What are the roles of ‘SEBI’ as a capital market regulator?

Updated till December 1, 2023.

The Securities and Exchange Board of India  (SEBI) was established as the regulator for the Stock and Security market in India under the Securities and Exchange Board of India Act 1992. The main object of SEBI is to protect the interests of investors in securities and promote the development of the securities market through appropriate regulations.

Read: FUNCTIONS OF THE SECURITIES AND EXCHANGE BOARD OF INDIA-SEBI

The following agencies, organizations, and entities involved in stock markets and security markets are coming under the regulatory purview of SEBI.

1.  Registration and working of Stockbrokers, sub-brokers, share transfer agents, merchant bankers, and all those who are associated with the stock exchange in any manner.

2. Bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers

3. Investment advisers and such other intermediaries who may be associated with securities markets in any manner,

4. Depositories [Depository participants,] custodians of securities,

5. Registration and working of Mutual Funds, working   of venture   capital   funds   and   collective investment schemes

6. Regulate the substantial acquisition of shares and takeover of companies

7. Foreign institutional investors,

8.  Credit rating agencies and such other intermediaries as notified by SEBI.

SEBI is vested with the following powers as a regulator, if it thinks necessary, to protect the interest of the investor.

1. May suspend the trading of any security in recognized stock exchange; restrain persons from accessing the securities market

2. Prohibit any person associated with the securities market from buying, sell, or dealing in securities;

3. Suspend any office-bearer of any stock exchange or self-regulatory organization from holding such a position;

4. Impound and retain the proceeds or securities in respect of any transaction which is under investigation;

5. Attach bank account/s or any transactions entered therein if such proceeds are involved in a violation of the act and regulations made thereunder ( Attachment is subject to the approval of the order by a first-class Judicial Magistrate).

The other important roles of SEBI are:

To promote and regulate self-regulatory organizations,     To prohibit fraudulent and unfair trade practices relating to securities markets,     To promote investors ‘education and training of intermediaries of securities markets,    To prohibit insider trading in securities,     To conduct research for efficient working and development of securities market, etc. are the other important functions of SEBI.

Appellate Authority:

Securities Appellate Tribunal is a statutory body established under the provisions of Section 15K of the Securities and Exchange Board of India Act, 1992.   It hears and disposes of appeals against orders passed by the Securities and Exchange Board of India or by an adjudicating officer under the Act.     Exercise jurisdiction, powers, and authority conferred on the Tribunal by or under this Act or any other law for the time being in force.

Clause 49 amendment to the listing agreement of SEBI is an important amendment to SEBI regulations. The amendment is part of a global trend in strengthening corporate governance. In terms of amendment to the regulations, the company’s board should comprise at least 50% independent non-executive directors. Those independent directors cannot be relatives; senior management staff or those who have financial relationships with the company. Failure to comply above clause would attract punitive action by SEBI which includes a hefty fine of up to Rs.1 crore or delisting from the Stock exchanges. The CEO or Company Secretary has to personally certify the authenticity of various declarations made to the board and the shareholders.

The Securities and Exchange Board of India (SEBI) had halved the IPO listing timeline to three days from six days earlier, in June this year. The new rule was implemented in two phases, where it was optional from September 1, 2023, and made mandatory from December 1, 2023. It is a move likely to benefit issuers who would receive securities listed in a shorter period along with those who have not been allotted securities as they will get their money back faster.
The new rule states that anchor investors are permitted to sell just 50% of investments after a lock-in of 30 days. To make a sale of the 50% left over, anchor investors must wait for 90 days. Several companies launching IPOs were busy allocating stock to anchor investors previously. This was mainly done so that IPOs could gain high traction. After 30 days of lock-in, investors could exit with a bull run of the IPO behind them. For regular investors, this meant a steep dip in the value of shares after the IPO listing. This will be prevented now. SEBI guidelines for an IPO are clearly on the side of the new investor.

SEBI Guidelines for IPO by A company that is not listed on the stock exchange (unlisted company).
1. The issuer must have a minimum net worth exceeding INR 1 Crore in each of the previous three years.
2. The net tangible assets of the issuer must exceed INR 3 Crores each year, with no more than 50% held in the form of monetary assets during the previous three years.
3. The net tangible assets of the issuer must exceed INR 3 Crores each year, with no more than 50% held in the form of monetary assets during the previous three years.
4. The average operating profit (before tax) of the company must surpass INR 15 Crores in at least three out of the last five years.
5. The issue size must not exceed five times the pre-issue net worth.
6. If the company has undergone a name change, a minimum of 50% of the revenue in the previous year must be generated from activities carried out under the new name.

QIB Routes:
For companies necessitating a substantial capital base but failing to meet Profitability Route conditions, the QIB Route offers an alternative under the SEBI guidelines for IPO. This route allows companies to access the public interest through the book-building procedure, with a specific allocation to Qualified Institutional Buyers.
As per SEBI guidelines, 75% of the company’s net offer to the public must be compulsorily allotted to Qualified Institutional Buyers. Failure to achieve the minimum subscription of QIB renders the company liable to refund the subscription fee.
Appraisal Route – Entry Norm III
The Appraisal Route involves the appraisal and participation of the project or public offer by Financial Institutions or Scheduled Commercial Banks, contributing a minimum of 15%, with at least 10% from the appraisers:
The Appraisal Route involves the appraisal and participation of the project or public offer by Financial Institutions or Scheduled Commercial Banks, contributing a minimum of 15%, with at least 10% from the appraisers:
The minimum post-issue face value capital must be INR 10 crores or mandatory market-making for at least two years.
All three entry norms also stipulate a requirement of a minimum of 1000 prospective allottees for the issuer company’s public issue.
SEBI Guidelines for FPO for Listed Companies
Listed companies in India seeking to conduct an FPO must adhere to specific guidelines outlined by the SEBI. These guidelines pertain to criteria related to company name changes and issue sizing:

If the company has undergone a name change within the past year, a minimum of 50% of the company’s revenue for the previous year must be generated from activities conducted under its new name. The size of the FPO must not exceed five times the pre-issue net worth, as per the company’s audited balance sheet from the last financial year.

Exempted Entities under SEBI Guidelines for IPO
The Securities and Exchange Board of India has identified certain entities that are exempted from the standard entry norms applicable to public issues. The exempted entities under SEBI guidelines for IPOs are:

1. Private and Public Sector Banks are exempted from the entry norms outlined for making a public issue.

2. Infrastructure companies that have had their projects appraised by a Public Financial Institution like IDFC or IL&FS, or a bank that was previously a PFI, and have received at least 5% of their project cost in funding from any of these institutions are exempt from the standard entry norms.

General SEBI Guidelines for IPO in India
Companies planning to make a public offer in India must adhere to the following general SEBI guidelines for IPO in India:

1. No Association with Similar Role: Directors, promoters, or other Key Management Personnel of the company must not hold similar positions in any other company.

2. No Debarment from Primary Market: Those with control over the company, such as directors, promoters, or key management personnel, must not be debarred from accessing the primary market.

3. Listing Application: The company must apply to list its shares with a recognized stock exchange in India.

4. Depository Arrangement: The company must enter into legal contracts with a depository to dematerialize its specific securities.

5. Fully Paid-up Equity Shares: Partly paid-up equity shares must be fully paid up before the IPO.

6. Minimum Public Shareholding: A listed company must maintain a minimum public shareholding of 25%. If not met, the company has one year to comply with this requirement.

7. Source of Funds: The company must arrange its financial resources from trustworthy and verifiable sources, excluding the amount allocated to issue new company shares.

8. Draft Offer and Red Herring Prospectus: For IPOs exceeding INR 50 lakhs, the process begins with the company filing a draft offer in the form of a Draft Red Herring Prospectus (DRHP) with SEBI.

9. Final Offer Document: After the review and receipt of the final observation letter from SEBI, the company must file the final offer document or Red Herring Prospectus with the Registrar of Companies (ROC).

10. Book Building Process: Companies may opt for the book-building process under Entry Norm II, and in such cases, the IPO process must be completed within one year from the date of receiving the final observation letter from SEBI.

11. Independent Board Members: At least 50% of the company’s Board of Directors must consist of independent investors.

12. No Obligations to Promoters: The same 50% of the Board of Directors must have no obligations to the promoters or the company.

13. No Involvement in Economic Offences: Directors or promoters of the company must not be guilty of any economic offenses.

14. Not a Wilful Defaulter: The company, its promoters, or directors must not be classified as wilful defaulters.

15. Disclosure of Shares to SEBI: The issuer company must disclose the number of shares or the number of shares to SEBI between the date of filing its draft Red Herring Prospectus and the issuance of specified securities.

16. Large IPO Pre-submission: If a company plans to go for a public issue exceeding INR 100 crores, it must submit a draft offer document with the regional office of SEBI before proceeding with the IPO.

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12. No Obligations to Promoters: The same 50% of the Board of Directors must have no obligations to the promoters or the company.

13. No Involvement in Economic Offences: Directors or promoters of the company must not be guilty of any economic offences.

14. Not a Wilful Defaulter: The company, its promoters, or directors must not be classified as wilful defaulters.

15. Disclosure of Shares to SEBI: The issuer company must disclose the number of shares or the number of shares to SEBI between the date of filing its draft Red Herring Prospectus and the issuance of specified securities.

16. Large IPO Pre-submission: If a company plans to go for a public issue exceeding INR 100 crores, it must submit a draft offer document with the regional office of SEBI before proceeding with the IPO.

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