STOCK EXCHANGES CONTROL BY SEBI

The Indian Capital Markets are efficiently regulated and tracked by The Securities and
Exchange Board of India (SEBI), The Reserve Bank of India and the Ministry of Finance.
The Ministry of Finance operates via the Department of Economic Affairs (Capital Markets
Division). The role of the division is to formulate policies for organized policy development
of securities markets. In particular, the division works to safeguard the interests of traders and
investors trading in the stock market of India.

SEBI Regulations
The Capital Markets Division of the Department of Economic Affairs sees to the
administration of rules made within the bounds of the Securities and Exchange Board of India
Act of 1992. This is the act that established the Securities and Exchange board of India, or
SEBI, the main authorised regulatory body that regulates Indian stock exchanges. The key
function of SEBI is to keep the interest of investors/traders protected.

SEBI acted as a watchdog and lacked the authority of controlling and regulating the
affairs of the Indian capital market. Nonetheless, in the year 1992, it got statutory status and
became an autonomous body to control the activities of the entire stock market of the
country. The statutory status of the SEBI authorized it to conduct the following activities:
1. SEBI got the power of regulating and approving the by-laws of stock exchanges.
2. It could inspect the accounting books of the recognized stock exchanges in the country. It
could also call for periodical returns from such stock exchanges.
3. SEBI became empowered to inspect the books and records of financial Intermediaries.
4. It could constrain companies for getting listed on any stock exchange.
5. It could also handle the registration of stockbrokers.

SEBI’s Role
While trading in the Indian stock market, investors and traders have to execute trades
while abiding by rules. This is to promote fairness. SEBI’s role is to carry out functions that
meet with the tenets of SEBI regulations and these functions include the following:
● SEBI regulates Capital Markets through certain measures it takes.
● Protects the interests of traders and investors, thereby, promoting fairness in the stock
exchange.
● SEBI regulates how the security markets and stock exchanges function.
● SEBI regulates how transfer agents, stock brokers and merchant bankers, etc, function.
● SEBI handles the registration activity of new brokers, financial advisors, etc.
● SEBI encourages the formation of Self-regulatory Organizations.
● SEBI promotes investor learning opportunities.
● SEBI makes rules to prevent malpractice.
● SEBI manages and controls a ‘complaints’ division.
● SEBI ensures that the issue of IPOs and FPOs can take place in a transparent and healthy
way.
● SEBI is responsible for ensuring that the investors don’t become victims of any stock market
manipulation or fraud.
● They act as mediators in the securities market and ensure that the stock market transactions
take place in a smooth and secure manner.
● SEBI monitors the activities of the stock market intermediaries like brokers and sub-brokers.
The Decisions of SEBI

The Indian stock market would be a hapless place without the regulations enforced by SEBI.
SEBI has been responsible for taking several steps to ensure the seamless operation of stock
markets in India:

● Determination of Stock Pricing - In a recent SEBI announcement, all companies listed have
been given permission to decide their own share prices, plus a premium over and above this.
● No Insider Trading - One of the main loopholes in the Capital Markets of India was ‘insider
trading’. SEBI has abolished this practice which gives certain traders unfair advantages over
others.
● Regulation of Mutual Funds - SEBI regulates control over mutual funds, both of the
government and private sector.

Laws for Regulating Stock market

1. Securities and Exchange Board of India Act, 1992 (SEBI Act):

● The SEBI Act empowers SEBI to protect the interests of investors and to promote
the development of the capital/securities market, besides regulating it.
● It sets out the functions and powers of SEBI and establishes its structure and
management.
● The Capital Markets Division of the Department of Economic Affairs sees to the
administration of rules made within the bounds of the SEBI Act of 1992.
● This is the act that established the Securities and Exchange Board of India, or
SEBI, the main authorized regulatory body that regulates Indian stock exchanges.
● The key function of SEBI is to keep the interest of investors/traders protected.
● While trading in the Indian stock market, investors and traders have to execute
trades while abiding by rules, to promote fairness. SEBI monitors the rules.
2. Securities Contracts (Regulation) Act, 1956 (SCRA):
● This law provides the legal framework for the regulation of securities
contracts in India.
● It covers the listing and trading of securities, the registration and regulation
of stockbrokers and sub-brokers, and the prohibition of insider trading.
● SCRA is an Act of the Parliament of India enacted to prevent undesirable
exchanges in securities and to control the working of the stock exchange in
India

3. Companies Act, 2013:

● This law regulates the incorporation, management, and governance of
companies in India.
● It also sets out the rules for the issue and transfer of securities by
companies.
● This act regulates the incorporation of a company, responsibilities of a
company, directors, and dissolution of a company.
● The act enabled companies to be formed by registration, set out the
responsibilities of the companies, their executive director, and secretaries,
and also provides for the procedures for its winding.
● The amendment to the act was passed in 2020. Ministry of Corporate
affairs governs this act.

4. Depositories Act, 1996:

● This law provides for the regulation and supervision of depositories in
India.
● It sets out the procedures for the dematerialization and transfer of securities
held in electronic form.
 5. Insider Trading Regulations, 2015:
● These regulations prohibit insider trading in securities listed on Indian
stock exchanges.
● They prescribe the code of conduct for insiders, the procedures for
disclosures, and the penalties for violations.

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 market manipulation
and insider trading. Insider Trading Regulations, 2015 prohibits insider trading in securities
listed on Indian stock exchanges. They prescribe the code of conduct for insiders, the
procedures for disclosures, and the penalties for violations. Violations of these regulations are
ground offenses that can lead to a deemed violation of the Prevention of Money Laundering
Act 2002.

Role of RBI in stock market regulations

The Reserve Bank of India is responsible for regulating the financial activities of the Indian
economy.

● It monitors the capital market and keeps a close tab on the exchange rates.
● The monetary policy designed by the Reserve Bank of India affects the equity markets
directly.
● It controls the interest rates, which, when lowered, reduces the cost of debt, and the
cost of equity is brought down consecutively.

CONTROL OVER CORPORATE SECURITIES BY STOCK EXCHANGES

Stock Exchange (also known as stock market or share market) is one of the main
integral part of capital market in India. It plays a vital role in growing industries and
commerce of a country which eventually affect the economy. It is well organized market for
purchase and sale of corporate and other securities which facilitates companies to raise
capital by pooling funds from different investors as well as act as an investment intermediary
for investors. Stock Exchange market is a vital component of a stock market. It facilitates the
transaction between traders of financial instruments and targeted buyers. A stock exchange in
India adheres to a set of rules and regulations directed by Securities and Exchange Board of
India or SEBI. The said authoritative body functions to protect the interest of investors and
aims to promote the stock market of India. The stock exchange in India serves as a market
where financial instruments like stocks, bonds and commodities are traded.
Sec.9 of Securities Contracts (Regulation) Act, 1956- Powers of recognised stock
exchanges
● Any recognised stock exchange with the previous approval of the Securities and
Exchange Board of India, make bye-laws for the regulation and control of contracts.
Stock exchanges can make bye-laws for-
● The opening and closing of markets and the regulation of the hours of trade;
● a clearing house for the periodical settlement of contracts and differences there under,
the delivery of and payment for securities, the passing on of delivery orders and the
regulation and maintenance of such clearing house.
● The submission to the Securities and Exchange Board of India by the clearing house
as soon as may be after each periodical settlement.
● The regulation or prohibition of blank transfers
● The regulation, or prohibition of budlas or carry-over facilities;
● The fixing, altering or postponing of days for settlements;
● The determination and declaration of market rates, including the opening, closing,
highest and lowest rates for securities;
● The listing of securities on the stock exchange, the inclusion of any security for the
purpose of dealings and the suspension or withdrawal of any such securities, and the
suspension or prohibition of trading in any specified securities.
● The method and procedure for the settlement of claims or disputes, including
settlement by arbitration;
● The levy and recovery of fees, fines and penalties;
● The fixing of a scale of brokerage and other charges;
● The making, comparing, settling and closing of bargains
● If contravention of any of the bye-laws shall render the member concerned liable to
one or more of the following punishments, namely:--
(i) fine;
(ii) expulsion from membership;
(iii) suspension from membership for a specified period;
(iv) any other penalty of a like nature not involving the payment of
money.
 PUBLIC ISSUE OF SHARES

When an issue / offer of securities is made to new investors for becoming part of
shareholders’ family of the issuer, it is called a public issue. Public issue can be further
classified into Initial Public Offer (IPO) and Follow on Public Offer (FPO). The significant
features of each type of public issue are illustrated below:
I) INITIAL PUBLIC OFFER (IPO): When an unlisted company makes either a fresh
issue of securities or offers its existing securities for sale or both for the first time
to the public, it is called an IPO. This paves way for listing and trading of the
issuer’s securities in the Stock Exchanges.
II) FOLLOW ON PUBLIC OFFER (FPO): When an already listed company makes
either a fresh issue of securities to the public or an offer for sale to the public, it is
called a Follow on Public Offer (FPO).

INITIAL PUBLIC OFFERING

An initial public offering, or IPO, is a common way that a firm goes public and sells
shares to raise financing. By participating in an IPO, an investor can buy shares before they
are available to the general public in the stock market. An initial public offering (IPO) refers
to the process of offering shares of a private corporation to the public in a new stock
issuance. Companies must meet requirements by exchanges and the Securities and Exchange
Commission (SEC) to hold an IPO. IPOs provide companies with an opportunity to obtain
capital by offering shares through the primary market. Companies hire investment banks to
market, gauge demand, set the IPO price and date, and more. An IPO can be seen as an exit
strategy for the company’s founders and early investors, realizing the full profit from their
private investment. There are two common types of IPOs: a fixed price and a book building
offering. A company can use either type separately or combined.

1. FIXED PRICE OFFERING

Under fixed price, the company going public determines a fixed price at which its shares are
offered to investors. The investors know the share price before the company goes public.
Demand from the markets is only known once the issue is closed. To partake in this IPO, the
investor must pay the full share price when making the application.
2. BOOK BUILDING OFFERING
Under book building, the company going public offers a 20% price band on shares to
investors. Investors then bid on the shares before the final price is settled once the bidding
has closed. Investors must specify the number of shares they want to buy and how much they
are willing to pay. Unlike a fixed price offering, there is no fixed price per share. The lowest
share price is known as the floor price, while the highest share price is known as the cap
price. The final share price is determined using investor bids.

METHODS OF RAISING FUND

1] Offer through Prospectus

This is a method of public issue. It is also the most used method in the primary market to
raise funds. Here the company invites the investors (general members of the public) to invest
in their company via an advertisement also known as a prospectus. After a prospectus is
issued, the public subscribes to shares, debentures etc. As per the response, shares are allotted
to the public. If the subscriptions are very high, allotment will be done on lottery or pro-rata
basis. The company can sell the shares directly to the public, but it generally hires brokers
and underwriters. Merchant banks are another option to help out with the process, especially
Initial Public Offerings.

2] Private Placement

Public offers are an expensive affair. The incidental costs of IPO’s tend to be very high.
This is why some companies prefer not to go down this route. They offer investment
opportunities to a select few individuals. So the company will sell its shares to financial
institutions, banks, insurance companies and some select individuals. This will help them
raise the funds efficiently, quickly and economically. Such companies do not sell or offer
their securities to the public at large.

3] Rights Issue

Generally, when a company is looking to expand or are in need of additional funds, they
first turn to their current investors. So the current shareholders are given an opportunity to
further invest in the company. They are given the “right” to buy new shares before the public
is offered the chance. This allotment of new shares is done on pro-rata basis. If the
shareholder chooses to execute his right and buy the shares, he will be allotted the new
shares. However, if the shareholder chooses to let go of his rights issue, then these shares can
be offered to the public.

4] E-IPO

It stands for Electronic Initial Public Offer. When a company wants to offer its shares to the
public it can now also do so online. An agreement is signed between the company and the
relevant stock exchange known as the E-IPO. This system was introduced in India some three
years ago by the SEBI. This makes the process of the IPO speedy and efficient. The company
will have to hire brokers to accept the applications received. And a registrar to the issue must
also be appointed.

The IPO process essentially consists of two parts. The first is the pre-marketing phase
of the offering, while the second is the initial public offering itself. When a company is
interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also
make a public statement to generate interest. The underwriters lead the IPO process and are
chosen by the company. A company may choose one or several underwriters to manage
different parts of the IPO process collaboratively. The underwriters are involved in every
aspect of the IPO due diligence, document preparation, filing, marketing, and issuance.

Steps to an IPO

1. Proposals- Underwriters present proposals and valuations discussing their services,

the best type of security to issue, offering price, amount of shares, and estimated time
frame for the market offering.
2. Underwriter- The company chooses its underwriters and formally agrees to
underwrite terms through an underwriting agreement.
3. Team- IPO teams are formed comprising underwriters, lawyers, certified public
accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
4. Documentation- Information regarding the company is compiled for required IPO
documentation. The S-1 Registration Statement is the primary IPO filing document. It
has two parts—the prospectus and the privately held filing information.The S-1
includes preliminary information about the expected date of the filing. It will be
 revised often throughout the pre-IPO process. The included prospectus is also revised
continuously.
5. Marketing & Updates- Marketing materials are created for pre-marketing of the new
stock issuance. Underwriters and executives market the share issuance to estimate
demand and establish a final offering price. Underwriters can make revisions to their
financial analysis throughout the marketing process. This can include changing the
IPO price or issuance date as they see fit. Companies take the necessary steps to meet
specific public share offering requirements. Companies must adhere to both exchange
listing requirements and SEC requirements for public companies.
6. Board & Processes- Form a board of directors and ensure processes for reporting
auditable financial and accounting information every quarter.
7. Shares Issued- The company issues its shares on an IPO date. Capital from the
primary issuance to shareholders is received as cash and recorded as stockholders'
equity on the balance sheet. Subsequently, the balance sheet share value becomes
dependent on the company’s stockholders' equity per share valuation
comprehensively.
8. Post IPO- Some post-IPO provisions may be instituted. Underwriters may have a
specified time frame to buy an additional amount of shares after the initial public
offering (IPO) date. Meanwhile, certain investors may be subject to quiet periods.

IPO –CONTROL BY SEBI

A company must first file an IPO prospectus with the Securities and Exchange Board of India
(SEBI), which outlines the details of the offering. The SEBI reviews the prospectus and
decides whether or not the offering can proceed. IPOs in India are governed by the Securities
and Exchange Board of India, which is the country's capital market regulator. SEBI's primary
role is to ensure that the process is fair and transparent for all parties involved. To that end,
SEBI has a set of guidelines that companies must follow. For example, SEBI has established
a minimum amount companies must raise to justify the process. In addition, it also requires
using a specific set of auditors and a particular type of prospectus when issuing an Initial
Public Offering.
 Eligibility criteria for IPO applications mandated by SEBI

In order to be eligible to list and trade on a stock exchange in India, a company must meet
certain criteria set forth by the Securities and Exchange Board of India. Some of these
requirements include:

-First, the company must have a minimum net worth of Rs. 3 crores.

-Second, it must have been in business for at least 3 years.

-Third, it must have made profits in at least 2 out of the 3 most recent financial years.

-Fourth, at least 25% of the company must be owned by the public (i.e. not held by promoters
or related parties).

-Fifth, the audited financial statements for the past 3 years must be clean, with no
qualifications or exceptions.

-Sixth, it must have a minimum paid up capital of Rs. 1 crore.

-Seventh, the net profit in the last 3 years must be positive.

-Eighth, The company should not have defaulted on any loan and/or overdraft from any bank
or financial institution.

Necessary conditions apart from IPO applications mandated by NSE and SEBI

● The company must have been in business for at least 3 years, and it must have made profits in
at least 2 of those years. It must also have a minimum net worth of Rs. 3 crores.

● Additionally, the company must not have any outstanding litigation against it, and at least
25% of the shares must be offered to the public.

● It can apply for listing on the stock exchange through a merchant banker. A merchant banker
is a financial intermediary who arranges and manages equity and debt capital markets
transactions. Firms usually hire merchant bankers to help them raise funds in the capital
market. A merchant banker will help a firm price and execute the IPO, and after listing the
shares on the stock exchange, it will be responsible for managing shareholder relations.
 Process of applying for an IPO

1. Appointment of merchant bankers: The Company appoints one or more merchant bankers to
act as its lead manager(s).

2. Filing of Draft Red Herring Prospectus (DRHP) with SEBI: The DRHP is filed with the
Securities and Exchange Board of India.
3. Obtaining SEBI approval: Once the DRHP is filed, SEBI will review it and provide
comments/suggestions within 60 days. The company then needs to address any concerns
raised by SEBI and file a revised DRHP, if required.
4. Finalising the offer size and price band: Once SEBI has given its comments, the company can
finalise the offer size and price band.

5. The launch of the IPO: After the finalisation of the issue details, the company announces to
the public its intention to launch an IPO. The lead merchant banker(s) then contacts potential
investors and provides them with a copy of the draft Red Herring Prospectus (DRHP).
6. The pricing of the IPO: The lead merchant banker(s) decide on the price at which they will
launch the IPO. However, it must be within the specified range. They decide on this basis of
how well the issue is expected to perform and in view of prevailing market conditions.
7. The book opening and allotment: The IPO is open for subscription by eligible investors for a
specified period of time. The lead merchant banker(s) will arrange for the opening of the
issue on behalf of the company as per SEBI guidelines.

Grounds for rejection of Draft Red Herring Prospectus (DRPH) directed by SEBI

Draft Red Herring Prospectus (DRPH) is a document filed with SEBI by a company seeking
to go public. The DRPH sets out the company's business plan and financial projections and is
used to gauge investor interest in the IPO. SEBI requires all companies seeking to go public
in India to file a DRPH. The DRPH must be filed at least 21 days before the IPO's launch and
made available to all potential investors. It is essential for companies to provide accurate and
up-to-date information in their DRPHs, as any material misstatements could lead to SEBI
taking action against the company. SEBI has outlined certain conditions that must be met for
a company's Draft Red Herring Prospectus (DRHP) to be accepted. If any of these conditions
are not met, the DRHP may be rejected outright.

The grounds for rejection are as follows:

1. Substantial changes have been made in the financial statements or any other information
contained in the DRHP, and no change report has been filed.

2. Changes have been made to the structure of the board of directors without obtaining prior
approval from SEBI.

3. Changes have been made to the management of the company without obtaining prior
approval from SEBI.

4. Any non-compliance with any applicable laws, rules or regulations of India or other
countries.

5. Any changes have been made to the company's shareholding pattern without informing
SEBI.

6. Any change in the name of the company.

7. Any change in the registered office of the company.

8. Any change in the objects and purposes for which a public issue is proposed to be made.

9. Any other material change.

If a company fails to comply with the above Regulations the company may be subject
to civil or criminal penalties, including fines and jail time for the company's officers. Also, it
may be barred from selling securities in the future. In addition, the failure to comply with IPO
requirements could damage its reputation and make it difficult to raise capital in the
future. Recent IPOs have faced a number of failures, primarily due to overvaluation and poor
planning. The public issue by a company is governed by the SEBI (Disclosure and Investor
Protection) Guidelines, 2000 also known as the DIP Guidelines.