what is sebi

8/18/2019 What is SEBI

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What is SEBI? • Securities and Exchange Board of India = SEBI

• It regulates both the primary and secondary markets. (explained in

my previous article)• It protects the interests of the investors in securities

• It promotes the development of the securities market.

• SEBI as established in !"## but as given statutory poers in

!""$% and started orking e&ectively since !""'.

Why did the government create SEBI?s you kno that in India% the overnment on*t do any ma+or reform oraction unless the things get messed up really bad. ,he same as the casehy SEBI as given the poer to control both primary and secondary market

because they ere in complete mess. So lets -rst see% hat as theproblems in primary and secondary markets before SEBI came in picture.

The problems in Primary market before SEBI came• primary market as extremely restrictive regulations on theissuers enforced by the ontroller of apital Issues (I)

/o lets assume I0m the big businessman.

• 1rimary market is here i issue my security for the -rst time.

• I can0t -x the prices of my shares% as I like% because i0ve to follothe rules made by I.

• but that dude alays underprice my issues.

• 2hen I put my e3uity shares for the -rst time in 1rimary market =

this is I14 (initial public o&ering)

• but no as you kno that I can0t -x high prices for my I14 due to

I dude.

• so my I14 is very cheap.

• so lots of people ill send application to buy it because its cheap

(= over subscription)

• so i0ll have to give the I14 shares via lottery only to a fe people.

• but those ho get my cheap I14 via lottery ill immediately go to

secondary market and sell it at higher price.

• = I lost money (that I could have made if I dude alloed me to

sell my I14 5 higer price.)• and those lucky dudes ho on the lottery made money ithout

really doing anything.

• s you can see% all this is not good for industrial 6evelopment.

The problems in secondary market before SEBI came


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Secondary market = here you trade the securities that you purchased fromprimary market.7or general understanding8 the stock markets = secondary market = hereyou sell9buy shares.So lets see the

problems of Stock markets before SEBI came

• -rst organi:ed stock exchange as established in !#;< in Bombay (no

umbai)

•

there ere almost $> regional stock exchanges in !""$%• but trading as concentrated in Bombay Stock Exchange and it

en+oyed a monopoly

• ?sers from outside Bombay found it extremely di@cult to trade in

BSE due to poor technology and high cost of telecommunications.(they didn’t have internet or cellphones with free incoming calls in1992!)

• BSE imposed a high entry barrier% so that competition among

brokers as absent.

• ,hat*s hy services provided by the brokers ere% thus% extremely

ine@cient and costly. (its same like Indian railay*s stinking toilets8 youcan*t complain because railay don*t have much competition.)

Specifc problems in Share market beore1992 open o!tcry" system

• means trading used to take place in trading ring here non8

brokers ere not alloed in.


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• ,hese traders ill shout the prices like e0ve in vegetable markets.

• ,here asn0t any mechanism to verify the prices at hich trading

actually took place.

• So% brokers used to charge prices to the investors (buyers andsellers of securities) that ere usually di&erent from the actual prices

•

=brokers used to report higher than actual prices for buy ordersand loer than actual prices for sell orders).

• If investors (buyers or sellers) demanded a more accurate price%orders often got cancelled (for example% the broker could simply claimthat such a favourable price as not obtained in the market).

#he settlement system • payment of money and delivery of securities after trade by the

brokers to both parties (buyer and seller of shares)

• it favored the brokers and as to the disadvantage of the

investors.• the settlement as Afutures8style and as on a fortnightly basis.

• means that trading done during a fortnight ould be settled at the

end of the fortnight.

• system of badla =enabled the brokers to carry forard their

liability (of money or securities) to next settlement.

• so% brokers could postpone settlement almost inde-nitely% if the

prices ere not favorable to them.

• ,his led to a high degree of risks. Carge8scale problems arising out

of failure to make payment or deliver shares% ould lead to closure of

BSE for days together%• this used to recur at the rate of almost once every other year.

“bad delivery” of Shares• Even after you buy the shares and get the paper in your hands8

you had to send the shares to the registrar of the company to registerthe onership of that share in your name.

• t this stage% the problem of bad delivery arose due to a number

of problems

• if the signature of the seller did not match ith the one maintained

ith the registrar% the shares ere sent back.

Reasons for inaccurate signature

• ,he seller of the shares% ho probably purchased the shares years

back% might unillingly sign in a di&erent manner.

• But in many cases% manipulations by unscrupulous operators ere

responsible.


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• counterfeit shares (herein any signature ere put by thecounterfeiter)%

• Engineering bad deliveries by selling party*s brokers or by the

companies themselves to delay settlement in order to support pricemanipulation.

•

,he time lag beteen buying shares and getting it registered inthe name of the buyer used to take anything beteen !8' months ifeverything as alright.

• ,he time lag normally ent up to six months on an average in

case of bad delivery. nyays so above ere the problems ith primary D secondary market soovt. made a la to give poers to SEBI to control them both. nd so Ias abolished. /SE (/ational stock exchange) as established to end the monopoly of

Bombay Stock Exchange.

$SE %$ational stock e&change'• /SE as a ne exchange promoted and oned by public sector

-nancial institutions (like I6BI% ?,I% CI% I% I7I% etc.) and banks.

• /SE is professionally8managed (as opposed to the otherexchanges that are managed by brokers or members still today)

ou sa the problems of BSE ago% and to curb them%

SE came !ith " innovations

(omp!teri)ed trading

• 7irst% physical% Foor8based% brokers8dominated trading outside the

eyes of the investors as replaced by anonymous% computeri:ed ordermatching system

• here trading is done in front of the investors.


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• ,he order8matching system is characteri:ed by strict price8timepriority%

• herein an order is executed according to the price parameters

set by the investors.

• ,he 4,EI% hich as set up in !""$% as the -rst computerised

exchange in India.• /SE started operations in !""G ith electronic trading% hile all

other exchanges introduced electronic trading subse3uently.

• By arch '!% !"""% all the $' stock exchanges in the country hadcomputerised on8line screen based trading.

Satellite comm!nication

• to spread the reach of the exchange to all over the country asattempted successfully% for the -rst time% by /SE.

• ,his as in stark contrast to the other exchanges hich till then

had the reach limited to their cities of operation for over a century.

*roessional managers

• the traditional exchanges ere and still are managed by the

member brokers.

• ,his gave rise to many malpractices% a conFict of interest being

the most important one. Since the brokers themselves ere in chargeof enforcement of rules and regulations% they never took a decision infavour of the investors that ent against their interest.

• ,his gave rise to a conFict of interest beteen the members as

brokers and members as responsible for enforcement of rules andregulations.

• /SE avoided this problem right from beginning because it as setup as a limited liability company ith brokers as franchisees.

• ,his led to a situation here brokers ere not held responsible for

enforcement of rules and regulations% and

• those ho ere entrusted ith enforcement (professionalmanagers) ere not brokers.

• s a result% /SE*s sta& is free of pressures from brokers and is

better able to perform regulatory and enforcement functions.

Weekly settlement

• If you buy shares from me% you*ve to give me the money in !

eek and I*ve to give you the shares in the same ! eek.

• the traditional practice of fortnightly settlement cycle D system ofbadla that alloed extension of even this fortnightly cycle asreplaced by a strict eekly settlement cycle ithout badla.


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Result#BSE Is busted

• E3uity trading at /SE commenced in /ovember !""G.

• 2ithin one year of operation% /SE surpassed the BSE in terms of

turnover.

• BSE as orking since !#;


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• /o ore than a thousand brokers entered the market ith the/SE leading to steep increase in competition and the conse3uent fall inthe brokeragesH by a very substantial amount.

• ,his led to a drastic fall in transaction costs. (Hthe broker*s

ommission)

$o more bad delivery

utomation of the trading system eliminated all the problems associatedith manual trading (e.g.% bad delivery9 signature etc.)

Investors o!tside 0!mbai can earn money

• Investors from all over the country have got access to anexchange on same terms and conditions as investors ithin umbaifor the -rst time.

• Earlier% Bombay stock exchange as the pre8dominant one in the

country%• but investors outside the city found it extremely di@cult and costlyto do business in the exchange. (no cellphones ith free incoming)

• ,hus% true to its name% /SE turned out to be the -rst national stock

exchange.

• ,his bene-ted the investors from outside umbai more thanperhaps the investors ithin the city.

$ational Sec!rities (learing (orporationimited %$S(('

•

It*s a subsidiary of /.S.E% to prevent the counter party risk.(established in ugust !""


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• ou read above% ho the Lbad delivery of shares* as engineering by thebrokers.D the menace of counterfeit shares. nd the fear of theft of shares.

• ,o curb this problem% SEBI came up ith the novel idea that is

L6emateriali:ation of share holding*

• ,his means% you*ve to get a 6emat account in the bank and

•

hen you buy shares% you don*t get a Lpiece of paper*. ,hat sharegets automatically credited to your demat account.

• In /ovember !""M% the /ational Securities 6epository Ctd. (/S6C)%the -rst depository in India% as established 7or this purpose.

• SEBI played an active role in gradual shifting from physical

certi-cates to dematerialised holding by introducing a mandatoryelement in the process.

• urrently almost cent percent trading and settlement are done in adematerialised environment.

• But things are not that safe and seet% thanks to I14 scam86emat

Nueen Ooopal

1anchal

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