Table of Contents
Chapter 5: SEBI - Role and Regulations
Chapter 5: SEBI - Role and Regulations
Learning Objectives
After studying this chapter, you should understand:
- Statutory mandate, regulatory objectives, and administrative powers of the Securities and Exchange Board of India (SEBI) under the SEBI Act, 1992.
- Investigation and enforcement powers of SEBI (Civil Court powers under Code of Civil Procedure, 1908).
- Provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015 [PIT Regulations].
- Regulations governing Unpublished Price Sensitive Information (UPSI), trading window closures, and pre-clearance.
- SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 [PFUTP].
- Statutory Code of Conduct and compliance obligations for intermediaries.
5.1 Statutory Mandate and Powers of SEBI
The Securities and Exchange Board of India was established as a statutory body on April 12, 1992, pursuant to the SEBI Act, 1992.
THE THREEFOLD STATUTORY MANDATE OF SEBI
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PROTECTING THE PROMOTING THE REGULATING THE
INTERESTS OF INVESTORS DEVELOPMENT OF THE SECURITIES MARKET
Safeguard retail & Promote financial literacy, Register, license, inspect,
institutional investors electronic settlement, and enforce discipline across
against market abuses. infrastructure & innovation. exchanges and intermediaries.
Statutory Powers of SEBI
- Quasi-Legislative: Issues regulations, circulars, and guidelines governing stock exchanges, clearing corporations, mutual funds, and intermediaries.
- Quasi-Executive: Investigates market misconduct, inspects books of intermediaries, and conducts searches and seizures. Vested with powers of a Civil Court under the Code of Civil Procedure, 1908:
- Summoning and enforcing the attendance of witnesses on oath.
- Compelling production of books, registers, and electronic records.
- Inspecting books of listed companies and intermediaries.
- Quasi-Judicial: Adjudicates regulatory violations and passes binding orders:
- Imposing monetary penalties under Chapter VI-A of the SEBI Act.
- Debarring entities from securities markets or holding key managerial positions.
- Ordering disgorgement of illegal profits.
- Freezing bank and demat accounts during investigations.
5.2 SEBI (Prohibition of Insider Trading) Regulations, 2015 [PIT Regulations]
Insider trading involves dealing in securities based on confidential, unpublished price-sensitive corporate information to make unlawful gains or avoid losses.
Core Legal Definitions
- Unpublished Price Sensitive Information (UPSI): Information relating to a company or its securities that is not generally available and which, upon becoming public, is likely to materially affect securities prices. Includes:
- Financial results;
- Dividends (interim and final);
- Mergers, demergers, acquisitions, delistings, and major expansions;
- Changes in Key Managerial Personnel (KMP);
- Material capital structure changes.
- Insider: Any person who is a "Connected Person" or in possession of or having access to UPSI.
- Connected Person: Anyone associated with the company (directors, officers, employees, auditors, merchant bankers, legal counsel, RTAs) during the 6 months prior to the trade.
Key Compliance Requirements
- Trading Window Closure: The company must close its trading window for all designated persons from the end of each financial quarter until 48 hours after financial results are made public.
- Pre-Clearance of Trades: Designated persons planning to trade in company securities exceeding prescribed monetary thresholds (typically ₹10 Lakhs in a quarter) must obtain advance pre-clearance from the Compliance Officer.
- Contra-Trade Ban: A designated person who executes a permitted trade cannot execute an opposite/contra transaction (buy vs. sell) within 6 months of the original trade.
- Structured Digital Database (SDD): Listed companies and intermediaries must maintain an internal electronic database containing names and PANs of all persons with access to UPSI, timestamped with tamper-proof audit trails.
5.3 SEBI (Prohibition of Fraudulent & Unfair Trade Practices) Regulations, 2003
The PFUTP Regulations prohibit manipulative, deceptive, and artificial market schemes:
- Market Manipulation: Artificially inflating, depressing, or causing price fluctuations in securities.
- Circular Trading & Wash Sales: Entering into transactions with no genuine change in beneficial ownership, designed to create artificial trading volume.
- Front-Running: Intermediaries trading on personal accounts ahead of large client orders.
- Spreading Misleading Rumors: Disseminating unsubstantiated information to influence investor decisions.
Chapter Summary & Exam Cheat Sheet
- SEBI Preamble: Protect investors, promote market development, regulate securities market.
- Civil Court Powers: SEBI holds powers under Code of Civil Procedure, 1908 (summoning, inspection, oaths).
- Trading Window Closure: Closes from quarter-end until 48 hours after financial results are public.
- Contra-Trade Restriction: Minimum 6-month holding period; opposite transactions prohibited for designated persons.
- Structured Digital Database (SDD): Mandatory electronic audit trail for all entities handling UPSI.
- PFUTP Scope: Prohibits circular trading, wash sales, front-running, and price manipulation.