Q.Riya, a software engineer wanted to invest a part of her savings in the stock-market. Encouraged by some online discussions, she came across a company ‘Smart-Tech Ltd.’, whose stock price was rising very fast. News began to circulate that company had got a large government contract and she believed that its share price would double soon. Convinced by the positive claims, Riya also invested in the shares of this company. Over the next week, the shares continued to rise but suddenly, the price started crashing. Within days, her investment had lost more than 60% of its value. Riya started researching and discovered that the news about the government contract was false. Securities and Exchange Board of India (SEBI) also took immediate notice of the situation and called for detailed trading information and conducted enquiries and inspections. After examining trading information and conducting enquiries, SEBI found that a group of traders had spread false information to artificially boost the stock price. By taking action against the group of traders, SEBI made it clear that fraudulent and unfair trade practices are strictly prohibited.
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Start your 14-day free trial to unlock the full solution →The passage shows SEBI performing its regulatory function (calling for trading information and conducting enquiries and inspections into the traders’ conduct) and its protective function (taking action to prohibit the fraudulent and unfair trade practices that harmed investors), with each category having further roles such as registering intermediaries and prohibiting insider trading.
Let us first understand the context. Financial markets, especially stock markets, are built on trust. When that trust is broken by false rumours or manipulation, ordinary investors like Riya suffer. That is precisely why a regulator like SEBI exists — not just to punish wrongdoers, but to create an environment where honest participants can trade without fear. The passage you have given is a clear example of how SEBI steps in when the market is poisoned by misinformation.
- Identifying the two functions from the passage
Read the passage carefully. It says: “…called for detailed trading information and conducted enquiries and inspections. After examining trading information and conducting enquiries, SEBI found that a group of traders had spread false information to artificially boost the stock price.” Here SEBI is calling for information and carrying out inspections and enquiries into the working of the market and the conduct of its participants. Overseeing and controlling the market in this way — calling for information, inspecting and investigating — is part of SEBI’s regulatory function.
The passage then says: “By taking action against the group of traders, SEBI made it clear that fraudulent and unfair trade practices are strictly prohibited.” Here SEBI is acting to shield investors like Riya by stamping out manipulation. Prohibiting fraudulent and unfair trade practices in order to safeguard investors is SEBI’s protective function.
Note
The regulatory function is about overseeing and controlling how the market and its participants operate — registering intermediaries, framing rules, and calling for information through inspections and enquiries. The protective function is about safeguarding investors — prohibiting fraud, unfair trade practices and insider trading. Both are visible in this one incident.
- One more function of each category For the regulatory function, SEBI also registers and regulates the intermediaries of the securities market — stockbrokers, sub-brokers, merchant bankers and others — laying down the conditions on which they may operate. This keeps the market orderly and its participants accountable. …
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