The responsibility for the orderly functioning of the security market has been delegated to Securities Exchange Board of India which is entrusted to protect the interest of investors and ensure the development of securities market.
The responsibility entrusted with SEBI is to create an environment in which the various participants such as the investors, government, intermediaries and the stock exchanges are satisfied.
SEBI derives its validity from Securities and Exchange Board of India Act, 1992 (the SEBI Act, hereafter). The main purpose of the Act is the protection of investors in the securities market and thereby making it a reliable place. The provisions of the SEBI Act define its role in more specific terms. These broadly relate to
- Regulating stock exchanges as well as other security markets
- Regulating trade markets
- Prohibiting practices that are considered to be unhealthy for development of the securities market such as insider trading and fraudulent and unfair trade practices for promoting and regulating self-regulatory organizations.
SEBI performs several of its functions which are based on its powers which have been given to it under Securities Contract Regulation Act, 1956 and the Securities Contract Regulation Rules, 1956. The object of the SCR Act is to provide for the regulation of stock exchanges and of securities dealt in on them. It also indulges in regulating the securities outside the stock market.
Stock market facilitates mobilisation of funds from small investors and channelizes these resources into various development needs. In order to avoid undesirable transactions in securities by regulation of the business of dealing, the Securities Contract Regulation Act, 1956 was enacted by parliament.
What is Stock Exchange?
A stock exchange is an important factor in the capital market. It is a secure place where trading is done in a systematic way. Here, the securities are bought and sold as per well-structured rules and regulations. Securities mentioned here includes debenture and share issued by a public company that is correctly listed at the stock exchange, debenture and bonds issued by the government bodies, municipal and public bodies.
Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in a stock exchange. It can enforce rules and regulation on the brokers and firms that are enrolled with them. In other words, a stock exchange is a forum where securities like bonds and stocks are purchased and traded. This can be both an online trading platform and offline (physical location)
Listing of Securities – The Process
According to Section 9 (1) (m) of the SCR Act, any stock exchange is free to make rules for listing of securities as part of the bye laws which govern their working. A company applying to get their securities listed on a particular stock exchange have to apply and comply with the necessary rules specified in the bye laws and SCR rules.
Securities Contract Regulation Rules, 1956 have defined the documents that a company has to provide to the stock exchange while seeking the list of its securities
The Listing Agreement
All securities exchanges presently have a listing agreement that has several common, standard provisions. It is a contract that securities exchanges enter into with issuers which effectively governs the relationship between the issuer and the investor.
Recognition of stock exchange
Section 3 of the Securities Contract (Regulation) Act lays down that for recognition, every stock exchange for the purpose of being recognised has to make an application in a prescribed manner to the Central Government. If the central government is satisfied, then it may grant recognition subject to further inquiry and condition imposed as laid down in the Act.
Every grant of recognition shall be published in the Official Gazette. The opportunity has to be given to the applicant to present their matter in case their application is refused. Any amendment shall not be made without the involvement of central government.
Corporatisation and Demutualisation of Stock Exchanges
Historically stock exchanges were formed as mutual organisations. Ownership and trading rights were clubbed together. The disadvantage in this is that the organization would work towards the benefit of the members and not the investors. In view of these shortcomings, a step was taken by the Government of India for the demutualisation and Corporatisation of the stock exchanges.
Withdrawal of recognition
If, in the interest of the public, the central government feels that the recognition given to the stock exchange be withdrawn, then it has the power to do so under section 5 of the SCR Act.
Powers vested in Stock Exchanges
Power to call for returns and make direct enquiries– According to Section 6 of the SCR Act, every stock exchange shall preserve books of accounts for a period of minimum 5 years and it may be subject to inspection at times by SEBI.
Power of stock exchanges for management and regulation purposes to make bye-laws- Section 9 of the SCR Act gives the power to the various stock exchanges to make bye-laws for the regulation and control of contracts.
Establish trading floor
A stock exchange may establish additional trading floor with the prior approval of SEBI in accordance with the terms and conditions stipulated by SEBI.
Penalties and procedures- Under Section 23 of the SCR Act, various penalties have been listed and any person who indulges in them be subjected to a penalty decided by the adjudicating officer or imprisonment which may extend to 10 years or fine which may extend to twenty five crore Rupees.
The penalties have been explained as follows –
Penalty for failure to furnish information, return, etc
Any person, who is required under this act, fails to furnish any information, document, books, returns or report to a recognised stock exchange or fails to maintain books of accounts
Penalty for failure by any person to enter into any agreement with clients
Any person who is required under this act or any bye laws of a recognised stock exchange, fails to enter into an agreement with his clients.
Penalty for failure to redress investor’s grievances
If any stock broker, after being called by SEBI, fails to redress the grievances within time.
Failure to segregate securities or moneys of clients or client
A registered stock broker if fails to segregate securities or moneys of clients or client or uses the money of a client for himself or for any other client.
Penalty for failure to comply with provisions of listing conditions or delisting conditions
If a company fails to comply with provisions of listing conditions or delisting conditions or commits a breach thereof.
Penalty for excess dematerialisation or delivery of unlisted securities
If any company dematerialises securities more than the issue securities of a company or delivers in the stock exchanges the securities which are not listed or delivers securities where no trading permission has been given by the recognised stock exchange, he shall be liable to a penalty which shall not be less than 5 lakh rupees and which may extend to 5 crore rupees.
Penalty for failure to furnish periodical returns, etc
if a recognised stock exchange fails or neglects to furnish periodical returns to SEBI or fails or neglects to make or amend its rules or bye-laws s directed by SEBI or fails to comply with directions issued by SEBI, such recognised stock exchange shall be liable to a penalty which shall not be less than 5 lakhs rupees and which may extend to 25 crore rupees.
Penalty for contravention where no separate penalty has been prescribed
If anyone contravenes of any provision of this Act, the rules or bye laws or the regulation of the recognised stock exchange or directions issued by SEBI for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than 1 lakh rupees and which may extend to 1 crore rupees.
Under Section 23- I, SEBI shall appoint any officer not below the rank of a division chief of SEBI to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity to be heard.
Any person aggrieved by the decision of the recognized stock exchange or adjudicating officer or any order of SEBI may appeal to Securities Appellate Tribunal (SAT). SAT shall dispose of the matter in 6 months.
Other functions discharged by SEBI pertaining to regulation of the stock market
serious concern has been around manipulative practices in the Indian securities markets. Manipulative practices are usually resorted to by traders and brokers in the market. Often they involve the owner managers or promoters of companies who may stand to gain from these practices. These have typically been meant to create a false market in the securities or to push the price of the securities down to unwarrantedly low levels through circular trading and other means. Such practices have not been limited to the so-called “penny stocks” alone but have often been practiced in the shares of larger and well established companies as well. Thus manipulative practices can harm the interests of small and large investors alike as well as that of companies whose shares are subject to such practices. SEBI has addressed these through the SEBI (Fraudulent and Unfair Trade Practices) Regulation, 2003.
SEBI (Amendment) Bill 2002 gave more powers to SEBI to cover all transactions associated with the securities market and in the next year ie 2003, it got the power to impose enhanced monetary penalties.
FAQs
What is the significance of recognition of a stock exchange?
Recognition of a stock exchange is essential for its legal operation. It signifies that the exchange has met the regulatory requirements and standards set by the regulatory authority of the country.
Who grants recognition to a stock exchange?
In most countries, recognition is granted by the regulatory body responsible for overseeing securities markets. For example, in India, it is granted by the Securities and Exchange Board of India (SEBI), while in the United States, it is the Securities and Exchange Commission (SEC).
What criteria must a stock exchange meet to obtain recognition?
The criteria vary from country to country but generally include factors such as adequate infrastructure, financial soundness, governance standards, market surveillance capabilities, and compliance with regulatory requirements.
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