Q) Examine the role of SEBI as a regulatory authority, regulation of capital markets leads to increase in investors’ protection. This assignment discusses the role played by the Securities and Exchange Board of India (SEBI) as a regulator of Indian capital markets and discusses in depth the capital market reforms initiated by SEBI. In spite of these reforms and increasing regulatory powers over the years, SEBI has been largely unsuccessful in controlling capital market scams. The strengths and weaknesses of SEBI as a regulatory organization are also examined. It describes the recent initiatives by SEBI to promote investor education and corporate governance, transparency and abidance of regulations among corporates.
» The genesis of SEBI
» Role and functions of SEBI
» Introduction to Capital Market
» Role of SEBI in the Capital Market
» Investor protection
» Identify the loopholes in the financial system that allows capital market scams to happen and suggest a suitable course of action to avoid them.
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), the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta (Mehta). Harshad Mehta: the high-profile stockbroker
Harshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed headlines for the notorious BSE security scam of 1992. By year 1990, Mehta became a prominent name in the Indian stock market. He started buying shares heavily. The shares of India's foremost cement manufacturer Associated Cement Company (ACC) attracted him the most and the scamster is known to have taken the price of the cement company from 200 to 9000 (approx.) in the stock market – implying a 4400% rise in its price. It is believed that It was later revealed that Mehta used the replacement cost theory to explain the reason for the high-level bidding. The replacement cost theory basically states that older companies should be valued on the basis of the amount of money that would be needed to create another similar company. By the latter half of 1991, Mehta had come to be called the ‘Big Bull’ as people credited him with having initiated the Bull Run. The making of the 1992 security scam
Mehta, along with his associates, was accused of manipulating the rise in the Bombay Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the banking system and drained off funds from inter-bank transactions. Subsequently, they bought huge amounts of shares at a premium across many industry verticals causing the Sensex to rise dramatically. However, this was not to continue. The exposure of Mehta's modus operandi led banks to start demanding their money back, causing the Sensex to plunge almost dramatically as it had risen. Mehta was later charged with 72 criminal offences while over 600 civil action suits were filed against him. Significantly, the Harshad Mehta security scandal also became the flavor of Bollywood with Sameer Hanchate's film Gafla. Mehta and his associates used an instrument called the bank receipt (BR). Securities were not traded in reality in a ready forward deal but the seller gave the buyer a BR which is a confirmation of the sale of securities. A BR is a receipt for the money received by the selling bank and pledges to deliver the securities to the buyer. In the meantime, the securities are held in the seller’s trust by the buyer.
Armed with these schemes, all Mehta needed now were banks which would readily issue fake BRs, or ones without the guarantee of any government securities. His search ended when he found that the Bank of Karad (BOK), Mumbai and the Metropolitan Co-operative Bank (MCB) two small and little known lenders, were willing to comply. The two banks agreed to...
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