-regulation of business and its statutory regulations.
 
4. To regulate and develop a code of conduct for intermediaries such as
brokers, underwriters, etc.

Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three

objectives SEBI has three important functions. These are:

I. Protective functions.
II. Developmental functions.
III. Regulatory functions.

1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor
and provide safety of investment.
As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main
objective of inflating or depressing the market price of securities. SEBI
prohibits such practice because this can defraud and cheat the investors.

(ii) It Prohibits Insider trading:

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Insider is any person connected with the company such as directors,
promoters etc. These insiders have sensitive information, which affects
the prices of the securities. This information is not available to people at
large but the insiders get this privileged information by working inside
the company and if they use this information to make profit, then it is
known as insider trading, e.g., the directors of a company may know that
company will issue Bonus shares to its shareholders at the end of year
and they purchase shares from market to make profit with bonus issue.
This is known as insider trading. SEBI keeps a strict check when insiders
are buying securities of the company and takes strict action on insider
trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements,
which are likely to induce the sale or purchase of securities by any other
person.

(iv) SEBI undertakes steps to educate investors so that they are able to
evaluate the securities of various companies and select the most
profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market
by taking following steps:

a) SEBI has issued guidelines to protect the interest of debenture-holders

wherein companies cannot change terms in midterm.

b) SEBI is empowered to investigate cases of insider trading and has

provisions for stiff fine and imprisonment.

c) SEBI has stopped the practice of making preferential allotment of

shares unrelated to market prices.

2. Developmental Functions:
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These functions are performed by the SEBI to promote and develop
activities in stock exchange and increase the business in stock exchange.
Under developmental categories following functions are performed by
SEBI:

i. SEBI promotes training of intermediaries of the securities market.

ii. SEBI tries to promote activities of stock exchange by adopting

flexible and adoptable approach in following way:

a) SEBI has permitted Internet trading through registered stockbrokers.

b) SEBI has made underwriting optional to reduce the cost of issue.

c) Even initial public offer of primary market is permitted through

stock exchange.

3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock
exchange. To regulate the activities of stock exchange following
functions are performed:

a) SEBI has framed rules and regulations and a code of conduct to

regulate the intermediaries such as merchant bankers, brokers,
underwriters, etc.

b) These intermediaries have been brought under the regulatory

purview and private placement has been made more restrictive.

c) SEBI registers and regulates the working of stockbrokers, sub-

brokers, share transfer agents, trustees, merchant bankers and all
those who are associated with stock exchange in any manner.
 
d) SEBI registers and regulates the working of mutual funds etc.

13  
  
e) SEBI regulates takeover of the companies.

f) SEBI conducts inquiries and audit of stock exchanges.

Objectives Of The Study:

• To study the impact of SEBI on Investors in India.

• To study the impact of SEBI on financial markets in India.
• To study the impact of SEBI on stock exchanges.
• To study the impact of SEBI in business.

Research Methodology

Secondary data has been used for the study. Secondary data is collected
from library, textbooks and journals, articles from newspapers and from
relevant websites available on the Internet.

14  
 CHAPTER 2- REVIEW OF LITERATURE

The Security and Exchange Board of India was established by the

government of India on 12 April 1988 an interim administrative body to
promote orderly and healthy growth of the securities orderly and healthy
growth of the securities market and to protect investor’s rights. It is
functioning under administrative control of Ministry of Finance. The SEBI
was given statutory status on 30th January 1992 through and ordinance,
later it was replaced by an act of parliament, Securities and Exchange
Board of India Act, 1992. The capital market had witness a heavy growth
during 1980’s.
Since its inception SEBI has been working targeting the securities and is
attending to the fulfillment of its objectives with commendable zeal and
dexterity. The improvements in the securities markets like capitalization
requirements, margining, establishment of clearing corporations etc.
reduced the risk of credit and also reduced the market. SEBI has introduced
the comprehensive regulatory measures, prescribed registration norms, the
eligibility criteria, the code of obligations and the code of conduct for
different intermediaries like, bankers to issue, merchant bankers, brokers
and sub-brokers, registrars, portfolio managers, credit rating agencies,
underwriters and others. It has framed bye-laws, risk identification and risk
management systems for Clearing houses of stock exchanges, surveillance
system etc. which has made dealing in securities both safe and transparent
to the end investor.

This chapter presents the various literature reviews of already conducted

studies in India and abroad. The review of books, journals, committee
reports, company reports, SEBI bulletins and research papers on the
Securities and Exchange Board of India have been presented in this chapter.

Chandra (1991), in a study on the proper functioning of the securities

markets, examined he government policy of favoring the small shareholders
in terms of allotment of shares. The study argued that, such a policy
suffered from several lacunae such as higher issue and servicing costs and
lesser vigilance about the functioning of companies, because of inadequate
  15  
  
knowledge. The study suggested that there was a need to eliminate the bias
as that would lead to a better functioning of the Capital Market and would
strengthen investors’ protection. With proportional allocation being
advocated by SEBI, a shift in the policy was evident. However, there
appeared to be some re-thinking on the proportional allocation after the
recent experiences, which clearly demonstrate that such a policy could
result in a highly skewed ownership patterns.

Pandya (1992), in a study, “SEBI: Its Role, Powers, Functions and

Activities”, observed that as a regulatory and development body, SEBI's
efforts in the direction of investor protection are varied and unlimited. The
measures brought in by SEBI broadly cover measures for allocation
efficiency in the primary market with a fair degree of transparency. It was
found out that reforms in the secondary market institutions, mutual funds
and regulation of various market intermediaries and above all for the
protection of the investing public, were necessary.

Barua and Varma (1993), in a study on the activities of the scams

reported that press reports first appeared in April 1992, indicating that there
was a shortfall in Government Securities held by the State Bank of India
(SBI). Investigations revealed that it was just the tip of an iceberg, which
came to be called the securities scam. It involved the misappropriation of
funds to the tune of over Rs. 3500 crore (about $ 1.2 billion). The scam had
engulfed top executives of large nationalized banks, foreign banks,
financial institutions, brokers, bureaucrats and politicians. The functioning
of the money market and the stock market had been thrown into disarray.
The scam had generated such immense public interest that it had become a
permanent feature on the front pages of newspapers. A large number of
agencies, namely, the Reserve Bank of India (RBI), the Central Bureau of
Investigation (Indian CBI), the Income Tax Department, the Directorate of
Enforcement and the Joint Parliamentary Committee (JPC) all set out to
investigate the various aspects of the scam. The government set up the
Janakiraman Committee to probe the scam, which broke out between April
1991, and June 1992. At least 10 commercial banks were involved,

16  
  
including the Standard Chartered Bank, the SBI and National Housing
Bank (an RBI subsidiary).

Barua and Varma (1993), in another study, stated the modus operandi
used in the scam. It found out that in form, the brokers used the Ready
Forward (RF) deal, which was not a loan at all. The borrowing bank (Bank
2) actually sold the securities to the lending bank (Bank 1) and bought them
back at the end of the period of the deal at (typically) a slightly higher
price. The price difference represented the profit on the deal. It was found
out that the RF instrument was used in other countries, known as a
repurchase (or repo) agreement. It was a very safe and secured form of
lending and it was very common throughout the world. The US repo
market, for example, is about a hundred times larger than the Indian RF
market. It found out that the RF in India served two main purposes: (a) it
provided much needed liquidity to the government securities markets and
(b) it was an important tool in the hands of the banks to manage their
Statutory Liquidity Ratio (SLR) requirements. Banks in India were required
to maintain 38.5% of their Demand and Time Liabilities (DTL) in
government securities and certain approved securities, which were
collectively known as SLR securities.

Barua and Varma (1993), in a study, examined the impact of the scam and
found out that it resulted in a sharp fall in the share prices. The index fell
from 4500 to 2500, representing a loss of Rs. 100,000 crores in market
capitalization. Though one may be tempted to blame the steep decline in
prices on the scam, but they think that the reason for this fall was not the
scam directly. It found out that the scam resulted in the withdrawal of about
Rs. 3,500 crore from the market, which for a market of the size of Rs.
250,000 crores (at an index level of 4500) was a very small amount, and
therefore should have had little impact on the prices. The study found out
that there were however, two major reasons for the fall, both related to the
government's knee jerk response to the scam. First was the phenomenon of
tainted shares, which created panic in the market, and second was the
perceived slowdown of the reform process, which destroyed the very

17  
  
foundation on which the boom was based. It was found out that Harshad
Mehta and others were being described as the products of the situation, this
was as a result of political pressures and the bad press it received during the
scam. The study revealed that it was the liberalization policies of the
government, which did not function properly, and which were later on put
on hold for a while. The Securities Exchange Board of India (SEBI)
postponed sanctioning of the private sector mutual funds. Some question
marks arose regarding privatization as the chairman of the committee
looking into this ended up in jail on charges of involvement in the scam.

Dhillon (1993), in a doctoral dissertation examined the regulatory policies

of the Bombay Stock Exchange (BSE) over a four-year period (July 1986 -
June 1990). The findings showed that regulatory authorities decided
changes in their margin policy on the basis of market activity. It found out
that the margins were prompted by changes in settlement returns, price
volatility, trading volume and open positions. The Granger causality results
showed that there was limited causality in the reverse direction: margin
changes did not affect returns, and had only a limited impact on price
volatility, trading volume and open positions. The event study methodology
applied to daily margins showed similar results, except that daily margin on
sellers did not appear to be affected by the market variables. Further, there
was also evidence of under margining leading to excessively levered
positions, thereby increasing the insolvency risk. The results revealed that
regulations through this instrument had only a marginal impact on the dual
objectives of controlling market activities and insolvency risk.

Barua and Varma (1993), in a related study of the scam, defined the term
"securities scam" as a diversion of funds to the tune of over Rs. 3500 crore
from the banking system to various stockbrokers in a series of transactions
(primarily in Government securities) during the period April 1991 to May
1992. It found out that in April 1992, the first press report appeared
indicating that there was a shortfall in the Government Securities held by
the State Bank of India. In a little over a month, investigations revealed that
this was just the tip of an iceberg which came to be called the securities

18  
  
scam, involving misappropriation of funds to the tune of over Rs. 3500
crores. The scam engulfed top executives of large nationalized banks,
foreign banks and financial institutions, brokers, bureaucrats and
politicians. The functioning of the money market and the stock market was
thrown in disarray. The scam generated such immense public interest that it
became a permanent feature on the front pages of newspapers. A large
number of agencies, namely, the Reserve Bank of India (RBI), the Central
Bureau of Investigation (CBI), the Income Tax Department, the Directorate
of Enforcement and the Joint Parliamentary Committee (JPC) were all set
to investigating the various aspects of the scam.

Varma (1996), in a study of the weaknesses of the Securities Market,

found out that investors were being treated unfairly. Thus, investors were
being misled with impunity. Using two examples, the study pointed out
how easily issuers and merchant bankers got away with grossly misleading
advertisements for public issues. The first example was the reported
decision of the Ministry of Finance to rescind the penalty imposed by the
Securities and Exchange Board of India (SEBI) on SBI Caps for its role as
lead manager of the infamous MS Shoes public issue. The second was the
issue advertisements of the IDBI deep discount bonds, which failed to
mention that the IDBI had a call option to redeem the bond at various dates
at various prices. This was necessary information that was not made
available to the investors. On the basis of such information investors could
decide whether to invest or not, since the bond without call options were
worth Rs 5,300. With call options it was worth only about Rs 4,800. This
showed how significant the concealed information really distorted the deal
in favor of the issuers. The found out that, as the Indian Capital Markets
became more developed, the most important element of investor protection
was to ensure that the information given to investors was true, fair and
adequate to enable the investors to make well-informed investment
decisions. It found out that it was a matter of grave concern that issue
advertisements in India flout such a requirement with impunity.

19  
  
Varma (1996), stated that, it was necessary to distinguish between the role
of SEBI as a market regulator and the role of Government as the formulator
of national economic policy. The study found out that it was not the
function of the market regulator to manipulate the microstructure of the
market in order to nudge stock prices up or down. Any such attempt is
unreasonable and amounted to rigging stock prices. The study stated that
the job of the market regulator was to create a market environment, which
was efficient and transparent. It stated that such an environment should
allow the direction of price movements to the free play of the market forces
rather than force in manipulations. It stated that the government as the
formulator of economic policy had a very different role to play, that is, the
role of controlling the economic fundamentals, which were the ultimate
determinants of stock prices.

Varma and Barua (1996), also stated that, investors must be protected in
all deals, whether they are rights issue, script issue or merger. The study
stated that, the right to protection of the investor was of paramount
importance. Thus, it lamented “Under the proposed merger of Hindustan
Lever Limited (HLL) and Brooke Bond Lipton India Limited (BBLIL),
shareholders of BBLIL were to receive 9 shares of HLL for every 20 shares
of BBLIL held by them. Minority shareholders of BBLIL were unhappy
because the 20:9 or 2.222222:1 ratio was worse than the ratio of 2:1 (or
more accurately 1.9:1) implicit in the market prices at the time of the
announcement. It stated that, the awkward ratio of 2.222222:1 left the small
shareholders of BBLIL with a large percentage of odd lots after the merger.
It found out that the swap ratio was decided on the basis of the advice of
two respected firms of accountants and two well-known merchant bankers.
This brought to the surface the question of how so many experts could
together come up with such an unreasonable conclusion. It found out that
the answer was that though the government abolished the office of the
Controller of Capital Issues long ago, the ghost of its formula continued
haunting Indian companies as well as their accountants and merchant
bankers. It was argued that, such a ghost must be exorcised, if dealings in
the Indian capital market were to be done at fair and reasonable valuations.

20  
  
Varma and Barua (1996), in a study, “SEBI Comes down on Bulls to
Punish the Bears”, pointed out the reasons, which were often given for
introducing circuit breakers in the Securities Markets as follow:

a) They prevented a sudden collapse of confidence,

b) They provided time for payment and thereby reduced the risk of
default,

c) They provided time for market operators to think through and to

decide the stance they found necessary to take in the market.

The study found out that the first reason was extremely erroneous, since
it mixed up cause and effect. The last reason given was even more
erroneous. It stated that an open market provided an opportunity to trade,
but did not create a compulsion to trade. Finally, the argument about default
risk was also not valid, because Stock Exchanges could and should use
margin requirements to deal with such a risk. It should be borne in mind
that this does not at all render the Securities Market a risk free investment
environment.

The study advanced several valid arguments against circuit breakers, which
were as follows:

a) They did not allow the markets to self-correct themselves,

b) They in fact exacerbated the trend by inducing higher volumes as the

prices moved close to the band limit, and traders became desperate
executing the trade before the circuit breaker took effect,

c) They created illiquidity precisely at times when liquidity was most

needed by the market,

21  
  
d) When applied to only one market, they created arbitrage opportunities.

It stated that, such arguments indicated that regulators must allow a free
play of market forces to determine prices of securities in the Market. It
pointed out that everything should be done to ensure that reliable
information which was the biggest facilitator of proper free markets should
be made available simultaneously and easily to all operators for informed
decision making purposes.

Varma and Raghunathan (1996), in a study, stated that, the new takeover
code by the Bhagwati committee was comprehensive and well drafted. The
study pointed out that the code added little value over the existing code of
SEBI. It pointed out that some provisions of the code were retrograde,
while others lacked rigor. It revealed that the new code was seen as:

1) A useful tool in the capital market. In one of the most pernicious steps,
the new code blocked acquisitions through an exchange of shares.

2) The stipulation of the Minimum Offer Price was discordant with the
spirit of free pricing, and was a needless obstacle in the emergence of
an orderly market for corporate control.

3) While it appeared to allow conditional offers, the code effectively

made them unconditional by stipulating that even if the conditions
were not met, the acquirer must acquire at least 20 per cent of the
shares. This norm was unwarranted and could make transparent
takeovers difficult.

4) The committee had shown excessive concern for incumbent

managements by legitimizing a creeping takeover.

5) Together with the effective ban on stock offers, the requirement for an
escrow account prevented takeovers by successful, but cash strapped

22  
  
companies. Furthermore, the stipulated 10 per cent was too low to
achieve the desired objective.

6) The code also contained many drafting errors and ambiguities and
made understanding rather difficult.

Drucker (1999), identified systemic risk as risk that was inherent in the
Capital Market and could not be avoided. The study pointed out that, the
only way to avoid it was to abandon the Capital Market investment
business. Furthermore, it pointed out that, the Capital Market risks were
concerned with volatility in prices and also some poor market conditions,
which affected demand, in the case of futures and options. It pointed out
that SEBI was helping the investors in reducing the Capital Market risks by
carefully educating them, bringing in careful rules and regulations which
should reduce risks and also the imposition of margin trading.

Varma (2002), with a view on Corporate Governance, stated that from the
days of Adam Smith, those who have placed their faith in the free markets
had done so in the full knowledge of the greed that permeated human
society. It pointed out that, the breakdown of market discipline may be
attributed to State interventions in the free market that fatally weakened its
ability to correct itself. However, the arguments were that:

i. Corporate Governance was compromised by weakening corporate

pillars of etiquette and internal control,

ii. Capital Market discipline was weakened by regulatory restrictions on

short sales and inefficient banking regulations,

iii. The contract enforcement mechanism that was critical for free market
capitalism was weakened by restricting private securities litigation,

iv. The private sector watchdogs failed, because they operated as coy
oligopolies that had no incentive to succeed.

23  
  
The study stated that, the massive regulatory failures represented by the
Enron case and other corporate frauds in the USA are evidence of lack of
good Corporate Governance. Failures in market discipline are equally
evident, leaving the markets vulnerable and distressing the Investors. The
study pointed out that, Corporate Governance checks and balances had not
been carefully implemented, as they should in corporate and market
environment. It concluded that in a nutshell, an infectious greed seemed to
have gripped much of the business community and helped to destroy it, at
the detriment of the investors.

Dubey (2007), examined the risk management of companies and pointed

out that, the management of companies dealing in the Capital Market must
make sure that all risks taking activities were carefully identified and
disclosures made. Such activities as the increased use of derivatives, which
possessed a potentially indomitable and preposterous nature, were fuelling
the systemic risk in the Indian Capital Market.

Gaggav (2007), in a study of risk assessment, pointed out that, risk

assessment and management was fast becoming an area of disclosure in the
report of Board of directors, and therefore the Capital Market should not be
an exception. It pointed out that, the era of demutualization in the Capital
Market meant that careful disclosure of risk management activities, put in
place by management, minimized the losses that resulted both to the
company and the investors.

Hyderabad (2007), in a study of risk management measures, pointed out

that risk management measures should be a continuous process. Stating
that, the process should help in identifying all risk factors, analyzing risks
factors and deciding upon good measures of effective risks handling and
control. It found out that, risks handling and control therefore involved such
activities as risks identification, risks quantification, risks mitigation and
risk insurance. It pointed out that, like other parameters used in taking the
temperature of the Capital Market and reporting to investors when to buy

24  
  
and when to sell, there should be a risk measurement parameter that should
be reporting the risky level of the Capital Market, so that investors should
know when to invest and when not to invest. A risk measurement index was
very necessary in the Capital Market. This could help to inform investors
when to expect low returns.

Hyderabad (2007), in a study of business decision-making, found out that,

business decision making involved the consideration of risk and return,
because higher risks generally entailed higher returns. However, it
concluded that, this was not true in the Capital Market, where higher risks
led to low returns and even losses.

Kansara (2007), in a study of the capital market, pointed out that, the
primary market in India had earlier witnessed two major boom periods. The
current one was the third and most sustained. There was a fundamental
difference in the state of the primary market then and what it was on the
earlier two occasions. The first bull phase was during the period of 1986-
88, following the Rajiv Gandhi-led government taking charge at the Centre.
It was then that the market witnessed a slew of public issues hitting the
market. The second boom was during 1994-96, which saw all kinds of
entities – from the well run to the fly-by-night (next day house to let),
tapping the Capital Market without any substantial fund-raising program in
sight. The Securities & Exchange Board of India (SEBI), (the Capital
Market regulator), learnt its lessons from these two experiences and came
out with the Comprehensive Disclosure and Investor Protection (DIP)
Guidelines, for the first time in the year 2000. These regulations made a
vast change in the Indian Primary Market and were a key factor in the
sustainable Bull Run that had been witnessed in the IPO market, since June
2003. The study pointed out that, on the earlier two occasions of the IPO
boom, investors were provided with very little information by companies
raising funds through the IPO market, to take informed decisions on
whether to subscribe to an issue or not. Based on the poor information
provided, in the prospectus (all issues were fixed price issues then),
decision-making was a difficult task. This was because, Companies and

25  
  
merchant bankers hardly used to disclose information about the company’s
past, present and future performance. Following SEBI’s decision to move
to a disclosure-based process in the fund-raising exercise, the quality of the
issuers’ information provision improved, and it has helped in the raising of
larger amounts of capital from the domestic market. The situation in the
earlier days was that very little information was provided, making
investment decisions difficult. The study found out that, the full size of a
prospectus, then, was not more than 50 pages, but today due to the
comprehensive disclosure requirements, every Draft Red Herring
Prospectus (DRHP) for the book built issues), runs into nothing less than
400 pages. The study concluded that, following the Disclosure and Investor
Protection (DIP) Guidelines, in the year 2000, the disclosure-based regime
in the fund-raising process had attained a maturity level.

Reddy (2007), in a study on corporate governance in the financial sector,

pointed out that, in India, as in the case of many other countries, there are
several agencies entrusted with the task of regulation and supervision of
different institutions and market participants in the financial sector. It
pointed out that, the RBI regulated and supervised the major part of the
financial system through its various departments under the provisions of the
Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. Its
supervisory domain covers Commercial Banks, Non- Banking Financial
Companies (NBFCs), Urban Cooperative Banks (UCBs) and some of the
All-India Financial Institutions (AIFIs). Some of these AIFIs, in turn,
regulated and/or supervised other institutions in the financial sector. Thus,
the Regional Rural Banks (RRBs) and Central and State Cooperative Banks
were supervised by the Reserve Bank of India through National Bank for
Agriculture and Rural Development (NABARD); State Financial
Corporations (SFCs) through the Industrial Development Bank of India
(IDBI) (since transferred to SIDBI) and the Housing Finance Companies
through National Housing Bank (NHB). It pointed out that, since 1992, the
Securities and Exchange Board of India (SEBI) has regulated the Capital
Markets and supervised several institutions such as the Stock Exchanges,
Mutual Funds, Asset Management Companies, securities dealers and

26  
  
brokers, Merchant Bankers and Credit Rating Agencies. SEBI regulated
venture capital funds also. The Insurance Regulatory and Development
Authority (IRDA) regulated the entities in the insurance sector, since 1999.
Economic Times of India (2007) reported that the Securities and Exchange
Board of India (SEBI) created a database of all participants in the bourses, a
move that helped the regulator to keep a watch on traders, investors and
intermediaries operating in the market.
It stated that the National Institute of Securities Market (NISM) was
coordinating certification in the country's Securities Markets and engaged
agencies to administer computer-based tests across the country, (SEBI
release). NISM, established by SEBI, also put in place a comprehensive
continuing professional education framework involving reputed institutions.
SEBI had always organized workshops for market participants on
`Certification of associated persons in the Securities Markets. It pointed out
that, certification had been mandated in the US, UK and Singapore among
other countries. In India, certification was mandated for distributors of
mutual funds, traders in derivatives segment and depository participants.
The regulations introduced in the year 2007, had enlarged the scope of
mandated certification to a number of new segments of intermediaries and
their associated persons. It pointed out that, all persons handling investors'
money, investor complaints, dealing with operational risk, attending to
compliance and persons responsible for management of intermediates must
have to demonstrate minimum proficiency standards in order to maintain
their registration with SEBI. The certificate was to be obtained by passing
an examination approved by SEBI and was valid for three years.
The above reviews fall short of quantifying the risks in the Capital Market.
This research project should be able to quantify the risks and examine the
functions of SEBI as regulator of the Indian Capital Market. This should be
able to guide investors to invest wisely, avoiding losses.

Varma (2009), in a study, Risk Management Lessons from the Global

Financial Crisis for Derivative Exchanges, stated that during the global
financial turmoil of 2007 and 2008, no major derivative clearing house in
the world encountered distress, while many banks were pushed to the brink

27  
  
and beyond. An important reason for this was that derivative exchanges
have avoided using value at risk, normal distributions and linear
correlations. The study stated that this was an important lesson. Pointing
out that the global financial crisis has also taught the public that in risk
management, robustness was more important than sophistication and that it
was dangerous to use models that are over calibrated to short time series of
market prices. The study applied these lessons to the important exchange
traded derivatives in India and recommended major changes to the current
margining systems to improve their robustness. It also discussed directions
in which global best practices in exchange risk management could be
improved to take advantage of recent advances in computing power and
finance theory. The study argued that risk management should evolve
towards explicit models based on coherent risk measures (like expected
shortfall), fat tailed distributions and non- linear dependence structures.

Varma (2009), in a study, Indian Financial Sector and the Global Financial
Crisis, stated that though the Indian financial sector had very limited
exposure to the toxic assets at the heart of the global financial crisis, it
suffered a severe liquidity crisis after the Lehman bankruptcy. The study
stated that the Reserve Bank of India could have averted the liquidity crisis
with timely injection of liquidity into the system. Apart from the liquidity
crisis, India also had to deal with the collapse of global trade finance;
deflation of an asset market bubble; demand contraction for exports; and
corporate losses on currency derivatives. Looking ahead, the paper argued
that the crisis was a wake-up call for the Indian banks and financial system
for better managing their liquidity and credit risks, re-examining the
international expansion policies of banks, and reviewing risk management
models and stress test methodologies. The study rejected the widely held
notion that financial innovation caused the global crisis and offered
examples from the bond markets and securitization to establish the
necessity of continuing with the financial reforms. It pointed out that, while
India had a high growth potential, the growth was not inevitable. It pointed
out that, only the right economic and financial policies and a favorable
global environment could make rapid growth a sustainable phenomenon.

28  
  
Varma (2009), in a study, Satyam Fraud: The Regulatory Response stated
that a major fraud was an opportunity to push through important reforms,
which would otherwise be resisted by powerful vested interests. It stated
that this opportunity was missed in India. Point out that the initial
regulatory response to the Satyam fraud was swift and appropriate, but this
momentum was lost very quickly. Those who hoped for comprehensive and
decisive reforms had been disappointed. This means the Corporate
Governance principles only rely mainly on the SEBI clause 49 for
enforcement.

29  
 CHAPTER 3- DATA ANALYSIS &
  INTERPRETATION
 
Following are the exercise done by observers on so many areas relating
Capital Market relating to SEBI since inception. These are (i) investigations
taken up by SEBI (ii) Nature of investigations taken up and completed by
SEBI on issues like Market manipulation and price rigging, etc., (iii) Types
actions taken by SEBI on various entities (iv) No of Prosecutions launched
by SEBI (v) Nature of Prosecutions launched by SEBI (vi) Actions taken
on Mutual Funds by SEBI (vii) Details of Appeals before Securities
Appellate Tribunal (SAT) (viii) Details of Appeals under Section 15Z of
the SEBI Act against the Orders of Securities Appellate Tribunal (ix)
Investor‘s Grievances received and redress by SEBI.

TABLE 1: Investigations by the SEBI

Success Rate
Cases taken up for Cases
Year (%)
investigation completed
1992-93 2 2 100
1993-94 3 3 100
1994-95 2 2 100
1995-96 60 18 30
1996-97 122 55 45
1997-98 53 46 87
1998-99 55 60 109
1999-00 56 57 102
2000-01 68 46 68
2001-02 111 29 26
2002-03 125 106 85
2003-04 121 152 126
2004-05 130 179 138
2005-06 159 81 51
2006-07 120 102 85
2007-08 25 169 676

  30  
  
2008-09 76 83 109
2009-10 71 74 104
TOTAL 1359 1264 93
Source: SEBI Annual Report 2009-10

From the observation of Table No.1, it is clearly indicating that, though the
cases taken for investigations probe into possible or suspected or alleged
infringements of security market regulations such as price manipulation,
artificial volume creation, insider trading, violation of takeover code or any
other regulations, public issue related irregularities or any fraudulent or
unfair trade practices. Investigations are initiated based on evidence
available from various resources including SEBI‘s own surveillance
activities, stock exchanges, other intermediaries, and complaints from
various sources including press reports. The SEBI then calls for
information, compels production of documents, summons person
interrogation, examines witnesses and where necessary, with the
magistrate‘s approval carries out even search and seizure operations. On
completion of investigation, the SEBI takes actions such as warning,
suspension of activities, cancellation of registration, and denial of access to
the capital market for a specified period, imposition of monetary penalties
and initiation of prosecution proceedings. From the following table reveals
that, in the beginning period it had took up actions for investigation vary
slow. But, from 2002-3 year onwards SEBI shifted to speedy completion of
the investigations in the subsequent years. This success percentage was
abnormal during 2007-09.

TABLE 2: Nature of investigations taken up and

completed by SEBI

Nature of
Investigation
Investigations Completed
Investigations taken up

31  
  
2004 2005 2006 2008 2009 2004 2005 2006 2008 2009
Year -05 -06 -07 -09 -10 -05 -06 -07 -09 -10
Market
Manipulatio
n and Price
110 137 102 52 44 148 77 62
62 46
rigging

Issues related

Manipulatio
n
2 3 0 2 2 2 1 4 1 7

Take overs 1 4 2 3 2 2 3 3 1 5
Insider
14 10 10 8 10 12 10
Trading 7 6 18

Miscellaneou
s
10 15 5 5 13 17 7 8 7 6

TOTAL 76 71 179 81 102 83 74

130 165 127
Source: SEBI Annual Report 2009-10

Table No.2 reveals that Nature of investigations taken up and investigations

completed by SEBI during 2004-05 to 2009-10 is very good on the aspects
of market manipulation and price rigging and other issues like
manipulation, takeovers, insider trading and other miscellaneous offences
or frauds done by entities/promoters/brokers etc. Now a days the SEBI has
responding very attentively to curb such type corporate frauds or mistakes
and is taking necessary actions immediately.

TABLE 3: Types of actions taken by SEBI

32  
  
No of entities
Particulars 2002- 2003- 2004- 2005- 2006- 2008- 2009-
03 04 05 06 07 09 10
Cancellation 11 3 3 2 0 - -

Suspension 42 43 42 36 52 46 48

Warning issued 62 22 53 71 27 179 37

Prohibitive directions
issued under section 11B 140 106 134 632 345 230 691
of SEBI Act

Issues Refunded /Option

2 - - - - - -
given

TOTAL 257 174 232 741 424 455 776

Source: SEBI Annual Report 2009-10

Table 3 indicates that the actions taken by SEBI on so many entities

regarding cancellation, suspension, warning issued, prohibitive directions
issued under 11B of SEBI of Act, on investigations probe into possible or
suspected or alleged infringements of security market regulations such as
price manipulation, artificial volume creation, insider trading, violation of
takeover code or any other regulations, public issue related irregularities.
From the above observation it reveals that total actions taken by SEBI has
been increasing, it shows that it is well sound and regulating authority on
behalf of Government of India for the development of capital markets in
India.

33  
  
 
TABLE 4: Number of prosecutions launched by SEBI

Number of Prosecutions Number of entities/persons against

Year
Launched whom prosecution launched
1996-97 6 46
1997-98 8 63
1998-99 11 92
1999-00 25 154
2000-01 28 128

2001-02 95 512

2002-03 229 864

2003-04 480 2406

2004-05 86 432

2005-06 30 101

2006-07 23 152

2007-08 40 185

2008-09 29 114

  34  
  
2009-10 30 109

Source: SEBI Annual Report 2009-1

Table No. 4 discloses that total number of prosecutions launched till 31

March 2010 was 1121 and the total number of persons or entities against
whom prosecution was launched was 5358. From the above it is clearly
revealed that as regulator of capital markets, SEBI has done a tremendous
role for control of various manipulations occurred in our Indian securities
markets from the last 18 years.

TABLE 5: Nature of prosecutions launched

Year 2003-04 2005-06 2006-07 2009-10

Section 63,68 of Companies Act, 1956 18 18 20 -
Section 73,77 and 113 of Companies
41 42 42 70
Act, 1956
Indian Penal Code 05 05 5 8
Securities and Exchange Board of
795 920 930 934
India Act, 1992
Depositories Act, 1996 13 13 13 14
Securities Contract (Regulation) Act,
14 16 16 5
1956
TOTAL 886 1014 1026 1031
Source: SEBI Annual Report 2009-10

Table No 5 shows that, these prosecutions were launched by SEBI under

35  
  
the Companies Act, The SEBI Act, The Depository Act, The Securities
Contract Regulation Act and India Penal Code. Maximum number of
prosecutions relating to Violation of the SEBI (Substantial Acquisition of
Shares and Take-overs) Regulation, 1997, unregistered entities, Violation
of SEBI (Insider Trading), 1992, Violation of SEBI (Portfolio Managers)
Rules, 1993, Non-payment of Penalty Amount Imposed by the
Adjudicating Officer and others were launched under the SEBI Act. Under
various sections of several Acts SEBI has taken stringent actions against so
many entities or persons to curb various fraudulent acts done by corporates
or others. In October 2002, the Union Cabinet approved the ordinance that
will be the first big attempt at strengthening market regulations a decade
since the SEBI Act came into being. The SEBI will now have more teeth
for investigation, including powers of search and seizure, only constrained
by the requirement to obtain an order from a magistrate. The SEBI will
have the power to impose deterrent fines, which can be as much as Rs.25
crore or three times the undue profit‘ derived through market offences,
whichever is higher. The quantum of fines goes up from the present range
of Rs.5, 000 to Rs.5 lakh to a minimum of one lakh going up to Rs.25 crore
or even more. The ordinance will also amend the SEBI Act, to better clarify
and define offences such as ̳insider trading‘, fraudulent and manipulative
trade practices, and market manipulation‘.

TABLE 6: Actions taken on mutual funds by SEBI

Description No of Mutual Funds

Year 2000-01 2005-06
Adjudication ordered 4 -
Penalties imposed 3 -
Warning/deficiency letters 22 4

36  
  
Payment of Interest 22 17
Compensation to unit -holders 2 -
Compensation to scheme 1 -
Exit option to Investors 2 -
Source: SEBI Annual Report 2005-06

Table No.6 reveals that observed that, the Indian mutual fund industry (both
in public and private sector) has grown tremendously in the last decade. At
present there are around 40 Asset Management Companies are operating
more than 500 various schemes in Asset Allocation of in Equity, Debt,
Money Market and Government securities. Net Assets up to 31st march,
2001 net assets were in this industry Rs. 90,587 crores, whereas in the
year2010 these assets amount crossed to 800,000 crores. It is expected to
cross by 2012 more than Rs. 12, 00,000 crores. Hence, as a regulator on
Mutual funds SEBI has issued so may guidelines during1996, 2002 and
2010 on unit holders, Trustees, Sponsors, AMCs, and Custodians (DP).
From the above table it is depicted that SEBI had taken actions on various
parties to develop the Indian mutual fund industry on professional, health,
and ethical lines and enhance and maintain standards in all areas with a
view to protecting and promoting the interests of mutual funds and their
unit holders. During 2005-06, SEBI issued warning letters to four mutual
funds for violating the investments and advertisement code. SEBI has made
it mandatory for mutual funds to pay interest @ 15% p.a. for delays in the
dispatch of repurchase/redemption proceeds to the unit holders. During
2004-05 and 2005-06, 17 mutual funds paid Rs.22 lakhs and Rs.2.57 lakh
respectively to investors. Because of such action, the interest amount paid
by mutual funds declined significantly during 2005-06.

37  
  
TABLE 7: Details of appeals filed before securities
appellate tribunal (SAT)

No. Of Appeals
Status of Appeals
2003-04 2004-05 2005-06 2006-07 2009-10
Appeals filed 175 440 244 123 361
Appeals
dismissed/remanded/allowed 49 151 281 293 155
etc.

Appeals pending* 139

126 438 401 80
Source: SEBI Annual Report 2009-10

Table No. 7 shows that, if any dissatisfied entity or persons can make a file
before Securities Appellate Tribunal (SAT) against the decisions taken by
SEBI against them. The above table shows during 2003-04 to 2009-10. The
appeals pending have been decreased in 2009-10 comparatively previous
period. It disclosed that SEBI has been taken actions or decisions accurately
in one side. On the other side, this SAT also encouragement to SEBI as
well as SRO or Ombudsman.

TABLE 8: Details of appeals under section 15z of the

SEBI act against the orders of securities appellate tribunal

Appeals filed Appeals filed by

Years Total
by SEBI other parties against

38  
  
SEBI

2003-04 5
7 12
10 12
2005-06 2
Cases filed

2006-07 14 31 45
29 104
2009-10 75
Cases
pending

2003-04 18 6 24

2005-06 7 1 8
2006-07 28 34 62
2009-10 81 82 163

2003-04 1 - 1
Cases dismissed

2005-06 3 1 4
2006-07 1 2 3
2009-10 8 99 107

Source: SEBI Annual Report 2009-10

39  
  
Table No.8 indicating that, Details of Appeals under Section 15Zof the
SEBI Act against the Orders of Securities Appellate Tribunal, has also been
disseminating or solving as early as possible. Recently, most of the orders
of the SEBI were overturned by the SAT. The Tribunal had quashed SEBI‘s
order BPL, Videocon, and Sterlite for lack of evidence. In L&T‘s case,
SAT struck down the order against Reliance for violation of takeover code.
In the case of HCL, definition of insider was found to be vague and
confusing. Nevertheless, the number might be less during 2003-04 and the
number may be more in 2009-10, the SAT has dismissed so many cases.

TABLE 9: Investor’s grievances - cumulative

Grievances
Year(end Grievances Grievances Resolved redressal rate
March) Received (Redressed)
(In per cent)

1991-92 18,794 4,061 21.61

1992-93 1,29,111 27,007 20.92
1993-94 7,13,773 3,66,524 51.35
1994-95 12,29,853 7,18,366 58.41
1995-96 16,06,331 10,34,018 64.37

1996-97 14,65,883
18,23,725 80.38
1997-98 23,35,232 21,42,438 91.74
1998-99 24,34,364 22,69,665 93.24
1999-00 25,32,969 24,16,218 95.39
2000-01 26,29,882 25,01,801 95.13

40  
  
2001-02 27,11,482 25,72,129 94.86

2002-03 27,48,916 26,11,101 94.99

2003-04 26,32,632
27,85,660 94.50

2004-05 28,40,095 26,85,993 94.57

2005-06 28,80,580 27,23,060 94.53

2007-08 27,54,736
29,35,513 93.84
2008-09 29,93,093 28,30,725 94.57
2009-10 30,25,428 28,73,467 94.97
Source: SEBI Annual Report 2009-10

From the Table No .9 discloses that how the SEBI has been received
Grievance received from various people and redressed these grievances by
it. For this purpose only SEBI has established a comprehensive investor
grievances redressal mechanism. The investor Grievances redressal and
Guidance Division of the SEBI helps investors who prefer to make
complaints to the SEBI against listed companies. A standard complaint
format is available at all SEBI offices and on the SEBI website for the
convenience of investors. Each complaint is taken up with the company and
if the complaint is not resolved within a reasonable time, a periodical
follow up is also made with the company. Errant companies are warned of
stern action for their failure to redress grievances. Recalcitrant companies
are referred for prosecution. From the above table it reveals that the
grievances redressal rate (success percentage) has been increasing due to
stringent actions taken by SEBI for the benefit of innocent investors.

41  
 CHAPTER 4- FINDINGS & SUGGESTIONS
 
FINDINGS: ROLE OF SEBI ON INDIAN CAPITAL MARKET
Throughout its eighteen-year existence as a statutory body, SEBI has
sought to balance the two objectives by constantly reviewing and
reappraising its existing policies and programs, formulating new policies
and crafting new regulations in areas hitherto unregulated, and
implementing them to ensure growth of the market. From the above
analysis and interpretation as well as other keen observation details, the
researchers find out the following facts about SEBI, and its role also
explained in our Indian capital market.
• The SEBI has introduced an array of reforms in the primary and
secondary markets and catalyzed modernization of the market
infrastructure to prepare the market for the twenty-first century. India
probably the only country in the world where all the exchanges have
screen-based trading. Computerized trading has led to reduction in the
scope for price rigging and manipulation, since a paper trail can easily
lead the regulators now to the doorsteps of the guilty. 

• It is observed that, in recent times, SEBI has, retails investors limit

increased to Rs. 2,00,000 from Rs. 1,00,000 in Initial Public Offerings
(IPOs). 

• Dematerialization has pushed the process further. SEBI has taken

several steps for the smooth-cum-speedy development of both primary
and secondary markets from time to time for the development of all
areas. 

• Application of computerization has also given a boost to surveillance.

The basic surveillance is carried out by the stock exchanges, while the
SEBI monitors the process. Introduction of price caps, price bands,
circuit filters, margins and stock watch are some ways of keeping a
strict are some ways of keeping a strict vigil on the market. 
  42  
• Improvements have been made in the clearance and settlement system.
A major step in this direction has been the establishment of
depositories- NSDL and CDSL—and a clearing corporation—
NSCCL. 

• For reviving primary markets, the SEBI further streamlined and

simplified the issue procedure, imparted greater flexibility to the issue
process and strengthened the criteria for accessing the securities
market. In recent times SEBI has taken a drastic decision for reduction
of IPOs‘ period from 21 days to12 days (IPOs issue-opening and
listing-period). The SEBI introduced the option of making an issue
through book building and recently it introduced ASBA scheme (in
IPOs) for investment by investors through bankers. 

• The development of mutual funds was given a major impetus, with the
revision of mutual funds regulations, which now provide greater
operational flexibility to the fund managers and increase their
accountability and supervision. Recently, it has introduced KYC
norms and not charging on any entry-load on investments made by 
investors on NFOs or on any existing schemes. SEBI is trying its level
best for availability of ULIPs at very normal and cheaper rates.

• Far-reaching changes have been made in the SEBI regulations for

substantial acquisition of shares and takeovers. The regulations for
Foreign Institutional Investors (FIIs) were liberalized to provide
greater flexibility and for widening the scope of their investments in
the Indian securities market. 

• Some merchant bankers were found to be unscrupulous. They had not

performed their duties diligently in scrutinizing the prospectus and had
taken advantage of the loopholes by concealing some facts in their
prospects. The SEBI reduced the categories of merchant bankers from
four to one. Moreover, it has prohibited merchant bankers from
undertaking activities such as leasing, bills and discounting. 
43  
• To empower investors make informed decisions and facilitate fair
dealing, the SEBI introduced online filing and dissemination of time
sensitive price information, benchmarking or mutual fund schemes,
valuation norms for unlisted scripts in mutual fund portfolios,
rationalization of depository participants‘ charges and new regulation
for portfolio managers. 

• The SEBI revolutionized the settlement system by introducing T+2

rolling settlement system scripts across exchanges. It has issued
guidelines for demutualization and corporatization of stock
exchanges. 

• To create an effective regulatory regime in which all stakeholders have

confidence, the SEBI has posted the Securities Appellate Tribunal
(SAT) orders on the SEBI website, initiated consultative process for
framing regulations, and shortened the inquiry process. SAT provides
a grievance redressal platform against the SEBI‘s orders. Public
dissemination of such appellate orders is vital as this act as a precedent
of other similar cases and on the decision-making process of the
SEBI. 

• The SEBI is trying to bring down various forms of risk (structural,

systematic and operational) that are there in the securities market:

a) From the structural point, at present our Indian capital market is

having well infra facilities compare with the rest of the world. For
instance, Pre-Market Auction session are opened, and improvement of
Price-discovery mechanism. 

b) From the systematic risk point-wise, these are re-classified in to three

ways. i.e. disclosure standards (at present these are best in the world),
accounting standards (these are by and large aligned completely with
the international accounting standards) and corporate governance (now
many companies have adopting world best corporate governance

44  
 practices). 

c) Operational viewpoint, our Indian capital market is the best

comparable to the rest of the world. At present our Indian stock
exchanges are follows T+2 settlement cycles. Further, every
transaction on the trading platform is guaranteed for settlement by a
third party.

• SEBI has introduced a number of measures to protect the interests of

investors. To create awareness among issuers and intermediaries of the
need to redress investor grievances‘ quickly, the SEBI issues
fortnightly press releases, publishing the names of the companies
against whom maximum number of complaints have been received. To
ensure that no malpractice takes place in the allotment of shares, a
representative of the SEBI supervises the allotment process. It has
been issuing advertisements from time-to-time to guide and enlighten
investors on various issues related to the securities market and of their
rights and remedies. Investors trading times also increased. 

• In order to protect the interest of investors, SEBI took several

measures with a two-pronged approach to discipline and take action
against erring entities and at the same time to educate the investors
about the risks associated with investing in unregulated schemes. The
actions taken by the SEBI included issuing show cause notices to
defaulting entities, initiating court proceedings to obtain appropriate
relief in the interest of investors, conducting a special audit of the
books of accounts of the larger entities, making credit rating
mandatory for existing schemes, disseminating information to
investors through the issue of press releases/public notices. Recently, it
has allowed Anchor-investors‘ for making investment in IPOs. 

• The SEBI has introduced an automated complaints handling system to

with investor complaints. These are classified under various classes
like non-receipt of refund orders/stock invest, non-receipt of dividend,
non-receipt of share certificate/bones shares/debentures/interest on
45  
 debenture/redemption amount of debentures, non-receipt of annual
reports and complaints related to plantation schemes. It is trying
utmost to combat eliminations and reduction of price- rigging. In this
connection it had taken action on Bank of Rajasthan towards price-
rigging recently. 

• SEBI has taken some steps for educating investors from 2000-01
onwards; it distributed the booklet titled A Quick Reference Guide for
Investors to investors. It has published a book regarding ̳Investor
Grievances-Rights and Remedies‘. 

• This information has passed to various stock exchanges as well as

advertised through various national newspapers, broadcast messages
through Vividh Bharati and Doordarshan also. The SEBI set up a new
institution in 2003 called the Ombudsman‘ for the capital market. It
has encouraged forming of investors‘ associations.

• SEBI has successfully taken up primary market reforms in order to

remove the inadequacies and deficiencies in the issue procedures of
new shares and debentures. There is now transparency in fixing price
and premium of a share. Issuing companies are required to disclose all
material facts and risk factors in the prospectus.

• SEBI has encouraged the participation of foreign institutional investors

(FIIs) in the Indian capital market. It has simplified the procedure for
their registration and operation in the stock exchanges. FIIs have been
permitted to repatriate capital, capital gains, dividends and interest on
shares and debentures.
• SEBI has helped in the process of institutional and market
development in the secondary market. It approves ‘market makers’ on
the recommendations of stock exchanges. By dealing in scripts, market
makers impart liquidity in them and reduce volatile movements in
share prices.

46  
• SEBI has modernized the entire operations of stock exchanges in
India. All stock exchanges are computerized. The stock market trading
is 100% computerized and is on-line. In many developed countries of
the world, including America and Japan, the trading is not fully
computerized and a large part of their trade is still on the floor. This is
a big achievement of SEBI. The introduction of electronic trading in
all the 23 stock exchanges has reduced transaction costs.

• SEBI introduced an element of compulsion by making

dematerialization of shares compulsory for trading. This has been done
in phases for shares being traded daily on a large scale. At present
more than 50% of the trade in stock exchanges is in the demat form.
Dematerialization of shares has encouraged trading especially by FIIs
because it removes the fear of fake or forged shares and bad deliveries.
It has also eliminated transfer problems.

• SEBI has allowed Internet trading under Order Routing System (ORS)
through registered stockbrokers on behalf of clients. It has thus
facilitated investors to buy and sell shares through the Internet on their
computers. It is a major advancement in trading shares at stock
exchanges in India.

• SEBI has introduced a circuit-breaker system based on the market

volatility of individual stocks. According to this system, if market
volatility in a stock crosses a certain limit, the trading in this stock is
stopped for a few days so that speculators may not take undue
advantage.  This is a better system than the American circuit- breaker
system, which is related to the index of stocks. The New York Stock
Exchange is closed even for half- an-hour or more whenever the
market volatility crosses the index limit. Thus SEBI has developed a
better circuit-breaker system whereby there is no need to close the
stock exchange.

47  
 • The SEBI had issued detailed guidelines for all companies — old as
well as new — for disclosure of information and protection of the
interests of investors. The guidelines relate to first issue of new
companies, first issue by existing companies, issue of convertible
debentures, etc. The guidelines are in addition to other legal provisions
in existence.

• SEBI has prosecuted many companies for delaying share transfers and
for delay in refund of public issue money. This step gives protection to
investors and avoids their exploitation through delayed payments.

• EBI has started the registration of foreign institutional investors. This

is in pursuance of the government guidelines for investments by
foreign institutional investors issued in September 1992. This is a
step in the right direction for effective control on such investors who
are likely to invest on a massive scale in the near future.

• Merchant banking has been statutorily brought under the regulatory

framework of SEBI. Merchant bankers are now to be authorized by
SEBI. They have to adopt the stipulated capital adequacy norms, abide
by the code of conduct, which specifies a high degree of responsibility
towards investors in respect of pricing and premium fixation of issues
and disclosures in the prospectus. Merchant bankers have now a
greater degree of accountability in the offer document and issue
process.

SUGGESTIONS

Based on the findings and conclusions drawn from the study, the following
suggestions seem feasible for strengthening the capital market, especially
the investors.

• Investor protection continues to remain a dream despite a plethora of

48  
 laws, rules and regulations and a host of regulators in the form of RBI,
the Company Law Board and the SEBI. Investor protection should be
the goal of the regulators. All the existing regulations and fresh
regulatory proposals are to be reviewed, aiming at this goal. It is time
to take stock of the realities and make drastic measures to ensure
safety of investors.

• Special regulation is needed to book the culprits in the case of

vanishing companies. SEBI should be empowered to award interest,
costs and damages to investors who have suffered on account of
cheating by promoters. Provision should be made for personal liability
of promoters, directors and concerned intermediaries involved in
vanishing companies. SEBI should have the powers to attach the
property of the defaulting company and then it should be allowed to
sell the property to make good the losses suffered by the investors.
Entrepreneurs setting up new companies should be asked to furnish
more details to the regulators, such as photographs, passport number
etc. and at least three references so that they do not disappear into thin
air.

• There is a strong need for rating of public issues by authorized

agencies like CRISIL, CARE, etc.

• Investors should put forward their grievances to the regulatory bodies

for redressal.

• Appoint an Ombudsman for redressal of investor grievances.

• Stock Exchange should remove inefficiencies and promote market

access to be attractive to investors by improving both the trading and
settlement process. Assure fair deal to investors.

• Probe into irregularities and manipulations in all transactions. The

regulators should be able to take quick corrective action, nip the
49  
 problem in the bud, punish the guilty and plug the loopholes in the
system.

• Efforts should be made to revive the capital markets, both the primary
and the secondary markets. Budget proposals should include tax
incentives for investment in public issues

• Ensure stability and integrity of the market. Monitor excessive

volatility in the market and take prompt action by imposing high
margins. It acts as a 'brake' to excessive speed of volatility.

• It is necessary to tighten our systems and procedures besides ensuring

the surveillance mechanism across the stock markets in line with
developed markets. Review the functions of the stock markets and
stipulate policy issues on market operations.

• More information and greater transparency in the disclosure of

information is required to inspire greater investor confidence.

• Wherever the regulator proposes to introduce a new system in the

capital market it must allow sufficient transition time to ensure smooth
sailing. Otherwise, investors are prone to loose money.

• Investors need to investigate events of unrealistic boom in the share

prices to control the damage of a scam that may happen.

• Investors should try to attend company meetings to come to know

about the policies o the company.

• Diversification is a safe method of risk management. Diversify the

portfolios, as it will help to reduce risks.

• Investors should not run after hot tips. They should try to find out
50  
 whether the price of a share is a real reflection of the earning capacity
and future prospects of the issuer. He should understand that long run
investing is safer. Investing requires caution; patience and hard work
and the investor should never let greed judge his sentiment.

Stock markets provide an attractive opportunity for making money. There is

no other form of investment as on today which can offer a better rate of
return than that offered by shares. The other side of the picture is that the
companies may not line up to the expectations o the investors. Selecting
only those shares in which he has a high level of confidence regarding their
stability and prosperity, can minimize the risk. The Indian stock market has
made rapid strides. Its role in the Indian financial system is getting
transformed from being peripheral to becoming central. The stock markets'
behavior has a powerful influence on the course of economic activity.
Everybody today accepts that economic growth requires rising levels of
investment. India, with its vast investor base, strong capital market tradition
and vibrant industry can optimally utilize the stock markets to raise
resources cheaply and provide an impetus for economic growth. But this
could be possible only when we learn to respect those investors who
contribute to the stock markets' growth and help them to boost their
confidence. In this era of scams, it is absolutely imperative that the investor
embraces and manages properly the risks to make the extra buck, which
bolsters his confidence.

51  
 CHAPTER 5- CONCLUSION

The SEBI is a regulatory body, which is eighteen years old, and the capital
market system is more than 100 years old. This matured capital market
system requires monitoring rather than over-regulation. The SEBI should
supervise this capital market system in such a manner that all sub-systems
become self-regulatory organizations (SROs) gradually. The SEBI should
lay down the boundaries within which these sub-systems should operate.
Moreover, the fundamental infrastructure for regulation, disclosure,
surveillance and trading are all in place. Hence, the SEBI should stop being
pre-occupied with day-to-day regulations and become more of a visionary.
The SEBI can ensure a free and fair market and take India into league of
major global capital markets in the next round of reforms. To enable this, it
has to thoroughly review its structure and functioning. The SEBI has to
balance between the costs of regulation and market development. There
should be cross-border cooperation between various regulators and between
regulators and industry. With the rapid growth in the dealings of stock
markets, lot of malpractices started in stock markets such as price rigging,
‘unofficial premium on new issue, and delay in delivery of shares, violation
of rules and regulations of stock exchange and listing requirements. Due to
these malpractices it is the duty of SEBI to bring light and justice to the
stock markets and investors of India.

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