Investor Protection and Empowerment

1. Investor Protection and Empowerment ACG Cross Training Seminar May 29, 2012

2. Disclaimer SEBI, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the presenter / author and do not necessarily reflect the views of SEBI.

3. Functions of Securities Market • Channelizing savings into financing for real sector. • To raise capital for new investment • An alternative to bank finance (CM Model – Issuer – investor structure vis-à-vis – saver – borrower model) • Means for transferring risk and diversifying risk exposure • Efficient Securities Market contributes to economic growth.

4. Evolution of Indian Capital Markets • Long History – stock trading first started in 1830s • BSE established in 1875 – oldest exchange in Asia • Ahmedabad SE formed in 1894, Calcutta SE formed in 1908, Madras SE in 1920 • Bombay Securities Contracts (Control) Act, 1925 • Capital Issues (Control) Act, 1947

5. Legal Framework • Companies Act, 1956 • Securities Contracts (Regulation) Act, 1956 • Securities Contracts (Regulation) Rule, 1957 • Establishment of SEBI by Government ordinance in 1988 • SEBI Act 1992 – Creation of SEBI as statutory independent & quasi-judicial regulatory body • Depositories Act 1996

6. SEBI & it’s mandate • Established by Government ordinance in 1988 • Given statutory status on February 21, 1992 Preamble to SEBI Act, 1992 “An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

7. Regulatory Framework From control of capital to freedom to issue capital Merit to disclosure Giving market greater role in shaping resource allocation Single & Independent Regulator. Regulation of product, market, institution / intermediary Competitive neutrality Regulation & Development Quasi Judicial powers Accountability

8. Types of Instruments • Equity Shares – buy and sale of shares on stock exchange or on spot basis off-market. Transactions either as trader or investor. • Debt securities – Govt securities, Corporate Bonds and Debentures • Derivatives - are contracts which derive their value from the spot price of a given “underlying”. which can include anything like currencies, commodities, securities, index of the prices of securities, debt instruments, interest rates etc. • Futures - legally binding agreement to buy or sell the underlying at a future date • Options - gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying at a predetermined price within or at end of a specified period.

9. Product Traded In Secondary Market Equity Debt Govt. Securities (non-repo) Derivatives Index Futures & Options Stock Futures & Options Exchange Traded Currency Futures Exchange Traded Interest Rate Futures Mutual Funds / ETFs Derivatives on Foreign Equity Indices

10. Indian Securities Markets Secondary Market • NSE occupies 5th position in terms of notional turnover (US$ 455 Billion) and 2rd position in terms of total volume (91.39 million) among derivatives exchanges globally (based on February 2012 trading data). • India stands 1st in Stock Futures, 13th in Index Futures, 5th in Stock Options and 4th in Index Options in World Derivatives Market (in terms of turnover)

11. Indian Securities Market Market Participants

12. Mandate of SEBI

13. Regulatoryprocess • Pro active as well as reactive approach • Extensive consultation with market participants & other regulators • Clarification of policies through Informal Guidance Scheme • Posting of all rules, regulations, circulars and data on the SEBI web site • Dissemination of orders passed by SEBI, Securities Appellate Tribunal and the Supreme Court, through the SEBI web-site

14. Regulation of Intermediaries Licensing standard Certification of associated person Prudential regulation Internal controls and risk management Business conduct Rules Market conduct Rules Procedure for dealing with failure of market intermediary

15. Regulation of Market Efficiency and credibility of the markets Integrity of trading. Transparency of trading Proper management of large exposure, default risk and market disruption. Risk Management Clearing and settlement – fair, effective and efficient. To detect and deter manipulation and unfair trade practices.

16. Regulatory Norms • To ensure that investors get clear, accurate information for their investment in financial products (information asymmetry) • Safeguarding & Maintenance of functioning of competitive framework. • Protect investors from hidden fees, abusive terms & deceptive practices.

17. Regulatory Norms • Financial Literacy • Suitability and appropriateness • Investors responsible for risks & rewards • Prevention of potential systemic risks.

18. Regulatory Norms • Effective Surveillance to ensure: • transparency, fairness and integrity in the markets • true and fair price discovery • prompt detection of market manipulation and other market abuses • Prompt investigation and timely action • Suitable policy intervention

19. Regulatory Norms • Monitoring / Surveillance • Price volume movements • Position / exposure / concentration monitoring • Corporate developments • Filings under Insider Trading & Takeover Regulations • Rumour Verification • Stock Watch System • Online monitoring through alerts • Offline monitoring through day-end and periodic reports

20. Regulatory Norms Continuous Disclosure of all material news Corporate Governance Accounts Salient feature of B/S, P&L Quarterly Interim Financial Reports Consolidated Financial Statements, Cash flow Statement, Related party transaction Minimum level of shareholding Disclosure of shareholding / ownership Utilization of Issue proceeds Responding to market rumours Disclosure of Bulk / Block deals

21. Accounting Standards close to International Standards. Corporate Governance Guidelines made mandatory for listed companies Issue of Capital and Disclosure Requirements (ICDR) Regulations, replaced the previous Disclosure and Investor Protection (DIP) guidelines . Automated Screen based Trading from 1994 Moved from physical securities to dematerialisation in 1998 - 99.9% securities traded in demat form Regulatory Norms

22. Regulatory Norms • Account period settlement to Rolling settlements in 2000 • Introduction of derivatives trading in 2000 – now we have the largest single stock futures market in the world • Adequate risk containment measures in place - Real time VaR based margining and strict exposure monitoring mechanism • Efficient clearing and settlement mechanism • Circuit filter for individual scrips and market wide index based circuit breaker • Enhanced Surveillance Standards - Integrated Market Surveillance System (IMSS)

23. International Scenario • Protection at Trading Member Level • Bankruptcy of a Major Global Financial Broker MF Global • Moving towards Client Level Protection

24. Order has to be entered in specific client code which is mapped to unique identification (Permanent Account Number – PAN) Margins- upfront client level portfolio based initial margins and mark to market collected before start of next days trading Volatility parameters revised multiple times a day Online and real time monitoring of positions and margins. Minimum Liquid Networth to be maintained at any point of time Automatic deactivation of trading terminals Client level details & segregation at CC level being considered Indian Risk Management Scenario

25. Regulatory Measures • Protection incase of Public Issue of Securities Issue of Capital and Disclosure Requirements (ICDR) Regulations - Eligibility Norms for Issuer - Pricing Norms - Disclosure Requirements (IPO/FPO)

26. Regulatory Measures • Protecting Investors Funds and Securities • Client’s money in a separate account • Restriction on use of funds from client’s account • Restriction on use of constituent beneficiary account • Provide statement of accounts for funds and securities to all the clients • Periodic reconciliation and settling of running accounts • Penalty for violation of norms

27. Regulatory Measures • Protecting Investors Interest • Disclosure of Proprietary trading / funding • Maintenance of separate codes for each client and proprietary trades • Timely issue of Contract Notes by brokers – exchange also sends to select clients on random basis • Facility of sms alerts • Trade Verification facility on exchange website • Facility to freeze demat account

28. Regulatory Measures • Administrative mechanism of Capital Cushions • Protection in case of a Default- • Settlement Guarantee Fund • Investor Protection Fund • Investor Complaint Resolution through Conciliation and Arbitration Mechanisms

29. Regulatory Measures • Processing of Investor Complaints in SEBI Complaints Redress System (SCORES) • Centralized database of all complaints. • Online movement of complaints to the concerned intermediaries • Online upload of Action Taken Reports (ATRs) by the concerned entities • Online viewing by investors of action on the complaints and its current status.

30. Regulatory Measures • Investor Protection and Education Fund created for the following purpose- • Educational activities including seminars, training, research and publications. • Awareness programmes • Aiding investors’ associations recognized by the Board to undertake legal proceedings • Investor Education and Awareness Programs • Toll free help line

31. Present Status • India continues to be high growth economy in a world beset with recession • Large domestic market and strong internal demand • Securities market infrastructure and practices among the best in the world • High global interest in investing in India

32. ROAD AHEAD • Needs to be addressed • Financial literacy • Financial inclusion • Reaching out to the retail investor • Broadening and deepening the markets • Better quality of intermediation

33. THANKYOU Shashi Kumar DGM, SEBI