1. 25 years of reforms: Paradigm shift in disclosure requirements

25 years of reforms: Paradigm shift in disclosure requirements

While securities laws are being enacted/ modified continuously to combat mischiefs, Sebi has ensured that the securities market functions in a transparent manner

By: | Updated: July 21, 2016 8:49 AM
The Sebi Act, 1992 established the Securities and Exchange Board of India (Sebi) to protect the interests of investors in securities, and to promote the development of and to regulate the securities market.(Reuters) The Sebi Act, 1992 established the Securities and Exchange Board of India (Sebi) to protect the interests of investors in securities, and to promote the development of and to regulate the securities market.(Reuters)

The capital markets have over the ages provided the means for businesses to grow and prosper worldwide, and in turn create value for its stakeholders. However, from the time of the British South Sea Bubble in the early 18th century and even earlier, volatile markets have resulted in significant losses to investors, particularly those that didn’t understand the risks associated with their investments.

The causes of bubbles and black swan events resulting in volatility in the markets can be multifarious; but one thing is for sure, human greed was in some manner involved with the fall. In order to deal with risks in relation to investments in capital markets and with a view to protect investors, regulatory bodies have been constituted all over the world as watchdogs to the gateway of the securities world.

Prior to the nineties, the Controller of Capital Issues (CCI) set up under the Capital Issues (Control) Act, 1947 was in charge of regulating capital issuances in India. The price, quantity and type of capital issuance was to be approved by the CCI ahead of an issuance.

Accordingly, this legislation provided for an arbitrary system in which all issuances were ultimately left to the CCI to decide. In order to liberalise the process of issuance of securities, amongst other things, the Act was repealed in 1992, which paved the way for the Sebi Act, 1992.

The Sebi Act, 1992 established the Securities and Exchange Board of India (Sebi) to protect the interests of investors in securities, and to promote the development of and to regulate the securities market. Thereafter, by separate amendments, the power to adjudicate upon lapses of securities laws was provided to Sebi, with statutory appeals from such adjudication lying with the securities appellate tribunal (SAT) set up for this specific purpose.

Following through with liberalisation of the process for issuance of securities, and for setting up a transparent regime for the listing of securities at prices determined by market forces, the Sebi (Disclosure and Investor Protection) Guidelines, 2000 were enacted.

This allowed for book built issues along with a definite disclosure regime akin to international securities offerings. For the first time, Sebi specified the disclosures that would be required in a prospectus in order for a person to make a well informed investment decision in securities.

These guidelines, not only led to evolution of disclosure regime, but detailed rules with respect to the advertising of issuances and regulating the distribution of research material were also formulated. In other words, the whole of the offering process in an initial or a follow-on public offering was, for the first time, set in stone; a far departure from the arbitrary system under the CCI.

Separately, though the stock exchanges were in operation, there was no legislation for their regulation. Under the constitution which came into force in 1950, stock exchanges and forward markets came under the exclusive authority of the central government.

The Securities Contract Regulation Act was enacted in 1956 to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges, and to prevent undesirable transactions in securities. While it has undergone several modifications since its enactment in 1950, it is still the central legislation for regulating stock exchanges.

From the securities laws regulations point, India has seen extensive changes in the last 20 years. Sebi has become particularly active in both regulating capital issuances and takeovers of listed companies, and the adjudication of offences pertaining to securities laws.

The regulations in relation to capital markets disclosures have also evolved significantly, as have the laws on takeovers. The enactment of the Sebi (Issuance of Capital and Disclosure Requirements) Regulations, 2009, the successor law in relation to public offerings and private placements, has paved the way for further evolution of the disclosure laws in India.

While law making is an evolving process, and securities laws are being enacted/modified continuously to combat the mischiefs that the regulator is faced with, Sebi has ensured that the securities market functions in a transparent manner. For instance, Satyam and Sahara examples have led to multiple changes in securities laws in relation to corporate governance and public offers. However, Sebi continues to provide a stable securities laws regime that ensures that the stakeholders receive their dues and market sentiments are not buoyed by scams and instances of corruption.

The author is partner, BMR Legal

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