InvestorQ : What is the role that SEBI plays in the capital markets in India and why it is important?
Dilmini Mercia made post

What is the role that SEBI plays in the capital markets in India and why it is important?

Dawn Cherian answered.
2 years ago

SEBI came into existence in 1992 through the passage of the SEBI Act in Parliament. After the Harshad Mehta scam of 1991, the government of the day felt the need to have a full-fledged regulator for the capital markets. The formation of SEBI was for the dual purpose of orderly development of the capital markets and protecting the interests of the small investors.

It must be said to the credit of SEBI that after they have started regulating the stock markets following positive changes have happened. Firstly, the old Badla system was abolished and the trading in futures and options was permitted. Secondly, the key exchanges moved out of the Open Outcry System and shifted entirely to the online trading system. Internet trading has brought lot of transparency to markets. Thirdly, we saw the introduction of demat and rolling settlement during the period which were instrumental in changing the face of the Indian equity markets.

Pre-empting risks in the capital markets...

The biggest contribution of SEBI is that it regulates brokers and exchanges on a real time basis. Hence, it is able to pre-empt many problems due to this real time monitoring. SEBI has also set stringent stock level limits and broker level limits which ensure that problems do not get compounded. SEBI also has a market intelligence wing which collects data and trends from other sources to detect if any trader / broker are creating unnecessary volatility in the market. These measures have been instrumental in making the market a much safer place.

Being tough with defaulters and errant traders...

SEBI has been quite touch with defaulters and errant traders in the market. An example is the way SEBI dealt with the IPO mis-allotment between 2004 and 2006, where some investors were using multiple demats accounts to corner a large share of IPO allotments. SEBI not only penalized brokers but also severely restricted their other businesses. This toughness has become a major deterrent for potential defaulters. This has also made the market much safer. SEBI is quick to pass penal orders and its proactive approach has helped the markets become more reliable.

Promoting equity investing among retail investors...

One of the major worries has been that Indian small investors have not participated in the equity markets in a big way. A lot is changing in the last few years. The absence of any major scam in the markets in the last 15 years has given renewed confidence to investors to participate in equities. Secondly, SEBI has contributed substantially to promoting mutual funds through investor education. Mutual funds offer a convenient and safer way for small investors to participate in the equity markets. Not surprisingly, the total of AUM of Indian mutual funds has crossed the $200 billion mark and has grown substantially over the last 10 years.

Maintaining integrity of the capital markets...

This is an important function played by SEBI. Investors will get confidence in the markets only if they are convinced about the integrity of the markets. Today all transactions on the exchange are guaranteed by the settlement guarantee fund (SGF) as the exchange clearing house acts as the counter party to each transaction. That eliminates risk of default by parties. SEBI has come down heavily on price manipulation and circular trading. The Surveillance department at SEBI constantly analyzes data from the markets to see if there are signals of price manipulation. This has largely enhanced the faith of investors in markets. Lastly, SEBI has introduced a variety of risk management products in the market which have helped investors enhance returns and reduce risk. These include F&O, interest rates futures, VIX futures, currency futures, currency options etc.