Regulations

The Advisory Committee on Alternative Investment Policy, constituted by the SEBI under the chairmanship of Shri N. R. Narayana Murthy, was mandated to make recommendations on various aspects of the alternative investment and start up ecosystem in India. Their key recommendations included improving the tax pass-through system, unlocking domestic capital resources, promoting onshore fund management, and reforming regulations for Alternative Investment Funds (AIFs). Additionally, they aim to address hurdles inhibiting industry development, engage with other regulators when necessary, and handle any relevant issues related to the alternative investment industry and the growth of the Indian start-up ecosystem.

The Securities and Exchange Board of India (“SEBI”) regulates the securities market in India, ensuring market integrity, investor protection, efficiency, transparency, risk management, market development, compliance, and enforcement. Earlier, settlement of transactions in the securities markets was based on the physical movement of certificates, which caused delays, bottlenecks, increased transaction costs and created risks for market participants. To tackle this issue, the Depositories Ordinance 1995 was passed on September 20, 1995, allowing for the dematerialization of securities, thereby reducing the risks associated with physical record-keeping and the transfer of shares. Subsequently, the Depositories Act, 1996, was passed on August 10, 1996, and the said Act was deemed to have come into force on September 20, 1995. In exercise of the powers under section 30 of the Securities and Exchange Board of India Act, 1992 (SEBI Act) read with Section 25 of the Depositories Ordinance, 1996 (which was subsequently repealed by the Depositories Act, 1996), the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 were enacted, which inter alia provided for matters related to registration of a depository and depository participant, rights and obligations of the depository, the depository participant, the issuer, the manner of surrender of a certificate of security, the creation of a pledge or hypothecation, etc. The aforesaid Regulations were subsequently replaced by the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 (“DP Regulations”), which came into effect on October 3, 2018, and included provisions inter alia related to ownership norms in a depository and governance of a depository. This article provides an overview of the evolution of regulations governing depositories and participants and the significant/key changes/amendments made over the years.

SEBI (Mutual Funds) Regulations, 1996 were notified on May 31, 1993. These regulation deals with the registration, constitution and management of mutual funds and operation of trustees, the constitution and management of asset management company and custodian, schemes of mutual funds, investment objectives and valuation policies, general obligations, inspection and audit, procedures for action in case of default etc.

The evolution of securities market regulations in India traces its origins to the Joint Stock Companies Act of 1850, influenced by English Corporate Law. The legislation evolved with the Companies Act of 1857 and 1866, with significant advancements like the introduction of limited liability. The Bombay Securities Contracts Control Act of 1925 marked the first dedicated regulation for stock exchanges. Control over capital issues began under the Defense of India Act, 1939, and evolved into the Capital Issues (Control) Act, 1947. Post-independence, the Securities Contract (Regulation) Act of 1956, further shaped market regulation. A major milestone was the establishment of the Securities and Exchange Board of India (SEBI) in 1988, which gained statutory status in 1992, which led to the repeal of the Capital Issues (Control) Act. SEBI's regulatory framework includes the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Companies Act, 2013, and the Depositories Act, 1996. SEBI's regulatory ambit expanded further with the integration of regulation of commodity derivatives under the securities market framework in 2015.

The committee was formed by the Ministry of Finance, Department of Economic Affairs, Government of India, under the chairmanship of Shri A. D. Gorwala. The mandate of the committee was to review and report on government draft proposals and to submit a revised bill with a memorandum detailing each clause's reasons. The Committee agreed with two considerations of the government regarding the usefulness of stock exchanges and the systematic regulation of these exchanges. The report critically examined the proposal for abolishing or limiting blank transfers and suggests that the abolition or limitation of blank transfers will do more harm than good and is crucial for promoting progress and development.

SEBI constituted the committee on Fair Market Conduct under the chairmanship of Dr. T K Vishwanathan, Ex-Secretary General, Lok Sabha and Ex-Law Secretary. The mandate of the Committee was to review relevant regulations framed by SEBI to deal with market abuse and to review the surveillance, investigation and enforcement mechanisms being undertaken by SEBI to make them more effective in protecting market integrity and the interest of investors from market abuse. The committee made several recommendations on market manipulation and fraud, insider trading, the code of conduct under insider trading regulations, and surveillance, investigation & enforcement.

In the year 2000-2001, the RBI- SEBI Technical Committee reviewed the RBI guidelines on bank's investments in capital market. The report of the committee was submitted on April 12,2001. It recommended a 20% ceiling on overall exposure to capital market and revision in limits related to investments in shares and advances against shares and debentures, prudent risk management policy for banks, prohibition on Primary Co-operative banks to grant any credit facility against the security of shares and other capital market instruments, and monthly reporting to RBI.

Subsequent to the Union Budget 2007-08 announcement “to allow short selling settled by delivery and securities lending and borrowing to facilitate delivery, by institutions” and after a series of discussions with the stock exchanges, depositories and market participants, SEBI specified a broad regulatory framework for short selling and a full-fledged securities lending and borrowing scheme by institutional investors. The framework for short selling and SLB was operationalized with effect from April 21, 2008.

The JPC was formed under the Chairmanship of Mr. Prakash Mani Tripathi to investigate and address irregularities and manipulations in financial transactions, including insider trading involving shares and other financial instruments. It aimed to examine the roles of various entities, such as banks, brokers, promoters, stock exchanges, financial institutions, corporate entities, and regulatory authorities. The Committee's goals were to recommend protective measures for small investors and propose deterrent actions for those who violated the regulations.

SEBI constituted a working group on Social Stock Exchanges under the chairmanship of Shri Ishaat Hussain. The broad terms of reference for the Committee were to review and recommend: a) Possible structures and mechanisms, within the securities market domain, to facilitate raising of funds by social enterprises and voluntary organizations and b) Associated regulatory framework inter-alia covering the issues relating to eligibility norms for participation, disclosures, listing, trading, oversight etc. According to the report of the Working Group, the SSE can be housed within the existing stock exchanges such as the BSE and/or NSE. This will help the SSE leverage the existing infrastructure and client relationships of the exchanges to onboard investors, donors, and social enterprises (for-profit and non-profit). The SSE will have two primary roles: (a)To effectively deploy the fundraising instruments and structures available under the regulatory guidelines towards social enterprises and (b) To foster overall sector development by creating a capacity-building unit.

This video is the part 2 of the series showing evolution of securities market regulations in India.

The video gives a brief about the initiatives undertaken by SEBI for Investors protection

In a significant decision, the Securities and Exchange Board of India (SEBI) decided that all debt instruments would have to be rated by a cred rating agency.

Rigorous enforcement of the rules and guidelines governing the financial sector - rather than extensive and excessive control, form the key to market -oriented financial sector reform, according to Mr. M Narasimham, former governor of the Reserve Bank of India (RBI) and chairman of the Administrative Staff College of India.

The Securities and Exchange Board of India approved the regulations for credit rating agencies (CRAs) which bars them from rating securities issued by their promoters, moreover as per the new regulations, a CRA cannot rate securities issued by any borrower, subsidiary or associate of the promoters if any chairman or director.

The Securities and Exchange Board of India has constituted an expert committee to review the adequacy of disclosure requirements in offer documents.

The Securities and Exchange Board of India is inclined to designate on depository as a central depository, but also committed to have multiplicity of depositories without letting them mushroom. It has also proposed a minimum net worth requirement of 100 crores to set up a depository.

We must prepared for harsh discipline' said Mr. Ramakrishna at a seminar. But a free market will automatically create a need for regulation. He also said, no Indian businessman who groans under the controls, has yet been penalised to the point where it sets an example for the community....

Stock prices have flared up in kerb deal on the announcement that the Securities Contracts Regulations Act has been amended through an ordinance promulgated by the President of India deleting the prohibition on "options".

The promulgation of the ordinance to bring in a depository system in the Indian Securities market is expected to change the face of the market. It was year 1986 when the Stock Holding Corporation of India was set up with a mandate to develop the first depository India.

The Securities and Exchange Board of India (SEBI), constituted on April 12, 1988, by the government of India to promote the orderly and healthy development of securities markets and to provide adequate investor protection, will to begin with, prepare a comprehensive legislation for the regulation and development of securities markets.

The 12 man committee, which began its work under the Chairmanship of Mr. C H Bhabha in January 1951, suggested the constitution of an autonomous, four man corporate investment and administration commission with the statutory status and wide powers to regulate, control, inspect and guide the administration of the joint stock companies under the reformed laws.