Securities and Exchange Board of India - Role as a Regulator

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Case Details:

Case Code : FINC036
Case Length : 14 Pages
Period : 1999 - 2004
Pub. Date : 2005
Teaching Note :Not Available
Organization : SEBI
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The vision of SEBI is to be the most dynamic and respected regulator - globally."

- Website of Securities and Exchange Board of India (SEBI), www.sebi.gov.in.

"We have to ensure that there are no issues involving investor interest. We have to watch out for that. I am looking at SEBI to be a benchmark for the rest of the world."¹

- GN Bajpai, Chairman, SEBI.

"SEBI has become like a programmed watchdog. The robbery takes place right under its nose but it barks only the next morning when its owner (the Ministry of Finance) asks it to do so."²

- Sujay Marathi, Journalist, www.mouthshut.com.

Introduction

On April 12, 1988, the Securities and Exchange Board of India (SEBI) was established with a dual objective of protecting the rights of small investors and regulating and developing the stock markets in India.

In 1992, the Bombay Stock Exchange (BSE),³ the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta (Mehta).⁴

Analysts unanimously felt that if more powers had been given to SEBI, the scam would not have happened.

As a result, the Government of India (GoI) brought in a separate legislation by the name of 'SEBI Act 1992' and conferred statutory powers to it. Since then, SEBI had introduced several stock market reforms. These reforms significantly transformed the face of Indian stock markets.

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SEBI introduced on-line trading and demat⁵ of shares which did away with the age-old paper-based trading, thus bringing more transparency into the trading system.

Analysts and experts appreciated SEBI for these reforms. One stock market analyst said, "I'm sure that most of us would agree that SEBI has handled the challenges exceptionally well."⁶ In spite of SEBI's capital market reforms and increasing regulatory powers over the years, analysts felt that it had failed miserably in stopping stock market scams. In the ten years after the Mehta scam, several scams came to light, casting doubt on the efficiency of SEBI as a regulatory body.

However, a few analysts felt there was a need to confer more powers to SEBI to stop these scams. One analyst commented, "It's rather daunting task of putting in place a regulatory framework for the market against all odds."⁷

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1] Interview, There's nothing arbitrary in SEBI, Businessworld, November 24, 2003.

2] Marathi Sujay, Drastic need for restructuring, www.mouthshut.com, February 26, 2002.

3] Established in 1875 in India, BSE is the oldest stock exchange of Asia. It is also the first stock exchange in India to have obtained permanent recognition in 1956 from the GoI under the Securities Contracts (Regulation) Act, 1956.

4] Mehta worked as a stockbroker in BSE. He was the most recognizable person in BSE during the early 1990s and was nicknamed as big bull. Mehta was held responsible for the BSE crash of 1992. On December 31, 2001, he died of heart attack at the age of 47.

5] The process of demat involves the conversion of physical share certificates of an investor into an electronic form and credited in the investor's account with a depository participant (DP).

6] Arun Jethmalani, Musical Chairs at SEBI, Economic Times, January 28, 2001.

7] Narasimhan CRL, More powers for capital market regulator, The Hindu, December 07, 2002.