SEBI — Role and Regulations

What this chapter covers

Chapter 6 carries 14 marks out of 100 — 14% of the paper, the second largest chapter.

Learning Objectives: After studying this chapter, you should know about:

Why regulation exists

The existence of an efficient and stable financial system is essential to make the securities market vibrant, wide reaching and effective. An efficient capital market ensures that resources are priced and allocated correctly in an economy.

And the aim: the purpose of securities regulation should be to have markets that are fair, transparent and efficient and ensure protection of the investors' interests.

Fair, transparent, efficient — and protective.

The regulators

India has more than one regulator. In India the prime regulators are the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA) and the Department of Economic Affairs (DEA). Both RBI and SEBI have been set up through Acts of the Parliament which define their role and responsibilities.

SEBI is the apex regulator of the securities market and also responsible for its orderly growth and protection of the investor's interests.

The first sample question tests that — the apex regulator is SEBI.

The RBI, as the manager of public debt, is responsible for the primary issue of government securities, all contracts involving such securities and money market instruments.

Other regulators also exist for particular sectors. The Insurance Regulatory Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) have been set up with the specific mandate to regulate the functioning and growth of particular industries or markets.

A consolidation in progress: Securities Markets Code Bill, 2025 has been amended with the objective to simplifying securities regulation and strengthening SEBI's powers. Securities Markets Code Bill, 2025 was introduced in Parliament to consolidate SEBI Act, SCRA, and Depositories Act into a single code.

6.1 The SEBI Act, 1992 and SEBI's role

The Securities and Exchange Board of India (SEBI) was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

The preamble of SEBI provides for "The establishment of a Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market."

Three functions in the preamble — protect, develop, regulate.

The objective of SEBI is therefore to facilitate the growth and development of the capital markets in terms of mechanisms, participants and securities and to ensure the protection of the investors in the securities market.

Note that investor protection comes first in the preamble. The fourth sample question asks whether it is a secondary objective. The answer is false.

Powers over stock exchanges

The SEBI Act entrusts the responsibility of inspection, investigation and enforcement of the activities, systems and mechanisms of the institutions and intermediaries of the securities market. SEBI has been assigned the powers of recognizing and regulating the functions of a stock market under the Securities Contracts (Regulation) Act (SCRA).

The requirements for granting recognition to a stock exchange include representation of SEBI on the board of the stock exchange and an undertaking to make and amend their rules only with the prior approval of SEBI. The stock exchanges have to furnish periodic reports to the regulator and submit bye-laws for SEBI's approval. Stock exchanges are required to send monitoring reports daily and for every settlement.

SEBI has set up surveillance mechanisms, both internal and at stock exchanges, to deal with unfair trade practices. Measures such as circuit filters, price bands and caps have led to enhanced safety in the market.

And the surveillance is wide: an integrated surveillance mechanism which tracks the activities of the stock exchanges, the brokers, depository, R&T agents, custodians and clearing agents aim at timely identification of fraudulent activities. SEBI and the central government have over-riding powers under the SCRA in all matters relating to the stock markets.

R&T agents are expressly within that surveillance net.

Powers over intermediaries

Regulating market intermediaries through registration and supervision is a primary function of the securities market regulator. Market intermediaries such as brokers, R&T Agents, depositories, custodians, bankers, merchant bankers, portfolio managers etc. have to get themselves registered under the respective regulations of SEBI.

The regulations specify the net worth, experience, infrastructure and other requirements necessary for an intermediary to be eligible for registration.

And once granted: compliance with the required eligibility provisions, the certificate of registration granted to intermediaries shall be permanent unless surrendered by the intermediary or suspended or cancelled by SEBI.

Permanent, subject to three exits — surrender, suspension, cancellation.

Inspection, investigation and penalty

SEBI makes routine inspections of the intermediaries functioning in the securities markets to ensure compliance with prescribed standards. It also orders investigations into the operations of any of the constituents of the securities market. These cover activities such as:

How an investigation begins: investigation is based on SEBI's surveillance activities or those of the stock exchange. A preliminary probe is conducted after which, if necessary, a full-fledged investigation is undertaken.

SEBI has the powers to call for information, summon persons for interrogation, examine witnesses and conduct search and seizure. If the investigations so require, SEBI is also empowered to penalize violators. The penalty could take the form of suspension, monetary penalties and cancelation of registration.

The fifth sample question asks whether SEBI can enforce penalties. It can, so the answer is true.

The primary market

SEBI also has the mandate to ensure the streamlined functioning of the primary markets. It has laid out the eligibility, norms and rules to be followed for the public issue of securities in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The regulations specify the eligibility conditions, common conditions for public issues of securities, minimum net worth requirements for an issuer, the minimum public holdings to be maintained and the lock-in on the holdings of the promoters. SEBI has also specified the roles and responsibilities of intermediaries in the primary markets such as the merchant bankers, underwriters, R&T Agents and brokers.

These regulations impose minimum disclosure requirements on the issuer to ensure that investors have all the relevant information before making the investment. The listing agreement that companies enter into with the stock exchange has clauses for continuous and timely flow of relevant information to the investors, corporate governance and investor protection.

And: SEBI has also issued a host of Investor Charters specifying about the roles of the intermediaries, rights and responsibilities of the investors and disclosure of grievance redressals by the intermediaries to facilitate investor awareness. Their aim is simple. Investors should know what to expect.

6.2.1 Prohibition of Insider Trading Regulations, 2015

Insider trading refers to the dealing in securities by persons connected with a company having unpublished price sensitive information that is not available to the public. In simple terms, someone who knows a secret about the company trades on it before others know. Such persons include the directors and employees of the company, associates such as bankers and tax consultants or employees of the stock exchanges etc.

Unpublished price sensitive information is any information relating to a company or its securities, directly or indirectly, that is not generally available to the public and which upon becoming generally available, is likely to materially affect the price of the securities. Two tests, then. Is it secret? And would it move the price once known?

What it includes: financial results, dividends, change in capital structure, changes in key managerial personnel, mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions.

Why it matters: the regulations seek to prevent insider trading which erodes the confidence of the common investors in the securities markets.

What companies must do: SEBI's guidelines require companies to have comprehensive code of conduct to prevent such activity. This includes:

• Appointing a compliance officer to enforce it.
• Ensuring periodic disclosure of holding by all persons considered as insiders.
• Ensuring data confidentiality and adherence to the requirements of the listing agreement on flow of price sensitive information.

Trading plans

As per the regulations, insiders are required to formulate and present their trading plans with Compliance Officer for approval and public disclosure. Thereafter, the insiders can carry out trades as per the approved plan.

The 2024 amendments made four changes:

The structured digital database

The Board of Directors or Head(s) of the organisation of every person required to handle unpublished price sensitive information ensures that a structured digital database is maintained. It is a record of who knew what, and when. It contains:

Such database are not be outsourced and are maintained internally with adequate internal controls and checks, such as time stamping and audit trails to ensure non tampering of the database.

Not outsourced — kept in house, time stamped, with audit trails.

How long: the structured digital database is preserved for a period of not less than 8 years after completion of the relevant transactions. If SEBI starts an investigation, the clock stops. In the event of receipt of any information from SEBI regarding any investigation or enforcement proceedings, the relevant information in the structured digital database are to be preserved till the completion of such proceedings.

The penalties: monetary penalties, criminal prosecution, prohibiting persons from transacting in the securities markets and declaring transactions as void.

6.2.2 Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003

An important function of SEBI is to prohibit fraudulent and unfair trade practices relating to securities markets. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices.

The definition: Regulation 2(1)(c) defines fraud as inclusive of any act, expression, omission or concealment committed to induce another person or his agent to deal in securities.

And a crucial qualification: there may or may not be wrongful gain or avoidance of any loss. However, that is inconsequential in determining if fraud has been committed.

Gain is not an ingredient of the offence. Inducement is.

To prevent fraud, the regulations specify prohibition of certain dealings in securities and prohibition of manipulative, fraudulent and unfair trade practices. The Regulations also specify investigation powers of SEBI and applicable penalties in case of wrong doings.

6.3 The Investor Education and Protection Fund

The IEPF is a fund created by the Ministry of Corporate Affairs for promoting investors' awareness and protecting their interests. A separate body runs it. For administration of Investor Education and Protection Fund, Government of India has on 7th September, 2016 established Investor Education and Protection Fund Authority.

This fund is utilized for refund of unclaimed and unpaid amounts, promotion of investors' awareness and protection of the interests of investors etc. in accordance with provisions of section 125(3) of the Companies Act, 2013.

Note the ministry — MCA, not SEBI.

Where the money comes from: the fund is created out of contributions from the central government, state government, companies and institutions. Unclaimed investor money also flows in:

The condition is time. This money goes to the fund only provided such money has remained unpaid and unclaimed for a period of 7 years from the date they were due for payment.

Seven years — which the third sample question tests.

What it does: the fund conducts investor education programs, media campaigns and seminars. It also funds investor education projects of institutions and organizations... Multilingual Information, Education and Communication booklets and films have also been developed for creating awareness.

The 2016 Rules

Ministry of Corporate Affairs (MCA) vide Gazette Notification published the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.

What is credited to the Fund:

• All the resultant benefits arising out of shares held by the IEPF Authority.
• All grants, fees and charges received by the IEPF Authority under these rules.
• All sums received by the Authority from such other sources as may be decided upon by the Central Government.
• All income earned by the Authority in any year.

And interest travels with principal: in case of term deposits and debentures of companies, due unpaid or unclaimed interest shall be transferred to the Fund along with the transfer of the matured amount of such term deposits and debentures.

Accounts and audit: the Authority shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in specified format. Someone outside must check them. The accounts of the IEPF Authority shall be audited annually by the Internal Audit Party of the Office of Chief Controller of Accounts and Comptroller and Auditor-General of India.

The company's obligations

The rule is long, so here it is in three parts.

Sixty days after the AGM, or the date it should have been held, whichever is earlier.

The statement contains:

• The names and last known addresses of the persons entitled to receive the sum.
• The nature of amount.
• The amount to which each person is entitled.
• The due date for transfer into the Investor Education and Protection Fund.
• Such other information as may be considered necessary.

Transfer of shares: the shares shall be credited to DEMAT Account of the IEPF within a period of 30 days of such shares becoming due to be transferred to the Fund.

And the mechanism used: company shall follow the procedure for transmission of shares instead of transfer of shares. Transfer of shares by the companies to IEPF shall be deemed to be transmission of shares.

Transmission, not transfer. This distinction matters for the R&T agent's procedures.

For physical shares, there are three steps:

1. The Company Secretary or the person authorised by the Board shall make an application, on behalf of the concerned shareholder, to the company, for issue of a new share certificate. It shall state "Issued in lieu of share certificate No..... for the purpose of transfer to IEPF".
2. The particulars go in Form No. SH-1.
3. Then the company shall inform the depository by way of corporate action to convert the share certificates into DEMAT form and transfer in favour of the IEPF Authority.

For dematerialised shares: the Company shall inform the depository by way of corporate action... and on receipt of such intimation, the depository shall effect the transfer of shares in favour of DEMAT account of the IEPF Authority.

Claiming back

Money sent to the IEPF is not lost. The owner can claim it back. This covers amounts such as:

The person may claim the shares to the Authority by submitting an application in Form IEPF-5 online along with a requisite fee.

The Nodal Officer: every company which is required to credit amounts or shares to the Fund... shall nominate a Nodal Officer. He shall either be a Director or Chief Financial Officer or Company Secretary of the company. His job is verification of claims and coordination with Investor Education and Protection Fund Authority.

His details must be published, and any change in the Nodal Officer or his details shall be communicated to the IEPF Authority through Form No. IEPF-2 within 7 days of such change along with board resolution thereof.

Nodal/Deputy Nodal Officers of companies are required to issue Entitlement Letters to claimants with all details required to file Form IEPF-5.

Verification is the company's job, not the Authority's. The company shall be responsible for verifying the genuineness and entitlement of the claimant. It does this through Aadhar Card, PAN Card, Passport, any other Government ID proof, matching of signature and photo etc. The company shall verify such documents as may be required and retain the originals submitted by the claimant... The company shall submit e-verification report to the IEPF Authority.

And a priority window: IEPF Authority has introduced a Special Window Facility for claimants who are senior citizens of age 75 years and above. The claims by such claimant shall be prioritised after receipt of e-verification report from the companies.

Fraudulent claims: any fraudulent claim by the claimant shall be deemed to be fraud and the claimant shall be liable accordingly.

6.4 The three regulations governing R&T agents

Registrar and Transfer (R&T) Agents are identified as 'intermediaries' by the SEBI Act and are regulated by SEBI. The primary regulations are:

1. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 2. SEBI (Intermediaries) Regulations, 2008 3. SEBI (Depositories and Participants) Regulations, 2018

6.4.1 The RTA Regulations, 2025

The SEBI (Registrars to an Issue and Transfer Agents) Regulations came into effect in 2025. These regulations govern the registration, capital adequacy, governance, and operational obligations that a Registrar to an Issue and Share Transfer Agent (RTA) must abide by.

The big change: under the 2025 framework, the historical classification of RTAs into separate categories has been replaced with a Unified Registration system. One certificate now covers two roles:

One certificate, two roles.

The definition: "Registrar to an issue and share transfer agent" means a body corporate or a division or unit of such body corporate, appointed to carry out the following activities-

Registration, fees and net worth

The conditions attached to registration:

Unlisted company services must be walled off. Three rules apply:

• The services provided to unlisted companies shall be separate and segregated from all other services, through a separate business unit.
• Such services provided to unlisted companies shall not come under regulatory jurisdiction of SEBI.
• Every registrar to an issue and share transfer agent shall make an appropriate disclaimer to that extent to the unlisted company.

Existing RTAs get eighteen months: those serving unlisted companies before the 2025 Regulations shall segregate such activities into a separate business unit within a period of eighteen months from the date of notification.

On rejection: SEBI may reject the application after giving the applicant a reasonable opportunity of being heard. The decision is communicated within thirty days. The applicant may then apply within a period of thirty days from the date of receipt of such intimation, to SEBI for reconsideration.

On fees: SEBI may on sufficient cause being shown permit the registrar... to pay such fees at any time before the expiry of six months from the date on which such fees becomes due. If the fee is still not paid, SEBI may suspend the certificate, whereupon the registrar... shall cease to carry on any of his activity.

Obligations and responsibilities

Abide by the code of conduct.

Not act as R&T Agent for an associate company.

Maintain proper books of accounts and records for a minimum period of 8 years.

Appoint a Compliance Officer who shall ensure compliance with the regulations. He shall report immediately and independently to SEBI any non-compliance observed by him. Compliance officer shall monitor the internal controls and place periodic reports before the Audit Committee or an equivalent body.

All claims/disputes arising between RTA and its clients shall be submitted to a dispute resolution mechanism that includes mediation, conciliation and arbitration.

RTAs shall redress the investor grievances within 21 calendar days from the date of receipt of the grievance.

Eight years of records; twenty-one calendar days for grievances; no associate company work.

The Code of Conduct — Schedule III

Thirty-one clauses. Among the most examinable:

Not reject the dematerialisation / rematerialisation requests on flimsy grounds. Such request could be rejected only on valid and proper grounds and supported by relevant documents.

On investment advice: an RTA or its employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of its long or short position in the said security has been made. Put simply, it must first say whether it holds or has sold the security.

On termination: records go back quickly. The RTA must hand-over all the records/ data and all related documents... within one month from the date of termination of agreement with the respective clients or within one month from the date of expiry/cancellation of certificate of registration... whichever is earlier.

And the final prohibition: an RTA shall not, in respect of any dealings in securities, be party to or instrumental for -

Inspection, cancellation and the sandbox

SEBI may appoint inspecting authority to inspect the operations of an agent either on receiving a complaint from an investor or otherwise... Further, SEBI may appoint a qualified auditor to investigate into the books of accounts of RTAs.

SEBI may suspend or even cancel the registration granted to an R&T Agent in case of non-compliance... But it must be fair first. Such a penalty will be imposed only after holding an enquiry into the facts of the case and issuing a show cause notice to the R&T Agent.

The regulatory sandbox is a safe space to try new ideas. It is a live testing environment where new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for a specified period of time. It allows exemption for a period not exceeding 12 months, subject to satisfying specified eligibility conditions.

The 2018 strengthening circular

SEBI has issued a circular with the objective of raising industry standards for RTA, Issuer Companies and Banker to an Issue. It deals with three areas:

• Payment of dividend, interest and redemption.
• Transfer, transmission, correction of errors.
• Compulsory internal audit of RTAs.

All the records and documents, related to the above areas, are required to be maintained for period not less than 8 years after completion of the relevant transactions.

On dividends:

On transfers and errors:

A folio once allotted to a person should never be re-allotted to any other person under any circumstances.

RTAs shall follow the "Maker-Checker" concept in all of its activities to ensure accuracy of data.

All updation in the folio records shall be enabled only through front end modules. No back-end entry/ updation /correction should be permitted.

For any correction of errors, the RTAs must take prior approval from the company similar to cases of transfers and transmissions.

If the security holder is holding physical securities... the Bonus securities against these folios shall mandatorily be issued in physical mode only.

Enhanced due diligence is required where dividend, interest and redemption remains unpaid for at least three years or PAN and bank account details are not available in the folio, with a list shared at the end of every quarter.

On internal audit:

Qualified RTAs

Qualified RTAs are market intermediaries who service more than 2 crore folios. They are also referred to as the Critical Infrastructure Institutions (CII).

They must comply with enhanced monitoring. This works through adoption and implementation of internal policy framework and periodic reporting on these areas:

6.4.2 SEBI (Intermediaries) Regulations, 2008

The SEBI (Intermediaries) Regulations, 2008 consolidates the common requirements which will apply to all intermediaries. These are:

Applications may be made through the respective stock exchange, clearing corporation or depository participants if the intermediary is to be associated with these institutions. These institutions will examine the eligibility and other criterion before forwarding the application to SEBI.

The application will be considered based on factors such as:

The registration granted to intermediaries shall be permanent unless surrendered by the intermediary or suspended or cancelled.

Intermediaries must:

• Appoint a compliance officer who will give a report to the regulator on adherence to all obligations, responsibilities and eligibility criteria.
• Redress investor grievance within 45 days from receipt of such complaint and to maintain records of the same.
• Make complete disclosure of interest before making any recommendation to invest in any security to a client.
• Abide by the specified code of conduct.

How the two sets fit together. While common requirements will be governed by the SEBI (Intermediaries) Regulations, the intermediary-specific requirements will continue to be as per the relevant regulations applicable to individual intermediaries.

6.4.3 SEBI (Depositories and Participants) Regulations, 2018

R&T Agents are a category of intermediaries who are allowed to be participants of a Depository under the SEBI (Depositories and Participants) Regulations, 2018.

The certificate shall be granted if the Depository concerned and SEBI are satisfied as to the eligibility and competence of the R&T Agent.

The participant undertakes to pay the fees, maintain records, address investor complaints within the specified time and comply with all requirements. It must also abide by a code of conduct requiring them to:

Do all activities in such a way that investors' interests are protected. Redress investor complaints within 21 calendar days of the date of receipt of any complaint. Co-operate with the regulator in case of any enquiry or inspection. Have mechanisms in place, such as the maker-checker concept, to ensure there are checks and balances in all the transactions. Maintain records and data carefully. Have good corporate governance policies in place.

And the participant shall agree to:

Enter into agreements with the beneficiary owners according to the bye-laws of the Depository. Separate accounts shall be opened for each beneficial owner and the accounts shall be managed separately. They must have continuous electronic connectivity with the Depository. The participants must have good accounting systems and procedures in place. They must maintain records of all transactions between the investors and the participants- dematerialisation, rematerialisation, records of instructions and approvals. Integrity of data should be ensured and it should be protected from damage, loss or misuse. Records should be maintained depository-wise if the participant is associated with more than one Depository.

The sample questions confirm five points:

• The apex regulator is SEBI.
• Insider trading is controlled by regulations prescribed by SEBI.
• The IEPF is funded by unpaid dividends unclaimed for at least seven years.
• It is false that investor protection is a secondary objective of SEBI.
• It is true that SEBI has the power to enforce penalties.