Securities Market- A glance
In simple words, one can understand that it is a market like we
have special market for bamboo crafts, or cloths, likewise securities need a
market to be purchased and sold.
This type of market is known as Securities Market. Or Officially, Securities market is a component of wider financial market where securities can be bought and sold between subjects of the economy, based on demand and supply.
This type of market is known as Securities Market. Or Officially, Securities market is a component of wider financial market where securities can be bought and sold between subjects of the economy, based on demand and supply.
It involves huge amount of
money of investors or day to day traders, so the government has set up a
regulator SEBI (Securities Exchange Board of India).
Securities markets trade in equities or shares, bonds, and derivatives instruments where process can be determined and participants both professional and non-professionals.
Securities markets trade in equities or shares, bonds, and derivatives instruments where process can be determined and participants both professional and non-professionals.
Types of Security Market- Securities markets can
be divided into two levels: -
Primary markets - where new securities are
issued. It is where first time the company launches its shares or securities.
Secondary markets – It is
a place where securities which are already in market and they are not launched
new, but still buyers and sellers again buy and sell these.
What are the current issues
on regulation of security market?
India’s stock markets
are booming with the Bombay Stock exchange Sensex touching new highs.
The regulation of securities markets has evolved over the last two and half
decades since the setting up of the securities and exchange board of India
(SEBI). SEBI tries to keep ethical practices into the market but certain people
find loop holes and bring new problems like - front running, insider
trading, and shady accounting practices. These practices are harmful as
these effects and manipulate share prices. Let us understand how these factors
can affect on share market in detail.
1.
Front running (Tailgating) – It is
an act of placing one’s own order in front of the others. In simple
terms, in securities market there are brokers, and there are buyers.
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| Front Running - Illustrations |
There are some big buyers who have huge amount of money for investment. They order securities to be purchased in advance. Somehow these brokers get access to that data that someone is going to get these many securities. These brokers, if they come to know that big buyers are going to buy particular securities, so what brokers do? They go first and get more securities and then sell those securities and earn more.
This
form of front- running is not only unethical; it is illegal as, it given an
unfair advantage to the broker.
2.
Insider trading – Insider
trading is when someone has information available to them like company is
making loss, and going to lose money. So, what would be the response in this
case? That someone will sell securities before public comes to know about the
loss. This is an example of insider trading.
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| Insiders Misuse the Secret |
Same
thing can happen when a person (insider) who has information that company is
going to gain money, what can be the predictable response? They will buy shares
or securities of that company. It is illegal when the material information is
still non-public.
Illegal
insider trading includes tipping other when anyone has any sort of non-public
information. Legal insider trading happens when directors of the company
purchase or sell shares, but they disclose their transaction legally. The Securities
and Exchange Commission has rules to protect investment from the effects of
insider trading.
3.
Shady accounting practices - Shady
accounting practice is an unethical and fraud accounting practices which effect
whole market less trust worthy for the investors.
Issues and TK Vishwanathan:
Like International market regulators, SEBI was also
worried about these practices. SEBI appointed TK
Viswanathan committee on Fair Market Conduct. The Report
was submitted recently. It talked about granting more powers to Securities
And Exchange Board Of India (SEBI) has given way too many concerns. There
are certain highlights of recommendations are given below-
Recommendations – These
are some of the recommendations given below-
On Insider’s Trading- The committee
has said that there should be two separate code of conduct for insider’s
trading. One code is to set minimum standard and deal with insider information
of listed companies. Second is set of standard for market intermediaries or
brokers and others who handle price sensitive information.
Information Maintenance- The Company
should maintain details of
1.
Immediate relatives of designated
persons who might deal with serious information
2.
People with whom designated person
might share a material financial relationship.
Such
information may be maintained by company in a searchable electronic format.
It
may share details with SEBI on case to case bases.
Calls- SEBI
has power to ask for call records including numbers and durations. The recommendation
is that SEBI could tap telephone and other electronic conversation which raised
controversy as it hampers with fundamental rights to privacy of an individual. However
the intention was to check insider trading and other frauds.
Malpractices – The committee
also recommended that “Banami Trading” should be considered fraud. A person who trades in other’s name is called as Benami Trading.
If someone trades from the money which is not
from her/his financial resources- It should also be considered as a fraud.
Scope of regulation of fraud should not only
cover the intermediaries but also employees and agents of them who often escape
after being involved into frauds.
It also suggested that SEBI should be given
the power to grant immunity to whistle- blower to help uncover illegal
activities.
Controversy and criticism –
The recommendations of report created some
controversies like recording phone calls. It will be considered as tyrannically
and against fundamental rights of citizens.
Second SEBI is set to granted power to act
directly against perpetrators of financial statement fraud. Too much power
possible may discourage and drive away genuine investors as well
Benefits-
A strong regulator serves
as a good deterrent to fraudulent practices in the market. Greater executive
powers can help the regulator take swifter action against offender. They do
not, instead, must rely on government bodies such as the ministry of corporate
affairs. This could also free SEBI from various manifestations of political
influence. As SEBI can better understand the complex nuances that financial
market fraud entails, it may be better placed to enforce the law.
