The Securities Market Regulation: Role, Rule Making Powers and Quasi Judicial Powers of SEBI and SAT

Introduction

The Indian securities market has witnessed remarkable transformation over the past few decades, evolving from an unregulated space riddled with malpractices to a sophisticated financial ecosystem governed by robust regulatory mechanisms. At the heart of this transformation stands the Securities and Exchange Board of India (SEBI), which functions as the principal regulator of the capital markets in India. Alongside SEBI operates the Securities Appellate Tribunal (SAT), a specialized adjudicatory body that ensures checks and balances in regulatory enforcement. Together, these institutions form the backbone of investor protection and market integrity in India’s financial landscape. The journey of securities market regulation in India reflects the nation’s commitment to fostering transparent and efficient capital markets. During the late 1970s and early 1980s, India’s capital markets experienced unprecedented growth, attracting substantial retail participation. However, this growth was accompanied by serious challenges including price manipulation, unauthorized merchant banking activities, delays in share transfers, and widespread violations of existing company law provisions. These irregularities severely undermined investor confidence and threatened the very foundation of the securities market. The absence of a dedicated regulatory authority meant that existing legal frameworks under the Companies Act, 1956, and the Securities Contracts (Regulation) Act, 1956, were inadequate to address the complexities of modern securities trading.

Recognizing the urgent need for specialized oversight, the Government of India established SEBI on April 12, 1988, initially as a non-statutory body. However, without statutory backing, SEBI’s effectiveness remained limited. The turning point came in 1992 when the SEBI Act was enacted, transforming it into an autonomous statutory authority with comprehensive powers to regulate and develop the securities market regulation. This legislative intervention marked a paradigmatic shift in India’s approach to capital market regulation, providing SEBI with the legal teeth necessary to enforce compliance and protect investor interests.

Historical Context and Legislative Framework

The evolution of securities market regulation in India cannot be understood without examining the legislative framework that preceded SEBI’s establishment. The Securities Contracts (Regulation) Act, 1956, was the primary legislation governing securities trading before SEBI’s inception. This Act provided for the regulation of stock exchanges and prevention of undesirable transactions in securities, but it lacked provisions for comprehensive market surveillance and investor protection. The Capital Issues (Control) Act, 1947, regulated the issuance of securities and required government approval for pricing and quantum of issues, but this regime proved cumbersome and unsuited to the liberalizing economy of the 1980s.

The SEBI Act, 1992, represented a comprehensive overhaul of securities regulation in India. [1] The Act not only established SEBI as a statutory body but also delineated its powers, functions, and organizational structure. Section 11 of the SEBI Act, 1992, specifies the powers and functions of the Board, including the power to regulate the business in stock exchanges and other securities markets, to register and regulate intermediaries, to promote and regulate self-regulatory organizations, and to prohibit fraudulent and unfair trade practices. The Act also incorporated provisions for investigation, inspection, and enforcement, providing SEBI with a comprehensive toolkit for market regulation.

The legislative framework was further strengthened with the enactment of the Depositories Act, 1996, which facilitated the dematerialization of securities and electronic maintenance of ownership records. [2] This legislation addressed one of the persistent problems in Indian securities markets—delays and irregularities in physical share transfers—by establishing a depository system similar to those in developed markets. The integration of the SEBI Act, Securities Contracts (Regulation) Act, and Depositories Act created a comprehensive legal architecture for securities market regulation.

Institutional Structure and Organizational Framework of SEBI

SEBI’s organizational structure is designed to facilitate effective regulation across multiple dimensions of the securities market. The Board of SEBI consists of a Chairman and several members appointed by the Central Government, including representatives from the Ministry of Finance, the Reserve Bank of India, and independent members with expertise in securities markets, law, economics, and finance. This composition ensures that SEBI benefits from diverse perspectives and technical expertise in formulating policies and regulations.

The functional organization of SEBI comprises various departments specializing in different aspects of market regulation. The Market Regulation Department oversees trading activities and ensures compliance with trading norms. The Intermediaries Department registers and supervises brokers, merchant bankers, portfolio managers, and other market intermediaries. The Corporation Finance Department regulates primary market activities including initial public offerings and follow-on public offerings. The Investment Management Department oversees mutual funds, portfolio managers, and other collective investment schemes. This departmental structure enables SEBI to maintain specialized focus on different market segments while ensuring coordinated regulatory oversight.

Core Functions and Responsibilities of SEBI

SEBI’s mandate encompasses three broad categories of functions: protective, regulatory, and developmental. Each category addresses specific aspects of market functioning and collectively contributes to the overall health of the securities ecosystem.

Protective Functions

The protective functions of SEBI are fundamentally oriented toward safeguarding investor interests, which remains the primary objective enshrined in the preamble of the SEBI Act. These functions include preventing price manipulation and market abuse, ensuring fair disclosure by companies accessing capital markets, prohibiting insider trading, and preventing fraudulent practices by intermediaries. SEBI has developed comprehensive regulations to operationalize these protective objectives.

The SEBI (Prohibition of Insider Trading) Regulations, 2015, establish a detailed framework for preventing insider trading. [3] These regulations define “insider” broadly to include any person who has access to unpaid price sensitive information and impose stringent disclosure obligations on insiders regarding their trading activities. The regulations also mandate listed companies to formulate comprehensive codes of conduct for prevention of insider trading and establish mechanisms for monitoring and reporting suspicious trading patterns.

Similarly, the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, provide SEBI with powers to investigate and prosecute various forms of market manipulation including price rigging, circular trading, wash trades, and dissemination of false information. These regulations have been instrumental in SEBI’s enforcement actions against market manipulators and have contributed significantly to improving market integrity.

Regulatory Functions

SEBI’s regulatory functions encompass the entire spectrum of securities market activities. The registration and supervision of market intermediaries constitute a critical component of this regulatory framework. SEBI registers and regulates stock brokers, sub-brokers, share transfer agents, merchant bankers, underwriters, portfolio managers, investment advisers, research analysts, credit rating agencies, and depository participants. Each category of intermediary is subject to specific regulations prescribing capital adequacy norms, operational standards, client protection measures, and codes of conduct.

The SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, establish the framework for broker registration and supervision. These regulations prescribe minimum net worth requirements, specify the examination and certification requirements for brokers, mandate segregation of client securities and funds, and establish investor grievance redressal mechanisms. SEBI periodically revises these norms to adapt to changing market conditions and technological developments.

SEBI also regulates corporate governance standards for listed companies through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These regulations mandate extensive disclosure requirements, prescribe composition norms for boards of directors, require establishment of audit committees and risk management committees, and impose obligations for related party transaction approvals. The regulations represent one of the most comprehensive corporate governance frameworks globally and have significantly enhanced transparency in Indian corporate practices.

The regulation of primary markets represents another crucial regulatory function. SEBI’s jurisdiction over initial public offerings ensures that companies accessing public capital provide complete and accurate information to prospective investors. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, prescribe detailed norms for eligibility, pricing, disclosures, and procedural requirements for public issues. These regulations establish a merit-based regulatory approach where SEBI verifies compliance with disclosure norms rather than evaluating the investment merit of securities.

Developmental Functions

Beyond protection and regulation, SEBI actively promotes market development through various initiatives. These developmental functions include conducting training programs for intermediaries and investors, promoting fair trading practices through self-regulatory organizations, facilitating technological innovations in trading systems, conducting research on securities market trends, and encouraging wider participation in securities markets.

SEBI has been instrumental in modernizing India’s securities market infrastructure. The transition from open outcry trading to electronic trading platforms, the establishment of depositories for dematerialization of securities, the implementation of straight-through processing for settlement, and the introduction of derivatives trading all reflect SEBI’s developmental initiatives. The establishment of investor education and protection funds demonstrates SEBI’s commitment to enhancing investor awareness and compensating victims of intermediary defaults.

Quasi-Judicial, Quasi-Legislative and Quasi-Executive Powers

SEBI’s effectiveness as a regulator stems significantly from the amalgamation of quasi-judicial, quasi-legislative, and quasi-executive powers vested in it by the SEBI Act. This combination of powers enables SEBI to function as a comprehensive regulatory authority capable of rule-making, enforcement, and adjudication.

Quasi-Legislative Powers

The quasi-legislative powers of SEBI emanate primarily from Section 30 of the SEBI Act, which empowers the Board to make regulations for carrying out the purposes of the Act. This power enables SEBI to formulate detailed regulations covering various aspects of securities market functioning without requiring legislative amendments for each regulatory intervention. SEBI has exercised this power extensively, issuing numerous regulations covering intermediary registration, market conduct, corporate governance, mutual funds, alternative investment funds, and various other aspects of securities markets.

The process of regulation-making at SEBI typically involves extensive consultation with market participants and stakeholders. SEBI releases concept papers or consultation papers inviting comments and suggestions before finalizing regulations. This consultative approach ensures that regulations reflect practical considerations and incorporate diverse perspectives. The regulations made by SEBI have the force of law, and non-compliance can result in penalties and other enforcement actions.

Quasi-Executive Powers

SEBI’s quasi-executive powers enable it to implement and enforce the regulations it formulates. These powers include conducting inspections of intermediaries, investigating suspected violations of securities laws, issuing directions to intermediaries and listed companies, suspending or canceling registrations of non-compliant intermediaries, and initiating prosecution proceedings for serious violations. Section 11 of the SEBI Act specifically enumerates various powers of the Board including powers to call for information, undertake inspection, conduct inquiries, and conduct audit of stock exchanges and intermediaries.

The enforcement mechanism available to SEBI has evolved significantly over the years. Initially, SEBI’s enforcement actions were primarily administrative in nature, involving suspension or cancellation of registrations and directions for corrective action. However, subsequent amendments to the SEBI Act have provided SEBI with additional enforcement tools including monetary penalties and disgorgement of wrongful gains.

Quasi-Judicial Powers

The quasi-judicial powers of SEBI represent perhaps the most significant aspect of its regulatory authority. These powers enable SEBI to adjudicate violations and impose penalties, effectively combining the roles of investigator, prosecutor, and judge within a single regulatory framework. This consolidation of powers has been subject to judicial scrutiny and debate regarding compliance with principles of natural justice.

Section 11B of the SEBI Act empowers the Board to issue directions in the interest of investors, for orderly development of securities market or to prevent the affairs of any intermediary being conducted in a manner detrimental to the interests of investors or securities market. These directions can include restraining persons from accessing securities markets, prohibiting intermediaries from carrying out certain activities, and requiring disgorgement of unfair gains. The power to issue such interim directions without following a full adjudication process provides SEBI with an important tool for immediate intervention in cases requiring urgent action.

The adjudication process under the SEBI Act involves appointment of adjudicating officers who conduct proceedings and impose penalties for violations. Section 15A to 15J of the SEBI Act establish the framework for adjudication, specifying the procedure to be followed, the principles of natural justice to be observed, and the quantum of penalties that can be imposed. The adjudicating officer is required to provide reasonable opportunity of hearing to the alleged violator before passing an order imposing penalty.

The quantum of penalties imposable under the SEBI Act has been enhanced significantly through amendments. For various violations including failure to furnish information, failure to file returns, failure to enter into agreement with clients, and other regulatory breaches, penalties can extend up to one lakh rupees per day during which the failure continues, subject to maximum limits specified for different categories of violations. For fraudulent and unfair trade practices and insider trading, penalties can extend up to twenty-five crore rupees or three times the amount of profits made through such violations, whichever is higher.

Securities Appellate Tribunal: Structure and Jurisdiction

The Securities Appellate Tribunal was established under Section 15K of the SEBI Act in 1995 to provide an appellate forum for persons aggrieved by orders of SEBI or its adjudicating officers. [4] The establishment of SAT represented recognition of the principle that regulatory authorities exercising quasi-judicial powers should be subject to appellate review by an independent tribunal. SAT functions as a specialized tribunal with expertise in securities law and provides an efficient mechanism for resolution of disputes arising from regulatory actions.

The composition of SAT includes a Presiding Officer, who must be or have been a judge of the Supreme Court or Chief Justice of a High Court, and two other members who must have expertise in securities law, finance, economics, accountancy, or administration. This composition ensures that SAT brings both judicial experience and technical expertise to bear on the matters before it. The qualifications for appointment, tenure, and conditions of service of SAT members are prescribed in Sections 15L to 15N of the SEBI Act.

SAT’s jurisdiction extends to appeals against orders passed by SEBI under various provisions of the SEBI Act as well as orders passed by adjudicating officers imposing penalties. Section 15T of the SEBI Act specifies that any person aggrieved by an order of the Board or an adjudicating officer may prefer an appeal to SAT. The term “any person aggrieved” has been interpreted broadly by courts to include not only persons directly affected by orders but also persons whose interests are adversely impacted by regulatory actions.

The procedural framework for appeals before SAT is established in Sections 15T and 15U of the SEBI Act read with the Securities Appellate Tribunal (Procedure) Rules, 2000. Appeals must be filed within forty-five days from the date on which a copy of the order appealed against is received by the aggrieved person. SAT has discretion to entertain appeals beyond the prescribed period if it is satisfied that there was sufficient cause for the delay. The appeal must be filed in prescribed form accompanied by prescribed fees and must be in triplicate along with additional copies for respondents.

Upon receipt of appeal, SAT is required to provide reasonable opportunity of hearing to the parties and may pass such orders as it thinks fit, including confirming, modifying, or setting aside the order appealed against. Section 15U mandates that SAT dispose of appeals within six months from the date of receipt of appeal, reflecting the legislative intent to ensure expeditious resolution of disputes. However, in practice, the disposal timelines often extend beyond the statutory period due to complexity of matters and procedural requirements.

SAT possesses powers equivalent to those of a civil court under the Code of Civil Procedure, 1908, for purposes of discharging its functions. These powers include summoning and enforcing attendance of witnesses, examining witnesses on oath, requiring discovery and production of documents, receiving evidence on affidavits, issuing commissions for examination of witnesses or documents, reviewing its own decisions, dismissing applications for default or deciding them ex parte, and setting aside orders of dismissal or ex parte decisions. These powers enable SAT to conduct thorough examination of matters before it and ensure that its decisions are based on complete facts and evidence.

Landmark Judicial Pronouncements and Case Law

The interpretation and application of SEBI’s powers and SAT’s jurisdiction have been shaped significantly by judicial pronouncements. Several landmark decisions have clarified the scope of regulatory authority, standards for judicial review, and principles governing securities market regulation.

In Shreya Singhal v. Union of India, while primarily addressing constitutional validity of Section 66A of the Information Technology Act, the Supreme Court discussed principles of reasonableness and proportionality applicable to regulatory restrictions. These principles have been invoked in subsequent cases examining SEBI’s regulatory actions to ensure that regulatory interventions are proportionate to the regulatory objectives sought to be achieved.

The case of Rakesh Agrawal v. SEBI addressed the scope of SEBI’s investigative powers and the standards of evidence required for establishing market manipulation. [5] SAT held that while SEBI’s investigative powers are wide, the burden of proof for establishing violations rests with SEBI, and circumstantial evidence must be examined carefully before drawing adverse inferences. This decision emphasized the importance of maintaining evidentiary standards even in regulatory proceedings.

In SEBI v. Kanaiyalal Baldevbhai Patel, the Supreme Court examined the constitutional validity of SEBI’s power to impose monetary penalties and the consolidation of investigative, prosecutorial, and adjudicatory functions within SEBI. [6] The Court upheld the constitutional validity of these provisions, holding that the concentration of powers in SEBI does not violate principles of natural justice as long as adequate procedural safeguards are provided. The Court noted that in regulatory matters involving technical and specialized subjects, it is permissible for the same authority to exercise multiple functions.

The decision in Sahara India Real Estate Corporation Ltd. v. SEBI addressed fundamental questions regarding SEBI’s jurisdiction over collective investment schemes and the scope of regulatory authority over instruments that may fall outside traditional definitions of securities. [7] The Supreme Court held that SEBI’s jurisdiction extends to all instruments that fall within the definition of securities under the SEBI Act, and regulatory classification should be based on economic substance rather than legal form. This decision significantly expanded the scope of SEBI’s regulatory reach.

Regulatory Challenges and Contemporary Issues

The securities market regulation in India faces several contemporary challenges arising from technological developments, market evolution, and globalization. The emergence of algorithmic trading and high-frequency trading has posed challenges for market surveillance and regulation of market manipulation. SEBI has responded by introducing regulations requiring registration of algorithmic trading systems and imposing obligations for risk management and system audits.

The growth of alternative investment funds and increasing complexity of financial products have necessitated continuous evolution of regulatory frameworks. SEBI has been proactive in developing regulations for new product categories while balancing innovation and investor protection. The SEBI (Alternative Investment Funds) Regulations, 2012, establish a comprehensive framework for regulation of private equity funds, venture capital funds, and hedge funds operating in India.

The increasing integration of Indian securities markets with global markets has raised questions regarding cross-border enforcement and regulatory cooperation. SEBI has entered into bilateral memoranda of understanding with securities regulators in various jurisdictions to facilitate information sharing and enforcement cooperation. However, challenges remain in coordinating regulatory actions across jurisdictions and addressing regulatory arbitrage.

Conclusion

The regulatory architecture comprising SEBI and SAT represents a sophisticated and evolving framework for securities market regulation in India. SEBI’s comprehensive powers encompassing rule-making, enforcement, and adjudication enable it to respond effectively to market developments and emerging challenges. The establishment of SAT provides necessary checks and balances through independent appellate review of regulatory actions.

The transformation of India’s securities market from an unregulated space characterized by malpractices to a well-regulated market commanding international investor confidence testifies to the effectiveness of this regulatory framework. The continuous evolution of regulations in response to technological innovations, market developments, and global best practices demonstrates the dynamic nature of securities market regulation.

Going forward, the challenge for SEBI and SAT will be to maintain the delicate balance between fostering market development and ensuring investor protection, between promoting innovation and maintaining market integrity, and between regulatory intervention and market efficiency. The success of India’s securities market will depend significantly on the ability of these institutions to adapt to changing circumstances while remaining committed to their core mandate of protecting investor interests and promoting orderly market development.

References

[1] Securities and Exchange Board of India Act, 1992

[2] Depositories Act, 1996

[3] SEBI (Prohibition of Insider Trading) Regulations, 2015 

[4] Securities and Exchange Board of India Act, 1992, Section 15K 

[5] Securities Appellate Tribunal – Orders and Judgments

[6] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[7] SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 

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