Module 1.2 Regulatory Framework

Regulatory framework
Prof. Rahul Mailcontractor,

KLS’s Institute of Management Education and Research,
Hindwadi, Belgaum
Regulatory bodies and framework
• SEBI act, 1992

• ROC
• Capital issue (control) act ,1947
• Securities contract (regulation) act, 1956
• Depositories Act, 1996
• Companies Act, 1956
SEBI (ESTABLISMENT)
• In 1988 the Securities And Exchange Board of India
was established by government of India through an
executive resolution and was subsequently upgraded
as a fully autonomous body (a statutory body) in the
year 1992 with the passing of securities and exchange
board of India act (SEBI act) on 30th January 1992
• SEBI promotes orderly and healthy development in
the stock market. It was left as a watch dog to observe
the activities but was found ineffective in regulating
and
• controlling them. As a result in May 1992, SEBI was
granted legal status. SEBI is a body
• corporate having a separate legal existence and
perpetual succession.
Salient features of SEBI act 1992
• Shall be a body corporate with perpetual succession an
common seal with power to acquire hold and dispose of
property.
• HQ will be in Mumbai and may establish offices at other
places in India.
• Chairman and members of board will be appointed by the
central government.
• Government can prescribe terms of offices and other
conditions of service of the board and chairman.
• Primary duties of the board is to protect the interest of the
investors.
Amendments
• Can undertake inspection of any books.
• Issue commission for the examinations of witness of
documents.
• Power to regulate or prohibit issue of prospectus.
• Power to prohibit manipulative and deceptive devices.
• Penalties levied under the act have been enhanced.
Objectives of SEBI
The primary objective of SEBI is to promote healthy and
orderly growth of the securities market and secure investor
protection. The objective of SEBI are as follows:-
• To protect the interest of investors, so that , there is a steady
flow of savings into to the capital market.
• To regulate the securities market and ensure fair practices.
• To promote efficient services by brokers , merchant bankers
and financial intermediaries, so that, they become
competitive and professional.
Functions of SEBI
The SEBI act 1992 has entrusted with two functions they
are
1. Regulatory functions and
2. Developmental functions
Regulatory functions
• Regulation of stock exchanges and self regulatory
organizations.
• Registration and regulation of stock brokers , sub-brokers ,
registrars of all issues, merchant bankers, underwriters,
portfolio managers..etc
• Registration and regulation of the working of collective
investment schemes including mutual funds.
• Prohibition of fraudulent and unfair trade practices relating
to securities market.
• Prohibiting of insider trading.
• Regulating substantial acquisition of shares and takeovers of
the company.
Developmental functions
• Promoting investors education.
• Training of intermediaries.
• Conducting research and publishing information useful to all
market participants.
• Promoting of fair practices.
• Promotion of self regulatory organisations.
Powers of SEBI
• Power to call periodical returns from recognized stock
exchanges .
• Power to compel listing of securities by public companies.
• Power to levy fees or other changes for carrying out the
purposes of regulation.
• Power to call information or explanation from recognized
stock exchanges or their members.
• Power to grant approval to bye-laws of recognized stock
exchanges.
• Power to control and regulate stock exchanges.
Powers of SEBI
• Power to direct enquiries to be made in relation to affairs of
stock exchanges or their members.
• Power to make or amend bye-laws of recognized stock
exchanges.
• Power to grant registration to market intermediaries
• Power to declare applicability of section 17 of the securities
contract (regulation) act 1956 in any state or area to grant
licenses to dealers
Structure of SEBI
• The board shall consists of following members:-
1. Chairman
2. Two members, one from amongst the officials of the
central government dealing with finance and another from
the administration of companies act of 1956.
3. One members from amongst the officials of the reserve
bank of india.
4. five other members of whom atleast three shall be the
whole-time members to be appointed by the central
government.
Model code of conduct
• Code of conduct:- the code of conduct has to be strictly
observed and those employees, officers, or directors of the
company who violate the code of conduct will be subject to
disciplinary action by SEBI or by the company.
• Duty of officers:- every listed company has to employ a
compliance officer who as to report to MD or CEO of the
company.
• Security;- confidential files should be protected and kept
secure. these pertain to all files but especially computer files
and passwords, which are likely to have sensitive price
information.
Model code of conduct
• Closed trading window:- every company should have a
closed trading window period when no trade take places. It
should be closed period when the annual P&L and b/s have
been declared, when dividends have to be declared and
amalgamations have to made.
• Open trading window:- SEBI has also provided that trading
windows would open only after 24 hours of making sensitive
price available to the public.
• Information;- to avoid insider trading practices each listed
company has to provide sensitive information on a continous
basis to the stock exchange.
• Problems:- SEBI deals with the problems faced by the
investors. These are dealt with the investor grievance cell.
Investor grievance
• Investor grievance are usually due to delays in dispatch of
allotment letters, refund orders, misleading statements in
advertisements or in the prospectus, delay in transfer of
securities, non-payment of interest or dividend.
• These grievance are dealt with either SEBI or department of
company affairs.
Ombudsman
• SEBI issued ombudsman regulation in 2003 to provide fair and
transparent system of redressal of grievance.
• These regulation empower an investor to get redressal against
both the company and the intermediaries.
• Complaints dealt by ombudsman act are
1. Delays in receiving refund orders, allotment letters, dividend or
interest.
2. Non-receipt of dividend, certificates, bonus shares, annual
reports, refunds in allotment or redemption of mutual fund unit.
3. Non-receipt of letter of offers in respect of buy back of shares
or incase of delisting.
4. Complaints against grievance against intermediaries or listed
companies.
Rights of investor
• To participate and to vote in annual general meetings and
right to receive a notice for them or their proxy to attend the
meeting.
• To receive dividend, right shares , bonus offers , from the
company ,after there approval of the board.
• To receive and inspect minutes of the meeting.
• To receive balance sheet , P&L account , auditors report , and
directors report.
• To receive allotment letters and share certificates.
• To requisition an extra ordinary general meeting.
• To apply for winding up of the company.
• To proceed in civil or criminal proceedings against the
company.
Registrar of Companies
• The Registrar of Companies India is the official agency that deals with
administration of Companies Act 1956 & Companies Act, 2013.
• It falls under Ministry of Corporate Affairs.
• It has offices in all major states of India.
• The Registrar of Companies is the primary regulator for company- related
matters in India. It is popularly known as ROC.
• It is the Government agency deals with regulation and Management of all
types of Companies covered under the Companies Act 1956 &
Companies Act 2013 in india i.e Private Limited & Public Limited.
• The Registrar of Company takes care of Company registration (Also
known as Incorporation or Setup) in India , complete reporting and
regulation of Companies w.r.t its Directors, Shareholders , Government
Reporting of various matters including the annual filling of various
documents.
Capital issue (control) act ,1947
• Any firm, issuing shares needed central government

permission
• Also determine the amount and price of the issue
• The act was repealed in 1992,
• Market determined allocation started
Securities contract (regulation) act, 1956
• It provided for control on all aspect of securities trading and
running of stock exchange to prevent undesirable transaction
• It gives central government regulatory jurisdiction over
• Stock exchanges : recognition and supervision
• Contracts in securities
• Listing of securities
Stock exchanges : Recognition and supervision
• Processing application of recognition of stock exchanges
• Grant of recognition to stock exchange
• Procedure of corporatization and demutualization of stock
exchanges
• Withdrawal of recognition to stock exchange
• This act also empowers the Central government to call for
periodical returns and make direct enquiries
• To direct rules to be made and powers of SEBI to make or
amend bye-laws of recognized stock exchanges have been
laid down
• To supersede governing body of recognized stock exchange
and vests with the Central Government
• The power to suspend business of recognized stock
exchanges
Contracts in securities
• If the Central Government is not satisfied regarding the

nature or the volume of transactions in securities it may, by
notification in the Official gazette, declare contracts in
notified areas illegal
Listing of Securities
• The act also provides conditions of listing, delisting of
securities,
• Right of appeal against refusal of stock exchanges to list
securities of public companies,
• Right of appeal to SAT(Securities Appellate Tribunal) against
refusal of stock exchange to list securities of public
companies, procedures and powers of SAT,
• Right to legal representation.
Penalties and Procedures
• The act also provides various cases when a person is liable

for penalties such as when there is failure to :
• Furnish information, return, etc.
• Enter into agreements with clients
• Redress investor's grievances
• Segregate securities or moneys of client or clients
• Comply with provision of listing and delisting conditions
etc.
Companies Act, 1956
• It deals with issue, allotment and transfer of securities and various

aspects relating to company management
• Provide for standard disclosure in public issues
• Company management
• Management perception of the risk factors
• Information about other listed companies under the same
management
• Company ‘s other projects
Depository Act , 1996
• Provides for the establishment of depositories in securities
• Ensure free transferability of securities with speed and
accuracy by making securities freely transferable
• Dematerializing the securities
• On line transfer
• The Depositories Act, 1996 provides for the establishment of
depositories for securities to ensure transferability of
securities with speed, accuracy and security.
• The act provides the rights and obligations of depositories,
participants, issuers and beneficial owners
Depository Act , 1996 cont-
• A depository is required to enter into an agreement with one
or more participants as its agents.
• Any person through a participant can enter into an agreement
for availing its services.
• Any person who enters into an agreement with depository
should surrender the certificate of security for which he
requires the services of a depository to the issuer
• After the issuer receives the certificate of security, he should
cancel the certificate of security and substitute in its records
the name of the depository as a registered owner in respect of
that security
• The depository should enter the name of the person who has
entered into agreement, as the beneficial owner in its records.
Depository Act , 1996 cont-
• After receiving intimation from the participant, every depository
should register the transfer of security in the name of the
transferee.
• All securities held by a depository should be dematerialized and be
in a fungible form.
• The depositories should be deemed to be the registered owner for
the purpose of effecting transfer of ownership of security on behalf
of a beneficial owner.
• The depository as a registered owner should not have any voting
rights or other rights in the securities held by it.
• A Beneficial owner, with the prior approval of the depository can
create a pledge or hypothecation of securities owned by him
through a depository.
• The depository is required to maintain a register and an index of
beneficial owners.
• The depositories are required to furnish information about the
transfer of securities in the name of beneficial owners at such
intervals and in such manner as may be specified by the bye-laws.

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Regulatory framework

Prof. Rahul Mailcontractor,

• SEBI act, 1992

• Any firm, issuing shares needed central government

• If the Central Government is not satisfied regarding the

• The act also provides various cases when a person is liable

• It deals with issue, allotment and transfer of securities and various

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