Role of SEBI in Capital Market: Developments and Challenges

Role of SEBI in regulating Disclosures of Offer Documents and Code of Advertisement

Among many important things one of the most important works of SEBI is to provide safety to dealings and investment for which transactions are done with adequate transparency along with strict compliance of rules laid down by SEBI which subsequently provides high degree of security to transactions at the stock exchange. SEBI also look after the dealing in stock exchanges in India and as we know a stock exchange allows trading only in securities that have been listed with it and for listing any security it has to satisfy the standards laid down by SEBI to see the genuineness and soundness of the company and with that it also has to provide for disclosure of certain information on regular basis. ^[3]

As part of SEBI™s efforts to protect investors™ interests, it has initiated many primary market reforms which include improved disclosure standards in public issue documents, introduction of prudential norms and simplification of issue procedures.^[4]  The SEBI has approved committee report by Y.H. Malegaon Committee on accounting standards and issued guidelines in the above mentioned regard in Jan. 2000. The report suggested that disclosure norms should be widened and relevant accounting standards should be upgraded to that of internationally acknowledged standards. With that additional disclosures are required to be given to make them more meaningful and transparent. As a result of that all listed companies are now indebted to observe forcibly the clauses of listing Agreement and SEBI has powers to enforce them. ^[5]

As a result of that companies are now required to disclose all material facts and risk factors associated with their projects while making public issue. All issue documents are to be vetted by SEBI to ensure that the disclosures are not only adequate but also authentic and accurate.^[6]

The Securities and Exchange Board of India issued the guidelines for disclosure and investor™s protection in June, 1992 after the Capital Issues (Control), Act, 1947 was repealed. In these guidelines SEBI requires the issuer (which is here the company) to disclose full facts and particulars to the intending investors in their offer documents and also prescribe other rules in connection with the issue of shares.

Chapter V of ICDR deals with the manner of disclosures in the offer documents. Section 57 of ICDR says that the offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision, it also says that the letter of offer shall contain disclosures as specified in part e of schedule viii.^[7]

SEBI has issued detailed guidelines for the disclosures of full facts in the Prospectus/offer documents by the issuer companies. It says that along with unveiling all material facts the company has to state the risk aspects associate while making public issues. In case of the existing companies, financial performance of the company for the last five years, along with risk factors and management insight of risk factors are also requisite to be there in the prospectus/offer document.^[8]

Chapter VI of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 talks about the content of the offer document, Section I contents of the prospectus which says that other than disclosures specified in Schedule II of the Companies

Act, 1956, the prospectus shall contain all the information which shall be true and adequate so as to facilitate the investors to make an informed decision on the investments in the issue. The information must be substantial enough for the investor to make an informed choice.^[9]

In addition to regulations regarding the disclosure requirements SEBI also looks into the fact that investor does not get befooled by misleading advertisement .SEBI has issued guidelines for the same to ensure that the advertisement is truthful, fair and clear. For e.g. it shall be the responsibility of the Lead Manager to ensure strict compliance with the code of advertisement by the issuer company.

Chapter IX of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 deals with guidelines on advertisement. It clearly mentions that an advertisement shall be in a clear, concise and understandable language. Excess use of technical terminology should be avoided. Along with that it also mentions what amounts to misleading advertisement. The code mentions that Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. It should not contain statements which are false, misleading, biased or deceptive, based on assumption/projections. It should not be designed as likely to be misunderstood, it should not contain statements which directly or by implication or by omission may mislead the investor. ^[10] Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons and it shall be accompanied by a standard warning in legible fonts.

This is all done by SEBI with an aim to protect the investor, in reality the term Investor Protection is a very broad term encompassing a range of measures intended to protect the investors from malpractices of companies, brokers, merchant bankers, etc. Since all investments include some risk element, so Investors Beware should be the motto of all programs for enlistment of savings for investment. The investor can suffer the loss either by his own mistake of carelessness or by malpractice done by the company or by any broker. For the latter part they have every right to complain. The main purpose of SEBI behind all the above mentioned regulations is to protect the investor from being befooled. By providing all this information SEBI is trying to protect the shareholders interest by making him do transactions on the basis of informed decisions. So we can say that SEBI plays a very important role in protecting shareholder from getting coned.