Stock Exchanges, at their core, are platforms or marketplaces where securities such as shares, bonds, and derivatives are bought and sold. They play a pivotal role in the efficient functioning of capital markets by providing a structured and regulated framework for transactions. The Securities and Exchange Board of India (SEBI) governs the operation of these exchanges in India.
Role and Function of Stock Exchanges
Stock exchanges perform a myriad of functions that aid in the smooth functioning of the capital market ecosystem:
Secondary Market Operations: Stock exchanges serve as the platform for the buying and selling of securities. They enable liquidity and price discovery for listed securities.
Regulation and Monitoring: Stock exchanges enforce rules and regulations to ensure fair trading and to protect investors' interests. They also monitor members' activities for any violations.
Listing of Securities: Stock exchanges provide a platform for companies to list their securities. This process involves a rigorous vetting of the company's financial health and compliance with SEBI guidelines.
Clearing and Settlement: Stock exchanges, through their associated clearinghouses, handle the clearing and settlement of trades to ensure smooth transfer of securities and funds between the transacting parties.
Stock Exchanges in India
In India, there are two major stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both of these exchanges are regulated by SEBI under the Securities Contracts (Regulation) Act, 1956.
Bombay Stock Exchange (BSE)
Founded in 1875, the BSE is Asia's oldest stock exchange and the world's 10th largest. It provides a transparent market for trading in equity, debt instruments, derivatives, and mutual funds.
National Stock Exchange (NSE)
Established in 1992, the NSE is India's largest stock exchange in terms of total market capitalisation of listed companies. It has brought about revolutionary changes in the Indian securities market by leveraging technology and providing a modern, fully automated screen-based electronic trading system.
SEBI’s Role in Regulating Stock Exchanges
SEBI, as the apex regulator of Indian capital markets, has a significant role in the governance and supervision of stock exchanges. The primary legislation governing this role is the SEBI Act, 1992, and the rules and regulations framed thereunder.
Recognition of Stock Exchanges: Under the Securities Contracts (Regulation) Act, 1956, a stock exchange cannot operate unless it is recognised by SEBI. SEBI grants recognition based on certain prescribed criteria, including adequate infrastructure, necessary facilities for brokers and investors, and an effective self-regulatory mechanism.
Monitoring and Supervision: SEBI closely monitors the activities of stock exchanges to ensure compliance with its regulations and guidelines. It carries out inspections and investigations to detect and prevent market manipulation and unfair trade practices.
Enforcement Actions: In case of violations, SEBI can take enforcement actions against stock exchanges. These include issuance of warning or censure, imposition of penalties, and in severe cases, withdrawal of recognition.
Significant Case Laws
Sahara India Real Estate Corporation Ltd. & Ors vs. SEBI (2012): This landmark judgement by the Supreme Court underscored SEBI's role in protecting the interests of investors. The court upheld SEBI's order for Sahara to refund the money raised through Optionally Fully Convertible Debentures (OFCDs) to investors, citing non-compliance with public issue norms.
SEBI vs. Shriram Mutual Fund (2006): This case highlighted SEBI's powers to regulate mutual funds. The Supreme Court upheld SEBI's order against Shriram Mutual Fund for breaching investment restrictions, underscoring the importance of adherence to SEBI regulations for ensuring investor protection.
Conclusion
Stock exchanges are integral to the functioning of the capital market, providing a platform for securities trading and facilitating capital formation. In India, stock exchanges operate under the strict regulatory ambit of SEBI, ensuring a transparent, fair, and efficient market for all participants.
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