NISM Series III A – SEBI Act 1992: Powers, Functions, Penalties and Registration of Intermediaries
Welcome to Part 4 of the NISM Series III A Short Notes series on PassNISM.in. This post covers Chapter IV: Securities and Exchange Board of India Act, 1992 — a fundamental chapter for the NISM Series III A exam.
The SEBI Act forms the legal backbone of India's entire securities regulatory system. Understanding its key provisions is mandatory for compliance professionals, stock brokers, merchant bankers, and anyone preparing for the NISM certification exam.
Overview – SEBI Act, 1992
The SEBI Act, 1992 is the law that established SEBI as a statutory body. Its core purpose is to:
- Protect the interests of investors in securities
- Promote the development of securities markets
- Regulate the securities markets and related matters
SEBI's regulatory ambit includes stock exchanges, stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and all other intermediaries associated with the securities market.
Powers and Functions of SEBI
Under the SEBI Act, SEBI has been granted broad powers. Key functions include:
- Regulating the business of stock exchanges and other securities markets
- Registering and regulating stock brokers, sub-brokers, share transfer agents, bankers to an issue, registrars, merchant bankers, underwriters, portfolio managers, investment advisers, and all associated intermediaries
- Registering and regulating depositories, their participants, custodians of securities, foreign institutional investors, and credit rating agencies
- Registering and regulating Venture Capital Funds and other Collective Investment Schemes
- Promoting and regulating Self-Regulatory Organizations (SROs)
- Prohibiting fraudulent and unfair trade practices relating to securities markets
- Promoting investor education and training of securities market intermediaries
- Prohibiting insider trading in securities
- Regulating substantial acquisition of shares and company takeovers
- Calling for information, undertaking inspections, conducting inquiries, and auditing intermediaries and persons associated with the securities market
- Exercising powers delegated to it under the Securities Contracts (Regulation) Act, 1956
Penalties and Adjudication Under the SEBI Act
The SEBI Act empowers SEBI to impose penalties and initiate adjudication proceedings against intermediaries who default. Non-compliance with provisions under the various sub-sections of Section 15 of the SEBI Act can lead to penalties. Common grounds for adjudication include:
- Failure to furnish information or returns to SEBI
- Failure to enter into agreements with clients as required
- Failure to redress investor grievances
- Engaging in fraudulent or unfair trade practices
- Insider trading violations
Securities Appellate Tribunal (SAT) – Appellate Tribunal
Under Section 15U of the SEBI Act, SAT:
- Is not bound by the Code of Civil Procedure
- Is guided by principles of natural justice
- Has powers to regulate its own procedures
- Has the same powers as a civil court while trying a suit under the Code of Civil Procedure
Registration of Intermediaries
Under the SEBI Act, no intermediary — including stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars, merchant bankers, underwriters, portfolio managers, and investment advisers — can buy, sell, or deal in securities without obtaining a Certificate of Registration from SEBI.
For example, a stock broker applying for registration must apply in Form A of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
Prohibition of Manipulative and Deceptive Devices, Insider Trading – Section 12A
Section 12A of the SEBI Act is a critical section. It prohibits any person from directly or indirectly:
- Using any manipulative or deceptive device or contrivance in connection with the issue, purchase, or sale of listed or to-be-listed securities
- Employing any device, scheme, or artifice to defraud in connection with securities dealings
- Engaging in any act or practice that operates as fraud or deceit upon any person in connection with securities
- Engaging in any insider trading activity
- Dealing in securities while in possession of material non-public information, or communicating such information to any other person
- Acquiring control of any company or securities beyond the permitted percentage without complying with the relevant regulations
Quick Revision – Key Points on SEBI Act for the Exam
| Section | Key Provision |
|---|---|
| Section 11(1) | General powers and functions of SEBI |
| Section 11(2A) | Power to inspect books of listed companies |
| Section 11(3) | SEBI has powers equivalent to civil court in certain matters |
| Section 11A | Power to regulate or prohibit issue of prospectus/offer document |
| Section 12A | Prohibition of manipulation, deceptive devices, insider trading |
| Section 15 | Penalties for various defaults |
| Section 15U | Constitution and powers of SAT |
Frequently Asked Questions (FAQs) What is the purpose of the SEBI Act, 1992?
The SEBI Act, 1992 established SEBI as a statutory regulator to protect investor interests, promote development of the securities market, and regulate all aspects of securities market operations in India.
What is Section 12A of the SEBI Act?
Section 12A prohibits manipulative and deceptive devices, insider trading, and dealing in securities using material non-public information. It covers a wide range of fraudulent behaviors in the securities market.
Can an intermediary operate without SEBI registration?
No. No intermediary — including stock brokers, merchant bankers, portfolio managers, or investment advisers — can deal in securities without holding a valid Certificate of Registration from SEBI.
Continue to Part 5: Securities Contracts (Regulation) Act, 1956 and SCRR, 1957.
NISM Series III A – Securities Contracts (Regulation) Act 1956 and SEBI (Intermediaries) Regulations 2008
Welcome to Part 5 of the NISM Series III A Short Notes series. This post covers two important chapters: the Securities Contracts (Regulation) Act, 1956 (SCRA) and the SEBI (Intermediaries) Regulations, 2008.
Securities Contracts (Regulation) Act, 1956 (SCRA)
The SCRA provides direct and indirect control over all aspects of securities trading and the running of stock exchanges. Its primary objective is to prevent undesirable transactions in securities.
The Act gives the Central Government regulatory jurisdiction over:
- Stock exchanges (through recognition and supervision)
- Contracts in securities
- Listing of securities on stock exchanges
The SCRA aims to prevent undesirable speculation and regulate contracts and transactions in securities. Every transaction in securities between two persons is essentially a contract.
Call for Periodical Returns – Section 6(2)
Every member of a recognized stock exchange must maintain and preserve — for up to 5 years — such books of accounts and documents as the Central Government may prescribe. These records are subject to SEBI inspection.
Contracts and Options in Securities – Section 15
No member of a recognized stock exchange can enter into a contract as a principal with any non-member unless:
- The person's consent or authority has been secured, and
- Disclosure is made in the contract note or agreement
A stock broker may act as principal if written consent is received from the client within 3 days of the contract date, with proper disclosure on the contract note.
Penalties and Procedures – Sections 23 to 26
Sections 23 to 26 provide for penalties on any person or intermediary for non-compliance with provisions under the various rules and regulations governing the securities market in India.
Securities Contracts (Regulation) Rules, 1957 (SCRR)
These rules were framed by the Central Government under Section 30 of the SCRA. Key rules from a compliance perspective:
| Rule | Key Requirement |
|---|---|
| Rule 8 | Specifies rules for admission of members to a stock exchange |
| Rule 9 | All contracts between members of a recognized stock exchange must be confirmed in writing |
| Rule 12 | All stock brokers must get accounts audited by a Chartered Accountant when required by SEBI |
| Rule 15(1) | Every member must maintain and preserve certain books of account and documents for 5 years |
| Rule 15(2) | Certain other documents must be maintained and preserved for 2 years |
SEBI (Intermediaries) Regulations, 2008 General Obligations of Intermediaries
Every intermediary registered with SEBI must:
- Provide SEBI with a Compliance Officer's certificate on 1st April every year, certifying continuous compliance with all obligations
- Display the certificate at all offices including branch offices
- Appoint a Compliance Officer to monitor all regulatory requirements
Inspection and Disciplinary Proceedings
During an inspection by SEBI's inspecting authority, every director, partner, trustee, officer, employee, and agent of the intermediary must:
- Produce books, accounts, records (including telephone and electronic records)
- Furnish statements and information within the time specified by the inspecting authority
- Allow reasonable access to the intermediary's premises
Action in Case of Default
If a default is established, the process is:
- Designated authority submits a report recommending action
- Designated member issues a show-cause notice to the intermediary
- Intermediary is given opportunity to respond
- Appropriate direction or action is passed
A common order may be passed for multiple notices where the subject matter is substantially the same.
Surrender of Certificate of Registration
An intermediary can surrender its registration certificate by making a request to SEBI. SEBI may require the intermediary to satisfy it regarding various factors before processing the request.
Effect of Debarment, Suspension, Cancellation, or Surrender
From the date of debarment or suspension, the concerned intermediary must:
- Not undertake any new assignment, contract, or scheme
- Allow clients to withdraw or transfer securities or funds without additional cost
- Make provisions for liabilities incurred
- Take any other action directed by SEBI regarding records, documents, and investor assets
Code of Conduct Under SEBI (Intermediaries) Regulations
- High Standards of Service
- Conflict of Interest: Identify and disclose conflicts; always act in clients' interest
- Compliance and Corporate Governance: Adhere to all applicable rules and maintain ethical standards
Quick Revision – Record Retention Periods
| Regulation / Rule | Records to be Maintained | Period |
|---|---|---|
| SCRA Section 6(2) / SCRR Rule 15(1) | Books of accounts and documents | 5 years |
| SCRR Rule 15(2) | Certain other documents | 2 years |
| PMLA | Transaction records | 10 years from cessation |
| SEBI (Research Analyst) Regulations | Research reports and records | 5 years |
| SEBI (Investment Advisers) Regulations | Client records and advice | 5 years |
Frequently Asked Questions (FAQs) What is the main objective of SCRA, 1956?
The SCRA aims to prevent undesirable transactions in securities by regulating the business of securities dealing and trading, and by giving the Central Government control over stock exchanges, securities contracts, and listing requirements.
For how long must stock exchange members preserve books of accounts?
Under Rule 15(1) of the SCRR, certain books of accounts and documents must be preserved for 5 years. Under Rule 15(2), certain other documents must be maintained for 2 years.
When must a broker submit a written audit?
Under Rule 12 of the SCRR, stock brokers must get their accounts audited by a Chartered Accountant whenever SEBI requires such an audit.
Continue to Part 6: SEBI (Prohibition of Insider Trading) Regulations, 1992.