SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

In Indian stock market regulation was a pre-independence phenomenon. The Defence rules provisions were made to check the flow of capital into production of essential commodities. These rules were used as a temporary measure and later it was changed as Capital Issues (Control) Act 1947.

The legislation had the following objectives
1. To further the growth of companies with sound capital structure.
2. To avoid undue congestion or overcrowding of public issues in a particular period.
3. To ensure that investment takes place in conformity with the objectives of five year plan.
4. To ensure orderly and healthy growth of capital markets with adequate protection to investors.

CONTROLLER OF CAPITAL ISSUES (CCI)
For the purpose of achieving the above objectives, an office of Controller of capital Issues was set up. It was entrusted with the responsibility of regulating the capital issues in the country. It was vested with the powers to approve the kind of instruments, size, timing and premium of issue.

SECURITIES CONTRACTS (REGULATIONS) ACT
It was proved over time that the provisions in the capital issues Act were totally inadequate to regulate the growing dimensions of capital market activity. The government realized the necessity of creating a broad based and more secure environment for the business to grow. This led to the enactment of Companies Act and Securities Contracts (Regulations) Act in 1956. But this Act also did not do well due to the following reasons. They are:
1) Lack of diversity in financial instruments.
2) Disclosure of financial information.
3) Preponderance of speculative trading
4) Poor liquidity and
5) Lack of control over brokers.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
SEBI was set up as a non-statutory body on 12-04-1988. it took almost 4 years for the government to bring about a separate legislation in the name of SEBI of India Act, 1992 conferring statutory powers. The act Charged to SEBI with comprehensive powers over practically all aspects of capital market operations.

Objectives
According to the preamble of the SEBI Act, the primary objective of the SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. For this purpose, the SEBI monitors the activities of not only stock exchanges but also merchant bankers etc. the objectives of SEBI are as follows:
1) To protect the interest of investors so that there is a steady flow of savings into the capital market.
2) To regulate the securities market and ensure fair practices by the issuers of securities so that they can raise resources at minimum cost.
3) To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional.

Functions of SEBI
Section 11 of the SEBI Act specifies the functions as follows:
1) Regulatory functions:
a) Regulation of stock exchange and self regulatory organizations.
b) Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio mangers and such other intermediaries who are associated with securities market.
c) Registration and regulation of the working of collective investment schemes including mutual funds.
d) Prohibition of fraudulent and unfair trade practices relating to securities market.
e) Prohibit insider trading in securities
f) Regulating substantial acquisitions of shares and take over of companies.

2) Developmental Functions:
a) Promote investor’s education.
b) Training of intermediaries.
c) Conduct research and published information useful to all market participants.
d) Promotion of fair practices. Code of conduct for self regulatory organizations.
e) Promoting self regulatory organizations.

SEBI Guidelines pertaining to Primary Market
SEBI has brought out a number of guidelines from time to time for primary market, secondary market, mutual funds, merchant bankers, foreign institutional investors, investor protection etc

SEBI Guidelines to Primary Market

New company: A new company is one which has not completed 12 months commercial production and does not have audited results and where the promoters do not have a track record. These companies will have to issue shares only at par.

New company set up by existing company:
When a new company is set up by existing companies with a five year track record of consistent profitability and a contribution of at least 50% in the equity of new company, it can issue its share at premium.

Privately and closely held companies
The private and closely held companies having a track record of consistent profitability for at least three years, shall be permitted to price their issues freely with consultation with lead managers to the issue.

Existing listed companies

The existing listed companies will be allowed to raise fresh capital by freely pricing expanded capital provided the promoter’s contribution is 50% on first Rs.100 crores of issue, 50% on the next Rs.200 crores, 30% on the next Rs.300 crores and 15% on balance issue amount.

Reservation of issues

Reservations under public subscription for various categories of persons is made in the following manner.
1) Permanent employees 10%
2) Indian mutual funds 20%
3) Foreign institutional investors 15%
4) Development financial institutions 20%
5) Shareholders of group of companies 10%

Composite issue
Composite issue is right issue cum public issue by existing listed companies. They are allowed differential pricing. They can charge different prices as compared to right shareholders. But justification for the price difference should be given in the offer document.

Guidelines for public issue
1) Abridged (shortened) prospectus has to be attached with every application.
2) A company has to highlight the risk factors in the prospectus.
3) Objectives of the issue and cost of project should be mentioned in the prospectus.
4) Company’s management, past history and present business should be highlighted.
5) Last 3 years capital issues made by the company with other listed companies of the same management should be stated.
6) Justification for premium if any is to be stated
7) Subscription list for public issues should be kept open for minimum 3 days.
8) Collection centres should be at least 30 which include all centres with stock exchange.
9) Collection agents should not collect application money in cash.
10) The quantum of issue shall not exceed the amount specified in the prospectus.
11) Compliance report in the prescribed form should be submitted to SEBI within 45 days from the date of closure of issue.
12) The allotments have to be made in multiples of tradable lot of 100 shares of Rs.10 each.
13) Issues by way of bonus, rights, etc. to be made in appropriate lots to minimize odd lots.
14) If minimum subscription of 90% has not been received, the entire amount is to be refunded to investors within 120 days.
15) The capital issue should be fully paid up within 120 days.
16) Underwriting has been made mandatory.
17) Limit has been increased from Rs.3 crores to Rs.5 crores for listing of companies.
18) The gap of closure dates of public issue and public issue should not exceed 30 days.