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Stock Market Regulation in India

Context: The Supreme Court has asked the Securities and Exchange Board of India (SEBI) and the government to produce the existing regulatory framework in place to protect investors from share market volatility.

About Stock Market

  • Stock Market: It is a place where publicly traded companies’ stocks are bought and sold, allowing investors to buy shares of a company’s stock and take ownership of a small piece of that company.
    • It is a key indicator of the overall health of the economy, as the performance of companies listed on the stock market reflects the current economic conditions.
  • Share market: It is where shares are either issued or traded in. A share market only allows trading of shares.
  • Stock market helps in trading financial instruments like bonds, mutual funds, derivatives as well as shares of companies.

Regulation of Indian Capital Markets

  • They are regulated and monitored by the Ministry of Finance, the Securities and Exchange Board of India and the Reserve Bank of India.
Entities Function
Ministry of Finance
  • It regulates through the Department of Economic Affairs – Capital Markets Division.
  • The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors.
  • Division administers legislations and rules made under the:
  • Depositories Act, 1996,
  • Securities Contracts (Regulation) Act, 1956 (SCRA)
  • Securities and Exchange Board of India Act, 1992.
Reserve Bank of India (RBI)
  • It is governed by the Reserve Bank of India Act, 1934.
  • The RBI is responsible for implementing monetary and credit policies, issuing currency notes, being banker to the government, regulator of the banking system, manager of foreign exchange, and regulator of payment & settlement systems while continuously working towards the development of Indian financial markets.
  • The RBI regulates financial markets and systems through different legislations.
  • It regulates the foreign exchange markets through the Foreign Exchange Management Act, 1999.
Securities and Exchange Board of India (SEBI)
  • It is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India.
  • SEBI’s primary functions include protecting investor interests, promoting and regulating the Indian securities markets.
  • All financial intermediaries permitted by their respective regulators to participate in the Indian securities markets are governed by SEBI regulations, whether domestic or foreign.

SEBI and Share Market

  • Securities Contracts (Regulation) Act, 1956 (SCRA) has empowered SEBI to recognise and regulate stock exchanges and later commodity exchanges in India
    • Rules and regulations made by SEBI under the SCRA relate to listing of securities like equity shares, the functioning of stock exchanges including control over their management and administration.
    • Act also seeks to protect the interests of investors by creating an Investor Protection Fund for each stock exchange.
  • SEBI ensures protection of investors’ interests by regulating the listing and trading of equity shares and other securities, and by registering and regulating institutions handling public funds.
  • SEBI and market volatility
    • SEBI does not interfere to prevent market volatility, as exchanges have circuit filters — upper and lower — to prevent excessive volatility.
    • However, SEBI can issue directions to those who are associated with the market, and has powers to regulate trading and settlement on stock exchanges.
    • Ex: SEBI can direct stock exchanges to stop trading, totally or selectively.
  • Safeguards against fraud
    • SEBI notified the Prohibition of Fraudulent and Unfair Trade Practices Regulations in 1995 and the Prohibition of Insider Trading Regulations in 1992 to prevent the two key forms of fraud, market manipulation, and insider trading.
    • Violation of these regulations are predicate offences that can lead to a deemed violation of the Prevention of Money Laundering Act.
    • SEBI has been given the powers of a civil court to summon persons, seize documents and records, attach bank accounts and property, and to carry out investigations.
  • Role of Securities Appellate Tribunal (SAT)
    • Appeals against orders of SEBI and the stock exchanges can be made to the Securities Appellate Tribunal (SAT) comprising three members.
    • Appeals from the SAT can be made to the Supreme Court.

Security and Exchange Board of India (SEBI)

  • It is mandated to oversee the secondary and primary markets in India since 1988 when the Government of India established it as the regulatory body of stock markets.
  • SEBI became an autonomous body through the SEBI Act of 1992.
  • SEBI has the responsibility of both development and regulation of the market.
  • It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.
  • Its basic objectives are:
    • Protecting the interests of investors in stocks
    • Promoting the development of the stock market
    • Regulating the stock market

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what is Stock Market?

It is a place where publicly traded companies' stocks are bought and sold, allowing investors to buy shares of a company's stock and take ownership of a small piece of that company.

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