The Government of India decided to set up a separate regulatory body, SEBI, because the Government and the stock exchanges were rather helpless in redressing investors’ problems. What was the cause of this helplessness?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Lack of proper penal provisions in the existing legislation
Option (1) Lack of a depository to hold securities in electronic form — Incorrect. A depository holds shares in electronic form to end theft, forgery and delays in transfer. It cannot punish those who cheat investors.
Option (2) Lack of trading terminals in the stock exchanges — Incorrect. Trading terminals are part of screen-based trading. They make trading faster but give no power to act against wrongdoers.
Option (3) Lack of proper penal provisions in the existing legislation — Correct. The existing laws had no proper penal provisions, that is, no proper punishment for wrongdoers. So the Government and the stock exchanges could not redress investors’ problems, and a separate regulator was set up.
Option (4) Lack of listing requirements for companies in the stock exchanges — Incorrect. Listing requirements already existed. Their violation was one of the malpractices of the time.
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. …” |