InvestorQ : How does SEBI discharge its various functions in the capital markets?
Khushi Patel made post

How does SEBI discharge its various functions in the capital markets?

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Anjana Aiyar answered.
1 year ago

In short, the Securities and Exchange Board of India (SEBI) performs the following functions in the market for its betterment. SEBI broadly performs the following functions with respect to the capital market. Let us outline the key functions and also understand these roles with real life examples.

· Maintains the integrity of the market

· Protects the interest of the small investor

· Ensures that participants play by the rules in the market

· Assists in the orderly growth and development of capital markets

Let us see how SEBI maintain integrity of markets?

SEBI regulation has become a stamp of safety and confidence in the markets. Today clients can trade with confidence through brokers and sub-brokers who are SEBI registered. Same applies to mutual funds. Investors are willing to put money in mutual funds because they are regulated by SEBI and that gives confidence to the investors. That is the first advantage of SEBI regulation. There are quite a few cases that highlight this role of SEBI. Back in 2006 when brokers were found guilty of opening duplicate demat accounts, SEBI immediately intervened and penalized these brokers to maintain integrity of markets. Also in 2005, when penny stocks were moving up sharply, SEBI launched a full-fledged investigation into penny stocks to ensure that investors did not lose faith in markets.

Let us turn to how SEBI protects the interests of the small and marginal investors?

In the last few years SEBI has undertaken several measures to protect and enhance the interests of small investors. When a small investor invests in an IPO, the new SEBI rules stipulate that they will have a separate quota and will also get a price discount over the institutional investors. Similarly, in the allotment process, the new allotment mechanism ensures that as many investors as possible get at least the minimum number of shares allotted. This ensures much wider participation of small investors in capital markets and helps them build wealth. SEBI has also recently increased the minimum lot size of F&O contracts from Rs.2 lakhs to Rs.5 lakhs. This will ensure that small investors do not take undue risks by trading aggressively in futures and options.

How SEBI ensures that participants play by the rules?

One of the key functions of SEBI is to ensure that financial intermediaries like brokers, mutual funds, stock exchanges, credit rating agencies play by the book. These institutions have access to sensitive information on companies. Hence SEBI has put in place strict rules wherein such intermediaries cannot use this information for making profits in the market. They can only act on information that has been made public. SEBI regulates brokers to ensure that their client trading and proprietary trading is kept at arm’s length to avoid conflict of interest. Senior officials of exchanges, brokerages and mutual funds are required to disclose all their stock holdings to SEBI on a regular basis. Also broker recommendations are monitored to see that their actual transactions are not at variance with calls and recommendations given.

How SEBI assists in the orderly growth of capital markets?

SEBI plays a very vital role in ensuring the orderly growth of capital markets. This has been done in a variety of ways. Firstly, SEBI created the Settlement Guarantee Fund (SGF) in the exchanges to ensure that the exchange acts as the counterparty for all transactions. This has substantially helped the markets to grow without hiccups. Secondly, real time risk management and broker level compliance are very important ways of creating an orderly growth in capital markets. We have seen in 1992 and 2000 as to how the speculative bubble resulted in huge losses. The modern day risk management system nips such bubbles in the bud. SEBI also constantly analyzes trade data, volumes data, and intraday trading data and bulk & block deals to identify any warning signals in the market.

SEBI plays a crucial role in maintaining an orderly stock market. Thanks to the efforts of SEBI, the mutual fund industry has grown to an AUM of $200 billion and the market cap of the Indian market has grown to $2 trillion. But above all, there have been no major scams since 2001 and the retail investors find Indian markets safer and much sounder.