Protection of investors from stock market violability

Before delving deeper into the norms protecting the investors from stock market violability let’s take a look at the basic terms associated with it.

• Financial markets – they are those places where buyers and sellers come together to trade financial instruments such as stocks, bonds, currencies, and commodities.
• Primary market is the market where securities are created, and the secondary market is where they’re traded among investors.
• The secondary market is generally referred to as the stock market – for examples the New York Stock Exchange, Nasdaq and FTSE. In the secondary market, investors trade among themselves without the involvement of the issuing companies.
• Securities -they are the exchangeable , taxable financial instruments . They hold some monetary value to them as well.
• A financial instrument is a real or virtual document representing a legal agreement involving any kind of monetary value. Financial instruments may be divided into two types: cash instruments and derivative instruments.
• A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation and is sold predominantly on stock exchanges.

Acts for regulating stock market

 

1. 1. SEBI Act, 1992:
      The SEBI Act came in the year 1992. Before it, the capital market was regulated by the Capital Issues Control Act 1947. The SEBI Act provides for the establishment of the Securities and Exchanges Board of India under section 3 of the act. It is a corporate body in the nature of the juristic person. The act also provides for the transfer of assets and liabilities of existing security boards to boards. SEBI Act empowers SEBI to promote the interest of investors and to promote the development of capital/ securities market besides regulating it., the SEBI Act acts as a watchdog. It is really essential for a body to promote the development of such securities. The body authorized to do is the SEBI. It not only protects the rights of the investors in securities but also promotes the development of a capital/securities market so that the stock market will boom, apart from that the Act also regulates the market. It also enlists the penalties to the people contravening the provisions of this act.
      WHAT SEBI CAN DO
      It holds power to impose penalties including monetary penalties, as SEBI is responsible for regulating the work here, it has to keep a check of any malpractices that may arise. . The Securities Contract ( Regulation) Act 1956 (SCRA ) act empowers SEBI to recognise stocks exchange , prescribe rules and by laws for their functioning and regulate trading, clearing and settlement on stock exchange.
      CAN SEBI CURB MARKET VOLATILITY
      SEBI doesn’t directly interfere to prevent market volatilities ,however certain reforms like exchange circuit filters has been introduced whereby the upper and lower limits of volatility are already set , to prevent excessive volatility, these are the two extremes beyond which the volatilities can’t happen.
      SEBI has power to regulate trading and settlement on stock exchanges. So we can say that the SEBI is the watchdog dealing with stocks and other securities. SEBI can also direct stock exchanges to stop trading , totally or selectively .
      It can also prohibit entities or persons from buying , selling or dealing in securities . If SEBI finds some misshaping or the stock brokers breaking the rules it can stop that stock broker from taking part in the market itself.

1. 1. The Securities Contracts (Regulation) Act, 1956:
      This act provides the legal framework for regulating stock exchanges and the trading of securities in India. It defines the powers and responsibilities of stock exchanges and SEBI.

1. 1. SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992:
      These regulations prescribe rules and standards for stockbrokers and sub-brokers, including their registration, conduct, and obligations to clients.

1. 1. SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003:
      These regulations prohibit fraudulent and unfair trade practices in the securities market, including insider trading, market manipulation, and misleading statements.

1. 1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
      These regulations mandate disclosure norms for listed companies. Companies are required to provide timely and accurate information about their financial performance, operations, and material events to protect investors’ interests.

1. 1. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:
      These regulations govern the acquisition of shares and takeovers of listed companies. They aim to ensure fairness and transparency in change of control situations.

1. 1. Investor Education and Protection Fund (IEPF) Authority Rules, 2016:
      These rules govern the utilization of the IEPF, which is aimed at protecting the interests of investors. It allows for the refund of unclaimed dividends, matured deposits, and other unclaimed amounts to investors.

1. 1. The Securities Appellate Tribunal (SAT) Regulations, 2000:
      The SAT is an appellate body that hears appeals against SEBI orders. These regulations govern the procedures for filing appeals and seeking redressal. The appeals against The Securities Appellate Tribunal goes to the Supreme court.

1. 1. The Companies Act, 2013:
      The Companies Act includes provisions related to corporate governance, disclosure, and protection of minority shareholders’ rights, which indirectly contribute to investor protection. All the companies in India gets registered under this act.

1. 1. The Depositories Act, 1996:
      This act regulates the functioning of depositories in India, which play a vital role in facilitating electronic trading and dematerialization of securities, enhancing investor safety.

GUIDELINES ON FUND RAISING
The Companies Act registers all the companies in India . It regulates , companies, incorporated, registered India. This Act delegates the authority to enforce some of it’s provisions to SEBI. These functions include regulation of raising capital, corporate governance norms etc. The SEBI gives disclosure and investor protection guidelines.

STOCK EXCHANGES
The Securities Contracts (Regulation) Act, 1956 has empowered SEBI to recognise and regulate stock exchanges and later commodity exchanges in India.
SEBI has the power to declare an Instrument as a security . It also creates an Investor Protection Fund for each stock exchange.

SAFEGUARDS AGAINST FRAUD

 

1. 1. The frauds undermine regulations and prevents a market from being fair and transparent . SEBI notified the Prohibition of Fraudulent and Unfair Trade Practices Regulations in 1995 and the Prohibition of insider Trading Regulations in 1992. The main frauds that occur in stock market are market manipulation and insider trading. Certain cases which shocked India with the frauds committed in stock market are given below-
      a. Ketan Parikh Scam – This scam occurred around 2000s .Ketan Parekh, a stockbroker, was involved in manipulating the prices of certain stocks, particularly those of companies in the technology, media, and telecommunications sectors. He engaged in circular trading and created a web of interconnected entities to inflate stock prices. This led to a stock market bubble that eventually burst, resulting in substantial losses for investors. Finally he was fiend and barred from trading in Indian securities market.
      b. Harshad Mehta Scam- this scam occurred in 1990s, it was regarding market manipulation .Harshad Mehta, a stockbroker, exploited various loopholes in the banking and stock market systems to rig stock prices and manipulate the Bombay Stock Exchange. The scam led to a significant rise in stock prices, followed by a sharp crash, causing massive financial losses. Harshad Mehta was eventually charged with financial crimes and faced legal consequences. This scandal exposed weaknesses in India’s financial regulatory framework and led to subsequent reforms in the securities market.

1. 1. SEBI has been given the power of a civil court to summon persons , seize documents and records , attach bank accounts and property , and to carry out investigations.

1. 1. SEBI has acted against frauds committed by people including Sahara India case , Ketan Parek ( as explained above) and Vijay Malya since 1992 whenever any question on the credibility of India’s Stock market has been raised it’s the SEBI who comes into the picture for safeguards and regulations.

1. 1. Appeals against orders of SEBI and stock markets can be maid to the Securities Appellate Tribunal (SAT) comprising of three members .Appeals from SAT can be made to Supreme Court.

Stock Exchange Reforms
• SEBI has time and gain come up with new regulations be it The Securities Appellate Tribunal (SAT) Regulations, 2000, The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, or The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 etc . They aim to regulate the and safeguard the interest of investors and curb malpractices in the stock market.
• BOLT system Reform was adopted in January 1995 by the Bombay Stock Exchange (BSE) when it shifted to online trading platforms which was called BOLT . The BSE allowed expansion of online trading system operational during 1995 .
• Exchange Reforms were introduced by the SEBI which revolutionised the market system with online trading system and built BOLT system providing transparent trading and investments in stock market.. this lead to the launching of a depository system , on line electronic trading for all exchanges . It also encouraged online registration of different stock brokers in the country.

Potential Laws / amendments/laws needed to prevent stock market volatility
• A strict Insider Trading regulation is needed ,a clear definition of insider trading should be provided and the penalties should also be increased so as to create a fear in the minds of the wrongdoers.
• In Market Manipulation Prevention strict regulations and surveillance should be introduced to detect market manipulation and again strict penalties should be imposed on the wrongdoers.
• Circuit Breakers should be introduced so that they temporarily halt trading during extreme price movements. It would act as a cooling period and prevent panic selling and buying of stocks. Which would ultimately help the investors and also save us from what happened in the case of Adani stocks after the Hindenburg report.
• Real time reporting should be done for large scale or unusual traders to ensure transparency and so as to regulate any irregularities if arise.
• A coordinate response plan should be formulated in advance for in case of market crisis . The central banks and government authorities should address it so that the Nation stands united in case when the market falls drastically so that it’s not only the investors and buyers who bear all loss .
• Rules should be made for mandatory market education programmes to be taken by people before letting them invest or during the time of investing to assist them and to let them know what to do in case of market crisis or malpractices .
• With the coming of technology it’s high time to apply it in stocks regulation as well, apart from listing them online. We should make such laws mandating the firms engaged in high frequency trading to have automated control in place so a stop prevent runway algorithms and erroneous orders.
• It should be made mandatory for the companies to disclose material information related to their companies so as to prevent any kind of volatility arising because of non-disclosure of information.

CONTRIBUTORS

Authored By:
Nidhi Yadav , Army Institute of Law Mohali, Punjab.
Edited By:
Tammana Bahl
Email: tammana@oberoilawchambers.com
Contact: +91 8360347585
Gagan Oberoi
Email: office@oberoilawchambers.com
Contact: +91 981270007

REFERENCES

Statutes
• The Securities Appellate Tribunal (SAT) Regulations, 2000
• The Depositories Act, 1996
• The Companies Act, 2013
• Investor Education and Protection Fund (IEPF) Authority Rules, 2016
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003
• SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
• The Securities Contracts (Regulation) Act, 1956

Articles and Journals
• Hindenburg report on Adani group | SC calls for protecting Indian investors from sudden market volatility – The Hindu
• What is the Difference Between Capital Markets and the Stock Market? – Robinhood
• Demystifying SEBI: Safeguarding India’s Stock Market Integrity | Paytm Money Blog
• Features of the Security and Exchange Board of India (SEBI) (ipleaders.in)
• The Securities And Exchange Board of India Act 1992.
• SEBI | Securities and Exchange Board of India Act, 1992 (As amended by the Finance Act, 2021 (13 of 2021) w.e.f. April 1, 2021)
• (PDF) The SEBI Role in Indian Stock Market (researchgate.net)
• SEBI – Objectives, Functions, Purpose and Structure (byjus.com)
• Framework for protection of investors in securities market – iPleaders
• What Is Financial Market: Definition and Meaning | Capital.com
• Outstanding Shares Definition and How to Locate the Number (investopedia.com)
• Financial Instruments Explained: Types and Asset Classes (investopedia.com)