By now, you have got an idea of What happens after the IPO process. As we saw in the article, SEBI played a major role in shaping our financial markets in India. Let's dig deeper to find who is this SEBI and what is its role in the regulation of the stock market.
The Securities and Exchange Board of India (SEBI) is the regulatory body for the securities and commodity market in India under the watchful eye of the ministry of finance, the government of India. The stock market comes under the securities market, and we’ll learn more about the commodity market in the coming articles.
SEBI was first established in 1988 as a non-statutory body for regulating the securities market and later in 1992 was accorded statutory powers with the passing of SEBI Act 1992 by the Indian parliament. SEBI is headquartered in Bandra Kurla Complex in Mumbai and has Northern, Eastern, Southern, and Western Regional Offices in New Delhi, Kolkata, Chennai, and Ahmedabad respectively.
A Securities Appellate Tribunal (SAT) is constituted to protect the interest of entities that feel aggrieved by Sebi’s decision. SAT consists of a presiding officer and two other members.
Like SEBI in India, United States has the Securities and Exchange Commission (SEC) which is the large independent agency of the United States federal government (like RBI in India), created in the aftermath of the Wall Street Crash of 1929.
Management of SEBI
The SEBI is managed by its members, which consists of the following:
The chairman is nominated by the Union Government of India.
Two members: Officers from the Union Finance Ministry.
One member from the Reserve Bank of India.
The remaining five members are nominated by the Union Government of India
Functions of SEBI
Sebi controls activities of stock exchanges, stock market, safeguards the rights of shareholders, and also guarantees the security of their investment (DEMAT accounts). It also aims to check fraudulence by harmonizing its statutory regulations and also enables a competitive professional market for intermediaries
To approve by−laws of Securities exchanges.
To require the Securities exchange to amend their by−laws.
Inspect the books of accounts and call for periodical returns from recognized Securities exchanges.
Inspect the books of accounts of financial intermediaries- Auditing.
Compel certain companies to list their shares in one or more Securities exchange-IPO processes.
Registration of Brokers and sub-brokers
Achievement of SEBI
SEBI is credited for quick movement towards making the markets electronic and paperless by introducing the T+5 rolling cycle from July 2001 and T+3 in April 2002 and further to T+2 in April 2003. What T+2 means is the settlement of shares is done in 2 days after trade day. Here T refers to Trade Day, the day you buy/sell a share. We’ll talk about the settlement of shares at a later point in time.
SEBI eliminated the physical share certificates that were prone to postal delays, theft, and forgery, apart from making the settlement process slow and time-consuming bypassing the Depositories Act, 1996.
SEBI, Exchanges, and Departments
It had asked many of these exchanges to either meet the required criteria or take a graceful exit in a circular dated 2012. SEBI's new norms for Securities exchanges mandate that it should have a minimum net worth of Rs. 1 billion and annual trading of Rs. 10 billion.
SEBI regulates the Indian financial market through its 20 departments.
Commodity Derivatives Market Regulation Department (CDMRD)
Corporation Finance Department (CFD)
Department of Economic and Policy Analysis (DEPA)
Department of Debt and Hybrid Securities (DDHS)
Enforcement Department – 1 (EFD1)
Enforcement Department – 2 (EFD2)
Inquiries and Adjudication Department (EAD)
General Services Department (GSD)
Human Resources Department (HRDM)
Information Technology Department (ITD)
Integrated Surveillance Department (ISD)
Investigations Department (IVD)
Investment Management Department (IMD)
Legal Affairs Department (LAD)
Market Intermediaries Regulation and Supervision Department (MIRSD)
Market Regulation Department (MRD)
Office of International Affairs (OIA)
Office of Investor Assistance and Education (OIAE)
Office of the chairman (OCH)
Regional offices (ROs)
I am again repeating this, SEBI is one of the most powerful authorities when it comes to financial problems in India. If your start messing with SEBI, then you wouldn’t go far. I will showcase one case scenario where SEBI had to step in to solve the case. The company which I am going to talk about is well known in India and had made a name for itself in the initial days. Let’s get started.
SEBI and SAHARA: The Rise and Fall of Subrata Roy
You must be familiar with the Sahara group, the official sponsors for the Indian cricket team for many years. Subrata Roy is the founder of the Sahara group, and he started his business from Gorakhpur, Uttar Pradesh in 1978. The aim of his business is simple, raise capital from people like investments and give them 1-2% returns on their capital per annum. The interest was small, but the highlight was from where he took the money.
He mainly concentrated on poor people from villages who were merely earning 2000-3000 per month since they didn't have any savings account. From this, they started depositing 10-20 rupees per day into their Sahara account. Since the agents for Sahara were from their village itself, it created a sense of trust for people. And after one year, Subrata Roy would say, keep your invested capital like that, we will double your investment in 3 years, so park your money for 3 more years.
By this, people didn’t take out their money. This was done to millions of poor village people worldwide and imagine the amount of cash Subrata Roy is sitting on. He made sure the investors kept on keeping their money parked with a false impression of doubling their money. Talking about the agents to collect money, at one time, Sahara was the second largest employer in India next to Indian Railways.
With this money, he sponsored the Indian cricket team and Indian hockey team, money-pumping formula one team (Force India), $128 million weddings of his two sons, hotels in New York, an Airline company (Air Sahara), etc. to name a few.
As ambition grew, greed also grew. Sahara wanted more money to keep on running their businesses in India as well as worldwide. For this, they took to the world of the financial market, particularly the stock market. The amount raised through an IPO is phenomenal if the company is very famous. As Sahara was one of the trusted and growing companies at that time, an IPO will fetch billions of dollars into their pocket.
Remember the DRHP document which you need to submit to SEBI when you’re filing for an IPO. If you’re not sure what a DRHP document is, read my article on Filing for an IPO. To give a brief, the DRHP document contains almost everything about your company, including your business model, goals, how much money you want to raise, and why you’re raising the capital. And SEBI investigated the document thoroughly, I mean exceptionally in a detailed manner since SEBI got complaints on Sahara’s subgroup companies.
In 2010, SEBI ordered Sahara to refund money collected from its investors (remember the poor village people). Sahara took the case to court but lost and the court directed Sahara to deposit 24,000 Cr collected from its investors with SEBI. This was done in installments and Sahara somehow managed to pay the first installment of 5120 Cr. But later, never managed to pay the coming installments. SEBI finally closed the case on Sahara prime city, which planned for IPO which initiated this long-running battle.
From here on, SEBI started to sell Sahara’s assets to pay back the money collected from investors. The Enforcement Directorate (ED) of India also filed a case against Sahara as they collected money from investors as cash where they did not pay tax.
Well, now you got an idea of what SEBI is and how SEBI controls the financial market in India. There is one more organization where SEBI has full control. That is our exchanges, the places where the shares are traded. SEBI keeps a watchful eye over the exchanges to catch any malpractices, fraud, insider trading, or abnormalities in the stock market. One of the most famous cases is the Harsha Mehta case or most famously known by the Netflix series name, Scam 1992. But I will talk about this at some other point in time.
In the next article, we will learn about the exchanges, how many exchanges are there in India and what role do the exchanges have in the stock market.