Before SEBI was set up, the lack of proper penal provisions in the ex…

Before SEBI was set up, the lack of proper penal provisions in the existing legislation left some bodies rather helpless in redressing investors’ problems. Which were these?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → The Government and the stock exchanges

Option (1) The Government and the stock exchanges — Correct. The 1980s saw many malpractices in the securities market, which hurt investor confidence. The Government and the stock exchanges could not redress investors’ problems, because the law then had no proper penal provisions. So the Government set up SEBI.

Option (2) The Government and the merchant bankers — Incorrect. Merchant bankers were among those committing the malpractices, such as self-styled merchant bankers. They were not the ones trying to help investors.

Option (3) The companies and the stock exchanges — Incorrect. Companies were also among those committing the malpractices, for example by not following the Companies Act.

Option (4) The companies and the merchant bankers — Incorrect. Both were among the wrongdoers. Their malpractices were the cause of investors’ grievances.

NCERT (Pre-rationalised Edition): “Reasons for the Establishment of SEBI The capital market has witnessed a tremendous growth during 1980’s, characterised particularly by the increasing participation of the public. This ever expanding investors population and market capitalisation led to a variety of malpractices on the part of companies, brokers, merchant bankers, investment consultants and others involved in the securities market. The glaring examples of these malpractices include existence of self – styled merchant bankers unofficial private placements, rigging of prices, unofficial premium on new issues, non-adherence of provisions of the Companies Act, violation of rules and regulations of stock exchanges and listing requirements, delay in delivery of shares etc. These malpractices and unfair trading practices have eroded investor confidence and multiplied investor grievances. The Government and the stock exchanges were rather helpless in redressing the investor’s problems because of lack of proper penal provisions in the existing legislation. In view of the above, the Government of India decided to set-up a separate regulatory body known as Securities and Exchange Board of India. …”