The Supreme Court asked the Securities and Exchange Board of India (SEBI) and the government to produce the existing regulatory framework in place to protect investors from stock market volatility.

Central idea

• After short-seller Hindenburg Research published a report accusing the Adani Group of stock market manipulation and accounting fraud, its shares plummeted.
• Investors were reported to have lost lakhs of crores.

Laws governing the Indian Stock Market

• The securities market in India is regulated by four key laws —

1. Securities and Exchange Board of India Act, 1992 (SEBI Act)
2. Securities Contracts (Regulation) Act, 1956 (SCRA) and
3. Depositories Act, 1996
4. Companies Act, 2013

• The framing of these laws reflect the evolution and development of the capital market in India.

Brief explanation of each acts-

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

(2) Securities Contracts (Regulation) Act, 1956 (SCRA)

• The SCRA empowers SEBI to recognise (and derecognise) stock exchanges, prescribe rules and bye laws for their functioning, and regulate trading, clearing and settlement on stock exchanges.

(3) Depositories Act, 1996

• As part of the development of the securities market, Parliament passed the Depositories Act and SEBI made regulations to enforce the provisions.
• This Act introduced and legitimised the concept of dematerialised securities being held in an electronic form.
• Today almost all the listed securities are held in dematerialised form.

(4) Companies Act, 2013

• It is an Act of the Parliament on Indian company law that regulates incorporation of a company, responsibilities of a company, directors, and dissolution of a company.
• It stipulates the type of Companies that can be formed such as- Public Ltd., Pt. Ltd., One Person Company ex.

Key role-player: SEBI

• SEBI set up the infrastructure for doing this by registering depositories and depository participants.
• The depository regulations empower SEBI to regulate functioning of depositories and depository participants by prescribing eligibility conditions, periodic inspections and powers to impose penalties including suspending or cancelling the registration as well as monetary penalties.

Can SEBI step in to curb market volatility?

• No direct meddling: While SEBI does not interfere to prevent market volatility, exchanges have circuit filters — upper and lower — to prevent excessive volatility.
• Issue directions: SEBI can issue directions to those who are associated with the market, and has powers to regulate trading and settlement on stock exchanges. Using these powers, SEBI can direct stock exchanges to stop trading, totally or selectively.
• Instant regulation: It can also prohibit entities or persons from buying, selling or dealing in securities, from raising funds from the market and being associated with intermediaries or listed companies.

What about stock exchanges?

• The SCRA has empowered SEBI to recognise and regulate stock exchanges and later commodity exchanges in India; this was earlier done by the Union government.
• In fact, the term “securities” is defined in the SCRA and powers to declare an instrument as a security remain vested in SEBI.
• The rules and regulations made by SEBI under the SCRA relate to listing of securities like equity shares, the functioning of stock exchanges including control over their management and administration.
• These include powers to determine the manner in which a settlement is done on stock exchanges (and to keep them with the times for e.g. T+1) etc.
• It seeks to protect the interests of investors by creating an Investor Protection Fund for each stock exchange.

Safeguards against fraud

• Fraud undermines regulation and prevents a market from being fair and transparent. To prevent the two key forms of fraud, market manipulation, and insider trading, SEBI notified-

1. Prohibition of Fraudulent and Unfair Trade Practices Regulations, 1995
2. Prohibition of Insider Trading Regulations, 1992

• These regulations, read with provisions of the SEBI Act, define species of fraud, who is an insider and prohibit such fraudulent activity and provide for penalties including disgorgement of ill-gotten gains.
• It must be noted that violation of these regulations are predicate offences that can lead to a deemed violation of the Prevention of Money Laundering Act.

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