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SEBIs objective and functions a legal perspective | Mostly Economics

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SEBIs objective and functions a legal perspective

Dharmishta Raval (http://www.pramericamf.com/Aboutus/Trustees.aspx) (ormerly an Executive
Director at SEBI) has this superb paper (http://www.igidr.ac.in/pdf/publication/WP-2011-008.pdf) on
the topic. Securities Exchange Board of India or SEBI is a capital market regulator of India. One would
usually assume papers on SEBI would be in area of finance etc. However, there some strong legal
linkages as well and one is amazed how much it is a legal body as well and has been designed
accordingly. Raval was instrumental in drafting the SEBI Act and is an authority on the subject.
She says India set up few regulators post 1991 reforms to regulate and develop markets independent of
the government.
In India, there have been several regulators that have been set up, the more prominent of which have been
SEBI (securities markets), TRAI (telecom) and CERC (energy). Of these, SEBI was among the rst, and has
been seen to be one of the more effective in terms of delivering on a mandate that includes (a) protection of
the investor, (b) prudential regulation of securities markets intermediaries and (c) development of the
markets.
In order to implement the mandate, the legal foundations to create regulators must have broad enabling
legislation. The legislation gives the regulator powers to issue regulations for the sector, and to supervise
based on the regulation. But most importantly, the regulator must be empowered to conduct investigation
of misdemeanours, adjudicate and have the authority to impose nes and other penalties if wrong-doing is
established. Lastly, the credibility of the regulatory process of the regulator is enforced when there are in
place appeals processes by courts that have specialised domain knowledge to review regulatory action
(which, in the case of the SEBI and securities markets, is the Securities Appellate Tribunals or SAT).
This paper examines various aspects of the legal process at SEBI, starting with the separation of powers
between Government and SEBI. To date, there has been little intervention by Parliament in the regulations
implemented by SEBI. While legislation places much of the details of how regulation is
operationalised within SEBIs powers, the government retains the powers to decide the organisational
structure, with the powers to appoint the top management at SEBI. Aside of this, SEBI has the freedom to
decide how regulation is to be operationalised, which uses the three mechanisms of regulations, circulars
and guidelines.

She looks at this entire legal aspects of setting a regulator. What should be the objective? What should 1/5

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SEBIs objective and functions a legal perspective | Mostly Economics

She looks at this entire legal aspects of setting a regulator. What should be the objective? What should
be the legal powers to achieve the objective? What should be the tools in functioning etc
The legal foundations for regulators involves broad enabling legislation. The legislation also gives powers
to the regulator to issue subordinate legislation which are required to be tabled in Parliament after they
have been issued. This makes it possible for detailed domain knowledge to be embedded in subordinate
legislation, which could evolve rapidly. The regulator would then operationalise these regulations in its
supervisory function. Regulators feature a unique combination of functions of writing law and
administering it. Besides conducting investigations, regulators are also responsible for adjudicating and
imposing nes and other penalties for misdemeanours.
There are three steps to establishing regulators:
Definition of mandate of the regulator
Creation of subordinate legislation
Enforcement of the regulatory mandate
SEBI Act 1992 establishes SEBIs mandate:

1. Investor protection,
2. Regulation of the securities market, and
3. Promotion and development of the securities market
Unlike SEBI, both in US and UK there is no explicit mandate to develop securities markets.
She discusses SEBI Act 1992. It is broadly in two parts:
Role of Government It appoints board members, SEBI accounts to be maintained by GoI,
Functioning of SAT
Role of SEBI: regulating intermediaries, Framing regulation on insider trading/ take-overs etc,
regulations on stock exchanges etc.
SEBI act is different from other acts:

The SEBI Act, 1992 gives SEBI power to draft regulations in order to regulate the market and discharge its
functions and duties. While the objectives are provided in the SEBI Act, 1992, the implementation details
are left to the regulator. The securities market is regulated more through regulations than through the
SEBI Act, 1992.
This is in marked contrast to other statutes in India, which provides for the regulatory framework in the
parent Act. For example, the Income-Tax Act is a complete self su
cient code, and the income tax authorities
are required to implement the Act as against notifyingthe regulatory framework. They are not expected to

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SEBIs objective and functions a legal perspective | Mostly Economics

notify the regulatory framework and be policy decision-makers. The government notifies not only the Act
but also the rules. Similarly, the Parliament notifies the Indian Companies Act, 1956, and the government
noti es the rules thereunder.
In the case of SEBI, Parliament has delegated its powers of drafting the regulatory framework to SEBI.
Besides the parent Act, SEBI also has powers under the provisions of the Securities Contract (Regulation)
Act, 1956, (referred as the SCR Act) to notify the framework to regulate stock exchanges, and transactions
on the stock exchanges, as well as the depositories under the provisions of the Depositories Act, 1996.

The paper moves on to discuss how SEBi frames regulations, circulars and guidelines. Circulars are
meant to clarify regulations. For regulations, SEBI has a more transparent method.
Right from the start, in 1992, before notifying any regulation, SEBI has issued a public concept note or
policy paper on the proposed regulations. For example, the SEBI (Insider Trading) Regulations of 1992,
which were aimed at prohibiting insider trading, were preceded by a concept paper containing the
objectives, rationale and provisions of the proposed regulation. This concept paper was posted on the
SEBI web- site seeking comments and suggestions from the public. On receipt of the comments from the
public, these were internally debated within SEBI. The revised draft regulations, along with comments
received from the public, were then circulated for the consideration and approval of the SEBI Board.

SEBI also appoints committees to recommend the contents of regulations. The committees, which consist of
experts as well as policy-makers, study the matter and present recommendations in a report. The report
rst gets placed before the public for a period of time for comments. At the end of this period, SEBI takes a
decision, and the regulations are amended. On the day SEBI Board approves the regulations, the decision of
the SEBI Board is communicated to thepublic by means of a press release.
She goes on to discuss SEBIs other functions of enforcement, inspection and penalties. Also reviews
SAT appeals.
Overall it has been great going by SEBI. It has been very transparent in its operations and has evolved
well overtime. She then recommends some changes right from its organisation to its functions.
I am not getting into all the recommendations. However, I would just like to add one. SEBI should
have good economists (both finance and macro) as well. Taking a cue from SEC which has just
appointed (http://sec.gov/news/press/2011/2011-114.htm) Craig M. Lewis as Chief Economist, SEBI
could have such experts as well. It just helps connect many dots.
An amazing paper. Covers many aspects of SEBI functioning.

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11 Responses to SEBIs objective and functions a

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SEBIs objective and functions a legal perspective | Mostly Economics

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