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REGULATION OF SECURITIES MARKETSSEM V

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DEFINITION OF 'SECURITY‘

A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.

A security is a fungible, (being of such nature or kind as to be freely exchangeable or replaceable),negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.

For example, the issuer of a bond issue may be a municipal government raising funds for a particular project. Investors of securities may be retail investors - those who buy and sell securities on their own behalf and not for an organization and wholesale investors are financial institutions acting on behalf of clients or acting on their own account. Institutional investors include investment banks, pension funds, managed funds and insurance companies.

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DEFINITION of 'Security‘ Contd)• Securities are typically divided into debt securities and equities.• A debt security is a type of security that represents money that is

borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock and collateralized securities (such as CDOs and CMOs).

Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains.

In the United States, the U.S. Securities and Exchange Commission (SEC) and other self-regulatory organizations (such as the Financial Industry Regulatory Authority) regulate the public offer and sale of securities.

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Nature of savings and investments in India• Savings:

Savings is Income not spent. Savings is Income minus expenditure Savings and Investment has direct relationship Increase in Income may result in increase in savings Income remaining the same savings can be increased by reducing

expenditure Growth of Economy depends on Capital accumulation which depends on rate

of savings Savings is the main source of Investment Savings depends on

Ability to save Willingness to save

Savings is a Systematic Activity over a long period on a regular basis. No risk on savings as against investment where capital is at stake It is individual who can save . Savings is personal in nature. Savings is related to Investment . Increased savings always corresponds to

increase in investment.

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Investments• When money is not utilised for current consumption but deployed to purchase Financial

Instruments or other assets in order to gain profitable return in the form of interest income or appreciation of value it is investment.

• Different investments has different Risk return profiles.• Once the investor has made his investment he has no active role to play in the day to day

management and control of the Institution.• Investment comes with the risk of loss of principal sum.• Different types of investments are :

• Financial Investments – Bank FD• Economic Investment – Plant & Machinery• Business Investment – Start of a business• General Investments- Purchase of a car

• Certain investments give tax benefits• Difference between savings and Investments

savings Investments

Term Long term Short or long term

Source From Income From savings & borrowing

Risk No risk of loss of capital Capital may be lost

Tax benefit Saving in cash form – no benefit Certain investment gives tax benefit

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• Objectives –Features – characteristics – attributes- purpose- criteria of investment

1. Safety2. Liquidity3. Income 4. Capital appreciation5. Tax benefits6. Hedge against inflation7. Simplicity8. Flexibility9. Appealing

“opportunities multiply when they are seized; die when neglected.

- Richard DennyBusiness growth specialist and inspirational speaker. UK

Luck is the sense to recognize an opportunity and the ability to take advantage of it.

Zig Ziglar (an American author,and motivational speaker US)

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Nature of Savings and Investment in India1. India is thickly populated Country and for ages it believed in savings management.2. Two thirds of the population depends on agricultural Sector and this Sector constantly

faces the peril of either drought or floods. Hence savings become a question mark in this sector.

3. For decades unrecognized sector has been dominating the organized ones and people engaged in agriculture have been exploited by higher interest rates.

Gross savings as a proportion of GDP

1950-51 8.9%

2002-2003 26.1%

2003-2004 28.1%

One of the highest savings rate in the world (US & UK 15% India 24%,but China surpasses India with 40%

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Nature of Savings and Investment in India

4. Households in India that continue to contribute overwhelmingly to aggregate savings.

5.Sharp lowering of revenue deficit by the Governments and the savings by the Govt bodies that accounted for the increased savings rate in the recent past.

6.Under the guidance of Central states have also reduced the wasteful expenditure Govt

7.Rise in saving rate not always seen in growth in investment rate.Last two years it has lagged. Invest ments went outside India. During 2003-04 nearly Rs50000 crore investment went outside India showing that investment opportunities in India were not large enoughto absorb the savings

8. There are also other argument that growth in the service sector that has driven the overall GDP growth in the Country. Service require less capital

9. Yet through Policy prescriptions more industries can be formed whereby the growth in investment in India will take place.

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Indian Financial system

Fin Institutions FIN Markets Financial Instruments Fin ServicesBanking Ins NonBanking Ins Money marketscapital Market Money Market InsmtsCapital Mkt Instruments

Venture capitalMerchant banking

organised unorganised PrimarySecondary PortfolioServicesFactoring

call money Mkts Mutual FundsShort term bill Mkts Guilt edged Industrial Development Credit ratingComm Papers sec Mkts Fin Institutions Leasing182 days treasury bills mkts IFCI SIDBIcertificate of deposit Govt &Semi GovtNew issues mktICICI UTI

Securities Old issue mktIDBI IRBISFC

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Q1What is marketing of Financial services? Explain the types of financial products

Ans:

Efficiency of an emerging financial system (Indian financial system) largely depends on the quality & variety of Fin. Services provided by Financial intermediaries.

The term Fin Services can be defined as “activities, benefits, and satisfaction connected with the sale of money that offers to users and customers, financial related value.”

Issue of securities will not suffice,adequate information is to be provided.

Financial intermediaries play this role.

Financial intermediaries play an important economic function by facilitating a productive use of the Communities surplus money . They help to distribute various financial services. Their dominance vary from country to country

Two Types: 1) UnOrganised & 2) Organised

UnOrganised Sector:

1. Money Lenders

2. Indigenous bankers

3. Chit Funds

4. Nidhis or Mutual benefit funds

5. Self help groups

Volume of business handled by them is not known. In Urban -mostly their role is small Rural- Very significant presence

Disadvantage – reduces the efficiency of a countries

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Insurance Companies :

They take care of insurance need, Private sector entry recently, Many are formed by the subsidiaries of banks . –Cross sell insurance products

4) Mutual Funds:

These are Organizations satisfy the needs of individual investors through pooling resources from large No. with similar investment goals & risk appetite, Resource collected is invested in capital & money market securities generated are distributed to investors. Expert Fund managers able to diversify /even out the risks.

Financial Products:

Generally the consumer is invest his money and getting product which involves complexities of risk return, volatility etc

Types of Financial products:-

1)Shares:- represent ownership of a `company. Dividends are the returns.

2)Bonds:- issued by corporate to finance their business operations & Governments to fund their budget expenses like infrastructure and special programs. Bonds have fixed interest rates. Principal or the face value is recovered at the time of maturity

4)Options: Right to buy & sell shares. An option holder does not actually purchase shares instead he purchase the rights on the shares

5)Mutual Funds : These are professionally managed financial instruments that involve the diversification of investment into a number of financial products, such as shares,bonds,and govt Securities. These help toreduce the investor’s risk exposure while increasing the profit potentials.

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Govt has taken several steps to reduce the impact of this unorganised sector, by introducing the following organizations:

1.All India Development Financial Institutions(DFI): includes IFCI,IDBI,ICICI,IIBI, SIDBI

2.State Level Financial Corporations :

1.Mainly concentrate Industrial development of the state .

2. Legal bodies created under state Finance corporation Act 1951 ( shares financed by State Govt,banks, FI,Private investors

3.SFC also permitted to raise funds through issue of debentures/bonds

4.Main focus of SFC is to finance Local Industrial units which are usually small & medium situated in backward areas

2) Organised Sector: of Financial intermediaries include wide range of Institutions functioning under overall surveillance of SEBI & RBI

• Initially they transfer the funds from lender to borrower. This service was offered by banks, FI, brokers market leaders,

• Financial system then widened along with development- scope increased.

• Investment bankers, underwriters, stock exchanges, registrar, depositors, custodians, portfolio managers, MF, Financial advertisers, Financial consultants, primary dealers, satellite dealers, self regulator organizations etc. Some intermediaries may offer their services in more than one markets.

• Financial service is one of oldest industry- now astronomical changes are taking place-technology , mobile banking, effective channel marketing,

• Financial services include – Banking services( such as credit card, debit card, currency exchange, custodial function, etc

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Insurance Companies :

They take care of insurance need, Private sector entry recently, Many are formed by the subsidiaries of banks . –Cross sell insurance products

4) Mutual Funds:

These are Organizations satisfy the needs of individual investors through pooling resources from large No. with similar investment goals & risk appetite, Resource collected is invested in capital & money market securities generated are distributed to investors. Expert Fund managers able to diversify /even out the risks.

Financial Products:

Generally the consumer is invest his money and getting product which involves complexities of risk return, volatility etc

Types of Financial products:-

1)Shares:- represent ownership of a `company. Dividends are the returns.

2)Bonds:- issued by corporate to finance their business operations & Governments to fund their budget expenses like infrastructure and special programs. Bonds have fixed interest rates. Principal or the face value is recovered at the time of maturity

4)Options: Right to buy & sell shares. An option holder does not actually purchase shares instead he purchase the rights on the shares

5)Mutual Funds : These are professionally managed financial instruments that involve the diversification of investment into a number of financial products, such as shares,bonds,and govt Securities. These help toreduce the investor’s risk exposure while increasing the profit potentials.

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Q2 What are the important money Market Instruments? Explain them in brief.The money market can be defined as a market for short term money and financial assets that are near

substitutes for money. ( short Term - one year).Instruments used in Money market are near substitutes

for money which can be quickly converted into money.

Call Money /Notice –Money Call Money/Overnight Money – Very short term borrowed or lent for day ( intervening holidays are excluded for this purpose). When its is more than one day & upto 14 days it is Notice Money .No collateral security required.

Inter bank term Money : Interbank market for deposits of maturity beyond 14 days is referred as the term money market The entry restrictions are the same as those for call /notice Money except that as per the existing regulations , the specified entities are not allowed to lend beyond 14 days.

Treasury bills: Issued by Govt for its short term needs (upto one year ). IOU of a Govt Issued at discounted price. The rate of discount and issue price are determined at each auction.

Profit = Maturity vale- issue price

Certificate of Deposits: CD is negotiable money market instrument issued in dematerialized for or as a Usance Promissory note for funds deposited at a bank or other eligible Financial Institution for a specified time period Issue of CDs are presently governed by RBI guidelines.

CDs can be issued by 1) scheduled Commercial banks excluding Regional Rural Banks (RRBS) and local area banks 2) Select all India Financial Institutions that have been permitted by RBI to raise short term resources within the umbrella limit fixed by RBI

Banks have the freedom to issue CD depending on their requirements

FI may issue within the overall umbrella limit fixed by RBI ie issue of Cd together with other instruments Viz term money, term deposit, commercial papers and inter corporate deposits should not exceed 100% of its net owned funds as per the latest audited balance sheet.

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Q2 What are the important money Market Instruments? Explain them in brief. (contd)Commercial Papers : A cO with net worth of more than 4 crore can issue a

commercial paper for working capital requirements. CP is note in evidence of a debt obligation of the issuer. CP is therefore an unsecured loan.

Promissory note privately placed with investors at a discount rate to face value determined by the market forces.

A CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP

provided

i) The tangible networth of the Co is not less than Rs. 4crores

ii) Working capital (fund based) limit of the Co. from the banking system is not less than Rs. 4crores

iii) The borrowers account of the Co. is classified as Standard Asset by the financing banks

Minimum period of CP is 7 days. The minimum credit rating shall be as determined by the market forces or such

equivalent rating by other Agencies in India.

B) Capital Market Instruments:

• Long term. More than one year financial instruments; in equity segment . Equity shares, preference shares, non convertible preference shares, etc and debt segment debentures ,Zero coupon bonds, deep discount bonds etc.

C) Hybrid instruments:- have features of equity & debenture. Eg Convertible debentures , warrants.

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Investment alternatives (options) available to an Indian Investor1. Investment options India refers to those options ( instruments) that help an investor

save and invest2. These are issued by banks , financial institutions, stock brokerages, insurance providers,

credit card agencies and Govt sponsored entities.3. These instruments are categorized in terms of their types or underlying asset class,

volatility , risk and return.4. Various investment options available to an Indian Investor are:

1) Shares:- represent ownership of a `company. Dividends are the returns.

2) Bonds:- issued by corporate to finance their business operations & Governments to fund their budget expenses like infrastructure and special programs. Bonds have fixed interest rates. Principal or the face value is recovered at the time of maturity

4) Options: Right to buy & sell shares. An option holder does not actually purchase shares instead he purchase the rights on the shares

5) Mutual Funds : These are professionally managed financial instruments that involve the diversification of investment into a number of financial products, such as shares,bonds,and govt Securities. These help to reduce the investor’s risk exposure while increasing the profit potentials.

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Invest ment alternatives (options) available to an Indian Investor

6. Treasury bills: Issued by Govt for its short term needs (upto one year ). IOU of a Govt Issued at discounted price. The rate of discount and issue price are determined at each auction.

• Profit = Maturity vale- issue price

7.Certificate of Deposits: CD is negotiable money market instrument issued in dematerialized for or as a Usance Promissory note for funds deposited at a bank or other eligible Financial Institution for a specified time period Issue of CDs are presently governed by RBI guidelines. CDs can be issued by 1) scheduled Commercial banks excluding Regional Rural Banks

(RRBS) and local area banks 2) Select all India Financial Institutions that have been permitted by RBI to raise short term resources within the umbrella limit fixed by RBI

Banks have the freedom to issue CD depending on their requirements FI may issue within the overall umbrella limit fixed by RBI ie issue of Cd together

with other instruments Viz term money, term deposit, commercial papers and inter corporate deposits should not exceed 100% of its net owned funds as per the latest audited balance sheet.

8. Annuities: These are contracts between investors and insurance companies wherein the latter makes periodic payments in exchange for finance protection in the event of an unfortunate incident.

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Investor Profiles• An investor profile is a reflection of an investor's goals and objectives. It defines how

much risk some one is willing to accept and also the kinds of rewards or returns that he is expecting .

• Based on this profile, an investor and a financial advisor can together determine where to allocate funds, because each assets class carriers a different level of risk.

• An investor profile dictates how much capital goes to stock s ,bonds, and other asset classes, and how much should remain in cash.

• Certain criteria determine an investor profiles. Often a financial advisor will ask a client to fill out an investor profile questionnaire.– Amount of money available to invest

– When the funds will be needed

– What the funds will be used for

– Age of an investor ( some one close to retirement –shorter investment time)

– The way an investor handles his loss also plays into his investor profile. ( If a portfolio declines 20% in one year’s time and the investor uses this as an opportunity to purchase additional securities, his tolerance limit is high. If, however liquidates the portfolio – then it is a low risk tolerance.

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Investor Profiles

• A conservative investor profile :

– Risk as little as possible

– Returns may be mod est but so is the chance of losing money.

• A moderate investor profile:

– Has reasonable understanding of the stock market and is willing to take some risk

– An aggressive investor profile

– has advanced knowledge of financial markets and not afraid to take risky investment and expects high rate of return

• A portfolio will be divided based on investment objectives. Government bonds tend to be the safest investment . Corporate bonds can be risky because if a Co defaults on a loan certain investors may not be paid. A bellwether (a leading Co) investor may feel safer with proven historical records. A risky stock is one with no proven track record or that has demonstrated signs of continued weakness in its price.

• An investor profile or style defines an individual’s preferences in investment decisions For eg:

Short term trading (active Management) or long term holding (buy & hold)

Risk averse or risk tolerant/ seeker

All classes of assets or just one (stocks for example)

Value stock , growth stock , quality stock, defensive or cyclical stocks

Big cap or small cap stocks

Use of derivatives

Home turf or international diversification

Hands on or via investments funds and so on.

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Investor Profiles

• The Investors style /profile is determined by

Objective personal or social traits such as age, gender, income, wealth, family , tax situation..

Subjective attitudes, linked to the temper (emotions) and beliefs(cognition) of the investor.

Generally the investor’s financial return/ risk objectives, assuming they are precisely set and fully rational.

• A conservative investor profile :

– Risk as little as possible

– Returns may be mod est but so is the chance of losing money.

• A moderate investor profile:

– Has reasonable understanding of the stock market and is willing to take some risk

– An aggressive investor profile

– has advanced knowledge of financial markets and not afraid to take risky investment and expects high rate of return

• A portfolio will be divided based on investment objectives. Government bonds tend to be the safest investment . Corporate bonds can be risky because if a Co defaults on a loan certain investors may not be paid. A bellwether (a leading Co) investor may feel safer with proven historical records. A risky stock is one with no proven track record or that has demonstrated signs of continued weakness in its price.

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Investor Profiles

• An investor profile or style defines an individual’s preferences in investment decisions For eg:

Short term trading (active Management) or long term holding (buy & hold)

Risk averse or risk tolerant/ seeker

All classes of assets or just one (stocks for examble)

Value stock , growth stock , quality stock, defensive or cyclical stocks

Big cap or small cap stocks

Use of derivatives

Home turf or international diversification

Hands on or via investments funds and so on.

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Investor Profiles

• Profile of an Indian Investor

Indian investor profile = Low risk + High returns

They are risk averse people- major part is bank deposit, insurance PF, pension fund etc

• Over past 20 years capital market have grown tremendously on many parameters but many house holds have not ventured into it. In fact since 2000 household exposure to capital market has crossed 7% only once in 2007-08

• Study by SEBI indicates startling insight into house hold savings preferences .• India has 227 million households of which only 24.5 mn invest in equity debt , mutual funds,

derivatives and other instruments in the capital markets. This represents about 11% of the household sector. The remaining 89% also likely to be net savers but rely on non risky anvenues such as banks ,insurance or post office saving instruments.

• Among the house holds who did not invest in the secondary markets nearly 41% did not have knowledge on financial market and lacked investment skills.

0.1

0.35

0.1

0.2

0.15

0.1

Currency Deposits Shares Govt Insurance PF & Pension

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• This was prevalent across various income groups and education categories. In addition a stunning 16.5% of the most educated and 16% of the upper middle class and upper income groups thought that investments in the secondary market were not safe

• The challege is to increase the public awareness of the importance of financial planning while indicating the risk sand returns of different instruments.

• It is signal – to professionals – develop products keeping in mind the inherent risk averse nature of Indian households. For Regulators it is warning to get the macro structure in order so that systematic crises that erode investors confidence are minimized. And for Govt it is chance to bring untapped savings into financing economic activity

• Why should Finance Industry and Policy makers bother? Because House hold savings contributes 60 to 70 % of India’s gross domestic savings and has been stable and highest component for over six decades.

• In 2010-11 RBI estimated House hold savings to be $ 220 billion. If only 10% of it is attracted /invested $ 22 billion would be domestically available flowing into our capital market. This more than $ 17 million brought in by FII during 2011-12. For a country that is starved of savings to fund its current account deficit it would be wise to spur domestic savings as well as attract foreign in flows.

Is the profile of the Indian investor chaning ? (Oct 2010)

• There seems to be revolution in the stock market. From the tumultuous , unpredictable times the stock market has come along way . More people are investing in more instruments than ever before and doing it intelligently. Are reforms a positive regulator and fantastic bull run empowering the average Indian ?

• Roller coaster of Indian stock market in the nervous nities. Other form of savings were much better.

• Even then people did invest in stock market Bull run with mounting excitement made many to lose their capital when the bubble bust

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Is the profile of the Indian investor chaning ? (Oct 2010)

• Winds of change

• Well all that is changing. New breed investor / demat is in, investment in equity through mutual funds made possible. More & more women are educating themselves and investing online.

• Financial reforms: have helped. Market is open is mostly free and fair, there is honest competition, information provided on line , investor education is on the raise and resources are available on every relavant website.

• SEBI brought many regulatory controls .

• The Sign :

• Short term volatality is not scaring anyone tHere is sure sign that investors have arrived.

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Investor Profiles• DEFINITION of 'Cyclical Stock'

– An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession. Contrast cyclical stocks with counter-cyclical stocks, which tend to move in the opposite direction from the overall economy, and with consumer staples, which people continue to demand even during a downturn.

• DEFINITION of 'Gross Domestic Product - GDP'– The monetary value of all the finished goods and services produced within a country's

borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

– GDP = C + G + I + NX– where:– "C" is equal to all private consumption, or consumer spending, in a nation's

economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

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Investor Profiles

• DEFINITION of 'High Net Worth Individual - HNI'• A classification used by the financial services industry to denote an individual or a family with high net

worth. Although there is no precise definition of how rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment accounts instead of regular mutual funds.

• The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but more than $100,000 is considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then referred to as "very HNWI". More than $50 million in wealth classifies a person as "ultra HNWI".

• HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on.

• DEFINITION of 'Private Placement'• The sale of securities to a relatively small number of select investors as a way of raising capital. Investors

involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

• Explanation to 'Private Placement'• Since a private placement is offered to a few, select individuals, the placement does not have to be

registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and a the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred.

Securities and Exchange Board of India(SEBI) is the regulator for the securities market in India.History:It was established by The Government of India on 12 april 1988 and given statutory powers in 1992 with SEBI Act 1992. SEBI has its headquarters at the business district of Bandra Kurla Complex in Mumbai, and has Northern, Eastern, Southern and Western Regional Offices in New Delhi, Kolkata,Chennai and Ahmedabad respectively. It has opened local offices at Jaipur and Bangalore and is planning to open offices at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.Controller of Capital Issues was the regulatory authority before SEBI came into existence; it derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However in 1995, the SEBI was given additional statutory power by the Government of India through an amendment to theSecurities and Exchange Board of India Act, 1992. In April 1988 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India.

• The SEBI is managed by its members, which consists of following:• The chairman who is nominated by Union Government of India.• Two members, i.e., Officers from Union Finance Ministry.• One member from the Reserve Bank of India.• The remaining five members are nominated by Union Government

of India, out of them at least three shall be whole-time members.

Reasons for Establishment of SEBI:• With the growth in the dealings of stock markets, lot of malpractices

also started in stock markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).

Purpose and Role of SEBI:• SEBI was set up with the main purpose of keeping a check on malpractices and

protect the interest of investors. It was set up to meet the needs of three groups.1. Issuers:• For issuers it provides a market place in which they can raise finance fairly and easily.2. Investors:• For investors it provides protection and supply of accurate and correct information.3. Intermediaries:• For intermediaries it provides a competitive professional market.Objectives of SEBI:• The overall objectives of SEBI are to protect the interest of investors and to promote

the development of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:

1. To regulate the activities of stock exchange.2. To protect the rights of investors and ensuring safety to their investment.3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

• Functions of SEBI:• The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three

important functions. These are:• i. Protective functions• ii. Developmental functions• iii. Regulatory functions.• 1. Protective Functions:• These functions are performed by SEBI to protect the interest of investor and provide safety of

investment.• As protective functions SEBI performs following functions:(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practice because this can defraud and cheat the investors.

(ii) It Prohibits Insider trading:Insider is any person connected with the company such as directors, promoters etc. These insiders have sensitive information which affects the prices of the securities. This information is not available to people at large but the insiders get this privileged information by working inside the company and if they use this information to make profit, then it is known as insider trading, e.g., the directors of a company may know that company will issue Bonus shares to its shareholders at the end of year and they purchase shares from market to make profit with bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:• SEBI does not allow the companies to make misleading statements which are likely to induce

the sale or purchase of securities by any other person.(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of

various companies and select the most profitable securities.(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:• (a) SEBI has issued guidelines to protect the interest of debenture-holders wherein

companies cannot change terms in midterm.• (b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine

and imprisonment.(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market

prices.2) Developmental Functions:• These functions are performed by the SEBI to promote and develop activities in stock

exchange and increase the business in stock exchange. Under developmental categories following functions are performed by SEBI:

• (i) SEBI promotes training of intermediaries of the securities market.• (ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable

approach in following way:• (a) SEBI has permitted internet trading through registered stock brokers.• (b) SEBI has made underwriting optional to reduce the cost of issue.• (c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:• These functions are performed by SEBI to regulate the business in stock exchange. To

regulate the activities of stock exchange following functions are performed:• (i) SEBI has framed rules and regulations and a code of conduct to regulate the

intermediaries such as merchant bankers, brokers, underwriters, etc.• (ii) These intermediaries have been brought under the regulatory purview and private

placement has been made more restrictive.• iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer

agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.

• (iv) SEBI registers and regulates the working of mutual funds etc.• (v) SEBI regulates takeover of the companies.• (vi) SEBI conducts inquiries and audit of stock exchanges. The Organisational Structure of SEBI:• 1. SEBI is working as a corporate sector.• 2. Its activities are divided into five departments. Each department is headed by an executive

director.• 3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and

Delhi.• 4. SEBI has formed two advisory committees to deal with primary and secondary markets.• 5. These committees consist of market players, investors associations and eminent persons.

Objectives of the two Committees are:1. To advise SEBI to regulate intermediaries.2. To advise SEBI on issue of securities in primary market.3. To advise SEBI on disclosure requirements of companies.4. To advise for changes in legal framework and to make stock exchange more

transparent.5. To advise on matters related to regulation and development of secondary

stock exchange.• These committees can only advise SEBI but they cannot force SEBI to take action

on their advice.