Introduction
Regulators in India are set up under their own statutes with a specific objective and consequently, carry out their functions keeping these objectives in mind. The Securities and Exchange Board of India (SEBI) was set up with the objective of promoting the safe, healthy and orderly functioning and growth of the securities market in India. SEBI is a quasi-judicial administrative body which works to achieve this objective.
The primary function of the SEBI, laid down under section
11(1) of the Sebi Act, 1992 keeping in mind its main objective, is to create
and promote the growth of a healthy, safe, fair and orderly securities market,
while also ensuing the protection and the best interests of the investors. Based
on these primary functions, section 11(2) of the SEBI Act lays down the
specific functions of the SEBI, revolving around the main functions stated
herein. These are summarised as follows:
· Monitoring and Regulating the Stock Exchanges,
as well as other securities markets, and ensuring that no unfair and fraudulent
practices that harm the interests of the various stakeholders are carried out.
· Protection of Investors, by ensuring safe and
efficient transactions. This helps in attracting more investors to the market,
which leads to its growth, and consequently the growth of the country’s
economy. This is done through strict regulation of the securities market and
its participants, and promoting the education and awareness of investors and
intermediaries through various programmes.
· Regulation of the various players in the
securities markets, including intermediaries like brokers and agents,
depositories, investors and so on. It also regulates various schemes and funds,
such as venture capital funds, mutual funds and so on.
· Regulating substantial acquisitions and
takeovers of companies, in order to ensure that no fraudulent activities, like
money laundering and hostile takeovers, take place.
· Other specific activities, such as calling for
information from the various players in the securities market, conducting
research, and so on.
It is important to reiterate that these specific functions
are carried on with the objective of achieving a fair and orderly securities
market and promoting and protecting the best interests of the investors. It is,
therefore, also clear that the SEBI exercises regulatory jurisdiction over the
securities markets and stock exchanges in India.
In order to exercise such regulatory jurisdiction, the SEBI
has been entrusted with various powers under the SEBI Act, which can be
summarised as follows:
·
SEBI has the power to issue various orders,
such as the order to investigate the affairs of any participant in the
securities market under section 11C, and consent orders under section 15T to
settle proceedings against anyone who is, prima facie, in contravention with
the Regulations. SEBI is also entitled to suspend the trading of a security, or
restraining people from participating the in the securities markets and even
hold the proceeds of any transaction under investigation.
·
SEBI is also empowered to initiate civil,
administrative and even criminal proceedings against those who violate the
provisions of the Act or the Regulations issued by SEBI.
·
Section 15 of the SEBI Act gives SEBI the power
to impose penalties as well, in certain situations where a person does not
comply with certain provisions of the Act, or indulges in insider trading or
other unfair and fraudulent practices in the securities market.
·
Apart from the above, SEBI also issues regulations
that govern the functioning of the various stock exchanges and other securities
markets in the country. For example, it gives recognition to stock exchanges
under Section 3 of the Securities Contracts (Regulations) Act, 1957; and even
makes model bye-laws to promote self-regulation.
Therefore, it is clear that SEBI exercises regulatory powers
over the securities markets in order to achieve its main objectives as already
stated hereinabove. However, in India, there exist multiple regulators exercising
jurisdiction over companies. This may result in a conflict as to which
regulator can exercise jurisdiction over a particular matter.
Such a situation has arisen on multiple occasions before. In
one instance, the SEBI issued orders against certain Unit Linked Insurance
Schemes on the ground that they were akin to mutual funds. These insurance
schemes, however, came within the purview of the Insurance Regulatory
Development Authority (IRDA). The issue involved here was that the order of the
SEBI could only be overturned by the Securities Appellate Tribunal or the
Supreme Court, as per the SEBI Act. This was solved only with the passing of
the Securities and Insurance Laws Ordinance, having retrospective application,
which essentially overturned the orders of the SEBI.
In another instance of the Etihad-Jet Airways
acquisition case, the SEBI issued an order stating that the transaction
violated the Takeover Code, despite the fact that the transaction had been
approved by other sectoral regulators, including the Competition Commission of
India and the Foreign Investment Promotion Board. However, it was shown that
the transaction did not trigger the provisions of the Takeover Code, since the
transfer of shareholding was below its minimum threshold of 26%. This was
settled amicably.
These instances make it clear that SEBI is bound by the
provisions of the SEBI Act and other laws made by the parliament. Its
jurisdiction is limited to the regulation of the Securities Markets and
investor protection, according to the provisions of the parent acts and the
rules and regulations enforced by SEBI.
Safety of the Public Offer Process in India
As has been reiterated multiple times, the main objectives
of the SEBI are to develop a fair and safe securities market and protect the
interests of the investors. In line with these objectives, SEBI has taken
various steps to ensure the protection of investors in public offers by
companies. This has been done mainly through the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018 (ICDR Regulations). These
include:
·
Eligibility Criteria for a Company to Issue a
Public Offer
The ICDR Regulations,
under Regulation 6 prescribe certain criteria for a public company to be
eligible to issue shares through an initial public offer (IPO). These
include certain minimum requirements of holding assets and earning a specified
amount of profits in order to be eligible to make an IPO. The requirements
include:
o
Net tangible assets valued at a minimum of Rs. 3
Crores in each of the previous 3 years, with not more than 50% in monetary
assets.
o
Average Operating Profits of minimum Rs. 15
Crores in each of the previous 3 years.
o
Minimum Net worth of Rs. 1 Crore in each of the
previous 3 years.
o
In case the company’s name has been changed,
minimum 50%of the earnings should be in the new name.
o
If the above requirements are not met, an IPO
can be made only through the book-building process and a minimum of 75% of the
net offer must be issued to Qualified Institutional Buyers, failing which full
money must be refunded to the investors.
These eligibility criteria
help to ensure that only companies with a high level of financial standing and
with strong balance sheets are eligible to issue shares through a public offer.
Such companies are less likely to default on their offer contract, and more
likely to give good returns to the investor. In this manner, SEBI protects
investors from companies with weak financial standing from issuing shares and
causing losses for the investors.
In addition to this,
further protection is provided by the SEBI under Regulation 5 of the ICDR
Regulations, by debarring certain companies from issuing a public offer
altogether, including those where the company itself or its promoters are
barred from participating in the securities market, or if the company’s
promoters or directors are wilful defaulters or fugitive economic offenders.
This adds an extra layer of protection from those who are likely to indulge in
fraudulent activities, and also acts as a preventive measure for other
companies to not follow any unfair means, thereby protecting the investors.
·
Filing and Rejection of Draft Offer Documents
The ICDR Regulations
require issuers to file their draft offer documents or prospectus with SEBI.
SEBI then checks and gives observations on whether these disclosures meet the
minimum standards required under the Regulations. In furtherance of this, the
SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012 has been
introduced, laying down the broad criteria for rejection of draft offer
documents. These criteria include the following criteria for rejection of draft
offer documents, inter alia:
o
Unidentifiable Promoters, Circular transactions
to build up net worth, false disclosure of promoters’ contribution, etc.
o
The object of the offer is vague, or for
repayment of a corporate debt, or to create intangible assets like goodwill, or
to set up a plant without proper licenses and permissions, or where the time
gap between procurement and utilization of funds is unreasonable.
o
The
business model is explained in an exaggerated manner, or the financial
statements show a false position of the company.
o
Existence of litigation against the company that
threatens its survival, etc.
The examples of the criteria laid down by the SEBI to
reject draft offer documents shows its intent to protect investors from
fraudulent issuers. Further, this also ensures that a mechanism is in place for
the investors’ funds to be utilised towards making profits, which will
consequently assure good returns and encourage more investment. It also ensures
that a company has a good financial standing, and that no losses are likely to
be caused to the investors.
·
Disclosure of Risk Factors
The ICDR Regulations also require a company to
disclose the management’s view of Internal and External risks through a risk
factor disclosure. These risks include business risks, legal risks, and so on.
Future risks are also included through ‘forward-looking statements’, which are
essentially estimations of risks that may arise in the future. Such statements
are subject to the Bespeaks Doctrine, which states that such forward-looking
statements must be accompanied by a caveat that they are not accurate
representations of the future.
The disclosure of risk factors is essential, since it
educates the investor and makes them aware about the potential risks associated
with the business. If an investor faces a loss due to a risk factor that was
not disclosed, then he will be compensated for such loss. In this manner, SEBI
promoted investor awareness and education and enables the investors to take the
best possible decisions.
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