Authored By: Anju Sah
Dr Rohini Kanta Barua Law College
Abstract
Investing in stocks and shares without adequate knowledge carries significant risk; therefore, investment must be accompanied by informed understanding for a positive outcome. This article bridges the gap between a market beginner and a savvy investor by explaining the role of the Securities and Exchange Board of India (SEBI) in the capital market. It covers the history, composition, and functions of SEBI, and the important role the regulator plays in the stock market. This article illustrates how a robust regulatory environment transforms an unregulated, disorganised platform into a disciplined, transparent marketplace.
Introduction: SEBI as a Fair Market Regulator
SEBI stands for the Securities and Exchange Board of India, established on 12th April 1992 under the Securities and Exchange Board of India Act, 1992. SEBI is a regulatory body that regulates the stock market and protects investors’ interests in the capital market. It acts as a watchdog, maintaining a fair regulatory framework for the securities market. Since 1992, SEBI has served as the apex regulatory body of the capital market, protecting investor interests and ensuring fair practices through strict market regulations.
SEBI aims to promote transparency in the Indian investment market while encouraging greater participation by investors. It was founded as a regulatory authority to oversee the operations of the Indian capital market, entrusted with the power to monitor and investigate activities across the securities market. The Securities and Exchange Board of India is a quasi-executive, quasi-legislative, and quasi-judicial body — it has the power to draft regulations for the securities market, implement rules, and impose penalties for violations. In this sense, SEBI functions as a referee for the stock market, doing all that is essential to enhance investor protection and ensure fair market regulation.
Constitution and Members
The management board of the Securities and Exchange Board of India consists of nine members:1
- A Chairman;
- Two members or officials from the Ministry of the Central Government dealing with Finance;
- One member from the Reserve Bank of India; and
- Five members appointed by the Central Government, of whom three shall be whole-time members.
History and Origin
The Securities and Exchange Board of India (SEBI) did not emerge overnight. Before 1992, SEBI was regarded as a non-statutory body. It gained statutory recognition and autonomous status on 30th January 1992.
Prior to the establishment of SEBI, multiple Acts governed the Indian capital market and stock exchanges, often leading to confusion and regulatory inefficiency. These Acts included:
- The Bombay Securities Contract Act, 1925
- The Capital Issues (Control) Act, 1947
- The Securities Contracts (Regulation) Act, 1956
- The Indian Companies Act, 1956
The establishment of SEBI marked a significant milestone in the history of the Indian stock market. The idea of creating a dedicated regulatory authority for the Indian securities market gained momentum during the late 1980s. In the 1987–1988 budget speech, the then government highlighted the need for healthy growth of the capital market and stressed the importance of protecting investor rights. The speech drew attention to the urgent need to curb insider trading and malpractices in the securities market, and to build trust among investors that their investments were safe and protected.
An independent regulatory body had become an urgent necessity for the orderly functioning and administration of the securities market. Thus, in 1988, a notification was issued and SEBI was constituted as an interim administrative body under the Finance Ministry. In 1992, SEBI became a fully autonomous statutory body empowered to regulate the Indian capital market.
The Securities Market Before 1988
After World War II, the Indian capital market experienced significant fluctuations, and there was little impetus from the colonial administration for the organised growth of Indian securities markets. In 1948, a report on the Indian Stock Exchange was submitted by a committee headed by P.J. Thomas. The committee’s recommendations included the licensing of stock exchanges and private dealers, as well as the framing of bye-laws for the fair regulation of the Indian stock market. The committee also suggested the registration of securities on stock exchanges and the imposition of restrictions on certain bank transfers.
In 1947, the Capital Issues (Control) Act, 1947 was passed to regulate the issuance of securities.2 Before this Act, the issue of capital was governed by the Defence of India Act, 1939. The primary aim of the Capital Issues (Control) Act was to provide oversight over the issue of capital. It required companies to obtain prior permission from the Central Government before issuing capital, thereby concentrating significant powers in the hands of the Central Government.
The Bombay Securities Contract Act, 1925 regulated the Indian securities market until the Securities Contracts (Regulation) Act, 1956 came into force. In 1951, a report submitted by the A.D. Gorwala Committee recommended that the Bombay Securities Contract Act, 1925 contained various deficiencies that restricted the growth of the Indian capital market. This eventually led to the enactment of the Securities Contracts (Regulation) Act, 1956, to address the growing need for stronger financial institutions and market infrastructure.
The Securities Market After 1988
In 1995, the Securities Contracts (Regulation) Act, 1956 (SCRA) was amended to improve risk management for market participants.3 Again in 1999, the SCRA was further amended to expand the definition of “securities.” Between 1956 and 1999, various committees were constituted to improve the functioning of the Indian capital market, including the G.S. Patel Committee and the Abid Hussain Committee. These committees made significant recommendations for the development of the capital market and for the regulation of financial intermediaries such as merchant bankers, underwriters, and custodial service providers. During this period, SEBI was also established as a non-statutory body in 1988.
Finally, in 1991, a special committee was formed under the chairmanship of M. Narasimham to improve the flexibility and operation of the capital market. This committee’s 1991 report emphasised the need for SEBI to be granted full autonomous statutory status. It recommended that SEBI be empowered with greater regulatory and supervisory powers to effectively control the capital market. As a result, in 1992, SEBI was vested with full supervisory, regulatory, and quasi-judicial powers.
The Indian Capital Market Before the Formation of SEBI
Before the formation of SEBI, the Indian capital market was regulated by a patchwork of Acts, bye-laws, and rules, with no uniform regulatory framework. The absence of a dedicated, empowered regulator made the market vulnerable to fraud and manipulation. Before SEBI was formally constituted in 1988, the Indian capital market was largely unregulated and disorganised. Market activity was overseen by the Controller of Capital Issues (CCI) under the Capital Issues (Control) Act, 1947, but this authority proved insufficient to fairly regulate the market or protect investor interests.
Capital market scams were common, and fraudulent activities went largely unchecked. Insider trading, price rigging, and broker-driven manipulation were widespread. The Harshad Mehta securities scam — one of the most significant financial frauds in Indian history — exposed deep loopholes in the market structure and its regulatory framework, further underscoring the urgent need for an empowered independent regulator.
Additionally, companies were not bound by adequate disclosure requirements. Concealment of material information was commonplace, making it extremely difficult for investors to make informed decisions. In the absence of a strict, effective regulator, retail investors frequently suffered losses due to information asymmetry and unchecked market manipulation.
SEBI: Organisational Structure and Functions
The Securities and Exchange Board of India is one of the most important regulatory authorities governing the Indian capital market. It is empowered with quasi-legislative, quasi-executive, and quasi-judicial powers — meaning it can frame rules, enforce them, and adjudicate violations. This tri-functional character makes SEBI a comprehensive and self-sufficient regulatory body.
The primary objectives of SEBI are to monitor and regulate the capital market, protect the interests of investors, and create a safe investment environment through robust rules and market frameworks. SEBI works to prevent malpractices in the stock market and continually refines its guidelines to keep pace with evolving market conditions.
Among its key functions, SEBI:
- Develops and maintains hassle-free securities markets for investors;
- Regulates market operations and intermediaries;
- Monitors acquisitions and takeovers of companies;
- Examines the books of accounts and other necessary documents of companies prior to their launching an Initial Public Offering (IPO); and
- Registers and regulates financial intermediaries such as stock brokers, merchant bankers, and underwriters.
In terms of its organisational structure, SEBI operates under a hierarchical board comprising a Chairperson nominated by the Union Government, two members from the Union Finance Ministry, one member from the Reserve Bank of India, and five other members nominated by the Union Government.
Conclusion
The Securities and Exchange Board of India stands as the cornerstone of India’s securities market regulatory framework. Born out of the failures and abuses of an unregulated market, SEBI has, since 1992, maintained the critical balance between fair market regulation and robust investor protection. It ensures that the capital market remains a transparent and equitable platform for the trading of shares and securities, while holding companies accountable through periodic scrutiny of their financial records and disclosures.
From its origins as a non-statutory administrative body in 1988 to its current status as a powerful autonomous regulator, SEBI’s evolution mirrors the maturation of India’s own capital markets. It serves as a watchdog that not only establishes the rules of fair play but also enforces them — penalising offenders and safeguarding the trust that investors place in the system. For any beginner entering the world of investment, understanding SEBI is the first and most essential step toward becoming an informed market participant.
Reference(S):
1 Securities and Exchange Board of India Act 1992, s 4.
2 Capital Issues (Control) Act 1947.
3 Securities Contracts (Regulation) Act 1956 (as amended 1995).
