GS Paper 3
Syllabus: Indian economy and related issues
Context: The SC recently asked the SEBI and the government to produce the existing regulatory framework in place to protect investors from share market volatility.
- This followed the Hindenburg Research report, which accused the Adani Group of stock market manipulation and accounting fraud.
- A share/a stock market is a component of a free-market economy, where various kinds of stock shares/bonds/securities are traded.
- It allows companies to raise money and investors to participate in the financial achievements of the companies, makes profits through capital gains, and earn income through dividends.
The securities market in India is regulated by four key laws:
- The Companies Act, 2013: It regulates the incorporation of a company, responsibilities of a company, directors, and dissolution of a company.
- The Securities and Exchange Board of India Act, 1992: It empowers SEBI to register intermediaries like stock brokers, merchant bankers, and portfolio managers, regulate their functioning, impose penalties including suspending/cancelling the registration
- The Securities Contracts (Regulation) Act, 1956 (SCRA): It empowers SEBI to recognise (and derecognise) stock exchanges, prescribe rules and bye-laws for their functioning, and regulate trading, clearing and settlement on stock exchanges.
- The Depositories Act, 1996: It introduced and legitimised the concept of dematerialised securities being held in an electronic form. SEBI set up the infrastructure for doing this by registering depositories and depository participants.
Can SEBI step in to curb market volatility?
- While SEBI does not interfere to prevent market volatility, exchanges have circuit filters (upper and lower) to prevent excessive volatility.
- But SEBI can issue directions to stock exchanges to stop trading, totally or selectively.
- It can also prohibit entities or persons from buying, selling or dealing in securities, or from raising funds from the market.
What are the guidelines for fundraising?
- The Companies Act has delegated the authority to enforce some of its provisions to SEBI, including the regulation of raising capital, corporate governance, resolution of investor grievances, etc.
- As a result, SEBI issued guidelines such as the Issue of Capital and Disclosure Requirement Regulations, the Listing Obligations and Disclosure Requirements Regulations (2015), etc.
What are the safeguards against fraud?
- Fraud undermines regulation and prevents a market from being fair and transparent.
- SEBI notified the Prohibition of Fraudulent and Unfair Trade Practices Regulations (1995) and the Prohibition of Insider Trading Regulations (1992).
- These regulations define different types of fraud, and provide for penalties and violation of these regulations is a presumed violation of the Prevention of Money Laundering Act.
- SEBI has been given the powers of a civil court and using these powers, SEBI has acted against Satyam, Sahara India, Ketan Parekh and Vijay Mallya.
- Appeals – SEBI order → Securities Appellate Tribunal (SAT) → SC
Context: The capital markets regulator SEBI has recently asked stock brokers and depository participants to maintain a website.
A stockbroker (registered with SEBI) is a member of a recognised stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges.
A depository is an organisation which holds securities (like shares, debentures, bonds, etc.) of investors in electronic form at the request of the investors through a registered depository participant.
A depository participant is an agent of the depository – National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) – through which it interfaces with the investor and provides depository services.
The rationale behind the website: It will contain basic details such as their registered address, and the registration number, and give customers relevant information right from the process of opening an account to filing a complaint.
Hindenburg report on Adani group | SC calls for protecting Indian investors from sudden market volatility