Mains Daily Question
Feb. 19, 2023
The Securities and Exchange Board of India is a crucial institution for regulating and supervising the securities market in India. Enumerate its importance and the challenges faced by it. (10 Marks)
Approach:
Introduction: Define SEBI as an institution, its overarching legislation, and its functioning.
Body: Mention the importance of SEBI and highlight challenges in its functioning.
Conclusion: Suggest a way forward to further strengthen SEBI for better market regulation and to ensure development.
Answer:
The Securities and Exchange Board of India (SEBI) is a statutory regulatory body that oversees the securities market in India. It operates under the SEBI Act of 1992. It is responsible for issuing regulations for various participants in the securities market, such as listed companies, brokers, mutual funds, and rating agencies.
Importance of SEBI for India:
- SEBI is in charge of regulating the securities market, which is allowed by the SEBI Act of 1992. This keeps investors safe and keeps the market honest.
- Ensures fair price discovery and encourages openness by requiring corporations to provide pertinent information, which also helps to prevent insider trading.
- Boosts investor confidence: SEBI's rules and supervision make investors more confident in the securities market, which leads to more investments and growth.
- Prevents fraudulent activity: SEBI takes enforcement measures against dishonest behavior, like Ponzi schemes, to safeguard investors and uphold market integrity. For example, SEBI’s actions against the Satyam computers
- helps businesses get money: SEBI rules allow businesses to get money through public offerings and other means, which they can then use to grow their businesses.
- Promotes corporate governance: SEBI's principles for corporate governance increase accountability and transparency while protecting the rights of minority shareholders.
- The regulatory framework set up by SEBI encourages innovation and growth by making it easier for new goods and markets to be created. For example, it approved novel products like real estate investment trusts (REITs).
- Financial literacy and inclusion are promoted by SEBI efforts like the Mutual Fund Sahi Hai campaign and investing education programs.
- Maintains a stable financial system: SEBI's regulatory oversight, together with that of other regulators, ensures macroeconomic stability by maintaining the stability of the financial system.
- Encourages responsible corporate behavior and sustainable investments: SEBI's laws on environmental, social, and governance (ESG) policies encourage sustainable investments.
However, there are certain challenges in the functioning of SEBI:
- Resources are limited, which causes delays in regulatory and enforcement proceedings, as seen, for instance, in the Karvy Stock Broking case where finally SEBI took action in 2020.
- Legal problems: SEBI has trouble with legal delays that slow down its enforcement work. For example, in the Sahara Group case, there was a long legal battle over the repayment of funds raised through optionally fully convertible debentures (OFCDs).
- Cooperation with other regulators: There are difficulties in cooperating with other regulators, which results in regulatory gaps.
- Insider trading: Despite SEBI's efforts, insider trading still poses a problem in India and distorts the market, such as in the National Stock Exchange's (NSE) case in 2021–22.
- Cybersecurity threats, such as a cyberattack on NSE servers, pose a serious challenge to SEBI and necessitate ongoing monitoring.
- Regulatory holes: SEBI's regulatory framework has difficulties due to regulatory holes in sectors like over-the-counter (OTC) derivatives.
- International coordination: As SEBI strives to align its regulations with international best practices, such as in the case of Foreign Account Tax Compliance Act (FATCA) compliance, international coordination on regulatory issues presents a challenge.
- Lack of understanding among investors is still a problem, which leads to bad investments like Ponzi schemes.
Therefore, it is essential to guarantee that laws like the SEBI Act, the Securities Contracts Regulation (Act of 1956), and other SEBI-related laws are strengthened. In addition, procedures for institutional cooperation should be established in order to support proportionate regulation and safeguard public confidence. A thriving securities market will be ensured as a result, serving as a tool to encourage India's growth and development.