ROLE OF SEBI IN PRIMARY MARKET 1 The Indian market is one of the main and promising emerging

security market in the world and therefore is ranked eight amongthe other world markets. The market in its entirety can be

divided into

Primary market Secondary market, and Derivative market

The capital market is a market for long –term funds both equityand debt- and funds raised within and outside of the country; theprimary market refers to the long –term flow of funds from thesurplus sector to the government and corporate sector (throughprimary issues) and to banks and non-banks financialintermediaries (through secondary issues).2 The primary market isthe market which provides a conduit for sale of new securities.This market provides chance to issuers of securities, thegovernment as well as corporate, to raise capital to meet theirrequirements of investments or for liberation of theirobligations. Securities laws are needed mainly because of theunique informational needs of the investors because sellingsecurities to investors in the various capital markets providesthe means for corporations, governments and government agenciesto satisfy their need for capital. And to regulate and controlvarious volatile natured reforms of the market the regulation of

1 SURBHI SHARMA, 4th year National Law University , Odisha.2 SHAIK ABUDL MAJEEB PASHA et al., A STUDY ON ROLE OF SEBI IN INDIAN CAPITAL MARKET: AN EMPIRICAL ANALYSIS, International Journal of Multidisciplinary Research Vol.2 Issue 3 (March 2012); available at zenithresearch.org.in/.../30_ZEN_VOL2_ISSUE3_MARCH12.pdf

the capital market is highly needed. The securities market isregulated by various agencies, such as the Department ofEconomics Affairs (DEA), the Department of Company Affairs (DCA),the Reserve Bank of India (RBI) and the SEBI3. This project willonly deal with role of SEBI in primary market.

SEBI has been delegated with the task of protecting investor’sinterest, to encourage development of securities market as wellas regulating it. And to exercise its powers and carry out itsfunctions, SEBI has set up various departments in diverse marketssuch as:-

Primary Market Department Issue Management and Intermediation Department Secondary Market Department (Policy, Operating and ExchangeAdministration New Investment Products, Insider Trading) Secondary Market Department (Exchange Administration,Inspection and Non-Member Intermediaries).Institutional Investment Department (Mutual funds andForeign Institutional Investment).

The SEBI Act, 1992 establishes SEBI with four-fold objectives ofprotection of the interests of investors in securities,development of the securities market, regulation of thesecurities market and matters connected therewith and incidentalthereto.4

SEBI plays a very important role in primary market; some of itsfunctions are looking after all policy matters and regulatoryIssues for primary market, portfolio management services,investment advisors, regulation and monitoring of merchantbankers etc. main objective of this paper is to discuss about the

3 Id.4 Supra note 1

role of SEBI in protecting shareholders interest in primarymarket with taking into study four main aspects namelyregulation over intermediaries, disclosures in offerdocuments ,code of advertisement and insider trading.

Over the years, SEBI has brought about several changes to theissue process which range from minute details such as the numberof centers for receiving applications for public offerings toevents that substantively influence and affect investor welfare.SEBI has synchronized the primary market by system of rules whichcould regulate the areas such as issuers’ eligibility to offersecurities to the public, by regulation of information producedat the time of issue; in toto SEBI looks into regulation ofprocesses and procedures concerning the issuance of securities.These aspects are basically governed by SEBI (Issuer of Capitaland Disclosure Requirements) Regulations, 2009 (ICDR)5 and a setof regulations which would govern the different intermediariessuch as the merchant banker, registrar to the issue etc.

To manage its affairs, SEBI has a five member board, headed by a chairperson, out of the five members, one member each is taken from the Law and Finance ministries, one member is from RBI, and the remaining two members can be eminent members of the industry.6

When the Securities and Exchange Board of India (SEBI) Act was brought into force in 1992 the forum where SEBI's orders could bechallenged was an appellate authority comprising government

5 SEBI has made available on its website a latest version of the SEBI (ICDR) Regulations, 2009 incorporating the changes made by the SEBI (ICDR) (Amendment) Regulations, 2009, SEBI (ICDR) Amendment Regulations, 2010, SEBI (ICDR) (Second Amendment) Regulations, 2010 and SEBI (ICDR) (Third Amendment) Regulations, 2010.6 Siddharth Singh, SEBI – Insights and Functionalities (February 2, 2010); available at file:///E:/studies/corp%20law/SEBI%20-%20Insights%20and%20Functionalities.htm

officers in the Finance Ministry; in 1995, when SEBI was given the power to impose monetary penalty, the SAT was set up to decide on appeals against SEBI imposed monetary penalties, leaving the appellate powers in other matters still with the Central Government. 7

It was in February 2000 that even the remaining appellate powers of the Central Government were transferred to the SAT; the SEBI Act was amended in 2002 restructuring the constitution of the Tribunal to a three-member set-up though the prevailing one-member set-up was to continue till two more members were appointed.8

SEBI derives its powers from sec 55A of companies act. SEBI has been empowered to administer the provisions of the sections specified in section 55A in relation to mainly three matters:

(i) issue of securities;(ii) transfer of securities; and(iii) Non-payment of dividend.9

This section has been inserted by the Companies (Amendment) Act, 2000 to provide the power to inspect books of account and other books and papers in respect of issue and transfer of securities and non-payment of dividend will be managed by the Securities andExchange Board of India. In respect of other companies, the said provisions will continue to be administered by Central Governmentthrough the department of Company affairs and ROCs.10 Section 55

7 SAT's commendable role in fine-tuning the capital market, (business)The Hindu; available at http://www.hindu.com/biz/2003/11/10/stories/2003111000010200.htm (Monday, Nov 10, 2003)8 Supra note 6.9 Section 55A, The Companies Act,1956.10 A. Ramaiya, Guide to the Companies Act , pg 722-724 (17th ed. 2010).

A (1) of the Companies Act requires the SEBI to deal with mattersconcerning the issue of securities. In addition to that referencecan be made to Section 11-B of the SEBI Act which vests the SEBI with power to make an inquiry and issue directions to any companyin respect of matters specified in Section 11-A of the SEBI Act.11

A recent judgment by the Delhi high court in Kimsuk Krishna Sinha v. SEBI12 throws interesting light on the role of SEBI in ensuring Correct Disclosure in offer documents and actions that SEBI can or should take.The high court says that

“The purpose of inserting Section 55A in the Companies Act was to empower theSEBI to take both corrective and preventive action. This is perhaps because as aregulatory body SEBI gets to see the draft prospectus preceding a public issue bya company even before the public gets to see the RHP. SEBI is enabled andempowered to examine the DRHP and insist on complete and truthful disclosureof all relevant facts therein. The very purpose of having an independentregulatory authority like SEBI, and vesting it with statutory powers of inquiry, isto enable it to take prompt action in matters relating to issue and transfer ofshares

Besides, section 29A of the Securities Contracts( Regulation) Act, 1956 provides for further powers there under to be delegated to SEBI by Central Government.

Certain powers under the Securities Contracts (Regulation) Act, 1956 have also been entrusted to SEBI for regulating the dealings in securities on the stock exchange and outside the stock exchange

The main subject matter of the paper will revolve around thequestions relating to role and influence SEBI has in primarymarket in terms of rules and regulation in protecting11 Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197.12Id.

shareholders interest in the primary market. We will try to lookin brief how does SEBI protects those shareholders interest withreference to SEBI’s regulation over intermediaries, disclosuresin offer documents, code of advertisement and insider trading.Scope and case laws which will be used in this project have beenlimited to Indian context.

Role of SEBI in regulating Disclosures of Offer Documents and Code ofAdvertisement

Since the authorization of Securities and Exchange Board of India(from now onwards will be referred as SEBI), it has come up withnumerous set of rules and regulation with an aim to regulate theemerging Indian securities market and also to improve its safetyand efficiency. These initiatives have made a huge impact onalmost every facet of the Indian market rather some of theseinitiatives have even changed the market vitally.

“There is a growing network of financial intermediaries that operate in a highlycompetitive environment while being governed by a tight set of norms. India hasone of the most sophisticated new equity issuance markets. Disclosurerequirements and the accounting policies followed by listed companies forproducing financial information are comparable to the best regimes in theworld.”13

Among many important things one of the most important works ofSEBI is to provide safety to dealings and investment for whichtransactions are done with adequate transparency along withstrict compliance of rules laid down by SEBI which subsequentlyprovides high degree of security to transactions at the stockexchange. SEBI also look after the dealing in stock exchanges inIndia and as we know a stock exchange allows trading only insecurities that have been listed with it and for listing anysecurity it has to satisfy the standards laid down by SEBI to seethe genuineness and soundness of the company and with that it

13 G Sabarinathan ; SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments; Vikalpa Vol 35 No 4 (2010)

also has to provide for disclosure of certain information onregular basis. 14

As part of SEBI’s efforts to protect investors’ interests, it hasinitiated many primary market reforms which include improveddisclosure standards in public issue documents, introduction ofprudential norms and simplification of issue procedures.15 TheSEBI has approved committee report by Y.H. Malegaon Committee onaccounting standards and issued guidelines in the above mentionedregard in Jan. 2000. The report suggested that disclosure normsshould be widened and relevant accounting standards should beupgraded to that of internationally acknowledged standards. Withthat additional disclosures are required to be given to make themmore meaningful and transparent. As a result of that all listedcompanies are now indebted to observe forcibly the clauses oflisting Agreement and SEBI has powers to enforce them. 16

As a result of that companies are now required to disclose allmaterial facts and risk factors associated with their projectswhile making public issue. All issue documents are to be vettedby SEBI to ensure that the disclosures are not only adequate butalso authentic and accurate.17

The Securities and Exchange Board of India issued the guidelinesfor disclosure and investor’s protection in June, 1992 after theCapital Issues (Control), Act, 1947 was repealed. In theseguidelines SEBI requires the issuer (which is here the company)

1418 Indian Financial Market; available at http://www.nios.ac.in/srsec319new/319el18.pdf15 Id.16 Lesson 17 Securities Exchange Board Of India (SEBI),Security Analysis And Portfolio Management; available at http://www.psnacet.edu.in/courses/MBA/sapm/lecture-17.pdf17 Supra note 2

to disclose full facts and particulars to the intending investorsin their offer documents and also prescribe other rules inconnection with the issue of shares.

Chapter V of ICDR deals with the manner of disclosures in theoffer documents. Section 57 of ICDR says that the offer documentshall contain all material disclosures which are true andadequate so as to enable the applicants to take an informedinvestment decision, it also says that the letter of offer shallcontain disclosures as specified in part e of schedule viii.18

SEBI has issued detailed guidelines for the disclosures of fullfacts in the Prospectus/offer documents by the issuer companies.It says that along with unveiling all material facts the companyhas to state the risk aspects associate while making publicissues. In case of the existing companies, financial performanceof the company for the last five years, along with risk factorsand management insight of risk factors are also requisite to bethere in the prospectus/offer document.19

Chapter VI of Securities and Exchange Board of India (Disclosureand Investor Protection) Guidelines, 2000 talks about the contentof the offer document, Section I contents of the prospectus whichsays that other than disclosures specified in Schedule II of theCompaniesAct, 1956, the prospectus shall contain all the information whichshall be true and adequate so as to facilitate the investors tomake an informed decision on the investments in the issue. The

18section 57 , Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, (2009)19 Unit 10 Regulatory Framework For Capital Market; available at www.egyankosh.ac.in/ bitstream/ 123456789/ 25899/ 1/ Unit10.pdf

information must be substantial enough for the investor to makean informed choice.20

In addition to regulations regarding the disclosure requirementsSEBI also looks into the fact that investor does not get befooledby misleading advertisement .SEBI has issued guidelines for thesame to ensure that the advertisement is truthful, fair andclear. For e.g. it shall be the responsibility of the LeadManager to ensure strict compliance with the code ofadvertisement by the issuer company.

Chapter IX of Securities and Exchange Board of India (Disclosureand Investor Protection) Guidelines, 2000 deals with guidelineson advertisement. It clearly mentions that an advertisement shallbe in a clear, concise and understandable language. Excess use oftechnical terminology should be avoided. Along with that it alsomentions what amounts to misleading advertisement. The codementions that

Advertisements shall be accurate, true, fair, clear, complete,unambiguous and concise. It should not contain statements whichare false, misleading, biased or deceptive, based onassumption/projections. It should not be designed as likely to bemisunderstood, it should not contain statements which directly orby implication or by omission may mislead the investor. 21

Advertisements shall not be so framed as to exploit the lack ofexperience or knowledge of the investors. No advertisement shalldirectly or indirectly discredit other advertisements or make

20 Securities And Exchange Board Of India (Disclosure And Investor Protection)Guidelines (2000)21 Sixth Schedule Regulation 30 ,THE GAZETTE OF INDIA EXTRAORDINARY PART – III – SECTION 4 , SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) (AMENDMENT) REGULATIONS (2012)

unfair comparisons and it shall be accompanied by a standardwarning in legible fonts.

This is all done by SEBI with an aim to protect the investor, inreality the term “Investor Protection” is a very broad termencompassing a range of measures intended to protect theinvestors from malpractices of companies, brokers, merchantbankers, etc. Since all investments include some risk element, so“Investors Beware” should be the motto of all programs forenlistment of savings for investment. The investor can suffer theloss either by his own mistake of carelessness or by malpracticedone by the company or by any broker. For the latter part theyhave every right to complain. The main purpose of SEBI behind allthe above mentioned regulations is to protect the investor frombeing befooled. By providing all this information SEBI is tryingto protect the shareholders interest by making him dotransactions on the basis of informed decisions. So we can saythat SEBI plays a very important role in protecting shareholderfrom getting coned.

Preserving the Shareholders’ interests through regulation overintermediaries

SEBI has introduced a number of regulatory measures with thepurpose of restructuring the capital market. These regulationswere brought into the market mainly to protect the investors'interest. Practically if we see it is not always possible thatthere is direct transaction of securities h between the issuerand the investor because of many different issues such asdifferent locations etc. so to help both the parties there arepeople known as intermediaries who help both the party in theirtransaction. Cambridge dictionary defines intermediary as

‘someone who carries messages between people who are unwilling orunable to meet’. Here in this context also intermediaries arethose persons who are associated with the securities market andact in between the investors and the issuers of securities. Theyfacilitate the securities transactions, for example, merchantbankers, brokers, underwriters; Registrar to an issue, depository.participants, etc.22 one of the main objectives of SEBI is‘Promotion of efficient services by brokers, merchant Bankers andother intermediaries so that they become competitive andprofessional.’23

Risks are inherent in any competitive market, and investorsbenefit from competitive markets so therefore management of theintermediaries are required to develop and implement effectiveprocesses and management systems commensurate with their businessoperations and risk characteristics in accordance with thegeneral principles set out in the regulation. 24

In order to interpose between issuers and investors, regulatorsrecognize various classes of intermediaries in the capitalmarket. Regulation through intermediaries has been found, perhapsmore effective in certain spheres of activity. SEBI, over theperiod, has recognized many types of capital marketintermediaries in India.25 Intermediaries such as merchantbankers, underwriters, debenture trustees, bankers to an issue,

22 Supra note 7

23 Supra Note 424 Regulatory Framework for Intermediaries, Securities and Futures Commission (June 2011); available at http://www.sfc.hk/sfc/doc/EN/aboutsfc/Regulatoryframework.pdf25 Part-III Functions of SEBI in Respect of Matters specified in Section 11 ofthe SEBI Act, 1992; SEBI Annual Report (2002-2003); available at http://www.sebi.gov.in/cms/sebi_data/commondocs/0203c_p.pdf

registrars to an issue and share transfer agents and portfoliomanager are the intermediaries that function in the inter alia inthe primary markets.26

‘Financial intermediation can improve economic efficiency in atleast five ways, by:

1) facilitating transactions;

2) facilitating portfolio creation;

3) easing household liquidity constraints;

4) spreading risks over time; and

5) reducing the problem of asymmetric information.’ 27

Starting with Section 12 of the SEBI Act28 gives power to grantregistration certificates to intermediaries, this provides forcompulsory registration of the various intermediaries associatedwith the securities market hence all intermediaries, namely,stock broker, sub-broker, share transfer agent etc. are requiredto buy, sell, or deal in securities in accordance with theconditions of a certificate of registration granted by SEBI.29

SEBI is also empowered to suspend or cancel a certificate ofregistration after giving the person concerned a reasonableopportunity of being heard.30The same act confers power to SEBIissue directives to the intermediaries.

Section 11(2) of SEBI act provides that SEBI shall register andregulate the working of stock brokers and sub-brokers and In

26 Id.27 CHAPTER 3: The Role of Financial Intermediaries and Financial Markets; available at http://highered.mcgraw-hill.com/sites/dl/free/.../chapter03sg_5ed.doc28 Securities and Exchange Board of India Act, 199229 Supra note 730 Id.

fulfillment of the above, SEBI carries out inspections of thebooks and records of stock brokers to verify whether Books ofaccounts, records and other documents are being maintained in themanner specified by the Securities Contracts (Regulation) Rules,1957 and SEBI (Stock Brokers and Sub Brokers) Regulations,1992.31

For insure that shareholders interest is protected SEBI relies oncertification by the merchant banker and others for ensuringconformity with the regulations set by SEBI. The provisions castthe responsibility on the issue manager for validating theaccuracy of the prospectus as well as for ensuring that otherintermediaries involved in an issue such as the banker andregistrar have the required license and that the underwriter hasthe financial capacity to provide the service.32

Incorrect certification would mean that the merchant banker runsthe risk of facing stricture or monetary penalty or even beingsuspended or losing its license over the time this certificationmechanism has been continuously strengthened (SEBI, 1995;1996).33

Intermediaries provide many value-adding functions that cannot beeasily substituted or ‘internalized’ through direct supplier-buyer dealings, and hence mediating parties may continue to playa significant role even in the E-Commerce world.34

31 PART III FUNCTIONS OF SEBI IN RESPECT OF MATTERS SPECIFIED IN SECTION 11 OFTHE SECURITIES AND EXCHANGE BOARD OF INDIA ACT(1992); annual report 2000-2001;available at http://www.sebi.gov.in/cms/sebi_data/commondocs/part-34_p.pdf32 Supra note 133 Supra note 134 George M. Giaglis, The Role of Intermediaries in Electronic Marketplaces: Assessing Alternative Hypotheses for the Future; available at http://www.eicstes.org/EICSTES_PDF/PAPERS/The%20Role%20of%20Intermediaries%20in%20Electronic%20Marketplaces%20%28Giaglis%29.pdf

The regime to regulate them should be such that to protect theinterests of investors it should be recognized that the initialentry barrier cannot be set too high and that investor protectionshould also be complemented by the availability of information,facilitating informed choices by investors and availability tothe Commission of inspection, investigatory and disciplinarypowers in respect of the intermediary.35

SEBI has securities and exchange board of India (intermediaries)regulations, 2008 to regulate the conduct of intermediaries.Chapter I states what an intermediary is, chapter II talks aboutregistration of intermediaries. SEBI has incorporated certainobligation on the intermediaries and chapter III talks about thesame obligations. And chapter V talks about actions in case ofdefault and also the manner of suspension and cancellation oflicense. Schedule III of the same regulation talks about investorprotection and says that every intermediary shall make allpossible efforts to protect the interest of investor. He mustensure that he is giving high standard of service must be givenand exercise due skill and diligence.

Role of SEBI in regulating Insider Trading

Mr. Arthur Levitt, a former Chairman of the Securities andExchange Commission of the USA has expressed that insider trading“has utterly no place in any fair-minded law abiding economy.”36

There has been an increasing recognition that in order to35 Mr Justice H.C. Nel, The Final Report Of The Commission Of Inquiry Into TheAffairs Of The Masterbond Group And Investor Protection In South Africa Vol 2 Nel Commission (April 2001) 36 Remarks by Arthur Levitt , A Question of Integrity Promoting Investor Confidence by Fighting Insider Trading, "S.E.C. Speaks" Conference ( February 27, 1998);available at http://www.sec.gov/news/speech/speecharchive/1998/spch202.txt

maintain the confidence of investors in the public securitiesmarket, it is essential that some economic agents who possess aninformational advantage over the others do not exploit the sameto derive pecuniary gains for themselves.37

U.S Securities and Exchange Commission describes "Insidertrading" as a term which includes both legal and illegal conduct,the legal version is when corporate insiders—officers, directors,and employees—buy and sell stock in their own companies.38

Illegal insider trading refers generally to buying or selling asecurity, in breach of a fiduciary duty or other relationship oftrust and confidence, while in possession of material, nonpublicinformation about the security. Insider trading violations mayalso include "tipping" such information, securities trading bythe person "tipped," and securities trading by those whomisappropriate such information.39

‘Company insiders have information unavailable to the public.These individuals have firsthand knowledge of what the company isdoing and better information concerning what the future mighthold. If there are likely problems for the company in the future,such as poor earnings, slow growth, or lawsuits, then insiderscan sell their stock before these events happen. When thisinformation becomes public, the stock’s price should decrease.However, this price decrease occurs after the insider has soldhis or her shares, thus avoiding the loss. In this case theinsider beat the market. On the other hand, insiders know whentheir company has a bright future, high potential earnings,innovative products being developed, etc. When the future looks37 Supra note 1

38 U.S. Securities and Exchange Commission; available at http://www.sec.gov/answers/insider.htm (Modified:04/19/2001)39 Id.

bright, insiders can buy shares before the public becomes awareof these facts. The price, later, fully increases to representthe positive information. In both cases, insiders use privateinformation to beat the market.’40

Earlier, the concept of insider trading was limited to the aspectof a company insider tipping of an outsider and the outsiderusing the tip and trading in the company’s shares, thisconstitutes a breach of fiduciary duty owed by the insider to thecompany’s shareholders; it was called the classical theory ofinsider trading.41 Later US Supreme Court in the case US v/sO’Hagan42 in 1997 extended the scope of insider trading byincluding the misappropriation theory which said that a personcommits insider trading when he obtains material confidentialinformation and uses it in securities transactions in breach offiduciary duty or similar relationship of confidence to thesource of information but not necessarily to the shareholders ofthe company whose stocks are traded.43

It is said that the information captured by insider tradingmodifies the responsiveness of returns to annual unexpectedearnings and also the information captured by insider trainingdiffers from that captured by annual unexpected earnings.44

Insider trading weakens the confidence of the investor in thefairness and honesty of the securities markets and this is reason40 Kris McKinley & Elon College ,Stock Market Efficiency and Insider Trading; available at org.elon.edu/ipe/mckinley.pdf41Neha Mirajgaoker, Insider Trading; available at http://jurisonline.in/2008/09/insider-trading/ (2008)42 United States v. O'Hagan, 521 U.S. 642, 655 (1997)43 Id.44 Steven Allen and Ramachandran Ramanan , Insider Trading, Earning Changes,And Stock Prices, Management Science Vol. 41, No. 4, Apr., 1995; available at http://www.jstor.org/stable/2632886

SEBI has treated the recognition and suit of insider tradingviolation as one of its main concern. SEBI’s first enactment torestrain insider trading, namely, SEBI (Prohibition of InsiderTrading) Regulations, 1992 did not make much advancement due topoor enforcement. These regulations, again, have been amendedsubstantially over time. SEBI’s current approach centers aroundprevention of insider trading by requiring listed companies,intermediaries, and advisors to set up internal systems forpreventing insider trading and reporting on compliance orotherwise to SEBI. The insider trading regulations provide fordisclosure of smaller amounts and provides for disclosure onselling shares (something which the takeover code does notmandate). 45

Regulation 2(e) of SEBI (Prohibition of Insider Trading)Regulations defines an ‘insider’ as a person connected or deemedto be connected and who is reasonably expected to have access toany unpublished price sensitive information in respect ofsecurities [i.e. shares, debentures etc.] of a company, or whohas received or has had access to such unpublished information.46The directors, officer, employers of the company, & personsinvolving a professional or business relationship [like CA’slawyers etc.] are connected person as per regulations 2 (c).47Theinsider trading Regulations provide for disclosure of smalleramounts and provides for disclosure on selling shares (somethingwhich the takeover code does not mandate).48 Regulation 3 & 3Aenumerates the various acts that an insider and company are

45 Supra note 746 SEBI on Insider Trading; available at http://www.legalserviceindia.com/article/l268-SEBI-on-Insider-Trading.html47 Id.48 Consultative Paper on amendments to SEBI (Prohibition of Insider Trading) Regulations 1992, Securities And Exchange Board Of India; available at www.sebi.gov.in/commreport/InsiderTrading.pdf

prohibited to do, these regulations prohibit an insider and acompany to ‘deal’ in certain circumstances; the term ‘deal’ isdefined under regulation 2(d) which describe dealing insecurities to mean an act of subscribing, buying, selling oragreeing to do so by any person either as principal or agent.49

The Securities and Exchange Board of India (Prohibition ofInsider Trading) Regulations 1992 requires that a person who isconnected with a listed company and is in possession of anyunpublished price sensitive information likely to materially affect theprice of securities of company, shall not(i) On his behalf or on behalf of any other person deal insecurities or(ii) Communicate such information to any other person, who whilein possession of such information shall not deal in securities.50

“Price sensitive information” means any information which relatesdirectly or indirectly to a company and which if published islikely to materially affect the price of securities of company.The following shall be deemed to be price sensitive information:—(i) Periodical financial results of the company;(ii) Intended declaration of dividends (both interim and final);(iii) Issue of securities or buy-back of securities;(iv) any major expansion plans or execution of new projects.(v) Amalgamation, mergers or takeovers;(vi) disposal of the whole or substantial part of theundertaking;

49 Supra note 3250 Payel Jain ,An insight into SEBI’s Insider Trading Regulations; available at http://www.vinodkothari.com/tutorials/An%20insight%20into%20Insider%20Trading%20Regulations.pdf

(vii) and significant changes in policies, plans or operations ofthe company;51

Apart from this chapter II of the same regulation givesguidelines regarding prohibition on dealing, communicating orcounseling on matters relating to insider trading. Chapter IIItalks about power given to the board to make inquiries andinspection. Chapter IV talks about code of internal proceduresand conduct for listed companies and other entities mainly itfocuses upon disclosure requirement and internal procedures whichis quite evident from the head note i.e. ‘Policy on disclosureand internal procedure for prevention of insidertrading’52.schedule I and schedule II talks about different modelcode for the prevention of insider trading for listed companieswell as for other entities; the latter schedule although talksabout code of corporate disclosure practices for prevention ofinsider trading.

51section 2 h(ha),Securities And Exchange Board Of India ( [Prohibition Of] Insider Trading Regulations (1992) {Inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-2-2002.}52 Chapter IV ,Securities And Exchange Board Of India ( [Prohibition Of] Insider Trading) Regulations(1992)

Conclusion The Securities and Exchange Board of India Act was passed in1992, thus giving the regulatory teeth to the body; SEBI wasentrusted with the primary task of protecting the interests ofthe investors in addition to that SEBI was also entrusted withthe twin objectives of developing and regulating the stockmarket.53

Throughout this whole journey of SEBI’s existence from last 18years it has tried to find a balance between existing policiesand forming new policies and regulation curbing the loopholes inthe existing policies and then implementing them to ensure thatsecurities market is growing. And it has been successful also inits objective.

The SEBI has framed regulations under the SEBI Act and theDepositories Act for registration and regulation of all marketintermediaries, for prevention of unfair trade practices, andinsider trading.54 In this regard, SEBI has done an excellent jobbecause overall reports show that a lot of investors havedefinitely improved due to the policies and steps taken by theregulator.

To empower investors make informed decisions and facilitate fairdealing, the SEBI now has also introduced online filing anddissemination of time sensitive price information, benchmarkingor mutual fund schemes, valuation norms for unlisted scripts inmutual fund portfolios , rationalization of depository

53 Supra note 554 Supra note 1

participants‘ charges and new regulation for portfolio managers.55

According to recent reports prepared by the internationalorganization of securities commission, fairness and efficiencyare two parts of the same coin. The report observes:

If a market is unfair, in the end it is also inefficient. For example if limit orderpositions are not protected, they will not enter the market and the overallliquidity of the market will suffer.56

Securities and Exchange Board of India has brought about reformsin the new issues market by issuing guidelines for disclosure andInvestor Protection, pricing of new issues by companies, entrynorms for new issues; it has also taken various steps for reformsin the primary new issues market and almost all these measureshave been duly discussed in the above chapters.57 SEBI’s currentapproach centers around prevention of insider trading byrequiring listed companies, intermediaries, and advisors to setup internal systems for preventing insider trading and reportingon compliance or otherwise to SEBI.58

But to have effective investor protection to take place, theregulators need the co-operation of the people involved, theentities and the government. 59

55 Supra note 156Transparency In Secondary Markets: A Synthesis Of IOSCO Debate , International Organization Of Secuirities Commissions, Milano 1993, p2157 Supra note 1258 Supra note 659 Supra note 28

The whole idea of investor protection can be substantiated by thehelp of the words said by Arthur Levitt , the chairman of theSEC, in his recent speech (28 September 1998) as follows:

“The significance of transparent, timely and reliable financial statements and itsimportance to investor protection has never been more apparent. The currentfinancial situations in Asia and Russia are stark examples of this new reality.These markets are learning painful lessons taught many times before: investorspanic as a result of unexpected or unquantifiable bad news.

If a company fails to provide meaningful disclosure to investors about where ithas been, where it is and where it is going, a damaging pattern ensues. The bondbetween shareholders and the company is shaken; investors grow anxious; pricesfluctuate for no discernible reasons; and the trust that is the bedrock of ourcapital markets is severely tested..’’60

So to avoid this kind of situation SEBI has put its foot firm andhence is playing its role very well in protecting theshareholders interest in the security market.

Bibliography

60 Arthur Levitt, The Numbers Game.. NYU Center for Law and Business, New York, N.Y.(September 28, 1998)

Statutes Referred

1. Securities And Exchange Board of India Act,19922. Securities And Exchange Board of India (Prohibition Of Insider Trading)

regulations, 19923. Securities And Exchange Board Of India ( Investor Protection and education

fund) Regulations, 20094. Companies Act,19565. Securities And Exchange Board Of India (Disclosure And

Investor Protection) Guidelines (2000)6. Securities And Exchange Board Of India (Issue Of Capital And

Disclosure Requirements) Regulations

7. Securities And Exchange Board Of India (Mutual Funds) (Amendment) Regulations, 2012

Books Referred

1. James D.Cox Et Al.,Securities Regulation (cases and materials),6th ed,2009

2. Taxman’s SEBI manual,17th ed,20113. A. Ramaiya, Guide to the Companies Act 722-724 (17th ed.

2010).

Articles Referred

1. Bhave, C. B., Insider Trading and SEBI

( http://www.jstor.org/stable/4399312)

2. Gupta, L. C. , Challenges before Securities and Exchange Board of India, (http://www.jstor.org/stable/4403941)

3. Allen ,Steven, and , Ramanan, Ramachandran , Insider Trading, Earning Changes,And Stock Prices, Management Science Vol. 41, No. 4, Apr., 1995; (http://www.jstor.org/stable/2632886)

4. Overview of Indian security market,

(http://www.niftydirect.com/nsebse/market-gyan/Learning

%20Session%205th.pdf)

5. Part-III Functions of SEBI in Respect of Matters specified

in Section 11 of the SEBI Act, 1992; SEBI Annual Report

(2002- 2003);

(http://www.sebi.gov.in/cms/sebi_data/commondocs/0203c_p.pdf

6. Part III Functions Of SEBI In Respect Of Matters Specified

In Section 11 Of The Securities And Exchange Board Of India

Act(1992); Annual Report 2000-2001;

(http://www.sebi.gov.in/cms/sebi_data/commondocs/part-

34_p.pdf)

7. Mr Justice H.C. Nel, The Final Report Of The Commission Of

Inquiry Into The Affairs Of The Masterbond Group And

Investor Protection In South Africa (April 2001)

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Marketplaces: Assessing Alternative Hypotheses for the

Future;

(http://www.eicstes.org/EICSTES_PDF/PAPERS/The%20Role%20of

%20Intermediaries%20in%20Electronic%20Marketplaces

%20%28Giaglis%29.pdf)

9. Mckinley, Kris, Stock Market Efficiency and Insider Trading

(http://org.elon.edu/ipe/mckinley.pdf)

10. Transparency In Secondary Markets: A Synthesis Of IOSCO

Debate, International Organization Of Secuirities

Commissions, Milano 1993, p21

11.Shaik Abudl Majeeb Pasha et al., A Study On Role Of Sebi In

Indian Capital Market: An Empirical Analysis, International

Journal of Multidisciplinary Research Vol.2 Issue 3 (

zenithresearch.org.in/.../30_ZEN_VOL2_ISSUE3_MARCH12.pdf)

12. Pandey, T N Style of functioning of Securities and

Exchange Board of India,

(http://www.claonline.in/DisplayFileDetails.aspx?

tble=QXJ0aWNsZXM=&Filename=NThfMDMuaHRt)

13. Sabarinathan,G, SEBI’s Regulation of the Indian

Securities Market: A Critical Review of the Major

Developments,

(http://www.vikalpa.com/pdf/articles/2010/Vik354-02-

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14. FICCI Study Suggests Major Role For SEBI In Primary

Market Revival, The Financial Express, (Wed, 15 Feb 2012)

15. Consultative Paper on amendments to SEBI (Prohibition

of Insider Trading) Regulations 1992, Securities And

Exchange Board Of India

( www.sebi.gov.in/commreport/InsiderTrading.pdf)

16. Singh, Siddharth, SEBI – Insights and Functionalities,

(February 2, 2010), (file:///E:/studies/corp%20law/SEBI%20-

%20Insights%20and%20Functionalities.htm)

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(www.egyankosh.ac.in/bitstream/123456789/25899/1/Unit10.pdf)

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market, (business)The Hindu;

(http://www.hindu.com/biz/2003/11/10/stories/200311100001020

0.htm ) (Monday, Nov 10, 2003)

19. Chapter 18- Indian Financial Market

(http://www.nios.ac.in/srsec319new/319el18.pdf)

20. Lesson 17- Securities Exchange Board Of India

(SEBI),Security Analysis And Portfolio Management

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(http://www.sfc.hk/sfc/doc/EN/aboutsfc/Regulatoryframework.p

df)

22.CHAPTER 3: The Role of Financial Intermediaries and

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(http://highered.mcgraw-hill.com/sites/dl/free/.../chapter03s

g_5ed.doc)

23. U.S. Securities and Exchange Commission

(Modified:04/19/2001)

(http://www.sec.gov/answers/insider.htm )

24. Mirajgaoker Neha, Insider Trading; (2008)

(http://jurisonline.in/2008/09/insider-trading/)

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(http://www.legalserviceindia.com/article/l268-SEBI-on-

Insider-Trading.html)

26. Payel Jain ,An insight into SEBI’s Insider Trading

Regulations; available at

(http://www.vinodkothari.com/tutorials/An%20insight%20into

%20Insider%20Trading%20Regulations.pdf)

27. Arthur Levitt, The Numbers Game.. NYU Center for Law

and Business, New York, N.Y.(September 28, 1998)

Cases Referred

1. Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197.2. United States v. O'Hagan, 521 U.S. 642, 655 (1997)