What are the stock market regulations in India? What regulatory structure has been put in place to safeguard investors from the volatility of the stock market? Does India’s Securities and Exchange Board have the authority to represent investors’ interests? What legal provisions support SEBI? Read here to learn the answers.
The Supreme Court recently asked the Securities and Exchange Board of India (SEBI) and the government to produce the existing regulatory framework to protect investors from share market volatility.
The stock and securities market in India is regulated by four fundamental laws:
- The Companies Act, 2013
- The Securities and Exchange Board of India Act, 1992 (SEBI Act)
- The Securities Contracts (Regulation) Act, 1956 (SCRA)
- The Depositories Act, 1996.
Stock markets are components of a Free-Market economy because they enable democratized access to investor trading and the exchange of capital.
The stock market in India
A stock market is a place where shares of publicly traded corporations are exchanged. In an initial public offering (IPO), corporations sell shares to the general public on the primary market to raise money.
A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers.
- India’s premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.
In India, securities regulations have evolved in the face of two diverging trends.
- The first is a drive towards financial market liberalization, which comprises the removal of financial repressive measures such as direct interest rate restrictions, forced investment in government assets, administrative pricing of securities, and so forth.
- Stronger regulation is the second driving force. As financial markets are characterized by severe knowledge asymmetries that increase moral hazard and, in extreme circumstances, result in market failure, thus a pressing need for tighter regulation.
In summary, an unregulated market can entail high systemic risk.
Stock market regulations in India
The Indian stock markets are efficiently regulated and tracked by The Securities and Exchange Board of India (SEBI), The Reserve Bank of India, and the Ministry of Finance. The Ministry of Finance operates via the Department of Economic Affairs (Capital Markets Division).
The Ministry formulates rules and regulations required for the functioning of the capital markets. It also develops laws necessary for safeguarding the interests of the investors in the stock market.
Securities Contracts (Regulation) Act, 1956 (SCRA)
- SCRA is an Act of the Parliament of India enacted to prevent undesirable exchanges in securities and to control the working of the stock exchange in India
- It provides the legal framework for the regulation of securities contracts in India.
- It also covers the listing and trading of securities, the registration and regulation of stockbrokers and sub-brokers, and the prohibition of insider trading.
Securities and Exchange Board of India Act, 1992 (SEBI Act)
- The Capital Markets Division of the Department of Economic Affairs sees to the administration of rules made within the bounds of the SEBI Act of 1992.
- This is the act that established the Securities and Exchange Board of India, or SEBI, the main authorized regulatory body that regulates Indian stock exchanges.
- The key function of SEBI is to keep the interest of investors/traders protected.
- While trading in the Indian stock market, investors and traders have to execute trades while abiding by rules, to promote fairness. SEBI monitors the rules.
Depositories Act, 1996
- The Depositories Act, of 1996 regulates the depositories of securities in India.
- It sets out the procedures for the dematerialization and transfer of securities held in electronic form.
Companies Act, 2013
- This act regulates the incorporation of a company, responsibilities of a company, directors, and dissolution of a company.
- The act enabled companies to be formed by registration, set out the responsibilities of the companies, their executive director, and secretaries, and also provides for the procedures for its winding.
- The amendment to the act was passed in 2020. Ministry of Corporate affairs governs this act.
- It also sets out the rules for the issue and transfer of securities by companies.
Role of SEBI in stock market regulations
SEBI regulates Capital Markets through certain measures it takes.
- Protects the interests of traders and investors, thereby, promoting fairness in the stock exchange.
- regulates how the security markets and stock exchanges function.
- regulates how transfer agents, stock brokers, and merchant bankers, etc, function.
- handles the registration activity of new brokers, financial advisors, etc.
- encourages the formation of Self-regulatory Organizations.
- promotes investor learning opportunities.
- makes rules to prevent malpractice.
- manages and controls a ‘complaints’ division
- It regulates mutual funds, both government and private-sector-related.
SEBI can issue directions to those who are associated with the market and has powers to regulate trading and settlement on stock exchanges.
SEBI has the power to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its inquiry.
Safeguards against fraud
SEBI notified the Prohibition of Fraudulent and Unfair Trade Practices Regulations in 1995 and the Prohibition of Insider Trading Regulations in 1992 to prevent market manipulation and insider trading.
- Insider Trading Regulations, 2015 prohibits insider trading in securities listed on Indian stock exchanges. They prescribe the code of conduct for insiders, the procedures for disclosures, and the penalties for violations.
Violations of these regulations are ground offenses that can lead to a deemed violation of the Prevention of Money Laundering Act 2002.
Role of RBI in stock market regulations
The Reserve Bank of India is responsible for regulating the financial activities of the Indian economy.
- It monitors the capital market and keeps a close tab on the exchange rates.
- The monetary policy designed by the Reserve Bank of India affects the equity markets directly.
- It controls the interest rates, which, when lowered, reduces the cost of debt, and the cost of equity is brought down consecutively.
The actions of SEBI are also checked through an appellate tribunal. Appeals against orders of SEBI and the stock exchanges can be made to the Securities Appellate Tribunal (SAT) comprising three members. Appeals from the SAT can be made to the Supreme Court.
The Indian regulatory organizations are crucial in maintaining stock prices, which in turn helps the country’s economy expand. Indian financial authorities also urge citizens to increase their savings and make stock platform investments. By protecting their capital, the regulators increase investors’ faith in the market.
These organizations promote capital production, which aids in accelerating the nation’s economic growth.
-Article written by Swathi Satish
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