4.

2 REGULATORY FRAMEWORK FOR SECURITIES MARKET

The regulation of capital market is very important in order to avoid illegal practices relating
to securities market and avoid unexpected gains by an individual through severe punishment
prescribed by laws. Various organizations regulate the market to keep the economy stable.
The regulatory structure has been framed under the four pillars that are the Ministry of
Finance, Reserve Bank of India, Security and Exchange Board of India, and the National
Stock Exchange. 

1. Ministry of Finance(MoF)
Economic policies and manifestos of ministry help in market regulation and
framework. They formulate rules and analyse them for the efficient and effective
growth of the market.
The Department of Economic Affairs manages the market works under certain sets of
laws that are the Depositories Act, 1996, Securities Contract (Regulation) Act,
1956, SEBI Act, 1992 and other laws such as the Companies Act, 2013, etc.

2. Reserve Bank of India

 RBI formulates policies and regulates rules in response to current situations.

 Plays active participation in the stock market and sets parameters for debt,
equity, and securities transactions.
 RBI implements monetary policies. Through this, RBI plays a vital role in
developing the financial economy.
 RBI manages foreign exchange, settlement, and payments systems.
 It is a bank regulator and has access to many bank accounts and funds to
control the capital market.
 RBI sets parameters for regulation, such as repo rate and reverse repo rate.
 RBI is an intermediary body between the market and the government.

3. Security Exchange Board of India (SEBI)

 SEBI is a principal regulatory body that is also a statutory body established

under the SEBI Act,1992.
 It protects the interest of investors in securities market and also promote the
market.
  It supervises, controls, and manages several institutional brokers, investors,
companies, and all other associated persons related to the market.
 SEBI prohibits malpractice or unfair trade practices such as insider trading or
manipulation of funds.
 The stock exchanges work under the direct control of this body as they adopt
the flexible and adaptable approach for regulating the market.

REGULATORY FRAMEWORK

Before 1992-93, the financial market in India was highly segmented due to various rules and
barriers. In order to make it more efficient and to promote economic growth, SEBI was
established. SEBI is responsible for regulating and supervising the capital market in India,
which plays a significant role in the country's economic growth.

1. SEBI Act, 1992

The SEBI Act, 1992 establishes SEBI with statutory powers for protecting the interests of
investors in securities, promoting the development of the securities market, and regulating the
securities market.

 SEBI has regulatory jurisdiction over corporates, intermediaries, and persons

associated with the securities market in the issuance of capital and transfer of
securities.
 It can conduct enquiries, audits, and inspections and adjudicate offences under the
Act.
 SEBI has the power to register and regulate all market intermediaries and impose
penalties for violations of the provisions of the Act, rules, and regulations.
 SEBI has full autonomy and authority to regulate and develop an orderly securities
market.
2. Securities Contracts (Regulation) Act, 1956
 The Act provides for direct and indirect control over securities trading and running of
stock exchanges to prevent undesirable transactions.
 Central government/SEBI have regulatory jurisdiction over stock exchanges,
contracts in securities, and listing of securities on stock exchanges.
 Deals in all types of issues related to Stock trading and aims at smooth functioning of
the stock exchanges.
 Stock exchange must comply with the conditions prescribed by CG as a condition for
recognition.
 Organised trading activity in securities takes place on a specified recognised stock
exchange.
 Stock exchanges determine their own listing regulations, which must conform to the
minimum listing criteria set out in the Rules.
 Prevents any kind of defective transactions.
3. Depositories Act, 1996
 The Depositories Act, 1996 was created to establish depositories in securities.
 Its objective is to make it easy to transfer securities with speed, accuracy, and
security.
 As per the Act securities of public limited companies are freely transferable in a
depository mode.
 Ownership records are made in the book entry form which simplify the settlement
process.
 The Act also enables electronic transfer of ownership of securities, without physically
transferring the securities from one person to another.
 Transfer of securities is done without transfer deed or other procedural requirements
under the Companies Act.
4. Companies Act, 2013
  The Act strengthens the regulatory framework on corporate governance.
 It deals with issues related to securities, company management, and transfer of
securities.
 The Act promotes transparency and fairness in the securities market by setting
disclosure standards.
 The Act regulates underwriting, the use of premium and discounts on issues, rights
and bonus issues, payment of interest and dividends, etc.
5. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021
This Act deals with the issue and listing of debt securities and also non-convertible
redeemable preference shares which are in compliance with the SEBI Act, circulars
and other relevant Regulations.

NEED FOR REGULATORS IN CAPITAL MARKET

In 1980’s the development of stock markets attracted investments by individual shareholders.

Once the stock markets started flourishing, stock markets in India saw many malpractices
such as price rigging, delayed delivery issues, and unofficial self-modulated merchant
bankers. The Harshad Mehta scam of 1992, involving more than 4000 crores of market
manipulations, also shook investors trust in securities. To regulate the smooth functioning of
exchanges, the SEBI was formed as a result of the Government's efforts.

Before SEBI, the controller of capital issues was responsible for regulating capital markets.
Indian Capital Markets are regulated and monitored by the Ministry of Finance, SEBI, and
The Reserve Bank of India.

The Ministry of Finance through the Department of Economic Affairs-Capital Markets

Division is responsible for formulating policies related to the growth and development of
securities markets, institutional reforms, investor protection mechanisms, and providing an
efficient legislative framework for securities markets. Before 1992, factors such as the
Capital Issues Control Act and insider trading obstructed equity trading expansion. Measures
were taken to improve the fairness of the capital market and increase investor protection.

SEBI – The Capital Markets Regulator

The SEBI was established in 1988 as a non-statutory body to regulate the securities market.
However, it was only in 1992 that SEBI was granted legal status through the SEBI Act,
which gave it statutory powers to regulate and develop the securities market in India.

Powers and Functions of SEBI

SEBI derives its regulatory powers from the Securities Contracts Regulation Act (SCRA) and
the Companies Act. In 1995, the Securities Laws (Amendment) Ordinance increased SEBI’s
regulatory powers. SEBI is under the overall control of Ministry of Finance. SEBI is a
constituent of the financial regulatory framework in India and has the following objectives:

1. Protecting the interests of investors: SEBI’s primary objective is to safeguard the

interests of investors by ensuring fair and transparent practices in the securities
market.

2. Promoting the development of the securities market: SEBI is responsible for

promoting the growth and development of the securities market by introducing new
products and facilitating new market participants.

3. Regulating the securities market: SEBI regulates the securities market by enforcing
rules and regulations that govern the issuance and trading of securities.

4. Watchdog for all capital market participants: SEBI acts as a watchdog for all market
participants, including issuers of securities, investors, and financial intermediaries.

Participants in the Financial Market

 The financial market has three main participants: issuers, investors, and financial
intermediaries.
 Issuers are companies that raise capital through the issuance of securities.
 Investors are individuals or institutions that invest in securities.
 Financial intermediaries are entities that facilitate the buying and selling of securities,
such as stockbrokers, investment banks, and mutual funds.

SEBI’s Twin Task of Regulation and Development

 SEBI has a twin task of regulation and development of the securities market. Its
regulatory measures are aimed at helping the development of market.
 SEBI monitors market players to ensure that everyone follows the rules promoting
responsible and accountable behaviour.
 It also wants to make sure they themselves and everyone else follow the rules to make
the securities market fair and transparent in India.