Role of SEBI in Capital Market: Developments and Challenges

Preserving the Shareholders™ interests through regulation over intermediaries

Intermediaries are those persons who are associated with the securities market and act in between the investors and the issuers of securities. They facilitate the securities transactions, for example, merchant bankers, brokers, underwriters; Registrar to an issue, depository .participants, etc.^[11]  One of the main objectives of SEBI is promotion of efficient services by brokers, merchant Bankers and other intermediaries so that they become competitive and professional.

Risks are inherent in any competitive market, and investors benefit from competitive markets so therefore management of the intermediaries are required to develop and implement effective processes and management systems commensurate with their business operations and risk characteristics in accordance with the general principles set out in the regulation. ^[12]

In order to interpose between issuers and investors, regulators recognize various classes of intermediaries in the capital market. Regulation through intermediaries has been found, perhaps more effective in certain spheres of activity. SEBI, over the period, has recognized many types of capital market intermediaries in India.^[13] Intermediaries such as merchant bankers, underwriters, debenture trustees, bankers to an issue, registrars to an issue and share transfer agents and portfolio manager are the intermediaries that function in the inter alia in the capital markets.^[14]

˜Financial intermediation can improve economic efficiency in at least five ways, by:

1) facilitating transactions;

2) facilitating portfolio creation;

3) easing household liquidity constraints;

4) spreading risks over time; and

5) reducing the problem of asymmetric information.™^[15]

Starting with Section 12 of the SEBI Act^[16] gives power to grant registration certificates to intermediaries, this provides for compulsory registration of the various intermediaries associated with the securities market hence all intermediaries, namely, stock broker, sub-broker, share transfer agent etc. are required to buy, sell, or deal in securities in accordance with the conditions of a certificate of registration granted by SEBI.^[17]

SEBI is also empowered to suspend or cancel a certificate of registration after giving the person concerned a reasonable opportunity of being heard.^[18]The same act confers power to SEBI issue directives to the intermediaries.

Section 11(2) of SEBI act provides that SEBI shall register and regulate the working of stock brokers and sub-brokers and in fulfillment of the above, SEBI carries out inspections of the books and records of stock brokers to verify whether Books of accounts, records and other documents are being maintained in the manner specified by the Securities Contracts (Regulation) Rules, 1957 and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.^[19]

For insure that shareholders interest is protected SEBI relies on certification by the merchant banker and others for ensuring conformity with the regulations set by SEBI. The provisions cast the responsibility on the issue manager for validating the accuracy of the prospectus as well as for ensuring that other intermediaries involved in an issue such as the banker and registrar have the required license and that the underwriter has the financial capacity to provide the service.^[20]

Incorrect certification would mean that the merchant banker runs the risk of facing stricture or monetary penalty or even being suspended or losing its license over the  time this certification mechanism has been continuously strengthened.^[21]

Intermediaries provide many value-adding functions that cannot be easily substituted or ˜internalized™ through direct supplier-buyer dealings, and hence mediating parties may continue to play a significant role even in the E-Commerce world.^[22]

The regime to regulate them should be such that to protect the interests of investors it should be recognized that the initial entry barrier cannot be set too high and that investor protection should also be complemented by the availability of information, facilitating informed choices by investors and availability to the Commission of inspection, investigatory and disciplinary powers in respect of the intermediary.^[23]

SEBI has Securities and Exchange Board of India (Intermediaries) Regulations, 2008 to regulate the conduct of intermediaries. Chapter I states what an intermediary is, chapter II talks about registration of intermediaries. SEBI has incorporated certain obligation on the intermediaries and chapter III talks about the same obligations. And chapter V talks about actions in case of default and also the manner of suspension and cancellation of license. Schedule III of the same regulation talks about investor protection and says that every intermediary shall make all possible efforts to protect the interest of investor. He must ensure that he is giving high standard of service must be given and exercise due skill and diligence.