Regulation of Stock Exchanges

Regulation of Stock Exchanges

The stock exchanges play a very vital and sensitive role in the functioning of the economy, especially the private sector of the economy. The functioning of the exchanges, therefore, needs to be transparent, fair and efficient. This is ensured through proper regulation of the working of stock exchanges. There are Acts, rules, regulations, by-laws and guidelines governing the functioning of secondary markets or stock exchanges in the country. There is also a regulator in the form of the Securities and Exchange Board of India (SEBI) to oversee and monitor the functioning of both the primary and secondary securities markets in India.

The Securities Contracts (Regulation) Act, 1956, and the rules made under the Act, namely the Securities Contracts (Regulation) Rules, 1957, constitute the main laws governing stock exchanges in India. The preamble to the Act states that it is “an act to prevent undesirable transactions in securities by regulating the business of dealing therein”. This Act provides for the direct and indirect control of virtually all aspects of securities trading and the functioning of stock exchanges.

This Act provides for the direct and indirect control of virtually all aspects of securities trading and the functioning of stock exchanges.

The provisions of the Securities Contracts (Regulation) Act, 1956, were formerly administered by the Central Government. However, since the enactment of the Securities and Exchange Board of India Act, 1992, the Board established under this Act has been authorised to administer almost all the provisions of the Securities Contracts (Regulation) Act. The various provisions of the Act deal with recognition of stock exchanges, submission of relevant documents, approval of by-laws and rules made by stock exchanges, listing of securities in stock exchanges and such other matters relating to the trading of securities and the functioning of stock exchanges.

Taking into consideration the fact that the securities market in India had shown tremendous growth, the government decided to set up a separate board for the regulation and orderly functioning of the securities market in the country, in the model of the Securities and Investment Board (SIB) of UK and the Securities and Exchange Commission (SEC) of USA.

Initially, the Securities and Exchange Board of India was constituted as an interim administrative body in 1988. SEBI was given a statutory status on 30th January 1992 by an ordinance to provide for the establishment of SEBI. Later, in April 1992, the Securities and Exchange Board of India Act was passed. In this Act it is stipulated that it shall be the duty of the Board to protect the interests of investors in the securities market and to promote the development of and to regulate the securities market.

Thus, the SEBI has been constituted to promote orderly and healthy development of the securities market and to ensure adequate protection to the investors in the securities market. The Board plays a dual role, namely a regulatory role and a developmental role.

The SEBI is constituted with six members, including the chairman of the Board. Two members are officials of the central government ministries of Finance and Law, one member is an official of the Reserve Bank of India and two members are professionals having experience or special knowledge relating to securities markets and are appointed by the central government. The Board is empowered to regulate the business in stock exchanges, to register and regulate the working of stock market intermediaries such as stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, etc.

The Board is also authorised to prevent and prohibit fraudulent and unfair trade practices in the market. It makes regulations and issues guidelines regarding the various aspects of the working of stock exchanges, and constantly monitors the activities in the securities market to ensure just and fair dealings. Transparency and equal opportunity to all market participants have been the goals of all developmental and regulatory activities of SEBI.

A stock exchange has the power to make by-laws for the regulation and control of contracts entered into by members and also for the regulation of trading in the exchange. However, these by-laws have to be approved by SEBI before implementation. Amendments to the by-laws should also be similarly approved.

The Depositories Act, 1996, is another important legislation affecting the functioning of stock exchanges. This Act provides for the setting up of depositories for electronic recording and transfer of securities. The paper-based securities and their transfer often resulted in delay in the settlement and transfer of securities and also led to bad delivery, theft, forgery, etc. The Depositories Act, 1996, was passed to change over to the electronic mode of security transfer through security depositories so as to improve the efficiency of the system.

The securities market in India is properly regulated to ensure that it functions efficiently and effectively. There are strict laws governing the functioning of stock exchanges; there is a vigilant regulator who oversees the implementation of these laws. As a result, investors now have confidence in the efficiency and robustness of the Indian stock market.