In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development and regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.
The basic objectives of the Board were identified as:
- to protect the interests of investors in securities;
- to promote the development of Securities Market;
- to regulate the securities market and
- for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor.
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:
- It acts as a barometer for market behaviour;
- It is used to benchmark portfolio performance;
- It is used in derivative instruments like index futures and index options;
- It can be used for passive fund management as in case of Index Funds.
HOW THE STOCK MARKET REGULATED
In India, capital markets are regulated by the Securities and Exchange Board of India (SEBI). The capital market regulator came into existence in 1992 through a special act passed by Parliament. The formation of SEBI was a fall-out of the securities scam involving stockbroker Harshad Mehta who, with the help of a handful of banks, succeeded in artificially jacking up stock prices. We take a closer look at various issues concerning market volatility and how SEBI plays regulator:
Who regulates the Indian capital market?
Sebi regulates the entire capital market and the stock exchanges (SE) are a very significant part of it. Besides, SEs, Sebi regulates mutual funds (MFs), foreign institutional investors (FIIs), stockbrokers, merchant bankers, depositories, venture capital, portfolio managers and other related entities.
A major portion of SEBI’s time and energy goes in regulating the secondary market, which is the cash market where the trading of listed stocks takes place. SEBI has created a separate division called the secondary markets division to look after the day-to-day regulatory function of the segment. Recently, this division was renamed the markets regulation department.
Besides discharging its day-to-day regulatory function, SEBI also keeps a close watch on price movements and volatility in the market. To curb this volatility , which was the order of the day till recently, the regulator along with the bourses takes various steps for risk containment and tightening of the surveillance mechanism.
SEBI is the regulator of Indian Stock Market
These steps may include tightening of various margins or relaxing them, depending on the situation. Different types of margins are the best weapon at the disposal of the regulator. It is through this measure that the regulator can control price volatility of stock. When the price of the stock is rising unabatedly or it is supported without any fundamentals, the SEs in consultation with the regulator can hike the margins to contain volatility.
Other stricter measures to contain volatility include shifting them to the trade-to-trade segment where every order (buy or sell) results in compulsory delivery and no netting is allowed.
Does the Union finance ministry have a role to play in monitoring price movements in stock markets?
The ministry of finance too keeps a watchful eye on the stock market through its capital market division, headed by an officer of the rank of joint secretary. Though the ministry does not interfere in the day-to-day affairs of the market regulator, it does step in when major market movements happen.
