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The previous blogpost discussed the 1991 reforms and ended with promises including inter alia empowering the Securities and Exchange Board of India (“SEBI”) with statutory powers. This blogpost discusses the enactment of Securities and Exchange Board of India 1992 (“SEBI Act”).
The Securities and Exchange Board of India Ordinance 1992
The Securities and Exchange Board of India Ordinance 1992 [Ordinance No. 5 of 1992] was promulgated by the President on 31st January 1992 as the Parliament was not in session (“Ordinance”). The Ordinance granted SEBI statutory powers.
Budget Speech 1992-93
In furtherance of his budget speech of 1991-92, Dr. Manmohan Singh in his budget speech for the FY 1992-93 given on February 29, 1992, highlighted the necessity for reform of capital market as part of the financial sector reform. He emphasized the vital role that the capital market was to play in mobilizing and allocating resources from the public. As part thereof, SEBI had been established on a statutory basis and it was announced that it would be granted more powers with time to strengthen its capabilities.
In addition to this, he highlighted that guidelines had been issued by the Government to govern the operation of private sector mutual funds. A key announcement in this direction was also to permit companies with good track record to issue convertible debentures or equity to investors abroad (with same tax benefits as available for offshore mutual funds). This intended to enable domestic companies to tap the large pool of equity funds available in world capital markets.
Capital market reforms would however have been incomplete without a review of the office of controller of capital issues (CCI). It was announced that the practice of government control over capital issues as well as over pricing of issues had become obsolete and was to be done away with. This would finally enable companies to approach the market directly provided they conform with guidelines and disclosure requirements as well as investor protection measures.
March 30, 1992 in the Lok Sabha
Motion to disapprove the Ordinance was moved. In support of the Ordinance, it was highlighted how SEBI was originally set up in 1988 for the regulation and orderly functioning of the stock exchanges and the securities industry. Emphasis was placed on investor protection and prevention of trading malpractices.
The very rapid pace at which the stock market had been growing ever since the liberalisation in policies was announced the previous year, it had become essential to take immediate measures for maintaining the confidence of the stock market. The Minister of State in the Ministry of Finance offered to lay a bill replacing the Ordinance.
He emphasized the main objective of SEBI were to protect investor interests and to promote the development of securities market and to regulate it. The main powers and functions of SEBI relate to regulating the business in stock exchanges and any other securities market and registering and regulating market intermediaries, registering and regulating the working of pooling vehicles and prohibiting insider trading. Side Note: Author has concerns on insistence of delegation of some of these critical functions therefore by SEBI, it seems we have lost perspective.
The said minister highlighted the necessity of a well-regulated market for channelising an increasing flow of savings into investments in securities for the further development of the economy. Similarly, its importance for encouraging inflow of foreign exchange through investment made by non-resident Indians and offshore funds was also noted. With these points, the bill replacing the Ordinance was moved in the House.
The opposition extended support to the bill and expressed some plausible comments and suggestions primarily pertaining to the constitution of the governing body, power to issue direction to SEBI, power to supersede the governing body, power to issue directions to SEBI, power to supersede the governing body and regarding mutual funds, which were considered and amicably discussed in the house.
A member had highlighted how under the bill, the Central Government would only retain its supervisory role in watching the growth of this organization and see whether it is really functioning properly and meeting the objectives which have been stated. After sometime, the Government was to grant more freedom, independence and autonomy to SEBI.
The bill passed unanimously without any amendments in the house on the very same day.
April 01, 1992 in the Rajya Sabha
The bill replacing the Ordinance was introduced and passed the same day after various members raising concerns, which were deliberated upon at length.
SEBI Act, 1992
SEBI Act, 1992 received the assent of the President on April 04, 1992 and was enacted therefore as Act. 15 of 1992. By Section 3 of the SEBI Act, SEBI was statutorily set up as a body corporate having perpetual succession with power to acquire, hold, dispose property, to control and sue and be sued. Some notable provisions of the SEBI Act, as enacted as discussed.
Section 4 provided for the management of SEBI. It provided that the Board shall consist of a chairman, 2 members from the officials of Ministries of Finance and Law, 1 member from officials of the RBI and 2 other members to be appointed by the Central Government. Notably, ‘Board’ had been defined under Section 2(1)(a) to mean SEBI established under Section 3.
Interestingly, Section 4(2) read “The general superintendence, direction and management of the affairs of the Board shall vest in a Board of members, which may exercise all powers and do all acts and things which may be exercised or done by the Board”. Section 4(3) provided the Chairperson the power of general superintendence and direction of the affairs of the Board and empowered the Chairperson to also exercise all powers and do all acts and things which may be exercised or done by the Board.
Section 11 made SEBI dutybound to protect investors’ interest and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. To provide direction thereof on key measures, Section 11(2) provided that these measures may provide for
regulating the business of stock exchanges and any other securities markets;
registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
registering and regulating the working of collective investment schemes, including mutual funds;
promoting and regulating self-regulatory organisations;
prohibiting fraudulent and unfair trade practices relating to securities markets;
promoting investors’ education and training of intermediaries of securities markets;
prohibiting insider trading in securities;
regulating substantial acquisition of shares and takeover of companies;
calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self-regulatory organisations in the securities market;
performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be delegated to it by the Central Government;
levying fees or other charges for carrying out the purposes of this section;
conducting research for the above purposes;
performing such other functions as may be prescribed.
Notably, Section 17 of the SEBI Act read differently from that under the Ordinance. While Section 17 of the Ordinance provided for supersession of the governing body of SEBI under three circumstances, and only in public interest was the supersession to be limited to six months. Section 17 of the SEBI Act however provided for this limitation for all three circumstances, the other two being – grave emergency where the board is unable to discharge the functions and duties imposed on it by or under the Act and persistent default by the board in complying with any direction issued by the central government under the Act in certain situations as a result of which the financial position or administration of SEBI has deteriorated.
Further, a key clause, Section 19 provided that the Board could by general or special order in writing, delegate to any member, officer of the Board or any other person subject to conditions as specified therein such of its powers and functions under the SEBI Act except the powers under Section 29 as it deems necessary. Section 20 provided for appeal against any order of the Board with the Central Government.
Section 24 provided for punishment with imprisonment for a term which may extend to one year or with fine or with both for whoever contravenes or attempts to contravene or abet the contravention of the provisions of SEBI Act or any rules or regulations made thereunder. Section 26 provides that no court shall take cognizance of any offence punishable under this Act save on complaint made by the Board with previous sanction of the Central Government. It also provided that no court inferior to Metropolitan Magistrate or Judicial Magistrate of First class shall try any offences under the Act.
Lastly, SEBI Act amended Sections 6(h)(ii), 6(1), 6(2), 6(3), 9, 10, 17 and 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”), where the term ‘Central Government’ was substituted with SEBI. It also inserted Section 29A of the SCRA which empowered the Central Government to direct that the powers exercisable by it under any provisions of the SCRA shall by an order be exercisable also by the SEBI. This empowered SEBI to administer the SCRA.
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