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Accounting and Finance for Managers

LESSON

17 SEBI IN CAPITAL MARKET ISSUES

CONTENTS 17.0 Aims and Objectives 17.1 Introduction 17.2 Objectives of the SEBI 17.3 Entity of SEBI 17.4 Organisational Grid of the SEBI 17.5 Powers and Functions of SEBI 17.6 Role of SEBI 17.6.1 Promoter’s Contribution 17.6.2 Disclosures 17.6.3 Book Building 17.6.4 Allocation of Shares 17.6.5 Market Intermediaries 17.6.6 Debt Market Segment 17.6.7 Brokers 17.6.8 Suspension of a Broker 17.6.9 Recent Developments 17.7 Critical Review of SEBI 17.8 Let us Sum up 17.9 Lesson-end Activity 17.10 Keywords 17.11 Questions for Discussion 17.12 Suggested Readings

17.0 AIMS AND OBJECTIVES This lesson is intended to discuss the role of SEBI in regulating the Indian capital market. After studying this lesson you will be able to: (i) describe objectives behind instituting SEBI (ii) know the organisational structure of SEBI (iii) understand powers and functions of SEBI (iv) examine the role of SEBI in Indian financial market

17.1 INTRODUCTION

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During the late 80, the GOI decided to replace the Controller of Capital Issues Act, by way of inducting the Securities Exchange Board of India, in order to introduce the regulatory environment in the Indian capital market, to pave way for the promotion of congenial and conducive climatic condition for the investing public. Hence the Government

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of India has instituted the supreme authority SEBI to monitor and control the proceedings of the capital market in the country.

SEBI in Capital Market Issues

17.2 OBJECTIVES OF THE SEBI l

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To replace the office of the following major acts of implementation and to attain the following objectives: v

Control of Capital Issues Act (1947)

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The Companies Act (1956) - issue, allotment of the securities and disclosures

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Securities contract regulation Act (1956) - to control over the stock exchanges

In May, 1992 - the controller of issue of capital, pricing of the issues, fixing premia and rates of debentures were ceased in operation, provided the SEBI was promulgated. v

Protecting the interest of the investors

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Promoting the development of the securities market

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Regulating the securities market

17.3 ENTITY OF SEBI l l l

It was registered with the common seal and with the power to acquire, hold and dispose any property Power to sue or to be sued in its own name The Head office is situated in Mumbai; in addition the regional offices were established in the following metropolitan cities viz Kolkata, Chennai and Delhi, to monitor and control the capital market operations across the country

17.4 ORGANISATIONAL GRID OF THE SEBI l l l l l l

Six members in the committee Headed by the chairman One member each from the ministries of Law and Finance One member from the officials of Reserve Bank of India Two nominees from the central government It contains 4 different departments viz Primary department, Issue management and intermediaries department, Secondary department and Institutional Investment department

17.5 POWERS AND FUNCTIONS OF SEBI Section 11 of the Act Chapter IV highlights the Powers and Functions of SEBI l Regulating the business of the stock exchanges l Regulating the role of the intermediaries l Registering and regulating of depositories, participants and custodian of securities, credit rating agencies l Regulating of mutual funds and venture capital funds l Prohibiting the unfair trade practices l Prohibiting of insider trade activities l Regulating substantial takeovers and acquisitions l

Frequent conduct of research activities

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To conduct any enquiry which warrants the situation to safeguard the interest of the investors

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Accounting and Finance for Managers

Civil Court Procedure 1908: The SEBI has been given additional powers and functionswith reference to Civil Court Procedure 1908 to regulate the capital market in addition to the above enlisted powers and functions l Discovery and production of books of account of the errant during the inspection and enquiry. l Summoning and enforcing the attendance of the persons to stand before for the examination of oath. l

Acc to Sec 12 SEBI is empowered to conduct Inspection of books.

17.6 ROLE OF SEBI l

Entry norms for the companies at the moment of raising the capital from the market: v

The companies are expected to produce 3 years dividend track record of preceding the issue.

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At the entry level, immediately after listing, important point to be ensured is that Post issue of networth should be 5 times greater than the Pre issue networth.

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If it is a manufacturing company without any track record, wants to raise any capital from the market, the appraisal has to be done through development banks or commercial banks.

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Having three years track record, the SEBI never vets offer document of the issue of capital.

17.6.1 Promoter's Contribution l

Promoter's contribution should not be less than 20% and should be made before the issue.

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If the size of the issues is Rs. 100 cr -50% of the contribution should be made before the opening of issue and the remaining should be paid before the calls are made to the investors.

17.6.2 Disclosures l

Acc.Bhave committee- Financial results i.e., unaudited and audited financial results should be published.

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Risk factors and positions of the company should be highlighted in detail in the prospectus .

17.6.3 Book Building l

75% route was specified at the early moment in the process of book building. Then the book building process was opened to 100% route to the public.

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Sufficient opportunities are to be furnished to the investors to represent through the terminal to take part in the process of Book building.

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The company during the process requires 30 centers atleast for book building process to raise the share capital from the market.

17.6.4 Allocation of Shares l

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The Minimum application was -100 Nos for subscribing the issue of share capital. Then the Minimum application was hiked to 500 Nos. Then SEBI has felt that the Minimum application was too high, which did not pave the small investors to within the available surplus, then the minimum application brought down to 200 Nos.

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Small investors are who hold 1000 shares or few securities

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Allotment should be done within 30 days from the date of closure of the issue. During the non allotment of the shares, the company should refund the amount of the application money.

SEBI in Capital Market Issues

17.6.5 Market Intermediaries l

The various merchant bank categories were abolished. Each category of issue intermediary is required to undergo for specific registration process.

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Lead managers who manage the issue of capital should have a networth of Rs.5 cr.

17.6.6 Debt Market Segment l

Depository system for the debt securities were introduced

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Demat facility was specifically introduced for the government securities

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Listing of debt securities need not rely upon the equity listing in the respective stock exchange

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FIIs were permitted to invest 100% in the debt instruments of the Indian companies

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For the issuance of debt instruments the rating has been mandatory

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Minimum two ratings should be obtained for the issue of debt instrument more than Rs. 500 cr.

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Rating agency should not be associated with the firm of issuing company

17.6.7 Brokers l

Registration is given - Member of any stock exchange - key factors of registration - office space, previous experience, man power, selling or buying in securities

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Code of conduct-execution of orders, fairness of deals with the investors, issue of contract note

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Financial statements - should be submitted within 6 months of the accounting period

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Book of accounts - A minimum of 5 years to be preserved

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Regional offices - Establishment only with reference to attend the complaints of the small investors at speedy rate - Kolkata, Chennai and Delhi

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SEBI's final controlling measure is suspension and cancellation of the registration subject to certain conditions

17.6.8 Suspension of a Broker l

Suspension - permanent - dismissal is leading to cancellation of registration - due to the problem caused

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Violation of rules and regulations

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Fails to submit the true and fair information according to the norms of disclosures

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Untoward conduct with the investor

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Guilt of misconduct

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Poor financial status of the brokers-deterioration

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Stock exchange fees - fail to pay on time to the requirement

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Suspension of the membership

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Accounting and Finance for Managers

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Indulges in any act of insider trading of securities

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Convicted of a any criminal offence

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Sub-Broker

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Sub- broker- to obtain the registration

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Agreement in between broker & sub-broker

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Deposit should be made with - Broker

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Transfer of securities - without registration of bearing stamps - considered as bad deliveries in the angle of stock exchanges -July 1, 1997.

17.6.9 Recent Developments l

RBI approval copy is exempted

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FIIs are permitted to invest upto 100% in debt market funds

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FIIs which have securities worth of Rs 100 cr or more than mandatory requirement is to settle the transaction only through demat mode

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FIIs/NRIs/OCB -30% of the equity of the company in accordance with the union budget - 1997-98

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It was hiked by the Union Finance Minister during the budget 2000 Check Your Progress What steps have been taken by SEBI regarding allocation of shares?

17.7 CRITICAL REVIEW OF SEBI l

Disclosures- To present information only for the interest of investors

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Dissemination process - to disclose the information required which leads to undue delay. The route of dissemination of the information should be through SEBI to public and by considering the time wastage, the web sites were suggested for facilitating the investors.

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The Settlement for NSE are - Wednesday - Tuesday, and in the case of BSEMonday-Friday

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Leads to more arbitrage transactions which lead to greater fluctuations in the opening and closing prices of the securities

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Badla trade has been banned due to detrimental to the investors

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Special watch system has to be introduced to the international standards

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Capital adequacy: The capital required to be maintained is less than for intermediaries but at the same time the capital adequacy should be to the trading volume of them only in order to avoid the default risk of the investors.

17.8 LET US SUM UP

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The Govt of India has instituted the supreme authority SEBI to monitor and control the proceedings of the capital market in the country. The SEBI has been given additional powers and functions with reference to civil court procedure 1908 to regulate the capital market. Recent Developments RBI approval copy is exempted. FIIs permitted to invest upto 100% in debt market funds. FIIs which have securities worth of Rs 100 cr or more

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than mandatory requirement is to settle the transaction only through demat mode, FIIs/ NRIs/OCB -30% of the equity of the company in accordance with the union budget 1997-98. It was hiked by the union finance minister during the budget 2000.

SEBI in Capital Market Issues

17.9 LESSON-END ACTIVITY Discuss critically the power and functions of SEBI.

17.10 KEYWORDS Broker: member of the stock exchange, facilitates the client to buy and sell on behalf in the stock market Sub-broker: who assists the broker and does the buying and selling transactions for the client through the broker in the stock exchange Arbitrage: Buying the security at lesser price at one stock exchange and disposing them off at higher price at another stock exchange during the same moment Lead manager: Who takes active role in the process of issue management.

17.11 QUESTIONS FOR DISCUSSION 1.

When SEBI was established ? For what ?

2.

Briefly highlight the objectives of the SEBI.

3.

Explain the role of SEBI in administering the primary market.

4.

Explain the important enactments on the market intermediaries of the stock market.

5.

Elucidate the recent developments with the help of SEBI mandate.

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What are the steps taken by SEBI to suspend the registration of a broker?

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Why the companies are expected to highlight about the prospects and risk factors of the issue with relevance to the project?

17.12 SUGGESTED READINGS M.P. Pandikumar, “Accounting & Finance for Managers”, Excel Books, New Delhi. R.L. Gupta and Radhaswamy, “Advanced Accountancy”. V.K. Goyal, “Financial Accounting”, Excel Books, New Delhi. Khan and Jain, “Management Accounting”. S.N. Maheswari, “Management Accounting”. S. Bhat, “Financial Management”, Excel Books, New Delhi. Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGraw Hill, New Delhi (1994). I.M. Pandey, “Financial Management”, Vikas Publishing, New Delhi. Nitin Balwani, “Accounting & Finance for Managers”, Excel Books, New Delhi.

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