SEBI — Role and Regulations

What this chapter covers

Units 1 to 5 carry 20 marks between them — about 4 marks for this chapter.

What you will learn:

Why regulation exists

A securities market works well only if the financial system under it is efficient and stable. Then the market can be vibrant, wide reaching and effective. An efficient capital market ensures that resources are priced and allocated correctly in an economy. The firms and systems that make this happen need rules around them, so that the market runs properly.

The purpose of securities regulations should be to have markets that are fair, transparent and efficient and ensure protection of the investors' interests.

Four aims — fair, transparent, efficient, and protective of investors.

Who regulates what

India has four prime regulators:

Both RBI and SEBI were set up through Acts of the Parliament. Those Acts define their roles.

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

Some regulators look after one industry only. The Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) each have a specific mandate for their own industry or market.

A coming change: the Securities Markets Code Bill, 2025 was introduced in Parliament. It aims to consolidate SEBI Act, SCRA, and Depositories Act into a single code. The goal is to simplify securities regulation and strengthen SEBI's powers.

5.1 The SEBI Act, 1992 and the role of SEBI

SEBI was established on April 12, 1992, under 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 verbs — protect, promote, regulate.

So SEBI has two jobs. It helps the capital markets grow — in their mechanisms, participants and securities. And it protects investors in the securities market.

The SEBI Act makes SEBI responsible for inspection, investigation and enforcement across the market's institutions and intermediaries. Under the Securities Contracts (Regulation) Act (SCRA), SEBI also has the power to recognise and regulate stock exchanges.

Over the stock exchanges

To be recognised, a stock exchange must:

• give SEBI representation on the board of the exchange.
• undertake to make or change its rules only with the prior approval of SEBI.
• send periodic reports to SEBI, and submit its bye-laws for SEBI's approval.
• send monitoring reports daily and for every settlement.

Daily, and for every settlement.

SEBI runs surveillance, both inside SEBI and at the exchanges, to catch unfair trade practices. Tools such as circuit filters, price bands and caps have made the market safer.

An integrated surveillance mechanism tracks the stock exchanges, brokers, depositories, Registrars and Transfer Agents (R&T agents), custodians and clearing agents. Its aim is to spot fraud in time. SEBI and the central government have over-riding powers under the SCRA in all matters relating to the stock markets.

R&T agents are named in that surveillance list.

Over intermediaries

A main job of the regulator is to register and supervise market intermediaries. These include brokers, R&T agents, depositories, custodians, bankers, merchant bankers, portfolio managers and underwriters. Each must register under the SEBI regulations that apply to it.

The regulations set the net worth, experience, infrastructure and other conditions for registration. Once an intermediary meets them, its certificate is permanent. It ends only if the intermediary surrenders it, or SEBI suspends or cancels it.

Permanent registration — with three ways it can end.

Inspection, investigation and penalty

SEBI makes routine inspections of intermediaries to check they meet the prescribed standards.

It can also order investigations into anyone in the market for:

• price manipulation.
• artificial volume creation.
• insider trading.
• violation of the takeover code or any other regulation.
• public issue related malpractice, or other unfair practices.

An investigation starts from the surveillance of SEBI or of the stock exchange. First comes a preliminary probe. If needed, a full-fledged investigation follows.

During an investigation SEBI can call for information, summon persons for interrogation, examine witnesses and conduct search and seizure. Where needed, it can penalise violators. The penalty could take the form of suspension, monetary penalties and cancelation of registration.

The fifth sample question tests this — the penalty may be suspension, monetary penalty or cancellation of registration. Not custody of any kind.

Over the primary market

SEBI must also make sure the primary market runs smoothly. The rules for public issues are in the SEBI (Issue of Capital and Disclosure Requirements) Regulations.

These regulations set:

• the minimum net worth an issuer needs.
• the minimum public holdings to be kept.
• the lock-in on the holdings of the promoters.

SEBI's guidelines for each intermediary also set out their roles in the primary market. These cover merchant bankers, underwriters, R&T agents and brokers.

The regulations also impose minimum disclosure requirements on the issuer. The idea is simple: investors should have all the relevant information before they invest. The listing agreement that a company signs with the stock exchange adds clauses on the continuous and timely flow of information to investors, on corporate governance and on investor protection. SEBI investigates and penalises issuers and intermediaries who do not comply.

5.2 Regulations aimed at investor protection

5.2.1 The Prohibition of Insider Trading Regulations, 2015

Insider trading is dealing in securities by a person connected with a company who has unpublished price sensitive information (UPSI) that the public does not have.

Such persons include:

• the directors and employees of the company.
• associates such as bankers and tax consultants.
• employees of the stock exchanges, and others who hold UPSI.

The second sample question tests who makes these rules — SEBI.

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 conditions — not generally available, and likely to move the price materially.

Examples of UPSI:

The SEBI (Prohibition of Insider Trading) Regulations, 2015 aim to stop insider trading, because it erodes the confidence of the common investors.

SEBI requires all listed companies, registered intermediaries and fiduciaries to have a comprehensive code of conduct. This includes:

• appointing a compliance officer to enforce the code.
• periodic disclosure of holding by everyone treated as an insider.
• keeping data confidential, and following the listing agreement on the flow of price sensitive information.

Who counts as a fiduciary: professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries.

Reporting violations. Listed companies, intermediaries and fiduciaries must promptly inform the Stock Exchange(s) where the securities trade about any breach of the code of conduct. Any money they collect for such breaches must be remitted to SEBI for credit to the Investor Protection and Education Fund (IPEF), administered by SEBI.

Penalties. If SEBI's investigation proves an insider trading charge, the penalties include:

• monetary penalties.
• criminal prosecution.
• prohibiting persons from transacting in the securities markets.
• declaring transactions as void.

A recent extension: to tighten the rules on insider trading in mutual fund units, mutual fund units have been included in the SEBI (PIT) Regulations.

5.2.2 The Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003

An important job of SEBI is to prohibit fraudulent and unfair trade practices. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 let SEBI investigate market manipulation and fraudulent and unfair trade practices.

The regulations formally define "fraud" and "fraudulent". 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. There may or may not be wrongful gain or avoidance of any loss. However, that is inconsequential in determining if fraud has been committed.

Note that gain is irrelevant — the inducement is the offence.

To prevent fraud, the regulations prohibit certain dealings in securities, and prohibit manipulative, fraudulent and unfair trade practices. They also set out SEBI's investigation powers and the penalties.

5.3 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.

Created by the MCA, not SEBI — a distinction worth holding, since SEBI separately administers the Investor Protection and Education Fund (IPEF).

To run the fund, the Government of India set up the Investor Education and Protection Fund Authority on 7th September, 2016. The Authority:

• administers the IEPF.
• makes refunds of shares, unclaimed dividends, matured deposits/debentures etc. to investors.
• promotes awareness among investors.

Where the money comes from:

The third sample question tests this — seven years.

The fund is used to make refunds of unclaimed dividends, matured deposits and debentures to investors. It is also used for investor education, awareness and protection, through awareness programmes and other initiatives.

5.4 SEBI regulations for R&T agents

The SEBI Act treats Registrar and Transfer (R&T) agents as intermediaries. So SEBI regulates them, and they must follow its regulations and guidelines. Three main regulations govern them:

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

Three regulations.

5.4.1 The RTA Regulations

The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations came into effect in 2025. They cover the R&T agent's constitution, capital adequacy, obligations and responsibilities, inspection and reporting norms. Unit 7 covers them in detail.

5.4.2 The SEBI (Intermediaries) Regulations, 2008

SEBI oversees many kinds of intermediaries — brokers, R&T agents, merchant bankers, depository participants, investment advisers and bankers — each under its own regulations. The SEBI (Intermediaries) Regulations, 2008 pull together the common requirements that apply to all of them.

(a) What they cover. The common requirements are grant of registration, general obligations, common code of conduct, common procedure for action in case of default, and miscellaneous provisions.

(b) Applying for registration.

• The applicant files an application in the prescribed format, with any extra information the relevant regulations need, and the fees.
• If the intermediary will work with a stock exchange, clearing corporation or depository, it applies through that institution. The institution checks eligibility and other criteria, and then forwards the application to SEBI.
• Intermediaries already registered must file a disclosure in the specified format. These disclosures are made public on the website specified by SEBI.
• A registered intermediary that wants to work in a new category files for registration with additional shortened forms covering that category's requirements.

(c) Fit and proper. SEBI looks at the eligibility criteria, and at the market activities of people linked to the applicant. It also checks whether the applicant is "Fit and Proper". That judgment rests on integrity, honesty, ethical behaviour, reputation, fairness and character. The applicant must also not suffer any disqualification set by SEBI, such as a criminal complaint filed, being declared insolvent, or being categorised as a wilful defaulter.

Six qualities — integrity, honesty, ethical behaviour, reputation, fairness and character.

SEBI may use the criteria in Schedule II of the SEBI Regulations, 2008 to decide who is fit and proper.

(d) Registration is permanent unless the intermediary surrenders it, or it is suspended or cancelled under the regulation.

(e) Duties of every intermediary:

Note the 45 days here, as against 21 days for a depository participant below.

(f) Inspection. SEBI can inspect an intermediary's books and records after giving due notice, in the interest of investors. The intermediary must cooperate fully.

(g) Revocation. SEBI may revoke the certificate if the intermediary breaks the regulations or other guidelines. A show cause notice is issued first.

(h) Common and specific rules. The Intermediaries Regulations govern the common requirements. Each intermediary's specific requirements stay under its own regulations.

5.4.3 The SEBI (Depositories and Participants) Regulations, 2018

R&T agents are one of the intermediaries allowed to be participants of a depository under the SEBI (Depositories and Participants) Regulations, 2018. When they act in this role, they must follow these regulations. The R&T agent applies as set out in the regulations. It gets the certificate if the depository concerned and SEBI are satisfied about its eligibility and competence.

a) The participant undertakes to pay the fees, maintain records, address investor complaints within the specified time, and meet every condition on which the certificate was granted.

b) The code of conduct for participants requires them to:

i. Do all activities in such a way that investors' interests are protected.

ii. Address investor complaints within 21 days.

iii. Co-operate with the regulator in case of any enquiry or inspection.

iv. Have mechanisms in place, such as the maker-checker concept, to ensure there are checks and balances in all the transactions.

v. Maintain records and data carefully.

vi. Have good corporate governance policies in place.

The fourth sample question draws on three of these six — corporate governance policies, careful record-keeping and addressing complaints within the specified time are all required.

c) The participant also agrees to:

Depository-wise records where the participant serves more than one depository.

The chapter's sample questions confirm that the apex regulator of the securities markets in India is SEBI; that insider trading is controlled by regulations prescribed by SEBI; that the IEPF is funded by unpaid dividends remaining unclaimed for at least seven years; that depository participants must put in place good corporate governance policies, maintain records and data carefully and address investor complaints within the specified time; and that SEBI's penalty may take the form of suspension.