ROLE OF SEBI (THE REGULATOR) AND CRITICAL EVALUATION

FOR SMALL INVESTORS IN INDIAN STOCK MARKET

Authors1 * Mr Abhishek Pande (Mentor) Orange School of Business, Nagpur.

ABSTRACT

This paper argues that rather than applying the traditional solutions,the regulator

needs to adopt strong measures to protect the interest of small investors,it would be

fair to say that progress that we have made in this period is due largely to effects of

stringent measures adopted by SEBI. The dynamics of economics also plays a pivotal

role in the growth story of industry and commerce.The stock market is important

from both the industry’s point of view as well as the investor’s point of view.

KEYWORDS – acquisitions,derivatives,margins,rating agencies,stocks,volatility index.

LITERATURE OVERVIEW

In 1988 the Securities and Exchange Board of India (SEBI) was established by the

Government of India through an executive resolution, and was subsequently upgraded as a

fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities

and Exchange Board of India Act (SEBI Act)2 on 30th January 1992. In place of Government

Control, a statutory and autonomous regulatory board with defined responsibilities, to cover

both development & regulation of the market.

1Authors : Mr Abhishek Pande

2 The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992.

1

STATEMENT OF THE RESEARCH PROBLEM

This study helps to protect the interests of small investors in security market with the help of

regulator's role and creating awareness about economic indicators.

OBJECTIVES OF THE STUDY

To highlight the working of regulator with respect to stock markets.

To promote investors awareness about stock markets.

To educate small investors and students about the economic downturns of stock

markets.

To promote overall economic development for sustainable growth.

Since its inception SEBI has been working targeting the securities and is attending to the

fulfillment of its objectives with commendable zeal and dexterity. The improvements in the

securities markets like capitalization requirements, margining, establishment of clearing

corporations etc reduced the risk of credit.

SCOPE OF THE STUDY

This study includes the role of SEBI as a watchdog to manage stocks and securities in indian

market.The study is conducted to analyze the investor's preference and protect his interest

before the interest of the companies trading in indian stock market.To analyze the data

researcher used simple analytical techniques and tools such as pie charts.

RESEARCH DESIGN

Research Design of the study deals with understanding the investor's sentiments and his ability

to protect himself against the recessionary trends that often takes place in stock markets with

special reference to important economic indicators.

2

Data required for the study

To carry out the research,conceptual knowledge about investor's risk taking

ability,information about their preferences, choices, investment awareness,with respect to

different companies listed on stock exchange has been taken into consideration.

Data Sources

A. Primary Source

To study the SEBI guidelines for small investors pattern of purchasing shares of listed

companies in stock market,data collected through Primary Source. i.e. Interviews,

discussions & Questionnaires.

B. Secondary Source

The Secondary data have been collected through the books, magazines, broachers, Journal's

& annual general report, socio-economic profile and web sites.

To collect the primary data questionnaire is prepared. This questionnaire consists close-

ended questions. The questionnaire is a siphon off information viz. company preferences,

choices, determinants etc.

Data Analysis

Data collected from Primary and Secondary Sources is analyzed. The analyzed data is

formulated into the tabular and graphical form.

ROLE OF SEBI THE REGULATOR

The contribution of the market regulator has been to create a regulatory environment that

permitted competition to flourish at a time when many companies are not performing up to

the investor's expectation.

To provide license to dealers and brokers :

SEBI has power to provide license to dealers and brokers of stock market. If SEBI see's that

any financial product is of capital nature, then SEBI can also control that product and its

dealers.One of the main example is of ULIP's 3.

3 Unit Linked Insurance Plan

3

To stop fraud in stock market :

SEBI has many powers for stopping fraud in capital market.It can ban on the trading of those

brokers who are involved in fraudulent and unfair trade practices relating to stock market.It

can impose the penalties on capital market intermediaries if they are involved in insider

trading. 

To Control the mergers,acquisitions and takeover of the companies :

Many big companies in India want to create monopoly in stock market. So, these companies

buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is

for development of business or to harm stock market. 

To audit the performance of stock market :

SEBI uses their powers to audit the performance of different Indian stock exchanges for

bringing transparency in there working. 

To make new rules on carry - forward transactions :

Share trading transactions carry forward can not exceed 25% of broker's total transactions.

90 day limit for carry forward transactions is set by SEBI.

To create relationship with ICAI4 :

ICAI is the authority for making new auditors of companies. SEBI creates good relationship

with ICAI for bringing more transparency in the auditing work of company accounts because

audited financial statements are mirror to see the real face of company and after this investors

can decide to invest.Moreover,in many cases investor's trust still rely on audited financial

reports.

Introduction of derivative contracts on volatility index :

For reducing the risk of investors,SEBI has now decided to permit derivative contracts on

volatility index, subject to the conditions :

a. The underlying volatility index has a track record of at least one year.

b. The exchange has in place the appropriate risk management framework for such derivative

4 Regulates the profession of Chartered Accountants in India.

4

contracts.

c. Before introduction of such contracts, the stock exchange shall submit the following :-

i. Contract specifications.

ii. Position and exercise limits.

iii. Margins5.

iv. The economic purpose it is intended to serve.

v. Likely contribution to market development.

vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure

market integrity, protection of investors and orderly trading.

vii. The infrastructure of the exchange and the surveillance system to effectively monitor

trading in such contracts.

viii. Details of settlement procedures & systems.

ix. Details of back testing of margin calculation for a period of one year considering a call

and a put option on the underlying with a delta of 0.25 & - 0.25 respectively and actual value

of the underlying.

To get reports on portfolio management activities :

SEBI has power to call reports on portfolio management to check the stock market

performance.Recently,SEBI sent the letter to all registered portfolio managers of India for

demanding report.

To educate the investors :

Time to time, SEBI arranges scheduled workshops to educate the investors.The regulator

5 A type of financial collateral used to cover credit risk.

5

must also ruthlessly discard those elements of regulatory regime that are not in favour of

small investors.

FINDINGS FROM SEBI

Some of the findings from SEBI with respect to small investors grievances are :

Financial analysts at major banks promote stocks they know to be worthless,

misleading small investors who rely on their advice.

Ratings agencies give AAA ratings on debt they know to be in order to gain goodwill

of the issuers—who happen to pay fee's of agencies, violating rating agency's duty to

provide the marketplace with honest evaluations.

Some executives receive outsized and high compensation packages—the result of

false misleading recommendations of stocks to gain the goodwill of CEO's and

independent directors, thus violating duty to the shareholders of companies for whom

they are working.

Reputed fund managers charge exorbitant fees that investors have to absorb—fees

that dramatically reduce any possibility of outperforming market and that are set by

captive boards of captive management companies.

"High-frequency trading6" produces not only reality of a two-tiered market but also

probability of front-running—that is, illegally trading of information not yet widely

known—that eat's possible profit's of small investors being served by these market

players, violating the norms set by SEBI for best available price discovery.

Airlines stocks are bailed out, costing taxpayers tens of billions of rupees, even

though (as we later learned) the big broking firms knew that airlines stocks were

going down and were able to hedge and cover their positions.Smaller investors are left

holding the stock, and left for picking up the trash.

6 A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds.High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. 

6

The underlying assumption is apparent since information and advice, the very life-

blood of a level playing field, is not where it needs.

The small investors still doesn't have a fair shot. While there have been case-specific

remedies, the aggregate effect of all the scandal's still hold's the market forces

responsible.

ECONOMIC POINTS TO PONDER

There are many economic points that requires due consideration for a small investor

before he invests his hard earn money in stocks.These economic points act as a

preliminary study for any investor to understand before entering stock market.

Liquidity situation in a system- Less liquidity situations means shortage of funds in

market,it leads to increase in interest rates consequentally companies cost of funding

increase,it hammers profits of company and share prices of that company goes down

and therefore loss to small investors.

Climate or monsoon situation- In an agriculture base economy monsoon plays a vital

role,situation of bad monsoon curtails the demand & consumption levels,it adversally

affects profits of companies and therefore loss to small investors & vice versa.

Inflation rate in the economy- Inflation conditions puts pressure on margins of

companies,(e.g.. of petrol & diesel cost),hence the small investors should monitor

pulse of market with knowing the headline inflation7.

Technological development- Innovations in companies can increases productivity,this

drives investment and increases profits, pushing growth,hence small investors should

monitor this trend.

7 A measurement of price inflation that takes into account all types of inflation that an economy can experience.

7

Growth rates- Industry growth rates taking place in sectors like

construction,mining,manufacturing,power,auto,banking,metal etc, can provide vital

statistics for small investors if they are updated with proper information.

National income growth rate for the current year.

GDP estimates for the upcoming year.

Increase or decrease in foreign investments.

Increase or decrease in exports.

Trade liberalisation,capital mobility & exchange rate policy.

CONCLUSION

Finally we conclude that SEBI the regulator has three functions rolled into one body: quasi-

legislative8, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity,

it conducts investigation and enforcement action in its executive function and it passes

rulings and orders in its judicial capacity to create accountability for small investors,also

returns in stock market depends on conditions of economy.And a good economy would help

in improving living standards of individuals,who could encash higher returns from stock

market,business as a whole see's increased sales and profit which ultimately drives share

prices for small investors.

REFERENCES

8 A quasi-legislative capacity is that in which a public administrative agency or body acts when it makes rules and regulations.

8

Books

[1] SEBI Guidelines and Listing of Companies – Dr A V Avadhani

[2] Manual Taxmann's SEBI Manual

[3] Financial Management – M Y Khan,P K Jain

[4] A Legal Commentary on Securities Exchange Board of India Act - Sumit Agrawal,Robin

Joseph Baby,edited by Amit Agrawal

[5] Indian Economy – T R Jain, Mukesh Trehan, Ranju Trehan, Dr Rajinder Uppal

[6] Indian Economy - Mishra & Puri

[7] Principles of business economics 2nd edition – Joseph Nellis, David Parker

Websites

[1] NCAER website

[2] www.sebi.gov.in

[3] www.icmrindia.org

[4]www.cmie.com

ANNEXURE

Questionnaire for small Investors

Name of the participant: ________________

Contact number: _____________________

Date: ____/____/____

Q1. Tell us something about your overall stock market experience?

______________

9

Q2. Do you think stock market research is essential for investing your money to earn high returns?

Yes

No

Q3. How long have you been indulged into the stock market research and this business?

More than a year

More than three year

More than five years

More than seven years

More than this

Q4. Which of the following mentioned factors play an important role while you finalize a stock company?

Overall reputation

Offered stock market term & conditions

Condition of economy

Current stock quotes

Other, please write: ________________

Q5. You purchase the shares to:

Invest your money wisely

For long term money investment

For high end returns

To invest money regularly

Q6. Which of the following risk factors disturb the stock market continuously?

Corporate drawn

Market value fluctuations

Economic breakdown

Q7. Which of the methods do you use to conduct a stock market research before investing money into shares?

Internet

Friend’s advice

10

News paper

Television

Other, please mention: __________________

Q8. Would you like to mention a little more about you stock market expertise?

__________________________

60.50 22.88 10.03 3.45 2.82 0.31

11

0.0020.0040.0060.00

Survey Results

Different answers

out

of 1

00

Tip from friend

Opinion of analysts in print media 24.68 57.79 5.19 7.79 3.90 0.65

Opinion of experts on TV 13.64 30.30 18.18 34.85 0.00 3.03

Research reports in newspapers/magazines 28.57 16.67 14.29 21.43 9.52 9.52

Research reports on stock market websites 8.33 50.00 0.00 25.00 16.67 0.00

Advice of broker 11.11 55.56 0.00 11.11 22.22 0.00

Total 42.19 33.22 9.63 9.80 3.82 1.33

Centra

l Reg

ion

Easte

rn Reg

ion

Northern

Region

North-Ea

stern

Region

Southern

Region

West

ern Reg

ionTo

tal0.00

10.0020.0030.0040.0050.0060.0070.0080.00

Regional Disparity

InvestorSaverHouseholdsHouseholdsOtherHouseholdsTotalHouseholds

InvestorSaver

Households

Households Other

Households

Total

Household

s

Central Region 0.14 2.70 1.14 3.98

Eastern Region 2.62 5.28 1.63 9.53

Northern Region 1.42 10.20 5.80 17.42

North-Eastern Region 0.32 0.66 0.16 1.15

Southern Region 4.84 5.75 11.20 21.79

Western Region 5.88 8.93 4.71 19.51

Total 15.23 33.52 24.63 73.38

12

Bond15% Debenture

7%

IPO10%

SecondaryMarket

22%

MutualFund43%

Derivative4%

Investment Pattern

Bon

d

Debentur

e

IPO Secondary

Market

Mutual

Fund

Derivative

All India 14.89 6.94 10.05 21.59 42.89 3.64

Urban 15.07 8.57 8.47 21.25 40.80 5.85

Rural 14.60 4.26 12.66 22.04 46.44 0.00

13