CHAPTER 1

INTRODUCTION

1.1 SecAXTities Maiket

1.1.1 Types of Securities Market
1.1.2 Types of Listed Securities
1.2 Concept of Stock Market
1.2.1 Stock Markets in India
1.2.2 Organizational Structure of Stock Market
1.2.3 Functions of Stock Market
1.2.4 Membership of Stock Market
1.2.5 Computerized Trading on the Stock Market
1.2.6 Depository System in India
1.2.7 Regulatory Framework for Securities Market
1.3 Concept of SEBI
1.3.1 SEBI Act, 1992
1.3.2 Role of SEBI in Stock Exchange
1.3.3 Power of SEBI in Relation to Stock Exchange
1.3.4 Limitations of SEBI
1.4 Concept of DEMAT Account
1.4.1 Procedure to Open a DEMAT Account
1.4.2 Share Requirement to Open a DEMAT Account
 CHAPTER 1

INTRODUCTION

1.1 Securities Market

Securities Market plays a crucial and effective role in

the economic development of a nation. It provides the
financial resources needed for the long term and
sustainable development of the different sectors of the
economy. "Security" refers to a share, bond or government
stock that can be bought and sold, usually on the stock
exchange or on a secondary market, and carries a right to
some form of income, either in the form of a fixed rate of
interest or dividends.

1.1.1 Types of Securities Market

The Security Market has two interdependent and

inseparable segments, i.e.. The New Issues Market (Primary
Market) and the Stock (Secondary Market). These can be
described as under:

The Primary Securities Market

The primary market for securities is the new issues

market which brings together the "supply and demand" or
"sources and uses" for new capital funds. In this market,
the principal sources of fund is the domestic saving of
individuals and businesses; other suppliers include foreign
investors and governments. The principal u s e s of funds are:
the long-term financing of the investment is housing, the
long-term investment of corporations and other b u s i n e s s e s ,
and the long-term borrowing of government.
The Secondary Securities Market

The purposes of a stock exchange or secondary-

securities market, like any other organized market is to
enable buyers and sellers to effect their t r a n s a c t i o n s more
quickly and cheaply. Stock exchanges (markets) are
intricately inter-woven in the fabric of a nation's economic
life. Without a stock exchange, the saving of the
community-the sinews of economic progress and productive
efficiency-would remain underutilized. Stock exchange
means any body of individuals, whether incorporated or not,
constituted for the purpose of regulating or controlling the
business of buying, selling or dealing in securities
(Srivastava R.M., 2006, Khan M.Y., 2005, PP. 143-145).
These securities include:

• Share, scrips, stocks, bonds, debentures stock or

other marketable securities of a like n a t u r e in or any
incorporated company or other body, corporate.
• Government securities.
• Rights or interest in securities.

1.1.2 Types of Listed Securities

The members of the exchange are permitted to deal

only in listed securities in that particular exchange. The
governing body of a particular stock exchange can also
permit to deal in those securities which are listed in some
other recognized stock exchanges called permitted
securities. The listed securities are divided into two
categories called specified and non-specified. The specified
securities are also called "A" list securities or forward list or
cleared list securities. The non-specified securities are also
called "B" list or cash list or non-cleared list securities.
Different stock exchanges use different terms. For example,
in Madras Stock Exchange, shares are classified as A and B
groups, whereas in Bombay, Calcutta and Delhi shares are
classified under specified and non-specified shares.
Securities to be put in "A' list or specified list is decided by
the governing body of a Stock Exchange from time to time. A
broad list of certain norms and distinction criterion are laid
down for inclusion or exclusions of security in "A" list like
shares being fully paid up, the minimum paid up capital
should be Rs. 5 Crore, continued listing of a share for a
minimum period of three years on the "B" list, wide
dispersal of shares, dividend paying capacity of a company
volume of trading etc.

The governing board of a stock exchange decides to put

a security in specified list mainly on the basis of volume of
transactions in the concerned stock exchange. Generally,
specified securities belong to a big size and well established
companies. Badla transaction facility is available in
specified list securities and not on non-specified securities.
When governing board finds that a particular share is being
very actively traded, they can put the security in specified
list. In case the volume of trading in a specified security is
poor then it is transferred to non-specified list. Different
stock exchanges have their own list of specified and non-
specified securities. Thus, it is not necessary that a
specified list be same in all the stock exchanges (K. Bal,
Nartha S.S., 1998, PP. 372-373).

In nutshell, the securities which are traded in the

stock exchanges can be put under three categories which is
as follows:
• Specified or cleared or A or forward list securities.
• Non-specified or non-cleared or B or cash list
securities.
• Permitted securities or C list securities.

1.2 Concept of Stock Market

A stock exchange is a formal trading place for the

securities that have been sold to the public. In other words,
they provide the much needed liquidity and leverage to the
tradable i n s t r u m e n t s in the system.

1.2.1 Stock Markets in India

In India, stock exchanges have been defined as any

body of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in
securities. India has the privilege of having the oldest stock
exchange in Asia. Trading through securities began about
200 years ago, the first stock exchange came into existence
some time in 1857 at Bombay. It was only later that stock
exchanges sprang up in other countries. The post world
war-II boom in the stock exchange between 1946 and 1948
emphasized the need for reforms in the stock exchanges. In
response to this, the Indian government appointed a
committee under the chairmanship of A.D. Gorwala in 1948.
The aims of the committee were:

• To consider the draft proposals of the government on

the subject of stock exchange regulation.
• To submit a revised draft bill; and
• To discuss any other relevant recommendations on the
subject.
 The Committee submitted its report in August, 1951
and its recommendations formed the basis of Securities
Contract (Regulation) Act which came into force from
February 20, 1957. The Act laid down that:

• Stock exchanges should fulfill certain conditions

relating to their membership, etc. prior to their
recognition;
• Stock exchanges should have control over their trading
methods and practices, and
• There should be clear-cut provisions relating to listing
of securities by public companies.

The first recognized permanent stock exchange in India

was the Bombay stock exchange in 1957 followed by the
Calcutta stock exchange in 1980, Delhi, Ahmedabad and
Madras stock exchanges in 1982. The eighties saw the
growth of a number of new recognized stock exchanges in
the country. At present, there are 23 recognized stock
exchanges in the country, of which only eight are permanent
members. Among them, the latest and the most innovative
are the Over The Counter Exchange of India and National
Stock Exchange. With the equity cult spreading fast in the
country, the prospects of many more stock exchanges
springing up in the country are bright. It is estimated that
by the end of the century, the country would have over 40
stock exchanges.

1.2.2 Organizational Structure of Stock Market

The stock exchanges are the exclusive centers for

trading of securities. At present, there are 23 operative
stock exchanges in India, Most of the stock exchanges in
the country are incorporated as 'Association of persons'
under section 25 of Companies Act. The trading members,
who provide broking services also own, control and manage
the stock exchanges. They elect their representatives to
regulate the functioning of the exchange, including their
own activities. Until recently, the area of
operation/jurisdiction of an exchange was specified at the
time of its recognition, which in effect precluded
competition among the exchanges. These are called regional
exchanges. In order to provide an opportunity to investors
to i n v e s t / t r a d e in the securities of local companies, it is
mandatory for the companies, wishing to list their
securities, to list on the regional stock exchange nearest to
their registered office. If they so wish, they can seek listing
on other exchanges as well. Monopoly of the exchanges with
in their allocated area, regional aspirations of the people
and mandatory listing on the regional stock exchange
resulted in multiplicity of exchange. As a result, we have 24
exchanges in the country recognized over a period of time to
enable investors across the length and breadth of the
country to access the market.

The three newly set up exchanges Over The Counter

Exchange of India (OTCEI), National Stock Exchange of
India (NSE) and Inter-Connected Stock Exchange of India
(ICSE) were permitted since their inception to have nation-
wide trading. SEBI recently allowed all exchanges to set up
trading terminals anywhere in the country. Many of them
have already expanded trading operations to different p a r t s
of the country (Bhalla V.K., 2003, PP. 24-25). Further, with
extensive use of information technology, the trading
platforms of a few exchanges are also accessible from
anywhere through the internet and mobile devices. It
significantly expanded the reach of the exchange to the
homes of ordinary investors and assuaged the aspirations of
people to have exchanges in their vicinity. The i s s u e r s /
investors novi' prefer to l i s t / t r a d e on exchanges providing
nationwide network rather than on regional exchanges.

The Bombay Stock Exchange (BSE)

The Bombay Stock Exchange is the premier stock

exchange in India. It was the first to be recognized on
permanent basis in 1957. The capital listed in Bombay
accounted for about 40 percent of the overall capital listed
on all the stock exchanges, whereas its share of the market
capitalization amounted to around 90 percent. In terms of
the total number of companies and total number of stock
issues listed also, Bombay ranked first (Avadhani V.A.,
1996, PP. 253). It is roughly estimated that the turnover of
Bombay Stock Exchange is about 60 percent-70 percent of
the overall turnover of all the stock exchanges in the
country.

National Stock Exchange (NSE)

In 1991, Pherwani Committee made recommendation

for establishing National Stock Exchange. In 1992, the
government authorized IDBI for establishing this exchange.
IDBI is the main promoter of National Stock Exchange
(NSE). NSE has initial authorized capital of Rs. 25 crore.
NSE includes trading of equity s h a r e s , bonds and
government securities. NSE's head office is situated in
South Mumbai at Worli. As on December 1996, there were
roughly 1200 companies traded on same date of the. 1200
odd companies traded on the NSE, of against 5999
companies listed on the BSE as on the NSE, 535 were listed
and the remaining were permitted securities. As on March
3 1 , 1998, NSE terminals operate in 179 cities spread across
18 states. The total turnover in respect of NSE stood at Rs.
22,276 crore in April 1997. This rose to Rs. 40,980 crore in
July, 1997 but declined subsequently and stood at Rs.
30,625 crore in March, 1998.

Over the Counter Exchange of India (OTCEI)

The multi-tier securities exchange model was adopted

in our country in October, 1990 with the establishment of
the Over The Counter Exchange of India (OTCEI). The
objective of the OTCEI is to provide an alternate market for
the securities of smaller companies, public sector
companies, closely held companies desirous of listing, etc.
It has been promoted jointly by UTI, ICICI, IDBI, SBI Capital
Market Ltd., IFCI, GIC and Canbank financial services Ltd.
The government has conferred it the s t a t u s of a 'Recognized
Stock Exchange' under Sec. 4 of the Securities Contracts
Regulation Act. Consequently, companies listed with OTCEI
will practically be at par with companies listed on any stock
exchange in the country.

1.2.3 Functions of Stock Market

The stock market has to play an important role to

build real shareholder's democracy. The aim of the stock
exchange authorities is as follows:

• To protect the interests of the investing public, the

authorities of the stock exchanges have been
increasingly subjecting not only its members to a high
degree of discipline, but also those who use its
facilities-joint stock companies and other bodies in
whose stocks and shares it deals. There are strict
regulations to ensure that directors of joint stock
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 companies keep their shareholders fully informed
about the affairs of the company.
• Apart from providing a market that mobilizes and
distributes the nations saving, the stock exchange
ensures that the flow of saving is utilized for the best
purpose from the community point of view.
• The job of the stock exchange and its members is to
satisfy that need-to bring the buyers and sellers of
investments together, and to make the 'exchange' of
stock between them as simple and fair a process as
possible.
• The most important and socially useful service that the
stock exchange renders to the industries is with regard
to the shifting of the burden of financing from the
management to those of the investors.
• It is generally thought that a stock exchange serves
only those who have money to invest and securities to
sell. But a stock benefits the whole community in a
variety of ways. By enabling producers to raise capital,
it indirectly gives employment to millions of people and
helps consumers to get the goods needed by them.
• The overall trend of prices and volume of b u s i n e s s on
the stock exchange serves as an economic baro-meter
which faithfully registers the changing events and
opinion about the investment outlook.

1.2.4 Membership of Stock Market

The trading platform of a stock exchange is accessible

only to brokers. The broker enters into trades in exchanges
either on his own account or on behalf of clients. The
clients may place their orders with them directly or through
a sub-broker indirectly. A broker is admitted to membership
of an exchange in terms of the provisions of the Security
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Contracts (Regulation) Act, 1956 (SCRA), the Securities And
Exchange Board of India (SEBI) Act 1992, the rules,
circulars, notifications, guidelines, etc. prescribed there
under and the byelaws, rules and regulations of the
concerned exchange. No stock broker or sub-broker is
allowed to buy, sell or deal in securities, unless he or she
holds a certificate of registrations granted by SEBI. A
broker/sub-broker complies with the code of conduct
prescribed by SEBI. The stock exchanges are free to
stipulate thicker requirements for its members t h a n those
stipulated by SEBI. The minimum s t a n d a r d s stipulated by
NSE for membership are in excess of the minimum norms
laid down by SEBI. The s t a n d a r d s for admission of members
laid down by NSE stress on factors, such a s , corporate
structure, capital adequacy, track record, education,
experience etc. and reflect a conscious endeavor to ensure
quality broking services (Bhalla V.K., 2003, PP. 21-26).

1.2.5 Computerized 'On-Line Trading' in Share Markets

Mumbai share market is about 120 years old and is

now a modernized market which is working on international
standard. The new system named 'BOLT-BSE on line
trading' has replaced 120 years old traditional system
named open outcry system. This new system will enable
share brokers to watch fluctuations in share prices on their
computer screen itself and make transactions accordingly.
This new system was introduced in May 1995. Since,
J a n u a r y 29, 1996, Delhi Stock Exchange also adopted DOTS
(Delhi On-Line Trading System). For DOTS operations in
Delhi stock exchange, a new campus for DSE h a s been made
in Indira Gandhi Stadium in west plaza. Following Delhi,
Pune stock exchange also started on-line trading since
March 18, 1996. All other share markets in the country will
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soon adopt computerized share market system in coming
years. NSE and OTCEI have already adopted computerized
on-line trading.

1.2.6 Depository System in India

Depository system, based on non-physical transfer of

share certificates, was introduced in the country on the
recommendations of a technical committee. On September
2 1 , 1995 the President of India gave his assent to
Depository Ordinance, 1995. This ordinance vi^as passed in
Lok Sabha but it could not obtain the acceptance of Rajya
Sabha. Again on J a n u a r y 7, 1996, ordinance was released
for second time which cleared all obstacles for establishing
depository in India. The objective of the depository services
is to improve and modernize the market and to enhance the
level of investor protection through eliminating bad
deliveries, forgery of shares and expediting the transfer of
s h a r e s . This is being done through electronic book entry
form and scripless trading in stock exchanges thereby
reducing settlement risk. On November 8, 1996, the first
share depository in the county was established in Mumbai,
named as National Securities Depository Limited (NSDL).
This depository has been established by 3 main financial
institutions in the country, i.e. UTl, IDBI and National
Stock Exchange (NSE). This depository has opened a new
chapter of 'paperless trading' of securities in the country.
Under this system the delivery of securities will not be
necessary between buyers and sellers of securities but
mechanized system in depository will ensure the change in
the name of security holder (Indian economy, 2007, PP.
116-117). In February 1998, the second depository named
'Central Depository Services India Ltd. (CDSL)' has started
its functioning. CDSL has been sponsored by BSE, Bank of
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India, Bank of Baroda, SBI and HDFC Bank, CDSL got
registered with SEBI on August 19, 1998.

1.2.7 Regulatory Framework

The five main legislations governing the securities

market are: (a) Capital issues (Control) Act, 1947, (b) The
Companies Act, 1956, which sets out the code of conduct
for the corporate sector in relation to issue, allotment and
transfer of securities, and disclosures to be made in public
issues; (c) The Securities Contracts (Regulation) Act, 1956,
which provides for regulation of transactions in securities
through control over stock exchanges; (d) The Depositories
Act, 1996 which provides for electronic maintenance and
transfer of ownership to demit securities, and (e) T h e SEBI
Act, 1992 which establishes SEBI to protect investors and
develop and regulate securities m a r k e t / T h e silent features
of these legislations can be described as under:

a) Capital Issues (Control) Act, 1947

This act had its origin during the war in 1943, when
the objective was to channelise resources to support the war
efforts. It was retained with some modifications as a means
of controlling the raising of capital by companies and to
ensure that national resources were channelised into proper
lines, i.e. for desirable purpose to serve goals and priorities
of the government, and to protect the interests of investors.
Under this act, any firm wishing to issue securities had to
obtain approval from the central government, which also
determined the amount, type and price of the issue. As a
part of the liberalization process, this act was repealed in
1992 paving way for market determined allocation of
resources.

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b) S e c u r i t i e s C o n t r a c t s ( R e g u l a t i o n ) Act, 1 9 5 6

It p r o v i d e s d i r e c t a n d i n d i r e c t c o n t r o l of v i r t u a l l y all
aspects of securities trading and the running of stock
e x c h a n g e s a n d a i m s to p r e v e n t u n d e s i r a b l e t r a n s a c t i o n s in
securities. It gives central government regulatory
jurisdiction over stock exchanges, through a process of
recognition and continued supervision, contracts in
s e c u r i t i e s , a n d listing of s e c u r i t i e s on s t o c k e x c h a n g e s . As a
c o n d i t i o n of r e c o g n i t i o n , a s t o c k e x c h a n g e c o m p l i e s with
conditions prescribed by central government organized
t r a d i n g a c t i v i t i e s in s e c u r i t i e s t a k e s place on a specified
r e c o g n i z e d stock e x c h a n g e . The stock e x c h a n g e s d e t e r m i n e
t h e i r own listing r e g u l a t i o n s , w h i c h have to conform with
t h e m i n i m u m listing c r i t e r i a s e t o u t in t h e r u l e s .

c) C o m p a n i e s Act, 1 9 5 6

It d e a l s with i s s u e , a l l o t m e n t a n d t r a n s f e r of s e c u r i t i e s
a n d v a r i o u s a s p e c t s r e l a t i n g to c o m p a n y ' s m a n a g e m e n t . It
provides for standards of d i s c l o s u r e in p u b l i c issues of
c a p i t a l , p a r t i c u l a r l y in t h e field of c o m p a n y management,
a n d m a n a g e m e n t p e r c e p t i o n of r i s k f a c t o r s . It also r e g u l a t e s
underwriting, the use of p r e m i u m and discount on the
i s s u e s , r i g h t a n d b o n u s i s s u e s , p a y m e n t of i n t e r e s t and
d i v i d e n d s , s u p p l y of a n n u a l r e p o r t a n d o t h e r i n f o r m a t i o n .

d) D e p o s i t o r i e s Act, 1 9 9 6

The Depositories Act, 1996, provides for the

establishment of depositories in securities with the
objective of e n s u r i n g free t r a n s f e r a b i l i t y of s e c u r i t i e s with
s p e e d , a c c u r a c y a n d s e c u r i t y by (a) m a k i n g s e c u r i t i e s of
public limited companies freely transferable subject to
c e r t a i n e x c e p t i o n s , (b) d e m a t e r i a l i z i n g t h e s e c u r i t i e s in t h e
13
depository mode; and (c) providing for maintenance of
ownership records in a book entry form. In order to
streamline the settlement process, the act envisages
transfer of ownership of securities electronically by book
entry without making the securities moves from person to
person. The act has made the securities of all public limited
companies freely transferable, restricting the company's
right to use discretion in effecting the transfer of securities,
and the transfer deed another procedural requirement under
companies act have been dispensed with (Agarwal Krishna,
1997, PP. 71-73).

1.3 Concept of SEBI

The developments which took place in the stock

markets in India during the 1980's boom and the mega
issues during that period took the investors for a ride.
Companies raised over Rs. 12,000 crores from the public
during that period and in many cases the investors were
cheated by presenting rosy pictures about the security of
investments, high dividends and capital appreciation which
were not actually true. It was felt that legislation in this
regard was scattered in different laws and the
administrative agencies did not have proper manpower and
expertise to ensure a fair deal in investors. There was a
need to check the malpractices, insider trading and the
market pricing, etc., on the one hand and to regulate the
mutual funds and venture capital on the other.

In view of the above, SEBI (Securities and Exchange

Board of India) was initially constituted on 12'^'^ April, 1988
as a non-statutory body through a resolution of the
government for dealing with all matters relating to
development and regulation of securities market and

14
investor protection and to advise the government on all
these matters. The government issued an ordinance on
J a n u a r y 30, 1992 for giving statutory powers to SEBI. This
act was passed by the parliament as Act No. 15 of 1992
which received the assent of the parliament on 4th April,
1992. Further, on May 29, 1992 the government issued an
ordinance abolishing the capital Issues Control Act, 1947.
The ordinance also supersedes the various guidelines issued
by the CIC from time to time. Accordingly, SEBI h a s been
set up under the SEBI Act, 1992.

The main purpose of the SEBI Act is to provide for the

establishment of a board called 'Securities and Exchange
Board of India'. The purposes of the Board as laid down in
its preamble are as follows:

• To protect the interests of investors in securities.

• To promote the development of the securities market.
• To regulate the securities market; and
• For matters connected therewith or incidental thereto.

1.3.1 Securities and Exchange Board of India (SEBI) Act,

1992

This Act protects the interest 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 details of this Act are as follows:

Establishment and Incorporation of Board (Sec. 3)

• For the purposes of this Act, a Board by the name of

the Securities and Exchange Board of India shall be
established.

15
• The Board shall be a body corporate by the name
aforesaid, having perpetual succession and a common
seal, with power subject to the provisions of this Act,
to acquire, hold and dispose of property, both movable
and immovable and to contract, and shall, by the said
name, sue or be sued.
• The head office of the Board shall be at Bombay.
• The Board may establish offices at other places in
India.

Management of the Board (Sec. 4)

The Board shall consist of the following members,

namely:

• A Chairman;
• Two members from amongst the officials of the Central
Government dealing with Finance;
• One member from amongst the officials of the Reserve
Bank;
• Five other members of whom at least three shall be the
whole time members to be appointed by the Central
Government.
• The general superintendence, direction and
management of the affairs of the Board shall vest in a
Board of members, which may exercise all powers and
do all acts and things which may be exercised or done
by the Board.
• The Chairman shall also have powers of general
superintendence and direction of the affairs of the
Board and may also exercise all powers and do all acts
and things which may be exercised or done by that
Board.

16
• The Chairman and the other members shall be persons
of ability, integrity and standing who have shown
capacity in dealing with problems relating to securities
market or have special knowledge or experience of law,
finance, economics, accountancy, administration or in
any other discipline which, in the opinion of the
Central Government, shall be useful to the Board.

Term of Office and Conditions of Service of Chairman

and Members of the Board (Sec. 5)

• The term of office and other conditions of service of the

Chairman and the members shall be such as may be
prescribed.
• The Central Government shall have the right to
terminate the services of the chairman or a member
appointed by giving him notice of not less t h a n three
months in writing or three month's salary and
allowances in lieu thereof; and the Chairman or a
member, as the case may be, shall also have the right
to relinquish his office, at any time before the expiry of
the period by giving to the Central Government notice
of not less than three months in writing.

Removal of Member from Office (Sec. 6)

The Central Government shall remove a member from

office if, he -

• Is, or at any time has been, adjudicated as insolvent;

• Is of u n s o u n d mind and s t a n d s so declared by a
competent court;
• Has been convicted of an offence which, in the opinion
of the Central Government involves a moral turpitude;

17
• Has in the opinion of the Central Government, so
abused his position as to render his continuation in
office detrimental to the public interest.

Meetings (Sec. 7)

• The Board shall meet at such times and places, and

shall observe such rules of procedure in regard to the
transaction of business at its meeting (including
quorum at such meetings) as may be provided by
regulations.
• The Chairman or, if for any reason, he is unable to
attend a meeting of the Board, any other member
chosen by the members present from amongst
themselves at the meeting shall preside at the meeting.
• All questions which come up before any meeting of the
Board shall be decided by a majority votes of the
members present and voting, and in the event of an
equality of votes, the Chairman, or in his absence, the
person presiding, shall have a second or casting vote.
• But Under Sec. 7A, any member, who is a director of a
company and who as such director h a s any direct or
indirect pecuniary interest in any matter coming up for
consideration at a meeting of the Board, shall as soon
as possible after relevant circumstances have come to
his knowledge, disclosure the nature of his interest at
such meeting and such disclosure shall be recorded in
the proceedings of the Board, and the member shall
not take any part in any deliberation or decision of the
Board with respect to that matter.
Vacancies, e t c . , not to Invalidate Proceedings of Board
(Sec. 8)

No act or proceeding of the Board shall be invalid merely by

reason of:

• Any vacancy in, or any defect in the constitution of the

Board; or
• Any defect in the appointment of a person acting as a
member of the Board; or
• Any irregularity in the procedure of the Board not
affecting the merits of the case.

Officers and Employees of the Board (Sec. 9)

• The Board may appoint such other officers and

employees as it considers necessary for the efficient
discharge of its functions under this Act.
• The term and other conditions of service of officers and
employees of the Board appointed shall be such as may
be determined by regulations.

Transfer of Assets, Liabilities, e t c . of Existing Securities

and Exchange Board to the Board (Sec. 10)

On and from the date of establishment of the Board:-

• All properties and assets, movable and immovable or

belonging to the existing Securities and Exchange
Board, shall vest in the Board;
• All rights and liabilities of the existing Securities and
Exchange Board shall be transferred to and be the
rights and liabilities of, the Board;
• All sums of money due to the existing Securities and
Exchange Board immediately before that date shall be
deemed to be due to the Board;
• All suits and other legal proceedings instituted or
which could have been instituted by or against the
existing Securities and Exchange Board immediately
before that date may be continued or may be instituted
by or against the Board; and
• Every employee holding any office under the existing
Securities and Exchange Board immediately before
that date shall hold his office in the Board by the same
tenure and upon the same terms and conditions of
service as respects remuneration, leave, provident
fund, retirement and other terminal benefits as he
would have held such office.
• Anything contained in the Industrial Disputes Act,
1947 (14 of 1947) or in any other law for the time
being in force, absorption of any employee by the
Board in its regular service under this section shall
not entitle such employee to any compensation under
that Act or other law and no such claim shall be
entertained by any court, tribunal or other authority.

Functions of SEBI (Sec. 11)

Under section 11, SEBI has to perform the following

functions:

• To protect the interests of investors and to regulate

capital market with suitable m e a s u r e s .
• To regulate the business of stock exchanges and other
securities market.
• To regulate the working of stock brokers, sub-brokers,
share transfer agents, t r u s t e e ss,, merchant
mercna: bankers,

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 underwriters, port-folio managers etc. and also to
make their registration.
• To register and regulate collective investment plans of
mutual funds.
• To encourage self-regulatory organizations.
• To eliminate malpractices of security markets.
• To train the persons associated with security markets
and also to encourage investor's education.
• To check insider trading of securities.
" To supervise the working of various organizations
trading in security market and also to ensure
systematic dealings.
• To promote research and investigations for ensuring
the attainment of above objectives.
• Under new provisions SEBI has been given powers for
granting recognition to any stock exchange in the
country. SEBI has also been given the authority of
deciding voting right for any member and also of
amending it (till now this authority was exercised by
(central government). SEBI will now settle the disputes
relating to regulation of transactions under spot
delivery and non-listing of share by the company.

FINANCE, ACCOUNTS AND AUlilT OF THE BOARD:

Finance by the Central Government (Sec. 13 and 14)

The Central Government may, after due appropriation

made by Parliament by law in this behalf, make to the
Board grants of such sums of money as that Government
may think fit for being utilized for the purposes of this Act:

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> There shall be constituted a Fund to be called the
Securities and Exchange Board of India General Fund
and there shall be credited thereto:-
• All grants, fees and charges received by the Board
under this Act;
• All sums received by the Board from such other
sources as may be decided upon by the Central
Government.
> The Fund shall be applied for meeting -
• The salaries, allowances and other remuneration
of the members, officers and other employees of
the Board;
• The expenses of the Board in the discharge of its
functions.
• The expenses on objects and for purposes
authorized by this Act.

Accounts and Audit (Sec. 15)

The Board shall maintain proper accounts and other

relevant records and prepare an a n n u a l statement of
accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and
Auditor-General of India.

• The accounts of the Board shall be audited by the

Comptroller and Auditor General of India at such
intervals as may be specified by him and any
expenditure incurred in connection with such audit
shall be payable by the Board to the Comptroller and
Auditor General of India.
• The Comptroller and Auditor General of India and any
other person appointed by him in connection with the
audit of the accounts of the Board shall have the same

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 rights and privileges and authority in connection with
such audit as the Comptroller and Auditor General
generally has in connection with the audit of the
Government accounts and, in particular, shall have
the right to demand the production of books, accounts,
connected vouchers and other documents and papers
and to inspect any of the offices of the Board.
• The accounts of the Board as certified by the
Comptroller and Auditor General of India or any other
person appointed by him in this behalf together with
the audit report thereon shall be forwarded annually to
the Central Government and that Government shall
cause the same to be laid before each House of
Parliament.

1.3.2 Role of SEBI in Stock Exchange

Every stock exchange needs recognition from central

government. Any stock exchange, which is desirous of being
recognized may make an application to the central
government. The application should be accompanied by a
copy of the bye laws of the stock exchange for the regulation
and control of contracts ^and a copy of the rules relating in
general to the constitution of the stock exchange. If the
central government is satisfied that bye laws of the
exchange ensure fair dealing and protect investors; stock
exchange is willing to comply by other conditions which
central government may impose and it is in the interest of
trade and of the public to grant recognition, it may
recognize the stock exchange.

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1.3.3 Power of SEBI in Relation to Stock Exchange

The SEBI ordinance has given it the following powers in

relation to Stock Exchange:

• It may call periodical r e t u r n s from stock exchanges.

• It has the power to prescribe maintenance of certain
documents by the stock exchange.
• SEBI may call upon the exchange or any member to
furnish explanation or information relating to the
affairs of the stock exchange or any members.
• It has the power to approve bye-laws of the stock-
exchange for regulation and control of the contracts.
• It can amend by-laws of stock-exchange.
• In certain areas it can license the dealers in securities.
• It can compel a public company to list its s h a r e s .

Further, if the Central government is of the opinion

that the governing body of any recognized stock exchange
should be superceded then it may give a written notice
specifying the reasons for such action. After giving
opportunity to the governing body it may supercede it and
appoint person or persons to exercise and perform all the
powers and duties of the governing body.

1.3.4 Limitations of SEBI

Though SEBI has started as a watch dog in protecting

investors interests, regulating the working of stock exchanges
and promoting capital market, still it faces a number of
problems in its working. Some of these are as follows:

" The central government has authorized SEBI to frame

its rules and regulations for actively monitoring capital
market. These rules and regulations will have to be

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 approved by the government first. This will cause
unnecessary delays and interference by the finance
ministry. The bureaucratic delays in clearing the rules
will hamper the working of SEBI to frame or change
the rules as per the demand of the institution so that
it is able to achieve professional efficiency.
• SEBI will have to seek prior approval for solving
criminal complaints regarding violation of the
regulations. This will again cause delay at government
level.
• SEBI has not been given autonomy. Its board of
directors is dominated by government nominees. Out of
5 directors only 2 can be from outside and these are to
represent the ministries of finance, law and Reserve
Bank of India (Sharma R.K., Gupta Sashi, 2006, PP.
20.38-20.39). The chairman of the board has no fixed
tenure and can be removed with three months notice.
These appointments should be for a fixed tenure to
regulate the SEBI's working in the long run.

1.4 C o n c e p t of DEMAT A c c o u n t

Under Companies Act, 1956 sec. 68(b), provision for

DEMAT Account is prescribed. DEMAT refers to
Dematerialized Account. J u s t as an account with the bank.
If you want to buy or sell stock you need to open a DEMAT
account. So, it is j u s t like a bank account where actual
money is replaced by s h a r e s . To open a DEMAT account,
you have to approach DPs (Depository participants) (they
are like bank branches). Let's assume your portfolio of
shares looks like this: 40 of infosys, 25 of wipro, 45 of HLL
and 100 of ACC. All these will be shown in your DEMAT
account. So, you don't have to possess any physical

25
certificates showing that you own these s h a r e s . They are all
held electronically in your account. As you buy and sell tHe
shares, they are adjusted in your account. J u s t like a bank
passbook or statement, the DP will provide you with
periodic statements of holding and t r a n s a c t i o n s . Now-a-
days, practically all tradings have to be settled in
dematerialized form. Although the market regulator, the
securities and exchange board of India (SEBI), has allowed
trades of upto 500 shares to be settled in physical form,
nobody wants physical shares anymore. So, a DEMAT
account is a must for trading and investing.

1.4.1 Procedure to Open a DEMAT Account

Once you approach your DP, you will be guided

through the formalities of opening an account. You must fill
up an account opening form and sign an agreement with
your D.O. The D.P. will ask for some documents as proof of
your identity and address. Here is a broad list (you won't
need all of them though):

> Pan Card > Driving > It r e t u r n s

license
> Voter's ID > Photo credit > Electricity/landline
card Phone Bill.

> Passport > Employee

ID Card

> Ration > Bank

Card attestation

Lastly, you will have to submit a passport size

photograph on which you sign across.

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1.4.2 Share Requirement to Open a DEMAT Account

When opening an account with a bank, a minimum

balance is needed not so with a DEMAT account. A DEMAT
account can be opened with nil balance of s h a r e s , and there
is no minimum balance to be maintained either.

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 REFERENCES

1. Agarwal Krishna (1997), "Capital markets in India,"

Anmol publications pvt. Ltd.
2. Avadhani V.A. (1996), "Investment and securities
market in India," Himalaya publishing house.
3. Bhalla V.K. (2003), "Investment management," S.
chand 86 company ltd.
4. "Indian Economy", (2007), Pratiyogita Darpan.
5. K. Bal, Narta S.S. (1998), "Security Markets in India,"
Kanishka Publishers.
6. Khan M.Y (2005)., "Indian Financial System," Tata
Macgraw publication.
7. Sakriya D. (2000), "SEBI and securities market in
India," Anmol publications pvt. Ltd.
8. "SEBI Guidelines on Capital issues. Euro issues.
Merchant banking and mutual funds," (2000), A Nabhi
Publication, vol. 1.
9. Sharma R.K., Gupta Sashi, (2006), "Management
accounting, principles and practices," Kalyani
publications.
10. Srivastava R.M., Nigam Divya, (2006), "Management of
Indian financial institutions," Himalaya publishing
house.

Web addresses:
www.appuonline.com

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