2.1 Section 11: Functions of the Board
Section 11 is the heart of SEBI's regulatory architecture. It enumerates the functions of the Board and vests it with comprehensive powers to achieve its statutory objectives of investor protection and market regulation.
Section 11(1): Primary Duty
The phrase "as it thinks fit" grants SEBI wide discretionary powers. However, this discretion is not unfettered -- it must be exercised reasonably, in good faith, and for the purposes contemplated by the Act. Courts have consistently held that this power cannot be arbitrary or capricious.
Section 11(2): Enumerated Functions
Without prejudice to the generality of Section 11(1), SEBI may take measures to provide for:
- Regulating the business in stock exchanges and any other securities markets
- Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to issues, trustees of trust deeds, registrars to issues, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries
- Registering and regulating the working of venture capital funds, collective investment schemes, and mutual funds
- Promoting and regulating self-regulatory organizations
- Prohibiting fraudulent and unfair trade practices relating to securities markets
- Promoting investors' education and training of intermediaries
- Prohibiting insider trading in securities
- Regulating substantial acquisition of shares and take-overs of companies
- Calling for information, undertaking inspection, conducting inquiries and audits
- Performing such functions and exercising such powers under the provisions of the SCRA as may be delegated by the Central Government
| Function Category | Section 11(2) Clause | Related Regulations |
|---|---|---|
| Stock Exchange Regulation | Clause (a) | SECC Regulations, 2018 |
| Intermediary Registration | Clauses (b), (c) | Various Intermediary Regulations |
| Fraud Prevention | Clause (e) | PFUTP Regulations, 2003 |
| Insider Trading | Clause (g) | PIT Regulations, 2015 |
| Takeovers | Clause (h) | SAST Regulations, 2011 |
"Section 11 is the fountainhead of SEBI's regulatory power. Every regulation, every order, every direction must trace its lineage back to this enabling provision." SAT in Multiple Precedents
2.2 Section 11A: Power to Issue Directions
Section 11A empowers SEBI to issue directions to any person in the interest of investors or orderly development of securities market. This is a powerful tool for protective and preventive action.
Scope of Section 11A
Key Elements of Section 11A
- Purpose: Interest of investors OR orderly development of securities market
- Requirement: Reasons must be recorded in writing
- Target: Persons under Section 12 or associated with securities market
- Nature: Prospective directions, not retrospective penalties
Types of Directions Under Section 11A
SEBI can issue directions including but not limited to:
- Directing to refrain from accessing the securities market
- Prohibiting from buying, selling, or dealing in securities
- Restraining from acting as an intermediary
- Directing disgorgement of ill-gotten gains
- Directing to make disclosures
Section 11A directions are preventive/remedial, not punitive. They are not penalties under Chapter VIA. However, the practical impact can be severe -- a market debarment direction effectively ends a career in securities markets.
When challenging Section 11A directions, argue: (1) No nexus between direction and investor protection/market development; (2) Direction is disproportionate; (3) Reasons recorded are inadequate; (4) Direction is punitive in disguise.
2.3 Section 11B: Power to Issue Cease and Desist Orders
Section 11B, introduced by the 2002 Amendment, gives SEBI the power to issue cease and desist orders against persons violating the Act, rules, or regulations. This is a quasi-judicial power with significant implications.
The Cease and Desist Power
Pre-requisites for Section 11B Orders
- Enquiry Conducted: SEBI must conduct or cause to be conducted an enquiry
- Satisfaction: Board must be satisfied that action is necessary
- Specified Grounds: Must fall under one of the three statutory grounds
- Interest of Investors/Market: Direction must serve this interest
Procedural Safeguards
Section 11B orders must comply with principles of natural justice:
- Show cause notice must be issued
- Reasonable opportunity of hearing must be provided
- Order must contain reasons
- Findings must be based on material on record
Interim Orders Under Section 11B
SEBI can pass interim orders pending completion of enquiry in urgent cases:
- Ex-parte Interim Orders: Permitted in cases of urgency, but post-decisional hearing must follow
- Ad-interim Orders: Valid for 15 days, must be confirmed after hearing
- Time-bound Completion: Final order should be passed within reasonable time
SAT closely examines whether interim orders under Section 11B were justified. Prolonged interim orders without final determination have been criticized. If your client is under an interim order for an extended period, challenge the delay.
| Aspect | Section 11A | Section 11B |
|---|---|---|
| Nature | Directive power | Cease and desist power |
| Pre-requisite | No enquiry mandated | Enquiry required |
| Grounds | Two grounds | Three specific grounds |
| Interim Orders | Not explicitly provided | Permitted in urgent cases |
| Appeal | SAT under S.15T | SAT under S.15T |
2.4 Regulation-Making Power
Section 30 of the SEBI Act empowers the Board to make regulations for carrying out the purposes of the Act. These regulations have the force of law and form the operational framework for securities market regulation.
Section 30: Power to Make Regulations
The Board may, by notification, make regulations consistent with the Act and rules to carry out the purposes of the Act. Key areas include:
- Form and manner of applications for registration
- Fees payable for registration and renewal
- Conditions of registration and code of conduct
- Procedure for enquiry and adjudication
- Manner of investment of moneys by mutual funds, CIS
- Disclosure requirements for various market participants
Major SEBI Regulations
| Regulation | Year | Subject Matter |
|---|---|---|
| LODR Regulations | 2015 | Listing Obligations and Disclosure Requirements |
| PIT Regulations | 2015 | Prohibition of Insider Trading |
| SAST Regulations | 2011 | Substantial Acquisition of Shares and Takeovers |
| PFUTP Regulations | 2003 | Prohibition of Fraudulent and Unfair Trade Practices |
| ICDR Regulations | 2018 | Issue of Capital and Disclosure Requirements |
| Merchant Banker Regulations | 1992 | Registration and working of Merchant Bankers |
| Stock Broker Regulations | 1992 | Registration and working of Stock Brokers |
| AIF Regulations | 2012 | Alternative Investment Funds |
Remember the hierarchy: Act > Rules > Regulations > Circulars/Guidelines. A regulation cannot override the Act, and a circular cannot override a regulation. When advising, always check if SEBI's position has statutory backing.
2.5 Registration Requirements
Section 12 mandates registration with SEBI for various intermediaries and participants in the securities market. Operating without registration is a criminal offence under Section 27.
Section 12: Mandatory Registration
Registration Process
- Application: Submit prescribed form with fees and documents
- Eligibility Check: SEBI verifies fit and proper criteria
- Infrastructure Assessment: Physical and technological infrastructure review
- Grant of Certificate: Registration certificate issued with conditions
- Renewal: Periodic renewal with compliance certificate
Fit and Proper Criteria
SEBI's Intermediaries Regulations set out fit and proper criteria including:
- Financial integrity: Net worth requirements, no insolvency
- Good reputation: No conviction for moral turpitude or economic offence
- Competence: Qualified personnel and infrastructure
- Fair conduct: History of fair dealing with investors
- No regulatory action: Not debarred by any financial regulator
Section 27 makes it a criminal offence to operate as an intermediary without registration. Punishment: imprisonment up to 10 years and fine up to Rs. 25 crore. Even failed registration applications can indicate intent to operate in regulated space.
Before advising a client on new securities market activity, verify: (1) Is registration required? (2) Which category of registration? (3) Net worth and infrastructure requirements? (4) Fit and proper criteria compliance? (5) Timeline for registration?
Key Takeaways
- Section 11 is the fountainhead of SEBI's regulatory powers -- all actions must trace back to it
- Section 11A directions are preventive/remedial, not punitive penalties
- Section 11B requires an enquiry before passing cease and desist orders
- Interim orders under Section 11B must be time-bound and followed by proper hearing
- SEBI's regulation-making power under Section 30 creates the operational framework
- Section 12 registration is mandatory -- operating without it is a criminal offence
- Fit and proper criteria are gateway requirements for all intermediaries