Stock markets play a critical role as they are where buyers and sellers exchange equity shares of public corporations. Within a Free-Market economy, stock markets foster democratized access to investor trading and the exchange of capital. In essence, a free-market economy is a system where the pricing of goods and services are shaped by supply and demand, free from government regulation.
India’s stock exchange scene is dominated by two main players — the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Ensuring fair market practices within these exchanges is the Securities and Exchange Board of India (SEBI), which sets the legal framework and regulates all entities intending to operate in the market. The Securities Contracts Regulation Act (SCRA) strengthens SEBI’s role in recognizing and regulating both stock and commodity exchanges in India, a duty previously held by the Union government.
Key Laws for Stock Market Regulation
A few pivotal acts govern India’s securities market. The Securities and Exchange Board of India Act, 1992, protects investor interests, promotes the development of the capital/securities market, and regulates it. Furthermore, it establishes SEBI’s structure and management.
The Securities Contracts (Regulation) Act, 1956, provides the legal framework governing the listing and trading of securities, the registration and regulation of stockbrokers, and the prohibition of insider trading.
As for the Companies Act, 2013, it lays down regulations for company incorporation, management, and governance, including rules for security issues and transfers.
The Depositories Act, 1996 oversees depositories regulation, dematerialization, and transfer procedures for securities. Finally, Insider Trading Regulations which were laid out in 2015, prohibit insider trading in securities listed on Indian stock exchanges and outline the penalties for violations thereof.
SEBI’s Role in Curbing Market Volatility
While SEBI does not interfere to prevent market volatility, it can issue directions to individuals and entities associated with the market. Using its powers, SEBI can direct stock exchanges to halt trading altogether or selectively. Furthermore, it can bar entities or persons from buying, selling, dealing in securities, raising market funds, and associating with intermediaries or listed firms.
Safeguards Against Fraudulent Market Activities
To guard against trading frauds like market manipulation and insider trading, SEBI implemented the Prohibition of Fraudulent and Unfair Trade Practices Regulations in 1995 and the Prohibition of Insider Trading Regulations in 1992. These regulations set the parameters of fraudulent activity and lay out penalties, including disgorgement of illegitimate gains. Violations of these regulations can lead to violations of the Prevention of Money Laundering Act 2002.
SEBI also issued the Substantial Acquisition of Shares and Takeovers Regulations to ensure acquisitions and management changes occur only after public shareholders get the option to exit the company.
Appeals against SEBI and stock exchange orders can be made to the Securities Appellate Tribunal (SAT), and from SAT, further appeals can be taken to the Supreme Court.
