STUDY MATERIAL

EXECUTIVE PROGRAMME

SECURITIES LAWS
AND CAPITAL MARKETS

MODULE 2
PAPER 6

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 © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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 EXECUTIVE PROGRAMME
SECURITIES LAWS AND CAPITAL MARKETS
The securities markets are vital to the growth, development and strength of market economies and
the maturity of an economy are decided based on the robustness of securities market of an economy.
Considering that the Securities market is the core area of practice for the Company Secretaries, it
becomes very important for the professionals to be fully aware of various laws and regulations, both
for practice and guiding the Board of Directors on securities laws related matters. The securities
market is governed by various regulations enacted in the course of time by the competent legislative
body and regulating bodies. This study is divided into two Parts, Part I deals with Securities Laws and
Part II deals with Capital Market & Intermediaries.

Part I of the Study provides an in depth analysis of the legal principles applicable to listed companies
in addition to the Companies Act, 2013. The Regulatory Body Securities Exchange Board of India
(SEBI) having extended SEBI’s jurisdiction over corporates in the issuance of capital and transfer of
securities, during the course of time has come out with several regulations for smooth functioning of
the market, thereby also giving paramount importance to the stakeholders. Therefore, this study
discusses various legislative and regulatory guidance such as Securities Contracts (Regulation) Act,
1956, Depositories Act, 1996, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018,
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Prohibition of
Insider Trading) Regulations, 2015, etc.

Part II of the study deals with analyses of the secondary market or the capital market, which is the
bridge between the investors and the corporates. There are several intermediaries and institutions
involved in dealing with the capital market. SEBI has also jurisdiction over all such intermediaries
and persons associated with the securities market. In connection with the same, SEBI has regulated
their functioning through various regulations, which have been discussed in this part.

In the era of plethora of legislations, rules, and regulations, a Company Secretary professional is
expected to be well aware of these rules and principles, as these compliances make the functioning of
the markets smooth while violations leads to severe penalties.

This study material is published to aid the students in preparing the paper on Securities Laws and
Capital Markets for Executive Programme. It is part of the educational kit and takes the students step
by step through each phase of preparation emphasizing key concepts, principles, legal fundamentals
and procedures. Company Secretaryship being a professional course, the examination standards are
set very high, with focus on knowledge of concepts, their application, procedures and case laws, for
which sole reliance on the contents of this study material may not be enough. This study material
may, therefore, be regarded as the basic material and must be read alongwith the Bare Acts, Rules,
Regulations, Case Law.

The legislative changes made upto July, 2021 have been incorporated in the study material. The
students to be conversant with the amendments to the laws made upto six months preceding the date
of examination. It may happen that some developments might have taken place during the printing of
the study material and its supply to the students. The students are therefore advised to refer to the
updations at the Regulator’s website, Supplement relevant for the subject issued by ICSI and ICSI
Journal Chartered Secretary and other publications for updation of study material.

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In the event of any doubt, students may write to the Directorate of Academics of the Institute for
clarification at academics@icsi.edu.

Although due care has been taken in publishing this study material, the possibility of errors, omissions
and/or discrepancies cannot be ruled out. This publication is released with an understanding that
the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action
taken in that behalf.

Should there be any discrepancy, error or omission noted in the study material, the Institute shall be
obliged if the same is brought to its notice for issue of corrigendum in the e-bulletin ‘Student Company
Secretary’.

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 LEGAL AND REGULATORY FRAMEWORK
The Legal and Regulatory Framework of Securities Laws and Capital Markets in India is given below :

Legal Framework

Securities Contracts
Depositories Act, 1996
(Regulation) Act, 1956

Securities and Exchange

Board of India Act, 1992
SEBI (Depositories and
Securities Contracts
Participants) Regulations
(Regulations) Rules, 1957
2018
• Circulars
• Master Circulars
Regulations Governing Regulations Governing
• General Orders
Issue and Listing of Intermediaries
Securities • Guidelines
• Rules

• SEBI (Issue of Capital and • Regulations

Disclosure Requirements) • SEBI (Intermediaries)
Regulations, 2018 Regulations, 2008
• SEBI (Bankers to an Issue)
• SEBI (Listing Obligations and Regulations, 1994
Disclosure Requirements)
Regulations, 2015 • SEBI (Debenture Trustee)
Regulations, 1993
• SEBI (Share Based Employee
Benefits) Regulations, 2014 • SEBI (Portfolio Managers)
Regulations, 2020
• SEBI (Issue of Sweat Equity)
Regulations, 2002 • SEBI (Registrars to an Issue and
Share Transfer Agents)
• SEBI (Buy Back of Securities) Regulations, 1993
Regulations, 2018 • SEBI (Merchant Bankers)
Regulations, 1992
• SEBI (Prohibition of Insider
Trading) Regulations, 2015 • SEBI (Stock Brokers)
Regulations, 1992
• SEBI (Substantial Acquisition of
Shares and Takeovers) • SEBI (Mutual Funds)
Regulations, 2011 Regulations, 1996

• SEBI (Delisting of Equity

Shares) Regulations, 2021

• SEBI (Issue and Listing of Debt

Securities) Regulations, 2008 • SEBI (Foreign Portfolio Investors)
Other Regulations Regulations, 2019
• SEBI (Ombudsman) Regulations, 2003
• SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to
Securities Market) Regulations, 2003
• SEBI (Collective Investment Schemes)
Regulations, 1999

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 EXECUTIVE PROGRAMME
Module 2
Paper 6
SECURITIES LAWS AND CAPITAL MARKETS (Max Marks 100)
Syllabus
Objective:

Part I: To provide expert knowledge in the legislations, rules and regulations governing the entities
listed on the stock exchanges.
Part II: To provide the basic understanding of the working of capital markets in India.

PART I : SECURITIES LAWS (70 MARKS)

Detailed Contents
1. Securities Contracts (Regulation) Act, 1956 : Objectives of the SCR Act, Rules and Regulations
made there under; Important Definitions; Recognized Stock Exchange, Clearing Corporation;
Public issue and listing of securities; Rules relating to Public Issue and Listing of Securities under
Securities Contracts (Regulation) Rules, 1957.
2. Securities and Exchange Board of India Act, 1992: Objective; Powers and functions of SEBI;
Securities Appellate Tribunal; Penalties and appeals.
3. Depositories Act, 1996 : Depository System in India; Role & Functions of Depositories; Depository
Participants; Admission of Securities; Dematerialization & Re-materialisation; Depository Process;
Inspection and Penalties; Internal Audit and Concurrent Audit of Depository Participants.
4. An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 rechristened as SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018.
5. An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
6. An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
7. SEBI (Buyback of Securities) Regulations, 1998 : Conditions of buy-back; Buy back Methods:
Tender Offer, Open Market (Book building and Stock Exchange); General obligations; Penalties.
SEBI (Buyback of Securities) Regulations, 1998 rechristened as SEBI (Buyback of Securities)
Regulations, 2018.
8. SEBI (Delisting of Equity Shares) Regulations, 2009 : Delisting of Equity Shares; Voluntary
Delisting; Exit Opportunity; Compulsory Delisting.
SEBI (Delisting of Equity Shares) Regulations, 2009 rechristened as SEBI (Delisting of Equity
Shares) Regulations, 2021.
9. An Overview of SEBI (Share Based Employee Benefits) Regulations, 2014.
10. An Overview of SEBI (Issue of Sweat Equity) Regulations, 2002.
11. SEBI (Prohibition of Insider Trading) Regulations, 2015 : Unpublished price sensitive
information (UPSI); Disclosures; Codes of fair disclosure and conduct; Penalties and Appeals.
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12. Mutual Funds : Types of Mutual Funds and Schemes; Key players in Mutual Funds: Sponsor,
Asset Management Company, Trustee, Unit holder, Evaluating performance of Mutual funds- Net
Asset Value, Expense Ratio, Holding Period Return.
13. Collective Investment Schemes : Regulatory Framework; Restrictions on Business Activities;
Submission of Information and Documents; Trustees and their Obligations.
14. SEBI (Ombudsman) Regulations, 2003 : Procedure for Redressal of Grievances; Implementation
of the Award; Display of the particulars of the Ombudsman, SCORES, SEBI (Informal Guidance)
Scheme, 2003.
This Lesson has renamed as "Resolution of Complaints and Guidance".
Case Laws, Case Studies & Practical Aspects
PART II: CAPITAL MARKET & INTERMEDIARIES (30 MARKS)

15. STRUCTURE OF CAPITAL MARKET

i. Primary Market

(a) Capital Market Investment Institutions-Domestic Financial Institutions (DFI), Qualified

Institutional Buyers (QIB), Foreign Portfolio Investors (FPI), Private Equity, Angel Funds, HNIs,
Venture Capital, Pension Funds, Alternative Investment Funds.

(b) Capital Market Instruments-Equities, Preference Shares, Shares with Differential Voting Rights,
Corporate Debt, Non-Convertible Debentures (NCD), Partly, Fully and Optionally Convertible
Debentures, Bonds, Foreign Currency Convertible Bonds (FCCB), Foreign Currency Exchangeable
Bonds (FCEB) Indian Depository Receipts (IDR), Derivatives, Warrants;

(c) Aspects of Primary Market- Book Building, ASBA, Green Shoe Option.

ii. Secondary Market

Development of Stock market in India; Stock market & its operations, Trading Mechanism, Block and
Bulk deals, Grouping, Basis of Sensex, Nifty; Suspension and Penalties; Surveillance Mechanism; Risk
management in Secondary market, Impact of various Policies on Stock Markets such as Credit Policy
of RBI, Fed Policy, Inflation index, CPI, WPI, etc.

16. Securities Market intermediaries : Primary Market and Secondary Market Intermediaries: Role and
Functions, Merchant Bankers, Stock Brokers, Syndicate Members, Registrars and Transfer Agents,
Underwriters, Bankers to an Issue, Portfolio Managers, Debenture Trustees, Investment Advisers, Research
Analysts, Market Makers, Credit Rating Agencies; Internal Audit of Intermediaries by Company Secretary
in Practice.

Case Laws, Case Studies & Practical Aspects.

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 LESSON WISE SUMMARY
SECURITIES LAWS AND CAPITAL MARKETS
PART I – SECURITIES LAWS

Lesson 1 – Securities Contracts (Regulation) Act, 1956

Stock Market plays a significant role in the development of Economy. Stock Market facilitates mobilization of
funds from small investors and channelizes these resources into various development needs of various sectors
of the economy. The Securities Contracts (Regulation) Act, 1956 (“SCRA”) is an important piece of legislation
which regulates the stock exchanges and contracts in securities.
The SCRA was enacted to prevent undesirable exchanges in securities and to control the working of stock
exchange in India. It came into force on February 20, 1957. This Act gives powers to regulate and govern the
stock exchanges and their working. There are certain powers which are delegated to SEBI under this Act.
The Government of India promulgated the Securities Contracts (Regulations) Rules, 1957 (“SCRR”) for carrying
into effect the objects of the SCRA.
The SCRA and SCRR also prescribes the conditions for listing of securities on the stock exchanges. It also
provides for amount of public holding required in every public company seeking listing.
This lesson will give an insight into the various Powers of Central Government, Stock Exchange and SEBI under
the SCRA Act, the penal provisions, procedures, offences, the procedure for appeal to SAT, Right of Investors and
various listing and delisting provisions under Securities Contract (Regulations) Rules, 1957 etc. At the end of
this lesson, the student will able to understand:
• Registration of stock exchange(s);
• Powers of Central Government in various cases;
• Powers of Recognised Stock Exchange to make rules and bye-laws;
• Powers of SEBI under SCRA;
• Clearing Corporation and its functions;
• Issue of securities to the Public;
• Delisting of securities from recognised stock exchange;
• Procedure to file an appeal to Securities appellate tribunal;
• Various penalties for various offences as prescribed under the Act; and
• Requirements for listing of securities with recognised stock exchange;

Lesson 2 – Securities and Exchange Board of India Act, 1992

With an aim to regulate the securities market in India, the Govt. of India set up a regulatory body i.e. Securities
and Exchange Board of India (‘SEBI’) in 1988. It became an autonomous body by the Government of India on 12
April 1992 and given statutory powers in 1992 with SEBI Act, 1992 being passed by the Indian Parliament. The
Preamble of the Securities and Exchange Board of India is “to protect the interests of investors in securities and
to promote the development of, and to regulate the securities market and for matters connected therewith or
incidental thereto”.
The SEBI Act is the main Act from which several other Rules and Regulations have originated. The Act constitutes
a Board (“the SEBI”) to protect the investors’ interest in securities and to promote the development and to
regulate the securities market. The SEBI replaces the erstwhile Controller of Capital Issues. The SEBI has
various powers under the Act including to issue various Regulations to better regulate the securities market

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and for better investor protection. It governs and regulates the market intermediaries. It has wide powers of
investigation, survey, search and seizure, powers to impound documents, take statements on oath, etc. Thus, the
powers enshrined in the SEBI are of a very wide amplitude. It also has powers to issue “directions, e.g., cease
and desist” orders, by virtue of which, it can prohibit any person or intermediary from carrying out certain
operations. The Act provides for stringent penalties for different types of offences and violations.
The objective of this lesson, is to provide a broader information regarding various powers and functions of
SEBI, various stringent penalties for protecting the interest of investors and and inspection of various regulated
entities, etc. to the students. At the end of this lesson, the student will able to understand :
• Powers and functions of SEBI;
• Conditions for offer of collective investment scheme by a company;
• Investigations procedure by the SEBI;
• Various penalties imposed by the SEBI for various failures, default, non-disclosure and other offenses;
• Procedure & Conditions for registration of an intermediaries; and
• Formation of the Securities Appellant Tribunal, its compositions, tenure, requirements for appeal
and its powers.

Lesson 3 – Depositories Act, 1996

A Depository is an organization like a Central Bank where the securities of a shareholder are held in the
electronic form at the request of the shareholder through the medium of a Depository Participant. A DP can be
a bank, financial institution, a broker, or any entity eligible as per SEBI norms and is responsible for the final
transfer of shares from the depository to investors. The investor, at the end of a transaction receives a
confirmation from the depository.
In India, there is Depository System for securities trading in which book entry is done electronically and no
paper work is involved. The physical form of securities is extinguished and shares or securities are held in an
electronic form. Before the introduction of the depository system through the Depository Act, 1996, the process
of sale, purchase and transfer of securities was a huge problem, and there was no safety at all.
The Depositories Act, 1996 provides a legal framework for establishment of depositories to facilitate holding of
securities including shares in the demat form (electronic form) and to effect transfer of securities through book
entry. The Act establishes the depository system in India by providing for setting up of one or more depositories
to enable the investors to hold securities in non-physical form (known as dematerialized form) and to affect
transfer of securities by way of book entries in accounts maintained by the depository.
Every depository is required to be registered with SEBI and will have to obtain a Certificate for commencement
of business on fulfillment of the prescribed conditions. There are two types of depositories in India, namely
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The functioning
of Depository and its constituents in India is primarily governed by the Depository Act 1996, SEBI (Depository
& Participant) Regulations, 2018, Bye-laws and business rules of respective depositories.
The operational and functional issues relating to depository system have been discussed in this lesson to give
an idea of the practical implications of various statutory and regulatory provisions. Further, a Practising
Company Secretary has been recognised by SEBI for various types of Audit of Depository participants. At the
end of this lesson, the student will able to understand :
• Basics of depository and its benefits;
• Models of depository and its functions;
• Process of dematerialisation and rematerialisation of securities;
• Securities which are eligible to be issue in depository mode;
• The concept of fungibility and rights of depository & beneficial owner;

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 • The applicability of SEBI (Depositories and Participants) Regulations, 2018;
• Audit of depositories i.e., Internal Audit and Concurrent Audit by a Practising Company Secretary; and
• Audit of Reconciliation of Share Capital by a Practising Company Secretary.

Lesson 4 – An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations) were
notified with the objective to bring more clarity to the provisions of the rescinded SEBI DIP Guidelines by
removing the redundant provisions and modifying certain provisions on account of changes necessitated due
to market design.
The SEBI in order to align its provisions under ICDR Regulations with the Companies Act, 2013 and allied
regulations, had come with its consultation paper on May, 04, 2018 detailing the suggestive changes under
various fund raising options by listed issuers. The SEBI constituted a committee named “ICDR Committee”
under the chairmanship of Sri Prithvi Haldea in June, 2017 to review the ICDR Regulations which suggested
certain policy changes in continuation to the same, the SEBI on September, 11, 2018 notified the SEBI (ICDR)
Regulations, 2018 effective from the 60th day of its publication in official Gazette. SEBI (ICDR) Regulations,
2018, lay down various provisions and procedures for various types of issue including public and rights issue.
SEBI’s emphasis on disclosure based regulation has witnessed a proliferation of disclosure norms for various
types of capital raising activities by Indian companies. SEBI has gradually expanded the disclosure norms and
prospectus requirements, culminating in the presently applicable SEBI ICDR Regulations. It lay down guidelines
relating to conditions for various kinds of issues including public and rights issue. The ICDR Regulations provide
detailed provisions relating to public issue such as conditions relating to an IPO and Further Public Offer (FPO),
conditions relating to pricing in public offerings, conditions governing promoter’s contribution, restriction on
transferability of promoter’s contribution, minimum offer to public, reservations, manner of disclosures in offer
documents, etc.
At the end of this lesson, the student will able to understand:
• Types of Issue;
• Concept of draft offer document, letter of offer and red herring prospectus;
• Contribution of promoters in case of Public Issue & exemption from the same;
• Concept of underwriting, Opening of Public issue & Minimum Subscription;
• Minimum number of share applications and application money;
• Pre-issue advertisement & Post issue advertisement;
• Restriction on further issue of capital & Reservation on competitive basis; and
• Detailed procedure for issue of securities by companies.

Lesson 5 – An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations,

2015

Listing agreement means where the securities are listed on the application of any person in any recognised
stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.
It is a basic document which is executed between companies and the stock exchange when companies are listed
on the stock exchange. Listing Agreement entered into by listed companies with the stock exchanges prescribes
initial and continuous disclosure norms. The modifications to provisions of Listing Agreement are prescribed
by SEBI. The Listing Agreement has been modified from time to time to align with the regulatory requirements
arising out of the dynamic changes in the capital market.
With a view to consolidate and streamline the provisions of existing listing agreements for different segments
of the capital market and to align the provision relating to listed entities with the Companies Act 2013, SEBI has
notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 hereinafter referred as
‘Listing Regulations’.
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The SEBI Listing Regulations lay down the broad principles for periodic disclosures to be given by the listed
entities operating in different segments of the capital markets. The Listing Regulations have been structured to
provide ease of reference by consolidating into one single document across various types of securities listed on
the Stock Exchanges.
This lesson will give an overview of :
• Obligations of listed entities;
• Various compliances & disclosures required to be made by the listed entities;
• Types of Board committee under listing regulations;
• Concept of Vigil Mechanism and Related Party Transactions; and
• Role of Company Secretary as a compliance officer as per listing regulations.

Lesson 6 – An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

2011

One of the most popular modes of corporate expansion is by the acquisition of an existing company. However,
when the company being acquired is a listed company, then along with the promoters’ stake, there are a lot of
other interests, such as, public shareholders, financial institutions, foreign shareholders, etc. It is essential that
all these shareholders also get a fair deal in case of an acquisition. To address all such concerns, SEBI has framed
the SEBI (Substantial Acquisition of Shares and Takeover) Regulations,1997 which have evolved significantly
over the years and notified the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST
Regulations’) repealing the old regulation, providing for Acquisition of shares and takeover of listed companies
popularly known as “Takeover Code”.
Takeover code prescribes a systematic framework for acquisition of stake in listed companies. By these laws the
regulatory system ensures that the interests of the shareholders of listed companies are not compromised in
case of an acquisition or takeover. It also protect the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle.
After going through this lesson, the students will have the knowledge about the various procedural aspects of
takeover by an acquirer and target company with respect to acquisitions and takeover. At the end of this lesson,
the student will have the conceptual clarity about the following aspects of SEBI Takeover Code:
• Triggering point while making an open offer by an acquirer;
• Open offer to the public;
• Concept of Public announcement i.e., timing of Public announcement & Detailed Public announcement;
• Procedural compliances related to letter of offer, opening of the offer etc.;
• Obligations of the acquirer and target company;
• Various disclosures requirements;
• Exemptions available to the acquirer in case of open offer; and
• Practical aspects of takeover.
Lesson 7 – SEBI (Buy-Back of Securities) Regulations, 2018

Buy-back of securities is a corporate financial strategy which involves capital restructuring and is resorted by
companies to achieve the varied objectives of increasing earnings per share, averting hostile takeovers,
improving returns to stakeholders and realigning the capital structure.
Buy-back of securities, like any other transaction of corporate restructuring, brings into play several issues,
both financial and non-financial, and the process of buy-back needs to be structured in a way that all the issues
are taken care of favourably.
The concept of buy-back was introduced in the Companies Act, 1956 by the Companies (Amendment) Act, 1999
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by the insertion of Sections 77A, 77AA and 77B. Consequently, SEBI also issued the SEBI (Buy-Back of Securities)
Regulations, 1998 (“Old Regulation”) on 14th November 1998 with an objective of simplyfying the language,
removing redundant provisions and inconsistencies updating the references to the Companies Act, 2013/other
new SEBI Regulations and incorporating the relevant circulars, FAQ’s informal guidance in the regulations, the
SEBI notified the SEBI (Buyback of Securities) Regulations, 2018 on September 11, 2018 repeal the old
Regulation. These regulations are applicable to the buyback of securities of a company listed on a stock exchange.
Under the Companies Act, 2013 buyback is governed by sections 68, 69 and 70 and listed companies are
governed by the SEBI (Buy-Back of Securities) Regulations, 2018.
This lesson will give an insight to the students into various methods of buy back available, prohibitions,
objectives and process of buy back etc. At the end of this lesson, the student will able to understand:
• Methods of buy back of securities;
• Procedure for buyback of securities from existing or security shareholders, from open market and
from odd-lot holders;
• Compliances related to extinguishing of bought back securities; and
• Obligations of the company and Merchant Banker.
Lesson 8 – SEBI (Delisting of Equity Shares) Regulations, 2021

With the new trends towards regulatory simplification to facilitate growth of businesses, barriers to free entry
and exit to companies could ultimately prove to be prohibitive in terms of loss of Capital, resources and expertise.
Internationally, stock exchanges do not impose any restriction on delisting and allow delisting subject to certain
conditions such as minimum notice period for the company, exit offers to investors, etc.
Similarly in India, SEBI (Delisting of Equity Shares) Regulations, 2009 (“the delisting regulations”) gives an
option to the listed company to either get itself delisted from all the recognised stock exchanges where it is
listed through reverse book building or only from some of the stock exchanges and continue to be listed on the
exchanges having nationwide terminals through a simplified process. Additionally, these regulations provide
simplified procedure for delisting of shares of smaller companies.
In order to provide a statutory backing for the delisting framework, the Government has also notified delisting
rules under Rule 21 of Securities Contract (Regulations) Rules, 1957 (the SCR Rules) dealing primarily with
substantive aspect on delisting. The Delisting Regulations deal with the delisting of equity shares exclusively, as
against the erstwhile Delisting Guidelines which dealt with securities generally.
This lesson will make the student acquainted with the various provisions of delisting, reasons for delisting and
the various requirements to be complied with. At the end of this lesson, the student will able to understand:
• Agencies involved in delisting process and their Role;
• Concept of voluntary delisting and its different modes;
• Comprehensive procedure for delisting of equity shares from all the stock exchanges or few stock
exchange;
• Meaning of small companies and how it can voluntary delist its equity shares;
• Compulsory delisting of shares and its detailed procedure; and
• Special powers of the recognised stock exchange in case of delisting of equity shares.
Lesson 9 – SEBI (Share Based Employee Benefits) Regulations, 2014 – An Overview

In this very dynamic era, most of the organisations are faced with a persistent challenge of attracting and
retaining talented employees. Equity based compensation or stock based incentive schemes are widely used by
the organisations in India and across the globe for their perceived benefits to both employer and employees in
the long run.
The SEBI, in the year 1999, had framed “the SEBI (Employee Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines, 1999” (hereinafter “existing guidelines”) which provides for the stock based incentive
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schemes to employees. On 28th October, 2014, the SEBI had notified the SEBI (Share Based Employee
Benefits) Regulations, 2014 (hereinafter “Regulations”) repealing the existing guidelines. These Regulations
apply to ESOS, ESPS, General Employee Benefit Schemes (GEBS), Retirement Benefit Schemes (RBS) and SAR
Schemes of the listed companies.
This lesson will enable the students to learn the various provisions of SEBI (Share Based Employee Benefits)
Regulations, 2014. At the end of this lesson, the student will able to:
• Understand the provisions of Companies Act, 2013 with respect to Employee stock option;
• Specify the companies eligible to issue ESOP/ESPS/GEBS/RBS/SARS;
• Familiarize with the types of schemes offered by the listed company;
• Understand the full procedure for issue of fresh shares for ESOPs;
• Determine the implementation of scheme through trust;
• Understand the concept of compensation committee & cases where shareholders’ approval required;
• Explain the administration of specific schemes like ESOS/ESPS/GEBS/RBS/SARS;
• Specify the provisions of SEBI LODR which is applicable to ESOP/ESPS; and
• Role of company secretary in issue of ESOP/ESPS/GEBS/RBS/SARS.
Lesson 10 – SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview

Sweat equity shares refers to equity shares given to the company’s employees on favourable terms, in recognition
of their work. Sweat equity shares is one of the modes of making share based payments to employees of the
company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for
their services.
Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it
encourages the employees to contribute more towards the company in which they feel they have a stake.
Issue of sweat equity is governed by the provisions of section 54 of the Companies Act, 2013, relevant rules and
SEBI (Issue of Sweat Equity) Regulations, 2002. These regulations applicable to issue of sweat equity shares by
the listed companies. At the end of this lesson, the student will able to:
• Correlate the provision of Companies Act with SEBI Issue of Sweat Equity Regulations;
• Specify the eligible person for issue of sweat equity shares;
• Understand the requirement of shareholders’ approval by passing special resolution;
• Determine the pricing of sweat equity shares and its accounting treatment & valuation IPRs; and
• Enumerate the ceiling on Managerial remuneration & Lock-in of sweat equity shares.

Lesson 11 – SEBI (Prohibition of Insider Trading) Regulations, 2015

In India, insider trading is not only a tort i.e. a civil wrong but also a crime. The SEBI Act does not define the term
by itself although it refers to the term “insider trading” in many provisions. However, using the powers to make
regulations and in discharge of its functions, SEBI has made regulations prohibiting insider trading in the form
of the PIT Regulations, 1992. The PIT Regulations, 1992 have had their challenges in their drafting, interpretation
and reach. So, SEBI notified and issued SEBI (Prohibition of Insider Trading) Regulations, 2015 repealing the
SEBI (Prohibition of Insider Trading) Regulations, 1992. The objective of these regulations is to strengthen the
legal and enforcement framework, align Indian regime with international practices, provide clarity with respect
to the definitions and concepts, and facilitate legitimate business transactions.
At present, insider trading of securities by directors and key managerial personnel shall be administered by the
SEBI Regulations. These regulations are comprehensive and covering all the provisions of insider trading of
securities. At the end of this lesson, the student will be able to:

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 • Understand the important definitions i.e., Connected person, Person deemed to be connected person,
Insider, Unpublished price sensitive information;
• Explain the information/communication related to company which shall not be provide to any
person;
• Elucidate trading when in possession of Unpublished price sensitive information;
• Understand the concept of trading plans;
• Specify the disclosures of trading and interest by certain persons;
• Familiarize with the code of Fair disclosure and conduct; and
• Understand the various penalties for violations under SEBI Act.
Lesson 12 – Mutual Funds

A mutual fund allows a group of investors to pool their money together with a predetermined investment
objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into
specific securities (stocks or bonds). When an investor, invest in a mutual fund, buying units or portions of the
mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost
efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase
stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage
to mutual funds is diversification, by minimizing risk & maximizing returns. A mutual fund is the most suitable
investment scope for common people as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively lower cost.
The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an
initiative of the Government of India and Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became
the first non-UTI mutual fund in India. In 1996, SEBI had formulated the regulation on Mutual Fund i.e., SEBI
(Mutual Fund) Regulations, 1996, which for the first time, established a comprehensive regulatory framework
for the mutual fund industry. Since then, several mutual funds have been set up by the private and joint sectors.
Mutual fund provides the information about the investment particulars of the corpus (company and sector-
wise), credit ratings, market value of investments, NAVs, returns, repurchase and sale price of the schemes. At
the end of this lesson, the student will able to:
• Familiarize with the structure of mutual fund and understand the risks associated with Mutual fund;
• Specify the types of Mutual fund in India;
• Determine the key players of the Mutual Fund;
• Understand the concept of Sponsor, Asset Management Company (AMC), Trustee and Unit Holder;
• Meaning of Net Asset Value, Expense Ratio and Holding Period Return; and
• Correlate the compliances of SEBI Mutual Funds Regulations with SEBI LODR.
Lesson 13 – Collective Investment Schemes

A CIS is any scheme or arrangement which pools funds from investors and involves a corpus amount of ₹100
crore or more. Every CIS has to compulsorily register itself with SEBI, file offer documents for its schemes and
obtain a credit rating from a recognised rating agency, before it launches a scheme.
Collective Investment Scheme are regulated by SEBI (Collective Investment Scheme) Regulations, 1999 which
was notified on October 15, 1999. These regulations defines Collective Investment Management Company to
mean a company incorporated under the Companies Act, 2013 and registered with SEBI under these regulations,
whose object is to organize, operate and manage a collective investment.

xiv
This lesson will give an overview of collective investment scheme, listing of schemes and its winding up etc. At
the end of this lesson, the student will able to:
• Understand the business activities which is restrictions under CIS regulation;
• Understand the compliances related to quarterly report of CIS;
• Determine the obligations of collective investment management company(CIMC), trustee;
• Understand the conditions of the termination of the agreement with the CIMC; and
• Specify the procedure for allotment, transfer of units and winding up of scheme.
Lesson 14 – Resolution of Complaints and Guidance
SCORES is a web based centralized grievance redress system of SEBI which enables investors to lodge and
follow up their complaints and track the status of redressal of such complaints online from the above website
from anywhere.
Ombudsman in its literal sense is an independent person appointed to hear and act upon citizen’s complaint
about government services. In this regard, SEBI had notified the SEBI (Ombudsman) Regulations, 2003 on
August 21, 2003 which deals with establishment of office of Ombudsman, powers and functions of Ombudsman,
procedure for redressal of Grievances and implementation of the award. This lesson also covers provisions
related to SEBI Complaints Redress System (SCORES), and SEBI (Informal Guidance) Scheme, 2003.
SEBI (Informal Guidance) Scheme, 2003 deals with various aspects such as the nature of request fees to be
accompanied along with letter disposal of requests, SEBI discretion not request and certain types of request
and confidentiality of requests, etc.
In this lesson, a student will be able to know about SCORES, SEBI Ombudsman Regulations and Informal
Guidance Scheme, etc. At the end of this lesson, the student will able to know:
• How to file a complaint in SCORES site;
• When a case can be referred for arbitration;
• Concept of Ombudsman and its powers & functions;
• Procedure for redressal of grievance; and
• Concept of Informal Guidance.

PART II – CAPITAL MARKET AND INTERMEDIARIES

Lesson 15 – Structure of Capital Market

Capital is one of the important factors of production in any economy. A well organized financial system provides
adequate capital formation through savings, finance and investments. An investment depends upon Savings
and in turn Savings depends upon earnings of an individual or profits of the organization. This system may be
viewed as a set of sub-systems with so many elements which are interdependent and interlinking with each
other to produce the purposeful result within the boundary. Hence, the term system in the context of finance
means a set of complex and closely connected financial institutions, instruments, agents, markets and so on
which are interdependent and interlinking with each other to produce the economic growth within the country.
In any economy, financial Institutions play an important role because all the financial dealings and matters are
handled and monitored by such Institutions. In the primary market, there are four key players: corporations,
institutions, investment banks, and public accounting firms. Institutions invest capital in corporations that seek
to expand and grow their businesses, while corporations issue debt or equity to the institutions in return for
their capital investment. Investment banks are hired to match institutions and corporations based on their risk
profile and investment style. Finally, public accounting firms are responsible for the preparation, review, and
auditing of financial statements, tax work, consulting on accounting systems, M&A, and capital raising.

xv
A second important division falls between the stock markets is capital market instruments. Capital Market
Instruments are responsible for generating funds for companies, corporations and sometimes governments.
These are used by the investors to make a profit out of their respective markets.
Secondary Market refers to a market where securities are traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the debt markets. There are many other factors also such
as integration with global financial market, policy decision which affect the working of stock markets.
At the end of this lesson, the student will able to understand:
– Different categories of Investment Institutions in detail;
– Various Capital Markets Instruments;
– Book building, Application Supported by Block Amount, Green Shoe Option etc.; and
– Concept of Secondary Market & its trading mechanism etc.
Lesson 16 – Securities Market Intermediaries

Intermediaries are service providers and are an integral part of any financial system. The objective of these
intermediaries is to smoothen the process of investment and to establish a link between the investors and the
users of funds. The Market Regulator, i.e., SEBI regulates various intermediaries in the primary and secondary
markets through its Regulations for these respective intermediaries. These Regulations also empower SEBI to
inspect the functioning of these intermediaries and to collect fees from them and to impose penalties on erring
entities.
At the end of this lesson, the student would have an overview about various types of intermediaries operating
in Capital Market and its role & responsibility, Internal Audit of Intermediaries by Company Secretary in
Practice, etc.

xvi
 LIST OF RECOMMENDED BOOKS
PAPER 6 : SECURITIES LAWS AND CAPITAL MARKETS

READINGS

1. Sanjeev Aggarwal : Guide to Indian Capital Market; Bharat Law House, 22, Tarun
Enclave,Pitampura, New Delhi – 110034.
2. M.Y. Khan : Indian Financial Systems; Tata McGraw Hill, 4/12, Asaf Ali Road, New
Delhi – 110002.
3. S. Suryanarayanan & : SEBI – Law, Practice & Procedure; Commercial Law Publishers (India)
V. Varadarajan Pvt. Ltd., 151, Rajindra Market, Opp. Tis Hazari Court, Delhi - 110054
4. Taxmann : SEBI Manual
5. Shashi K Gupta : Financial Institutions and Markets ; Kalyani Publishers, 4863/2B,
Nishja Aggarwal Bharat Ram Road, 24, Daryaganj, New Delhi -110002
Neeti Gupta
REFERENCES

1. SEBI Annual Report : SEBI, Mumbai.

2. Website : www.sebi.gov.in
www.nseindia.com
www.bseindia.com
www.rbi.org.in
www.mca.gov.in
JOURNALS

1. SEBI and Corporate : Taxmann, 59/32, New Rohtak Road, New Delhi-110005.
Laws
2. Corporate Law Adviser : Corporate Law Adviser, Post Bag No. 3, Vasant Vihar, New Delhi-110052.
3. SEBI Monthly Bulletin : SEBI, Mumbai.
4. NSE News : National Stock Exchange of India Ltd., Exchange Plaza, Bandra Kurla
Complex, Bandra (E), Mumbai-400051.
Note : Students are advised to read relevant Bare Acts and Rules and Regulations relating thereto. E-Bulletin
‘Student Company Secretary’, ‘Monthly Updates’, ‘Regulatory Updates’ and ‘Chartered Secretary’ should also be
read regularly for updating the knowledge.

xvii
 ARRANGEMENT OF STUDY LESSONS
Module-2 Paper-6
Securities Laws and Capital Markets

PART I – SECURITIES LAWS

Sl. No. Lesson Title
1. Securities Contracts (Regulations) Act, 1956

2. Securities and Exchange Board of India Act, 1992

3. Depositories Act, 1996

4. An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

5. An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

6. An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

7. SEBI (Buy-Back of Securities) Regulations, 2018

8. SEBI (Delisting of Equity Shares) Regulations, 2021

9. SEBI (Share Based Employee Benefits) Regulations, 2014 – An Overview

10. SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview

11. SEBI (Prohibition of Insider Trading) Regulations, 2015

12. Mutual Funds

13. Collective Investment Schemes

14. Resolution of Complaints and Guidance

PART II – CAPITAL MARKET AND INTERMEDIARIES

15. Structure of Capital Market

16. Securities Market Intermediaries

xviii
 CONTENTS
SECURITIES LAWS (PART I)

LESSON 1
SECURITIES CONTRACTS (REGULATION) ACT, 1956

Securities Contracts (Regulation) Act, 1956  2

Key Definitions  3
Non-Applicability  5
Recognition of Stock Exchanges  6
Powers of Central Government  7
Powers of Recognised Stock Exchange  11
Punishments for Contraventions  13
Case Laws  13
Clearing Corporation  15
Powers of the SEBI  16
Additional Trading Floor  18
Licensing Of Dealers in Certain Areas  19
Public Issue and Listing of Securities  19
Contracts in Derivatives  19
Stock Exchanges other than recognised Stock Exchanges prohibited  19
Listing of Securities  20
Delisting of Securities  20
Right to Appeal  20
Procedure and powers of Securities Appellate Tribunal  21
Appeal to Supreme Court  22
Penalties and Procedures  22
Case Laws  24
Factors to be taken into account while adjudging the quantum of penalty by the Adjudicating Officer  24
Settlement of Administrative and Civil Proceedings  25
Recovery of Amounts  25
Continuance of Proceedings  26
Crediting sum realised by way of penalties to consolidated fund of India  26
Appeal to Securities Appellate Tribunal  26
Offences  27
Composition of certain Offences  28
xix
Contravention by Companies  28
Certain offences to be Cognizable  28
Cognizance of Offences by Courts  28
Establishment of Special Courts  28
Offences Triable by Special Courts  28
Appeal and Revision  29
Application of Code to Proceeding before Special Court  29
Transitional Provisions  29
Miscellaneous Provisions  29
Securities Contracts (Regulation) Rules, 1957  31
Requirements of Listing of Securities with Recognised Stock Exchanges  32
Conditions precedent to submission of application for listing by Stock Exchange  34
Application for listing of new securities  36
Suspension or withdrawal of admission to dealings in securities on stock exchange  36
Minimum Shareholding  37
Delisting of Securities  37
Role of Company Secretary  38
Lesson Round up  39
Glossary  39
Test Yourself  40

LESSON 2
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

Introduction  42
Objective of SEBI  42
SEBI Act, 1992  42
Establishment of the Securities and Exchange Board of India (SEBI)  43
Management of the SEBI  43
Functions and powers of the SEBI  43
Case Laws  50
Registration of Intermediaries  51
Prohibition of Manipulative and Deceptive Devices, Insider Trading etc.  52
Penalties and Adjudication  52
Adjudication  55
Case Laws  56
Settlement of Administrative and Civil Proceedings  57
Case Snippets  58

xx
Securities Appellate Tribunal  58
Appeal to the Securities Appellate Tribunal  62
Powers of Securities Appellate Tribunal  62
Right to Legal Representation  63
Appeal to Supreme Court  63
Powers of Central Government  64
Returns and Reports  66
Delegation of Powers  66
Appeal to the Central Government  66
Bar of Jurisdiction  66
Public Servants  66
Offences  67
Cognizance of Offences by Courts  67
Contravention by Companies  68
Recovery of Amounts  69
Role of Company Secretary  70
Lesson Round Up  71
Glossary  71
Test Yourself  72

LESSON 3
DEPOSITORIES ACT, 1996

Introduction  74
Legal Framework  74
Depository System – An Overview  75
Bank–Depository - an Analogy  76
Depository Functions  76
Benefits of Depository System  76
Models of Depository  77
Legal Linkage  77
Depository Participant  78
Issuer  78
Dematerialisation  78
Rematerialisation  79
Electronic credit in New Issues  80
Trading System  80
Corporate Actions  80
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Depositories Act, 1996  80
Power of the SEBI  84
Penalties and Adjudication  85
Offences and Cognizance  86
Power of Central Government to make Rules  88
Power of Depositories to make Bye-Laws  89
SEBI (Depositories and Participants) Regulations, 2018  89
Reconciliation  90
Audit under SEBI (Depositories and Participants) Regulations, 2018  90
Internal Audit of Operations of Depository Participants  90
Concurrent Audit  91
Role of Company Secretary  92
Case Laws  92
Lesson Round Up  93
Glossary  93
Test Yourself  94

LESSON 4
AN OVERVIEW OF SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2018

Introduction  96
Genesis  96
Types of Issues  97
Applicability of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 [Regulation 3] 98
Meaning of Draft Offer Document, Letter of Offer and Red Herring Prospectus  98
Initial Public Offer / Further Public Offer  99
Eligibility requirements to be complied with for IPO  99
General Conditions [Regulation 7]  102
Additional conditions for an offer for sale [Regulation 8]  103
Issue of Warrants [Regulation 13]  104
Eligibility Criteria for Further Public Offer (FPO)  105
General Conditions for FPO [Regulation 104]  105
Issue of Warrants [Regulation 111]  106
Promoters’ Contribution [Regulation 113]  106
Lock-in Requirements  109
Other Requirements for IPO & FPO  111
Appointment of Lead Managers, Other Intermediaries and Compliance Officer [Regulation 23 & 121]  111
Disclosures in draft offer document and offer document [Regulation 24 & 122]  111
xxii
Filing of offer Document [Regulations 25 & 123]  112
Draft offer document and offer document to be available to the public [Regulations 26 & 124]  113
Pricing [Regulations 28 & 126]  113
Minimum Offer to Public [Regulation 31]  114
Reservation on Competitive Basis [Regulations 33 & 130]  114
Underwriting [Regulations 40 & 136]  115
Monitoring Agency [Regulations 41 & 137]  116
Public Communications, Publicity Materials, Advertisements and Research Reports [Regulations 42 & 138]  116
Opening of the Issue [Regulations 44 & 140]  117
Minimum Subscription [Regulations 45 & 141]  117
Period of Subscription [Regulations 46 & 142]  117
Application and Minimum Application Value [Regulations 47 & 143]  117
Allotment Procedure and Basis of Allotment [Regulations 49 & 145]  118
Oversubscription [Proviso to Regulations 49(2) & 145(2)]  118
Allotment, Refund and Payment of Interest [Regulations 50 & 146]  120
Post-issue Advertisements [Regulations 51 & 147]  120
Post-issue responsibilities of the lead manager(s) [Regulations 52 & 148]  121
Release of subscription money [Regulations 53 & 149]  121
Post-issue reports [Regulations 55 & 151]  121
Restriction on Further Capital Issues [Regulation 152]  122
Fast track FPO  122
Exit Opportunity to Dissenting Shareholders [Scheduled xx]  123
Rights Issue  125
Preferential Issue  126
Qualified Institutions Placement  127
Initial Public Offer of Indian Depository Receipts  128
Rights Issue of Indian Depository Receipts  129
Initial Public Offer by Small and Medium Enterprises  130
Innovators Growth Platform  131
Bonus Issue  132
Power to Relax Strict Enforcement of the Regulations  133
Procedure for Issue of Securities  133
Role of Company Secretary  136
Lesson Round Up  136
Glossary  137
Test Yourself  138

xxiii
 LESSON 5
AN OVERVIEW OF SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS)
REGULATIONS, 2015

Introduction  142
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015  142
Regulatory Framework  142
Key Definitions  144
Applicability  145
Obligations of Listed Entities  145
Common Obligations of Listed Companies  146
Compliances under SEBI (LODR) Regulations  147
Corporate Governance under SEBI (LODR) Regulations, 2015  152
Key Provisions pertaining to Corporate Governance  154
Composition of Board of Directors  154
Maximum age of non-executive directors  155
Minimum Directors Requirement  156
Meetings of Board  156
Quorum of board meeting  156
Key Compliance Requirements for Board  156
Maximum Number of Directorships / Committee Membership & Chairpersonship  156
Board Committees  157
Vigil Mechanism  161
Related Party Transactions  161
Corporate Governance requirements related to Subsidiary  163
Secretarial Audit and Secretarial Compliance Report  164
Obligations in Respect of Independent Directors  164
Obligation in Respect of Employees including senior Management, key Managerial persons,
Directors and Promoters  165
Prior Intimations [Regulation 29]  165
Disclosure of Events or Information [Regulation 30]  166
Meetings of Shareholders and Voting [Regulation 44]  167
Regulations applicable on Top 500, Top 1000 And Top 2000 Listed Entities  167
Compliances under SEBI Listing Regulations for the Listed Entity which has listed its non- 
convertible debt Securities or Non- Convertible Redeemable Preference Shares or both  168
Policies covered under SEBI (LODR) Regulations  169
Liability of a Listed Entity for Contravention.  170
Role of Company Secretary  170
xxiv
Case Laws  171
Case Studies  171
Lesson Round Up  176
Glossary  177
Test Yourself  177

LESSON 6
AN OVERVIEW OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 2011

Introduction  180
Genesis  181
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011  182
Important Definitions  182
Applicability & Exemptions  185
Trigger Point for making an Open Offer by an Acquirer  186
Open Offer  186
Mandatory Open Offer  187
Delisting Offer  189
Voluntary Offer  190
Minimum Offer Size  192
Conditional Offer  192
Public Announcement  192
Offer Price  194
Filing of Letter of Offer with the SEBI  197
Dispatch of Letter of Offer  197
Opening of the Offer  198
Completion of Requirements  198
Process at Glance  198
Obligations on further Acquisition  199
Completion of Acquisition  200
Disclosures for Acquisition during Offer Period  200
Payment of Interest in Case of Delay  200
Provision of Escrow  200
Mode of Payment  202
Competing Offer  203
Withdrawal of Open Offer  203
Obligations of the Target Company  204

xxv
Obligations of the Acquirer  206
Obligations of the Manager to the Open Offer  206
Disclosures  207
Exemptions  209
Power of SEBI to relax Strict Enforcement of the Regulations  215
Case Laws  216
Lesson Round Up  218
Glossary  219
Test Yourself  219

LESSON 7
SEBI (BUY-BACK OF SECURITIES) REGULATIONS, 2018

Introduction  222
Objectives of Buy-Back  223
Provisions of the Companies Act, 2013  224
SEBI (Buy-Back) Regulations, 2018  224
Applicability  225
Important Definitions  225
Conditions for Buyback of Shares or Other Securities  226
Methods of Buyback  227
Sources of Buyback  228
Prohibitions for Buy-back  228
Authorisation for Buy-back  228
Explanatory Statement  229
Additional Disclosures  229
Buy-back Process  230
Buy-back through Tender Offer  231
Additional Disclosures  231
Offer Procedure  232
Escrow Account  233
Closure and Payment to Securities holders  234
Extinguishment of Certificate and Other Closure Compliances  234
Odd-lot Buy-back  235
Buy-back from the Open Market  235
Buy-back of Shares through Stock Exchange  235
Buy-back through Book Building  237
Obligations for all buy-back of Shares or other Specified Securities 238

xxvi
Power of SEBI to relax strict enforcement of the Regulations  240
Buyback vis-a-vis compliance under SEBI (SAST) Regulations, 2011  240
Role of Company Secretary  241
Lesson Round Up  241
Glossary  242
Test Yourself  243

LESSON 8
SEBI (DELISTING OF EQUITY SHARES) REGULATIONS, 2021

Introduction  246
Genesis  246
Regulatory Framework of SEBI (Delisting of Equity Shares) Regulations, 2021 247
Applicability  247
Non-Applicability  248
Conditions for Delisting  248
Voluntary Delisting  249
Appointment of peer reviewer Company Secretary to carry out the Due-Diligence  251
Obligations of the Company (Regulation 28)  257
Obligations of the Acquirer (Regulation 30)  257
Procedure for Voluntary delisting from all the stock exchanges  258
Compulsory Delisting  259
Consequences of Compulsory Delisting  261
Procedure for Compulsory Delisting  261
Special Provisions for Delisting  262
Power of SEBI to relax strict enforcement of the Regulations  263
Role of Company Secretary in Delisting  264
Lesson Round Up  264
Glossary  265
Test Yourself  265

LESSON 9
SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 – AN OVERVIEW

Introduction  268
Genesis  268
Provisions under Companies Act, 2013  269
SEBI (Share Based Employee Benefits) Regulations, 2014  269
Applicability  270
Companies Covered  270
xxvii
Non-Applicability  270
Important Definitions  270
Schemes - Implementation and Process  272
Eligibility Criteria  276
Compensation Committee  276
Shareholders Approval  277
Variation of Terms of the Schemes  277
Winding up of the Schemes  278
Non-Transferability  278
Listing  278
Schemes Implemented By Unlisted Companies  278
Compliances and Conditions  279
Certificate from Auditors  279
Disclosures  279
Accounting Policies  279
Administration of Specific Schemes  280
Employee Stock Option Scheme (ESOS)  280
Employee Stock Purchase Scheme (ESPS)  280
Stock Appreciation Rights Scheme (SARS)  281
General Employee Benefits Scheme (GEBS)  281
Retirement Benefit Scheme (RBS)  282
Power of SEBI to relax strict enforcement of the Regulations  282
Directions by the SEBI and action in case of default  282
SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 for ESOP/ESPS  283
SEBI (Prohibition of Insider Trading) Regulations, 2015 for ESOP/ESPS  283
Procedure for Issuing ESOP by a Listed Company  284
Role of Company Secretary  285
Lesson Round Up  285
Glossary  286
Test Yourself  286

LESSON 10
SEBI (ISSUE OF SWEAT EQUITY) REGULATIONS, 2002 – AN OVERVIEW

Introduction  290
Sweat Equity Shares Provisions as under Companies Act, 2013  290
SEBI (Issue of Sweat Equity) Regulations, 2002  291
Applicability  291

xxviii
Sweat Equity Shares may be issued to Employee and Directors  292
Special Resolution  292
Issue of Sweat Equity Shares to Promoters  292
Pricing of Sweat Equity Shares  293
Valuation of Intellectual Property  293
Accounting Treatment  294
Placing of Auditors before Annual General Meeting  294
Ceiling on Managerial Remuneration  294
Lock-in  294
Listing  294
Applicability of Takeover  294
Power to relax strict enforcement of the Regulations  294
Lesson Round Up  295
Glossary  295
Test Yourself  296

LESSON 11
SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015

Introduction  298
Regulatory Framework  299
Key Definitions  300
Restriction on Communication or Procurement of Unpublished Price Sensitive Information (UPSI)
(Regulations 3)  303
Trading when in Possession of Unpublished Price Sensitive Information (UPSI): Permission & Limitation  305
Trading plans  306
Disclosure Requirements  308
Informant incentives and Rewards  310
Codes of Fair Disclosure and Conduct  311
Penalty provisions for violations of the Regulations  317
Appeal to Securities Appellate Tribunal  317
Role of Company Secretary as Compliance Officer  318
Checklists under SEBI (Prohibition of Insider Trading) Regulations 2015  319
Judgments and Developments  321
Major Case Studies on Insider Trading  321
Lesson Round Up  322
Glossary  323
Test Yourself  323

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 LESSON 12
MUTUAL FUNDS

Introduction  326
Structure of a Mutual Fund 327
Overview of Mutual Funds Industry in India 329
Types of Mutual Funds  329
Schemes according to Investment Objective 330
Advantages of Mutual Funds 331
Risks involved in Mutual Funds 332
Key Players in Mutual Fund 332
Net Asset Value 337
Expense Ratio 339
Holding Period Return 340
Evaluating Performance of Mutual Fund 340
SEBI (Mutual Funds) Regulations, 1996 – Overview 340
Registration of Mutual Funds 341
Constitution and Management of Asset Management Company and Custodian 343
Schemes of Mutual Fund 344
Code of Conduct of Mutual Funds 345
Advertisement of Conduct of Mutual Funds 345
Restriction on Investment by Mutual Funds 345
Pricing of Units of Mutual Fund 346
Facilitating transaction in Mutual Fund Schemes through the Stock Exchange Infrastructure 347
Power to relax strict enforcement of the Regulations 347
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 347
Case Laws 348
Lesson Roundup 349
Glossary349
Test Yourself  350

LESSON 13
COLLECTIVE INVESTMENT SCHEMES

Meaning of Collective Investment Schemes (CIS) 352

Genesis  352
SEBI (Collective Investment Schemes) Regulations, 1999 – An Overview 353
Registration of Collective Investment Management Company  355

xxx
Business Activities and Obligations of Collective Investment Management Company 357
Trustees and their Obligations  358
Collective Investment Schemes of Collective Investment Management Company 362
General Obligations of Collective Investment Management Company 366
Procedure for Action in case of Default 367
Penal Provisions 369
Key Aspects for Launching Collective Investment Scheme 370
Role of Company Secretary 370
Case Laws 371
Lesson Round Up 374
Glossary374
Test Yourself  375

LESSON 14
RESOLUTION OF COMPLAINTS AND GUIDANCE

Introduction  378
Matters not considered as Complaints in SCORES 378
Type of Companies not covered under SCORES  379
Timeline for lodging Complaint on SCORES  379
Process for lodging Complaint Online on SCORES by Investors  380
Handling of the Complaints by Listed Entities and SEBI registered Intermediaries  380
Handling of SCORES Complaints by Stock Exchange  381
When are Investor Complaints Disposed of?  383
When can SEBI take Action for Non-Resolution of Investor Complaints?  384
When can a case be referred for Arbitration?  384
SEBI Mobile Application: Recent Development  384
Case Laws 385
Ombudsman386
Powers and Functions of Ombudsman  387
Procedure for filing a complaint  388
Evidence Act not to apply in the Proceedings before Ombudsman  390
SEBI (Informal Guidance) Scheme, 2003 391
Lesson Round Up 393
Glossary393
Test Yourself  394

xxxi
 CAPITAL MARKET & INTERMEDIARIES (PART II)

LESSON 15
STRUCTURE OF CAPITAL MARKET

Financial Markets in India 396

Money Market  397
Capital Market  397
Securities Market  397
Need for Regulators in Capital Market 399
Capital Market Investment Institutions 402
National Level Institutions 403
State Level Institutions 404
Participants of Capital Market 405
Foreign Portfolio Investor  406
Alternative Investment Funds  406
Venture Capital  408
Areas of Investment 408
Private Equity 408
Types of Private Equity 409
Angel Fund 409
Anchor Investors 409
High net worth Individuals 410
Pension Fund 410
Legislations411
Atal Pension Yojana (APY) 411
Government pension 411
Capital market Instruments 411
Equity Shares 411
Shares with Differential Voting Rights 413
Preference Shares 413
Debentures414
Categories of Debentures 415
Optionally Fully Convertible Debenture (OFCD) 415
Bonds415
Characteristics of a Bond 415
Types of Bond 416
Foreign Currency Convertible Bonds (FCCBS) 416
xxxii
Foreign Currency Exchangeable Bonds (FCEBS) 417
Indian Depository Receipts 417
Derivatives418
Future419
Options420
Warrant421
Real Estate Investment Trust (‘REIT’) 421
Infrastructure investment trusts (‘INVITS’) 422
Securitized Debt Instruments 422
Municipal Bonds 422
Exchange Traded Funds (ETF) 423
Mechanism for Issuance of Securities in Primary Market 423
Book Building 423
Application Supported by Block Amount (ASBA) 425
Self-Certified Syndicate Bank 425
ASBA Process 425
Use of Unified Payments Interface (UPI) with ASBA in Public Issue Process 426
Green Shoe Option 428
Stock Exchange 432
Trading Mechanism 433
Types of Securities 434
Market Participants  434
Margins437
Book Closure and Record Date 437
Block Deal 437
Bulk Deal 438
Stock Market Index 438
Basis of Sensex 438
Nifty439
Basics of Investing – A Guidance to Budding Investors  439
Market Surveillance 441
Grievance Redressal in Securities Market 442
Risk Management in Secondary Market 443
Impact of various Policies on Stock Markets 443
Lesson Round Up 448
Glossary449
Test Yourself  450

xxxiii
 LESSON 16
SECURITIES MARKET INTERMEDIARIES

Introduction454
Securities and Exchange Board of India (Intermediaries) Regulations, 2008 455
Registration of Intermediaries 456
General Obligations of Intermediaries 458
Regulatory Framework of Intermediaries 459
Merchant Banker  459
Registrars and Share Transfer Agents  460
Bankers to an issue  462
Debenture Trustees  462
Stockbrokers  465
Portfolio managers  465
Custodians  467
Investment Advisers  468
Research Analysts  469
Credit Rating Agencies  470
Depository Participant (DP)  471
Foreign Portfolio Investor  472
Case Laws 474
Internal Audit of Intermediaries by Company Secretary in Practice 476
Role of Company Secretary 476
LESSON ROUND UP  477
GLOSSARY  477
TEST YOURSELF 478
TEST PAPER  479

xxxiv
 Securities Contracts
Lesson 1 (Regulation) Act, 1956
Key Concepts One Learning Objectives
Should Know
To understand:
• Securities
• The genesis of introducing the law in India
• Derivatives
• The Powers of Central Government, Stock Exchange and SEBI under
• Recognised Stock the Securities Contracts (Regulation) Act, 1956
Exchange
• The contracts in Securities and how does the listing of securities take place?
• Listing
• The penal provisions, procedures or offences under the Securities
• Delisting Contracts (Regulations) Act, 195
• Securities • The procedure for appeal to Securities Appellate Tribunal
Appellate
Tribunal • Right of Investors, and

• Clearing • The provisions of Securities Contracts (Regulations) Rules, 1957

Corporation
• Recovery Lesson Outline
• Penalties I. Securities Contracts • Miscellaneous Provisions
• Minimum (Regulation) Act, 1956
II. Securities Contracts
Shareholding • Introduction (Regulations) Rules,1957
• Key Definitions • Requirements of Listing of
• Non-applicability of Securities with recognised
Securities Contracts Stock Exchanges
(Regulation) Act, 1956 • Conditions precedent to
• Recognition of Stock submission of application
Exchanges for listing by Stock Exchange

• Grant of Recognition to • Application for listing of new

Stock Exchange securities

• Withdrawal of Recognition • Suspension or withdrawal of

admission to dealings in
• Powers of Central securities on stock exchange
Government
• Minimum Shareholding
• Powers of Recognised Stock
Exchange • Delisting of securities

• Clearing Corporation • Role of Company Secretary

• Powers of SEBI • LESSON ROUND-UP

• Listing & Delisting of • GLOSSARY

Securities • TEST YOURSELF
• Right Appeal • LIST OF FURTHER
• Penalties and Procedures READINGS
• OTHER REFERENCES
 2  Lesson 1 • EP-SLCM

Regulatory Framework
• Securities Contracts (Regulation) Act, 1956
• Securities Contracts (Regulation) Rules, 1957

SECURITIES CONTRACTS (REGULATION) ACT, 1956

INTRODUCTION
Stock Market plays a significant role in development of a country’s Economy. The stock market helps in the
mobilization of the funds from the small savings of the investors and channelizes such resources into different
development needs of various sectors of the economy. In order to prevent undesirable transactions in securities by
regulating the business of dealing therein, and by providing for certain other matters connected therewith, the
Securities Contracts (Regulation) Act, 1956 was enacted by Parliament.
The stock market is the platform of securities trading. The stock exchanges also suffer from certain limitations and
require strict control over their activities in order to ensure safety in dealings thereon. Hence, in 1956, the Securities
Contracts (Regulation) Act (‘SCRA’) was passed which provided for recognition of stock exchanges by the Central
Government. The provisions of this Act came into force with effect from February 20, 1957.
The Government promulgated the Securities Contracts (Regulations) Rules, 1957 for carrying into effect the objects
of the Securities Contracts (Regulation) Act.

The Securities Contracts (Regulation) Act, 1956, extends to the whole of India and came into force on February 20,
1957. The Act defines various terms in relation to securities and provides the detailed procedure for the stock
exchanges to get recognition from Government/SEBI, procedure for listing of securities of companies and
operations of the brokers in relation to purchase and sale of securities on behalf of investors.

The Securities Contracts (Regulation) Act, 1956, provides for direct and indirect control of all aspects of the
securities trading including the running of stock exchanges which aims to prevent undesirable transaction in
securities by regulating the business of dealing therein. It gives the Central Government regulatory jurisdiction
over:
(a) Stock exchanges through a process of recognition and continued supervision,
(b) contracts in securities, and
(c) listing of securities on stock exchanges.

As a condition of recognition, a stock exchange complies with the requirements prescribed by the Central
Government. The stock exchanges frame, their own listing regulations in consonance with the minimum listing
criteria set out in Securities Contracts (Regulations) Rules, 1957.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 3

Securities Contracts (Regulation) Act, 1956 (SCRA) – A Birds Eye View (Regulation) Act, 1956

Recognition/
Derecognition/
Corporatisation/
Demutualisation of
Stock Exchange
Right of appeal to
Securities Appellate Prescribe Powers of
Tribunal against refusal Stock Exchanges,
of stock exchange to list SEBI and Central
securities of public Government
companies

SCRA Right of appeal

against refusal of
Public issue and
stock exchanges to
listing of securities
list securities of
public companies

Penalties and Delisting of

Procedure securities

KEY DEFINITIONS
Section 2 of this Act contains definitions of various terms used in the Act. Some of the important definitions are
given below:
Securities
Securities include
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in
or of any incorporated company or a pooled investment vehicle or other body corporate;
(ii) derivative;
(iii) units or any other instrument issued by any Collective Investment Scheme to the Investors in such schemes;
(iv) security receipt as defined in clause (zg) of Section 2 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002;
(v) units or any other such instrument issued to the investors under any mutual fund scheme;
 4  Lesson 1 • EP-SLCM

(vi) units or any other instrument issued by any pooled investment vehicle;
(vii) any certificate or instrument (by whatever name called) issued to an investor by any issuer being a special
purpose distinct entity which possess any debt or receivable, including mortgage debt, assigned to such
entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage
debt, as the case may be;
(viii) government securities;
(ix) such other instruments as may be declared by the Central Government to be securities; and
(x) rights or interests in securities.

Contract
“Contract” means a contract for or relating to the purchase or sale of securities.
Spot Delivery Contract
Spot delivery contract means a contract which provides for –
(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the
contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of
money therefor through the post being excluded from the computation of the period aforesaid if the parties
to the contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of another
beneficial owner when such securities are dealt with by a depository.

Stock Exchange
Stock Exchange means –
(a) any body of individuals, whether incorporated or not, constituted before corporatisation and
demutualisation under Sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 2013 (erstwhile Companies Act, 1956) whether
under a scheme of corporatisation and demutualisation or otherwise,

for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

Recognised Stock Exchange

Recognised Stock Exchange means a stock exchange which is for the time being recognised by the Central
Government.
Government security
Government security means a security created and issued whether before or after the commencement of this Act,
by the Central Government or a State Government for the purpose of raising a public loan and having one of the
forms specified in clause (2) of section 2 of the Public Debt Act, 1944.

Derivative
Derivative includes –
(a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or
contract for differences or any other form of security;
(b) a contract which derives its value from the prices or index of prices, of underlying securities;
(c) commodity derivatives; and
(d) such other instruments as may be declared by the Central Government to be derivatives.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 5

“commodity derivative” means a contract –

(i) for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, and which
is not a ready delivery contract; or
(ii) for differences, which derives its value from prices or indices of prices of such underlying goods or activities,
services, rights, interests and events, as may be notified by the Central Government, in consultation with the
SEBI, but does not include securities as referred to in sub-clauses (A) and (B) above.

Currency
Derivatives
Equity
Derivatives
Deriv
Der

Commodity
Deriva ves

DERIVATIVES

Securities Appellate Tribunal

Securities Appellate Tribunal means a Securities Appellate Tribunal established under sub-section (1) of section
15K of the Securities and Exchange Board of India Act, 1992.
Member
Member means a member of a recognised stock exchange;

NON-APPLICABILITY

Section 28 provides that the

provisions of SCRA shall not
apply to -

the Government, the Reserve any convertible bond or share the Central Government, in the
Bank of India, any local authority warrant or any option or right, interest of trade and commerce
or any corporation set up by a in so far as it entitles the person or the economic development of
special law. in whose favour any of the the country, may specify any
foregoing has been issued, class of contracts as contracts to
whether by conversion of the which this Act or any provision
bond or warrant or otherwise, contained therein shall not apply.
on the basis of the price agreed
upon when the same was issued.
 6  Lesson 1 • EP-SLCM

RECOGNITION OF STOCK EXCHANGES

Section 3 Section 4 Section 5

Application for recognition of Grant of recognition of stock Withdrawl of recognition
stock exchanges exchanges

Application for recognition of stock exchange

Section 3 lays down that any stock exchange, desirous of being recognized for the purposes of this Act may make an
application in the prescribed manner to the Central Government. Every application shall contain such particulars as
may be prescribed, and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation and
control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange and in
particular to –
(a) the governing body of such stock exchange, its constitution and powers of management and the manner in
which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock exchange of various classes of members, the qualifications, for membership, and
the exclusion, suspension, expulsion and re-admission of members therefrom or thereinto;
(d) the procedure for the registration of partnerships as members of the stock exchange in cases where the rules
provide for such membership; and the nomination and appointment of authorized representatives and clerks.

Grant of recognition to stock exchange

Section 4 lays down that if the Central Government is satisfied (powers are exercisable by SEBI also) after making
such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require;
(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions
as may be prescribed with a view to ensure fair dealing and to protect investors;
(b) that the stock exchange is willing to comply with any other conditions (including conditions as to the number
of members) which the Central Government, after consultation with the governing body of the stock exchange
and having regard to the area served by the stock exchange and its standing and the nature of the securities
dealt with by it, may impose for the purpose of carrying out the objects of this Act; and
(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock
exchange;

It may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such
form as may be prescribed.
The conditions which the Central Government (powers are exercisable by SEBI also) may prescribe for the grant of
recognition to the stock exchanges may include, among other matters, conditions relating to-
(i) the qualifications for membership of stock exchanges;
(ii) the manner in which contracts shall be entered into and enforced as between members;
(iii) the representation of the Central Government on each of the stock exchange by such number of persons not
exceeding three as the Central Government may nominate in this behalf; and
(iv) the maintenance of accounts of members and their audit by chartered accountants whenever such audit is
required by the Central Government.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 7

Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also
in the Official Gazette of the State in which the principal office of the stock exchange is situated, and such recognition
shall have effect as from the date of its publication in the Gazette of India.
No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange
concerned to be heard in the matter; and the reasons for such refusal shall be communicated to the stock exchange
in writing.
Withdrawal of recognition
Section 5 lays down that if the Central Government is of opinion that the recognition granted to a stock exchange
should in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the
governing body of the stock exchange a written notice that the Central Government is considering the withdrawal
of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be
heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition
granted to the stock exchange.
However, the withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and the Central Government may, after consultation with the stock exchange, make such provision as it
deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due
performance of any contracts outstanding on that date.
Where the recognized stock exchange has not been corporatized or demutualised or it fails to submit the scheme
within the specified time therefore or the scheme has been rejected by the SEBI, the recognition granted to such
stock exchange, shall, stand withdrawn and the Central Government shall publish, by notification in the Official
Gazette, such withdrawal of recognition.
However, such withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and SEBI may, after consultation with the stock exchange, make such provisions as it deems fit in the
order rejecting the scheme published in the Official Gazette.

It is to be noted that the powers under Section 4 and Section 5 have been delegated concurrently to SEBI also.
Hence, SEBI may exercise these powers.

POWERS OF CENTRAL GOVERNMENT

 8  Lesson 1 • EP-SLCM

To call for periodical returns and make direct enquiries

Every recognised stock exchange shall furnish to the SEBI, such periodical returns relating to its affairs as may be
prescribed.
Every recognised stock exchange and every member thereof shall maintain and preserve for not exceeding five
years such books of accounts, and other documents as the Central Government, after consultation with the stock
exchange concerned, may prescribe in the interest of the trade or in the public interest, and such books of account,
and other documents shall be subject to inspection to all reasonable times by SEBI.
The Securities and Exchange Board of India, if it is satisfied that it is in the interest of the trade or in the public
interest so to do, may, by order in writing,–
(a) call upon a recognised stock exchange or any member thereof to furnish in writing such information or
explanation relating to the affairs of the stock exchange or of the member in relation to the stock exchange as
the SEBI may require; or
(b) appoint one or more persons to make an inquiry in the prescribed manner in relation to the affairs of the
governing body of a stock exchange or the affairs of any of the members of the stock exchange in relation to
the stock exchange and submit a report of the result of such inquiry to the SEBI within such time as may be
specified in the order or, in the case of an inquiry in relation to the affairs of any of the members of a stock
exchange, direct the governing body to make the inquiry and submit its report to the SEBI;
Where an inquiry in relation to the affairs of a recognised stock exchange or the affairs of any of its members in
relation to the stock exchange has been undertaken:
(a) every director, manager, secretary or other officer of such stock exchange;
(b) every member of such stock exchange;
(c) if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm; and
(d) every other person or body of persons who has had dealings in the course of business with any of the persons
mentioned in clauses (a), (b) and (c), whether directly or indirectly;

shall be bound to produce before the authority making the inquiry all such books of account, and other documents
in his custody or power relating to or having a bearing on the subject-matter of such inquiry and also to furnish the
authorities within such time as may be specified with any such statement or information relating thereto as may be
required of him.

To Direct Rules or make Rules

Section 8 deals with the power of Central Government to make rules or direct rules to be made in respect of
recognised stock exchange. Where, after consultation with the governing bodies of stock exchanges generally or
with the governing body of any stock exchange in particular, the Central Government is of opinion that it is necessary
or expedient so to do, it may, by order in writing together with a statement of the reasons therefor, direct the
recognised stock exchanges generally or any recognised stock exchange in particular, as the case may be, to make
any rules or to amend any rules already made in respect of all or any of the matters or to amend any rules already
made in respect of all or any of the matters as specified, within a period of two months from the date of the order.
If any recognised stock exchange fails or neglects to comply with any order, within the period specified therein, the
Central Government may make the rules for, or amend the rules made by, the recognised stock exchange, either in
the form proposed in the order or with such modifications thereof as may be agreed to between the stock exchange
and the Central Government.
Where in pursuance of this section any rules have been made or amended, the rules so made or amended shall be
published in the Gazette of India and also in the Official Gazette or Gazettes of the State or States in which the
principal office or offices of the recognised stock exchange or exchanges is or are situate, and, on the publication
thereof in the Gazette of India, the rules so made or amended shall, notwithstanding anything to the contrary
contained in the Companies Act, 2013 or in any other law for the time being in force, have effect as if they had been
made or amended by the recognised stock exchange or stock exchanges, as the case may be.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 9

To Supersede governing bodies of a recognised stock exchange

Without prejudice to any other powers vested in the Central Government under this Act, where the Central
Government is of opinion that the governing body of any recognised stock exchange should be superseded, then, the
Central Government may serve on the governing body a written notice that the Central Government is considering
the super session of the governing body for the reasons specified in the notice and after giving an opportunity to the
governing body to be heard in the matter, it may, by notification in the Official Gazette, declare the governing body
of such stock exchange to be superseded, and may appoint any person or persons to exercise and perform all the
powers and duties of the governing body, and, where more persons than one are appointed, may appoint one of
such persons to be the chairman and another to be the vice-chairman thereof.
On the publication of a notification in the Official Gazette, the following consequences shall ensure, namely –
(a) the members of the governing body which has been superseded shall, as from the date of the notification of
super session, cease to hold office as such members;
(b) the person or persons appointed may exercise and perform all the powers and duties of the governing body
which has been superseded;
(c) all such property of the recognised stock exchange as the person or persons appointed may, by order in
writing, specify in this behalf as being necessary for the purpose of enabling him or them to carry on the
business of the stock exchange, shall vest in such person or persons.

The governing body of which is superseded, the person or persons appointed shall hold office for such period as
may be specified in the notification published and, the Central Government may from time to time, by notification,
vary such period.
The Central Government, may at any time before the determination of the period of office of any person or persons
appointed call upon the recognised stock exchange to reconstitute the governing body in accordance with its rules
and on such re-constitution all the property of the recognised stock exchange which has vested in, or was in the
possession of, the person or persons appointed, shall vest or re-vest, as the case may be, in the governing body so
re-constituted;
However, until a governing body is so re-constituted, the person or persons appointed, shall continue to exercise
and perform their powers and duties.
To Suspend business of Recognised Stock Exchange
If in the opinion of the Central Government, an emergency has arisen and for the purpose of meeting the emergency,
the Central Government considers it expedient so to do, it may, by notification in the Official Gazette, for reasons to
be set out therein, direct a recognised stock exchange to suspend such of its business for such period not exceeding
seven days and subject to such conditions as may be specified in the notification, and if, in the opinion of the Central
Government, the interest of the trade or the public interest requires that the period should be extended, may, by like
notification extend the said period from time to time.
However, where the period of suspension is to be extended beyond the first period, no notification extending the
period of suspension shall be issued unless the governing body of the recognised stock exchange has been given an
opportunity of being heard in the matter.

To Prohibit Contracts in Certain Cases

Section 16 stipulates that if the Central Government is of opinion that it is necessary to prevent undesirable
speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no
person in the State or area specified in the notification shall, save with the permission of the Central Government,
enter into any contract for the sale or purchase of any security specified in the notification except to the extent and
in the manner, if any, specified therein.
All contracts in contravention of the above provisions entered into after the date of the notification issued thereunder
shall be illegal.
 10  Lesson 1 • EP-SLCM

To Grant Immunity
Section 23-O deals with the power to grant immunity. The Central Government may, on recommendation by the
SEBI, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this
Act or the rules or the regulations made thereunder, has made a full and true disclosure in respect of alleged violation,
grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence
under this Act, or the rules or the regulations made thereunder or also from the imposition of any penalty under this
Act with respect to the alleged violation.
However, no such immunity shall be granted by the Central Government in cases where the proceedings for the
prosecution for any such offence have been instituted before the date of receipt of application for grant of such
immunity.Provided further that the recommendation of the SEBI are not binding upon the Central Government.
An immunity granted to a person as mentioned above may, at any time, be withdrawn by the Central Government,
if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the
immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with
respect to which the immunity was granted or for any other offence of which he appears to have been guilty in
connection with the contravention and shall also become liable to the imposition of any penalty under this Act to
which such person would have been liable, had not such immunity been granted.
To Delegate or to Make Rules
Power to Delegate
Section 29A stipulates that the Central Government may, by order published in the Official Gazette, direct that the
powers (except the power under section 30) exercisable by it under any provision of this Act shall, in relation to
such matters and subject to such conditions, if any, as may be specified in the order, be exercisable also by the
Securities and Exchange Board of India or the Reserve Bank of India constituted under section 3 of the Reserve
Bank of India Act, 1934.
Power to Make Rules
Section 30 empowers the Central Government to make rules for the purpose of carrying into effect the objects of
this Act by notification in the Official Gazette.
In particular, such rules may provide for,–
(a) the manner in which applications may be made, the particulars which they should contain and the levy of a
fee in respect of such applications;
(b) the manner in which any inquiry for the purpose of recognising any stock exchange may be made, the
conditions which may be imposed for the grant of such recognition, including conditions as to the admission
of members if the stock exchange concerned is to be the only recognised stock exchange in the area; and the
form in which such recognition shall be granted;
(c) the particulars which should be contained in the periodical returns and annual reports to be furnished to the
Central Government;
(d) the documents which should be maintained and preserved under section 6 and the periods for which they
should be preserved;
(e) the manner in which any inquiry by the governing body of a stock exchange shall be made under section 6;
(f) the manner in which the bye-laws to be made or amended under this Act shall before being so made or
amended be published for criticism;
(g) the manner in which applications may be made by dealers in securities for licences under section 17, the fee
payable in respect thereof and the period of such licences, the conditions subject to which licences may be
granted, including conditions relating to the forms which may be used in making contracts, the documents to
be maintained by licensed dealers and the furnishing of periodical information to such authority as may be
specified and the revocation of licences for breach of conditions;
(h) the requirements which shall be complied with—
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 11

(A) by public companies for the purpose of getting their securities listed on any stock exchange;
(B) by collective investment scheme for the purpose of getting their units listed on any stock exchange;
(ha) the grounds on which the securities of a company may be delisted from any recognised stock exchange under
sub-section (1) of section 21A;
(hb) the form in which an appeal may be filed before the Securities Appellate Tribunal under sub-section (2) of
section 21A and the fees payable in respect of such appeal;
(hc) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 22A and the
fees payable in respect of such appeal;
(hd) the manner of inquiry under sub-section (1) of section 23-I;
(he) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 23L and the
fees payable in respect of such appeal;
(i) any other matter which is to be or may be prescribed.

Every rule made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session, for a total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule
should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case
may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything
previously done under that rule.
POWERS OF RECOGNISED STOCK EXCHANGE

To make Rules restricting voting rights etc.

Section 7A of the Act stipulates that a recognised stock exchange may make rules or amend any rules made by it to
provide for all or any of the following matters, namely: –
(a) the restriction of voting rights to members only in respect of any matter placed before the stock exchange at
any meeting;
(b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so
that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital
of the stock exchange;
(c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a
meeting of the stock exchange; and
(d) such incidental, consequential and supplementary matters as may be necessary to give effect to any of the
matters specified in clauses (a) (b) and (c).

Powers have been delegated concurrently to SEBI also.

No rules of a recognised stock exchange made or amended in relation to any matter referred to in clauses (a) to (d)
shall have effect until they have been approved by the Central Government (Powers are exercisable by SEBI also)
and published by that Government in the Official Gazette.
 12  Lesson 1 • EP-SLCM

To make Bye-laws
Section 9 of the Act provides that any recognised stock exchange may, subject to the previous approval of the SEBI,
make bye-laws for the regulation and control of contracts.
In particular, such bye-laws may provide for :
(a) the opening and closing of markets and the regulation of the hours of trade;
(b) a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and
payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing
house;
(c) the submission to the Securities and Exchange Board of India by the clearing house as soon as may be after
each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of
India may, from time to time, require, namely:—
(i) the total number of each category of security carried over from one settlement period to another;
(ii) the total number of each category of security, contracts in respect of which have been squared up
during the course of each settlement period;
(iii) the total number of each category of security actually delivered at each clearing;
(d) the publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange
Board of India under clause (c) subject to the directions, if any, issued by the Securities and Exchange Board
of India in this behalf;
(e) the regulation or prohibition of blank transfers;
(f) the number and classes of contracts in respect of which settlements shall be made or differences paid through
the clearing house;
(g) the regulation, or prohibition of budlas or carry-over facilities;
(h) the fixing, altering or postponing of days for settlements;
(i) the determination and declaration of market rates, including the opening, closing highest and lowest rates for
securities;
(j) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any,
and conditions relating thereto, and the forms of contracts in writing;
(k) the regulation of the entering into, making, performance, rescission and termination, of contracts, including
contracts between members or between a member and his constituent or between a member and a person
who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or
intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members
who are not parties to such contracts;
(l) the regulation of taravani business including the placing of limitations thereon;
(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and
the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any
specified securities;
(n) the method and procedure for the settlement of claims or disputes, including settlement by arbitration;
(o) the levy and recovery of fees, fines and penalties;
(p) the regulation of the course of business between parties to contracts in any capacity;
(q) the fixing of a scale of brokerage and other charges;
(r) the making, comparing, settling and closing of bargains;
(s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering
or otherwise, and the exercise of powers in such emergencies, including the power to fix maximum and
minimum prices for securities;
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 13

(t) the regulation of dealings by members for their own account;

(u) the separation of the functions of jobbers and brokers;
(v) the limitations on the volume of trade done by any individual member in exceptional circumstances;
(w) the obligation of members to supply such information or explanation and to produce such documents relating
to the business as the governing body may require.

PUNISHMENTS FOR CONTRAVENTIONS

Section 9(3) of the Act provides that the bye-laws made may :
(a) specify the bye-laws, the contravention of which shall make a contract entered into otherwise than in
accordance with the bye- laws void.
(b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or
more of the following punishments, namely;
(i) fine,
(ii) expulsion from membership,
(iii) suspension from membership for a specified period,
(iv) any other penalty of a like nature not involving the payment of money.

Any bye-laws shall be subject to such conditions in regard to previous publication as may be prescribed, and, when
approved by the SEBI, shall be published in the Gazette of India and also in the Official Gazette of the State in which
the principal office of the recognised stock exchange is situated, and shall have effect as from the date of its
publication in the Gazette of India.
However, if the SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made immediately, it may, by order in writing specify the reasons therefor, dispense with the condition of
previous publication.

CASE LAWS
1. 21.02.2020 Pacific Finstock Ltd. (Appellant) vs. BSE Securities Appellate
Ltd. (Respondent) Tribunal
For listing of a security, the listing norms as on date of Application filed alone is required to be consider
but status of the directors/ promoters of the company are required to be considered on the date of the
passing of the order on the listing application.
Facts of the case
The appellant has filed the present appeal being aggrieved by the BSE Limited (BSE) order dated August 02,
2019 (“BSE”) rejecting the listing application. The facts leading to the filing of the present appeal are:
• The appellant was a listed company on the Vadodara Stock Exchange and Ahmedabad Stock Exchange but
subsequently it came on the Dissemination Board* of the BSE and remained on the Dissemination Board
for the last several years.
Dissemination Board -
BSE  has launched a  Dissemination Board  mechanism on  BSE  India website (www.bseindia.com)
enabling dissemination of bids/Offer placed by buyers and sellers of securities of companies that are
listed exclusively on exiting or de-recognised Regional Stock Exchanges using the services of the Trading
Members of BSE.

• SEBI Circular for Exclusively listed companies of De-recognized/Non-operational/exited Stock

Exchanges placed in the Dissemination Board (DB)
14  Lesson 1 • EP-SLCM

SEBI issued a Circular dated October 10, 2016 by which the companies which were on the Dissemination
Board were required to get their company listed on nationwide stock exchange or provide an exit
opportunity to existing shareholders.
• In terms of this Circular, the appellant submitted a plan of action to BSE for direct listing.
• In the meanwhile, the promoters/ directors of the appellant company were debarred from accessing the
securities market vide SEBI’s order dated September 28, 2019 passed in the matter of Kavit Industries
Ltd. This fact was brought to the notice of the appellant and sought clarification as to how the company is
required to comply with the requirements for direct listing of its securities. It transpires that the company
vide letter dated May 18, 2019 intimated that two of its directors have resigned with effect from April 15,
2019.
• BSE after considering the aforesaid response, found that one of its promoters continued to remain as the
promoter of the company inspite of being debarred by SEBI and therefore, the direct listing requirements
norms had not been complied with. Accordingly, the listing application was rejected.
SAT ORDER
The appeal fails and is dismissed.
In the instant case, the debarment was in direct conflict when the norms stipulated for considering the listing
agreement. Such order of SEBI of debarment of one of the promoters was brought to the knowledge of the
company. The said listing requirements norms were not rectified and consequently the BSE had no option but
to reject the listing application. The said order does not suffer from any manifest error of law and requires no
interference.
There is no dispute on this proposition namely that the listing norms that was in force on the date when the
application was filed was alone required to be considered. Subsequent norms or amended norms or regulations
are not required to be considered. However, the status of the directors/ promoters of the company are required
to be considered on the date of the passing of the order on the listing application. If on the date when the listing
application was being considered the promoters/ directors of the company committed default and thereby
incurred a debarment from accessing the securities market then it was imperative upon the authority to consider
such debarment while considering the listing application.
2. 03.12.2019 Karvy Stock Broking Limited (Appellant) vs. National Securities Appellate Tribunal
Stock Exchange of India (Respondent)
Facts of the case
• The present appeal was filed by the appellant seeking quashment of the NSE order/circular dated
December 2, 2019. Vide the said circular respondent NSE had suspended the present appellant from its
membership due to the alleged non compliance of the regulatory provisions of the Exchange.
• Learned counsel for the respondent raised objection on the maintainability of the present appeal on the
ground that the equally efficacious remedy is available to the appellant under National Stock Exchange of
India Ltd. Rules. He therefore submitted that the appeal be not entertained.
SAT ORDER
The Rules are framed by respondent NSE in exercise of the powers of the Section 9 of the SCRA. The appellant
has equally efficacious remedy to challenge the impugned order before the relevant authority of the respondent
NSE. SAT did not find any reason to entertain the appeal.
Learned Senior counsel for the respondent submitted that the appeal, if any, filed by the appellant with the
respondent, they would be heard expeditiously by convening meeting of the relevant authority. There is no need
to bypass the statutory Rules. At this stage, learned counsel for the appellant submitted that the appellant may
be provided with liberty to seek documents from the respondent. SAT did not find any hitch in acceding to the
said request. The respondent shall supply the documents or grant inspection of the same relevant to the dispute.
For the reasons stated above, the appeal is disposed of. Appellant would be at liberty to file an appeal as provided
by Rule 13A(d) of the NSE Rules.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 15

CLEARING CORPORATION
Role of Clearing Corporation
Clearing Corporation is responsible:-
• for clearing and settlement of all trades executed on Stock Exchange and deposit and collateral management
and risk management functions;
• to bring and sustain confidence in clearing and settlement of securities;
• to promote and maintain, short and consistent settlement cycles;
• to provide counter-party risk guarantee, and
• to operate a tight risk containment system.
Section 8A(1) provides that a recognised stock exchange may, with the prior approval of the SEBI, transfer the
duties and functions of a clearing house to a clearing corporation, being a company incorporated under the
Companies Act, 2013, for the purpose of –
(a) the periodical settlement of contracts and differences thereunder;
(b) the delivery of, and payment for, securities;
(c) any other matter incidental to, or connected with, such transfer.

Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a
clearing corporation, make bye-laws and submit the same to the SEBI for its approval.
SEBI may, on being satisfied that it is in the interest of the trade and also in the public interest to transfer the duties
and functions of a clearing house to a clearing corporation, grant approval to the bye-laws submitted to it and
approve transfer of the duties and functions of a clearing house to a clearing corporation.

India
International
Clearing National
Corporation Commodity
(IFSC) Limited Clearing Ltd.

Metropolitan
Clearing
Corporation
of India Ltd. Indian Clearing
Clearing Corporation
Corporations Ltd.

Multi
Commodity
Exchange National
Clearing Securities
Corporation Ltd. Clearing
Corporation
NSE IFSC Ltd.
Clearing
Corporation
Limited
 16  Lesson 1 • EP-SLCM

POWERS OF THE SEBI

To make or amend Bye- laws To Issue directions Power to adjudicate To make Regulations
of Recognised Stock Exchanges [Section 12A] [Section 23 -I] [Section 31]
[Section 10]

To make or amend Bye-laws of Recognised Stock Exchanges

The SEBI may, either on a request in writing received by it in this behalf from the governing body of a recognised
stock exchange or on its own motion, if it is satisfied after consultation with the governing body of the stock exchange
that it is necessary or expedient so to do and after recording its reasons for so doing, make bye-laws, for all or any
of the matters specified in section 9 or amend any bye-laws made by such stock exchange under that section.
Where in pursuance of this section any bye-laws have been made or amended, the bye-laws so made or amended
shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of
the recognised stock exchange is situated, and on the publication thereof in the Gazette of India, the bye-laws so
made or amended shall have effect as if they had been made or amended by the recognised stock exchange
concerned.
Where the governing body of a recognised stock exchange objects to any bye-laws made or amended by SEBI on its
own motion, it may, within two months of the publication thereof in the Gazette of India apply to SEBI for revision
thereof and SEBI may, after giving an opportunity to the governing body of the stock exchange to be heard in the
matter, revise the bye-laws so made or amended, and where any bye-laws so made or amended are revised as a
result of any action taken under this sub-section, the bye-laws so revised shall be published and shall become
effective.
The making or the amendment or revision of any bye-laws shall in all cases be subject to the condition of previous
publication.
However, if the SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made, amended or revised immediately, it may, by order in writing specifying the reasons therefor,
dispense with the condition of previous publication.
To Issue Directions
Section 12A provides that if, after making or causing to be made an inquiry, the SEBI is satisfied that it is necessary–
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing corporation, or such other agency or
person, providing trading or clearing or settlement facility in respect of securities, being conducted in a
manner detrimental to the interests of investors or securities market; or
(c) to secure the proper management of any such stock exchange or clearing corporation or agency or person,
referred to in clause(b).
it may issue such directions –
(i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or
class of persons associated with the securities market; or
(ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange, as may
be appropriate in the interests of investors in securities and the securities market.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 17

Explanation : The power to issue directions under this section shall include and always be deemed to have been
included the power to direct any person, who made profit or averted loss by indulging in any transaction or
activity in contravention of the provisions of this Act or regulations made there under, to disgorge an amount
equivalent to the wrongful gain made or loss averted by such contraventions.
Without prejudice to the provisions of section 12 A(1) and section 23-I, the SEBI may, by an order, for reasons to be
recorded in writing, levy penalty under sections 23A, 23B, 23C, 23D, 23E, 23F, 23G, 23GA and 23H after holding an
inquiry in the prescribed manner.
To make Regulations
The SEBI may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and
the rules made thereunder to carry out the purposes of this Act.
In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or
any of the following matter namely :
(a) the manner, in which at least fifty-one percent of equity share capital of a recognised stock exchange is held,
within twelve months from the date of publication of the order under sub-section (7), of Section 4B by the
public other than shareholders having trading rights under sub-section (8) of that section;
(b) the eligibility criteria and other requirements under Section 17A;
(c) the terms determined by the SEBI Board for settlement of proceeding under sub-section (2) of section 23JA and
(d) any other matter which is required to be, or may be, specified by regulations or in respect of which provision
is to be made by regulation.
Every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session for a total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the regulation or both Houses agree that the
regulation should not be made, the regulation shall thereafter have effect only in such modified form or be of no
effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the
validity of anything previously done under that regulation.
 18  Lesson 1 • EP-SLCM

To adjudicate
Section 23-I deals with power to adjudicate by the SEBI.
The SEBI may appoint any officer not below the rank of a Division Chief of SEBI to be an adjudicating officer for
holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being
heard for the purpose of imposing any penalty.
While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case to give evidence or to produce any document, which
in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on
such inquiry, he is satisfied that the person has failed to comply with the provisions, he may impose such penalty as
he thinks fit in accordance with the provisions of this Act.
The SEBI may call for and examine the record of any proceedings under this section and if it considers that the order
passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may,
after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of
penalty, if the circumstances of the case so justify. However, no such order shall be passed unless the person
concerned has been given an opportunity of being heard in the matter.
Further, nothing contained in this sub-section shall be applicable after an expiry of a period of three months from
the date of the order passed by the adjudicating officer or disposal of the appeal, whichever is earlier.

Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals Development Co. Ltd.
[ADJUDICATION ORDER NO. Order/GR/KG/2020-21/8680-8682]
SEBI Adjudication Order:
SEBI, in exercise of the powers conferred under Section 15-I of the SEBI Act read with Rule 5 of the Adjudication
Rules,1995 and Section 23-I of the SC(R) Act, 1956 read with Rule 5 of the Adjudication Rules, 2005, imposed a
total penalty of Rs. 2,00,000/- (Rupees Two Lacs only) under Section 15HB of the SEBI Act, 1992 and Section 23A(a)
of the Securities Contracts (Regulation) Act, 1956, on the Noticees i.e. The Orissa Minerals Development Co. Ltd., Dr.
Satish Chandra and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate Disclosure Practice for
Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the PIT Regulations, 1992 and also
against The Orissa Minerals Development Co. Ltd for violation of Clause 36 of Listing Agreement read with Section
21 of SCRA.

Powers of Board not to apply to International Financial Services Centre.

The powers exercisable by the Board under this Act,—
(a) shall not extend to an International Financial Services Centre set up under subsection (1) of section 18 of
the Special Economic Zones Act, 2005;
(b) shall be exercisable by the International Financial Services Centres Authority established under sub-section
(1) of section 4 of the International Financial Services Centres Authority Act, 2019, in so far as regulation of
financial products, financial services and financial institutions that are permitted in the International Financial
Services Centres are concerned.
_________________________________________________
ADDITIONAL TRADING FLOOR
Section 13A stipulates that a stock exchange may establish additional trading floor with the prior approval of the
Securities and Exchange Board of India in accordance with the terms and conditions stipulated by the SEBI.

“Additional Trading Floor” means a trading ring or trading facility offered by a recognised stock exchange outside
its area of operation to enable the investors to buy and sell securities through such trading floor under the
regulatory framework of that stock exchange.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 19

LICENSING OF DEALERS IN CERTAIN AREAS

Section 17 provides that no person shall carry on or purport to carry on, whether on his own or on behalf of any
other person, the business of dealing in securities, except under the authority of a license granted by the SEBI in this
behalf.
PUBLIC ISSUE AND LISTING OF SECURITIES
Section 17A provides for public issue and listing of securities referred to in sub-clause (ie) of clause (h) of section 2.

Section 2(h)(ie) provides that any certificate or instrument (by whatever name called), issued to an investor by
any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage
debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be.

• No securities of the nature referred to in sub-clause (ie) of clause (h) of section 2 shall be offered to the public
or listed on any recognized stock exchange unless the issuer fulfil such eligibility criteria and complies with
such other requirements as may be specified by regulations made by the SEBI.
• Every issuer intending to offer the certificates or instruments referred therein to the public shall make an
application, before issuing the offer document to the public, to one or more recognized stock exchanges for
permission for such certificates or instruments to be listed on the stock exchange or each such stock exchange.
• Where the permission applied for listing has not been granted or refused by the recognized stock exchanges
or any of them, the issuer shall forthwith repay all moneys, if any, received from applicants in pursuance of
the offer document, and if any such money is not repaid within 8 days after the issuer becomes liable to repay
it, the issuer and every director or trustee thereof, as the case may be, who is in default shall, on and from the
expiry of the eighth day, be jointly and severally liable to repay that money with interest at the rate of fifteen
percent per annum.

In reckoning the eighth day after another day, any intervening day which is a public holiday under the Negotiable
Instruments Act, 1881, shall be disregarded, and if the eighth day (as so reckoned) is itself such a public holiday,
there shall for the said purposes be substituted the first day thereafter which is not a holiday.

• All the provisions of this Act relating to listing of securities of a public company on a recognized stock
exchange shall, mutatis mutandis, apply to the listing of the securities of the nature referred to in sub-clause
(ie) of clause of section 2 by the issuer, being a special purpose distinct entity.

CONTRACTS IN DERIVATIVES
Section 18A stipulates that notwithstanding anything contained in any other law for the time being in force,
contracts in derivative shall be legal and valid if such contracts are –
(a) traded on a recognised stock exchange;
(b) settled on the clearing house of the recognised stock exchange, or in accordance with the rules and bye-laws
of such stock-exchange;
(c) between such parties and on such terms as the Central Government may, by notification in the official Gazette,
specify.

STOCK EXCHANGES OTHER THAN RECOGNISED STOCK EXCHANGES PROHIBITED

Section 19 of the Act stipulates that no person shall, except with the permission of the Central Government, organise
or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the
purpose of assisting in, entering into or performing any contracts in securities.
This section shall come into force in any State or area on such date as the Central Government may, by notification
in the Official Gazette, appoint.
 20  Lesson 1 • EP-SLCM

LISTING OF SECURITIES
Conditions for Listing
Section 21 of the Act provides that where securities are listed on the application of any person in any recognised
stock exchange, such person shall comply with the conditions of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations.

Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals Development Co. Ltd.
[ADJUDICATION ORDER NO. Order/GR/KG/2020-21/8680-8682]
SEBI conducted investigation into the alleged delayed disclosure of the price sensitive information by The Orissa
Minerals Development Company Ltd., (“OMDC/Company”), in the scrip of OMDC, to the Stock Exchanges (“BSE” and
“NSE”) for alleged violation of provisions of the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations,
1992 during the investigation period July 02, 2012 to August 10, 2012.
The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company Secretary) has made belated
disclosure to the stock exchanges of the important price sensitive information. Therefore, SEBI hold that they have
violated the provisions of Clause 2.1 of the Code of Corporate Disclosure Practice for Prevention of Insider Trading
contained in Schedule II read with Regulation 12(2) of the PIT Regulations, 1992. Further, OMDC, also violated
Clause 36 of the Listing Agreement read with Section 21 of Securities Contracts (Regulation) Act, 1956

DELISTING OF SECURITIES
Section 21A provides that a recognised stock exchange may delist the securities, after recording the reasons therefor,
from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.
The securities of a company shall not be delisted unless the company concerned has been given a reasonable
opportunity of being heard.
A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal (SAT) against
the decision of the recognised stock exchange delisting the securities within fifteen days from the date of the
decision of the recognized stock exchange delisting the securities and the provisions of Sections 22B to 22E of this
Act, shall apply, as far as may be, to such appeals.
The Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from
filing the appeal within the said period, allow it to be filed within a further period not exceeding one month.
A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal (SAT) against
the decision of the recognised stock exchange as per the procedure laid down under the Securities Contracts
(Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.

RIGHT TO APPEAL
Right of appeal to Central Government against refusal of stock exchanges to list securities of
public companies
Where a recognised stock exchange refuses to list the securities of any public company or collective investment
scheme, the company or scheme shall be entitled to be furnished with reasons for such refusal, and may, –
(a) within fifteen days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the
Companies Act, 2013 (hereafter in this section referred to as the “specified time”), the application for
permission for the shares or debentures to be dealt with on the stock exchange, within fifteen days from the
date of expiry of the specified time or within such further period, not exceeding one month, as the Central
Government may, on sufficient cause being shown, allow,
appeal to the Central Government against such refusal, omission or failure, as the case may be, and thereupon
the Central Government may, after giving the stock exchange an opportunity of being heard,–
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 21

(i) vary or set aside the decision of the stock exchange, or

(ii) where the stock exchange has omitted or failed to dispose of the application within the specified time, grant
or refuse the permission,
and where the Central Government sets aside the decision of the recognised stock exchange or grants the permission,
the stock exchange shall act in conformity with the orders of the Central Government.
Right of appeal to Securities Appellate Tribunal (SAT) against refusal to list securities of public
companies by Stock exchanges
Where a recognised stock exchange, acting in pursuance of any power given to it by its bye-laws, refuses to list the
securities of any company, the company shall be entitled to be furnished with reasons for such refusal, and may, –
(a) within fifteen days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the
Companies Act, 2013, the application for permission for the shares or debentures to be dealt with on the
stock exchange, within fifteen days from the date of expiry of the specified time or within such further period,
not exceeding one month, as the Securities Appellate Tribunal may, on sufficient cause being shown, allow
appeal to the Securities Appellate Tribunal having jurisdiction in the matter against such refusal, omission or
failure, as the case may be, and thereupon the Securities Appellate Tribunal may, after giving the stock
exchange, an opportunity of being heard, –
(i) vary or set aside the decision of the stock exchange; or
(ii) where the stock exchange has omitted or failed to dispose of the application within the specified time,
grant or refuse the permission,

and where the Securities Appellate Tribunal sets aside the decision of the recognised stock exchange or grants the
permission, the stock exchange shall act in conformity with the orders of the Securities Appellate Tribunal.
Every appeal shall be in such form and be accompanied by such fee as may be prescribed. The Securities Appellate
Tribunal shall send a copy of every order made by it to SEBI and parties to the appeal. The appeal filed before the
Securities Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by
it to dispose off the appeal finally within six months from the date of receipt of the appeal.
The appeal filed before the Securities Appellate Tribunal is as per the procedure laid down under the Securities
Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.
Procedure and Powers of Securities Appellate Tribunal
Section 22B stipulates that the Securities Appellate Tribunal shall not be bound by the procedure laid down by the
Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other
provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own
procedure including the places at which they shall have their sittings.
The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same
powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the
following matters, namely :–
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte; and
(h) any other matter which may be prescribed.
 22  Lesson 1 • EP-SLCM

Right to Legal Representation

The appellant may either appear in person or authorise one or more chartered accountants or company secretaries
or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate
Tribunal.

“Company Secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the
Company Secretaries Act, 1980 and who has obtained a certificate of practice under sub-section (1) of section 6
of that Act.

Limitation
The provisions of the Limitation Act, 1963 shall, as far as may be, apply to an appeal made to a Securities Appellate
Tribunal.
Civil Court not to have jurisdiction
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Securities
Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court
or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.
Appeal to Supreme Court
Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme
Court within 60 days from the date of communication of the decision or order of the Securities Appellate Tribunal
to him on any question of law arising out of such order.
However the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the
appeal within the said period, allow it to be filed within a further period not exceeding sixty days.
PENALTIES AND PROCEDURES
Any person who –
(a) without reasonable excuse (the burden of proving which shall be on him) fails to comply with any requisition
made under sub-section (4) of section 6; or
(b) enters into any contract in contravention of any of the provisions contained in section 13 or section 16; or
(c) contravenes the provisions contained in section 17 or section 17A or section 19; or
(d) enters into any contract in derivative in contravention of section 18A or the rules made under section 30; or
(e) owns or keeps a place other than that of a recognised stock exchange which is used for the purpose of entering
into or performing any contracts in contravention of any of the provisions of this Act and knowingly permits
such place to be used for such purposes; or
(f) manages, controls, or assists in keeping any place other than that of a recognised stock exchange which is
used for the purpose of entering into or performing any contracts in contravention of any of the provisions of
this Act or at which contracts are recorded or adjusted or rights or liabilities arising out of contracts are
adjusted, regulated or enforced in any manner whatsoever; or
(g) not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-
laws of such stock exchange or not being a dealer in securities licensed under section 17 willfully represents
to or induces any person to believe that contracts can be entered into or performed under this Act through
him; or
(h) not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-
laws of such stock exchange or not being a dealer in securities licensed under section 17, canvasses, advertises
or touts in any manner either for himself or on behalf of any other person for any business connected with
contracts in contravention of any of the provisions of this Act; or
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 23

(i) joins, gathers or assists in gathering at any place other than the place of business specified in the byelaws of
a recognised stock exchange any person or persons for making bids or offers or for entering into or performing
any contracts in contravention of any of the provisions of this Act.
shall, without prejudice to any award of penalty by the Adjudicating Officer or the SEBI under this Act, on
conviction, be punishable with imprisonment for a term which may extend to ten years or with fine, which
may extend to twenty five crore rupees or with both.
Any person who enters into any contract in contravention of the provisions contained in section 15 or who fails to
comply with the provisions of section 21 or section 21A or with the orders of or the Central Government under
section 22 or with the orders of the Securities Appellate Tribunal shall, without prejudice to any award of penalty
by the Adjudicating Officer under this Act, on conviction, be punishable with imprisonment for a term which may
extend to ten years or with fine which may extend to twenty five crore rupees, or with both.
The Act prescribes various penalties against persons who might be found guilty of offences under section 23 the
Act.

Section Contravention Penalty

23A(a) Any person who fails to furnish any information, Fine of at least 1 lakh rupees but may
document, books, returns or report to the recognised extend to 1 lakh rupees per day during
stock exchange or to the SEBI, fails to furnish the same which such failure continues, subject to a
within the time specified therefor in the listing agreement maximum of 1 crore rupees
or conditions or bye-laws of the recognised stock
exchange or the Act or rules made thereunder, or who
furnishes false, incorrect or incomplete information,
document, books return or report.
23A(b) Any person who fails to maintain books of account or Fine of at least 1 lakh rupees but may
records, as per the listing agreement or conditions, or extend to 1 lakh rupees per day during
bye-laws of a recognised stock exchange which such failure continues, subject to a
maximum of 1 crore rupees
23B Any person who fails to enter into an agreement with Fine of at least 1 lakh rupees but may
clients extend to 1 lakh rupees per day during
which such failure continues, subject to a
maximum of 1 crore rupees
23C Failure by a stock broker or sub-broker or a listed Fine of at least 1 lakh rupees but may
company or proposed listed company to redress extend to 1 lakh rupees per day during
investors’ grievances within the time stipulated by which such failure continues, subject to a
SEBI or recognised stock exchange maximum of 1 crore rupees
23D Failure to segregate securities or money of client or At least 1 lakh rupees but may extend to
clients or using the securities or money of client for rupees 1 crore
self-use or for any other client
23E Failure to comply with the provisions of listing conditions Liable for at least 5 lakh rupees which
or delisting conditions or grounds or breach thereof is may extend to rupees 25 crores
committed, by a company or a person managing collective
investment scheme or mutual fund or real estate
investment trust or infrastructure investment trust or
alternative investment fund.
23F If any issuer make an excess dematerialisation or At least 5 lakh rupees which may extend
delivery of unlisted securities to 25 crores rupees
23G Failure by recognised stock exchange to furnish At least 5 lakh rupees which may extend
periodical return or furnish false, incorrect or incomplete to 25 crores rupees
periodical returns to SEBI or fails or neglects to make or
amend its rules or bye-laws as directed by SEBI or fails to
comply with the directions of SEBI
 24  Lesson 1 • EP-SLCM

23GA Where a stock exchange / a clearing corporation fails Penalty at least 5 crore rupees which may
to conduct its business with its members /any issuer/ extend to 25 crore rupees or three times
its agent/ any person associated with the securities the amount of gains made out of such
markets in a manner not in accordance with the rules/ failure, whichever is higher.
regulations made by the SEBI and the directions issued
by it under this Act
23H Whoever fails to comply with any provision of this Act, At least 1 lakh rupees which may extend
the rules of articles or bye-laws or the regulations of to rupees 1 crore
recognised stock exchange or directions issued by
SEBI for which no separate penalty has been provided

CASE LAWS
1 20.08.2020 Dr. Satish Chandra, Ms. Sucharita Das Adjudicating Officer, Securities and
and The Orissa Minerals Development Co. Exchange Board of India
Ltd. (collectively known as “Noticees”) vs.
SEBI

The disclosures were made by The Orissa Minerals Development Co. Ltd. to stock exchanges belatedly
each after a period of more than 24 hours since the time of their receipt by OMDC.
Facts of the case:
SEBI conducted investigation into the alleged delayed disclosure of the price sensitive information (hereinafter
referred to as “PSI”) by The Orissa Minerals Development Company Ltd., (hereinafter referred to as “OMDC/
Company”), in the scrip of OMDC, to the Stock Exchanges ( “BSE” and “NSE”) for alleged violation of provisions
of the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 1992 during the investigation
period July 02, 2012 to August 10, 2012.
The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company Secretary) has made
belated disclosure to the stock exchanges of the important price sensitive information. Therefore, SEBI hold that
the Noticees have violated the provisions of Clause 2.1 of the Code of Corporate Disclosure Practice for Prevention
of Insider Trading contained in Schedule II read with Regulation 12(2) of the PIT Regulations, 1992. Further,
OMDC, also violated Clause 36 of the Listing Agreement read with Section 21 of Securities Contracts (Regulation)
Act, 1956 (“SCRA”).
By not making the disclosures on time, the Noticee has failed to comply with the mandatory statutory obligation.
Order:
In view of the foregoing, considering the facts and circumstances of the case, the material on record, SEBI
imposed a total penalty of Rs. 2,00,000/- (Rupees Two Lacs only) under Section 15HB of the SEBI Act, 1992 and
Section 23A(a)* of the Securities Contracts (Regulation) Act, 1956, on the Noticees i.e. The Orissa Minerals
Development Co. Ltd., Dr. Satish Chandra and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate
Disclosure Practice for Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the PIT
Regulations, 1992 and also against The Orissa Minerals Development Co. Ltd for violation of Clause 36 of Listing
Agreement read with Section 21 of SCRA.
* Section 23A(a) deals with Penalty for failure to furnish information, return, etc

Factors to be taken into account while adjudging the quantum of penalty by the Adjudicating
Officer

Section 23J provides for the factors to be taken into account by the adjudicating officer. While adjudging the quantum
of penalty under section 12A and section 23-I, the SEBI or adjudicating officer shall have due regard to the following
factors, namely –
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 25

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the
default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.

Settlement of administrative and civil proceedings

Section 23JA states that any person, against whom any proceedings have been initiated or may be initiated under
section 12A or section 23-I, may file an application in writing to SEBI proposing for settlement of the proceedings
initiated or to be initiated for the alleged defaults.
The SEBI may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for
settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the SEBI in
accordance with the regulations made under the SEBI Act, 1992.
For the purpose of settlement under this section, the procedure as specified by the SEBI under the SEBI Act, 1992
shall apply. No appeal shall lie under section 23L against any order passed by the SEBI or adjudicating officer, as the
case may be, under this section. All settlement amounts, excluding the disgorgement amount and legal costs,
realised under this Act shall be credited to the Consolidated Fund of India.
Recovery of amounts
Section 23JB deals with recovery of amounts. If a person fails to pay the penalty imposed under this act or fails to
comply with any direction of SEBI for refund of monies or fails to comply with a direction of disgorgement order
issued under Section 12A or fails to pay any fees due to SEBI, the Recovery Officer may draw up under his signature
a statement in the specified form specifying the amount due from the person (such statement being hereafter in this
Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the
certificate by one or more of the following modes, namely:-

Modes of recovery
Appointing a
Attachment and receiver for the
Attachment & Arrest of the
Attachment of sale of the management of
sale of person's person & his
the person's person's the person's
movable detention in
bank accounts; immovable movable and
property prison
property immovable
properties

and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232 the second and third schedule to the
Income Tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time in so
far as may be, apply with necessary modifications as of the said provisions and the rules thereunder were the
provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-Tax
Act, 1961.
Explanation 1. – For the purposes of this sub-section, the person’s movable or immovable property or monies held
in bank accounts shall include any property or monies held in bank accounts which has been transferred, directly
or indirectly on or after the date when the amount specified in certificate had become due, by the person to his
spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and which is
held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property or
monies held in bank accounts so transferred to his minor child or his son’s minor child is concerned, it shall, even
after the date of attainment of majority by such minor child or son’s minor child, as the case may be, continue to be
included in the person’s movable or immovable property or monies held in bank accounts for recovering any
amount due from the person under this Act.
 26  Lesson 1 • EP-SLCM

Explanation 2. – Any reference under the provisions of the Second and Third Schedules to the Income-tax Act, 1961
and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a reference to the
person specified in the certificate.
Explanation 3. – Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act, 1961,
shall be construed as a reference to appeal before the Securities Appellate Tribunal under section 23L of this Act.
The Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising
the powers under sub-section (1).
Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a
Recovery Officer, pursuant to non-compliance with any direction issued by the SEBI under section 12A, shall have
precedence over any other claim against such person.

The expression “Recovery Officer” means any officer of the Board who may be authorised, by general or special
order in writing to exercise the powers of a Recovery Officer.

Continuance of Proceedings
Section 23 JC provides that where a person dies, his legal representative shall be liable to pay any sum which the
deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased:
However, in case of any penalty payable under this Act, a legal representative shall be liable only in case the penalty
has been imposed before the death of the deceased person.
Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, initiated against the deceased before his death shall be deemed to have been
initiated against the legal representative, and may be continued against the legal representative from the stage at
which it stood on the date of the death of the deceased and all the provisions of this Act shall apply accordingly;
Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, which could have been initiated against the deceased if he had survived, may
be initiated against the legal representative and all the provisions of this Act shall apply accordingly.
Every legal representative shall be personally liable for any sum payable by him in his capacity as legal representative
if, while his liability for such sum remains undischarged, he creates a charge on or disposes of or parts with any
assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited
to the value of the asset so charged, disposed of or parted with.
The liability of a legal representative under this section shall, be limited to the extent to which the estate of the
deceased is capable of meeting the liability.
Explanation.—For the purposes of this section ‘‘Legal representative” means a person who in law represents the
estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where
a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the
party so suing or sued.
Crediting sum realised by way of penalties to Consolidated Fund of India
As per Section 23K all sums realised by way of penalties under this Act shall be credited to the Consolidated Fund
of India.
Appeal to Securities Appellate Tribunal
Section 23L stipulates that any person aggrieved, by the order or decision of the recognized stock exchange or the
adjudicating officer or any order made by the Securities and Exchange Board of India under or sub-section of section
23-I, may prefer an appeal before the Securities Appellate Tribunal.
Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order or decision
is received by the appellant and it shall be in such form and be accompanied by such fee as may be prescribed.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 27

However the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty- five
days if it is satisfied that there was sufficient cause for not filing it within that period.
On receipt of an appeal the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity
of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed
against.
The Securities Appellant Tribunal shall send a copy of every order made by it to the parties to the appeal and to the
concerned adjudicating officer. The appeal filed before the Securities Appellate Tribunal shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from
the date of receipt of the appeal.
The appeal may be prefer before the Securities Appellate Tribunal as per the procedure laid down under the
Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.

Person Appeal to be SAT shall give SAT to send a Every appeal

aggrieved by filed within an copy of every filed before
the order of 45 days opportunity order to the SAT to be
stock (unless of being parties to disposed of
exchange/ further heard and appeal and to within 6
adjudicating extension pass an concerned months from
officer/order granted by order- adjudicating the date of
of SEBI may SAT) confirming/ officer receipt of
appeal to SAT modifying appeal.
setting aside
the appealed
order

Extracts from SAT Order dated 25th February 2019 in the matter of Synergy Cosmetics (Exim) Limited vs. BSE Limited
[Appeal No. 469 of 2018]
Synergy Cosmetics (Exim) Limited (Company) is a listed company and its securities got delisted on the platform of
the BSE Limited. The BSE Limited vide its notice dated 18.10.2016 suspended the trading in securities of the
company for non-compliance of listing requirements. Since no steps were taken by the company for revocation of
the suspension, a show cause notice dated 26.04.2018 was issued calling upon the company to show cause as to
why the securities of the company should not be compulsorily delisted from the platform of the BSE Limited. The
BSE Limited by the impugned order dated 26.06.2018 issued an order compulsorily delisting the securities of the
company. The appellant being aggrieved by the computation of the fair value of the shares has filed the appeal under
Section 23L of the Securities Contracts (Regulation) Act, 1956.

Offences

Section 23M provides that if any person contravenes or attempts to contravene or abets the contravention of the
provisions of this Act or of any rules or regulations or byelaws made thereunder, for which no punishment is
provided elsewhere in this Act, he shall be punishable with imprisonment for a term which may extend to ten years,
or with fine, which may extend to twenty-five crore rupees or with both.
If any person fails to pay the penalty imposed by the adjudicating officer or the SEBI or fails to comply with the
direction or order , he shall be punishable with imprisonment for a term which shall not be less than one month but
which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.
 28  Lesson 1 • EP-SLCM

Composition of certain offences

As per Section 23N, notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence
punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also
with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate
Tribunal or a court before which such proceedings are pending.
Contravention by companies
Section 24 provides that, where a contravention of any of the provisions of this Act or any rule, regulation, direction
or order made thereunder has been committed by a company, every person who, at the time when the contravention
was committed, was in charge of, and was responsible to, the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the contravention, and shall be liable to be
proceeded against and punished accordingly.
However, any such person shall not be liable to any punishment provided in this Act, if he proves that the
contravention was committed without his knowledge or that he exercised all due diligence to prevent the commission
of such contravention .
Where a contravention of any of the provisions of this Act or any rule, regulation, direction or order made thereunder
has been committed by a company and is proved that the contravention has been committed with the consent or
connivance of, or is attributable to any gross negligence on the part of any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer of the company shall also be deemed to be
guilty of that contravention and shall be liable to be proceeded against and punished accordingly.
The provisions of this section shall be in addition to and not in derogation of, the provisions of section 22A of the Act.
Certain offences to be cognizable
As per Section 25, notwithstanding anything contained in the Code of Criminal Procedure, 1898, any offence
punishable under section 23 shall be deemed to be cognizable offence within the meaning of that Code.
Cognizance of offences by courts
Section 26 provides that no court shall take cognizance of any offence punishable under this Act or any rules or
regulations or bye-laws made thereunder, save on a complaint made by the Central Government or State Government
or the SEBI or a recognised stock exchange or by any person.
Establishment of Special Courts
Section 26A lays down the provisions for establishment of Special Courts by Central Government for the purpose of
speedy trial.
(a) The Central Government may, for the purpose of providing speedy trial of offences under this Act, by
notification, establish or designate as many Special Courts as may be necessary.
(b) A Special Court shall consist of a single judge who shall be appointed by the Central Government with the
concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is
working.
(c) A person shall not be qualified for appointment as a judge of a Special Court unless he is, immediately before
such appointment, holding the office of a Sessions Judge or an Additional Sessions Judge, as the case may be.
Offences triable by Special Courts
Section 26B provides that all offences committed under this Act, shall be taken cognizance of and tried by the
Special Court established for the area in which the offence is committed or where there are more Special Courts
than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 29

Appeal and Revision

As per Section 26C, the High Court may exercise, so far as may be applicable, all the powers conferred by Chapters
XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits
of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of
the High Court.
Application of code to proceeding before Special Court
Section 26D provides that the Code of Criminal Procedure, 1973 shall apply to the proceeding before a special court
and for the purposes of the said provisions, the special court shall be deemed to be Court of Session and the person
conducting prosecution before a special court shall be deemed to be a public prosecutor within the meaning of the
Code of Criminal Procedure, 1973. The persons conducting prosecution should have been in practice as an Advocate
for not less than seven years or shall have held a post, for a period of not less than seven years, under the Union or
a State, requiring special knowledge of law.
Transitional provisions
Section 26E stipulates that, any offence committed under this Act, which is triable by a Special Court shall, until a
Special Court is established, be taken cognizance of and tried by a Court of Session exercising jurisdiction over the
area, notwithstanding anything contained in the Code of Criminal Procedure, 1973.
However, nothing contained in this section shall affect the powers of the High Court under section 407 of the Code
to transfer any case or class of cases taken cognizance by a Court of Session under this section.
MISCELLANEOUS PROVISIONS
Entitlement of the Investors to Dividend declared by the Company
It shall be lawful for the holder of any security whose name appears on the books of the company issuing the said
security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding
that the said security has already been transferred by him for consideration, unless the transferee who claims the
dividend from the transferor has lodged the security and all other documents relating to the transfer which may be
required by the company with the company for being registered in his name within fifteen days of the date on which
the dividend became due.

Explanation. – The period specified in this section shall be extended –

(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his
claim to the dividend;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the
actual period taken for the replacement thereof; and
(iii) in case of delay in the lodging of any security and other documents relating to the transfer due to causes
connected with the post, by the actual period of the delay.

Nothing contained in above paragraph shall affect –

(a) the right of a company to pay any dividend which has become due to any person whose name is for the time
being registered in the books of the company as the holder of the security in respect of which the dividend
has become due; or
(b) the right of the transferee of any security to enforce against the transferor or any other person his rights, if
any, in relation to the transfer in any case where the company has refused to register the transfer of the
security in the name of the transferee.

Right to Receive Income from Collective Investment Scheme

It shall be lawful for the holder of any securities, being units or other instruments issued by collective investment
scheme, whose name appears on the books of the collective investment scheme issuing the said security to receive
 30  Lesson 1 • EP-SLCM

and retain any income in respect of units or other instruments issued and declared by the collective investment
scheme in respect thereof for any year, though the said security, being units or other instruments issued by collective
investment scheme, has already been transferred by him for consideration, unless the transferee who claims the
income in respect of units or other instruments issued by collective investment scheme from the transfer or has
lodged the security and all other documents relating to the transfer which may be required by the collective
investment scheme with the collective investment scheme for being registered in his name within fifteen days of the
date on which the income in respect of units or other instruments issued by the collective investments scheme
became due.
Explanation – The period specified in this section shall be extended –
(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his claim
to the income in respect of units or other instruments issued by collective investment scheme;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the
actual period taken for the replacement thereof; and
(ii) in case of delay in the lodging of any security, being units or other instruments issued by the collective
investment scheme, and other documents relating to the transfer due to causes connected with the post, by
the actual period of the delay.

This shall not affect –

(a) the right of a collective investment scheme to pay any income from units or other instruments issued by
collective investment scheme which has become due to any person whose name is for the time being
registered in the books of the collective investment scheme as the registered holder in the books of the
collective investment scheme being units or other instruments issued by collective investment scheme in
respect of which the income in respect of units or other instruments issued by Collective Investment Scheme
has become due; or
(b) the right of transferee of any security, being units or other instruments issued by collective investment
scheme, to enforce against the transferor or any other person his rights, if any, in relation to the transfer in
any case where the company has refused to register the transfer of the security being units or other
instruments issued by the collective investment scheme in the name of the transferee.

Right to receive Income from Mutual Fund

Section 27B provides that it shall be lawful for the holder of any securities, being units or other instruments issued
by any mutual fund, whose name appears on the books of the mutual fund issuing the said security to receive and
retain any income in respect of units or other instruments issued by the mutual fund declared by the mutual fund
in respect thereof for any year, notwithstanding that the said security, being units or other instruments issued by
the mutual fund, has already been transferred by him for consideration, unless the transferee who claims the income
in respect of units or other instruments issued by the mutual fund from the transferor has lodged the security and
all other documents relating to the transfer which may be required by the mutual fund with the mutual fund for
being registered in his name within fifteen days of the date on which the income in respect of units or other
instruments issued by the mutual fund became due.
The period specified in this Section may be extended –
(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his claim
to the income in respect of units or other instrument issued by the mutual fund;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of transferee, by the actual
period taken for the replacement thereof;
(iii) in case of delay in the lodging of any security, being units or other instruments issued by the mutual fund, and
other documents relating to the transfer due to cause connected with the post, by the actual period of the
delay.
This shall not affect –
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 31

(a) the right of a mutual fund to pay any income from units or other instruments issued by the mutual fund which
has become due to any person whose name is for the time being registered in the books of the mutual fund as
the holder of the security being units or other instruments issued by the mutual fund in respect of which the
income in respect of units or other instruments issued by mutual fund has become due; or
(b) the right of transferee of any security, being units or other instruments issued by the mutual fund, to enforce
against the transferor or any other person his rights, if any, in relation to the transfer in any case where the
mutual fund has refused to register the transfer of the security being units or other instruments issued by the
mutual fund in the name of the transferee.
Protection of action taken in good faith
No suit, prosecution or other legal proceeding whatsoever shall lie in any court against the governing body or any
member, office bearer or servant of any recognised stock exchange or against any person or persons appointed
under sub-section (1) of section 11 for anything which is in good faith done or intended to be done in pursuance of
this Act or of any rules or bye-laws made thereunder.
Special Provisions related to Commodity Derivatives
Section 30A deals with following special provisions relating to commodity derivatives:-
1. This Act shall not apply to non-transferable specific delivery contracts. However, no person shall organise or
assist in organising or be a member of any association in any area to which the provisions of section 13 have
been made applicable (other than a stock exchange) which provides facilities for the performance of any non-
transferable specific delivery contract by any party thereto without having to make or receive actual delivery
to or from the other party to the contract or to or from any other party named in the contract.
2. Where in respect of any area, the provisions of section 13 have been made applicable in relation to commodity
derivatives for the sale or purchase of any goods or class of goods, the Central Government may, by notification,
declare that in the said area or any part thereof as may be specified in the notification all or any of the
provisions of this Act shall not apply to transferable specific delivery contracts for the sale or purchase of the
said goods or class of goods either generally, or to any class of such contracts in particular.
3. If the Central Government is of the opinion that in the interest of the trade or in the public interest it is
expedient to regulate and control non-transferable specific delivery contracts in any area, it may, by
notification in the Official Gazette, declare that all or any of the provisions of this Act shall apply to such class
or classes of non-transferable specific delivery contracts in such area in respect of such goods or class of
goods as may be specified in the notification, and may also specify the manner in which and the extent to
which all or any of the said provisions shall so apply.

Validation of certain Acts

Section 32 provides that any act or thing done or purporting to have been done under the principal Act, in respect
of settlement of administrative and civil proceedings, shall, for all purposes, be deemed to be valid and effective as
if the amendments made to the principal Act had been in force at all material times.
II. SECURITIES CONTRACTS (REGULATION) RULES, 1957
These rules were made by the Central Government in exercise of the powers conferred by Section 30 of the Securities
Contracts (Regulation) Act, 1956 and notified on February 21, 1957. The Government promulgated the Securities
Contracts (Regulation) Rules, 1957 (‘SCRR’) for carrying into effect the objects of the Securities Contracts
(Regulation) Act. These rules provide among other things, for the-

procedure to be Submission of inquiry into the affairs requirements for

followed for periodical returns and of stock exchanges and listing of securities on
recognition of Stock annual reports by their members a recognised stock
Exchanges recognised stock exchange
exchanges
 32  Lesson 1 • EP-SLCM

The rules are statutory and they constitute a code of standardized regulations uniformly applicable to all the
recognised stock exchanges.Under the SCRR, the Government and the Securities and Exchange Board of India (SEBI)
issue notifications, guidelines, and circulars which need to be complied with by market participants. Most of the
powers under the SCRA are exercisable by Department of Economic Affairs (DEA) while a few others by SEBI. The
powers of the DEA under the SCRA are also concurrently exercised by SEBI. The powers in respect of the contracts
for sale and purchase of securities, gold related securities, money market securities and securities derived from
these securities and carry forward contracts in debt securities are exercised concurrently by Reserve Bank of India (RBI).
REQUIREMENTS OF LISTING OF SECURITIES WITH RECOGNISED STOCK EXCHANGES

Rule 19(1)
This is one of the most important provisions of the Securities Contracts (Regulation) Rules, 1957. Rule 19 provides
for the complete procedure in this regard. A public company as defined under the Companies Act, 2013, desirous of
getting its securities listed on a recognised stock exchange, shall apply for the purpose to the stock exchange and
forward along with its application the following documents and particulars:
(a) Memorandum and articles of association and, in the case of a debenture issue, a copy of the trust deed.
(b) Copies of all prospectuses or statements in lieu of prospectuses issued by the company at any time.
(c) Copies of offers for sale and circulars or advertisements offering any securities for subscription or sale during
the last five years.
(d) Copies of balance sheets and audited accounts for the last five years, or in the case of new companies, for such
shorter period for which accounts have been made up.
(e) A statement showing –
i. dividends and cash bonuses, if any, paid during the last ten years (or such shorter period as the
company has been in existence, whether as a private or public company),
ii. dividends or interest in arrears, if any.
(f) Certified copies of agreements or other documents relating to arrangements with or between –
i. vendors and/or promoters,
ii. underwriters and sub-underwriters,
iii. brokers and sub-brokers.
(g) Certified copies of agreements with –
i. managing agents and secretaries and treasurers,
ii. selling agents,
iii. managing directors and technical directors,
iv. general manager, sales manager, managers or secretary.
(h) Certified copy of every letter, report, balance sheet, valuation contract, court order or other document, part
of which is reproduced or referred to in any prospectus, offer for sale, circular or advertisement offering
securities for subscription or sale, during the last five years.
(i) A statement containing particulars of the dates of, and parties to all material contracts, agreements (including
agreements for technical advice and collaboration), concessions and similar other documents (except those
entered into in the ordinary course of business carried on or intended to be carried on by the company)
together with a brief description of the terms, subject-matter and general nature of the documents.
(j) A brief history of the company since its incorporation giving details of its activities including any reorganization,
reconstruction or amalgamation, changes in its capital structure (authorised, issued and subscribed) and
debenture borrowings, if any.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 33

(k) Particulars of shares and debentures issued (i) for consideration other than cash, whether in whole or part,
(ii) at a premium or discount, or (iii) in pursuance of an option.
(l) A statement containing particulars of any commission, brokerage, discount or other special terms including
an option for the issue of any kind of the securities granted to any person.
(m) Certified copies of –
i. acknowledgment card or the receipt of filing offer document with the SEBI;
ii. agreements, if any, with the Industrial Finance Corporation, Industrial Credit and Investment
Corporation and similar bodies.
(n) Particulars of shares forfeited.
(o) A list of highest ten holders of each class or kind of securities of the company as on the date of application
along with particulars as to the number of shares or debentures held by and the address of each such holder.
(p) Particulars of shares or debentures for which permission to deal is applied for;

However, a recognised stock exchange may either generally by its bye-laws or in any particular case call for such
further particulars or documents as it deems proper.
Rule 19(2)
Sub-rule 2 of Rule 19 provides that apart from complying with such other terms and conditions as may be laid down
by a recognised stock exchange, an applicant company shall satisfy the stock exchange that;
(a) Its articles of association provide for the following among others –
(i) that the company shall use a common form of transfer;
(ii) that the fully paid shares will be free from all lien, while in the case of partly laid shares, the company’s
lien, if any, will be restricted to moneys called or payable at a fixed time in respect of such shares;
(iii) that any amount paid-up in advance of calls on any share may carry interest but shall not entitle the
holder of the share to participate in respect thereof, in a dividend subsequently declared;
(iv) there will be no forfeiture of unclaimed dividends before the claim becomes barred by law;
(v) that option or right to call of shares shall not be given to any person except with the sanction of the
company in general meeting;
However, a recognised stock exchange may provisionally admit to dealings the securities of a company which
undertakes to amend its articles of association at its next general meeting so as to fulfill the foregoing
requirements and agrees to act in the meantime strictly in accordance with the provisions of this clause.

Rule 19(2)(b)
The minimum offer and allotment to public in terms of an offer document shall be-
(i) at least twenty five per cent of each class or kind of equity shares or debenture convertible into equity shares
issued by the company, if the post issue capital of the company calculated at offer price is less than or equal
to one thousand six hundred crore rupees;
(ii) at least such percentage of each class or kind of equity shares or debentures convertible into equity shares
issued by the company equivalent to the value of four hundred crore rupees, if the post issue capital of the
company calculated at offer price is more than one thousand six hundred crore rupees but less than or equal
to four thousand crore rupees;
(iii) at least ten percent of each class or kind of equity shares or debentures convertible into equity shares issued
by the company, if the post issue capital of the company calculated at offer price is above four thousand crore
rupees but less than or equal to one lakh crore rupees;
(iv) at least such percentage of each class or kind of equity shares or debentures convertible into equity shares
issued by the company equivalent to the value of five thousand crore rupees and at least five per cent of each
 34  Lesson 1 • EP-SLCM

such class or kind of equity shares or debenture convertible into equity shares issued by the company, if the
post issue capital of the company calculated at offer price is above one lakh crore rupees.
However, the company referred to in sub-clause (ii) or sub-clause (iii), shall increase its public shareholding
to at least twenty five per cent within a period of three years from the date of listing of the securities.
The company referred to in this sub-clause (iv) shall increase its public shareholding to at least ten per cent
within a period of two years and at least twenty-five per cent. within a period of five years, from the date of
listing of the securities.

The applicant company, who has issued equity shares having superior voting rights to its promoters or
founders and is seeking listing of its ordinary shares for offering to the public under this rule and the regulations
made by the SEBI in this regard, shall mandatorily list its equity shares having superior voting rights at the same
recognized stock exchange along with the ordinary shares being offered to the public.

Conditions precedent to submission of application for listing by Stock Exchange

Sub-rule (3) of Rule 19 provides that company while applying for listing shall, as conditions precedent, undertake
inter alia –
(a) (i) that letters of allotment will be issued simultaneously and that, in the event of its being impossible to
issue letters of regret at the same time, a notice to that effect will be inserted in the press so that it will
appear on the morning after the letters of allotment have been posted.
(ii) that letters of right will be issued simultaneously,
(iii) that letters of allotment, acceptance or rights will be serially numbered, printed on good quality paper
and, examined and signed by a responsible officer of the company and that whenever possible, they
will contain the distinctive numbers of the securities to which they relate.
(iv) that letters of allotment and renounceable letters of right will contain a proviso for splitting and that,
when so required by the exchange, the form of renunciation will be printed on the back of or attached
to the letters of allotment and letters of right;
(v) that letters of allotment and letters of right will state how the next payment of interest or dividend on
the securities will be calculated;
(b) to issue, when so required, receipts for all securities deposited with it whether for registration, subdivision,
exchange or for other purposes; and not to charge any fees for registration of transfers, for sub-division and
consolidation of certificate and for sub-division of letters of allotment, renounceable letters of right, and
split consolidation, renewal and transfer receipts into denominations of the market unit of trading;
(bb) to issue, when so required, consolidation and renewal certificates in denominations of the market unit of
trading, to split certificates, letters of allotment, letters of right, and transfer, renewal, consolidation and split
receipts into smaller units, to split call notices, issue duplicates thereof and not require any discharge on call
receipts and to accept the discharge of members of stock exchange on split, consolidation and renewal
receipts as good and sufficient without insisting on the discharge of the registered holders;
(c) when documents are lodged for sub-division or consolidation (or renewal) through the clearing house of the
exchange;
(i) to accept the discharge of an official of the stock exchange clearing house on the company’s split
receipts and (consolidation receipts and renewal receipts) as good and sufficient discharge without
insisting on the discharge of the registered holders; and
(ii) to verify when the company is unable to issue certificates or split receipt or (consolidation receipts or
renewal receipts) immediately on lodgement whether the discharge of the registered holders, on the
documents lodged for sub-division or consolidation (or renewal) and their signatures on the relative
transfers are in order;
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 35

(d) on production of the necessary documents by shareholders or by members of the exchange, to make on
transfers an endorsement to the effect that the power of attorney or probate or letters of administration or
death certificate or certificate of the Controller of Estate Duty or similar other document has been duly
exhibited to and registered by the company;
(e) to issue certificates in respect of shares or debentures lodged for transfer within a period of one month of the
date of lodgement of transfer and to issue balance certificates within the same period where the transfer is
accompanied by a larger certificate;
(f) to advise the stock exchange of the date of the board meeting at which the declaration or recommendation of
a dividend (or the issue or right or bonus share) will be considered;
(g) to recommend or declare all dividends and/or cash bonuses at least five days before the commencement of
the closure of its transfer books or the record date fixed for the purpose and so advise the stock exchange in
writing of all dividends and/or cash bonuses recommended or declared immediately after a meeting of the
board of the company has been held to finalise the same;
(h) to notify the stock exchange of any material change in the general character or nature of the company’s
business;
(i) to notify the stock exchange of any change –
(i) in the company’s directorate by death, resignation, removal or otherwise,
(ii) of managing director, managing agent or secretaries and treasurers,
(iii) of auditors appointed to audit the books and accounts of the company;
(j) to forward to the stock exchange copies of statutory and annual reports and audited accounts as soon as
issued, including directors’ reports;
(k) to forward to the stock exchange as soon as they are issued, copies of all other notices and circulars sent to
the shareholders including proceedings of ordinary and extraordinary general meetings of the company and
to file with the stock exchange certified copies of resolutions of the company as soon as such resolutions
become effective;
(l) to notify the stock exchange prior to intimating the shareholders, of any new issue of securities whether by
way of right, privilege, bonus or otherwise and the manner in which it is proposed to offer or allot the same;
(m) to notify the stock exchange in the event of re-issue of any forfeited securities or the issue of securities held
in reserve for future issue;
(n) to notify the stock exchange of any other alteration of capital including calls;
(o) to close the transfer books only for the purpose of declaration of dividend or issue of right or bonus shares or
for such other purposes as the stock exchange may agree and to give notice to the stock exchange as many
days in advance as the exchange may from time to time reasonably prescribe, stating the dates of closure of
its transfer books (or, when the transfer books are not to be closed, the date fixed for taking a record of its
shareholders or debenture holders) and specifying the purpose or purposes for which the transfer books are
to be closed (or the record is to be taken) and in the case of a right or bonus issue to so close the transfer
books or fix a record date only after the sanctions of the competent authority subject to which the issue is
proposed to be made have been duly obtained, unless the exchange agrees otherwise;
(p) to forward to the stock exchange an annual return immediately after each annual general meeting of at least
ten principal holders of each class of security of the company along with particulars as to the number of
shares or debentures held by, and address of, each such holder;
(q) to grant to shareholders the right of renunciation in all cases of issue of rights, privileges and benefits and to
allow them reasonable time not being less than four weeks within which to record, exercise, or renounce such
rights, privileges and benefits, and to issue, where necessary, coupons or fractional certificates or provide for
the payment of the equivalent of the value of the fractional right in cash unless the company in general
meeting or the stock exchange agrees otherwise;
(r) to promptly notify the stock exchange–
 36  Lesson 1 • EP-SLCM

(i) of any action which will result in the redemption, cancellation or retirement in whole or in part of any
securities listed on the exchange,
(ii) of the intention to make a drawing of such securities, intimating at the same time the date of the
drawing and the period of the closing of the transfer books (or the date of the striking of the balance)
for the drawing,
(iii) of the amount of securities outstanding after any drawing has been made;
(s) to intimate the stock exchange any other information necessary to enable the shareholders to appraise the
position of the company and to avoid the establishment of a false market in the shares of the company;
(t) that in the event of the application for listing being granted, such listing shall be subject to the rules and bye-
laws of the exchange in force from time to time and that the company will comply within a reasonable time,
with such further listing requirements as may be promulgated by the exchange as a general condition for new
listings.

Application for listing of new securities

Rule 19(4) stipulates that an application for listing shall be necessary in respect of the following:
(a) all new issues of any class or kind of securities of a company to be offered to the public;
(b) all further issues of any class or kind of securities of a company if such class or kind of securities of the
company are already listed on a recognised stock exchange.

Suspension or withdrawal of admission to dealings in securities on stock exchange

Rule 19(5) stipulates that a recognised stock exchange may suspend or withdraw admission to dealings in the
securities of a company or body corporate either for a breach of or non-compliance with, any of the conditions of
admission to dealings or for any other reason, to be recorded in writing, which in the opinion of the stock exchange
justifies such action;
However, no such action shall be taken by a stock exchange without affording to the company or body corporate
concerned a reasonable opportunity by a notice in writing, stating the reasons, to show cause against the proposed
action.
Further, where a recognised stock exchange has withdrawn admission to dealings in any security, or where
suspension of admission to dealings has continued for a period exceeding three months, the company or body
corporate concerned may prefer an appeal to the Securities Appellate Tribunal constituted under section 15K of the
SEBI Act, 1992 and the procedure laid down under the Securities Contracts (Regulation) (Appeal to Securities
Appellate Tribunal) Rules, 2000 shall apply to such appeal. The Securities Appellate Tribunal may, after giving the
stock exchange an opportunity of being heard, vary or set aside the decision of the stock exchange and its orders
shall be carried out by the stock exchange. [Rule 19(5)]
A recognised stock exchange may, either at its own discretion or shall in accordance with the orders of the Securities
Appellate Tribunal restore or re-admit to dealings any securities suspended or withdrawn from the list. [Rule 19(6)]
All requirements with respect to listing prescribed by these rules shall, so far as they may be, also apply to a public
sector company. [Rule 19(6A)]
The SEBI may, at its own discretion or on the recommendation of a recognised stock exchange, waive or relax the
strict enforcement of any or all of the requirements with respect to listing prescribed by these rules. [Rule 19(7)]
The minimum offer and allotment requirements as prescribed under clause (b) of sub-rule (2) shall not be applicable
to the listing of such equity shares having superior voting rights issued to the promoters or founders as the case
may be, in cases where the applicant company is seeking listing of its ordinary shares for offering to the public in
accordance with the provisions of this rule and the regulations made by the Securities and Exchange Board of India
in this regard. [Rule 19(8)]
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 37

Minimum Shareholding
Rule 19A (1) stipulates that every listed public sector company other than public sector company shall maintain
public shareholding of at least 25%. However, any listed company which has public shareholding below 25% on the
commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, shall increase its public
shareholding to at least 25% , within a period of three years from the date of such commencement, in the manner
specified by the SEBI.
Explanation : For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and
allotment made to public in terms of clause (b) of sub-rule (2) of rule 19, shall maintain minimum 25% public
shareholding from the date on which the public shareholding in the company reaches the level of 25% in terms of
said sub-clause.
Sub-rule (2) provides that where the public shareholding in a listed company falls below 25 % at any time, such
company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of
such fall in the manner specified by the SEBI.
However every listed public sector company whose public shareholding falls below twenty five per-cent. at any
time after the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, shall
increase its public shareholding to at least twenty five per-cent, within a period of two years from such fall, in the
manner specified by the SEBI.
Where the public shareholding in a listed company falls below 25% in consequence to SCRR (Amendment) Rules,
2015, such company shall increase its shareholding to atleast 25%, in the manner specified by the SEBI within a
period of three years, as the case may be, from the date of notification of:
(a) the Depository Receipts Scheme, 2014, in cases where the public shareholding falls below 25% as a result of
such scheme;
(b) the SEBI (Share Based Employee Benefits) Regulations, 2014, in cases where the public shareholding falls
below 25%, as a result of such regulations.

Sub rule (5) provides that where the public shareholding in a listed company falls below twenty-five per cent, as a
result of implementation of the resolution plan approved under section 31 of the Insolvency and Bankruptcy Code,
2016, such company shall bring the public shareholding to twenty-five per cent within a maximum period of three
years from the date of such fall, in the manner specified by the Securities and Exchange Board of India.
However, if the public shareholding falls below ten per cent, the same shall be increased to at least ten per cent,
within a maximum period of 12 months from the date of such fall, in the manner specified by the Securities and
Exchange Board of India. It is further provided that every listed company shall maintain public shareholding of at
least five per cent as a result of implementation of the resolution plan approved under section 31 of the Insolvency
and Bankruptcy Code, 2016.
The Central Government may, in the public interest, exempt any listed public sector company from any or all of
the provisions of minimum shareholding.

DELISTING OF SECURITIES

1. Rule 21 deals with delisting of securities. A recognized stock exchange may, without prejudice to any other
action that may be taken under the Act or under any other law for the time being in force, delist any securities
listed thereon on any of the following grounds in accordance with the regulations made by the SEBI, namely:–
(a) the company has incurred losses during the preceding three consecutive years and it has negative
networth;
(b) trading in the securities of the company has remained suspended for a period of more than six months;
(c) the securities of the company have remained infrequently traded during the preceding three years;
 38  Lesson 1 • EP-SLCM

(d) the company or any of its promoters or any of its director has been convicted for failure to comply with
any of the provisions of the Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations,
agreements made thereunder, as the case may be and awarded a penalty of not less than rupees one
crore or imprisonment of not less than three years;
(e) the addresses of the company or any of its promoter or any of its directors, are not known or false
addresses have been furnished or the company has changed its registered office in contravention of the
provisions of the Companies Act, 2013; or
(f) shareholding of the company held by the public has come below the minimum level applicable to the
company as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the
company has failed to raise public holding to the required level within the time specified by the
recognized stock exchange.
However, no securities shall be delisted unless the company concerned has been given a reasonable
opportunity of being heard.
2. If the securities is delisted under clause (1),
(a) the company, promoter and director of the company shall be jointly and severally liable to purchase
the outstanding securities from those holders who wish to sell them at a fair price determined in
accordance with regulations made by the SEBI, under the Act; and
(b) the said securities shall be delisted from all recognized stock exchanges.
3. A recognized stock exchange may, on the request of the company, delist any securities listed thereon in
accordance with the regulations made under the Act by the SEBI, subject to the following conditions, namely:
(a) the securities of the company have been listed for a minimum period of three years on the recognized
stock exchange;
(b) the delisting of such securities has been approved by the two-third of public shareholders; and
(c) the company, promoter and/or the director of the company purchase the outstanding securities from
those holders who wish to sell them at a price determined in accordance with regulations made by
SEBI under the Act.
However, the condition at (c) may be dispensed with by Securities and Exchange Board of India if the
securities remain listed at least on the National Stock Exchange of India Limited or the Bombay Stock
Exchange Limited.

Question: Whether a stock exchange on its own can delist any security thereon?
Answer: Rule 21 of the Securities Contracts (Regulations) Rules, 1957 deals with the delisting of securities. A
recognized stock exchange may, without prejudice to any other action that may be taken under the Act or under
any other law for the time being in force, delist any securities listed thereon on the grounds in accordance with
the regulations made by the Securities and Exchange Board of India.

ROLE OF COMPANY SECRETARY

Company Secretary has the Right to Legal Representation before Securities Appellate Tribunal (SAT). The appellant
may either appear before SAT in person or authorise one or more chartered accountants or company secretaries
or cost accountants or legal practitioners or any of its officers to present his or its case.
Lesson 1 • Securities Contracts (Regulation) Act, 1956 39

LESSON ROUND-UP

• The Securities Contracts (Regulation) Act, 1956 (‘SCRA‘) was enacted by Parliament to prevent undesirable
transactions in securities by regulating the business of dealing therein, and by providing for certain other
matters connected therewith.
• Section 2 of this Act contains definitions of various terms used in the Act.
• Section 3 lays down that any stock exchange, desirous of being recognized for the purposes of this Act
may make an application in the prescribed manner to the Central Government.
• Powers of the Central Government as covered under Section 6, 8, 11, 12, 16, 23-O, 29A.
• Powers of Recognised Stock Exchange as covered under Section 7A and 9.
• Powers of the SEBI as covered under section 10, 12A, 23-I and 31.
• The Act prescribes various penalties against persons who might be found guilty of offences under the Act.
• Section 21 of the Act provides that where securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the SEBI (LODR), Regulations,
2015.
• Section 31 provides that, SEBI may, by notification in the Official Gazette, make regulations consistent
with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.
• The Government promulgated the Securities Contracts (Regulation) Rules, 1957 for carrying into effect
the object of the Securities Contracts (Regulation) Rules, 1956.
• Rule 19 dealt with the requirement with respect to the listing of securities on a recognised stock exchange.
• Rule 21 dealt with the Delisting of securities.

GLOSSARY

Stock Exchange Anybody of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating controlling the business of buying, selling or dealing in securities.
Admission to Dealing The process of granting permission to the securities of a company to be listed on a
Stock Exchange and to provide trading facilities for the securities in the market.
Listed Company A company which has any of its securities offered through an offer document listed on
a recognised stock exchange and also includes Public Sector Undertakings whose
securities are listed on a recognised stock exchange.
Appointed date It means the date which the SEBI may, by notification in the Official Gazette, appoint
and different appointed dates may be appointed for different recognized stock
exchanges.
Commodity Derivative It means a contract - (i) for the delivery of such goods, as may be notified by the
Central Government in the Official Gazette, and which is not a ready delivery contract;
or (ii) for differences, which derives its value from prices or indices of prices of such
underlying goods or activities, services, rights, interests and events,
asmaybenotifiedbythe Central Government, inconsultationwiththe SEBI, butdoes not
include securities as referred to in sub-clauses (A) and (B) of clause (ac) of Section 2
under Securities Contracts (Regulation) Act, 1956.
Clearing Clearing Settlement or clearance of accounts, for a fixed period in a Stock Exchange
40  Lesson 1 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Briefly discuss the powers of stock exchange under the Securities Contracts (Regulation) Act, 1956.
2. The Central Government has directed a recognised stock exchange to suspend its business in the interest
of the trade or public? Describe the powers of Central Government in accordance with SEBI (Securities
Contracts (Regulation) Act, 1956
3. ABC Ltd. is listed on National Stock Exchange of India Limited (NSE) and further planning to list its shares
on BSE under Direct Listing. Can company list its shares on both stock exchanges? If yes, what are the
requirements to be made for such listing on BSE in accordance with the SEBI (Securities Contracts
(Regulation) Act, 1956) and rules made thereunder?
4. XYZ Ltd. has filed listing application to stock exchange. Stock exchange rejected the listing application on
the ground that the listing norms had not been complied with. You as a Company Secretary prepare a note
to your Managing Director in the light of rights available with the company.
5. ABC Ltd. applied for listing of instruments in a recognized stock exchange. However, permission was
refused by the stock exchange. Can the company appeal to SAT against such refusal? Explain.
6. 'A stock exchange on its own can delist any security thereon'. Explain how Recognized Stock Exchange
delists any securities listed thereon under Securities Contracts (Regulations) Rules, 1957.
7. What are the provisions for continuous listing requirement under Securities Contracts (Regulation)
Rules, 1957? List any six methods for achieving minimum public shareholding by a listed company

LIST OF FURTHER READINGS

• SEBI Notifications
• SEBI Circulars
• SAT Orders

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/
• http://sat.gov.in/
• https://www.nseindia.com/
• https://www.bseindia.com/
 Securities and Exchange Board
Lesson 2 of India Act, 1992
Key Concepts One Learning Objectives
Should Know
To understand the
• Securities and
• Objectives of establishment of SEBI
Exchange Board
of India • Regulatory prescriptions on establishment and incorporation of SEBI
• Securities • Functions and powers of SEBI
Appellate • Regulatory prescriptions on Registration of Intermediaries
Tribunal (SAT) • Penalties and its adjudications
• Adjudications • Regulatory prescriptions on establishment and appeal to Securities
• Settlement Appellate Tribunal (SAT)
• Recovery • Powers of the Central Government
• Offences
The Company Secretary is recognised to appear as legal representative before
• Penalty SAT under the SEBI Act, 1992, therefore a student who is pursuing CS course
• Securities needs to update himself with the various provisions and compliances of the
• Investigations SEBI Act 1992.

Lesson Outline
• Introduction • Appeal to Supreme Court
• Objective of SEBI • Powers of Central Government
• Regulatory Framework of SEBI • Returns and Reports
Act, 1992
• Delegation of Powers
• Establishment of the SEBI
• Appeal to the Central Government
• Management of SEBI
• Bar of Jurisdiction
• Functions and Powers of the SEBI
• Public Servants
• Registration of Intermediaries
• Offences & Punishments
• Prohibition of Manipulative and
deceptive devices, insider trading • Cognizance of Offences by Courts
etc. • Recovery of Amounts
• Penalties for failure • Central Government power to
• Adjudications make Rules SEBI power to
make Regulations
• Settlement of Administrative and • Role of Company Secretary
Civil Proceedings
• Establishment of Securities • LESSON ROUND-UP
Appellate Tribunal • GLOSSARY
• Appeal to Securities Appellate • TEST YOURSELF
Tribunal and its procedure
• LIST OF FURTHER READINGS
• Powers of Securities Appellate
Tribunal • OTHER REFERENCES
 42  Lesson 2 • EP-SLCM

Regulatory Framework
• Securities and Exchange Board of India Act, 1992

INTRODUCTION
The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of
the Securities and Exchange Board of India Act, 1992. The first statutory regulatory body that the Government of
India set up post the reforms of 1991 was the Securities and Exchange Board of India (SEBI).
The SEBI –
• can specify the matters to be disclosed and the standards of disclosure required for the protection of investors
in respect of issues;
• can issue directions to all intermediaries and other persons associated with the securities market in the
interest of investors or of orderly development for securities market; and
• can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act.
Since its establishment in 1992, a lot of initiatives have been taken to protect the interests of the investors. SEBI
under the SEBI Act, 1992 has been empowered to frame subordinate legislation and to investigate wrong doing,
impose relevant penalties and to conduct search and seizure operations.
In short, it has been given necessary autonomy and authority to regulate and develop an orderly securities market.
As per Section 1 of the Act, this Act may be called the Securities and Exchange Board of India Act, 1992. It extends
to the whole of India. It shall be deemed to have come into force on the 30th day of January, 1992.

OBJECTIVES OF SEBI

S
OBJECTIVES OF SEBI

To protect the interests of To regulate the securities market

To promote the development of and for matters connected
investors in securities
therewith or incidental thereto

SEBI ACT, 1992

Regulatory Framework
The SEBI Act, 1992 is divided into ten chapters which are discussed below:

SEBI Act, Chapter I Definitions of various terms

1992 Chapter II Establishment of SEBI
Chapter III Transfer of assets, liabilities, etc., of the existing SEBI
Chapter IV Powers and Functions of SEBI
Chapter V Registration Certificate
Chapter VA Prohibition of Manipulative and Deceptive Devices, Insider Trading and Substantial
Acquisition of Securities or Control
Chapter VI Finance, Accounts and Audit
Chapter VIA Penalties and Adjudication
Chapter VI B Establishment, Jurisdiction, Authority and Procedure of Securities Appellate Tribunal
Chapter VII Miscellaneous
 Lesson 2 • Securities and Exchange Board of India Act, 1992 43

ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Establishment and Incorporation of Board
Section 3 of the SEBI Act provides that there shall be a Board by the name of the Securities and Exchange Board of
India (SEBI) established as -
• a body corporate;
• having perpetual succession and a common seal;
• with power to acquire, hold and dispose of property, both movable and immovable; and
• to contract, and shall, by the said name, sue or be sued;
• the head office of the Board shall be at Mumbai.
Further, the Board may establish offices at other places in India.

MANAGEMENT OF THE SEBI

Section 4(1) of the SEBI Act provides that the SEBI shall consist of the following members (appointed by the Central
Government), namely:

Chairman

• The general superintendence, direction and management of the affairs of the Board shall vest in a Board of
members, which may exercise all powers and do all acts and things which may be exercised or done by the Board.
• The Chairman shall also have powers of general superintendence and direction of the affairs of the Board and
may also exercise all powers and do all acts and things which may be exercised or done by that Board.
• The Chairman and the other members shall be persons of ability, integrity and standing who have shown
capacity in dealing with problems relating to securities market or have special knowledge or experience of
law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the
Central Government, shall be useful to the Board.

FUNCTIONS AND POWERS OF THE SEBI

Chapter IV of the SEBI Act, 1992 deals with the powers and functions of SEBI.

Section 11 Functions of the SEBI

Section 11A To Regulate or Prohibit Issue of Prospectus, Offer

Document or AdvertisementSoliciting Money for Issue of Securities
 44  Lesson 2 • EP-SLCM

Section 11AA To Regulate Collective Investment Schemes

Section 11B Power to Issue Directions and Levy Penalty

Section 11C Investigation

Section 11D Cease and Desist Proceedings

Functions of the SEBI

regulate the
securities markets

protect the interests of promote the development

Duty of SEBI
the investors in securities of securities markets

Section 11 of the Act lays down that it shall be the duty of SEBI to protect the interests of the investors in securities
and to promote the development of, and to regulate the securities markets by such measures as it thinks fit.
Section 11(2) provides that the measures may provide for –

Measures
• Regulating the business in stock exchanges and any other securities markets;
• Registering and regulating the working of stock brokers, sub-broker, share transfer agents, bankers to an
issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities markets in any
manner;
• Registering and regulating the working of the depositories, participants, custodians of securities, foreign
institutional investors, credit rating agencies and such other intermediaries as the SEBI, may by notification
specify in this behalf;
• Registering and regulating the working of venture capital funds and collective investment schemes,
including mutual funds;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 45

• Promoting and regulating self-regulatory organisations;

• Prohibiting fraudulent and unfair trade practices relating to securities markets;
• Promoting investors’ education and training of intermediaries of securities markets;
• Prohibiting insider trading in securities;
• Regulating substantial acquisition of shares and takeover of companies;
• Calling for information, undertaking inspection, conducting inquiries and audits of the stock exchanges,
mutual funds, other persons associated with the securities markets, intermediaries and self regulatory
organisations in the securities market;
• Calling for information and records:
» from any person including any bank or any authority or board or corporation established or constituted
by or under any central or state Act, which in the opinion of the SEBI, shall be relevant to any investigation
or inquiry by the SEBI in respect of any transaction in securities;
» from any such agencies, as may be specified by the SEBI, such information as may be considered
necessary by it for the efficient discharge of its functions;
» from other authorities, whether in India, or outside India having functions similar to those of the
SEBI, in the matters relating to the prevention or detection of violation in respect of securities laws,
subject to the provisions of other laws for the time being in force in this regard.
• Performing such functions and exercising such powers under the provisions of the Securities Contracts
(Regulation) Act, 1956, as may be delegated to it by the Central Government;
• Levying fees or other charges for carrying out the purposes of this section;
• Conducting research for the above purposes;
• Calling from or furnishing to any such agencies, as may be specified by the SEBI such information as may
be considered necessary by if for the efficient discharge of its functions;
• Performing such other functions as may be prescribed.

Powers with respect to inspection of Books and Documents

Section 11(2A) prescribes that SEBI may take measures to undertake inspection of any book, or register, or other
document or record of any listed public company or a public company which intends to get its securities listed on
any recognised stock exchange where SEBI has reasonable grounds to believe that such company has been indulging
in insider trading or fraudulent and unfair trade practices relating to securities market.

Board is vested with the same power as that of Civil Court

Section 11(3) of the SEBI Act provides that the SEBI has been vested with the same powers as are available to a
Civil Court under the Code of Civil Procedure, 1908 for trying a suit in respect of the following matters:
(i) the discovery and production of books of account and other documents at such place and such time
indicated by SEBI.
(ii) summoning and enforcing the attendance of persons and examining them on oath.
(iii) inspection of any books, registers and other documents of any person listed referred in section 12 of the
Act at any place.
(iv) inspection of any book or register or other document or record of any listed company or a public company
which intends to get its securities listed on any recognized stock exchange.
(v) issuing commissions for the examination of witnesses or documents.

Passing of an order by an Board

As per Section 11(4), the SEBI, may, by an order or for reasons to be recorded in writing, in the interest of investors
or securities market take any of the following measures either pending investigation or inquiry or on completion of
such investigation or enquiry namely:
 46  Lesson 2 • EP-SLCM

(a) suspend the trading of any security in a recognised stock exchange.

(b) restrain persons from accessing the securities market and prohibit any person associated with securities
market to buy, sell or deal in securities.
(c) suspend any office-bearer of any stock exchange or self regulatory organisation from holding such position.
(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation.
(e) attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or any
person associated with the securities market in any manner involved in violation of any of the provisions of
this Act, or the rules or the regulations made thereunder.
However, the SEBI shall, within ninety days of the said attachment, obtain confirmation of the said attachment
from the Special Court, established under section 26A, having jurisdiction and on such confirmation, such
attachment shall continue during the pendency of the aforesaid proceedings and on conclusion of the said
proceedings, the provisions of section 28A shall apply.
Further, only property, bank account or accounts or any transaction entered therein, so far as it relates to the
proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations
made thereunder shall be allowed to be attached.
(f) direct any intermediary or any person associated with the securities market in any manner not to dispose of
or alienate an asset forming part of any transaction which is under investigation.

The SEBI shall give an opportunity of hearing to such intermediaries or persons concerned either before or
after passing such orders.

Levy of Penalty
The SEBI may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D,
15E, 15EA, 15EB, 15F, 15G, 15H, 15HA, 15HAA and 15HB after holding an inquiry in the prescribed manner.
The amount disgorged, pursuant to direction issued under section 11B or section 12A of the Securities Contracts
(Regulation) Act, 1956 or section 19 of the Depositories Act, 1996, or under a settlement made under section 15JB
or section 23JA of the Securities Contracts (Regulation) Act, 1956 or section 19-IA of the Depositories Act, 1996, as
the case may be –
• shall be credited to the Investor Protection and Education Fund established by the SEBI
• such amount shall be utilized by the SEBI in accordance with the regulations made under this Act.

Power of the sebi to regulate or prohibit issue of prospectus, offer document or advertisement
soliciting money for issue of securities
(1) As per the section 11A, the SEBI may, for the protection of investors, –

specify, by regulations – by general or special orders

the matters relating to issue of capital, prohibit any company from issuing
transfer of securities and other matters prospectus, any offer document, or
incidental thereto advertisement soliciting money from the
public for the issue of securities
the manner in which such matters shall be
disclosed by the companies specify the conditions subject to which the
prospectus, such offer document or
advertisement, if not prohibited, may be
issued
 Lesson 2 • Securities and Exchange Board of India Act, 1992 47

Power to Regulate Collective Investment Schemes

Section 11AA (1) of the SEBI Act, provides that any scheme or arrangement which satisfies the conditions referred
to in sub-section (2) or sub-section (2A) shall be a collective investment scheme.
However, any pooling of funds under any scheme or arrangement, which is not registered with the SEBI or is not
covered under sub-section (3), involving a corpus amount of Rs. 100 crore or more shall be deemed to be a collective
investment scheme.

[This section has been discussed in Lesson No. 13]

Power to issue directions and levy penalty

Issue of Directions
Section 11B of the Act provides that if the SEBI is satisfied, after making or causing to be made an enquiry that it is
necessary:

SEBI may issue such

directions

to any person or class of persons referred to any company in respect of matters relating
to in section 12, or associated with the to issue of capital, transfer of securities and
securities market; or other matter incidental thereto, as may be
appropriate in the interests of investors in
securities and the securities market.

in the interest of investors, or orderly development of securities market; or

to prevent the affairs of any intermediary or other persons referred to in

section 12 being conducted in a manner detrimental to the interests of
investors or securities market; or

to secure the proper management of any such intermediary or person

The power to issue directions under this section shall include and always be deemed to have been included the
power to direct any person, who made profit or averted loss by indulging in any transaction or activity in
contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the
wrongful gain made or loss averted by such contravention.

Levy of Penalty
The SEBI may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D,
15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner.

Investigations
(1) Grounds for Investigation
Section 11C of the Act provides that where the SEBI has reasonable ground to believe that:

• the transactions in securities are being dealt within a manner detrimental to the investors or the securities
market; or
• any intermediary or any person associated with the securities market has violated any of the provisions of
this Act or the rules or the regulations made or directions issued by SEBI thereunder;
 48  Lesson 2 • EP-SLCM

it may, at any time by order in writing, direct any person specified in the order to investigate the affairs of such
intermediary or persons associated with the securities market and to report thereon to the SEBI.
(2) Duty of officers to produce Accounts and Records
It is the duty of -
• every manager, managing director, officer and other employee of the company;
• every intermediary; or
• every person associated with the securities market;
to preserve and to produce to the Investigating Authority or any person authorised by it in this behalf, all the books,
registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the
intermediary or such person, which are in their custody or power.

(3) Powers of Investigating Authority

The Investigating Authority may require any intermediary or any person associated with securities market in any
manner to furnish such information to, or produce such books, or registers, or other documents, or record before
him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information
or the production of such books, or registers, or other documents, or record is relevant or necessary for the purposes
of its investigation.

(4) Period of Custody

The Investigating Authority may keep in its custody any books, registers, other documents and record produced for
six months and thereafter shall return the same to any intermediary or any person associated with securities market by
whom or on whose behalf the books, registers, other documents and record are produced.
However, the investigating officer may call for any book,, register, other document and record if they are needed
again. Further, if the person on whose behalf the books, registers, other documents and record are produced
requires certified copies of the books, registers, other documents and record produced before the Investigating
Authority, it shall give certified copies of such books, registers, other documents and record to such person or on
whose behalf the books, registers, other documents and record were produced.

(5) Examination on oath

Any person, directed to make an investigation may, examine on oath, any manager, managing director, officer and
other employee of any intermediary or any person associated with securities market in any manner, in relation to
the affairs of his business and may administer an oath accordingly and for that purpose may require any of those
persons to appear before it personally.

(6) Failure in compliance

If any person fails without reasonable cause or Person shall be punishable with
refuses

• to produce to the Investigating Authority or any • imprisonment for a term which may extend to 1
person authorised by it in this behalf any book, year, or
register, other document and record which is his • with fine, which may extend to 1 crore rupees, or
duty to produce; or • with both, and
• to furnish any information which it is his duty to • also with a further fine which may extend to five
furnish; or lakh rupees for every day after the first during
• to appear before the Investigating Authority which the failure or refusal continues.
personally when required to do so or to answer any
question which is put to him by the Investigating
Authority; or
• to sign the notes of any examination.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 49

(7) Notes of examination

Notes of any examination shall be taken down in writing and shall be read over to, or by, and signed by,
the person examined, and may thereafter be used in evidence against him.

(8) Seizure of Records

Application to the Magistrate or Judge of such designated Court for an order for the Seizure of records
Where in the course of an investigation, the Investigating Authority has reasonable ground to believe that the books,
registers, other documents and record of, or relating to any, any intermediary or any person associated with
securities market in any manner may be destroyed, mutilated, altered, falsified or secreted, the Investigating
Authority may make an application to the Magistrate or Judge of such designated Court in Mumbai, as may be
notified by the Central Government for an order for the seizure of such books, registers, other documents and records.
The authorised officer may requisition the services of any police officer or any office of the Central Government, or
of both, to assist him for all or any of the purposes specified above and it shall be the duty of every such officer to
comply with such requisition.
(9) Order of the Magistrate or Judge of such designated Court authorising the Investigating Authority
After considering the application and hearing the Investigating Authority, if necessary, the Magistrate or Judge of the
Designed Court may, by order, authorize the investigating authority –
(a) to enter, with such assistance, as may be required, the place or places where such books, registers, other
documents and records are kept,
(b) to search that place or those places in the manner specified in the order and,
(c) to seize books, registers and other documents and records, it consider necessary for the purpose of the
investigation.
Exemptions
However, the Magistrate or Judge of the Designated Court shall not authorize seizure of books, registers, other
documents and record of any listed public company or a public company (not being the intermediary specified
under section 12) which intends to get its securities listed on any recognized stock exchange unless such company
indulges in insider trading or market manipulation.

(10) Returning of records

The Investigating Authority shall keep in its custody the books, registers, other documents and record seized under
this section for such period not later than the conclusion of the investigation as it considers necessary and thereafter
shall return the same to the company or the other body corporate, or, as the case may be, to the managing director
or the manager or any other person, from whose custody or power they were seized and inform the Magistrate or
Judge of the Designated Court of such return.
The Investigating Authority may, before returning such books, registers, other documents and record as afores aid,
place identification marks on them or any part thereof.
(11) Every search or seizure made under this section shall be carried out in accordance with the provisions of the
Code of Criminal Procedure, 1973 relating to searches or seizures made under that Code.
 50  Lesson 2 • EP-SLCM

CASE LAWS

18.03.2021 Mr. Neeleshkumar Radheshyam Lahoti Adjudicating Officer, SEBI

(Noticee) (In the matter of Supreme Tex
Mart Limited) vs. Securities and Exchange
Board of India (SEBI)

Every person from whom information is sought should fully co-operate with the investigating officer
and promptly produce all documents, records, information as may be necessary for the investigations.
Facts of the Case:
SEBI conducted an investigation into the affairs of Supreme Tex Mart Limited (STML/ Company) for the period
June 01, 2016 to October 31, 2016. During the course of investigation, the Investigating Authority (IA) of SEBI
issued summons under Section 11C(2) read with Section 11C(3) of the SEBI Act, 1992 to Mr. Neeleshkumar
Radheshyam Lahoti (Noticee) seeking certain documents/ information. The Noticee replied to the summons
and submitted certain information. However, it was alleged that the Noticee submitted incorrect information. In
view of the same, SEBI initiated adjudication proceedings under Section 15HB of the SEBI Act against the Noticee.
SEBI Order:
SEBI imposed a penalty of 8 lakh on the Noticee under the provisions of Section 15HB of the SEBI Act. It was
established that the Noticee provided incorrect information to the Investigating Authority (IA) of SEBI and
hampered the process of investigation thus violating the provisions of Section 11C(2) read with Section 11C(3)
of the SEBI Act, 1992. It was a deliberate attempt of Noticee to misguide investigation. Section 11C(3) of the SEBI
Act empowers the IA to obtain records, documents, information etc., as considered relevant or necessary for the
purpose of investigation. Section 11C(2) of SEBI Act casts an obligation on every person associated with the
securities market to preserve and to produce to the Investigating Authority or any person authorised by it in this
behalf, such records, documents, information which are in their custody or power.

Cease and Desist Proceedings

Section 11D deals with the cease and desist powers of the SEBI. If the SEBI finds, after causing an inquiry to be
made, that any person has violated, or is likely to violate any provisions of this Act, or any rules or regulations made
thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation.
However, the SEBI shall not pass such order in respect of any listed public company or a public company which
intends to get its securities listed on any recognized stock exchange unless SEBI has reasonable grounds to believe
that such company has indulged in insider trading or market manipulation.

Power to Make Regulations

As per Section 30 of SEBI Act, 1992, the SEBI may, by notification, make regulations consistent with this Act and the
rules made thereunder to carry out the purposes of this Act. In particular, and without prejudice to the generality of
the foregoing power, such regulations may provide for all or any of the following matters, namely :–
• the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-
section (1) of section 7 including quorum necessary for the transaction of business;
• the terms and other conditions of service of officers and employees of the SEBI under sub-section (2) of
section 9;
• the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the
manner in which such matters shall be disclosed by the companies under section 11A;
• the utilisation of the amount credited under sub-section (5) of section 11;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 51

• the fulfilment of other conditions relating to collective investment scheme under subsection (2A) of section
11AA;
• the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for
certificate of registration and the manner of suspension or cancellation of certificate of registration under
section 12;
• the terms determined by the SEBI for settlement of proceedings under sub-section (2) and the procedure for
conducting of settlement proceedings under sub-section (3) of section 15JB;
• any other matter which is required to be, or may be, specified by regulations or in respect of which provision
is to be made by regulations.

POWERS OF SEBI NOT TO APPLY TO INTERNATIONAL FINANCIAL SERVICES CENTRE

Section 28C provides that the powers exercisable by the SEBI under this Act,—
(a) shall not extend to an International Financial Services Centre set up under sub-section (1) of section 18 of
the Special Economic Zones Act, 2005;
(b) shall be exercisable by the International Financial Services Centres Authority established under sub-
section (1) of section 4 of the International Financial Services Centres Authority Act, 2019,
in so far as regulation of financial products, financial services and financial institutions that are permitted
in the International Financial Services Centres are concerned.

REGISTRATION OF INTERMEDIARIES
Chapter V of the Act provides for registration of various intermediaries such as stock broker, sub-broker, share
transfer agents etc.
Section 12(1) of the Act provides that the following intermediaries are required to obtain a registration certificate
from the SEBI to buy, sell or deal in securities :
• Stock-Broker
• Sub-Broker
• Share Transfer Agent
• Banker to an issue
• Trustee of Trust Deed
• Registrar to an Issue
• Merchant Banker
• Underwriter
• Portfolio Manager
• Investment Adviser
• Depository
• Depository Participant
• Custodian of Securities
• Foreign Institutional Investor
• Credit Rating Agency
• Such other intermediary
(Above intermediaries are discussed in Chapter 16 of the study)
 52  Lesson 2 • EP-SLCM

A person shall not sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds
or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the
SEBI in accordance with the regulations.
It is clarified by the SEBI that a collective investment scheme or mutual fund shall not be include any unit linked
insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of
investment besides the component of insurance issued by an insurer.
A person shall not sponsor or cause to be sponsored or carry on or cause to be carried on the activity of an alternative
investment fund or a business trust as defined in clause (13A) of section 2 of the Income-tax Act, 1961, unless a
certificate of registration is granted by the SEBI in accordance with the regulations made under this Act.

Manner of application for registration

Every application for registration would in such manner and on payment of such fees as may be determined by the
SEBI Regulations.

Suspension/cancellation of a certificate of registration

The SEBI may, by order, suspend or cancel a certificate of registration in such manner as may be determined by the
SEBI Regulations. However, no such order shall be made unless the person concerned has been given a reasonable
opportunity of being heard.
PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES, INSIDER TRADING ETC.
Chapter VA of the Act deals with prohibition of manipulative and deceptive devices, insider trading and substantial
acquisition of securities or control.
Section 12A of the Act provides that a person shall not directly or indirectly:
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed
on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are
listed or proposed to be listed on a recognized stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a
recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made
thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or communicate such material or
non-public information to any other person, in a manner which is in contravention of the provisions of this
Act or the rules or the regulations made thereunder;
(f) acquire control of any company or securities more than the percentage of equity share capital of a company
whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the
regulations made under this Act.
PENALTIES AND ADJUDICATION
Chapter VIA of the SEBI Act deals with penalties which can be imposed under the Act for various failures, defaults,
non-disclosure and other offences.
It may be recalled that Section 11(2)(i) empowers SEBI to call for information and conduct enquiries and audits of
the stock exchanges, mutual funds, other persons associated with securities markets, intermediaries and self-
regulatory organisations in the security market.
Also Section 11(2)(ia) of the Act requires calling for information and record from any bank or any other authority
or SEBI or corporation established or constituted by or under any central, state or provincial Act in respect of any
transaction in securities which is under investigation or inquiry by the SEBI.
Lesson 2 • Securities and Exchange Board of India Act, 1992 53

Sl. No. Section Particulars

1. Section 15A Failure to furnish information, return, etc.

2. Section 15B Failure by any person to enter into agreement with clients.

3. Section 15C Failure to redress investors’ grievances.

4. Section 15D Certain Default in case of Mutual Funds.

5. Section 15E Failure to observe rules and regulations by an asset management company.

6. Section 15EA Default in case of alternative investment funds, infrastructure investment trusts
and real estate investment trusts.

7. Section 15EB Default in case of investment adviser and research analyst.

8. Section 15F Default in case of stock brokers.

9. Section 15G Insider Trading.

10. Section 15H Non-Disclosure of Acquisition of Shares and Takeovers.

11. Section 15HA Fraudulent and unfair trade practices.

12. Section 15HAA Penalty for alteration, destruction, etc., of records and failure to protect the
electronic database of SEBI.

13. Section 15HB Contravention where no separate penalty has been provided.

14. Section 15I Adjudications.

15. Section 15J Factors to be taken into account by the adjudicating officer.

16. Section 15JA Crediting sums realised by way of penalties to Consolidated Fund of India

17. Section 15JB Settlement of administrative and civil proceedings.

Penalties for Failures

Section Contravention Penalty

15A Failure to furnish information, return, etc. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15B Failure by any person to enter into agreement Penalty of at least 1 lakh rupees but may extend to 1
with clients. lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15C Failure to redress investors’ grievances. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15D Certain defaults in case of mutual funds. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees
15E Failure to observe rules and regulations by an Penalty of at least 1 lakh rupees but may extend to 1
asset management company. lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
54  Lesson 2 • EP-SLCM

15EA In case of alternative investment funds, Penalty of at least 1 lakh rupees but may extend to 1
infrastructure investment trusts and real lakh rupees per day during which such failure
estate investment trusts fails to comply with continues, subject to a maximum of 1 crore rupees
the regulations made by the SEBI or directions or 3 times the amount of gains made out of such
issued by the SEBI. failure, whichever is higher.

15EB In case investment adviser and research analyst Penalty of at least 1 lakh rupees but may extend to 1
fails to comply with the regulations made by the lakh rupees per day during which such failure
SEBI or directions issued by the SEBI. continues, subject to a maximum of 1 crore rupees.
15F Default in case of stock brokers.If any stock • Penalty of at least 1 lakh rupees but which may
broker- extend to 1 crore rupees for which the contract
• fails to issue contract notes in the form note was required to be issued by that broker.
and manner specified by the stock • Penalty of at least 1 lakh rupees but may extend
to 1 lakh rupees per day during which such
exchange of which such broker is a
failure continues, subject to a maximum of 1
member
crore rupees.
• fails to deliver any security or fails to • penalty of at least 1 lakh rupees but which may
make payment of the amount due to the extend to five times the amount of brokerage
investor in the manner within the charged in excess of the specified brokerage,
period specified in the regulations whichever is higher.
• charges an amount of brokerage which
is in excess of the brokerage specified in
the regulations
15G Insider Trading. Penalty of at least 10 lakh rupees but which may extend
If any insider who,— to 25 crore rupees or 3 times the amount of profits
made out of insider trading, whichever is higher.
• either on his own behalf or on behalf of any other
person, deals in securities of a body corporate
listed on any stockexchange on the basis of any
unpublished price-sensitive information; or
• communicates any unpublished price-sensitive
information to any person, with or without his
request for such information except as required
in the ordinary course of business or under any
law; or
• counsels, or procures for any other person to deal
in any securities of any body corporate on the
basis of unpublished price-sensitive information.
15H Non-disclosure of acquisition of shares and Penalty of at least 10 lakh rupees but which may
takeovers. extend to 25 crore rupees or 3 times the amount of
profits made out of such failure, whichever is higher.
15HA Fraudulent and unfair trade practices Penalty of at least 5 lakh rupees but which may
extend to 25 crore rupees or 3 times the amount of
profits made out of such failure, whichever is higher
15HAA Alteration, destruction, etc., of records and Penalty of at least 1 lakh rupees but which may
failure to protect the electronic database of extend to 10 crore rupees or 3 times the amount of
Board. Profits made out of such act, whichever is higher
15HB Contravention where no separate penalty has Penalty of at least 1 lakh rupees but which may
been provided. extend to 1 crore rupees
 Lesson 2 • Securities and Exchange Board of India Act, 1992 55

ADJUDICATIONS
Section 15-I deal with the SEBI’s power to adjudicate.
The SEBI may appoint any of its officers not below the rank of Division Chief to be
an adjudicating officer for holding an inquiry in the prescribed manner after giving
any person concerned a reasonable opportunity of being heard for the purpose of
imposing any penalty.

The adjudicating officer has powers to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case to give evidence or to
produce any document which in the opinion of the adjudicating officer, may be
useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is
satisfied that the person has failed to comply with the provisions, he may impose
such penalty as he thinks fit in accordance with the provisions of any of those sections.

The SEBI may call for and examine the record of any proceedings under this section and
if it considers that the order passed by the adjudicating officer is erroneous to the
extent it is not in the interests of the securities market, it may, after making or causing
to be made such inquiry as it deems necessary, pass an order enhancing the quantum
of penalty, if the circumstances of the case so justify.

However, no such order shall be passed unless the person concerned has been given an
opportunity of being heard in the matter. Further, nothing contained in this section
shall be applicable after an expiry of a period of three months from the date of the
order passed by the adjudicating officer or disposal of the appeal under section 15-T,
whichever is earlier.

Factors to be Taken into Account while Adjudging quantum of penalty

Section 15J lays down that while adjudging the quantum of penalty, the SEBI or the adjudicating officer shall have
due regard to the following factors, viz. –

The amount of loss caused to

an investor or group of
investors as a result of the
default
e d ade ere or
efa as ver

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su ab ag e f
re ntifi ant onat t o

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ul a
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a dv ti un

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th

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Section 15JA provides that all sums realised by way of penalties

under this Act shall be credited to the Consolidated Fund of India.
56  Lesson 2 • EP-SLCM

CASE LAWS

1. 28.02.2019 Adjudicating Officer, SEBI (Appellant) vs. Bhavesh Supreme Court of India
Pabari (Respondent)
The Supreme Court of India ruled in Adjudicating Officer, SEBI v. Bhavesh Pabari granting back the
discretionary power to Adjudicating Officer (AO) under supervision and scrutiny of the court.
Facts of the Case
The SEBI Act, as the object of its enactment would indicate, was enacted “to provide for the establishment of
SEBI to protect the interests of investors in securities and to promote the development of, and to regulate, the
securities market and for matters connected therewith or incidental thereto.”
Sections 15 A to 15 HA of the SEBI Act, 1992 are the penalty provisions whereas Section 15 I deals with the
power of adjudication and Section 15 J enumerates the “factors to be taken into account by the Adjudicating
Officer” while adjudging the quantum of penalty.
Section 15J has been a part of SEBI since 1992. Section 15J lays down that while adjudging the amount of penalty,
the adjudicating officer shall have due regard to the factors which are as follows:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the
default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
Explanation- For the removal of doubts, it is clarified that the power to adjudge the quantum of penalty under
sections 15A to 15E, clauses (b) and (c) of section 15-F, 15G, 15H and 15HA shall be and shall always be deemed
to have been exercised under the provisions of this section.”

The questions referred in the given case can be enumerated and summarized as follows:
(i) Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15J of the Securities and Exchange
Board of India Act, 1992 are exhaustive to govern the discretion in the Adjudicating Officer to decide on
the quantum of penalty or the said conditions are merely illustrative?
(ii) Whether the power and discretion vested by Section 15J of the SEBI Act to decide on the quantum of
penalty, regardless of the manner in which the first question is answered, stands eclipsed by the penalty
provisions contained in Section 15A to Section 15HA of the SEBI Act?
The Court held and in the view that-
• The provisions of clauses (a), (b) and (c) of Section 15J are illustrative in nature and have to be taken into
account whenever such circumstances exist. But this is not to say that there can be no other circumstance(s)
beyond those enumerated in clauses (a), (b) and (c) of Section 15J that the Adjudicating Officer is
precluded in law from considering while deciding on the quantum of penalty to be imposed.
Conditions stipulated in clauses (a), (b) and (c) of Section 15J are not exhaustive and in the given facts of
a case, there can be circumstances beyond those enumerated by clauses (a), (b) and (c) of Section 15J
which can be taken note of by the Adjudicating Officer while determining the quantum of penalty.
• Insofar as the second question is concerned, if the penalty provisions are to be understood as not admitting
of any exception or discretion and the penalty as prescribed in Section 15 A to Section 15-HA of the SEBI
Act is to be mandatorily imposed in case of default/failure, Section 15J of the SEBI Act would stand
obliterated and eclipsed. Hence, the question referred. Sections 15-A (a) to 15 HA have to be read along
with Section 15J in a manner to avoid any inconsistency or repugnancy.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 57

2. 01.07.2020 India Ratings and Research Private Ltd. (Appellant) vs. SEBI Securities Appellate
(Respondent) Tribunal
SEBI can call for and examine records of any proceedings if it considers the orders passed by the
adjudicating officer erroneous and not in the interests of securities markets. After making inquiry, SEBI
may enhance the quantum of penalty imposed, if the circumstances of the case so justify.

Facts of the case:

The Adjudicating Officer by the impugned order dated 26th December, 2019 had imposed a penalty of Rs.25
lakhs upon the Appellant for violating the Code of Conduct to the Securities and Exchange Board of India (Credit
Rating Agencies) Regulations, 1999 while granting credit rating to IL&FS for the financial year 2018-19.
SEBI issued a second show cause notice dated 28th January, 2020 by exercising powers under Section 15I(3) of
the SEBI Act directing the Appellant to show cause as to why penalty should not be enhanced as in their opinion
the order of the Adjudicating Officer was not in the interest of the securities market.
“Under Section 15I(3), the SEBI can call for and examine records of proceedings if it considers the orders passed
by the adjudicating officer erroneous and not in the interests of securities markets. After examining the matter,
the SEBI can enhance the quantum of penalty imposed.”
Misc. Application no.159 of 2020 has been filed in Appeal no.103 of 2020 praying that proceedings initiated by
SEBI pursuant to the second show cause notice dated 28th January, 2020 issued under Section 15I(3) of the
SEBI Act, should be stayed.
Order:
SEBI has the power to initiate proceedings under Section 15I(3) of the SEBI Act. SAT directed the Appellant to
deposit a sum of Rs.25 lakhs pursuant to the impugned order dated 26th December, 2019 before the Respondent
within four weeks which would be subject to the result of the appeal. SAT further directed that the proceedings in
pursuance to the second show cause notice dated 28th January, 2020 will continue and the Respondent will pass
appropriate orders after giving an opportunity of hearing to the Appellant either through physical hearing or
through video conferencing but any order that is passed by the Respondent shall not be given effect to during
the pendency of this appeal. Misc. Application is accordingly disposed of.

Settlement of Administrative and Civil Proceedings

Section 15JB deals with settlement of administrative and civil proceeding by SEBI.

Filing of an application

Any person against where any proceedings have been initiated or may be initiated under section 11, Section 11B,
section 11D, section 12(3) or section 15I, may file an application in writing to the SEBI proposing for settlement of
proceeding initiated or to be initiated for the alleged defaults.

SEBI may consider for settlements of defaults.

The SEBI, may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for
settlement, on payment of such by the defaulter or on such other terms as may be determined by the SEBI in
accordance with the regulations made under this Act.
 58  Lesson 2 • EP-SLCM

Procedure of settlement proceedings

The settlement proceedings shall be conducted in accordance with the procedure specified in the regulations made
under this Act.

No appeal shall be made

No appeal shall lie under section 15T against any order passed by the SEBI or adjudicating officer as the case may be.

Settlement amounts shall be credited to the Consolidated Fund of India.

All the settlement amounts excluding the disgorgement amount and legal costs, realised under this Act shall be
credited to the Consolidated Fund of India.

Case Snippets
1. JM Financial Ltd’s (JMFL) former vice president on July 16, 2020 had settled an alleged insider trading case
with SEBI by paying an amount of Rs 15 lakh towards settlement charges. During the span of investigation,
SEBI observed that he had entered into two off-market trades in shares of JMFL and had not obtained pre-
clearance from JMFL for the two off-market trades. Besides, he had entered the off-market transaction when
the trading window was closed.
2. Shareholders of the Kapashi Commercials Ltd. on 10th July, 2020, a BSE Listed company, have settled with
SEBI a case of alleged violation of takeover norms by paying over Rs 34 lakh amount towards settlement
terms. They had filed an application with the SEBI proposing to settle the case for alleged violation of SAST
(Substantial Acquisition of Shares and Takeovers) Regulations in respect of change in their shareholding in
Kapashi Commercials. It was alleged that the four individuals made delayed disclosures to the company and
BSE, about the change in their shareholding in Kapashi Commercials.
3. Northward Financial Planners (NFP) and its partners on July, 09, 2020 have settled with SEBI a case related
to alleged violation of Investment Advisers regulations upon payment of Rs. 21.67 lakh towards settlement
charge. NFP and partners were carrying on investment advisory activities since F.Y. 2013-14 and filed
application for SEBI registration after a delay of over 4 years and continued to carry on investment advisory
activity without seeking registration.

SECURITIES APPELLATE TRIBUNAL (SAT)

In order to afford proper appellate remedies, Chapter VIB of the SEBI Act provides for the establishment of the
Securities Appellate Tribunals (SAT) to consider appeals against the SEBI’s orders, or penalties.

Sl. No. Section Particulars

1. Section 15K Establishment of Securities Appellate Tribunals

2. Section 15L Composition of Securities Appellate Tribunal

3. Section 15M Qualification for appointment as Presiding Officer or Member of Securities

Appellate Tribunal
4. Section 15MA, 15MB Appointment of Presiding Officer or Member of Securities Appellate Tribunal
 Lesson 2 • Securities and Exchange Board of India Act, 1992 59

5. Section 15MC Validity of Appointment

6. Section 15N Tenure of office of Presiding Officer and other Members of Securities Appel-
late Tribunal
7. Section 15O Salary and allowances and other terms and conditions of service of
Presiding Officers
8. Section 15P, 15 PA Filling up of vacancies

9. Section 15Q Resignation and removal

10. Section 15R Orders constituting Appellate Tribunal to be final and not to invalidate its
proceedings
11. Section 15S Staff of the Securities Appellate Tribunal

12. Section 15T Appeal to the Securities Appellate Tribunal

13. Section 15U Procedure and powers of the Securities Appellate Tribunal

14. Section 15V Right to legal representation

15. Section 15W Limitation

16. Section 15X Presiding Officer, Members and staff of Securities Appellate Tribunals to be
public servants
17. Section 15Y Civil Court not to have jurisdiction

18. Section 15Z Appeal to Supreme Court

Establishment of Securities Appellate Tribunals.

• As per Section 15K, the Central Government is empowered to establish a Tribunal by notification, to be known
as the Securities Appellate Tribunal to exercise the jurisdiction, power and authorities conferred on it or
under the Act or any other law for the time being in force.
• The Central Government shall also specify in the notification the matters and places in relation to which the
Securities Appellate Tribunal may exercise jurisdiction.

Composition of Securities Appellate Tribunal

According to Section 15 L, the Securities Appellate Tribunal shall consist of a Presiding Officer and such number of
Judicial Members and Technical Members as the Central Government may determine, by notification, to exercise the
powers and discharge the functions conferred on the Securities Appellate Tribunal under this Act or any other law
for the time being in force.
Subject to the provisions of this Act,—
(a) the jurisdiction of the Securities Appellate Tribunal may be exercised by Benches thereof;
(b) a Bench may be constituted by the Presiding Officer of the Securities Appellate Tribunal with two or more
Judicial or Technical Members as he may deem fit;
However, every Bench constituted shall include at least one Judicial Member and one Technical Member;
(c) the Benches of the Securities Appellate Tribunal shall ordinarily sit at Mumbai and may also sit at such other
places as the Central Government may, in consultation with the Presiding Officer, notify.
The Presiding Officer may transfer a Judicial Member or a Technical Member of the Securities Appellate Tribunal
from one Bench to another Bench.
 60  Lesson 2 • EP-SLCM

Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal

(Section 15M)

Qualification

Presiding Judicial Technical

officer member member

is, or has been, a Judge of the Supreme Court

or a Chief Justice of a High Court or a Judge of High
Court for at least seven years, in the case of the
Presiding Officer; and

is, or has been, a Judge of High Court for at least five

years, in the case of a Judicial Member; or

The Presiding Officer and Judicial Members of the (i) is, or has been, a Secretary or an Additional Secretary in the
Securities Appellate Tribunal shall be appointed by the Ministry or Department of the Central Government or any
Central Government in consultation with the Chief equivalent post in the Central Government or a State
Justice of India or his nominee. Government; or
(ii) is a person of proven ability, integrity and standing having
special knowledge and professional experience, of not less than
fifteen years, in financial sector including securities market or
pension funds or commodity derivatives or insurance.

Appointment of Technical Member

The Technical Members of the Securities Appellate Tribunal shall be appointed by the Central Government on the
recommendation of a Search-cum-Selection Committee consisting of the following, namely:
(a) Presiding Officer, Securities Appellate Tribunal – Chairperson;
(b) Secretary, Department of Economic Affairs – Member;
(c) Secretary, Department of Financial Services – Member; and
(d) Secretary, Legislative Department or Secretary, Department of Legal Affairs – Member.
The Secretary, Department of Economic Affairs shall be the Convener of the Search-cum-Selection Committee. The
Search-cum-Selection Committee shall determine its procedure for recommending the names of persons to be
appointed.

Validity of appointment
As per Section 15MC, no appointment of the Presiding Officer, a Judicial Member or a Technical Member of the
Securities Appellate Tribunal shall be invalid merely by reason of any vacancy or any defect in the constitution of
the Search cum- Selection Committee.
A member or part time member of the SEBI or the Insurance Regulatory and Development Authority or the Pension
Fund Regulatory and Development Authority, or any person at senior management level equivalent to the Executive
Director in the SEBI or in such Authorities, shall not be appointed as Presiding Officer or Member of the Securities
Appellate Tribunal, during his service or tenure as such with the SEBI or with such Authorities, as the case may be,
or within two years from the date on which he ceases to hold office as such in the SEBI or in such Authorities.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 61

The Presiding Officer or such other member of the Securities Appellate Tribunal, holding office on the date of
commencement of Part VIII of Chapter VI of the Finance Act, 2017 shall continue to hold office for such term as he
was appointed and the other provisions of this Act shall apply to such Presiding Officer or such other member, as if
Part VIII of Chapter VI of the Finance Act, 2017 had not been enacted.
Tenure of office of Presiding Officer and other Members of Securities Appellate Tribunal
Section 15N lays down that the Presiding Officer or every Judicial or Technical Member of the Securities Appellate
Tribunal shall hold office for a term of five years from the date on which he enters upon his office, and shall be
eligible for reappointment for another term of maximum five years.
However, no Presiding Officer or the Judicial or Technical Member shall hold office after he has attained the age of
70 years.

Salary and allowances and other terms and conditions of service of Presiding Officers
Section 15O lays down that the salary and allowances payable to and the other terms and conditions of service
including pension, gratuity and other retirement benefits of the Presiding Officer and other Members of a Securities
Appellate Tribunal shall be such as may be prescribed.
However neither the salary and allowances nor the other terms and conditions of service of the Presiding Officer
and other Members of a Securities Appellate Tribunal shall be varied to their disadvantage after appointment.

Filling up of vacancies
As per Section 15P, if for reason other than temporary absence, any vacancy occurs in the office of the Presiding
Officer or any other Member of a Securities Appellate Tribunal -
• then the Central Government shall appoint another person in accordance with the provisions of this Act to fill
the vacancy and
• the proceedings may be continued before the Securities Appellate Tribunal from the stage at which the
vacancy is filled.
In the event of occurrence of any vacancy in the office of the Presiding Officer of the Securities Appellate Tribunal
by reason of his death, resignation or otherwise, the senior-most Judicial Member of the Securities Appellate
Tribunal shall act as the Presiding Officer until the date on which a new Presiding Officer is appointed in accordance
with the provisions of this Act.

Resignation and removal

Resignation by notice in writing
15Q lays down that the Presiding Officer or any other Member of a Securities Appellate Tribunal may, by notice in
writing under his hand addressed to the Central Government, resign his office.
However the Presiding Officer or any other Member shall, unless he is permitted by the Central Government to
relinquish his office sooner, continue to hold office -
• until the expiry of three months from the date of receipt of such notice, or
Whichever is the
• until a person duly appointed as his successor enters upon his office, or
earliest
• until the expiry of his term of office.

Removal of Presiding Officer or Judicial Member or Technical Member

The Central Government may, after an inquiry made by the Judge of the Supreme Court, remove the Presiding Officer or
Judicial Member or Technical Member of the Securities Appellate Tribunal, on such conditions as may be specified.
Provided that he shall not be removed from office unless he has been given a reasonable opportunity of being heard
in the matter. The Central Government may, by rules, regulate the procedure for the investigation of misbehavior or
incapacity of the Presiding Officer or any other Member.
 62  Lesson 2 • EP-SLCM

Orders Constituting Appellate Tribunal to be Final and not to invalidate its Proceedings
Section 15R makes it clear that no order of the Central Government appointing any person as the Presiding Officer
or a member of a Securities Appellate Tribunal shall be called in question in any manner, and no Act or proceeding
before a Securities Appellate Tribunals shall be called in question in any manner on the ground merely of any defect
in the constitution of a Securities Appellate Tribunal.

Appeal to the Securities Appellate Tribunal

Section 15T and 15U deal with the appeal procedure and powers of Securities Appellate Tribunal.

Any person aggrieved by an order of the

SEBI made or by an order made by an
adjudicating officer under this Act or by
an order of the IRDA1 or the PFRDA2 may
prefer an appeal to a SAT having
jurisdiction in the matter.
appeal within 6 months
SAT shall dispose of the

Within a period of forty-five days from the date

on which a copy of the order made by the SEBI
or the Adjudicating Officer or the IRDA or the
PFRDA as the case may be, is received by him
and it shall be in such form and be accompanied
by such fee as prescribed.

On receipt of appeal and after giving the parties

to opportunity of being heard SAT, pass order as
thinks fit, confirming, modifying or setting aside
the order appealed against.

The Securities Appellate Tribunal may entertain an

appeal after the expiry of the said period of
forty-five days if it is satisfied that there was
sufficient cause for not filing it within that period.

1. IRDA- Insurance Regulatory and Development Authority

2. PFRDA- Pension Fund Regulatory and Development Authority
The Securities Appellate Tribunal shall send a copy of every order made by it to the SEBI or the Insurance Regulatory
and Development Authority (IRDA) or the Pension Fund Regulatory and Development Authority (PFRDA), as the
case may be, the parties to the appeal and to the concerned Adjudicating Officer.

Procedure of SAT
Section 15U lays down that the Securities Appellate Tribunal shall not be bound by the procedure laid down by the
Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and subject to the other
provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own
procedure including the places at which they shall have their sittings.

Powers of SAT
The Securities Appellate Tribunals shall have, for the purposes of discharging their functions under this Act, the
same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, while trying a suit, in respect of
the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 63

(c) receiving evidence on affidavits;

(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte;
(h) any other matter which may be prescribed.
Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the
meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code and the Securities
Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the
Code of Criminal Procedure, 1973.
Where benches are constituted, the Presiding Officer of the Securities Appellate Tribunal may, form time to time
make provisions as to the distribution of the business of the Securities Appellate Tribunal amongst the benches and
also provide for the matters which may be dealt with, by each bench.
On the application of any of the parties and after notice to the parties, and after hearing such of them as he may
desire to be heard, or on his own motion without such notice, the Presiding Officer of the Securities Appellate
Tribunal may transfer any case pending before one Bench, for disposal, to any other Bench.
If a Bench of the Securities Appellate Tribunal consisting of two members differ in opinion on any point, they shall
state the point or points on which they differ, and make a reference to the Presiding Officer of the Securities Appellate
Tribunal who shall either hear the point or points himself or refer the case for hearing only on such point or points
by one or more of the other members of the Securities Appellate Tribunal and such point or points shall be decided
according to the opinion of the majority of the members of the Securities Appellate Tribunal who have heard the
case, including those who first heard it.

Right to Legal Representation

As per Section 15V, the appellant may either appear in person or authorise one or more chartered accountants or
company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before
the Securities Appellate Tribunal.

Limitation
As per the Section 15W, the provisions of the Limitations Act, 1963 shall apply to an appeal made to Securities
Appellate Tribunal.

Public Servants
As per section 15X, the Presiding Officer and other officers and employees of Securities Appellate Tribunal shall be
deemed to be public servants within the meaning of Section 21 of the Indian Penal Code.

Jurisdiction of Civil Court

Section 15Y lays down that no civil court has jurisdiction to entertain any suit or proceeding in respect of any matter
which an Adjudicating Officer appointed under this Act or a Securities Appellate Tribunal under this Act is
empowered by or under this Act to determine and no injunction shall be granted by any Court or other authority in
respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

Appeal to Supreme Court

Section 15Z lays down that any person aggrieved by any decision or order of the Securities Appellate Tribunal may
file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the
Securities Appellate Tribunal to him on any question of law arising out of such order.
It has been provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient
cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.
 64  Lesson 2 • EP-SLCM

Question: What is the time period for filling an appeal with SAT and Supreme Court?
Answer:
• In case of filing appeal with SAT: Within 45 days from the date of order of the copy made by the SEBI or
the adjudicating officer or the IRDA or the PFRDA, as the case may be.
• In case of filing appeal with Supreme Court: Within 60 days from the date of communication of the
decision or order of SAT.

POWERS OF CENTRAL GOVERNMENT

To issue directions
Section 16 empowers Central Government to issue directions in writing to the SEBI on questions of policy as it may
deem fit from time to time. However, the Central Government shall as far as practicable, give an opportunity to the
SEBI to express its views before any such directions is given by the Central Government. The decision of the Central
Government whether a question is one of policy or not shall be final.

To Supersede the SEBI

Section 17 lays down that if at any time the Central Government is of opinion that the SEBI is unable to discharge its
functions it may, by notification, supersede the SEBI for such period, not exceeding six months, as may be specified
in the notification.

circumstances exist which

render it necessary in the
public interest so to do,
the SEBI has persistently made
default in complying with any direction
issued by the Central Government
under this Act or in the discharge of the
Central Government functions and duties imposed on it by
on account of grave emergency, the or under the provisions of this Act and
SEBI is unable to discharge the may supersede the SEBI
as a result of such default the financial
functions and duties imposed on it by if position of the SEBI or the
or under the provisions of this Act administration of the SEBI has
deteriorated

Effect of publication of notification of superseding the SEBI

Upon the publication of the notification, it will have the following effects:
(a) all the members shall, as from the date of supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act, be exercised or
discharged by or on behalf of the SEBI, shall until the SEBI is reconstituted, be exercised and discharged by
such person or persons as the Central Government may direct; and
(c) all property owned or controlled by the SEBI shall, until the SEBI is reconstituted, vest in the Central
Government.
Reconstitution of Board on the expiration of the period of supersession
On the expiration of the period of supersession specified in the notification, the Central Government may reconstitute
the SEBI by a fresh appointment and in such case any person or persons who vacated their offices because of
supersession shall not be deemed disqualified for appointment.
However, the Central Government may, at any time, before the expiration of the period of supersession, take action.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 65

Action taken to be laid before each House of Parliament

The Central Government shall cause a notification issued and a full report of any action taken under this section and
the circumstances to such action to be laid before each House of Parliament at the earliest.

Power to grant Immunity

As per Section 24B of the Act, the Central Government may on the recommendations by the SEBI, if satisfied that
any person who is alleged to have violated any of the provisions of this Act or the rules or regulations made
thereunder has made a full and true disclosures in respect of alleged violations, grant to such persons, subject to
conditions as it may think fit to impose, immunity from prosecution for any offences under this Act or the rules or
the regulations made thereunder or also from the imposition of any penalty under this Act with respect to the
alleged violation.

Exemption
However, no such immunity shall be granted by the Central Government in cases where the proceedings for the
prosecution for any such offence have been instituted before the date of receipt of application for grant of such
immunity. It has also been provided that recommendations of the SEBI shall not be binding upon the Central
Government.

Withdrawal of granted immunity by the Central Government

An immunity granted to a person can be withdrawn by the Central Government, if it is satisfied such person had, in
the course of the proceedings not complied with the condition on which the immunity was granted or had given
false evidence and thereupon such person may be tried for the offence with respect to which the immunity was
granted or for any other offence of which he appears to have been guilty in connection with the contravention. He
shall also become liable to the imposition of any penalty under this Act to which such person would have been liable
had not such immunity been granted.

Power to make Rules

As per Section 29 of SEBI Act, 1992, the Central Government may, by notification, make rules for carrying out the
purposes of this Act. In particular, and without prejudice to the generality of the foregoing power, such rules may
provide for all or any of the following matters, namely :–
• the term of office and other conditions of service of the Chairman and the members under sub-section (1)of
section 5;
• the additional functions that may be performed by the Board under section 11;
• the manner in which the accounts of the Board shall be maintained under section 15;
• the manner of inquiry under sub-section (1) of section 15-I;
• the salaries and allowances and other terms and conditions of service of the 178[Presiding Officers, Members]
and other officers and employees of the Securities Appellate Tribunal under section 15-O and sub-section (3)
of section 15S;
• the procedure for the investigation of misbehaviour or incapacity of the 179[Presiding Officers, or other
Members] of the Securities Appellate Tribunal under sub-section (3) of section 15Q;
• the form in which an appeal may be filed before the Securities Appellate Tribunal under section 15T and the
fees payable in respect of such appeal;
• the form and the manner in which returns and report to be made to the Central Government under section 18;
• any other matter which is to be, or may be, prescribed, or in respect of which provision is to be, or may be,
made by rules.
 66  Lesson 2 • EP-SLCM

RETURNS AND REPORTS

Furnishing of returns and reports by the SEBI to the Central Government
In accordance with section 18 of the SEBI Act, the SEBI shall furnish to the Central Government at such time and in
such form and manner as may be prescribed or as the Central Government may direct, such returns and statements
and such particulars in regard to any proposed or existing programme for the promotion and development of the
securities market, as the Central Government may, from time to time, require.
Report of previous financial year by SEBI
SEBI shall, within ninety days after the end of each financial year, submit to the Central Government a report in such
form, as may be prescribed, giving a true and full account of its activities, policy and programmes during the previous
financial year.
Report to be presented before Parliament.
A copy of the report be laid, as soon as may be after it is received, before each House of Parliament.
DELEGATION OF POWERS
In accordance with Section 19 of the SEBI Act, the SEBI may, by general or special order in writing delegate to any
member, officer of the SEBI or any other person subject to such conditions, if any as may be specified in the order,
such of its powers and functions under the Act as it may deem necessary.

APPEAL TO THE CENTRAL GOVERNMENT

Appeal to Central Government
Section 20 of the Act provides that any person aggrieved by an order of the SEBI made, before the commencement of the
Securities Laws (Second Amendment) Act, 1999, under this Act or the rules or regulations made thereunder, may prefer
an appeal to the Central Government within such time as may be prescribed.
No appeal after expiry of limitation
The appeal shall not be admitted if it is preferred after the expiry of the period prescribed therefore.
However, an appeal may be admitted after the expiry of the period prescribed therefore if the appellant satisfies the
Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.
Appeal shall be made in prescribed form with a copy of an order
Every appeal made under this section shall be made in prescribed form and shall be accompanied by a copy of the
order appealed against by such fees as may be prescribed.
The procedure for disposing of an appeal shall be such as may be prescribed and the appellant shall be given a
reasonable opportunity of being heard.
BAR OF JURISDICTION
Section 20A lays down that -

no order passed by the SEBI or the no civil court shall have jurisdiction in no injunction shall be granted by any
Adjudicating Officer under this Act respect of any matter which the SEBI court or other authority in respect of
shall be appealable except as provided (or the adjudicating officer) is any action taken or to be taken in
in section 15T or section 20 and empowered by, or under, this Act to pursuance of any order passed by the
pass any order and SEBI or the adjudicating officer by, or
under, the SEBI Act

PUBLIC SERVANTS
Section 22 of the Act provides that all members, officers and other employees of the SEBI while acting or purporting
to act in pursuance of any of the provisions of the Act shall be deemed to be public servants within the meaning of
Section 21 of the Indian Penal Code.
Lesson 2 • Securities and Exchange Board of India Act, 1992 67

OFFENCES (SECTION 24)

Without prejudice to any award of penalty by the Adjudicating Officer or the SEBI under the
SEBI Act, if any person contravenes or attempts to contravene or abets the contravention of
the provisions of this Act or of any rules or regulations made thereunder, he shall be
punishable with imprisonment for a term which may extend to ten years or with fine which
may extend to twenty five crore rupees or with both.

If any person fails to pay the penalty imposed by the Adjudicating Officer or the SEBI or
fails to comply with directions or orders, he shall be punishable with imprisonment, for
a term which shall not be less than one month but which may extend to ten years or
with fine which may extend to twenty - five crore rupees or with both.

Section 24A provides that any offence punishable under this Act, not being an offence
punishable with imprisonment only or with imprisonment and also with fine, may before or
after the institutions of any proceeding, be compounded by a Securities Appellate Tribunal
or a Court before which such proceedings are pending.

COGNIZANCE OF OFFENCES BY COURTS

Sl No. Section Particulars

1. Section 26 Cognizance of Offences by Courts
2. Section 26A Establishment of Special Courts
3. Section 26B Offences triable by Special Courts
4. Section 26C Appeal and revision
5. Section 26D Application of Code to proceedings before Special Court

Section 26(1) lays down that no court shall take cognizance of any offence punishable under
this Act or any rules or regulations made thereunder, save on a complaint made by SEBI.

Section 26A(1) empowered the Central Government for providing speedy trial of offences under
this Act, by notification, establish or designate as many Special Courts as may be necessary.

Section 26A(2) provides that Special Court shall consist of a single judge who shall be
appointed by the Central Government with the concurrence of the Chief Justice of the High
Court within whose jurisdiction the Judge to be appointed is working.

Sub-section (3) of Section 26A stipulates that a person shall not be qualified for appointment
as a Judge of a Special Court unless he is, immediately before such appointment, holding the
office of a Sessions Judge or an Additional Sessions Judge, as the case may be.
 68  Lesson 2 • EP-SLCM

Offences triable by Special Courts

• Section 26B stipulates that notwithstanding anything contained in the Code of Criminal Procedure, 1973,
all offences under this Act, shall be taken cognizance of and tried by the Special Court established for the
area in which the offence is committed or where there are more Special Courts than one for such area, by
such one of them as may be specified in this behalf by the High Court concerned.

Appeal and revision

• Section 26 C provides for appeal and revision. The High Court may exercise, so far as may be applicable, all
the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court,
as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session
trying cases within the local limits of the jurisdiction of the High Court.

Application of Code to proceedings before Special Court

• Section 26D (1) provides that the provisions of the Code of Criminal Procedure, 1973 shall apply to the
proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be
deemed to be a Court of Session and the person conducting prosecution before a Special Court shall be
deemed to be a Public Prosecutor within the meaning of clause (u) of section 2 of the Code of Criminal
Procedure, 1973.
The person conducting prosecution referred to in Section 26D(1) should have been in practice as an
advocate for not less than seven years or should have held a post, for a period of not less than seven years,
under the Union or a state, requiring special knowledge of law.

Transitional provisions

• Section 26E provides that any offence committed under this Act, which is triable by a Special Court shall,
until a Special Court is established, be taken cognizance of and tried by a Court of Session exercising
jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973.
• However, this section shall not affect the powers of the High Court, under section 407 of the Code of
Criminal Procedure, 1973 to transfer any case or class of cases taken cognizance by a Court of Session
under this section.

CONTRAVENTION BY COMPANIES
Section 27 lays down that:
(1) Where a contravention of any of the provisions of this Act or any rule, regulation, direction or order made
thereunder has been committed by a company, every person who at the time the contravention was committed
was in charge of, and was responsible to, the company for the conduct of the business of the company, as well
as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against
and punished accordingly.
Exemption:
However, this provision shall not render any such person liable to any punishment provided in this Act, if he
proves that the contravention was committed without his knowledge or that he had exercised all due diligence
to prevent the commission of such contravention.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 69

(2) Where a contravention under this Act has been committed by a company and it is proved that the contravention
has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any
director, manager, secretary or other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished
accordingly.
RECOVERY OF AMOUNTS

Section 28A(1) provides that if a person

Fails to pay the Fails to comply with Fails to comply with a Fails to pay any fees
penalty imposed any direction of the direction of due to the SEBI
under this Act SEBI for refund of disgorgement order
monies or issued under section
11B or

The Recovery Officer may draw up under his signature a statement in the specified form specifying the
amount due from the person (such statement being hereafter in this Chapter referred to as certificate).

The Recovery Officer shall proceed to recover amount specified in the certificate by one or more of the
following modes, namely:-
(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties,
and for this purpose, the provisions of section 220 to 227, 228A, 229, 232, the Second and Third
Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in
force from time to time, in so far as may be, apply with necessary modifications as if the said provisions
and the rules made thereunder were the provisions of this Act and referred to the amount due under
this Act instead of to income-tax under the Income-tax Act, 1961.

“Recovery Officer” means any officer of the SEBI who may be authorized, by general or special order in writing, to
exercise the powers of a Recovery Officer.
Sub-section (2) empowered the Recovery Officer to seek the assistance of the local district administration while
exercising the powers.
The recovery of amounts by a Recovery Officer, pursuant to non-compliance with any direction issued by the SEBI
under section 11B, shall have precedence over any other claim against such person.

Explanation 1 - For the purpose of this sub-section, the person’s movable or immovable property or monies
held in bank accounts shall include any property or monies held in bank accounts which has been transferred
directly or indirectly on or after the date when the amount specified in certificate had become due, by the person
to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and
which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable
property or monies held in bank accounts so transferred to his minor child or his son’s minor child is concerned,
it shall, even after the date of attainment of majority by such minor child or son’s minor child, as the case may
be, continue to be included in the person’s movable or immovable property or monies held in bank accounts for
recovering any amount due from the person.
 70  Lesson 2 • EP-SLCM

Explanation 2 - Any reference under the provisions of the Second and Third Schedules to the Income-tax Act,
1961 and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a reference
to the person specified in the certificate.
Explanation 3 - Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act, 1961,
shall be construed as a reference to appeal before the Securities Appellate Tribunal under Section 15T of this Act.
Explanation 4 - The interest referred to in Section 220 of the Income-tax Act, 1961 shall commence from the
date the amount became payable by the person.

Continuance of proceedings
Section 28B (1) lays down that where a person dies, his legal representative shall be liable to pay any sum which the
deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased.
However, in case of any penalty payable under this Act, a legal representative shall be liable only in case the penalty
has been imposed before the death of the deceased person.
For the purposes of sub-section (1), –
(a) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, initiated against the deceased before his death, shall be deemed to
have been initiated against the legal representative, and may be continued against the legal representative
from the stage at which it stood on the date of the death of the deceased and all the provisions of this Act shall
apply accordingly;
(b) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, which could have been initiated against the deceased if he had
survived, may be initiated against the legal representative and all the provisions of this Act shall apply
accordingly.
Every legal representative shall be personally liable for any sum payable by him in his capacity as legal representative
if, while his liability for such sum remains undischarged, he creates a charge on or disposes of or parts with any
assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited
to the value of the asset so charged, disposed of or parted with.
The liability of a legal representative under this section shall be limited to the extent to which the estate of the
deceased is capable of meeting the liability.
Explanation.– For the purposes of this section “legal representative” means a person who in law represents the
estate of a deceased person, and includes any person who inter-meddles with the estate of the deceased and where
a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the
party so suing or sued.

ROLE OF COMPANY SECRETARY

Right to Legal Representation (Section 15V of the SEBI Act)
Any person aggrieved (the appellant) may either appear in person or authorise one or more chartered accountants
or company secretaries (PCS) or cost accountants or legal practitioners or any of its officers to present his or its case
before the Securities Appellate Tribunal (SAT).
Lesson 2 • Securities and Exchange Board of India Act, 1992 71

LESSON ROUND-UP

• The SEBI Act, 1992, was notified to protect the interests of the investors and to promote the
development of, and to regulate the securities markets by such measures as it thinks fit.
• The SEBI regulates the securities market and the SAT acts as a watchdog to ensure justice.
• The SEBI Act, 1992 empowers an aggrieved person for remedies against the SEBI’s order or penalties by
establishing Securities Appellate Tribunal.
• Any person aggrieved by any decision or order of the SAT can file an appeal to the Supreme Court.
• Section 15 Y of the SEBI Act provides that no civil court shall have jurisdiction to entertain a suit or
proceeding in respect of any matter in which an Adjudicating Officer (AO’) is appointed under the Act or
SAT is empowered by or under the Act to determine and no injunction shall be granted by any Court or
other authority in respect of any action taken or to be taken in pursuance of any power conferred by or
under the Act.
• The SEBI is empowered to issue directions under section 11B of the Act.
• The SEBI is further empowered to conduct inspections of registered intermediaries.
• Besides inspection, the SEBI is empowered to conduct investigations in case of breach of any regulation
or in case of action determental to the interest of investors.
• The SEBI is empowered to make rules and regulations.

GLOSSARY

Injunction A court order by which an individual is required to perform, or is restrained from

performing, a particular Act.

Ordinance An ordinance is an executive order issued by the President of India that holds the
same force and effect on an Act passed by the Parliament.

Securities Appellate Government by notification to exercise the jurisdiction, powers and authority
Tribunal (SAT) conferred on such Tribunal by or under the SEBI Act or any other law for the time
being in force.

Tribunal Article 227 of the Constitution of India defines ‘tribunal’ as a person or a body
other than a Court set up by the State for deciding rights of contending parties in
accordance with rules framed for regulation having force of law.
72  Lesson 2 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Discuss the various functions and powers of the SEBI.
2. Explain the role of the SEBI in strengthening regulatory framework and fostering investor confidence.
3. Enumerate the various penalties which can be imposed under the SEBI Act, 1992 for various failures,
defaults, non-disclosure and other offences.
4. Explain the procedure for Appeal to the Securities Appellate Tribunal.
5. Discuss the various powers of the Central Government under the SEBI Act, 1992.
6. Explain the factors to be considered by SEBI to arrive at the settlement terms.
7. ABC Ltd. is a registered stock broker of the Bombay Stock Exchange. SEBI levied a penalty of 2 crore on
the company for violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to the Securities Market) Regulations, 2003. ABC Ltd. is contemplating to challenge the SEBI’s
order before the Securities Appellate Tribunal (SAT) in an appeal. Explain the procedure for making an
appeal before the SAT.

LIST OF FURTHER READINGS

• SEBI Notifications
• SEBI Circulars
• SEBI Orders
• SAT Orders

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• http://sat.gov.in/
Lesson 3 Depositories Act, 1996
Key Concepts One Learning Objectives
Should Know
To understand:
• Depository
• Basic concept of depository and how it works
• Depository • Depository participants, its functions, rights and obligations of
Participant (DP) depositories, benefits of depositories, dematerialisation process,
and the regulatory framework for depository in India.
• Issuer
• Rights and Obligations of Depositories, Participants, Issuers and
• Beneficial Owner Beneficial Owners
(BO)
• Powers of SEBI, Depositories and Central Government
• Registered Further, a Company Secretary in Practice is authorised by SEBI to
Owner conduct internal/ concurrent audit of depositories participants and
• Security also to conduct the reconciliation of share capital.

Lesson Outline
• Introduction • Membership Rights in respect
of securities held by a
• Depository System – An
Depository
Overview
• Power of Central Government
• Depository Functions
to Make Rules
• Benefits of Depository System
• Power of Depositories to Make
• Models of Depository Bye-Laws
• Legal Linkage • SEBI (Depositories and
Participants)
• Depository Participant
• Regulations, 2018
• Issuer
• Reconciliation & Audit under
• Dematerialisation
SEBI (Depositories and
• Rematerialisation Participants) Regulations,
2018
• Electronic Credit in New Issues
• Internal Audit of operations of
• Trading System
Depository Participants
• Corporate Actions
• Concurrent Audit
• Legal Framework
• Role of Company Secretary
• Depositories Act,1996
• LESSON ROUND-UP
• Power of SEBI
• GLOSSARY
• Penalties and Adjudication
• TEST YOURSELF
• Offences and Cognizance
• LIST OF FURTHER READINGS
• OTHER REFERENCES
 74  Lesson 3 • EP-SLCM

Regulatory Framework
• The Depositories Act, 1996
• The SEBI (Depositories and Participants) Regulations, 2018
• Bye-laws of Depository
• Business Rules of Depository.
• The Companies Act, 2013
• The Indian Stamp Act, 1899
• Securities and Exchange Board of India Act, 1992
• Securities Contracts (Regulation) Act, 1956
• Benami Transaction (Prohibition) Act, 1988
• Income Tax Act, 1961
• Bankers’ Books Evidence Act, 1891
• Prevention of Money Laundering Act (PMLA), 2002

INTRODUCTION
Depositories are institutions that hold securities of investors in dematerialized / electronic form and provide demat
services to the investors through their Depository Participants (DP). There are two depositories in our country
namely, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Under each Depository, there are registered Depository Participants (DPs), which provide various services to the
investors like opening and maintaining of a Demat account, dematerialization of shares, etc.

The inception of depository system in the Indian Capital market has been started during the 90’s. Theft, forgery,
mutilation of certificates and other irregularities provided the issuer right to refuse the transfer of a security.
Added costs and delays in settlement, restricted liquidity and made investor grievance redressal time
consuming. To obviate these problems, the Depositories Act, 1996 was passed and subsequently the regulations
were notified.
LEGAL FRAMEWORK
The legal framework for a depository system has been laid down by the Depositories Act, 1996 and is regulated by
SEBI. The depository business in India is regulated by –
• The Depositories Act, 1996
• The SEBI (Depositories and Participants) Regulations, 2018
 Lesson 3 • Depositories Act, 1996 75

• Bye-laws of Depository
• Business Rules of Depository.
Apart from the above, Depositories are also governed by certain provisions of:
• The Companies Act, 2013
• The Indian Stamp Act, 1899
• Securities and Exchange Board of India Act, 1992
• Securities Contracts (Regulation) Act, 1956
• Benami Transaction (Prohibition) Act, 1988
• Income Tax Act, 1961
• Bankers’ Books Evidence Act, 1891

The legal framework for depository system in the Depositories Act, 1996 provides for the establishment of multiple
depositories. Anybody to be eligible for providing depository services must be formed and registered as a company
under the Companies Act, 2013 and seek registration with SEBI and obtain a Certificate of Commencement of
Business from the SEBI on fulfillment of the prescribed conditions.
The investors opting to join depository mode are required to enter into an agreement with depository through a
participant who acts as an agent of the depository. The agencies such as custodians, banks, financial institutions,
large corporate brokerage firms, non-banking financial companies etc. act as participants of depositories. The
companies issuing securities are also required to enter into an agreement with the Depository.

DEPOSITORY SYSTEM – AN OVERVIEW

• A depository is an organization which holds securities
(like shares, debentures, bonds, government According to Section 2(e) of the Depositories
securities, mutual fund units etc.) of investors in Act, 1996, Depository means a company formed
electronic form at the request of the investors through and registered under the Companies Act, 2013
a registered depository participant. It also provides and which has been granted a certificate of
services related to transactions in securities. registration under Section 12(1A) of the SEBI
• A Depository is an organization like a Central Bank Act, 1992.
where the securities of a shareholder are held in the
electronic form at the request of the shareholder through the medium of a Depository Participant. To utilize
the services offered by a Depository, the investor has to open an account with the Depository through a
Depository Participant.
• In the depository system, share certificates belonging to the investors are to be dematerialized and their
names are required to be entered in the records of depository as beneficial owners. Consequent to these
changes, the investors’ names in the companies’ register are replaced by the name of depository as the
registered owner of the securities.
• The depository, however, does not have any voting rights or other economic rights in respect of the shares as
a registered owner. The beneficial owner continues to enjoy all the rights and benefits and is subject to all the
liabilities in respect of the securities held by a depository.
• In the Depository mode, corporate actions such as IPOs, rights, conversions, bonus, mergers/amalgamations,
subdivisions & consolidations are carried out without the movement of paper, saving both cost & time.
Information of beneficiary owners is readily available. The issuer gets information on changes in shareholding
pattern on a regular basis, which enables the issuer to efficiently monitor the changes in shareholdings.
• The Depository system links the issuing corporates, Depository Participants (DPs), the Depositories and
clearing corporations of stock exchanges. This network facilitates holding of securities in the soft form and
effects transfers by means of account transfers.
 76  Lesson 3 • EP-SLCM

• Under the provisions of the Depositories Act, these Depositories provide various services to investors and
other Participants in the capital market, such as, clearing members, stock exchanges, investment institutions,
banks and issuing corporates. These include basic facilities like account opening, dematerialization,
settlement of trades and advanced facilities like pledging, distribution of non-cash corporate actions,
distribution of securities to allottees in case of public issues, etc.
• A depository cannot act as a depository unless it obtains a certificate of commencement of business from the SEBI.
• To utilize the services of a depository, the investor has to open an account with the depository through a
participant, similar to the opening of an account with any of the bank branches to utilize services of that bank.
Registration of the depository is required under the SEBI (Depositories and Participants) Regulations, 2018
and is a pre-condition to the functioning of the depository. Depository and depository participant both are
regulated by the SEBI.

BANK–DEPOSITORY - AN ANALOGY

BANK DEPOSITORY
Holds funds in an account Holds securities in an account
Transfers funds between accounts on the instruction of Transfers securities between accounts on the
the account holder instruction of the Beneficial owner account holder
Facilitates transfer of ownership without having to
Facilitates transfer without having to handle money
handle securities
Accountable for the safe keeping of funds Accountable for the safe keeping of securities

DEPOSITORY FUNCTIONS
• Account opening
• Dematerialisation
• Rematerialisation
• Settlement
• Initial Public Offers (IPO’s), corporate benefits
• Creation of encumbrance

Difference between Depository and Custodian

Both depository and custodian services are responsible for safe keeping of securities but they are different in the
sense that the Depository can legally transfer beneficial ownership, while a custodian cannot. The main objective of
a Depository is to minimize the paper work involved with the ownership, trading and transfer of securities.

BENEFITS OF DEPOSITORY SYSTEM

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.
At the outset, this system rids the capital market of the dangers related to handling of paper. The system provides
numerous direct and indirect benefits, like:
• Elimination of bad deliveries - In the depository environment, once the holdings of an investor are
dematerialised, the question of bad delivery does not arise i.e. they cannot be held “under objection”. In the
physical environment, buyer of shares was required to take the risk of transfer and face uncertainty of the
quality of assets purchased, while in a depository environment good money certainly begets good quality of
assets.
• Elimination of all risks associated with physical certificates - Dealing in physical securities have associated
security risks of theft, mutilation of certificates, loss of certificates during movements through and from the
registrars, thus exposing the investors to the cost of obtaining duplicate certificates, loss of certficates and
advertisements, etc. This problem does not arise in the depository environment.
 Lesson 3 • Depositories Act, 1996 77

• Immediate transfer and registration of securities - In the depository environment, once the securities are
credited to the investor’s account on pay out, he becomes the legal owner of the securities. There is no further
need to send it to the company’s registrar for registration. If securities are purchased in the physical environment,
the investor has to send it to the company’s Share Transfer Agent so that the change of ownership can be
registered. This process usually takes around three to four months and is rarely completed within the statutory
framework of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss
in transit. To overcome this, the normally accepted practice is to hold the securities in street names i.e. not to
register the change of ownership. However, if the investors miss a book closure the securities are not good for
delivery and the investor would also stand to loose their corporate entitlements.
• Faster disbursement of non-cash corporate benefits like rights, bonus, etc. – Depository system provides
for direct credit of non-cash corporate entitlements to an investors account, thereby ensuring faster
disbursement and avoiding risk of loss of certificates in transit.
• Reduction in brokerage by many brokers for trading in dematerialized securities – Brokers provide this
benefit to investors as dealing in dematerialized securities reduces their back office cost of handling paper and
also eliminates the risk of being the introducing broker.
• Reduction in handling of huge volumes of paper and periodic status reports to investors on their holdings and
transactions, leading to better controls.
• Elimination of problems related to change of address of investor, transmission, etc. – In case of change of
address or transmission of demat shares, investors are saved from undergoing the entire change procedure
with each company or registrar. Investors have to only inform their DP with all relevant documents and the
required changes are effected in the database of all the companies, where the investor is a registered holder of
securities.
• Elimination of problems related to selling securities on behalf of a minor – A natural guardian is not
required to take court approval for selling demat securities on behalf of a minor.
MODELS OF DEPOSITORY
Immobilisation – Where physical share certificate are kept in vaults with the depository for safe custody and all
subsequent transactions in these securities take place in book entry form. The actual owner has the right to
withdraw his physical securities as and when desired. The immobilization of fresh issue may be achieved by issuing
a jumbo certificate representing the entire issue in the name of depository, as nominee of the beneficial owners.
Dematerialisation – No Physical scrip in existence, only electronic records maintained by depository. This type of
system is cost effective and simple and has been adopted in India.

LEGAL LINKAGE
 78  Lesson 3 • EP-SLCM

DEPOSITORY PARTICIPANT (DP)

Just as a brokers act an agent of the investor at the Stock Exchange, a Depository Participant (DP) is the representative
(agent) of the investor in the depository system providing the link between the Company and investor through the
Depository. The Depository Participant maintains securities’ account balances and intimates the status of holding
to the account holder from time to time.

• Transmission requests/nomination
• Acts as an Agent of Depository
• Customer interface of Depository
• Functions like Securities Bank
• Characteristics of a DP

Characteristics • Account opening

of a DP • Facilitates dematerialisation/rematerialisation
• Instant transfer on pay-out
• Enables off market transfers
• Settles trades in electronic segment
• Pledge/enforcement of pledge etc.

A DP is one with whom an investor needs to open an account to deal in shares in electronic form. While the
Depository can be compared to a Bank, DP is like a branch of that bank with which an account can be opened.

Question: Who can be a DP?

Answer: Public financial institutions, scheduled commercial banks, foreign banks operating in India with the
approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing
corporations / clearing houses, NBFCs and registrar to an issue or share transfer agent complying with the
requirements prescribed by SEBI can be registered as DP.

ISSUER
“Issuer” means person making an issue of securities. Any entity such as a corporate / state or central government
organizations issuing securities which can be held by depository in electronic form.

Functions of Issuer Dematerialisation

Confirmation of Beneficiary Holdings
Corporate Actions – Rights, Bonus, etc.
Reconciliation of Depository Holdings
Rematerialisation

DEMATERIALISATION
Dematerialization is a process by which the physical share certificates of an investor are taken back by the Company
and an equivalent number of securities are credited his account in electronic form at the request of the investor. An
investor will have to first open an account with a Depository Participant and then request for the dematerialization
of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into
that account. This is very similar to opening a Bank Account.
Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has
to demat the shares if he/she wishes to sell the same through the Stock Exchanges, as physical shares are to be sold
through a separate session and are sold at a big discount to the market prices. Similarly, if an investor purchases
 Lesson 3 • Depositories Act, 1996 79

shares from the Stock Exchange, he/she will get delivery of the shares in demat form. Odd lot share certificates can
also be dematerialized. Similarly, in Public Issues/Right Issues, shares are issued only in demat form.
REMA PROCEDURE FOR DEMATERIALISATION TE

Question: Can an investor, already having a demat account; open another account with any other Depository
Participant (DP)?
Answer: Yes, the investor has a choice to open another demat account with any DP.

REMATERIALISATION
Rematerialisation is the process of converting securities held in electronic form in a demat account back in physical
certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the
DP with whom he has an account. A client can rematerialise his dematerialised holdings at any point of time. The
securities sent for rematerialisation cannot be traded.
 80  Lesson 3 • EP-SLCM

ELECTRONIC CREDIT IN NEW ISSUES

• Investor opens account with DP
• Submits application with option to hold securities in depository giving DP-Id and Client-Id
• Registrar uploads list of allottees to Depository
• Depository credits allottee’s account with DP
• Refunds sent by Registrar as usual.

TRADING SYSTEM
• Separate quotes in Book Entry
• Trading Member to have Clearing Account with DP
• Settlement as per Settlement Calendar of Stock Exchange
• Trading can be introduced in any Stock exchange if settlement is guaranteed.

CORPORATE ACTIONS
• Dividends/cash benefits, these benefits are directly forwarded to the investors by the company or its registrar
and transfer agent.
• Non-cash benefits, viz. Bonus, Rights Issue, etc. these benefits are electronically credited to the beneficial
owner’s account through Depository.

Question: How would Mr. X get Bonus Shares if he holds shares in Demat Form?
Answer: The concerned company obtains the details of beneficiary holders and their holdings from Depository
(NSDL or CDSL) as on the record date. The number of shares he is entitled for, are credited to his demat account
by the company / its RTA.

DEPOSITORIES ACT, 1996

Regulatory Framework
The Depositories Act, 1996 is divided into five chapters which are discussed below as under:

Depositories Act, 1996 Chapter I Definitions of various terms

Chapter II Certificate of Commencement of Business
Chapter III Rights and Obligations of Depositories, Participants, Issuers
and Beneficial Owners
Chapter IV Enquiry and Inspection
Chapter V Miscellaneous

Objectives
The depositories’ legislation as per the Statement of Objects and Reasons appended to the Depositories Act, 1996
aims at providing :
• A legal basis for establishment of depositories to conduct the task of maintenance of ownership records and
effecting changes in ownership records through book entry;
• Dematerilisation of securities in the depositories mode as well as giving option to an investor to choose between
holding securities in physical mode and holding securities in a dematerialized form in a depository;
 Lesson 3 • Depositories Act, 1996 81

• Making the securities fungible;

• Making the shares, debentures and any interest thereon of a public limited company freely transferable; and
• Exempting all transfers of shares within a depository from stamp duty.

Certificate of Commencement of Business by Depositories

Section 3 of the Depository Act, stipulates that no depository shall act as a depository unless it obtains a certificate
of commencement of business from the SEBI in such form as may be specified by the SEBI (Depositories and
Participants) Regulations, 2018.
The SEBI shall not grant a certificate unless it is satisfied that the depository has adequate systems and safeguards
to prevent manipulation of records and transactions.
However no certificate shall be refused unless the depository concerned has been given a reasonable opportunity
of being heard.
Eligibility Condition for Depository Services
Any company or other institution to be eligible to provide depository services must:
• has a net worth of not less than rupees one hundred crores.
• be formed and registered as a company under the Companies Act, 2013.
• be registered with SEBI as a depository under SEBI Act, 1992.
• has framed bye-laws with the previous approval of SEBI.
• has one or more participants to render depository services on its behalf.
• has adequate systems and safeguards to prevent manipulation of records and transactions to the satisfaction
of SEBI.
• complies with Depositories Act, 1996 and SEBI (Depositories and Participants) Regulations, 2018.
• meets eligibility criteria in terms of constitution, network, etc.

Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws,
with any depository for availing its services.

Rights and Obligations of Depositories, Participants, Issuers and Beneficial Owners

Agreement between depository and participant

A depository shall enter into an agreement with one or more participants as its agent in such form as may be
specified by the bye-laws.
Services of depository
Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws,
with any depository for availing its services.
Surrender of certificate of security
Any person who has entered into an agreement through a participant shall surrender the certificate of security, for which
he seeks to avail the services of a depository, to the issuer in such manner as may be specified by the regulations.
The issuer, on receipt of certificate of security, shall cancel the certificate of security and substitute in its records
the name of the depository as a registered owner in respect of that security and inform the depository
accordingly.
A depository shall, on receipt of the information from issuer, enter the name of the person in its records, as the
beneficial owner.3
 82  Lesson 3 • EP-SLCM

Registration of transfer of securities with depository

Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of
the transferee. If a beneficial owner or a transferee of any security seeks to have custody of such security the
depository shall inform the issuer accordingly.

Options to receive security certificate or hold securities with depository

Section 8 states that –
(1) Every person subscribing to securities offered by an issuer shall have the option either to receive the security
certificates or hold securities with a depository.
(2) Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details
of allotment of the security, and on receipt of such information the depository shall enter in its records the
name of the allottee as the beneficial owner of that security.
However, Section 29 of the Companies Act, 2013 read with the Companies (Prospectus and
Allotment of Securities) Rules, 2014, provides that –
• every company making public offer and such other class or classes of companies as may be prescribed, shall
issue the securities only in dematerialised form by complying with the provisions of the Depositories Act,
1996 and the regulations made thereunder.
• Further, in case of such class or classes of unlisted companies as may be prescribed, the securities shall be
held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and
the regulations made thereunder.
• Any company, other than a company mentioned above, may convert its securities into dematerialised form or
issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in
accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

It is not necessary that all eligible securities must be in the depository mode. In the scheme of the Depositories
legislation, the investor has been given supremacy. The investor has the choice of holding physical securities or opts
for a depository based ownership record.
However, in case of fresh issue of securities all securities issued have to be in dematerialized form. However, after
that investor will also have the freedom to switch from depository mode to physical mode and vice versa. The
decision as to whether or not to hold securities within the depository mode and if in depository mode, which
depository or participant, would be entirely with the investor.

Question: What type of instruments are available for demat at Depository?

Answer: All types of equity/ debt instruments viz. equity shares, preference Shares, partly paid shares, bonds,
debentures, commercial papers, certificates of deposit, government securities (G-SEC) etc. irrespective of
whether these instruments are listed / unlisted / privately placed can be dematerialized with depository, if they
have been admitted with the depository.

Restriction on Transfer of Securities

SEBI has amended relevant provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 to disallow listed companies from accepting request for transfer of securities which are held in physical form.
The shareholders who continue to hold shares and other types of securities of listed companies in physical form
even after this date, will not be able to lodge the shares with company / its RTA for further transfer. They will need
to convert them to demat form compulsorily if they wish to effect any transfer. Only the requests for transmission
and transposition of securities in physical form, will be accepted by the listed companies / their RTAs.
This amendment will help in curbing fraud and manipulation risk in physical transfer of securities by unscrupulous
persons. Further, with shares held in demat form will improve ease, convenience and safety of transactions for investors.
 Lesson 3 • Depositories Act, 1996 83

Requirements with the promoters and promoter group shareholding

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall ensure that
hundred percent of shareholding of promoter and promoter group is in dematerialized form and the same is
maintained on a continuous basis in the manner as specified by the SEBI.

Fungibility
Section 9 states that securities in depositories shall be in fungible form.
The Act envisages that all securities held in depository shall be fungible i.e. all certificates of the same security shall
become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the
time of entry into depository. It is like withdrawing money from the bank without bothering about the distinctive
numbers of the currencies.

Rights of Depositories and Beneficial Owner

Section 10 lays down that a depository should be deemed to be the registered owner for the purposes of effecting
transfer of ownership of security on behalf of a beneficial owner. The depository as a registered owner should not
have any voting rights or any other rights in respect of securities held by it. The beneficial owner is entitled to all
the rights and benefits and is subject to all the liabilities in respect of his securities held by a depository.

Register of Beneficial Owner

Section 11 provides that every depository is required to maintain a register and an index of beneficial owners in the
manner provided in the Companies Act, 2013.
Pledge or Hypothecation of Securities held in a Depository
Section 12 lays down that a beneficial owner may with the previous approval of the depository create a pledge or
hypothecation in respect of a security owned by him through a depository. Every beneficial owner should give
intimation of such pledge or hypothecation to the depository and such depository is required to make entries in its
records accordingly. Any entry in the records of a depository should be evidence of a pledge or hypothecation.
Furnishing of Information and Records by Depository and Issuer
Section 13 stipulates that depository shall furnish to the issuer information about the transfer of securities in the
name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws. Every issuer
shall make available to the depository copies of the relevant records in respect of securities held by such depository.

Option to opt out in respect of any Security

Section 14 of the Act provides that if a beneficial owner seeks to opt out of a depository in respect of any
security he shall inform the depository accordingly. After the receipt of intimation the depository should make
appropriate entries in its records and also inform the issuer. Every issuer shall, within thirty days of the receipt
of intimation from the depository and on fulfillment of such conditions and on payment of such fees as may be
specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the
case may be.

Act 18 of 1891 to apply to depositories

Section 15 lays down that the Bankers’ Books Evidence Act, 1891 shall apply in relation to a depository as if it were
a bank as defined in section 2 of that Act.

Depositories to Indemnify Loss in certain cases

As per section 16, any loss caused to the beneficial owner due to the negligence of the depository or the
participant, would be indemnified by the depository to such beneficial owner. Where the loss due to the
negligence of the participant is indemnified by the depository, the depository has the right to recover the same
from such participant.
 84  Lesson 3 • EP-SLCM

POWERS OF THE SEBI

1. To Call for Information and Enquiry

Section 18 of the Act provides that the SEBI in the public interest or in the interest of investors may by order in
writing,-
• call upon any issuer, depository, participant or beneficial owner to furnish in writing such information
relating to the securities held in a depository as it may require; or
• authorise any person to make an enquiry or inspection in relation to the affairs of the issuer, beneficial
owner, depository or participant, who shall submit a report of such enquiry or inspection to it within
such period as may be specified in the order.
Sub-section (2) to Section 18 provides that every director, manager, partner, secretary, officer or employee of
the depository or issuer or the participant or beneficial owner shall on demand produce before the person
making the enquiry or inspection all information or such records and other documents in his custody having
a bearing on the subject matter of such enquiry or inspection.
2. To Give Directions
Section 19 provides that the SEBI, if after making or causing to be made an enquiry or inspection, the SEBI is
satisfied that it is necessary in the interest of investors or the securities market or to prevent the affairs of any
depository or participant being conducted in the manner detrimental to the interests of investors or the
securities market, it may issue such directions, –
(a) to any depository or participant or any person associated with the securities market; or
(b) to any issuer,
as may be appropriate in the interest of investors or the securities market.
The Board may, by order, for reasons to be recorded in writing, levy penalty under sections 19A, 19B, 19C, 19D,
19E, 19F, 19FA and 19G after holding an inquiry in the prescribed manner.

The power to issue directions under this section shall include and always be deemed to have been included the
power to direct any person, who made profit or averted loss by indulging in any transaction or activity in
contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to
the wrongful gain made or loss averted by such contravention.

3. To Make Regulations
Section 25 of the Act provides that the SEBI may, by notification in the Official Gazette, make regulations
consistent with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.
In particular, and without prejudice to the generality of the foregoing power, such regulations may provide
for—
• the form in which record is to be maintained;
• the form in which the certificate of commencement of business shall be issued;
 Lesson 3 • Depositories Act, 1996 85

• the manner in which the certificate of security shall be surrendered ;

• the manner of creating a pledge or hypothecation in respect of security owned by a beneficial owner;
• the conditions and the fees payable with respect to the issue of certificate of securities ;
• the rights and obligations of the depositories, participants and the issuers ;
• the eligibility criteria for admission of securities into the depository .
• the terms determined by the Board for settlement of proceedings ;
• any other matter which is required to be, or may be, specified by regulations or in respect of which
provision to be made by regulations.

PENALTIES AND ADJUDICATION

The SEBI may, by order, for reasons to be recorded in writing, levy, penalty after holding an inquiry in the prescribed
manner.

Sl No. Section Particulars

1. Section 19A Penalty for failure to furnish information, return, etc.

2. Section 19B Penalty for failure to enter into an agreement.

3. Section 19C Penalty for failure to redress investors’ grievances.

4. Section 19D Penalty for delay in dematerialisation or issue of certificate of securities.

5. Section 19E Penalty for failure to reconcile records.

6. Section 19F Penalty for failure to comply with directions issued by the SEBI under section 19 of the Act.

7. Section 19FA Penalty for failure to conduct business in a fair manner.

8. Section 19G Penalty for contravention where no separate penalty has been provided.

9. Section 19H Penalty for power to adjudicate.

10. Section 19I Factors to be taken into account by adjudicating officer while adjudging quantum of penalty.

11. Section 19-IA Settlement of Administrative Civil Proceedings.

12. Section 19-IB Recovery of amounts.

13. Section 19-IC Continuance of proceedings

14. Section 19J Crediting sums realised by way of penalties to Consolidated Fund of India.
 86  Lesson 3 • EP-SLCM

Penalties

Shall be liable to a penalty

which shall not be less PENALTY
than one lakh rupees but
which may extend to one
crore rupees.

shall be liable to a penalty which shall not be less than one lakh rupees
but which may extend to one lakh rupees for each day during which such
failure continues subject to a maximum of one crore rupees.

It shall be liable to penalty which shall not be

less than five crore rupees but which may extend
Penalty for failure to conduct to twenty-five crore rupees or three times the
business in a fair manner. amount of gains made out of such failure,
whichever is higher.

Adjudication
The adjudication procedure, Settlement of Administrative Civil Proceedings, Recovery of amounts, Continuance of
Proceedings, Crediting sums by way of Penalities to Consolidated fund of India, as mentioned under Section 19H to 19J of
the Depositories Act, 1996 are same as the adjudication procedure prescribed under the SEBI Act, 1992. (Lesson-2)

OFFENCES AND COGNIZANCE

Sl No. Section Particulars

1. Section 20 Offences

2. Section 21 Contravention by Companies

Lesson 3 • Depositories Act, 1996 87

3. Section 22 Cognizance of Offences by Courts

4. Section 22A Composition of certain Offences

5. Section 22B Power to grant immunity

6. Section 22C Establishment of Special Courts

7. Section 22D Offences triable by Special Courts

8. Section 22E Appeal and revision

9. Section 22F Application of Code to proceedings before Special Court

10. Section 22G Transitional Provisions

11. Section 23 Appeals

12. Section 23A Appeal to SAT

13. Section 23B Procedure and powers of Securities Appellate Tribunal

14. Section 23C Right to legal representation

15. Section 23 D Limitation

16. Section 23E Civil court not to have jurisdiction

17. Section 23F Appeal to Supreme Court

18. Section 23G Powers of Board not to apply to International Financial Services Centre

Offences
 88  Lesson 3 • EP-SLCM

Contravention by companies
Where a contravention of any of the Provided that nothing contained in Where a contravention of any of
provisions of this Act or any rule, this sub-section shall render any the provisions of this Act or any
regulation, direction or order made such person liable to any rule, regulation, direction or order
thereunder has been committed by punishment provided in this Act, if made thereunder has been
a company, every person who at the he proves that the contravention committed by a company and it is
was committed without his proved that the contravention has
time the contravention was
knowledge or that he had exercised been committed with the consent or
committed was in charge of, and was all due diligence to prevent the connivance of, or is attributable to
responsible to, the company for the commission of such contravention. any neglect on the part of, any
conduct of the business of the director, manager, secretary or
company, as well as the company, other officer of the company, such
shall be deemed to be guilty of the director, manager, secretary or
contravention and shall be liable to other officer shall also be deemed
be proceeded against and punished to be guilty of the contravention and
accordingly. shall be liable to be proceeded
against and punished accordingly.

Cognizance of offences by courts

Section 22 provides that no court shall take cognizance of any offence punishable under this Act or any rules
or regulations or bye-laws made there under, save on a complaint made by the Central Government or State
Government or the SEBI or by any person.

Composition of certain offences

Section 22A provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, any
offence punishable under this Act, not being an offence punishable with imprisonment only, or with
imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded
by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Miscellaneous provisions
The miscellaneous provisions from Section 22B to 23G as mentioned above in the table are same as the
provisions as prescribed under the SEBI Act, 1992.

POWER OF CENTRAL GOVERNMENT TO MAKE RULES

Section 24 of the Act provides that the Central Government may, by notification in the Official Gazette, make rules
for carrying out the provisions of this Act. In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters, namely :—
• the manner of inquiry under sub-section (1) of section 19H;
• the time within which an appeal may be preferred under sub-section (1) of section 23;
• the form in which an appeal may be preferred under sub-section (3) of section 23 and the fees payable in
respect of such appeal;
• the procedure for disposing of an appeal under sub-section (4) of section 23;
• the form in which an appeal may be filed before the Securities Appellate Tribunal under section 23A and the
fees payable in respect of such appeal.

In exercise of the powers conferred, the Central Government makes the Depositories (Procedure for Holding
enquiry and imposing penalties by adjudicating officer) Rules, 2005 for holding inquiry for the purpose of
imposing penalty under sections 19A to 19G of the Depositories Act.
 Lesson 3 • Depositories Act, 1996 89

POWER OF DEPOSITORIES TO MAKE BYE-LAWS

A depository shall, with the previous approval of the Board, make bye-laws consistent with the provisions of this
Act and the regulations. In particular, and without prejudice to the generality of the foregoing power, such bye-laws
shall provide for -
• the eligibility criteria for admission and removal of securities in the depository;
• the conditions subject to which the securities shall be dealt with;
• the eligibility criteria for admission of any person as a participant;
• the manner and procedure for dematerialisation of securities;
• the procedure for transactions within the depository;
• the manner in which securities shall be dealt with or withdrawn from a depository;
• the procedure for ensuring safeguards to protect the interests of participants and beneficial owners;
• the conditions of admission into and withdrawal from a participant by a beneficial owner;
• the procedure for conveying information to the participants and beneficial owners on dividend
declaration, shareholder meetings and other matters of interest to the beneficial owners;
• the manner of distribution of dividends, interest and monetary benefits received from the company among
beneficial owners;
• the manner of creating pledge or hypothecation in respect of securities held with a depository;
• inter se rights and obligations among the depository, issuer, participants, and beneficial owners;
• the manner and the periodicity of furnishing information to the Board, issuer and other persons;
• the procedure for resolving disputes involving depository, issuer, company or a beneficial owner;
• the procedure for proceeding against the participant committing breach of the regulations and provisions for
suspension and expulsion of participants from the depository and cancellation of agreements entered with
the depository;
• the internal control standards including procedure for auditing, reviewing and monitoring.

Where the SEBI considers it expedient so to do, it may, by order in writing, direct a depository to make any bye-laws
or to amend or revoke any bye-laws already made within such period as it may specify in this behalf.
If the depository fails or neglects to comply with such order within the specified period, the SEBI may make the bye-
laws or amend or revoke the bye-laws made either in the form specified in the order or with such modifications
thereof as the SEBI thinks fit.

SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 2018

The Depositories Act, 1996 requires that the registration of the depository, depository participant and the
custodian, is mandatory with the SEBI. These market intermediaries can function or commence business only
after registration from SEBI has been obtained and requisite fee paid to SEBI. The requirement of registration
is a continuing one and the moment the registration is cancelled or revoked or surrendered, the person shall
cease to act as such.
The SEBI, on October 3, 2018, notified the SEBI (Depositories and Participants) Regulations, 2018 (‘New DP
Regulations’), repealing the SEBI (Depositories and Participants) Regulations, 1996 (‘Old DP Regulations’)
introducing amendments largely related to structuring, shareholding and governance of depositories.
These regulations also contain provisions for operations and functioning of depositories, form for application and
certificates used and schedule of fees for participants, etc. It also contains provisions for registration of depository
and depository participants, rights and obligations of various users and constituents, inspection and procedure for
action in case of default.
 90  Lesson 3 • EP-SLCM

RECONCILIATION
Regulation 75 of SEBI (Depositories and Participants)Regulations, 2018 provides that the issuer or its agent shall
reconcile the records of dematerialised securities with all the securities issued by the issuer, on a daily basis, where
the State or the Central Government is the issuer of Government securities, the depository shall, on a daily basis,
reconcile the records of the dematerialised securities.

AUDIT UNDER SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 2018

Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018 provides that every issuer shall submit
audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company Secretary or a
qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital, listed capital and
capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and
the in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such
further issued capital.
The audit report is required to give the updated status of the register of members of the issuer and confirm that
securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer
and where the dematerialization has not been effected within the said stipulated period, the report would disclose
the reasons for such delay.
The issuer is under an obligation to immediately bring to the notice of the depositories and the stock exchanges, any
difference observed in its issued, listed, and the capital held by depositories in dematerialized form.

INTERNAL AUDIT OF OPERATIONS OF DEPOSITORY PARTICIPANTS

The two Depository service providers in India, viz., National Securities Depository Ltd. (NSDL) and Central
Depository Services (India) Limited (CDSL) have allowed Company Secretaries in whole-time practice to undertake
internal audit of the operations of Depository Participants (DPs).
NSDL amended its Bye Law 10.3.1 of Chapter 10 w.e.f. March 16, 2009 which reads as follow:
10.3.1 “Every Participant shall ensure that an internal audit in respect of its depository operations is conducted
at intervals of not more than six months by a qualified Chartered Accountant or a Company Secretary or a
Cost and Management Accountant, holding a Certificate of Practice and a copy of the internal audit report shall
be furnished to the Depository.”
CDSL has vide its letter dated September 28, 1999 notified amendment of its Bye Laws 16.3.1 as follows:
16.3.1 Every participant shall ensure that an internal audit shall be conducted in respect of the participant’s
operations relating to CDSL by a qualified Chartered Accountant in accordance with the provisions of the
Chartered Accountants Act, 1949, or by a Company Secretary in accordance with the provisions of the
Company Secretaries Act, 1980 or by a Cost Accountant in accordance with the provisions of the Cost and
Works Accountants Act, 1959; in practice, at such intervals as may be specified by CDSL from time to time. A
copy of Internal Audit report shall be furnished to CDSL.
Checklist of Internal Audit of Operations of Depository Participants
• Account opening
• Reporting to BOs
• Dematerialisation of Securities
• Rematerialisation of Securities
• Market Trades
• Off Market Trades
• Transmission
• Returns to Depository
• Grievance Redressal Mechanism
 Lesson 3 • Depositories Act, 1996 91

• Collateral Security
• Assignment of Business
• Freezing of Account
• Closure of Account
• Pledge and Hypothecation
• Invocation of Pledge/Hypothecation by Pledgee
• Lending and Borrowing of Securities
• Records to be Maintained by DPs
• Disclosure and Publication of Information
• Supervision by DP
• Code of Ethics for DPs
• Branch of Depository Participants

CONCURRENT AUDIT
National Securities Depository Limited vide its Circular No. NSDL/POLICY/ 2006/0021 dated June 24, 2006
provides for concurrent audit of the Depository Participants. The Circular provides that w.e.f. August 1, 2006, the process
of demat account opening, control and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
Depository Participants have been advised to appoint a firm of qualified Chartered Accountant(s) or Company
Secretary(ies) holding a certificate of practice for conducting the concurrent audit. However, the participants in
case they so desire, may entrust the concurrent audit to their Internal Auditors. In respect of account opening, the
auditor should verify all the documents including KYC documents furnished by the Clients and verified by the
officials of the Participants. The scope of concurrent audit with respect to control and verification of DIS cover the
areas given below:
(I) Issuance of DIS
The procedure followed by the participants with respect to:
(a) Issuance of DIS booklets including loose slips.
(b) Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique pre- printed
serial numbers.
(c) Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

(II) Verification of DIS

The procedure followed by the Participants with respect to:
(a) Date and time stamping (including late stamping) on instruction slips.
(b) Blocking of used/reported lost/stolen instruction slips in back office system/ manual record.
(c) Blocking of slips in the back office system/manual record which are executed in DPM directly.
(d) Two step verification for a transaction for more than Rs. 5 lakh, especially in case of off transactions.
(e) Instructions received from dormant accounts.
The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued and controls on DIS
as mentioned above, during the day, by the next working day. In case the audit could not be completed within the
next working day due to large volume, the auditor should ensure that the audit is completed within a week’s time.
Any deviation and/or non-compliance observed in the aforesaid areas should be mentioned in the audit report of
the Concurrent Auditor. The Management of the Participant should comment on the observations made by the
Concurrent Auditor. The Concurrent Audit Report should be submitted to NSDL, on a quarterly basis, in a hard copy
form. If the Auditor for Internal and Concurrent Audit is the same, consolidated report may be submitted.
 92  Lesson 3 • EP-SLCM

ROLE OF COMPANY SECRETARY

• Right to Legal Representation (Section 23C): In case of any decision of the SEBI, the aggrieved entity/
company (the appellant) may either appear in person or authorise one or more chartered accountants or
company secretaries (PCS) or cost accountants or legal practitioners or any of its officers to present his or its
case before the Securities Appellate Tribunal (SAT).
• Internal Audit of Depository Participants: The 2 (two) Depository services providers in India, viz., National
Securities Depository Ltd. (NSDL) and Central Depository Services (India) Limited (CDSL) have allowed
Company Secretaries in whole-time practice to undertake internal audit of the operations of Depository
Participants (DPs).
• Reconciliation of Share Capital Audit: Company Secretary is authorised to issue quarterly certificate with
regard to reconciliation of the total issued capital, listed capital and capital held by depositories in
dematerialized form, details of changes in share capital during the quarter, and in-principle approval obtained
by the issuer from all the stock exchanges where it is listed in respect of such further issued capital under
SEBI (Depositories and Participants) Regulations, 2018. [Regulation 76 of SEBI (Depositories and Participants)
Regulations, 2018]
• Concurrent Audit of Depository Participants: Practising Company Secretary is authorized to carry out
concurrent audit of Depository Participants which covers audit of the process of demit account opening,
control and verification of Delivery Instruction Slips (DIS).

CASE LAW
31.03.2020 Jaypee Capital Services Ltd (Noticee) vs. SEBI Whole Time Member, Securities and
Exchange Board of India
Facts of the Case
Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate of Registration as
a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee) in accordance with provisions of
SEBI (Depositories and Participants) Regulations, 1996 (DP Regulations) initially for a period of five years which
was valid from August 11, 2006 to August 10, 2011. The certificate of registration was, thereafter, renewed in
2011 for a further period of five years and the renewed certificate was valid till August 10, 2016.
SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited (hereinafter
referred to as ‘CDSL’) informing that it has terminated the agreement with the Noticee w.e.f April 04, 2016
due to non- compliance on the part of JCSL with the bye-laws of CDSL. CDSL vide the said letter also
requested SEBI to cancel the certificate of registration granted to the Noticee at act as a Depository
Participant with immediate effect. Thereafter, National Securities Depositories Limited (hereinafter
referred to as “NSDL”) vide its letter dated April 22, 2016 informed SEBI that it has also terminated the
agreement with JCSL w.e.f May 23, 2016 due to the non-compliance on part of JCSL with the various bye-
laws of NSDL.
Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was alleged that the
Noticee was no longer eligible to be admitted as a participant of depository and had failed to inform SEBI about
the termination of its agreements with CDSL and NSDL.
Order
The failure on the part of the Noticee to inform SEBI of the termination of the agreement by the depositories
would have to be considered as a violation of Clause 14 of the Code of Conduct for the DPs.
SEBI, in exercise of powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992
read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, cancelled the certificate of
registration granted to the Noticee / Jaypee Capital Services Limited (SEBI Registration No. IN-DP-
NSDL-291-2008/IN-DP- CDSL-368- 2006) with immediate effect.
Lesson 3 • Depositories Act, 1996 93

LESSON ROUND-UP

• The legal framework for depository system in the Depositories Act, 1996 provides for the establishment
of single or multiple depositories.
• There are two Depositories functioning in India, namely the National Securities Depository Limited
(NSDL) and the Central Depository Services (India) Limited (CDSL).
• All the securities held by a depository are dematerialized and are in a fungible form.
• In the depository system, the ownership and transfer of securities takes place by means of electronic book
entries.
• A Depository Participant (DP) is the representative (agent) of the investor in the depository system
providing the link between the Company and investor through the Depository.
• The Depository Act, 1996 and SEBI (Depositories and Participants) Regulations, 2018 regulates the
function of Depositories and participants.
• Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018 provides that every issuer shall
submit audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company
Secretary or a qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital,
listed capital and capital held by depositories in dematerialized form, the details of changes in share
capital during the quarter and the in-principle approval obtained by the issuer from all the stock exchanges
where it is listed in respect of such further issued capital.
• Both the Depositories in India have allowed Practising Company Secretaries to undertake internal audit
of the operations of Depository Participants (DPs).
• Depository Participants are subject to concurrent audit by a Practising Company Secretary or qualified
Chartered Accountant. Concurrent Audit includes audit of process of demat account opening, control and
verification of delivery instruction slips.

GLOSSARY

Beneficial The true owner of a security or property, which may be registered in another
owner (BO) name means a person whose name appears as such on the records of the depository.
ISIN International Securities Identification Number (ISIN) is a code that uniquely identifies a
specific security, which is allocated at the time of admitting the same in the depository system.
Joint Account It means a bank or a demat account in the names of more than one person (maximum three
in case of a demat account). All the account holders must give their signature to operate a
demat account held jointly.
Pledge Any person having a demat account can pledge securities against loan / credit facilities
extended by a pledgee, who too has a demat account with a DP.
RRN A system generated unique number when a remat request is set up.
Transmission Transmission of securities denotes a process by which ownership of securities is transferred to
a legal heir or to some other person by operation of law. In case of transmission transfer deed
and stamp duty are not required.
94  Lesson 3 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Briefly outline the concept of Depository system in India.
2. “The holding of securities in dematerialise form is not mandatory”. Explain the relevant provisions with
reference to the Depositories Act.
3. Enumerate the enquiry, inspection and penalties under the Depositories Act, 1996.
4. Elucidate the procedure for dematerialisation of shares.
5. ‘‘Depository is to indemnify loss caused to the beneficial owner due to the negligence of the depository or
the depository participant’’. Examine
6. Depository participant provides link between the company and investors. Comment
7. Briefly explain the role of a Practising Company Secretary in concurrent audit of depository participants.
8. Write short note on:
(a) Fungibility
(b) Models of Depository
(c) Internal Audit of Depository Participants
(d) Concurrent Audit
(e) Rematerialisation
(f) Reconciliation of share capital under Regulation 75 of the SEBI (Depositories and Participants)
Regulations, 2018.

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI FAQs
• Depositories Bye-Laws
• SEBI Annual Reports
• SEBI Monthly Bulletin

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/
• https://nsdl.co.in/
• https://www.cdslindia.com/
 An Overview of SEBI (Issue
of Capital and Disclosure
Lesson 4 Requirements) Regulations, 2018

Key Concepts One Learning Objectives

Should Know
To understand:
• Primary & • Evolution of SEBI (Issue of Capital and Disclosure Requirements)
Secondary Markets Regulations, 2015
• Initial Public Offer • Conceptual understanding of important terminologies
• Further Public • Various types of issues in capital market
Offer
• Modes of raising funds and compliance requirements
• Private Placement
• Key Provisions like Draft offer letter, prospectus etc.
• Preferential • Eligibility requirements for issuing various instruments
Allotment
• Lock-in-period and its requirements
• Warrants
• Fast-track issue
• Intermediaries
• Regulatory requirements for IPO of Indian Depository Receipts
• Lead Manager
• Regulatory framework for IPO by Small and Medium Enterprises
• Underwriting • Provisions for listing on Innovators Growth Platform
• Offer Document
• Qualified
Institutional Buyer Lesson Outline
• Retail Individual • Introduction • Rights Issue
Investor • Genesis • Preferential Issue
• Application • Types of Issues • Qualified Institutions Placement
Supported by • Applicability of the SEBI (Issue • Initial Public Offer of Indian
Blocked Amount of Capital and Disclosure Depository Receipts
(ASBA) Requirements) Regulations, 2018 • Rights Issue of Indian
• Book Building • Meaning of Draft Offer Depository Receipts
Document, Letter Of Offer and • Initial Public Offer by Small and
• Innovators Growth Red Herring Prospectus Medium Enterprises
Platform • Initial Public Offer/Further • Innovators Growth Platform
• Selling Public Offering
• Bonus Issue
shareholders • Eligibility requirements to be
• Power to Relax Strict
complied with for IPO
Enforcement of the Regulations
• Eligibility criteria for Further
• Procedure for issue of securities
Public Offer (FPO)
• Role of Company Secretary
• Promoters’ Contribution
• LESSON ROUND-UP
• Lock-in Requirements
• GLOSSARY
• Other requirements for IPO &
FPO • TEST YOURSELF
• Fast Track FPO • LIST OF FURTHER READINGS
• Exit Opportunity to Dissenting • OTHER REFERENCES
Shareholders
 96  Lesson 4 • EP-SLCM

Regulatory Framework
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• Securities Contracts (Regulation) Rules, 1957

INTRODUCTION
Management of a public issue involves co-ordination of activities and co-operation of a number of agencies such
as managers to the issue, underwriters, brokers, registrar to the issue, solicitors/legal advisors, printers, publicity
and advertising agents, financial institutions, auditors and other Government/Statutory agencies such as Registrar
of Companies, Reserve Bank of India, SEBI etc. The whole process of issue of shares can be divided into two parts
(i) pre-issue activities and (ii) post issue activities. All activities beginning with the planning of capital issue till
the opening of the subscription list are pre-issue activities while, all activities subsequent to the opening of the
subscription list may be called post issue activities. As the demat shares are being admitted for dealings on the
stock exchanges, the securities can be issued only with the purpose of allotting the shares in Dematerialised form.
GENESIS
India ushered from a merit based regime (Controller of Capital Act) to disclosure based regime under SEBI. Under
Controller of Capital Issues (CCI) issue size and price were approved by CCI after examining the various parameters/
ratios. With the repeal of Capital Issues (Control) Act, 1947 all the guidelines, notifications, circulars etc. issued by
the office of the Controller of Capital Issues became defunct. The SEBI was given the mandate to regulate issuance of
securities, namely the guidelines for Disclosure and Investor Protection, 1992. Later, the SEBI issued a compendium
containing consolidated Guidelines, circulars, instructions relating to issue of capital effective from January 27,
2000. The compendium titled the SEBI (Disclosure and Investor Protection) Guidelines, 2000 replaced the original
Guidelines issued in June 1992 and clarifications thereof. On August 26, 2009 the SEBI rescinded the SEBI (DIP)
Guidelines, 2000 and notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
To align the provisions under ICDR Regulations with Companies Act, 2013 and allied regulations, SEBI issued a
consultation paper detailing the suggestive changes under various fund-raising options by listed issuers. Between
2009-till date, numerous amendments have been made to the ICDR Regulations. Different types of offerings to
raise funds in the primary market have been introduced. Further, there have been changes in market practices and
regulatory environment over a period of time. A need was thus felt to review and realign the ICDR Regulations
with these developments and to ensure that they reflect the best practices adopted globally. In view of the same,
the SEBI constituted the Issue of Capital & Disclosure Requirements Committee (“ICDR Committee”) under the
Chairmanship of Shri Prithvi Haldea in June, 2017, to review the ICDR Regulations with the following objectives:
a) To simplify the language and complexities in the regulations;
b) To incorporate changes/new requirements which have occurred due to change in market practices and
regulatory environment; and
c) To make the regulations more readable and easier to understand.

ICDR Committee Suggestions

The ICDR Committee suggested certain policy changes. These suggestions were also taken to the Primary Market
Advisory Committee (PMAC) of the SEBI which comprises of eminent representatives from the Ministry of Finance,
Industry, Market Participants, academicians, the Institute of Chartered Accountants of India and the Institute of
Company Secretaries of India. The recommendations of the PMAC were incorporated in the draft of the proposed
ICDR Regulations. In addition to the public consultation, the draft regulations along with the key policy changes
were also forwarded to the Ministry of Finance (MoF), Ministry of Corporate Affairs (MCA) and the Reserve Bank
of India (RBI) for their comments. The provisions of Companies Act, 1956 (wherever applicable), Companies Act,
2013, the SEBI (Substantial Acquisition & Substantial Takeover) Regulations, 2011, the SEBI (Share Based Employee
Benefits) Regulations, 2014 have been suitably incorporated.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 97

SEBI vide its notification dated 11th September, 2018 issued the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018 (‘ICDR Regulations, 2018’) which was effective from 60th day of its
publication in Official Gazette.

Chapter as per ICDR Regulations, 2018 Particulars

I. Preliminary
II. Initial Public Offer (IPO) on Main Board
III. Right Issue
IV. Further Public Offer
V. Preferential Issue
VI. Qualified Institutions Placement
VII. IPO of Indian Depositary Receipts (IDR)
VIII. Rights Issue of IDR
IX. IPO by Small and Medium Enterprises (SME)
X. Innovators Growth Platform (IGP)
XI. Bonus Issue
XI-A. Power to Relax Strict Enforcement of the Regulations
XII. Miscellaneous

TYPES OF ISSUES

Initial Further
Public Offer Public Offer

Qualified
Institutional
Placement
Types of Bonus
Issues Issue

Preferential
Issue
Rights Issue
of Securities
Private
Placement

Primary Market deals with those securities which are issued to the public for the first time. Primary Market provides
an opportunity to issuers of securities, Government as well as corporates, to raise financial resources to meet their
requirements of investment and/or discharge their obligations.
The following are the various types of issues in the capital market -
• Initial Public Offer: It means an offer of specified securities by an unlisted issuer to the public for subscription
and includes an offer for sale of specified securities to the public by any existing holder of such securities in
an unlisted issuer. In order to qualify as an Initial public offer, the offer of securities must be by an unlisted
issuer company and such an issue shall be made to the public and not to the existing shareholders of the
unlisted issuer company.
 98  Lesson 4 • EP-SLCM

• Further Public Offer (FPO): It is an offer of specified securities by a listed issuer company to the public for
subscription. In other words, another issue to the public other than its existing shareholders or to a select
group of persons by the listed persons is referred to as a Further Public offer.
• Rights Issue: Rights issue of securities is an issue of specified securities by a company to its existing
shareholders as on a record date in a predetermined ratio.
• Preferential Allotment: It refers to an issue, where a listed issuer issues shares or convertible securities,
to a select group of persons on a private placement basis it is called a preferential allotment. The issuer is
required to comply with various provisions which inter alia include pricing, disclosures in the notice, lock in
etc., in addition to the requirements specified in the Companies Act, 2013.
• Qualified Institutional Placement (QIP): It refers to an issue by a listed entity to only qualified institutional
buyers in accordance of Chapter VI of the SEBI (ICDR) Regulations, 2018.
• Bonus Issue: Bonus issue of shares means additional shares issued by the Company to its existing shareholders
to reward for their royalty and is an opportunity to enhance the shareholders wealth. The bonus shares are
issued without any cost to the Company by capitalizing the available reserves.

APPLICABILITY OF THE SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS)

REGULATIONS, 2018 [REGULATION 3]

RS. 50 crore or more

MEANING OF DRAFT OFFER DOCUMENT, LETTER OF OFFER AND RED HERRING PROSPECTUS
Draft Offer Documents

“Draft Offer document” means the offer document in draft stage. The draft offer documents are filed with the SEBI,
at least 30 days prior to the filing of the Offer Document with ROC/Stock Exchanges. The SEBI may specify changes,
if any, in the Draft Offer Document and the Issuer or the Lead Merchant banker shall carry out such changes in the
draft off document before filing the Offer document with ROC/SEs. The Draft Offer document is available on the
SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with the SEBI.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 99

Offer Document
“Offer document” means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a right
issue, which is filed with Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the
relevant information to help an investor to make his/ her investment decision.
Red Herring Prospectus (RHP)
“Red Herring Prospectus” is a prospectus, which does not have details of either price or number of shares being
offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper
and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares
are determined later. An RHP for an FPO can be filed with the ROC without the price band and the issuer, in such a
case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue.
In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding
process is completed. Hence, such details are not shown in the RHP filed with ROC as per the Companies Act, 2013.
Only on completion of the bidding process, the details of the final price are included in the offer document. The offer
document filed thereafter with ROC is called a prospectus.

INITIAL PUBLIC OFFER / FURTHER PUBLIC OFFER

A public issue of specified securities by an issuer can be either an Initial Public Offer (IPO) or a Further Public Offer
(FPO). An IPO is done by an unlisted issuer while a FPO is done by a listed issuer. As per the ICDR Regulations, the
issuer shall comply with the following conditions before making an IPO of specified securities. The conditions need
to be satisfied both at the time of filing the draft offer document (commonly referred to as the Draft Red Herring
Prospectus) and the time of registering or filing the final offer document (commonly referred to as the Prospectus)
with the Registrar of Companies.

ELIGIBILITY REQUIREMENTS TO BE COMPLIED WITH FOR IPO

Entities not eligible to make an initial public offer [Regulation 5(1) & (2)]

a) If the issuer, any of its promoters, promoter

group, selling shareholders* are debarred from
ENTITIES NOT ELIGIBLE TO MAKE AN IPO

accessing the capital market by the SEBI.

b) If any of the promoters or directors of the

issuer is a promoter or a director of any other
company

c) If the issuer or any of its promoters or directors

is a willful defaulter.

d) If any of the promoters or directors of the

issuer is a fugitive offender.

e) If there are any outstanding convertible securities or any

other right which would entitled any person with any
option to receive equity shares of the issuer.

Note: The restrictions under (a) and (b) above shall not apply to the persons or entities mentioned therein, who were
debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the draft offer
document with the SEBI.

* “selling shareholder(s)” means any shareholder of the issuer who is offering for sale the specified securities in
a public issue in accordance with these Regulations.
 100  Lesson 4 • EP-SLCM

Non applicability of Regulation 5(1) & (2)

Eligibility requirements for an initial public offer [Regulation 6(1) & 6(2)]
An issuer shall be eligible to make an IPO only if:
a. the issuer has net tangible assets of atleast Rs. 3 crores, calculated on a restated and consolidated basis, in
each of the preceding three full years of (12 months each) of which not more than 50% is held in monetary
assets.
However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or
made firm commitments to utilize such excess monetary assets in its business or project. This limit of 50%
shall not apply in case of IPO is made entirely through an offer for sale.
b. the issuer has an average operating profit of at least Rs.15 crores, calculated on a restated and consolidated
basis, during the three preceding 3 years, with operating profit in each of the three preceding years;
c. the issuer has a networth of atleast Rs.1 crore in each of the preceding three full years, calculated on a restated
and consolidated basis.
In case the issuer has changed its name within the last one year, atleast 50% of the revenue calculated on
a restated and consolidated basis, for the preceding one full year has been earned by it from the activity
indicated by the new name.
In case the Eligibility conditions are not met-
An issuer not satisfying the above-mentioned conditions shall be eligible to make an initial public offer only if the
issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to
qualified institutional buyers (QIBs) and to refund the full subscription money if it fails to do so.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 101

Eligibility Criteria for Main Board Listing as per SEBI (ICDR), 2018

Option I Net Tangible Assets of at Average operating Net worth of at least Rs.
least Rs. 3 crores (for past profit of Rs. 15 crores in 1 crore in each of the
Net tangib assets,
3 years) Not more than preceding three years (of preceding 3 full years
profitability and net worth = + twelve months each), with +
50% in monetary assets
track record
operating profit in each of
these preceding three years

Option II Issue through book If QIB part is not

building route with at subscribed, the issue
No net tangible assets, least 75% allotted to will fail even if it is
profitability and net = QIBs + oversubscribed on
worth track record overall basis

The above eligibility conditions are explained by the following Example:

Eligibility Condition No: 1
In case the issuer is proposing to file its draft offer document with the SEBI in August 2018, then the net tangible
assets for the last 3 full years of 12 months each shall be atleast Rs.3 crores and not more than 50% of the same
shall be held in monetary assets. In the following table, it is seen that the net tangible assets is more than Rs.
3 crores in the year ended March 31, 2014, March 31, 2015 and March 31, 2016. Further monetary assets
constitute less than 50% of the net tangible assets in each of the three previous financial years:
(Rs. in lacs)

Year Ended March 31 2014 2015 2016 2017 2018

Net Tangible Assets 1448.56 2275.53 2532.60 3510.33 4657.50
Monetary Assets 292.76 61.97 108.25 302.33 288.17
Monetary Assets as a percentage 20.21 2.72 4.27 8.61 6.19
of Net Tangible Assets
“Net Tangible Assets” mean the sum of all net assets of the issuer, excluding intangible assets as defined in
Accounting Standard 26 (AS 26) or Indian Accounting Standard (Ind AS) 38, as applicable, issued by the Institute
of Chartered Accountants of India.
Eligibility Condition No: 2
In case the issuer proposes to file its draft offer document with the SEBI in August 2018, then the average
operating profit for three preceding years shall be atleast Rs 15 crores. Further, the company shall have
operating profit in each of the three years. The average of the profits for the 3 preceding years is Rs.15.75 crores
which is more than the prescribed average of Rs.15 crores.
(Rs. in lacs)

Year Ended March 31 2016 2017 2018

Operating Profit 1630.31 1232.65 1864.63
 102  Lesson 4 • EP-SLCM

Eligibility Condition No: 3

In case the issuer proposes to file its draft offer document with the SEBI in August 2018 then the networth shall
be atleast Rs. 1 crore in each of the last 3 financial years. In the following table, it is seen that the company has
a networth of Rs. 1 crore in each of the last three financial years prior to the date of the filing of the draft offer
document with the SEBI.
(Rs. in lacs)

Year Ending March 31 2014 2015 2016 2017 2018

Equity Share Capital 1448.56 2000.00 2000.00 2000.00 2022.00
Share Application Money 0.00 0.00 0.00 0.00 165.00
Reserves & Surplus 0.00 304.52 590.02 1430.47 2742.71
Total 1448.56 2304.52 2590.02 3595.47 4764.71
Less : Misc. Expenses not
0.00 0.00 0.00 0.00 0.00
written off
Less: Deferred Tax Assets 0.00 0.00 13.45 0.00 61.08
Net worth 1448.56 2304.52 2576.57 3595.47 4703.63

Since the all the above eligibility conditions are satisfied in the example and there is no change in the name of
the company, this company is eligible to make an Initial Public Offering.
However, in case an issuer does not satisfy the eligibility conditions stipulated above, it may make an Initial
Public Offer through the book building process and further undertake to allot atleast 75% of the net offer to
the public to qualified institutional buyers and to refund full subscription money if it fails to do so. [Regulation
6(2)]

General Conditions [Regulation 7]

• An issuer making an initial public offer shall ensure that:
a) it has made an application to one or more stock exchanges to seek an in-principle approval for listing
of its specified securities on such stock exchanges and has chosen one of them as the designated stock
exchange;
b) it has entered into an agreement with a depository for dematerialisation of the specified securities
already issued and proposed to be issued;
c) all its specified securities held by the promoters are in dematerialised form prior to filing of the offer
document;
d) all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited;
e) it has made firm arrangements of finance through verifiable means towards 75% of the stated means
of finance for a specific project proposed to be funded from the issue proceeds, excluding the amount
to be raised through the proposed public issue or through existing identifiable internal accruals.
• The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document
and the offer document shall not exceed 25% of the amount being raised by the issuer.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 103

Explanation:
(i) “Project” means the object for which monies are proposed to be raised to cover the objects of the issue.
(ii) Partnership Firms
In case of an issuer which had been a partnership firm or a limited liability partnership, the track record of
distributable profit of the partnership firm or the LLP shall be considered only if the financial statements of the
partnership business for the period during which the issuer was a partnership firm conform to and are revised in
the format prescribed for companies under the Companies Act, 2013 and also comply with the following:
(a) adequate disclosures are made in the financial statements as required to be made in the format prescribed
under the Companies Act, 2013;
(b) the financial statements are duly certified by a Chartered Accountant stating that:
(i) the accounts and the disclosures made are in accordance with the provisions of Schedule III of the
Companies Act, 2013
(ii) the accounting standards of the Institute of Chartered Accountants of India have been followed;
(iii) the financial statements present a true and fair view of the firm’s accounts.

(iii) Spinning off of a division

In case of an issuer formed out of a division of an existing company, the track record of distributable profits of
the division spun-off shall be considered only if the requirements regarding financial statements as provided for
partnership firms and LLPs are complied with.

Additional conditions for an offer for sale [Regulation 8]

Shares must be fully paid-up.

Shall be held by the sellers for a period of at least one year

prior to the filing of the draft offer document.

The holding period of such convertible securities, including depository

receipts, as well as that of resultant equity shares together shall be
considered for the purpose of calculation of one year period.

In case the equity shares received Further, such holding period of one year shall be required
on conversion or exchange of fully to be complied with at the time of filing of the draft offer
paid-up compulsorily convertible document.
securities including depository
receipts are being offered for sale

If the equity shares arising out of the conversion or exchange of the fully paid-up
compulsorily convertible securities are being offered for sale, the conversion or exchange
should be completed prior to filing of the offer document (i.e. red herring prospectus in the
case of a book built issue and prospectus in the case of a fixed price issue), provided full
disclosures of the terms of conversion or exchange are made in the draft offer document.
 104  Lesson 4 • EP-SLCM

The requirement of holding equity shares for a period of one year shall not apply:

Non-Applicability

The offer for sale of a government company or statutory authority or corporation

or any special purpose vehicle set up and controlled by any one or more of them,
which is engaged in the infrastructure sector;

Equity shares offered for sale were acquired pursuant to any scheme approved by a High Court
under the sections 391 to 394 of Companies Act, 1956, or approved by a tribunal or the Central
Government under the sections 230 to 234 of Companies Act, 2013, as applicable, in lieu of
business and invested capital which had been in existence for a period of more than one year
prior to approval of such scheme;

If the equity shares offered for sale were issued under a bonus issue on securities held for a
period of at least one year prior to the filing of the draft offer document with the SEBI and
further subject to the following:

Such specified securities being issued out of

free reserves and share premium existing in the Such equity shares not being issued by utilisation
books of account as at the end of the financial of revaluation reserves or unrealized profits of the
year preceding the financial year in which the AND issuer.
draft offer document is filed with SEBI;

Issue of Warrants [Regulation 13]

An issuer shall be eligible to issue warrants in an initial public offer subject to the following:

Tenure of such warrants shall not exceed eighteen In case the warrant holder does not exercise the
months from the date of their allotment in the option to take equity shares against any of the
initial public offer warrants held by the warrant holder, within three
months from the date of payment of consideration,
such consideration made in respect of such
warrants shall be forfeited by the issuer

Eligibility

Price or formula for determination of exercise A specified security may have one or more
price of the warrants shall be determined upfront warrants attached to it
and disclosed in the offer document and atleast
25 % of the consideration amount based on the
exercise price shall also be received upfront
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 105

In case the exercise price of warrants is based on a formula, 25 % consideration amount based on the cap price of
the price band determined for the linked equity shares or convertible securities shall be received upfront.

ELIGIBILITY CRITERIA FOR FURTHER PUBLIC OFFER (FPO)

Entities not eligible to make a FPO [Regulation 102]
An issuer shall not be eligible to make a FPO of specified securities:

(a) If the issuer, any (b) If any of the (C) If the issuer or (d) If any of the
of its promoters, promoters or any of its promoters promoters or
promoter group or directors of the or directors is a directors of the
directors, selling issuer is a promoter willful defaulter issuer is a fugitive
shareholders are or a director of any offender
debarred from other company
accessing the capital which is debarred
market from accessing
capital market by the
SEBI

Note : The restrictions under (a) and (b) above shall not apply to the persons or entities mentioned therein, who
were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the
draft offer document with the SEBI.
Eligibility requirements for FPO [Regulation 103]
• An issuer may make a FPO if it has changed its name within the last one year and atleast 50% of the revenue
in the preceding one full year has been earned from the activity suggested by the new name.
• If an issuer does not satisfy the above-mentioned condition, it may make a FPO only, if, the issue is made
through the book-building process and the issuer undertakes to allot at least 75% of the net offer, to qualified
institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to
qualified institutional buyers.
General Conditions for FPO [Regulation 104]
An issuer making an FPO shall ensure that:

An application is made for listing of the specified securities to one or more of the recognized
stock exchanges and choose one of the exchanges as the designated stock exchange.

An agreement is entered into with a depository for dematerialization of specified

securities already issued and proposed to be issued.

All its existing partly paid up equity shares have either been fully paid up or have been
forfeited. In other words, if a company has partly paid up equity shares, they shall not be
permitted to make a public issue

The issuer should make firm arrangements of finance through verifiable means towards
75% of the stated means of finance for the specific project proposed to be funded from
the issue proceeds, excluding the amount to be raised through the proposed public issue
or through existing identifiable internal accruals.

Amount for General Corporate Purposes as mentioned in objects of the issue in the draft
offer document and the offer document shall not exceed 25% of the amount being raised
by the issuer.
 106  Lesson 4 • EP-SLCM

Issue of Warrants [Regulation 111]

An issuer shall be eligible to issue warrants in a further public offer subject to the following conditions:
• the tenure of such warrants shall not exceed eighteen months from the date of their allotment in the public
issue;
• a specified security may have one or more warrants attached to it;
• the price or formula for determination of exercise price of the warrants shall be determined upfront and at
least 25% of the consideration amount based on the exercise price shall also be received upfront. However, in
case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price
of the price band determined for the linked equity shares or convertible securities shall be received upfront.
• in case the warrant holder does not exercise the option to take equity shares against any of the warrants held
by the warrant holder, within three months from the date of payment of consideration, such consideration
made in respect of such warrants shall be forfeited by the issuer.

PROMOTERS’ CONTRIBUTION
In Case of IPO [Regulation 14]

The promoters of the issuer shall hold at least 20% of the post-issue capital.
However, in case the post-issue shareholding of the promoters is less than 20%., alternative investment funds
or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance
companies registered with IRDA may contribute to meet the shortfall in minimum contribution as specified for the
promoters, subject to a maximum of ten percent of the post-issue capital without being identified as promoter(s).
Non applicability
The requirement of minimum promoters’ contribution shall not apply in case an issuer does not have any identifiable
promoter.

Minimum Promoters’ Contribution

The minimum promoters’ contribution shall be as follows:

Promoters shall contribute 20%., as the case may be, either by way of equity shares including SR equity
shares held, if any, or by way of subscription to convertible securities.
If the price of the equity shares allotted pursuant to conversion is not pre-determined and not disclosed in
the offer document, the promoters shall contribute only by way of subscription to the convertible securities
being issued in the public issue and shall undertake in writing to subscribe to the equity shares pursuant to
conversion of such securities.

For issue of convertible securities which are For initial public offer of convertible debt
convertible or exchangeable on different dates and instruments without a prior public issue of
if the promoters’ contribution is by way of equity equity shares
shares (conversion price being pre-determined)
the promoters shall bring in a contribution of at least
such contribution shall not be at a price lower than 20% of the project cost in the form of equity shares,
the weighted average price of the equity share capital subject to contributing at least 20% of the issue size
arising out of conversion of such securities. from their own funds in the form of equity shares
However, if the project is to be implemented in stages, the promoters’ contribution shall be with respect to total
equity participation till the respective stage vis-à-vis the debt raised or proposed to be raised through the public
issue.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 107

Promoters’ Contribution to be brought in before Public Issue Opens [Regulation 14(4)]

• Timing: The promoters shall bring full amount of the promoters’ contribution including premium at least
one day prior to the date of opening of the issue. In case the promoters have to subscribe to equity shares or
convertible securities towards minimum promoters’ contribution, the amount of promoters’ shall be kept in
an escrow account with a scheduled commercial bank, which shall be released to the issuer along with the
release of the issue proceeds. However, where the promoters’ contribution has already been brought in and
utilised, the issuer shall give the Cash flow statement disclosing the use of such funds in the offer document.
• Pro-rata basis: Where the minimum promoters’ contribution is more than Rs.100 crore and the initial public
offer is for partly paid shares, the promoters shall bring in at least Rs.100 crore before the date of opening
of the issue and the remaining amount may be brought on a pro-rata basis before the calls are made to the
public.
Promoters’ contribution shall be computed on the basis of the post-issue expanded capital:
(a) assuming full proposed conversion of convertible securities into equity shares;
(b) assuming exercise of all vested options, where any employee stock options are outstanding at the time
of initial public offer.

Securities Ineligible for Minimum Promoters’ Contribution [Regulation 15]

For the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:

(a) Specified securities acquired during the preceding three years, if (b) specified securities acquired by
these are:- promoters and AIFs/ FVCIs / scheduled
• acquired for consideration other than cash and revaluation of commercial banks/ PFIs/ insurance
assets or capitalisation of intangible assets is involved in such companies during the preceding one
transaction; or year at a price lower than the price
• resulting from a bonus issue by utilisation of revaluation reserves at which specified securities are being
/unrealised profits of the issuer/from bonus issue against equity
offered to public in the initial public offer.
shares which are ineligible for minimum promoters’ contribution.

(c) promoters and AIFs during the preceding one year at a price less
than the issue price, against funds brought in by them during that period,
in case of an issuer formed by conversion of one or more partnership (d) specified securities pledged with any
firms/LLPs, where the partners of the erstwhile partnership firms/ creditor.
LLPs are the promoters of the issuer and there is no change in the
management. *

* In clause (c), specified securities, alloted to promoters against capital existing in such firms for a periodof
more than one year on a continuous basis, shall be eligible.
However, Clause (b) shall not apply:
• if the promoters and AIFs, as applicable pay to the issuer, the difference between the price at which specified
securities are offered in the initial public offer and the price at which the specified securities had been
acquired;
• if such specified securities are acquired in terms of the scheme under section 391 to 394 of the Companies
Act, 1956 or sections 230-240 of the Companies Act, 2013, as approved by a High Court or a tribunal or the
Central Government, as applicable, by promoters in lieu of business and invested capital that had been in
existence for a period of more than one year prior to such approval;
 108  Lesson 4 • EP-SLCM

• to an initial public offer by a government company, statutory authority or corporation or any special purpose
vehicle set up by any of them, which is engaged in infrastructure sector;
Specified securities referred above shall be eligible for the computation of promoters’ contribution, if such
securities are acquired pursuant to a scheme which has been approved by a High Court under sections 391- 394
of the Companies Act, 1956 or approved by Tribunal or the Central Government under sections 230-240 of the
Companies Act, 2013.

In Case of FPO

Exemption from Requirement of Promoters’ Contribution [Regulation 112]

The requirements of minimum promoters’ contribution shall not apply in case of:

(a) An issuer which does not have any identifiable promoter;

(b) where the equity shares of the issuer are frequently traded on a stock
exchange for a period of at least three years immediately preceding
the reference date, and:
• the issuer has redressed at least ninety five per cent of the
complaints received from the investors till the end of the quarter
immediately preceding the month of the reference date, and;
• the issuer has been in compliance with the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 for a minimum
period of three years immediately preceding the reference date

Minimum Promoters’ Contribution [Regulation 113]

• The promoters shall contribute in the public issue as follows:
a) either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital;
b) in case of a composite issue (i.e., further public offer cum rights issue), either to the extent of 20%
of the proposed issue size or to the extent of 20% of the post-issue capital excluding the rights issue
component.
• In case of a public issue or composite issue of convertible securities, the minimum promoters’ contribution
shall be as follows:
a) the promoters shall contribute 20%, as the case may be, either by way of equity shares or by way of
subscription to the convertible securities. However, if the price of the equity shares allotted pursuant
to conversion is not pre-determined and not disclosed in the offer document, the promoters shall
contribute only by way of subscription to the convertible securities being issued in the public issue and
shall undertake in writing to subscribe to the equity shares pursuant to conversion of such securities.
b) in case of any issue of convertible securities which are convertible or exchangeable on different dates
and if the promoters’ contribution is by way of equity shares (conversion price being pre- determined),
such contribution shall not be at a price lower than the weighted average price of the equity share
capital arising out of conversion of such securities.
• In case of a further public offer or composite issue where the promoters contribute more than the stipulated
minimum promoters’ contribution, the allotment with respect to excess contribution shall be made at a price
determined in terms of the provisions relating to pricing of frequently trading shares or the issue price,
whichever is higher.
• In case the promoters have to subscribe to equity shares or convertible securities towards promoters’
contribution, the promoters shall satisfy the requirements of at least one day prior to the date of opening
of the issue and the amount of promoters’ contribution shall be kept in an escrow account with a scheduled
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 109

commercial bank and shall be released to the issuer along with the release of the issue proceeds.
Further, where the minimum promoters’ contribution is more than one hundred crore rupees and the further
public offer is for partly paid shares, the promoters shall bring in at least one hundred crore rupees before the
date of opening of the issue and the remaining amount may be brought on a pro-rata basis before the calls are
made to the public.
• The SR equity shares of promoters, if any, shall be eligible towards computation of minimum promoters’
contribution.

“Weighted average price”:

(a) “weight” means the number of equity shares arising out of conversion of such specified securities into
equity shares at various stages;

(b) “price” means the price of equity shares on conversion arrived at after taking into account predetermined
conversion price at various stages.

Securities ineligible for minimum promoters’ contribution [Regulation 114]

For the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:
(a) specified securities acquired during the preceding three years, if these are:
i) acquired for consideration other than cash and revaluation of assets or capitalisation of intangible
assets is involved in such transaction; or
ii) resulting from a bonus issue by utilisation of revaluation reserves or unrealised profits of the issuer or
from bonus issue against equity shares which are ineligible for minimum promoters’ contribution;
(b) specified securities pledged with any creditor other than those for borrowings by the issuer or its subsidiaries.
Specified securities referred shall be eligible for the computation of promoters’ contribution, if such securities
are acquired pursuant to a scheme which has been approved by the High Court under section 391 to 394 of
the Companies Act, 1956 or approved by a tribunal or the Central Government under section 230 to 234 of the
Companies Act, 2013.
LOCK-IN REQUIREMENTS

For Securities Held by Promoters [Regulations 16 & 115]

In a public issue, the specified securities held by promoters shall be locked-in for the period stipulated hereunder:

The promoters contribution including contribution made by AIFs or FVCIs or scheduled

Promoters commercial banks or PFIs or insurance companies registered with IRDA, shall be locked-
Contribution in for a period of 3 years from the date of commencement of commercial production or
from the date of allotment in the IPO/FPO, whichever is later

Promoters’ holding
in excess of Promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for
minimum promoters’ a period of 1 year from the date of allotment in the initial public offer.
contribution

SR equity shares shall be under lock-in until conversion into equity shares having voting
In case of SR Equity rights same as that of ordinary shares or shall be locked-in for a period specified above,
whichever is later. In case of FPO, the SR equity shares shall be under lock-in until their
Shares conversion to equity shares having voting rights same as that of ordinary shares, provided
they are in compliance with the other provisions of these regulations.
 110  Lesson 4 • EP-SLCM

“Date of commencement of commercial production” means the last date of the month in which commercial
production of the project in respect of which the funds raised are proposed to be utilized as stated in the
offer document, is expected to commence.

Securities held by persons other than Promoters [Regulation 17]

The entire pre-issue share capital, held by persons other than the promoters, shall be locked-in for a period of one
year from the date of allotment in the initial public offer.
The provisions of this regulation shall not apply, in case of:
(i) Equity shares allotted to employees under employee stock option or employee stock purchase scheme prior
to initial public offer, if the issuer has made full disclosures with respect to such option; and
(ii) Equity shares held by an employee stock option trust or transferred to the employees by an employee stock
option trust pursuant to exercise of options by the employees, in accordance with the employee stock option
plan or employee stock purchase scheme;
(iii) Equity shares held by a venture capital fund or AIF of category I & II or a FVCI and such equity shares shall be
locked-in for a period of at least one-year from the date of purchase by the venture capital or AIF or FVCI.

For Point No. (iii), in case such equity shares have resulted pursuant to conversion of fully paid- up compulsorily
convertible securities, the holding period of such convertible securities as well as that of resultant equity
shares together shall be considered for the purpose of calculation of one year period and convertible securities
shall be deemed to be fully paid- up, if the entire consideration payable thereon has been paid and no further
consideration is payable at the time of their conversion.

Lock-in of party-paid securities [Regulations 19 & 117]

If the specified securities which are subject to lock-in are partly paid-up and the amount called-up on such specified
securities is less than the amount called-up on the specified securities issued to the public, the lock- in shall end
only on the expiry of three years after such specified securities have become pari passu with the specified securities
issued to the public.
Inscription or recording of non-transferability [Regulations 20 & 118]
The certificates of specified securities which are subject to lock-in shall contain the inscription “non-transferable”
and specify the lock-in period and in case such specified securities are dematerialised, the issuer shall ensure that
the lock-in is recorded by the depository.
Pledge of Locked In Shares [Regulations 21 & 119]
Specified securities, except SR equity shares, held by the promoters and locked in may be pledged as collateral
security for a loan granted by a scheduled commercial bank or a public financial institution or a systemically
important non-banking finance company or a housing finance company, subject to the following:
a) if the specified securities are locked-in as per Regulation 16 (a)- Lock-in of specified securities held
by the promoters, the loan has been granted to the issuer company or its subsidiary/subsidiaries
for the purpose of financing one or more of the objects of the issue and pledge of specified securities
is one of the terms of sanction of the loan.
b) if the specified securities are locked-in as per Regulation 16 (b)- Lock-in of specified securities
held by the promoters and the pledge of specified securities is one of the terms of sanction of the
loan.
However, such lock-in shall continue pursuant to the invocation of the pledge and such transferee shall not be
eligible to transfer the specified securities till the lock-in period stipulated in these regulations, has expired.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 111

Transferability of locked-in specified securities [Regulations 22 & 120]

Subject to the provisions of the SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011, the
specified securities except SR equity shares held by the promoters and locked-in as per regulation 115 may be
transferred to another promoter or any person of the promoter group or a new promoter or a person in control of
the issuer.
However, lock-in on such specified securities shall continue for the remaining period with the transferee and such
transferee shall not be eligible to transfer them till the lock-in period stipulated in these regulations has expired.
OTHER REQUIREMENTS FOR IPO & FPO
Appointment of Lead Managers, Other Intermediaries and Compliance Officer [Regulation 23 & 121]
• The issuer shall appoint one or more merchant bankers, which are registered with the SEBI, as lead manager(s)
to the issue.
• Where the issue is managed by more than one lead manager, the rights, obligations and responsibilities,
relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each lead manager
shall be predetermined and be disclosed in the draft offer document and the offer document.
• At least one lead manager to the issue shall not be an associate, as defined under the SEBI (Merchant Bankers)
Regulations, 1992 of the issuer.
• If any of the lead manager is an associate of the issuer, it shall disclose itself as an associate of the issuer and
its role shall be limited to marketing of the issue.
• The issuer shall, in consultation with the lead manager(s), appoint other intermediaries which are registered
with the SEBI after the lead manager(s) have independently assessed the capability of other intermediaries
to carry out their obligations.
• The issuer shall enter into an agreement with the lead manager(s) and enter into agreements with other
intermediaries as required under the respective regulations applicable to the intermediary concerned.
• Such agreements may include such other clauses as the issuer and the intermediaries may deem fit without
diminishing or limiting in any way the liabilities and obligations of the lead manager(s), other intermediaries
and the issuer under the Act, the Companies Act, 2013 or the Companies Act, 1956 (to the extent applicable),
the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and the rules and regulations
made thereunder or any statutory modification or statutory enactment thereof.
• In case of ASBA process, the issuer shall take cognizance of the deemed agreement of the issuer with the self-
certified syndicate banks.
• The issuer shall, in case of an issue made through the book building process, appoint syndicate member(s)
and in the case of any other issue, appoint bankers to issue, at centres.
• The issuer shall appoint a registrar to the issue, registered with the SEBI which has connectivity with all the
depositories.
• If the issuer itself is a registrar, it shall not appoint itself as registrar to the issue.
• The lead manager shall not act as a registrar to the issue in which it is also handling the post-issue
responsibilities.
• The issuer shall appoint a compliance officer who shall be responsible for monitoring the compliance of the
securities laws and for redressal of investors’ grievances.
Disclosures in draft offer document and offer document [Regulation 24 & 122]
• The draft offer document and the offer document shall contain all material disclosures which are true and
adequate to enable the applicants to take an informed investment decision.
 112  Lesson 4 • EP-SLCM

• The red-herring prospectus, shelf prospectus and prospectus shall contain:

(i) disclosures specified in the Companies Act, 2013; and
(i) disclosures specified in Part A of Schedule VI of ICDR Regulations 2018. In case of FPO the disclosures
are subject to the provisions of Parts C and D thereof.
• The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue
including the veracity and adequacy of disclosures made in the draft offer document and the offer document.
• The lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale,
the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the
offer document and as required in terms of the ICDR Regulations 2018.
• The lead manager(s) shall ensure that the information contained in the offer document and the particulars
as per audited financial statements in the offer document are not more than six months old from the issue
opening date.

Filing of offer Document [Regulations 25 & 123]

• Prior to making an IPO/FPO, the issuer shall file three copies of the draft offer document with the concerned
regional office of the SEBI under the jurisdiction of which the registered office of the issuer company is
located, along with fees as specified, through the lead manager(s).
• The lead manager(s) shall submit the following to the SEBI along with the draft offer document:
» a certificate, confirming that an agreement has been entered into between the issuer and the lead
manager(s);
» a due diligence certificate;
» in case of an issue of convertible debt instruments, a due diligence certificate from the debenture
trustee.
• The issuer shall also file the draft offer document with the stock exchange(s) where the specified securities
are proposed to be listed, and submit to the stock exchange(s), the Permanent Account Number, bank account
number and passport number of its promoters where they are individuals, and Permanent Account Number,
bank account number, company registration number or equivalent and the address of the Registrar of
Companies (ROC) with which the promoter is registered, where the ROC promoter is a body corporate.
• The SEBI may specify changes or issue observations, on the draft offer document filed with it within a period
of 30 days from the later of the following dates:
a) the date of receipt of the draft offer document filed with the SEBI; or
b) the date of receipt of satisfactory reply from the lead managers, where the SEBI has sought any
clarification or additional information from them; or
c) the date of receipt of clarification or information from any regulator or agency, where the SEBI has
sought any clarification or information from such regulator or agency; or
d) the date of receipt of a copy of in-principle approval letter issued by the recognised stock exchanges.
• If the SEBI specifies any changes or issues observations on the draft offer document, the issuer and lead
manager(s) shall carry out such changes in the draft offer document and shall submit to the Board an updated
draft offer document complying with the observations issued by the Board and highlighting all changes made
in the draft offer document and before filing the offer documents with the Registrar of Companies or an
appropriate authority, as applicable.
• If there are any changes in the draft offer document in relation to the matters specified in these regulations,
an updated offer document or a fresh draft offer document, as the case may be, shall be filed with the SEBI.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 113

• Copy of the offer documents shall also be filed with the SEBI and the stock exchanges through the lead
manager(s) promptly after filing the offer document with the Registrar of Companies.
• The draft offer document and the offer document shall also be furnish to the SEBI in a soft copy.

Draft offer document and offer document to be available to the public [Regulations 26 & 124]
• The draft offer document filed with the SEBI shall be made public for comments, if any, for a period of at least
21 days from the date of filing, by hosting it on the websites of the SEBI, stock exchanges where specified
securities are proposed to be listed and lead manager(s) associated with the issue.
• Issuer: The issuer shall, within two days of filing the draft offer document with the SEBI, make a public
announcement in one English national daily newspaper with wide circulation, one Hindi national daily
newspaper with wide circulation and one regional language newspaper with wide circulation at the place
where the registered office of the issuer is situated, disclosing the fact of filing of the draft offer document
with the SEBI and inviting the public to provide their comments to the SEBI, the issuer or the lead manager(s)
in respect of the disclosures made in the draft offer document.
• Lead Manager: The lead manager(s) shall, after expiry of the period stipulated above, file with the SEBI,
details of the comments received by them or the issuer from the public, on the draft offer document, during
that period and the consequential changes, if any, that are required to be made in the draft offer document.
• Issuer and Lead Manager: The issuer and the lead manager(s) shall ensure that the offer documents are
hosted on the websites as required under these regulations and its contents are the same as the versions as
filed with the Registrar of Companies, the SEBI and the stock exchanges, as applicable.
• Lead manager(s) and the stock exchanges: The lead manager(s) and the stock exchanges shall provide
copies of the offer document to the public as and when requested and may charge a reasonable sum for
providing a copy of the same.
Face Value of Equity Shares [Regulations 27 & 125]
The disclosure about the face value of equity shares shall be made in the draft offer document, offer document, offer
document, advertisements and application forms, along with price band or the issue price in identical font size.
Pricing [Regulations 28 & 126]
An issuer in an IPO and FPO may determine the price of specified securities in consultation with the lead manager
or through the book building process.

Price and Price Band [Regulations 29 & 127]

• The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor
price or price band in the red herring prospectus (in case of a book built issue) and determine the price at a
later date before filing the prospectus with the Registrar of Companies.
• However, the prospectus filing with the RoC shall contain only one price or the coupon rate, as the case may be.
• The cap on the price band, and the coupon rate in case of convertible debt instruments, shall be less than or
equal to one hundred and 20% of the floor price.
• The floor price or the final price shall not be less than the face value of the specified securities.
• Where the issuer opt not to make disclosure of the floor price or price band in the red herring prospectus,
the issuer shall be announce the floor price or price band at least two working days before the opening of the
bid (in case of an initial public offer) and at least one working day before the opening of the bid (in case of
a further public offer), in all the newspapers in which the pre issue advertisement was released or together
with the pre-issue advertisement.
• The announcement referred above shall also contain all the relevant financial ratios computed for both the
upper and lower end of the price band and also a statement drawing attention of the investors to the section
titled “basis of issue price” of the offer document.
 114  Lesson 4 • EP-SLCM

• The announcement and the relevant financial ratios shall be disclosed on the websites of those stock
exchanges where the securities are proposed to be listed and shall also be pre-filled in the application forms
available on the websites of the stock exchanges.
Differential Pricing [Regulations 30 & 128]
An issuer may offer specified securities at different prices, subject to the following:

Retail individual investors or retail individual shareholders or In other words, if the issue
employees entitled for reservation made under regulation 33 & price to the other categories of
130 of the ICDR Regulations, may be offered specified securities at applicants is Rs.100 the price
= at which the securities can be
a price not lower than by more than 10% of the price at which net
offer is made to other categories of applicants, other than anchor offered to the reserved categories
investors; shall not be less than Rs.90.

in case of a book built issue, the price of the In case the issuer opts for the alternate method
specified securities offered to an anchor investor of book building as specified under the ICDR
shall not be lower than the price offered to other Regulations, 2018, the issuer may offer specified
applicants securities to its employees at a price not lower by
more than 10% of the floor price

In case of FPO, an additional condition is that in case of a composite issue, the price of the specified securities offered
in the public issue may be different from the price offered in rights issue and justification for such price difference
shall be given in the offer document; and discount, if any shall be expressed in rupee terms in the offer document.

Minimum Offer to Public [Regulation 31]

The minimum net offer to the public shall be subject to the provision of clause (b) of sub-rule (2) of rule 19 of
Securities Contracts (Regulations) Rules, 1957.

Reservation on Competitive Basis [Regulations 33 & 130]

Reservation on competitive basis means reservation wherein specified securities are allotted in portion of the
number of specified securities applied for in respect of a particular reserved category to the number of specified
securities reserved for that category.
According to the SEBI (ICDR) Regulations, 2018, there are certain persons eligible for reservation on competitive
basis.
(1) The issuer may make reservation on a competitive basis out of the issue size excluding promoters’ contribution
in favour of the following categories of persons:
• Employees;
• shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter
companies.
However, the issuer shall not make any reservation for the lead manager(s), registrar, syndicate
member(s), their promoters, directors and employees and for the group or associate companies (as
defined under the Companies Act, 2013) of the lead manager(s), registrar and syndicate member(s)
and their promoters, directors and employees.
(2) In case of an FPO, other than in a composite issue, the issuer may make a reservation on a competitive basis
out of the issue size excluding promoters’ contribution for the existing retail individual shareholders of the
issuer.
(3) The reservation on competitive basis shall be subject to following conditions:
• the aggregate of reservations for employees shall not exceed 5% of the post issue capital of the issuer
and the value of allotment to any employee shall not exceed Rs. 2 Lakh. However, in the event of
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 115

under-subscription in the employee reservation portion, the unsubscribed portion may be alloted on
a proportionate basis, for a value in excess of Rs. 2 Lakh, subject to the total allotment to an employee
not exceeding Rs. 5 Lakh.
• reservation for shareholders shall not exceed ten per cent of the issue size;
• no further application for subscription in the net offer can be made by persons (except an employee
and retail individual shareholder of the listed issuer and retail individual shareholders of listed
subsidiaries of listed promoter companies) in favour of whom reservation on a competitive basis is
made;
• any unsubscribed portion in any reserved category may be added to any other reserved category and
the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall
be added to the net offer category;
• in case of under-subscription in the net offer category, spill-over to the extent of under-subscription
shall be permitted from the reserved category to the net public offer category.
(4) An applicant in any reserved category may make an application for any member of specified securities, but
not exceeding the reserved portion for that category.

ASBA [Regulations 35 & 132]

The issuer shall accept bids using only the ASBA facility in the manner specified by SEBI.

Availability of issue material [Regulations 36 &133]

The lead manager(s) shall ensure availability of the offer document and other issue material including application
forms to stock exchanges, syndicate members, registrar to issue, registrar and share transfer agents, depository
participants, stock brokers, underwriters, bankers to the issue, and self-certified syndicate banks before the
opening of the issue.

Prohibition on payment of incentives [Regulations 37 & 134]

Any person connected with the issue shall not offer any incentive, whether direct or indirect, in any manner, whether
in cash or kind or services or otherwise to any person for making an application in the initial public offer, except for
fees or commission for services rendered in relation to the issue.

Security Deposit [Regulations 38 & 135]

The issuer shall, before the opening of the subscription list, deposit with the stock exchange or stock exchanges
an amount calculated at the rate of 1% of the amount of the issue size available for subscription to the public in
the manner as may be specified by the SEBI and the amount so deposited shall be refundable or forfeitable in the
manner specified by the SEBI.
IPO Grading – Applicable to IPO only [Regulation 39]
The issuer may obtain grading for its initial public offer from one or more credit rating agencies registered with the
SEBI.

Underwriting [Regulations 40 & 136]

• If an issuer makes a IPO/FPO other than through the book building process, desires to have the issue
underwritten, it shall appoint the underwriters in accordance with the SEBI (Underwriters) Regulations,
1993.
• If the issuer makes a public issue through a book building process,
a) the issue shall be underwritten by lead managers and syndicate members. However, at least 75% of
the net offer to the public is proposed to be compulsorily allotted to the QIBs, and such portion cannot
be underwritten;
 116  Lesson 4 • EP-SLCM

b) the issuer shall, prior to filing the prospectus, enter into an underwriting agreement with the lead
manager(s) and syndicate member(s) which shall indicate the number of specified securities which
they shall subscribe to at the predetermined price in the event of under-subscription in the issue;
c) if the syndicate member(s) fail to fulfill their underwriting obligations, the lead manager(s) shall fulfill
the underwriting obligations;
d) the lead manager(s) and syndicate member(s) shall not subscribe to the issue in any manner except
for fulfilling their underwriting obligations;
e) in case of every underwriting issue, the lead manager(s) shall undertake minimum underwriting
obligation as specified in the SEBI (Merchant Bankers) Regulations, 1992;
f) where the issue is required to be underwritten, the underwriting obligations should at least to the
extent if minimum subscription.
Monitoring Agency [Regulations 41 & 137]

If the issue size excluding the size of offer for • The monitoring agency shall submit its report
sale by selling shareholders, exceeds Rs.100 to the issuer in the format specified in the ICDR
crores, the issuer shall ensure that the use Regulations, 2018 on a quarterly basis, till at least
of the proceeds of the issue is monitored by 95% of the proceeds of the issue excluding the
a public financial institution or by one of the proceeds raised for general corporate purposes,
scheduled commercial banks named in the have been utilized.
offer document as a banker to the issuer
• The Board of Directors and the management of
the issuer shall provide their comments on the
findings of the monitoring agency.

• The issuer shall, within forty-five days from the

end of each quarter, publicly disseminate the
In case the issuer is a bank or a public report of the monitoring agency by uploading
financial institution or an insurance company, the same on its website as well as submitting the
this provision is not applicable. same to the stock exchange(s) on which its equity
shares are listed.

Public Communications, Publicity Materials, Advertisements and Research Reports

[Regulations 42 & 138]
All public communication, publicity materials, advertisements and research reports shall comply with the provisions
of Schedule IX of the SEBI ICDR Regulations, 2018.

Issue-related Advertisements [Regulations 43 & 139]

• Subject to the provisions of the Companies Act, 2013, the issuer shall, after filing the red herring prospectus
(in case of a book built issue) or prospectus (in case of fixed price issue) with the Registrar of Companies,
make a pre-issue advertisement in one English national daily newspaper with wide circulation, Hindi national
daily newspaper with wide circulation and one regional language newspaper with wide circulation at the
place where the registered office of the issuer is situated.
• The pre-issue advertisement shall contain the disclosures specified in Part A of Schedule X of the SEBI ICDR
Regulations, 2018. However, the disclosures in relation to price band or floor price and financial ratios
contained therein shall only be applicable where the issuer opts to announce the price band or floor price
along with the pre-issue advertisement.
• The issuer may release advertisements for issue opening and issue closing, which shall be in the formats
specified in Parts B and C of Schedule X of the SEBI ICDR Regulations, 2018.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 117

• During the period the issue is open for subscription, no advertisement shall be released giving an impression
that the issue has been fully subscribed or oversubscribed or indicating investors’ response to the issue.
Opening of the Issue [Regulations 44 & 140]
A public issue (both IPO and FPO), subject to compliance with the provisions of the Companies Act, 2013, may be
opened within 12 months from the date of issuance of the observations by the SEBI.
In case of a fast-track issue, the issue shall open within the period specifically stipulated under the Companies Act,
2013. In case the issuer has filed a shelf prospectus, the first issue may be opened within 3 months of the issuance
of observations by the SEBI.
An IPO and an FPO shall be opened after at least 3 working days from the date of filing the red herring prospectus in
case of a book built issue or the prospectus in case of a fixed price issue with the Registrar of Companies.

Minimum Subscription [Regulations 45 & 141]

The minimum subscription to be received in an issue shall be not less than 90% of the offer through offer document
except in case of an offer for sale of specified securities. In case of an IPO, the minimum subscription to be received
shall be subject to allotment of minimum number of specified securities, as prescribed under the Securities
Contracts (Regulation) Rules, 1957.
In the event of non-receipt of minimum subscription, all application monies received shall be refunded to the
applicants forthwith, but not later than fifteen days from the closure of the issue

Period of Subscription [Regulations 46 & 142]

• An IPO/FPO shall be kept open for at least 3 working days and not more than 10 working days.
• In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red
herring prospectus, for a minimum period of 3 working days.
• In case of force majeure, banking strike or similar circumstances, the issuer may, for reasons to be recorded
in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built
issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of
3 working days.

Application and Minimum Application Value [Regulations 47 & 143]

• A person shall not make an application in the net offer category for a number of specified securities that
exceeds the total number of specified securities offered to the public. However, the maximum application by
non-institutional investors shall not exceed total number of specified securities offed in the issue less total
number of specified securities offered in the issue to QIBs.
• The issuer shall stipulate in the offer document the minimum application size in terms of number of specified
securities which shall fall within the range of minimum application value of Rs.10,000 to Rs.15,000.
• The issuer shall invite applications in multiples of the minimum application value, as per Part B of Schedule
XIV of the SEBI ICDR Regulation 2018.
• The minimum sum payable on application per specified security shall be at least 25% of the issue price:

“Minimum application value” shall be with reference to the issue price of the specified securities and not with
reference to the amount payable on application.

• However, in case of an offer for sale, the full issue price for each specified security shall be payable at the time
of application.
 118  Lesson 4 • EP-SLCM

Manner of Calls [Regulations 48 & 144]

If the issuer proposes to receive subscription monies in calls, it shall ensure that the outstanding subscription money
is called within twelve months from the date of allotment in the issue and if any applicant fails to pay the call money
within the said twelve months, the equity shares on which there are calls in arrear along with the subscription
money already paid on such shares shall be forfeited. In case the issuer has appointed a monitoring agency, the
issuer shall not be required to call the outstanding subscription money within twelve months.

Allotment Procedure and Basis of Allotment [Regulations 49 & 145]

• The issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less
than 1000.
• The issuer shall not make any allotment in excess of the specified securities offered through the offer document
except in case of oversubscription for the purpose of rounding off to make allotment, in consultation with the
designated stock exchange.
• The allotment of specified securities to applicants other than to the retail individual investors and anchor
investors shall be on a proportionate basis within the respective investor categories and the number of
securities allotted shall be rounded off to the nearest integer, subject to minimum allotment being equal to the
minimum application size as determined and disclosed in the offer document. However, the value of specified
securities allotted to any person, except in case of employees, in pursuance of reservation made under these
regulations, shall not exceed Rs.2 Lakh for retail investors or up to Rs.5 Lakh for eligible employees.
• The allotment of specified securities to each retail individual investor shall not be less than the minimum
bid lot, subject to the availability of shares in retail individual investor category, and the remaining available
shares, if any, shall be allotted on a proportionate basis.
• The authorised employees of the designated stock exchange, along with the lead manager(s) and registrars to
the issue, shall ensure that the basis of allotment is finalised in a fair and proper manner in accordance with
the procedure as specified in Part A of Schedule XIV.
Oversubscription [Proviso to Regulations 49(2) & 145(2)]
However, in case of oversubscription, an allotment of not more than one percent of the net offer to the public for the
purpose of making allotment in minimum lots.

Illustration explaining the procedure of allotment

Example A
(1) Total number of specified securities on offer@ Rs. 600 per share: 1 crore specified securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified securities.
(3) The issue is over-all subscribed by 2.5 times, whereas the retail individual investors’ category is
oversubscribed 4 times.
(4) The issuer has fixed the minimum application/bid size as 20 specified securities (falling within the range
of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of one lakh retail individual investors have applied in the issue, in varying number of bid lots i.e.
between 1 – 16 bid lots, based on the maximum application size of up to two lakh rupees.
(6) Out of the one lakh investors, there are five retail individual investors A, B, C, D and E who have applied
as follows: A has applied for 320 specified securities. B has applied for 220 specified securities. C has
applied for 120 specified securities. D has applied for 60 specified securities and E has applied for 20
specified securities.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 119

(7) As the allotment to a retail individual investor cannot be less than the minimum bid lot, subject to
availability of shares, the remaining available shares, if any, shall be allotted on a proportionate basis.
The actual entitlement shall be as follows:

Sl. No. Name of Total Number Total number of specified securities eligible to be allotted
Investor of specified
securities
applied for
1. A 320 20 specified securities (i.e. the minimum bid lot) + 38 specified
securities [{35,00,000 - (1,00,000 * 20)} / {140,00,000 -
(1,00,000 * 20)}] * 300 (i.e.320-20)
2. B 220 20 specified securities (i.e. the minimum bid lot) + 25 specified
securities [{35,00,000 - (1,00,000 * 20) / {140,00,000 - (1,00,000 *
20)}] * 200 (i.e. 220-20)
3. C 120 20 specified securities (i.e. the minimum bid lot) + 13 specified
securities [{35,00,000 - (1,00,000 * 20)} / {(140,00,000 - (1,00,000
* 20)}] * 100 (i.e. 120-20)
4. D 60 20 specified securities (i.e. the minimum bid lot) + 5 specified
securities [{(35,00,000 - 1,00,000 * 20)} / {(140,00,000 - (1,00,000
* 20)}] * 40 (i.e. 60-20)
5. E 20 20 specified securities (i.e. the minimum bid lot)
Example B
(1) Total number of specified securities on offer @ Rs. 600 per share: 1 crore specified securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified securities.
(3) The issue is overall subscribed by 7 times, whereas the retail individual investors’ category is over-
subscribed 9.37 times.
(4) The issuer has decided the minimum application/bid size as 20 specified securities (falling within the
range of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of two lakh retail individual investors have applied in the issue, in varying number of bid lots i.e.
between 1-16 bid lots, based on the maximum application size of up to two lakh rupees.
(6) As per the allotment procedure, the allotment to retail individual investors shall not be less than the
minimum bid lot, subject to availability of shares.
(7) Since the total number of shares on offer to the retail individual investors is 35,00,000 and the minimum
bid lot is 20 shares, the maximum number of investors who can be allotted this minimum bid lot should
be 1,75,000. In other words, 1,75,000 retail applicants shall get the minimum bid lot and the remaining
25,000 retail applicants will not get any allotment.
The details of the allotment shall be as follows:
No. No. of No. of retail Total no. of No. of investors who shall receive
shares at investors shares applied minimum bid-lot (to be selected by a
of lots
each lot applying at each for at each lot lottery)
lot
A B C D= (B*C) E
1. 20 10,000 2,00,000 8,750=(1,75,000/2,00,000)*10,000
 120  Lesson 4 • EP-SLCM

2. 40 10,000 4,00,000 8,750

3. 60 10,000 6,00,000 8,750
4. 80 10,000 8,00,000 8,750
5. 100 20,000 20,00,000 17,500
6. 120 20,000 24,00,000 17,500
7. 140 15,000 21,00,000 13,125
8. 160 20,000 32,00,000 17,500
9. 180 10,000 18,00,000 8,750
10. 200 15,000 30,00,000 13,125
11. 220 10,000 22,00,000 8,750
12. 240 10,000 24,00,000 8,750
13. 260 10,000 26,00,000 8,750
14. 280 5,000 14,00,000 4,375
15. 300 15,000 45,00,000 13,125
16. 320 10,000 32,00,000 8,750
Total 2,00,000 328,00,000 1,75,000

Allotment, Refund and Payment of Interest [Regulations 50 & 146]

• The issuer and lead manager(s) shall ensure that specified securities are allotted and/or application monies
are refunded or unblocked within such period as may be specified by the SEBI.
• The lead manager(s) shall ensure that the allotment, credit of dematerialised securities, refunding or
unblocking of application monies, as may be applicable, are done electronically.
• Where specified securities are not allotted and/or application monies are not refunded or unblocked within
the period stipulated above, the issuer shall undertake to pay interest at the rate of 15% per annum to the
investors and within such time as disclosed in the offer document and the lead manager(s) shall ensure the
same.
Post-issue Advertisements [Regulations 51 & 147]
• The lead manager(s) shall ensure that an advertisement giving details relating to:
• subscription,
• basis of allotment,
• number, value and percentage of successful allottees for all applications including ASBA,
• date of completion of despatch of refund orders, as applicable, or
• instructions to self-certified syndicate banks by the registrar,
• date of credit of specified securities and date of filing of listing application, etc.
is released within ten days from the date of completion of the various activities in at least one English national
daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation and one
regional language daily newspaper with wide circulation at the place where registered office of the issuer is
situated.
• The above-mentioned details shall also be placed on the websites of the stock exchange(s).
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 121

Post-issue responsibilities of the lead manager(s) [Regulations 52 & 148]

• The responsibility of the lead manager(s) shall continue until completion of the issue process and for any
issue related matter thereafter.
• The lead manager(s) shall:
• regularly monitor redressal of investor grievances arising from any issue related activities.
• be responsible for post-issue activities till the applicants have received the securities certificates,
credit to their demat account or refund of application monies and the listing agreement is entered
into by the issuer with the stock exchange and listing or trading permission is obtained.
• co-ordinate with the registrars to the issue and with various intermediaries at regular intervals after
the closure of the issue to monitor the flow of applications from syndicate member(s) or collecting
bank branches and/ or self-certified syndicate banks, processing of the applications including
application form for ASBA and other matters till the basis of allotment is finalised, credit of the
specified securities to the demat accounts of the allottees and unblocking of ASBA accounts/ dispatch
of refund orders are completed and securities are listed, as applicable.
• Any act of omission or commission on the part of any of the intermediaries noticed by the lead manager(s)
shall be duly reported by them to SEBI.
• In case there is a devolvement on the underwriters, the lead manager(s) shall ensure that the notice for
devolvement containing the obligation of the underwriters is issued within ten days from the date of closure
of the issue.
• In the case of undersubscribed issues that are underwritten, the lead manager(s) shall furnish information in
respect of underwriters who have failed to meet their underwriting devolvement to SEBI.
Release of subscription money [Regulations 53 & 149]
• The lead manager(s) shall confirm to the bankers to the issue by way of copies of listing and trading approvals
that all formalities in connection with the issue have been completed and that the banker is free to release the
money to the issuer or release the money for refund in case of failure of the issue.
• In case the issuer fails to obtain listing or trading permission from the stock exchanges where the specified
securities were to be listed, it shall refund through verifiable means the entire monies received within seven
days of receipt of intimation from stock exchanges rejecting the application for listing of specified securities,
and if any such money is not repaid within eight days after the issuer becomes liable to repay it, the issuer
and every director of the company who is an officer in default shall, on and from the expiry of the eighth day,
be jointly and severally liable to repay that money with interest at the rate of fifteen percent per annum.
• The lead manager(s) shall ensure that the monies received in respect of the issue are released to the issuer in
compliance with the provisions of Section 40 (3) of the Companies Act, 2013, as applicable.

Reporting of transactions of the promoters and promoter group [Regulations 54 & 150]
The issuer shall ensure that all transactions in securities by the promoter and promoter group between the date of
filing of the draft offer document or offer document, as the case may be, and the date of closure of the issue shall be
reported to the stock exchange(s), within twenty-four hours of such transactions.

Post-issue reports [Regulations 55 & 151]

The lead manager(s) shall submit a final post-issue report, along with a due diligence certificate as, within seven
days of the date of finalization of basis of allotment or within seven days of refund of money in case of failure of
issue.
 122  Lesson 4 • EP-SLCM

Restriction on Further Capital Issues [Regulation 152]

The issuer shall not make any further issue of specified securities in any manner whether by way of a public issue,
rights issue, bonus issue, preferential issue, qualified institutions placement or otherwise except pursuant to an
employee stock option scheme:
• In case of a fast track issue, during the period between the date of filing the offer document (in case of a book
built issue) or prospectus (in case of a fixed price issue) with the Registrar of Companies and the listing of the
specified securities offered through the offer document or refund of application monies; or
• in case of other issues, during the period between the date of filing the draft offer document and the listing of
the specified securities offered through the offer document or refund of application monies;
unless full disclosures regarding the total number of specified securities or amount proposed to be raised from such
further issue are made in such draft offer document or offer document, as the case may be.
FAST TRACK FPO [Regulation 155]
Eligibility

An Issuer Company need not file the draft offer document with SEBI and obtain observations from SEBI, if it satisfies
the following conditions for making a further public offer through fast track route:

(a) Listing Equity shares of the issuer have been listed on any stock exchange for a period of at least
three years immediately preceding the reference date
(b) Demat form Entire shareholding of the promoter group of the issuer is held in dematerialised form on
the reference date
(C) Market Average market capitalisation of public shareholding of the issuer is at least Rs.1000
Capitalisation crores in case of public
(d) Trading Annualised trading turnover of the equity shares of the issuer during six calendar months
Turnover immediately preceding the month of the reference date has been at least 2% of the
weighted average number of equity shares listed during such six months’ period.
However, if the public shareholding is less than fifteen per cent of its issued equity capital,
the annualised trading turnover of its equity shares has been at least 2% of the weighted
average number of equity shares available as free float during such six months’ period
(e) Delivery based Annualized delivery-based trading turnover of the equity shares during six calendar
trading months immediately preceding the month of the reference date has been at least 10% of
the annualised trading turnover of the equity shares during such six months period
(f) Compliance The issuer has been in compliance with the equity listing agreement or Securities and
with SEBI Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,
(LODR) 2015, as applicable, for a period of at least three years immediately preceding the
Regulations, reference date.
2015
However, if the issuer has not complied with the provisions of the listing agreement or SEBI
(LODR) Regulations, 2015, as applicable, relating to composition of board of directors,
for any quarter during the last three years immediately preceding the reference date,
but is compliant with such provisions at the time of filing of letter of offer, and adequate
disclosures are made in the letter of offer about such non-compliances during the three
years immediately preceding the reference date, it shall be deemed as compliance with
the condition.
Further, imposition of monetary fines by stock exchange on the issuer shall not be a
ground for ineligibility for undertaking issuances under these regulations
(g) Investor Issuer has redressed at least 95% of the complaints received from the investors till the
Complaints end of the quarter immediately preceding the month of the reference date
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 123

(h) No Show-cause No show-cause notices have been issued or prosecution proceedings have been initiated
notices by the SEBI and pending against the issuer or its promoters or whole-time directors as on
the reference date;
(i) No alleged Issuer or promoter or promoter group or director of the issuer has not settled any alleged
violations violation of securities laws through the consent or settlement mechanism with the SEBI
during three years immediately preceding the reference date
(j) Disciplinary Equity shares of the issuer have not been suspended from trading as a disciplinary measure
measures during last three years immediately preceding the reference date
(k) Conflict of There shall be no conflict of interest between the lead merchant banker(s) and the issuer
interest or its group or associate company in accordance with applicable regulations.
(l) Audit Impact of audit qualifications, if any and where quantifiable, on the audited accounts of
Qualification the issuer in respect of those financial years for which such accounts are disclosed in the
letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the
respective years.
“Average Market Capitalisation of Public Shareholding” means the sum of daily market capitalisation of public
shareholding for a period of one year up to the end of the quarter preceding the month in which the proposed issue
was approved by the shareholders or the board of the issuer, as the case may be, divided by the number of trading
days.

Post-listing exit opportunity for dissenting shareholders [Regulation 59 & 157 ]

• In case of further public offers, including under the fast track route, the promoters or shareholders in control
of an issuer shall provide an exit offer to dissenting shareholders as provided for in the Companies Act, 2013,
in case of change in objects or variation in the terms of contract related to objects referred to in the offer
document as per conditions and manner is provided in Schedule XX of SEBI ICDR Regulations, 2018;
• The exit offer shall not apply where there are neither identifiable promoters nor shareholders in control of
the listed issuer.
EXIT OPPORTUNITY TO DISSENTING SHAREHOLDERS [SCHEDULE XX]
The provisions of this Chapter shall apply to an exit offer made by the promoters or shareholders in control of an
issuer to the dissenting shareholders in terms of section 13(8) and section 27(2) of the Companies Act, 2013, in
case of change in objects or variation in the terms of contract referred to in the offer document.
However, the provisions of this Chapter shall not apply where there are neither identifiable promoters nor
shareholders in control of the listed issuer.

"Dissenting Shareholders" mean those shareholders who have voted against the
resolution for change in Objects or variation in terms of a contract, referred to in the offer
document of the issuer.

Conditions for Exit Offer

The promoters or shareholders in control shall make the exit offer in accordance with the provisions of this Chapter,
to the dissenting shareholders, in cases only if a public issue has opened after April 1, 2014; if :
• the proposal for change in objects or variation in terms of a contract, referred to in the offer document is
dissented by at least 10 % of the shareholders who voted in the general meeting; and
• the amount to be utilized for the objects for which the offer document was issued is less than 75 % of the
amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer
document).
 124  Lesson 4 • EP-SLCM

Eligibility of shareholders for availing the exit offer

Only those dissenting shareholders of the issuer who are holding shares as on the relevant date shall be eligible to
avail the exit offer.
Exit offer price
The ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:
• the volume-weighted average price paid or payable for acquisitions, whether by the promoters or shareholders
having control or by any person acting in concert with them, during the fifty-two weeks immediately preceding
the relevant date;
• the highest price paid or payable for any acquisition, whether by the promoters or shareholders having
control or by any person acting in concert with them, during the twenty-six weeks immediately preceding
the relevant date;
• the volume-weighted average market price of such shares for a period of sixty trading days immediately
preceding the relevant date as traded on the recognised stock exchange where the maximum volume of
trading in the shares of the issuer are recorded during such period, provided such shares are frequently
traded;
• where the shares are not frequently traded, the price determined by the promoters or shareholders having
control and the merchant banker taking into account valuation parameters including book value, comparable
trading multiples, and such other parameters as are customary for valuation of shares of such issuers.

Manner of providing exit to dissenting shareholders

• The notice proposing the passing of special resolution for changing the objects of the issue and varying the
terms of contract, referred to in the prospectus shall also contain information about the exit offer to the
dissenting shareholders.
• In addition to the disclosures required under the provisions of section 102 of the Companies Act, 2013 read
with rule 32 of the Companies (Incorporation) Rules, 2014 and rule 7 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and any other applicable law, a statement to the effect that the promoters
or the shareholders having control shall provide an exit opportunity to the dissenting shareholders shall also
be included in the explanatory statement to the notice for passing special resolution.
• After passing of the special resolution, the issuer shall submit the voting results to the recognised stock
exchange(s), in terms of the provisions of the SEBI (LODR) Regulations, 2015.
• The issuer shall also submit the list of dissenting shareholders, as certified by its compliance officer, to the
recognised stock exchange(s).
• The promoters or shareholders in control, shall appoint a merchant banker registered with SEBI and finalize
the exit offer price in accordance with these regulations.
• The issuer shall intimate the recognised stock exchange(s) about the exit offer to dissenting shareholders and
the price at which such offer is being given.
• The stock exchange(s) shall immediately on receipt of such intimation disseminate the same to public within
one working day.
• To ensure security for performance of their obligations, the promoters or shareholders having control,
as applicable, shall create an escrow account which may be interest bearing and deposit the aggregate
consideration in the account at least two working days prior to opening of the tendering period.
• The tendering period shall start not later than seven working days from the passing of the special resolution
and shall remain open for ten working days.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 125

• The dissenting shareholders who have tendered their shares in acceptance of the exit offer shall have the
option to withdraw such acceptance till the date of closure of the tendering period.
• The promoters or shareholders having control shall facilitate tendering of shares by the shareholders and
settlement of the same through the recognised stock exchange mechanism as specified by SEBI for the
purpose of takeover, buy-back and delisting.
• The promoters or shareholders having control shall, within a period of ten working days from the last date
of the tendering period, make payment of consideration to the dissenting shareholders who have accepted
the exit offer.
• Within a period of two working days from the payment of consideration, the issuer shall furnish to the
recognised stock exchange(s), disclosures giving details of aggregate number of shares tendered, accepted,
payment of consideration and the post-offer shareholding pattern of the issuer and a report by the merchant
banker that the payment has been duly made to all the dissenting shareholders whose shares have been
accepted in the exit offer.

Maximum permissible non-public shareholding

In the event, the shares accepted in the exit offer were such that the shareholding of the promoters or shareholders
in control, taken together with persons acting in concert with them pursuant to completion of the exit offer results
in their shareholding exceeding the maximum permissible non-public shareholding, the promoters or shareholders
in control, as applicable, shall be required to bring down the non-public shareholding to the level specified and
within the time permitted under Securities Contract (Regulation) Rules, 1957.
RIGHTS ISSUE
Definition of Right Issue

“Rights issue” means an offer of specified securities by a listed issuer to the shareholders of the
issuer as on the record date fixed for the said purpose.

In general, fresh shares offered to existing shareholders in proportion to their existing holding in the share capital
of the company are termed as “Rights shares” popularly known as rights issue. In the rights issue the shareholders
have a right to participate in the issue. It is pre-emptive rights given by the status to existing shareholders. In this
rights issue, the offer is required to be made to the existing shareholders on pro-rata to their existing holdings. The
shareholders who are offered may or may not subscribe to the same. They may subscribe partly or fully the offer.
They have a power to renounce the shares offered to any other person who need not be an existing shareholder of
the company.
An issuer offering specified securities of aggregate value of ten crore rupees or more, through a rights issue shall
satisfy the conditions of Chapter III of SEBI (ICDR) Regulations, 2018 at the time of filing the draft letter of offer with
the SEBI and also at the time of filing the final letter of offer with the stock exchanges, as the case may be.
Entities not eligible to make a rights issue [Regulation 61]
An issuer shall not be eligible to make a rights issue of specified securities:

(a) if the issuer, any of its promoters, promoter group or directors of the issuer are
debarred from accessing the capital market by the SEBI

(b) if any of the promoters or directors of the issuer is a promoter or director of

any other company which is debarred from accessing the capital market by the SEBI

(c) if any of its promoters or directors is a fugitive economic offender

 126  Lesson 4 • EP-SLCM

Explanation: The restrictions under (a) and (b) above will not apply to the promoters or directors of the issuer who
were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the draft
letter of offer with the SEBI.
General conditions [Regulation 62]
(1) The issuer making a rights issue of specified securities shall ensure that:
• it has made an application to one or more stock exchanges to seek an in-principle approval for
listing of its specified securities on such stock exchanges and has chosen one of them as the
designated stock exchange.
• all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited;
• it has made firm arrangements of finance through verifiable means towards 75% of the stated
means of finance for the specific project proposed to be funded from issue proceeds, excluding the
amount to be raised through the proposed rights issue or through existing identifiable internal
accruals.
(2) The amount for general corporate purposes, as mentioned in objects of the issue in the draft letter of offer
and the letter of offer, shall not exceed 25% of the amount raised by the issuer.
(3) Where the issuer or any of its promoters or directors is a willful defaulter, the promoters or promoter group
of the issuer shall not renounce their rights except to the extent of renunciation within the promoter group.
(4) Where the issuer has issued SR equity shares to its promoters or founders, then such a SR shareholder
shall not renounce their rights and the SR shares received in a rights issue shall remain under lock-in until
conversion into equity shares having voting rights same as that of ordinary equity shares along with existing
SR equity shares.
PREFERENTIAL ISSUE
Definition of Preferential Issue

“Preferential issue” means an issue of specified securities by a listed issuer to any select person or group of
persons on a private placement basis in accordance with Chapter V of these regulations and does not include
an offer of specified securities made through employee stock option scheme, employee stock purchase scheme
or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

An issuer offering specified securities through preferential issue shall satisfy the conditions of Chapter V of SEBI
(ICDR) Regulations, 2018.

Issuers ineligible to Make a Preferential Issue [Regulation 159]

Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity
shares of the issuer during the six months preceding the relevant date. However, in respect of the preferential issue of
equity shares and compulsorily convertible debt instruments, whether fully or partly, the SEBI may grant relaxation
from the requirements of this sub-regulation, if the SEBI has granted relaxation in terms of regulation 11(2) of the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 to such a preferential allotment.
Explanation: Where any person belonging to promoter(s) or the promoter group has sold/ transferred their equity
shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall
be ineligible for allotment of specified securities on preferential basis.
However the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s)
of the promoter group which qualifies for inter-se transfer amongst qualifying persons under regulation 10(1)
(a) of the SEBI (Substantial Acquisition of Shares and Takeover Regulations), 2011 or in case of transfer of shares
held by the promoters or promoter group on account of invocation of pledge by a scheduled commercial bank or
public financial institution or a systemically important non-banking finance company or mutual fund or insurance
company registered with the Insurance Regulatory and Development Authority.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 127

However, where any person belonging to promoter(s) or the promoter group has previously subscribed to warrants
of an issuer but has failed to exercise the warrants, the promoter(s) and promoter group shall be ineligible for issue
of specified securities of such issuer on preferential basis for a period of one year from:
• the date of expiry of the tenure of the warrants due to non-exercise of the option to convert; or
• the date of cancellation of the warrants, as the case may be.
• An issuer shall not be eligible to make a preferential issue if any of its promoters or directors is a fugitive
economic offender.
Conditions for preferential issue [Regulation 160]
A listed issuer making a preferential issue of specified securities shall ensure that:
• Fully Paid-up: All equity shares allotted by way of preferential issue shall be made fully paid up at the time
of the allotment.
• Special Resolution: A special resolution has been passed by its shareholders.
• Demat form: All equity shares held by the proposed allottees in the issuer are in dematerialised form.
• Compliance: The issuer is in compliance with the conditions for continuous listing of equity shares as
specified in the listing agreement with the stock exchange where the equity shares of the issuer are listed and
SEBI (LODR) Regulations, 2015 as amended, and any circular or notification issued by the SEBI thereunder.
• PAN: The issuer has obtained the Permanent Account Numbers (PAN) of the proposed allottees, except those
allottees which may be exempt from specifying their PAN for transacting in the securities market by the SEBI.

QUALIFIED INSTITUTIONS PLACEMENT

Definition of Qualified Institutions Placement

“Qualified institutions placement” means issue of eligible securities by a listed issuer to qualified
institutional buyers on a private placement basis and includes an offer for sale of specified securities by
the promoters and/ or promoter group on a private placement basis, in terms of these regulations.

The provisions relating to eligibility, conditions and other provisions for Qualified Institutions Placement have been
provided in Chapter VI of SEBI(ICDR) Regulations, 2018.
Conditions for Qualified Institutions Placement [Regulation 172]
(1) A listed issuer may make a qualified institutions placement of eligible securities if it satisfies the following
conditions:
(a) Special resolution:
• a special resolution approving the qualified institutions placement has been passed by its
shareholders, and the special resolution shall, among other relevant matters, specify that the
allotment is proposed to be made through qualified institutions placement and the relevant date
referred to in regulation 171(b)(ii);
• No shareholders’ resolution will be required in case the qualified institutions placement is
through an offer for sale by promoters or promoter group for compliance with minimum public
shareholding requirements specified in the Securities Contracts (Regulation) Rules, 1957;
• The allotment pursuant to the special resolution referred to in regulation 172(a) shall be
completed within a period of 365 days from the date of passing of the resolution.
 128  Lesson 4 • EP-SLCM

(b) Proposed allotment:

• the equity shares of the same class, which are proposed to be allotted through qualified institutions
placement or pursuant to conversion or exchange of eligible securities offered through qualified
institutions placement, have been listed on a stock exchange for a period of at least one year
prior to the date of issuance of notice to its shareholders for convening the meeting to pass the
special resolution.
• Where an issuer, being a transferee company in a scheme of compromise, arrangement and
amalgamation sanctioned by a High Court under sections 391-394 of the Companies Act, 1956 or
approved by a tribunal or the Central Government under sections 230 to 234 of the Companies
Act, 2013, whichever is applicable makes qualified institutions placement, the period for which
the equity shares of the same class of the transferor company were listed on a stock exchange
having nation-wide trading terminals shall also be considered for the purpose of computation of
the period of one year.
• This clause shall not be applicable to an issuer proposing to undertake qualified institutional
placement for complying with the minimum public shareholding requirements specified in the
Securities Contracts (Regulation), Rules 1957.
Explanation: For the purpose of clause (b), “equity shares of the same class” shall mean equity shares
which rank pari-passu in relation to rights as to dividend, voting or otherwise.
(c) An issuer shall be eligible to make a qualified institutions placement if any of its promoters or directors
is not a fugitive economic offender.
(2) All eligible securities issued through a qualified institutions placement shall be listed on the recognised stock
exchange where the equity shares of the issuer are listed. Provided that the issuer shall seek approval under
rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, if applicable.
(3) The issuer shall not make any subsequent qualified institutions placement until the expiry of two weeks from
the date of the prior qualified institutions placement made pursuant to one or more special resolutions.
Conditions for offer for sale by promoters for compliance with minimum public shareholding
requirements specified in the Securities Contracts (Regulation) Rules, 1957. [Regulation 173]
• The promoters and members of the promoter group may make an offer for sale of fully paid-up equity shares,
through a qualified institutions placement, for the purpose of achieving minimum public shareholding in
terms of the Securities Contracts (Regulation) Rules, 1957.
• The promoters or members of the promoter group shall not make such offer for sale if the promoter or
member of the promoter group has purchased or sold any equity shares of the issuer during twelve weeks
period prior to the date of the opening of the issue and they shall not purchase or sell any equity shares of the
issuer during the twelve weeks period after the date of closure of the issue.
• Such promoters or members of the promoter group may, within the twelve-week periods provided above, sell
equity shares of the issuer held by them through offer for sale through stock exchange mechanism specified
by the SEBI or through an open market sale, in accordance with the conditions specified by the SEBI
from time to time, subject to the condition that there shall be a gap of minimum two weeks between the
two successive offer(s).
INITIAL PUBLIC OFFER OF INDIAN DEPOSITORY RECEIPTS
The provisions of this Chapter shall apply to an issue of Indian Depository Receipts (hereinafter referred to as
“IDR”) made in terms of the Companies Act, 2013 and Companies (Registration of Foreign Companies) Rules, 2014.
An issuer making a public issue of IDRs shall satisfy the conditions of Chapter VII of SEBI (ICDR) Regulations, 2018
as on the date of filing draft offer document with the SEBI and also as on the date of filing the offer document with
the Registrar of Companies.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 129

Eligibility conditions [Regulation 183]

• Issuing company is listed in its home country for at least three

immediately preceding years;
• Issuer is not prohibited to issue securities by any regulatory body;
Eligibility
• Issuer has a track record of compliance with the securities market
regulations in its home country;
• Any of its promoters or directors is not a fugitive economic offender.
(‘home country’ means the country where the issuer is incorporated or listed)

• issue size shall not be less than Rs.50 crore;

• at any given time, there shall be only one denomination of IDRs of the
issuer;
Conditions • issuer shall ensure that the underlying equity shares against which
IDRs are issued have been or will be listed in its home country before
listing of IDRs in stock exchange(s);
• issuer shall ensure that the underlying shares of IDRs shall rank pari
passu with the existing shares of the same class.

• it has made an application to one or more stock exchanges to seek an

in-principle approval for listing of the IDRs on such stock exchanges
and has chosen one of them as the designated stock exchange;
• it has entered into an agreement with a depository for dematerialisation
of the IDRs proposed to be issued;

Issuer shall • it has made firm arrangements of finance through verifiable means
ensure that: towards 75% of the stated means of finance for the project proposed
to be funded from issue proceeds, excluding the amount to be raised
through the proposed issue of IDRs or through existing identifiable
internal accruals, have been made;
• The amount for general corporate purposes, as mentioned in objects
of the issue in the draft offer document and the offer document shall
not exceed 25% of the amount being raised by the issuer.

RIGHTS ISSUE OF INDIAN DEPOSITORY RECEIPTS

In addition to compliance with Chapter VII Initial Public Offer of Indian Depository Receipts, wherever applicable, a
listed issuer offering IDRs through a rights issue shall satisfy the conditions specified in Chapter VIII of SEBI (ICDR)
Regulations, 2018 at the time of filing the offer document.
The issuer shall ensure that it has made an application to all the stock exchanges in India, where its IDRs are already
listed, for listing of the IDRs to be issued by way of rights and has chosen one of them as the designated stock
exchange.
 130  Lesson 4 • EP-SLCM

Entities not eligible to make a rights issue [Regulation 213]

An issuer shall not be eligible to make a rights issue of IDRs if –

At the time of undertaking the rights issue,

the issuer is in breach of ongoing material
obligations under the listing agreement
and the SEBI LODR as may be applicable
to such issuer or material obligations
under the deposit agreement entered into
between the domestic depository and the Any of its promoters or directors is a
issuer at the time of initial offering of IDRs fugitive economic offender

INITIAL PUBLIC OFFER BY SMALL AND MEDIUM ENTERPRISES

An issuer making an initial public offer of specified securities shall satisfy the conditions of Chapter IX of SEBI
(ICDR) Regulations, 2018 as on the date of filing of the draft offer document with the SME exchange and also as on
the date of filing the offer document with the Registrar of Companies.

Entities not eligible to make an initial public offer [Regulation 228]

An issuer shall not be eligible to make an initial public offer:

(a) if the issuer, any of its promoters, promoter group or directors or selling shareholders are debarred from
accessing the capital market by the SEBI

(b) if any of the promoters or (c) if the issuer or any of its promoters (d) if any of its promoters or directors
directors of the issuer is a promoter or directors is a willful defaulter is a fugitive economic offender
or director of any other company
which is debarred from accessing
the capital market by the SEBI

Explanation: The restrictions under clauses (a) and (b) shall not apply to the persons or entities mentioned therein,
who were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the
draft offer document with the SME Exchange.
Eligibility requirements for an initial public offer [Regulation 229]

If post issue paid-up capital is <= Rs.10 Crores - list only on SME Board

If post issue paid-up capital is > Rs 10 crores but up to Rs.25 crores – Option to list either on SME
Board or on Main Board

SEBI does not issue any observation on the offer document

The lead manager(s) shall submit a due-diligence certificate to SEBI

IPO shall be 100% underwritten. The lead manager(s) shall underwrite at least 15%
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 131

Compulsory market making for a minimum period of 3 years from the date of listing

Minimum application size in IPO & Trading lot shall be one lakh rupees

May migrate to Main Board if SR is passed through postal ballot with majority of minority

In case of an issuer formed out of merger or a division of an existing company, the track record of the resulting issuer
shall be considered only if the requirements regarding financial statements as specified above are complied with.
General conditions [Regulation 230]
(1) An issuer making an initial public offer shall ensure that:
• it has made an application to one or more SME exchanges for listing of its specified securities on such
SME exchange(s) and has chosen one of them as the designated stock exchange
• it has entered into an agreement with a depository for dematerialisation of its specified securities
already issued and proposed to be issued;
• all its existing partly paid-up equity shares have either been fully paid-up or forfeited;
• all specified securities held by the promoters are in the dematerialised form;
• it has made firm arrangements of finance through verifiable means towards 75% of the stated means
of finance for the project proposed to be funded from the issue proceeds, excluding the amount to be
raised through the proposed public offer or through existing identifiable internal accruals.
(2) The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document
and the offer document shall not exceed 25% of the amount being raised by the issuer.

INNOVATORS GROWTH PLATFORM

Definition of Innovators growth platform

“Innovators growth platform” means the trading platform for listing and trading of specified
securities of issuers that comply with the eligibility criteria specified in regulation 283 of
SEBI (ICDR), 2018

Listing on Innovators Growth Platform (IGP)

Aimed to list start ups which are intensive in the use of technology, information technology, intellectual
property, data analytics, bio-technology or nano-technology to provide products, services or business
platform

At least 25% of pre-issue capital is held by QIBs, Innovators Growth Platform Investors, any other class
of investors as specified by SEBI for atleast a 1 year

Listing is allowed with or without IPO. SEBI will issue its observations in both the cases

The minimum offer size shall be ten crore rupees in case of IPO

Minimum application size shall be two lakh rupees and in multiples thereof

Number of allottees in the initial public offer shall at least be fifty

Minimum trading lot shall be two lakh rupees and in multiples thereof
 132  Lesson 4 • EP-SLCM

BONUS ISSUE

Bonus issue of shares means additional shares issued by the company to its
existing shareholders to reward for their royalty and is an opportunity to
enhance the shareholders wealth. The bonus shares are issued without any cost
to the Company by capitalizing the available reserves.

A listed company issuing bonus shares shall comply with the requirements of Companies Act, 2013 and also Chapter
XI of SEBI (ICDR) Regulations, 2018.

Conditions for a bonus issue [Regulation 293]

Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to
issue bonus shares to its members if:

it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc

If there is no such provision in the articles of association, the issuer shall pass a resolution at
its general body meeting making provisions in the articles of associations for capitalisation
of reserve

it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it

it has not defaulted in respect of the payment of statutory dues of the employees such as
contribution to provident fund, gratuity and bonus

any outstanding partly paid shares on the date of the allotment of the bonus shares, are
made fully paid-up

any of its promoters or directors is not a fugitive economic offender

Restrictions on a bonus issue [Regulation 294]

• An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same
class in favour of the holders of outstanding compulsorily convertible debt instruments if any, in proportion
to the convertible part thereof.
• The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments,
shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of
such convertible debt instruments, optionally convertible instruments, warrants, as the case may be, on the
same terms or same proportion at which the bonus shares were issued.
• A bonus issue shall be made only out of free reserves, securities premium account or capital redemption
reserve account and built out of the genuine profits or securities premium collected in cash and reserves
created by revaluation of fixed assets shall not be capitalised for this purpose.
• Bonus shares shall not be issued in lieu of dividends.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 133

• If an issuer has issued SR equity shares to its promoters or founders, any bonus issue on the SR equity shares
shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in
a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity
shares along with existing SR equity shares.

Completion of a bonus issue [Regulation 295]

• An issuer, announcing a bonus issue after approval by its board of directors and not requiring shareholders’
approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue
within fifteen days from the date of approval of the issue by its board of directors:
• Where the issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making
the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of
its board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’
approval.
Explanation: For the purpose of a bonus issue to be considered as ‘implemented’ the date of commencement
of trading shall be considered.
• A bonus issue, once announced, shall not be withdrawn.

POWER TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases [Regulation 295A]
• SEBI may exempt any person or class of persons from the operation of all or any of the provisions of these
regulations for a period as may be specified but not exceeding twelve months, for furthering innovation
relating to testing new products, processes, services, business models, etc. in live environment of regulatory
sandbox in the securities markets.
• Any exemption granted by the SEBI shall be subject to the applicant satisfying such conditions as may be
specified by the Board including conditions to be complied with on a continuous basis.
Explanation — For the purposes of these regulations, “regulatory sandbox” means a live testing environment where
new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the SEBI.
PROCEDURE FOR ISSUE OF SECURITIES
In the light of the provisions of the Companies Act and the guidelines issued by Government/SEBI under the
Securities Contracts (Regulation) Rules, 1957 and the SEBI Act, 1992, the procedure for issue of securities to be
followed by companies is given below. This procedure should be read along with the relevant SEBI regulations and
provisions of the other Acts.
Issue of Shares to the Public
A company proposing to raise resources by a public issue should first select the type of securities i.e., shares and/
or debentures to be issued by it. In case the company has applied for financial assistance to any of the financial/
investment institutions, the requirement of the funds to be raised from the public is to be decided in consultation
with the said institution while appraising the project of the company. The decision regarding the issue of shares to
be made at par or premium should be taken. The various steps involved in public issue of shares are enumerated
below:
(1) Compliance with the SEBI Regulations: Before making any issue of capital, it is to be ensured that the
proposed issue complies with the eligibility norms and other provisions of SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009.
 134  Lesson 4 • EP-SLCM

(2) Holding of general meeting: A general meeting of the shareholders (annual or extraordinary) is to be
convened for obtaining their consent to the proposed issue of shares if the articles so require. In case the
proposed issue requires any increase in authorised share capital (Section 61, 62, 64), alteration in capital
clause of the Memorandum of Association (Section 13), alteration of the Articles of Association (Section 14)
etc. the approvals for the same should also be obtained at the General Meeting.
(3) Appointment of managers to the issue: The Company issuing shares is to appoint one or more Merchant
Bankers to act as managers to the public issue.
(4) Appointment of various other agencies: The company should in consultation with the Managers to the
issue, decide upon the appointment of the following other agencies:
(a) Registrars to the Issue;
(b) Collecting bankers to the Issue;
(c) Advisors to the Issue;
(d) Underwriters to the Issue;
(e) Brokers to the Issue;
(f) Printers;
(g) Advertising Agents,
(h) Self Certified Syndicate Banks, etc.
(5) Drafting of prospectus: Next step is to draft a prospectus in accordance with Section 26 of the Companies
Act, 2013 and an abridged prospectus as required under Section 33(1) of the Companies Act, 2013. The
prospectus should contain the disclosures as required by the SEBI Regulations under Schedule VIII.
(6) Intimation to Stock Exchange: A copy of the Memorandum and Articles of Association of the company is to
be sent to the Stock Exchanges where the shares are to be enlisted, for approval.
(7) Approval of prospectus: The draft offer document along with the application form for issue of shares should
be got approved by the solicitors/legal advisors of the company to ensure that it contains all disclosures
and information as required by various statutes, rules, regulations, notifications, etc. The managers to the
issue should also verify and approve the draft prospectus. The financial institutions providing loan facilities
generally stipulate that the prospectus should be got approved by them. The company should in such a case,
forward a copy of the draft prospectus for their verification and approval as well. The approval of underwriters
should also be taken if they so require.
A copy of the draft offer document is also to be filed with the SEBI for scrutiny. Merchant Bankers, acting
as the Lead Manager to ensure that an offer document contain the disclosure requirements as specified by
the SEBI from time to time for the issue of securities. Also, to ensure that an offer document provides a true,
correct and fair view of the state of affairs of the company which are adequate for the investors to arrive at
a well-informed investment decision. The Merchant Bankers are required to submit the draft of the offer
document along with Due Diligence Certified to the SEBI in the form specified within six weeks before the
issue is scheduled to open for subscription. Further, they are held responsible for ensuring the compliance
with the SEBI Rules, Regulations, Guidelines and requirements for other laws, for the time being in force.
(8) Approval of board of directors to prospectus and other documents: After getting observations of the
SEBI in the draft prospectus and the application form, the board of directors of the company should approve
the final draft before filing with the Registrar of Companies. The company should, therefore, hold the meeting
of the board of directors to transact the following business:
• to approve and accept consent letters received from various parties agencies to act in their respective
capacities;
• to approve and accept appointment of underwriters, brokers, bankers to the issue registrar to the
issue, solicitors and advocates to the issue, etc;
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 135

• to accept the Auditors’ Report for inclusion in the prospectus;

• to approve the date of opening of subscription list as also earliest and latest dates for closing of
subscription list with the authority in favour of any director for earlier closing if necessary;
• to approve draft prospectus/draft abridged prospectus and the draft share application form;
• to authorise filing of the prospectus signed by all the directors or their constituted attorneys with the
Registrar of Companies;
• to authorise any officer of the company to deliver the prospectus for registration with the Registrar of
Companies and to carry out the corrections, if any, at the office of the Registrar of Companies;
• to approve the format of the statutory announcement;
(9) Making application to Stock Exchange(s) for permission to listing: Before filing prospectus with the
Registrar of Companies the company should submit an application(s) to the Stock Exchange(s) for enlistment
of securities offered to the public by the said issue [Section 40(1) of the Companies Act, 2013]. The fact that
an application(s) has/have been made to the Stock Exchange(s) must be stated in the prospectus.
(10) Printing and distribution of prospectus and application forms: After receipt of the intimation from
Registrar of Companies regarding registration of prospectus, the company should take steps to issue the
prospectus within 90 days of its registration with ROC. For the purpose, the first step is to get adequate
number of prospectuses and application forms printed. The provisions of Section 33 of the Companies Act,
2013 should be kept in view in this regard which provide that no one shall issue any form of application for
shares in or debenture of a company unless the form is accompanied by a memorandum containing such
salient features of a prospectus as may be prescribed.
At least 2 weeks before the announcement is made in any newspaper, journal etc. requisite number of copies
of the prospectus and application forms accompanied by the abridged prospectus should be distributed to
the brokers, underwriters, merchant bankers, lead managers, bankers etc. to the issue.
(11) Pricing
(12) Promoters contribution and lock-in-period
(13) Underwriting
(14) Mandatory Collection Centres
(15) Certificate relating to promoters’ contribution: The SEBI Regulations require that atleast one day prior to
the date of opening of the issue, a certificate from the Chartered Accountant to the effect that the promoters’
contribution in its entirety has been brought in advance before the public issue opens should be forwarded to
it. The certificate should be accompanied by a list of names and addresses of friends, relatives and associates
who have contributed to the promoters’ quota, along with the amount of subscription made by each of them.
The same shall be applicable if the promoter do not hold shares equivalent to minimum 20% of Post issue
paid up capital.
(16) Coordination with the bankers to the issue: The date of opening and closing of the subscription list should
be intimated to all the collecting and controlling branches of the bank with whom the company has entered
into an agreement for the collection of application forms. Further, the company should ensure that a separate
bank account is opened for the purpose of collecting the proceeds of the issues as required by Section 40(3)
of the Companies Act, 2013 and furnish to the controlling branches the resolution passed by the Board of
directors for opening bank account.
(17) Minimum subscription
(18) Allotment of shares: A return of allotment in Form PAS-3 of the Companies (Prospectus and Allotment of
Securities) should be filed with the Registrar of Companies within 30 days of the date of allotment along with
the fees as rules, 2014 specified in the Companies (Registration Offices and Fees) Rules, 2014.
 136  Lesson 4 • EP-SLCM

(19) Refund orders: The company shall disclose the mode in which it shall made refunds to applicants in the
prospectus and abridged prospectus.
ROLE OF COMPANY SECRETARY

SEBI Circular
Certification by Practising Company Secretary in case of offer/allotment of securities by companies to more than
49 and up to 200 investors. To issue a certificate regarding issuance of securities to more than 49 and up to 200
investors that the refund procedure as prescribed by the SEBI has been duly complied with [SEBI Circular No.
Eligibility
CFD/DIL3/CIR/P/2016/53 dated May 03, 2016]
In addition to the above, the Company Secretaries also have a major role to play in ensuring compliance with SEBI
(ICDR) Regulations, 2018 and other Capital market regulations including:
• The Company Secretaries have to guide the management in various regulatory and compliance activities in
public issue and listing
• The Company Secretary also has a key role to play in drafting of prospectus, securities documents and
approval listing or delisting of the securities.
• Co-coordinating and working closely with the Bankers, Registrars, Underwriters and relevant intermediaries.
• Operating as required under various laws including Companies Act, Regulations and Guidelines issued by
SEBI and Stock Exchange needs.
• Ensuring compliance with the regulations relating to Issue of Capital and Disclosure Requirements.
• The Company Secretary shall also ensure compliance with the rules and provisions related to the internal
audit, certifications and other applicable rules.

LESSON ROUND-UP

• Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of
prospectus.

• All listed companies whose equity shares are listed on a stock exchange and unlisted companies eligible to
make a public issue and desirous of getting its securities listed on a recognised stock exchange pursuant
to a public issue, may freely price its equity shares or any securities convertible at a later date into equity
shares.

• Issue of Securities are regulated by the SEBI (ICDR) Regulations, 2018.

• The SEBI (ICDR) Regulations, 2018 lays down the provisions and procedure for various types of issue,
including public and rights issue.

• In case of an IPO, the promoters of the issue shall hold at least 20% of the post issue capital.

• The SR shares shall be issued only to the promoters/ founders who hold an executive position in the
issuer company;

• The promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of
one year from the date of allotment in the IPO.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 137

• A merchant banker holding a valid certificate of registration is required to be appointed to manage the
issue.

• Every company making a public issue is required to appoint a compliance officer and intimate the name
of the compliance officer to SEBI.

• Public issue must be kept open for atleast 3 working days but not more than 10 working days including
the days for which the issue is kept open in case of revision in price band.

• Rights issue means an offer of specified securities by a listed issuer to the shareholders of the issuer as
on the record date fixed for the said purpose.

• Qualified institutions placement means issue of eligible securities by a listed issuer to qualified
institutional buyers on a private placement basis and includes an offer for sale of specified securities by
the promoters and/or promoter group on a private placement basis, in terms of these regulations.

• Innovators growth platform means the trading platform for listing and trading of specified securities of
issuers that comply with the eligibility criteria specified in regulation 283 of SEBI (ICDR), 2018.

• Bonus issue of shares means additional shares issued by the Company to its existing shareholders to
reward for their royalty and is an opportunity to enhance the shareholders wealth. The bonus shares are
issued without any cost to the Company by capitalizing the available reserves.

GLOSSARY

Average market
It means the sum of daily market capitalization of “public shareholding” for a period of capitalisation of one year
up to the end of the quarter preceding the month in which the proposed public shareholding issue was approved
by the Board of Directors/ shareholders, as the case may be, divided by the number of trading days.
Basis of allotment
An allotment pattern of an issue among different categories of applicant.
General Corporate Purpose
It includes such identified purposes for which no specific amount is allocated or any amount so specified towards
General Corporate Purpose or any such purpose by whatever name called, in the draft offer document filed with SEBI.
Offer for sale
An offer of securities by existing shareholder(s) of a company to the public of subscription through an offer document.
Price Band
The range within which the price of a security or the index of a currency is permitted to move within a given period.
138  Lesson 4 • EP-SLCM

TEST YOURSELF

1. Discuss briefly provisions relating to reservation on competitive basis under the SEBI (ICDR) Regulations, 2018.
2. What is the eligibility requirement for making an initial public offer by an issuer?
3. A company cannot offer its shares at different sets of people in a particular public issue. Comment
4. Briefly enumerate the various conditions required to be fulfilled by an issuer to issuer warrant in an initial
public offer.
5. What do you mean by SR equity shares?
6. P Ltd. is planning to issue an IPO in 2019 for which a draft offer document is proposed to be filed in
September, 2019. The following data is available regarding the company :
(`in crore)

2015-16 2016-17 2017-18

Net Tangible Assets 5.00 8.00 7.00
Monetary Assets 1.00 3.00 3.00
Net Worth 3.00 4.00 5.00

(i) Advice the company whether they can proceed with the IPO.
(ii) Will your answer be different if value of monetary assets is Rs. 4 crore in 2016-17 ?
(iii) How will you deal with the situation, if company has monetary assets of Rs. 5 crore in the year 2017-18
?
7. Write short notes on –
(a) Minimum subscription
(b) Minimum promoters’ contribution and lock-in-period
(c) Offer Document
(d) Red-herring Prospectus
(e) Regulatory sandbox

LIST OF FURTHER READINGS

• SEBI Manual
• Premier on Companies Act, 2013
• Regulations/Rules/Guidelines/Circulars issued by SEBI, RBI, MCA etc. from time to time
• SEBI Annual Reports
• SEBI Monthly Bulletin
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 139

OTHER REFERENCES (Including Websites/Video Links)

www.mca.gov.in
www.sebi.gov.in
www.icsi.edu
www.nseindia.com
www.bseindia.com
www. nsdl.co.in
www.cdslindia.com
140  Lesson 4 • EP-SLCM
 An Overview of SEBI (Listing
Obligations and Disclosure
Lesson 5 Requirements) Regulations, 2015

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand: • SEBI (Listing Obligations
• Disclosures and Disclosure
• Key provisions of the SEBI
Requirements) Regulations,
• Designated (LODR) Regulations, 2015
2015
securities • Various time and event
• Specified securities based compliances
• Various disclosure
• Listing agreement requirements prescribed
• Key Managerial therein
Personnel • Regulatory prescriptions on
Corporate Governance
• Listed Entity provisions
• Net Worth • Conceptual Understanding
on various committees of
• Related Party
the Board
• Small and Medium • Conceptual Understanding
Enterprises on various policies of a listed
• Subsidiary Company company

Lesson Outline
• Introduction • Compliances under SEBI
• Regulatory Framework of (LODR) Regulations, 2015
SEBI (Listing Obligations and for the Listed Entity which
Disclosure Requirements) has listed its Non-
Regulations, 2015 Convertible Debt Securities
or Non-Convertible
• Key Definitions
Redeemable Preference
• Applicability Shares or Both
• Obligations of Listed Entities • Policies covered under SEBI
• Compliances under SEBI (LODR) Regulations, 2015
(LODR) Regulations, 2015 • Liability of a Listed Entity
• Corporate Governance under for Contravention
SEBI (LODR) Regulations, • Role of Company Secretary
2015
• LESSON ROUND-UP
• Prior Intimations
• GLOSSARY
• Disclosure of Events or
• TEST YOURSELF
Information
• LIST OF FURTHER READINGS
• Meeting of shareholders and
voting • OTHER REFERENCES
 142  Lesson 5 • EP-SLCM

INTRODUCTION
Section 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) provides that where the securities are listed
on the application of any person in any recognised stock exchange, such person shall comply with the conditions of
the listing agreement with that stock exchange. Pursuant to insertion of these provisions in the SCRA in 1956, the
Listing Agreement, although a contract, was made a statutory requirement, thereby making it mandatory for every
listed entity in India to comply with the Listing Agreement.
In India, the Securities and Exchange Board of India (SEBI) regulats listed companies through the medium of listing
agreement entered into between each listed company with the concerned stock exchange. Compliance with the
listing conditions is mandatory by virtue of the governing law. SEBI has modified the provisions relating to Listing
Agreement that the companies need to enter into with the stock exchanges while listing securities and replaced the
Listing agreement with the new the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(‘Listing Regulations’).
Listing of securities with stock exchange is a matter of great importance for companies and investors, because this
provides the liquidity to the securities in the market. Any company intending to offer its shares to the public for
subscription is required to be listed on the stock exchange and has to comply with SEBI (Listing Obligation and
Disclosure Requirements) Regulations, 2015 (SEBI (LODR) Regulations). A company seeking listing of securities on
the Stock Exchange is required to enter into a formal listing agreement with the Stock Exchange.
Accordingly, the listed entity, before issuing securities, shall obtain an ‘in-principle’ approval from recognised stock
exchange(s) in the following manner:
(a) where the securities are listed only on recognised stock exchange(s) having nationwide trading terminals,
from all such stock exchange(s);
(b) where the securities are not listed on any recognised stock exchange having nationwide trading terminals,
from all the stock exchange(s) in which the securities of the issuer are proposed to be listed;
(c) where the securities are listed on recognised stock exchange(s) having nationwide trading terminals as well
as on the recognised stock exchange(s) not having nationwide trading terminals, from all recognised stock
exchange(s) having nationwide trading terminals.
The requirement of obtaining in-principle approval from recognised stock exchange(s), shall not be applicable for
securities issued pursuant to the scheme of arrangement for which the listed entity has already obtained
No-Objection Letter from recognised stock exchange(s) in accordance with regulation 37 of these SEBI (LODR)
Regulations.
SEBI has prescribed and also specified all the quantitative and qualitative requirements to be continuously complied
with by the issuer for continued listing. The Stock Exchanges monitor the compliances by listed companies and can
order suspension of the trading of such company’s shares in case of any non-compliance.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

SEBI notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’/
SEBI (LODR)’’) on September 2, 2015, which were effective from December 1, 2015 with two objectives, firstly, to
align clauses of the listing agreement with Companies Act, 2013 and secondly, to consolidate the conditions under
different securities listing agreements in one single regulation.

REGULATORY FRAMEWORK

S. Chapter and
Schedule No.
No.
under LODR Particulars
Regulations,
2015
1. Chapter I Preliminary (Definitions)
2. Chapter II Principles Governing Disclosures and Obligations of Listed Entity
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 143

3. Chapter III Common Obligations of Listed Entities

4. Chapter IV Obligations of Listed Entity which has Listed its Specified Securities
Obligations of Listed Entity which has Listed its Non-Convertible Debt Securities or
5. Chapter V
Non-Convertible Redeemable Preference Shares or Both
Obligations of Listed Entity which has Listed Its Specified Securities and either Non-
6. Chapter VI
Convertible Debt Securities or Non-Convertible Redeemable Preference Shares or Both

7. Chapter VII Obligations of Listed Entity which has Listed its Indian Depository Receipts

8. Chapter VIII Obligations of Listed Entity which has Listed its Securitised Debt Instruments
9. Chapter VIII A Obligations of Listed Entity which has Listed its Security Receipts
10. Chapter IX Obligations of Listed Entity which has Listed its Mutual Fund Units
11. Chapter X Duties and Obligations of the Recognised Stock Exchange(s)
12. Chapter XI Procedure for Action in Case of Default
13. Chapter XIA Power to relax strict enforcement of the regulations
14. Chapter XII Miscellaneous
15. Schedule I Terms of Securities
16. Schedule II Corporate Governance
Part A - Minimum Information to be Placed Before Board of Directors
Part B – Compliance Certificate
Part C - Role of the Audit Committee and Review of Information by Audit Committee
Part D - Role of Committees (other than Audit Committee)
Part E – Discretionary Requirements
17. Schedule III Part A - Disclosures of Events or Information: Specified Securities
Part B - Disclosure of Information having Bearing on Performance/Operation of Listed
Entity and/or Price Sensitive Information: Non-Convertible Debt Securities &
Non-Convertible Redeemable Preference Shares
Part C - Disclosures of Material Events or Information: Indian Depository Receipts
Part D - Disclosure of Information having Bearing on Performance/ Operation of Listed
Entity and/or Price Sensitive Information: Securitised Debt Instrument
Part E - Disclosure of Events or Information to Stock Exchanges: Security Receipts
18. Schedule IV Part A: Disclosures in Financial Results
Part B: Preparation and Disclosures in Financial Results of Listed Entity which has
Listed its Indian Depository Receipts
19. Schedule V Annual Report
20. Schedule VI Manner of Dealing With Unclaimed Shares
21. Schedule VII Transfer of Securities
22. Schedule IX Amendments to other Regulations
23. Schedule X List of SEBI Circulars which stand Rescinded
24. Schedule XI Fee in respect of draft Scheme of Arrangement
 144  Lesson 5 • EP-SLCM

KEY DEFINITIONS
• “Listed entity” means an entity which has listed, on a recognised stock exchange(s), the designated securities
issued by it or designated securities issued under schemes managed by it, in accordance with the listing
agreement entered into between the entity and the recognised stock exchange(s).
• “Designated securities” means specified securities, non-convertible debt securities, non-convertible
redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares,
Indian depository receipts, securitised debt instruments, security receipts, units issued by mutual funds and
any other securities as may be specified by the SEBI.
• “Specified securities” means ‘equity shares’ and ‘convertible securities’ as defined under clause (eee) of
sub- regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018.
• “Listing agreement” means an agreement that is entered into between a recognised stock exchange and an
entity, on the application of that entity to the recognised stock exchange, undertaking to comply with
conditions for listing of designated securities.
• “Independent Director” means a non-executive director, other than a nominee director of the listed entity:
(i) who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise
and experience;
(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or
member of the promoter group of the listed entity;
(iii) who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate
company;
(iv) who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with
the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during
the two immediately preceding financial years or during the current financial year;
(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent.
or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be
prescribed from time to time, whichever is lower, during the two immediately preceding financial
years or during the current financial year;
(vi) who, neither himself, nor whose relative(s) —
(A) holds or has held the position of a key managerial personnel or is or has been an employee of
the listed entity or its holding, subsidiary or associate company in any of the three financial
years immediately preceding the financial year in which he is proposed to be appointed;
(B) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of —
1. a firm of auditors or company secretaries in practice or cost auditors of the listed entity
or its holding, subsidiary or associate company; or
2. any legal or a consulting firm that has or had any transaction with the listed entity, its
holding, subsidiary or associate company amounting to ten per cent or more of the gross
turnover of such firm;

(C) holds together with his relatives two per cent or more of the total voting power of the listed
entity; or
(D) is a chief executive or director, by whatever name called, of any non-profit organisation that
receives twenty-five per cent or more of its receipts or corpus from the listed entity, any of its
promoters, directors or its holding, subsidiary or associate company or that holds two per cent
or more of the total voting power of the listed entity;
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 145

(E) is a material supplier, service provider or customer or a lessor or lessee of the listed entity;
(vii) who is not less than 21 years of age
(viii) who is not a non-independent director of another company on the board of which any non- independent
director of the listed entity is an independent director

APPLICABILITY
These regulations shall apply to a listed entity which has listed any of the following designated securities on
recognised stock exchange(s):

Securitised debt
instruments
Indian depository Security
receipts receipts

NCDs, NCRPs, Units issued by

Perpetual Debt mutual funds
Instrument

Specified securities
listed on main Any other
board or SME
Exchange or
Applicability securities as may
be specified by
Innovators Growth SEBI
Platform .

The provisions of these regulations which become applicable to listed entities on the basis of
market capitalisation criteria shall continue to apply to such entities even if they fall below
such thresholds.

OBLIGATIONS OF LISTED ENTITIES

The obligations of listed entities have been classified under following categories -

Common obligations (Applicable for all listed entities)

Obligations of Listed entity which has listed its Specified Securities

Obligations of Listed entity which has listed its Non- Convertible Debt Securities or Non-
Convertible Redeemable Preference Shares or both
 146  Lesson 5 • EP-SLCM

Obligations of Listed entity which has listed its Specified Securities and either
Non-Convertible Debt Securities or Non-Convertible Redeemable Preference
Shares or both

Obligations of Listed entity which has listed its Indian depository receipts.

Obligations of Listed entity which has listed its securitised debt instruments,

Obligations of Listed entity which has listed its Security Receipts.

Obligations of Listed entity which has listed its units issued by mutual funds.

COMMON OBLIGATIONS OF LISTED ENTITIES

The listed entity shall ensure that key managerial personnel, directors, promoters or any other person dealing with
the listed entity, complies with responsibilities or obligations, if any, assigned to them under these regulations.

General obligations applicable to all listed companies

Following are the key obligations applicable to all listed companies:
• Compliance officer and his/her obligations: A listed company shall appoint a qualified Company Secretary
as the Compliance officer who shall be responsible for:
» ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit
» Co-ordination and reporting to Board, recognised stock exchange(s) and depositories
» Ensuring correct procedures are followed and reports are filed
» Monitoring email address of grievance redressal division
• Share-transfer agent: The listed entity shall appoint a share transfer agent or mange the share transfer
facility in house
• Co-operation with intermediaries registered with the SEBI: Wherever applicable the listed entity
shall co-operate with and submit correct and adequate information to the intermediaries registered with the
SEBI such as credit rating agencies, registrar to an issue and share transfer agent etc.
• Preservation of documents: The listed entity shall have a policy for preservation of documents, approved
by its board of directors, classifying them in at least two categories as follows-
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 147

» documents whose preservation shall be permanent in nature

» documents with preservation period of not less than eight years after completion of the relevant
transactions
However, the listed entity may keep documents in electronic mode.
• Filing of information: The listed entity shall file the reports, statements, documents, filings and any other
information with the recognised stock exchange(s) on the electronic platform as specified by the SEBI or the
recognised stock exchange(s).
• Scheme of Arrangement: The listed entity shall ensure that any scheme of arrangement /amalgamation/
merger /reconstruction /reduction of capital etc. to be presented to any Court or Tribunal does not in any
way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s).
• Payment of dividend or interest or redemption or repayment: The listed entity shall use any of the
electronic mode of payment facility approved by the Reserve Bank of India, in the manner specified in
Schedule I, for the payment of dividends, interest, redemption or repayment amounts.
• Grievance Redressal Mechanism: The listed entity shall ensure that adequate steps are taken for expeditious
redressal of investor complaints. The listed entity shall ensure that it is registered on the SCORES platform or
such other electronic platform or system of the SEBI as shall be mandated from time to time.
• Fees and other charges to be paid to the recognized stock exchange(s): The listed entity shall pay all
such fees or charges, as applicable, to the recognised stock exchange(s), in the manner specified by the SEBI
or the recognised stock exchange(s).

COMPLIANCES UNDER SEBI (LODR) REGULATIONS

The Listed entity shall comply with the following compliances under the SEBI (LODR) Regulations:-
• One Time Compliances
• Quarterly Compliances
• Half yearly Compliances
• Yearly Compliances
• Event based Compliances

One-time Compliances
The following are the one time compliances:-

Regulation Particulars

6(1) A listed entity shall appoint a Company Secretary as the Compliance Officer

7(1) The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.
However, in the case of in-house share transfer facility, as and when the total number of holders of
securities of the listed entity exceeds one lakh, the listed entity shall either register with the SEBI
as a Category II share transfer agent or appoint Registrar to an issue and share transfer agent
registered with the SEBI
9 The listed entity shall have a policy for preservation of documents, approved by its Board of
Directors
 148  Lesson 5 • EP-SLCM

Quarterly Compliances

Regulation Title Particulars Time Limit

13(3) Investor complaints The listed entity shall file with the recognised within 21 days from end of
Statement stock exchange, a statement giving the quarter
number of investor complaints pending at
the beginning of the quarter, those received
during the quarter, disposed of during the
quarter and those remaining unresolved at
the end of the quarter

27(2) Quarterly The listed entity shall submit a quarterly within 21 days from the
Compliance report compliance report on corporate governance end of each quarter
in the format as specified by SEBI from time
to time to the recognized stock exchange(s)

31(1)(b) Shareholding The listed entity shall submit to the stock within 21 days from the
pattern exchange(s) a statement showing holding of end of each quarter
securities and shareholding pattern
separately for each class of securities, in the
format specified by SEBI from time to time
32(1) Statement of The listed entity shall submit to the stock Quarterly Basis till such
deviation(s) or exchange a statement of deviation or variation time the issue proceeds
Variation(s) (for public issue, rights issue, preferential have been fully utilized or
issue etc.) the purpose for which
these proceeds were
raised has been achieved.
32(6) Monitoring Agency Where the listed entity has appointed a within 45 days from the
Report monitoring agency to monitor utilisation of end of each quarter
proceeds of a public or rights issue, the listed
entity shall submit to the stock exchange(s)
any comments or report received from the
monitoring agency
33(3) Financial results The listed entity shall submit quarterly and within 45 days of end of
year-to-date standalone financial results to each quarter, other than
the stock exchange. the last quarter
In case the listed entity has subsidiaries, the
listed entity shall also submit quarterly/
year- to date consolidated financial results
47 Advertisements in Financial results, along-with the modified Within 48 hours of
Newspapers opinion(s) or reservation(s), if any, expressed conclusion of the meeting
by the auditor of board of directors at
which the financial results
were approved
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 149

Half Yearly Compliances

Regula-
Title Particular Time Limit
tion
23(9) Related Party The listed entity shall submit to the stock within 30 days from
disclosures exchange, disclosures of related party on the date of publication
consolidated basis of its standalone and
consolidated financial
results for the half year
33(3) Statement of The listed entity shall also submit as part half-yearly basis
Assets and of its standalone or consolidated financial
Liabilities/ results for the half year a statement of
Cashflow assets and liabilities and a statement of
cash flows by way of a note

Yearly Compliances

Regulation Title Particulars Time Limit

7(3) Compliance The listed entity shall submit a compliance Within 30 from the end of the
Certificate certificate to the exchange, duly signed by financial year
both the compliance officer of the listed
entity and the authorised representative of
the share transfer agent certifying that all
activities in relation to share transfer facility
of the listed entity are maintained either in
house or by Registrar to an issue and share
transfer agent registered with the SEBI
14 Annual Listing The listed entity shall pay all such fees or within 30 days of the end of
Fees charges, as applicable, to the recognised financial year
stock exchange(s), in the manner specified
by SEBI or the recognised Stock Exchange (s)

33(3) Annual Financial The listed entity shall submit annual audited within 60 days from the end of
results standalone financial results with audit the financial year
report and Statement on Impact of Audit
Qualifications applicable only for audit
report with modified opinion, to the stock
exchange
34 Annual Report The listed entity shall submit the annual Not later than the day of
report along with the Notice of the Annual commencement of dispatch to
General Meeting to the stock exchange. its shareholders.
34(1)(b) Changes to annual In case any changes to the annual report, within 48 hours after the
report the revised copy along with the details of annual general meeting
and explanation for the changes shall be sent
36 Annual reports to The listed entity shall send annual report to Not less than 21 days before
securities holders the holders of securities the annual general meeting.
(in soft or hard copy)
150  Lesson 5 • EP-SLCM

40(9) Certificate The listed entity shall ensure that the share within 30 days from the end of
transfer agent and/or the in-house share the financial year
transfer facility, as the case may be, produces
a certificate from a practising company
secretary certifying that all certificates
have been issued within thirty days of the
date of lodgment for transfer, subdivision,
consolidation, renewal, exchange or
endorsement of calls/ allotment monies

Event Based Compliances

Regulation Title Particulars Time Limit

7(5) Share-transfer The listed entity shall intimate the ap- Within 7 days of Agreement
agent pointment of Share Transfer Agent, to the with RTA
stock exchange(s)
28(1) In-principle The listed entity shall obtain In-principle Prior to issuance of Security
approval approval from recognised stock exchange

29(1)(a) read Intimations The listed entity shall give prior intimations At least 5 days in advance
along with of Board Meeting for fi- nancial result viz. (excluding the date of the
proviso to 29 quarterly, half yearly or annual, to the stock intimation and the date of
(2) exchange(s) the meeting)
29(1) (b), (c), Intimations The listed entity shall give prior intimations At least 2 working days in
(d), (e) & (f) of Board Meeting for Buyback, Voluntary advance (excluding the date
read along delisting, Fund raising by way of FPO, Rights of the intimation and date
with 29 (2) Issue, ADR, GDR, QIP, FCCB, Preferential of the meeting)
issue, debt issue or any other method,
declaration/ recommendation of dividend,
issue of convertible securities including
convertible debentures or of debentures
carrying a right to subscribe to equity shares
or the passing over of dividend, proposal for
declaration of Bonus securities etc., to the
stock exchange(s)
29(3) Intimations The listed entity shall give prior intimations At least 11 working days in
of Board Meeting for alteration in nature of Advance
Securities, alteration in the date on which
interest on debentures/ bonds/redemption
amount, etc. shall be payable to the stock
exchange(s)
30(6) Disclosure of events The listed entity shall disclose all events, as Not later than 24 hours
specified in Part A of Schedule III of SEBI from the occurrence of the
(LODR) Regulations, to the stock exchange(s) event or information

31(1)(a) Holding of Specified The listed entity shall submit to the stock One day prior to listing of
securities exchange(s) a statement showing hold- ing Securities
of securities and shareholding pattern
separately for each class of securities prior to
listing of securities
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 151

31(1)(c) Shareholding The listed entity shall submit to the stock Within 10 days of any
pattern exchange(s) a statement showing hold- ing capital restructuring
of securities and shareholding pattern exceeding 2% of the total
separately for each class of securities in case paid-up share capital
of Capital Restructuring
31A (8) Disclosure of The listed entity shall disclose to the stock within 24 hours from
material events in exchange the deemed material events i.e., the occurrence of the event
case for receipt of request for re-classification by
reclassification of the listed entity from the promoter(s)
any person as seeking re-classification, Minutes of the
promoter/public board meeting considering such request
which would include the views of the board
on the request, etc
37(1) Scheme of The listed entity shall file draft Scheme of Prior approval before filing
arrangement Arrangement to the stock exchange(s) with Court or Tribunal
39(2) Issue of Certificate The listed entity shall issue certificates or within 30 days from the
receipts or advices, as applicable, of date of such lodgment
subdivision, split, consolidation, renewal,
exchanges, endorsements, issuance of
duplicates thereof or issuance of new
certificates or receipts or advices, as
applicable, in cases of loss or old decrepit or
worn out certificates or receipts or advices,
as applicable
39(3) Information relating The listed entity shall submit information Within 2 days of getting in-
loss of securities with respect to loss of share certificates formation
and issue of the duplicate certificates to the
stock exchange
40(3) Registering the The listed entity shall register transfers of its within 15 days from the
transfer of securities in the name of the transferee(s) and date of such receipt of
securities issue certificates or receipts or advices, as request for transfer.
applicable, of transfers; or issue any valid
objection or intimation to the transferee or
transferor, as the case may be,
Transmission The listed entity shall proceed the In case securities held in
request transmission request for securities held in Dematerialised Mode,
dematerialization mode and physical mode within 7 days after receipt
of the documents
In case of Physical Mode,
within 21 days after receipt
of the documents
 152  Lesson 5 • EP-SLCM

42(2) Record Date / Book The listed entity shall intimate the record In case of Right Issue, at
Closure date or date of closure of transfer books to all least 3 working days in
the stock exchange(s) specifying the purpose advance (excluding the date
of the record date where it is listed or where of intimation and record date)
stock derivatives are available on the stock
of the listed entity or where listed entity’s
stock form part of an index on which Other than Right Issue, at
derivatives are available. The listed entity least 7 working days in
shall intimate the following events: advance (excluding the
(a)declaration of dividend date of intimation and
record date)
(b)issue of right or bonus shares
(c)issue of shares for conversion of
debentures or any other convertible security
(d)shares arising out of rights attached to
debentures or any other convertible security
(e)corporate actions like mergers, de-
mergers, splits, etc
(f) such other purposes as may be specified
by the stock exchange(s)
* For securities held in physical form the
listed entity may announce transfer book
closure
43A Dividend Dividend Distribution Policy by the top To formulate a dividend
distribution 1000 listed entities based on market distribution policy which
policy capitalization (calculated as on March 31 shall be disclosed on
of every financial year) the website of the listed
entity and a web-link shall
also be provided in their
annual reports.
44(3) Voting results The listed entity shall submit to the stock Within 2 working days
exchange details regarding voting results of conclusion of its
in the format specified by SEBI General Meeting
46 Maintenance of The listed entity shall maintain a functional within 2 working days
website website containing the basic information from the date of change in
about the listed entity and update any content
change in the content of its website.

Note: as per Regulation 36(4), the information and documents made by the listed entity-
(a) to the stock exchanges shall be in XBRL; and
(b) to the stock exchanges and on its website, shall be in a format that allows users to find relevant information
easily through a searching tool.

CORPORATE GOVERNANCE UNDER SEBI (LODR) REGULATIONS, 2015

The listed entities which has listed its specified securities on any recognised stock exchange(s) either on the main
board or on SME Exchange or on Innovators Growth Platform has to comply with certain corporate governance
provisions which are specified in Regulations 17 to 27 and clause (b) to (i) and t of regulation 46(2) and para C, D
and E of Schedule V of the SEBI (LODR) Regulations.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 153

Sl. Listing
Particulars
No. Regulation
1. Definitions 16
2. Board Composition 17(1)
3. Size of the Board 17(1)(a)
4. Appointment of Woman Director 17(1)(a)
5. Minimum number of directors requirement for top 1000 and top 2000 listed entities. 17(1)(c)
6. Where the listed company has outstanding SR equity shares. 17(1)(d)
7. Maximum age of non-executive directors 17 (1A)
8. Number of meetings of the board of directors. 17(2)
9. Quorum for meeting of the board of directors of top 1000 and top 2000 listed entities. 17(2A)
10. Maximum number of directorships 17A
11. Succession planning 17(4)
12. Code of Conduct of Board of Directors & Senior Management 17(5)
13. Prohibited Stock options for Independent Directors (IDs) 17(6)(d)
14. Performance evaluation of IDs 17 (10)
15. Maximum number of directorships 17A
16. Constitution of Audit Committee 18
17. Constitution of Nomination & Remuneration Committee 19
18. Constitution of Stakeholders Relationship Committee 20
19. Constitution of Risk management Committee 21
20. Formulation of Vigil mechanism 22
21. Related party transactions 23
22. Corporate governance requirements with respect to subsidiary of listed entity. 24
23. Secretarial Audit and Secretarial Compliance Report 24A
24. Obligations with respect to Independent Directors 25
25. Obligations with respect to employees including senior management, key managerial 26
persons, directors and promoters.
26. Other Corporate Governance Requirements 27
27. Submission of Corporate Governance Report to Stock Exchange 27(2) (a)
28. Dissemination under a separate section on the website of the company 46(2)
29. Corporate Governance Report to be part of the Annual Report Para C of
Schedule V
30. Declaration signed by the chief executive officer stating that the members of board of Para D of
directors and senior management personnel have affirmed compliance with the code of Schedule V
conduct of board of directors and senior management.
31. Compliance certificate from either the auditors or practicing company secretaries Para E of
regarding compliance of conditions of corporate governance shall be annexed with Schedule V
the directors’ report.
 154  Lesson 5 • EP-SLCM

Exceptions for Listed Entity which has listed its Specified Securities

As per Regulation 15(2) of the SEBI (LODR) Regulations, 2015 the compliance with the corporate governance
provisions as specified in Regulations 17 to 27 and clauses (b) to (i) and t of Regulation 46(2) and para C, D and E
of Schedule V shall not apply, in respect of following -
1. A listed entity having:-
• paid up equity share capital not exceeding rupees 10 crore and
• net worth not exceeding rupees 25 crore, as on the last day of the previous financial year.
Provided that-
Where the provisions of regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and
para C, D and E of Schedule V become applicable to a listed entity at a later date, it shall ensure compliance with the
same within six months from such date.
Further, once the above regulations become applicable to a listed entity, they shall continue to remain applicable till
such time the equity share capital or the networth of such entity reduces and remains below the specified threshold
for a period of three consecutive financial years.

Question: A Company ABC Limited, which has its Equity Shares listed on stock exchanges, has a paid up capital
of Rs. 9 Crore and net worth of Rs. 26 Crore.
Answer: In such a case, the exemption will not be available to ABC Limited as it is required to comply with both
conditions as stated in para 1 above.

2. A listed entity which has listed its specified securities on the SME Exchange.

3. The provisions as specified in regulation 17 shall not be applicable during the insolvency resolution process
period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency
Code: However, the role and responsibilities of the board of directors as specified under regulation 17 shall be
fulfilled by the interim resolution professional or resolution professional in accordance with sections 17 and 23 of
the Insolvency Code.
4. Regulations 18, 19, 20 and 21 shall not be applicable during the insolvency resolution process period in respect
of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code.
However, the roles and responsibilities of the committees specified in the respective regulations shall be fulfilled by
the interim resolution professional or resolution professional.
5. Notwithstanding any provisions under Regulation 15(2) stated above, the provisions of Companies Act, 2013
shall continue to apply, wherever applicable.

KEY PROVISIONS PERTAINING TO CORPORATE GOVERNANCE

Composition of Board of Directors

Board of Directors shall have optimum combination of executive and non-executive directors with at least one-
woman director and not less than fifty per cent. of the board of directors shall comprise of non-executive directors.

However, the Board of directors of the top 500 listed entities shall have at least one independent woman director by
April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman
director by April 1, 2020.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 155

Question:
ABC Limited is a listed entity and having on Board one-woman Director as Executive Director. The Company is
within the top 1000 listed entities. Whether the Company still requires to appoint another woman Director?
Answer:
In the given case, the Company will be required to appoint one Independent woman Director as the Company is
having Executive woman Director and not independent.

The Composition of board of directors of the listed entity shall be as follows:

Chairman Composition
• In case chairperson is a non-executive • at least one-third of the board of directors
director shall comprise of independent directors
Further in case-
• non-executive chairperson is a promoter of the • at least half of the board of directors shall be
listed entity or independent directors
• is related to any promoter or person occupying
management positions at the level of board of
director or at one level below the board of
directors
In case listed entity does not have a regular non- at least half of the board of directors shall comprise of
executive chairperson independent directors

Where the listed company has outstanding SR equity shares, atleast half of the board of directors shall comprise of
independent directors.

Question:
Mr. A is non-executive director of ABC Limited. X, Y and Z are promoters of ABC Limited. Mr. A is a chairperson
of the Company and he is also related to X. Suggest the requirement of Independent directors for ABC Limited.
Answer:
In the given case, since Mr. A is non-executive chairperson and is related to promoter, then ABC Limited will be
required to appoint atleast half of the directors as independent director.

With effect from April 1, 2022, the top 500 listed entities shall ensure that the Chairperson of the board of such
listed entity shall –
• be a non-executive director;
• not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative”
defined under the Companies Act, 2013.
However, the above shall not be applicable to the listed entities which do not have any identifiable promoters as per
the shareholding pattern filed with stock exchanges.

Maximum age of non-executive directors

No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who
has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory
statement annexed to the notice for such motion shall indicate the justification for appointing such a person.
 156  Lesson 5 • EP-SLCM

Explanation: The top 1000 and 2000 entities shall be determined on the basis of market capitalisation as at the end
of the immediate previous financial year.
Minimum Directors Requirement
The board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities
(with effect from April 1, 2020) shall comprise of not less than six directors.
Meetings of Board
Board shall meet at least four times a year, with a maximum time gap of one hundred and twenty days between any
two meetings.
Quorum of board meeting
The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019
and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three
directors, whichever is higher, including at least one independent director.
In case of listed entity, one independent director should be present at the Meeting to form a quorum.

Key Compliance Requirements for Board

• Periodically review compliance reports pertaining to all laws applicable to the listed entity, as well as steps
taken by the listed entity to rectify instances of non-compliances.
• Satisfy itself that plans are in place for orderly succession for appointment to the board of directors and
senior management.
• Lay down a code of conduct for all members of board of directors and senior management and incorporate
duties of independent directors.
• Recommend all fees or compensation, if any, paid to non-executive directors, including independent directors
and shall require approval of shareholders in general meeting.
• Lay down procedures to inform members of board of directors about risk assessment and minimization
procedures
• Responsible for framing, implementing and monitoring the risk management plan for the listed entity.
• Performance evaluation of independent directors
• The minimum information to be placed before the board of directors is specific in Part A of Schedule II.
• The chief executive officer and the chief financial officer shall provide the compliance certificate to the board
of directors as specified in Part B of Schedule II.

Maximum Number of Directorships / Committee Membership & Chairpersonship

• A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not
more than seven listed entities with effect from April 1, 2020. However a person shall not serve as an
independent director in more than seven listed entities.
• Any person who is serving as a whole time director / managing director in any listed entity shall serve as an
independent director in not more than three listed entities.
[Explanation - For the purpose of this regulation, the count for the number of listed entities on which a person
is a director / independent director shall be only those whose equity shares are listed on a stock exchange.]
• A director shall not be a member in more than ten committees or act as chairperson of more than five
committees across all listed entities in which he / she is a director which shall be determined as follows:
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 157

(a) the limit of the committees on which a director may serve in all public limited companies, whether
listed or not, shall be included and all other companies including private limited companies, foreign
companies and companies under Section 8 of the Companies Act, 2013 shall be excluded;
(b) for the purpose of determination of limit, chairpersonship and membership of the audit committee
and the Stakeholders’ Relationship Committee alone shall be considered.

Question:
Mr. A is a Director of ABC Listed company. He holds following membership / chairmanship in following companies –
1. Chairman of Audit Committee of ABC Listed company
2. Chairman of Nomination & Remuneration Committee of ABC Listed company
3. Chairman of Stakeholders’ Relationship Committee of ABC Listed company
4. Chairman of Audit Committee of XYZ Limited company
5. Chairman of Nomination & Remuneration Committee of XYZ Limited company
6. Chairman of Stakeholders’ Relationship Committee of XYZ Limited company
Please advise the limit of membership / chairpersonship.
Answer:
Mr. A, in the given case, is chairman of above mentioned committees. Only Audit Committee and Stakeholders
Relationship Committee will be counted for the purpose and both ABC Listed company and XYZ Limited, being
public limited company will be considered.
In view of the above, his total chairperson is 4 which is within the limit of 5 committee chairpersonship as
permitted.

It is to be noted that chairpersonship is counted in the overall limit of membership as well.

Board Committees

Audit Committee
(Regulation 18)

Nomination and
Risk Management Remuneration
Committee Committees
Committee
(Regulation 21) (Regulation 19)

Stakeholders Relationship
Committee (Regulation
20)
158  Lesson 5 • EP-SLCM

Nomination & Stakeholders

Audit Committee Remuneration Relationship Risk Management
Committee Committee
Committee
Composition • The committee • The committee shall • The committee shall • The Risk
shall comprise comprise of at least comprise of atleast Management
of at least three three directors. three directors. Committee shall
directors.
• All directors of the • The committee shall have minimum
• Two-thirds of the
members of audit committee shall be have at least one three members
committee shall non- executive independent with majority of
be independent directors. director. them being
directors. • At least fifty percent • In case of a listed members of the
• In case of a listed of the directors entity having board of
entity having directors,
shall be outstanding SR
outstanding SR including at
equity shares, the independent equity shares, at
audit committee directors. least two thirds of least one
shall only • In case of a listed the Stakeholders independent
comprise of entity having Relationship C o m director.
independent outstanding SR m i t t e e shall • In case of a
directors. comprise of listed entity
equity shares, two
• All members of having
thirds of the independent
audit committee
shall be nomination and directors. outstanding SR
financially remuneration equity shares, at
literate and at committee shall least two thirds
least one comprise of of the Risk
member shall independent Management
have accounting Committee shall
or related directors.
financial comprise
management independent
expertise directors.
Chairperson • The chairperson • The Chairperson • The chairperson of • The
shall be an shall be an this committee shall Chairperson of
independent independent be a non-executive the Risk
director. director . Provided director. management
• The Chairperson that the chairperson • The Chairperson of committee shall
shall be present of the listed entity, the be a member of
at Annual general whether executive • Stakeholders the board of
meeting to or non- executive, Relationship directors and
answer may be appointed Committee shall be senior
shareholder as a member of the present at the executives of the
queries. Committee and annual general listed entity
shall not chair such meetings to answer may be
Committee. queries of the members of the
• The Chairperson of security holders. committee.
may be present at
the annual general
meeting, to answer
the shareholders’ q
u e r i e s ; however,
it shall be up to the
chairperson to
decide who shall
answer the queries.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 159

Secretarial Standard 2 prescribes that the Chairman of the Audit Committee, Nomination and
Remuneration Committee and the Stakeholders Relationship Committee, or any other Member
of any such Committee authorised by the Chairman of the respective Committee to attend on
his behalf, shall attend the General Meeting.
Meetings • The committee • The committee shall • The committee shall • The committee
shall meet at meet at least once meet at least once in shall meet at
least four times in a year. a year. least twice in a
in a year and year.
not more than
one hundred and
twenty days shall
elapse between
two meetings.
Quorum • The quorum for • The quorum for a • The quorum for
audit committee meeting of the a meeting of the
meeting shall nomination and Risk
either be two remuneration Management
members or one committee shall be Committee shall
third of the either two members be either two
members of the or one third of the members or one
audit committee, members of the third of the
whichever is committee, members of the
greater, with at whichever is committee,
least two greater, including at whichever is
independent least one higher, including
directors. independent at least one
director in member of the
attendance board of
directors in
attendance.
• The meetings of
the risk
management
committee shall
be conducted in
such a manner
that on a
continuous
basis not more
than one
hundred and
eighty days shall
elapse between
any two
consecutive
meetings.
Secretarial Standard 1 prescribes that unless otherwise stipulated in the Act or the Articles or
under any other law, the Quorum for Meetings of any Committee constituted by the Board shall
be as specified by the Board.
If no such Quorum is specified as stated above, the presence of all the members of any such
Committee is necessary to form the Quorum.
 160  Lesson 5 • EP-SLCM

Role of • The role of the • The role of the • The role of the • The board of
Committee audit committee nomination and Stakeholders directors shall
and the remuneration Relationship define the role
information to be committee shall be Committee shall be and
reviewed by the as specified as in as specified as in responsibility of
audit committee Part D of the Part D of the the Risk
shall be as Schedule II. Schedule II. Management
specified in Part Committee and
C of Schedule II. may delegate
monitoring and
reviewing of the
risk
management
plan to the
committee and
such other
functions as it
may deem fit
(such function
shall specifically
cover cyber
security).
• The role and
responsibilities
of the Risk
Management
Committee shall
mandatorily
include the
performance of
functions
specified in Part
D of Schedule II.

Question:
ABC Limited is a listed company having all committees constituted in compliance with listing regulations. Its
Audit committee having 5 directors, out of which 4 directors are independent. At a meeting of the Audit
Committee, 2 directors were present (one non-executive and one independent). Is the meeting valid?
Answer:
In terms of the listing regulations, two independent directors should be present at the meeting of the Audit
Committee to constitute a valid quorum. Therefore, the aforesaid Meeting is invalid as only one Independent
Director was present.

Note:
• The Company Secretary shall act as the secretary to the audit committee.
• The provisions of Risk Management Committee shall be applicable to top 1000 listed entities, determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.
• The Risk Management Committee shall have powers to seek information from any employee, obtain outside
legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers
necessary.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 161

Vigil Mechanism
• The listed entity shall formulate a vigil mechanism / whistle blower policy for directors and employees to
report genuine concerns.
• The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(s)
or any other person who avail the mechanism.
• The vigil mechanism shall also provide for direct access to the chairperson of the audit committee in
appropriate or exceptional cases.

Related Party Transactions

Under Listing Regulations, 2015
As per Regulation 2(1) (zb) “related party” means a related party as defined under sub-section (76) of section 2 of
the Companies Act, 2013 or under the applicable accounting standards.
Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding
20% or more of shareholding in the listed entity shall be deemed to be a related party.
Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on
a recognised stock exchange(s).
As per Regulation 2(1)(zc) “related party transaction” means a transfer of resources, services or obligations between
a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party
shall be construed to include a single transaction or a group of transactions in a contract:
Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a
recognised stock exchange(s).
Under Companies Act, 2013
According to section 2 (76) “related party”, with reference to a company, means –
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds or holds along with his relatives,
more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act;
However, nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a
professional capacity;
(viii) Any body corporate which is –
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;
Explanation. – For the purpose of this clause, “the investing company or the venturer of a company” means a
body corporate whose investment in the company would result in the company becoming an associate
company of the body corporate.
 162  Lesson 5 • EP-SLCM

(ix) a director other than an independent director or key managerial personnel of the holding company or his
relative with reference to a company, shall be deemed to be a related party.

When will a transaction with a related party be material?

The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related
party transactions 108[including clear threshold limits duly approved by the board of directors and such policy
shall be reviewed by the board of directors at least once every three years and updated accordingly

A transaction with a related party shall With effect from July 01, 2019 a transaction
be considered material if the involving payments made to a related party
transaction(s) to be entered into with respect to brand usage or royalty shall
be considered material if the transaction(s) to
individually or taken together with
be entered into individually or taken together
previous transactions during a financial with previous transactions during a financial
year, exceeds 10% of the annual year, exceed five percent of the annual
consolidated turnover of the listed consolidated turnover of the listed entity as
per the last audited financial statements of
entity as per the last audited financial
the listed entity.
statements of the listed entity

Question:
A company ABC Limited, listed entity, entered into a transaction with related party namely XYZ Limited for an
amount of Rs. 26 Crore. The turnover of ABC Limited is Rs. 240 Cr on standalone basis and after considering
consolidation of subsidiaries & associates is Rs. 290 Cr. Please advise whether the transaction is related party
transaction or not.
Answer:
A material related party transaction is transaction which either individually or taken together with previous
transactions during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity as per the
last audited financial statements of the listed entity.
In the above case, ABC Limited has a consolidated turnover of Rs. 290 Cr and therefore, threshold for materiality
would be Rs. 29 Cr for a transaction with related party.
In case ABC Limited has not entered into any transaction during the financial year 2019-20, which crosses the
overall limit of Rs. 29 Cr including the existing Rs. 26 Cr transaction then it is not material related party transaction.

Approval of Audit Committee

All related party transactions shall require prior approval of the audit committee.

This approval is required irrespective of transaction is material or not.

Omnibus Approval: Audit committee may grant omnibus approval for related party transactions proposed to be
entered into by the listed entity subject to the following conditions-
(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on
related party transactions of the listed entity and such approval shall be applicable in respect of transactions
which are repetitive in nature;
(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval
is in the interest of the listed entity;
(c) the omnibus approval shall specify:
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 163

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of
transactions that shall be entered into,
(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and
(iii) such other conditions as the audit committee may deem fit.
However, where the need for related party transaction cannot be foreseen and aforesaid details are not
available, audit committee may grant omnibus approval for such transactions subject to their value not
exceeding rupees one crore per transaction.
(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered
into by the listed entity pursuant to each of the omnibus approvals given.
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals
after the expiry of one year.

Approval of the shareholders

All material related party transactions shall require approval of the shareholders through resolution and no related
party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.
However, the requirements specified above shall not apply in respect of a resolution plan approved under section
31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of
the resolution plan being approved.

Exceptions
The approval of Audit committee and shareholders shall not be required in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the shareholders at the general meeting for approval.
Government Company(ies) means Government Company as defined in sub-section (45) of section 2 of the Companies
Act, 2013.

Other provisions
• The provisions of this regulation shall be applicable to all prospective transactions.
• For the purpose of this regulation, all entities falling under the definition of related parties shall not vote to
approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.
• All existing material related party contracts or arrangements entered into prior to the date of notification of
these regulations and which may continue beyond such date shall be placed for approval of the shareholders
in the first General Meeting subsequent to notification of these regulations.
• The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated
financial results for the half year, disclosures of related party transactions on a consolidated basis, in the
format specified in the relevant accounting standards for annual results to the stock exchanges and publish
the same on its website.

Corporate Governance requirements related to Subsidiary

• “Material Subsidiary” shall mean a subsidiary, whose income or net worth exceeds ten percent of the
consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year.
Explanation.- The listed entity shall formulate a policy for determining ‘material’ subsidiary.
 164  Lesson 5 • EP-SLCM

• At least one independent director on the board of directors of the listed entity shall be a director on the board
of directors of an unlisted material subsidiary, whether incorporated in India or not.
• The audit committee of the listed entity shall review the financial statements, in particular, the investments
made by the unlisted subsidiary.
• The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting
of the board of directors of the listed entity.
• The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of
the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted
subsidiary.
Explanation.- For the purpose of this regulation, the term “significant transaction or arrangement” shall mean any
individual transaction or arrangement that exceeds or is likely to exceed ten percent of the total revenues or total
expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately
preceding accounting year

Question:
ABC Limited is having three subsidiaries A Ltd, B Ltd and C Ltd. The consolidated income of ABC Limited is Rs.
300 Cr and networth is Rs. 600 Cr.
The income and networth of A Ltd, B Ltd and C Ltd. are as follows –

Income Networth
A Ltd 10 Cr 65 Cr
B Ltd 45 Cr 14 Cr
C Ltd 10 Cr 18 Cr
Please examine if there is any material subsidiary of ABC Limited.
Answer:
In the given case,
10 % of consolidated income and networth of ABC Limited would be 30 Cr and 60 Cr respectively.
Hence, A Ltd since crossed threshold in terms of Networth, would be a material subsidiary.
B Ltd since crossed threshold in terms of income, would be a material subsidiary.
C Ltd since does not cross either of the threshold, would not be a material subsidiary.

Secretarial Audit and Secretarial Compliance Report

• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial
audit and shall annex a secretarial audit report given by a company secretary in practice, in such form as
specified, with the annual report of the listed entity.
• Every listed entity shall submit a secretarial compliance report in such form as specified, to stock exchanges,
within sixty days from end of each financial year.

Obligations in Respect of Independent Directors

• No person shall be appointed or continue as an alternate director for an independent director of a listed
entity with effect from October 1, 2018.
• The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and
rules made thereunder.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 165

• The independent directors of the listed entity shall hold at least one meeting in a financial year, without the
presence of non-independent directors and members of the management and all the independent directors
shall strive to be present at such meeting.
• An independent director who resigns or is removed from the board of directors of the listed entity shall be
replaced by a new independent director by listed entity at the earliest but not later than the immediate next
meeting of the board of directors or three months from the date of such vacancy, whichever is later.

Where the listed entity fulfils the requirement of independent directors in its board of directors without filling
the vacancy created by such resignation or removal, the requirement of replacement by a new independent
director shall not apply.

• The listed entity shall familiarise the independent directors through various programmes about the listed
entity, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
(c) roles, rights, responsibilities of independent directors; and
(d) any other relevant information.
• Every independent director shall, at the first meeting of the board in which he participates as a director and
thereafter at the first meeting of the board in every financial year or whenever there is any change in the
circumstances which may affect his status as an independent director, submit a declaration that he meets the
criteria of independence.
• With effect from October 1, 2018, the top 500 listed entities by market capitalization calculated as on March
31 of the preceding financial year, shall undertake Directors and Officers insurance (‘D and O insurance’) for
all their independent directors of such quantum and for such risks as may be determined by its board of
directors.

Obligation in Respect of Employees including senior Management, key Managerial persons, Directors and
Promoters

• Every director shall inform the listed entity about the committee positions he or she occupies in other listed
entities and notify changes as and when they take place.
• All members of the board of directors and senior management personnel shall affirm compliance with the
code of conduct of board of directors and senior management on an annual basis.
• Senior management shall make disclosures to the board of directors relating to all material, financial and
commercial transactions, where they have personal interest that may have a potential conflict with the
interest of the listed entity at large.
Explanation.- For the purpose of this sub-regulation, conflict of interest relates to dealing in the shares of
listed entity, commercial dealings with bodies, which have shareholding of management and their relatives etc.

PRIOR INTIMATIONS [REGULATION 29]

The listed entity is required to give prior intimation to stock exchange about the meeting of the board of directors
in which any of the following proposals is due to be considered. This is to ensure a complete transparency and to
maintain the volatility of the market price of the shares of the Company.
 166  Lesson 5 • EP-SLCM

At least 5 Clear Days in At least 2 Working Days in advance At least 11 Working Days in
advance advance
• financial results viz. • proposal for buyback of securities; • any alteration in the form or
quarterly, half yearly, • proposal for voluntary delisting nature of any of its listed
or annual, as the case • fund raising by way of FPO, rights issue, securities or in the rights or
may be; ADR/GDR/FCB, QIP, debt issue, privileges of the holders
preferential issue or any other method thereof.
and for determination of issue price: • any alteration in the date on
• declaration/ recommendation of dividend, which, the interest on
issue of convertible securities including debentures or bonds, or the
convertible debentures redemption amount of
• declaration of bonus securities redeemable shares or of
debentures or bonds, shall be
payable.

DISCLOSURE OF EVENTS OR INFORMATION [REGULATION 30]

• The listed entity shall frame a policy for determination of materiality, based on criteria specified in this sub-
regulation, duly approved by its board of directors, which shall be disclosed on its website.

• The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose
of determining materiality of an event or information and for the purpose of making disclosures to stock
exchange and the contact details of such personnel shall be also disclosed to the stock exchange and as well as
on the listed entity's website.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 167

• The listed entity shall first disclose to stock exchange of all events or information as soon as reasonably possible
and not later than 24 hours from the occurrence of event or information.

Outcome of Meetings of the board of directors

(to be disclosed to the Exchange within 30 minutes of the closure of the meeting)
a) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend and the date
on which dividend shall be paid/dispatched;
b) any cancellation of dividend with reasons thereof;
c) the decision on buyback of securities;
d) the decision with respect to fund raising proposed to be undertaken
e) increase in capital by issue of bonus shares through capitalization including the date on which such bonus
shares shall be credited/dispatched;
f) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for future issue or
the creation in any form or manner of new shares or securities or any other rights, privileges or benefits to
subscribe to;
g) short particulars of any other alterations of capital, including calls;
h) financial results;
i) decision on voluntary delisting by the listed entity from stock exchange(s).
In case of board meetings being held for more than one day, the financial results shall be disclosed within thirty
minutes of end of the meeting for the day on which it has been considered

MEETINGS OF SHAREHOLDERS AND VOTING [REGULATION 44]

• The top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall
hold their annual general meetings within a period of five months from the date of closing of the financial year.
• The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general
meetings.
• The listed entity shall provide the facility of remote e-voting to its shareholders and submit to the stock
exchange, within 2 working days of conclusion of its General Meeting, details regarding the voting results in
the format specified by the Board.

REGULATIONS APPLICABLE ON TOP 500, TOP 1000 AND TOP 2000 LISTED ENTITIES

TOP 500 LISTED ENTITIES TOP 1000 LISTED ENTITIES TOP 2000 LISTED ENTITIES
Board of directors shall have at least Board of directors shall have at least -
one independent woman director by one independent woman director by
April 1, 2019 April 1, 2020
With effect from April 1, 2022, the The board of directors (with effect The board of directors (with effect
Chairperson of the board of such from April 1, 2019) shall comprise from April 1, 2020) shall comprise
listed entity shall – of not less than six directors. of not less than six directors.
(a) be a non-executive director;
(b) not be related to the Managing
Director or the Chief Executive
Officer as per the definition of
the term “relative” defined
under the Companies Act,
2013.
 168  Lesson 5 • EP-SLCM

With effect from October 1, 2018, The quorum for every meeting of The quorum for every meeting of
entities shall undertake Directors the board of directors with effect the board of directors with effect
and Officers insurance (‘D and O from April 1, 2019 shall be one-third from April 1, 2020 shall be one-third
insurance’) for all their independent of its total strength or three of its total strength or three
directors of such quantum and for directors, whichever is higher, directors, whichever is higher,
such risks as may be determined by including at least one independent including at least one independent
its board of directors. director. director.
The provisions of Risk Management
Committee shall be applicable to top
1000 listed entities.
- The top 1000 listed entities shall -
formulate a dividend distribution
policy which shall be disclosed on
the website of the listed entity and a
web-link shall also be provided in
their annual reports.

• The top 500, 1000 and 2000 entities shall be determined on the basis of market capitalisation, as at the end
of the immediate previous financial year.

COMPLIANCES UNDER SEBI (LODR) REGULATIONS FOR THE LISTED ENTITY WHICH HAS LISTED
ITS NON-CONVERTIBLE DEBT SECURITIES OR NON- CONVERTIBLE REDEEMABLE PREFERENCE
SHARES OR BOTH

Regulation Title Intimation to Stock Exchanges Time Limit

50(1) Intimation to Stock Prior intimation to the stock exchange(s) before the Atleast 11 working days
exchanges due date for which the interest on debentures and
bonds, and redemption amount of redeemable
shares or of debentures and bonds shall be
payable.
50(3) Intimation of Board Intimation regarding the meeting of its board of Atleast 2 working days
meetings directors, at which the recommendation or in advance
declaration of issue of non- convertible debt
securities or any other matter affecting the
rights or interests of holders of non- convertible
debt securities or non-convertible redeemable
preference shares is proposed to be considered.
52(1) Half Yearly Financial The listed entity shall prepare and submit Within 45 days from the
results unaudited or audited financial results on a half end of each of the half
yearly basis in the format as specified by the year
Board to the recognized stock exchange
accompanied by the Limited Review Report
Proviso to Copy of financial The listed entities which have listed their equity On the same day on
52(1) results to Debenture shares and debt securities, a copy of the financial which the information
Trustee results submitted to stock exchanges shall be is submitted to the
provided to Debenture Trustees stock exchange
52(2) Annual Financial The listed entity shall prepare and submit Within 60 days from the
Results audited financial results end of the financial year

52(5) Submission of The listed entities shall submit a certificate Within 7 working days
certificate signed by signed by debenture trustee that is has taken from the date of
Debenture Trustee note of the contents of half yearly/annual submission of the
financial results submitted to Stock Exchange information
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 169

54(2) Disclosure of Asset The listed entity shall disclose to the stock Quarterly, half-yearly,
Cover exchange the extent and nature of security year-to-date and annual
created and maintained with respect to its financial statements as
secured listed non-convertible debt securities. applicable
55 Credit Ratings Each rating obtained by the listed entity with Atleast once a year
respect to non-convertible debt securities shall
be reviewed by a credit rating agency registered
by the SEBI.
57(1) Certificate The listed entity shall submit a certificate to the within one working day
stock exchange regarding status of payment in of the interest or
case of non-convertible securities. dividend or principal
becoming due

POLICIES COVERED UNDER SEBI (LODR) REGULATIONS

Regulation Title of Policy Requirements
9 Preservation of To be classified into two categories:-
documents Policy 1. documents whose preservation shall be permanent in nature
2. documents with preservation period of not less than eight
years after completion of the relevant transactions
16(1)(c ) Policy on determining The listed entity shall formulate a policy for determining ‘material’
"material subsidiary" subsidiary.
17(5) Code of Conduct The board of directors shall lay down a code of conduct for all
members of board of directors and senior management of the
listed entity. The code of conduct shall suitably incorporate the
duties of independent directors as laid down in the Companies Act,
2013
17(9)(b) Risk Management Policy The board of directors shall be responsible for framing, implementing
and monitoring the risk management plan for the listed entity
22 Vigil Mechanism The listed entity shall formulate a vigil mechanism/whistle
blower policy for directors and employees to report genuine
concerns
23(1) Materiality of related The listed entity shall formulate a policy on materiality of related
party transactions and party transactions and on dealing with related party transactions,
on dealing with related including clear threshold limits duly approved by the board of
party transactions directors and such policy shall be reviewed by the board of
directors at least once every three years and updated accordingly
30 Policy on determination The listed entity shall frame a policy for determination of
of materiality of events/ materiality, based on criteria specified in this sub-regulation, duly
information approved by its board of directors, which shall be disclosed on its
website.
43A Dividend The top 1000 listed entities based on market capitalization shall
Distribution Policy formulate a dividend distribution policy which shall be disclosed
on the website of the listed entity and a web-link shall also be
provided in their annual reports
Part D of Schedule II Board Diversity Policy The Nomination and Remuneration Committe shall devise a
policy on diversity of board of directors
 170  Lesson 5 • EP-SLCM

LIABILITY OF A LISTED ENTITY FOR CONTRAVENTION

The listed entity or any other person thereof who contravenes any of the provisions of these SEBI (LODR) regulations,
shall, in addition to liability for action in terms of the securities laws, be liable for the following actions by the
respective stock exchange(s), in the manner specified in circulars or guidelines issued by the SEBI:
(a) imposition of fines;
(b) suspension of trading;
(c) freezing of promoter/promoter group holding of designated securities, as may be applicable, in
coordination with depositories.
(d) any other action as may be specified by the SEBI from time to time

ROLE OF COMPANY SECRETARY

For Company Secretary in Employment

 A listed entity shall appoint a Qualified Company Secretary as the Compliance Officer. The compliance officer
of the listed entity shall be responsible for –
• ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
• co-ordination with and reporting to SEBI, recognised stock exchange(s) and depositories with respect
to compliance with rules, regulations and other directives of these authorities in manner as specified
from time to time.
• ensuring that the correct procedures have been followed that would result in the correctness,
authenticity and comprehensiveness of the information, statements and reports filed by the listed
entity under these regulations.
• monitoring email address of grievance redressal division as designated by the listed entity for the
purpose of registering complaints by investors.
 The listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance
officer of the listed entity and the authorised representative of the share transfer agent, wherever applicable,
within one month of end of each half of the financial year, certifying that all activities in relation to both physical
and electronic share transfer facility are maintained either in house or by Registrar to an issue and share transfer
agent registered with SEBI.
 “Senior Management” shall mean Officers/Personnel of the listed entity who are members of its core
management team excluding Board of directors and normally this shall comprise all members of management
one level below Chief Executive Officer/ Managing Director/ Whole Time Director/
Manager (including Chief Executive Officer/Manager, in case they are not part of the board) and shall specifically
include Company Secretary and Chief Financial Officer.

For Company Secretary in Practice

In addition to the above responsibilities, the following are the recognition to Company Secretary under the SEBI
Listing Regulations, 2015 :
• Certificate regarding Transfer of Securities: Certification to the effect that all transfers have been completed
within the stipulated time. [Regulation 40(9)]
• Certificate Regarding Compliance of Conditions of Corporate Governance under SEBI Listing
Regulations: SEBI listing regulations authorizes Company Secretary in Practice to issue certificate regarding
compliance of conditions of Corporate Governance. [Schedule V, clause E]

• Secretarial Audit and Secretarial Compliance Report: Every listed entity and its material unlisted
subsidiaries incorporated in India shall undertake secretarial audit and shall annex a secretarial audit report
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 171

given by a company secretary in practice, in such form as specified, with the annual report of the listed entity
[Regulation 24A].

• Certification regarding Director’s Disqualification: A certificate from a Company Secretary in Practice that
none of the directors on the board of the company have been debarred or disqualified from being appointed
or continuing as Directors of Companies by the Board/ Ministry of Corporate Affairs or any such Statutory
Authority. [Schedule V, Part C, Clause 10 (i)]

CASE LAWS

1. 04.03.2020 Picturehouse Media Ltd. vs. Bombay Securities Appellate Tribunal

Stock Exchange Ltd.
Penalty imposed for non compliance of SEBI LODR Regulations on delay appointment of women
director

The provisions of the LODR regulations require that every listed company should have a women director. The
appellant hereby is a public listed company and one women director resigned and consequently the post
became vacant which was require to be filled up by another woman under the LODR Regulations. Since there
was a delay in appointing a woman director of the company, the penalty was imposed by BSE under LODR
Regulations. The appellant has filed the appeal against the order passed by BSE imposing a penalty of
Rs.7,59,920/- for violation of Regulations 17(1) and 19(1) and 19(2) of SEBI LODR Regulations, 2015. In the
light of default committed by the appellant SAT did not find any error in the impugned order and dismissed the
appeal.

CASE STUDIES
1. Ms. Maya is the promoter director of Mayamruga Limited, who founded the Company along with her late father
many decades ago. Ms. Maya still owns 24% of the share capital and is a major shareholder. Due to personal issues
she resigned from the Board and had appointed professional directors as part of succession planning for the
Company.
Although she is no longer a director, Ms.Maya continues to show considerable interest in the business affairs of the
company. Recently she has been indicating that the board should consult her on issues of business strategy and
dividend policy. She has her own opinion about executive directors and wants the Board to remove two executive
directors as she believes that they contribute nothing of value to the board. Two other members of the board agree,
and argue that Ms. Maya should be consulted regularly on important issues, given her success in leading the
company in the past. However, the majority of the board members are hostile and resent Ms. Maya’s continual
interference.
After a recent showdown with the chairman, Ms. Maya has threatened to sue members of the board for gross
dereliction of their duties as directors. She believed that one director has deceived the Company by selling his own
property to the Company at an excessive price. The chairman was unaware of this transaction.
Required
As company secretary, prepare a report advising the chairman-
(a) the powers of the board under the Companies Act,2013
(b) the appropriate measures for dealing with Ms. Maya and responsibility of the board towards her.
(c) Whether the purchase of property by the company from one of its director was compliant with the provisions
of SEBI(LODR)
 172  Lesson 5 • EP-SLCM

Suggested Solution -

(a) Powers of the Board: As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its
Powers) Rules, 2014, the Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:–
• to make calls on shareholders in respect of money unpaid on their shares;
• to authorise buy-back of securities under section 68;
• to issue securities, including debenture, whether in or outside India;
• to borrow monies;
• to invest the funds of the company;
• to grant loans or give guarantee or provide security in respect of loans;
• to approve financial statement and the Board’s report;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another company;
• to make political contributions;
• to appoint or remove key managerial personnel (KMP);
• to appoint internal auditors and secretarial auditor.
(b) Ms. Maya was one of the founders and promoter directors of the Company and a major shareholder of the
company holding 24% of the shares. A responsible business acts with care and loyalty towards its shareholders
and in good faith for the best interests of the corporation. Business therefore has a responsibility to:
• Apply professional and diligent management in order to secure fair, sustainable and competitive
returns on shareholder investments.
• Disclose relevant information to shareholders, subject only to legal requirements and competitive
constraints.
• Conserve, protect, and increase shareholder wealth.
• Respect shareholder views, complaints, and formal resolutions.
(c) According to Section 2(76) of Companies Act 2013, “related party”, with reference to a company, means–
(i) a director or his relative;
(ii) key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds or holds along with his
relatives, more than two per cent. (2%) of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions
given in a professional capacity;
(viii) any body corporate which is—
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 173

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;”;
Explanation. — For the purpose of this clause, “the investing company or the venturer of a company” means
a body corporate whose investment in the company would result in the company becoming an associate
company of the body corporate.
(ix) a director other than an independent director or key managerial personnel of the holding company or his
relative with reference to a company, shall be deemed to be a related party.
Section 188 (1) of the Companies Act 2013 deals with the related party transactions with respect to:
• Sale, purchase or supply of any goods or materials
• Selling or otherwise disposing of, or buying, property of any kind
• Leasing of property of any kind
• Availing or rendering of any services
• Appointment of any agent for purchase or sale of goods,materials, services or property
• Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate
company,and
• Underwriting the subscription of any securities or derivatives thereof, of the company.
Also, Section 188(1) of the Companies Act 2013 provides that a company shall enter into any contract or arrangement
with a related party with respect to Related party transactions only with the consent of the Board of Directors given
by a resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule15 of the
Companies(Meetings of Board and its Powers)Rules,2014.
One of the board members had sold his property to Mayamrug Ltd. at a price which Ms.Maya considers excessive.
The board member is related party as per Section2(76) of Companies Act 2013 and selling property of any kind is
a related party transaction as per Section188(1) of the Companies Act 2013.
The law in India does not prohibit RPTs. Instead, the law puts into place a system of checks and balances, such as
requirements for approval from the board of directors/shareholders, timely disclosures and prior statutory
approvals, to ensure that the transactions are conducted within appropriate boundaries. RPTs are required to be
managed transparently, so as not to impose a heavy burden on a company’s resources,affect the optimum allocation
of resources, distort competition or siphon off public resources.
Therefore, if the related party transaction has taken place with the consent of the Board of Directors given by a
resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule 15 of the
Companies(Meetings of board and its Powers) Rules, 2014,then it is allowed as per the laws and regulations and the
allegations will not hold much significance.
__________________________________________________________________________________________________________________________________
2. Dr. Mahopatra, is a pathologist with more than 20 years of experience and has recently been appointed to the post
of Chairman of Testocare Ltd., a listed company. He has previously been employed in the company as Research
Director. Dr.Mahopatra had always been heading technical matters and management was a new avenue for him. He
is trying to spearhead the management of such a vast listed company and uphold the principles of corporate
governance. The Board is also evaluating to appoint another CEO.
Presently, the board of directors comprise of total ten directors (including one women director), six non-executive
directors and five were independent. The board is responsible for overseeing strategy, approving major corporate
initiatives and reviewing performance. There are three board committees - the Audit Committee, Remuneration
Committee and Stakeholders Relationship Committees. However, there is no Nomination Committee.
As the Company Secretary and Compliance Officer of Testocare Ltd, he is seeking your assistance to clarify some
issues of concern.
 174  Lesson 5 • EP-SLCM

You have been asked to prepare a brief report to:

(a) Provide Dr. Mahopatra with a robust definition of corporate governance and a brief explanation of what you
understand corporate governance to be.
(b) Comment on the board composition of Testocare Ltd. with respect to the Companies Act, 2013 and SEBI
LODR Regulations, 2015.
(c) Also comment whether the Board should appoint a CEO when Dr. Mahopatra is already the Chairman of the
Company.
Suggested Solution
(a) Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of
corporate governance is transparency, disclosure, accountability and integrity. It is to be borne in mind that
mere legislation does not ensure good governance. Good governance flows from ethical business practices
even when there is no legislation.
Good corporate governance promotes investor confidence, which is crucial to the ability of entities listed to
compete for capital. Good corporate governance is essential to develop added value to the stakeholders as it
ensures transparency which ensures strong and balanced economic development. This also ensures that the
interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes their rights.
The Institute of Company Secretaries of India defines - “Corporate Governance is concerned with the way
corporate entities are governed,as distinct from the way business within those companies are managed.
Corporate governance addresses the issues facing Board of Directors, such as the interaction with top
management and relationships with the owners and others interested in the affairs of the company”.
(b) Board Composition: Section 149(1) of the Companies Act 2013 provides that every company shall have a
Board of Directors consisting of individuals as Directors and shall have—
• A minimum number of three directors in the case of a public company,
• Atleast two directors in the case of a private Company, and
• Atleast one director in the case of a One Person Company, and
• A maximum of fifteen directors provided that a company may appoint more than fifteen directors after
passing a special resolution.
Section 149(4) provides that every public listed company shall have at- least one third of total number of
directors as independent directors.
Regulation 17(1)(a) of SEBI LODR Regulations, 2015 provides that Board of directors shall have an optimum
combination of executive and non-executive directors with at least one woman director and not less than fifty
per cent of the board of directors shall comprise of non-executive directors.
The board of Testocare Ltd. comprises of total ten directors, six non-executive directors and five were
considered independent. The total number of directors is more than the minimum required directors and at-
least one third of total number of directors are independent directors.
Also, as per SEBI Regulations, more than fifty per cent of the board of directors comprises of non- executive
directors and one women director. Therefore, the board composition of Company. is optimum as per the laws
and regulations.
The Company may also consider enhancing the scope of Remuneration Committee and make it Nomination &
Remuneration Committee.
(C) Separation of Chairman and CEO: First proviso to Section 203(1) of the Companies Act, 2013 provides for
the separation of role of Chairman and Chief Executive Officer subject to conditions thereunder.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 175

It specifies that an individual shall not be appointed or reappointed as the chairperson of the company, in
pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the
company at the same time after the date of commencement of this Act unless, –
(a) the articles of such a company provide otherwise;
(b) the company does not carry multiple businesses:
Regulation 17(1B) of SEBI (LODR) Regulations, 2015 provides that effect from April 1, 2022, the top 500
listed entities shall ensure that the Chairperson of the board of such listed entity shall -
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term
“relative” defined under the Companies Act,2013:
Also, it is perceived that separating the roles of chairman and chief executive officer (CEO) increases the
effectiveness of a company’s board. It is the board’s and chairman’s job to monitor and evaluate a company’s
performance. A CEO, on the other hand, represents the management team. If the two roles are performed by
the same person, then there is less accountability. A clear demarcation of the roles and responsibilities of the
Chairman of the Board and that of the Managing Director/CEO promotes balance of power.
The benefits of separation of roles of Chairman and CEO can be:
Director Communication: A separate chairman provides a more effective channel for the board to express
its views on management
Guidance: A separate chairman can provide the CEO with guidance and feedback on his/her performance
Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO manages the
company
Governance: A separate chairman allows the board to more effectively fulfill its regulatory requirements
Long-Term Outlook: Separating the position allows the chairman to focus on the long-term strategy while the
CEO focuses on short-term profitability
Succession Planning: A separate chairman can more effectively concentrate on corporate succession plans.
Therefore, on the basis of abovementioned laws and regulations and the potential benefits of separating
Chairman and CEO, the Company may appoint a CEO for the Company.
176  Lesson 5 • EP-SLCM

LESSON ROUND UP

• SEBI has notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 on
September 2, 2015 after the consultation process. The LODR Regulations came into force w.e.f. December
1, 2015.
• A listed entity shall appoint a Qualified Company Secretary as a Compliance Officer.
• The Listed entity shall comply with the following compliances under Listing Regulations:
• One Time Compliances
• Quarterly Compliances
• Half yearly Compliances
• Yearly Compliances
• Event based Compliances

• The listed entities which has listed its specified securities on any recognised stock exchange(s) either on
the main board or on SME Exchange or on institutional trading platform has to comply with certain
corporate governance provisions which are specified in Regulations 17 to 27 of the SEBI (LODR)
Regulations.

• The Board of directors shall have an optimum combination of executive and non-executive directors with
at least one-woman independent director and at least 50% of the board of directors shall comprise of non-
executive directors.
• The Board Committees are required to be constituted under SEBI (LODR) Regulations:
» Audit Committee
» Nomination and Remuneration committee
» Stakeholders Relationship Committee
» Risk Management Committee
• The listed entity shall formulate a vigil mechanism/whistle blower policy for directors and employees to
report genuine concerns.
• The listed entity shall formulate a policy on materiality of related party transactions and on dealing with
related party transactions including clear threshold limits duly approved by the board of directors and
such policy shall be reviewed by the board of directors at least once every three years and updated
accordingly.
• All material related party transactions shall require approval of the shareholders through resolution and
no related party shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not.
• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and shall annex a secretarial audit report given by a company secretary in
practice with the annual report of the listed entity.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 177

GLOSSARY

Financial year It means the period of twelve months commencing on the first day of April every year.
However, a company may at its option have a financial year commencing on a date other
than the first day of April.
Interim A dividend payment made during the course of a company’s financial year. Interim
Dividend, Dividend unlike the final dividend does not have to be agreed in a general meeting.

Investing It means a body corporate whose investment in the company would result in the
Company/ company becoming an associate company of the body corporate.
Venture of
a Company
Record Date A date on which the records of a company are closed for the purpose of determining the
stock-holders to whom dividends, proxies rights etc., are to be sent.
Committee Committee” shall mean committee of board of directors or any other committee so
constituted;

Half Year Half year” means the period of six months commencing on the first day of April or
October of a financial year;

Net Worth “Net worth” means net worth as defined in sub-section (57) of section 2 of the Companies
Act, 2013;
Schedule "Schedule" means a schedule annexed to these regulations;

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation)
1. Briefly explain the applicability of the SEBI LODR Regulations, 2015.
2. Elucidate the obligations of Listed Entities under the SEBI LODR Regulations, 2015.

3. State the conditions for which Omnibus approval of Audit Committee is required under the SEBI LODR
Regulations, 2015.
4. What are the requirement of Secretarial Audit under the SEBI LODR Regulations, 2015?
5. Explain the Event based compliances under the SEBI LODR Regulations, 2015.
6. Discuss about the various committees which are required to be mandatorily constituted under the SEBI
LODR Regulations, 2015.
7. Explain the obligations of Independent Directors w.r.t Directorship / membership of the Committees
under the SEBI LODR Regulations.
6. List out Various Policies which are to be maintained by the listed companies under SEBI LODR Regulations.
178  Lesson 5 • EP-SLCM

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI Annual Reports
• SEBI Monthly Bulletin
• SS - 1 Secretarial Standard on Meetings of the Board of Directors
• FAQs
• SEBI orders

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• https://www.nseindia.com/
• https://www.bseindia.com/
 An Overview of SEBI (Substantial
Acquisition of Shares and
Lesson 6 Takeovers) Regulations, 2011

Key Concepts One Learning Objectives

Should Know
To understand:
• Target Company • Meaning and purpose of substantial acquisition
• Acquirer • Background on evolution of the SEBI (Substantial Acquisition of
• Person acting in Shares and Takeovers) Regulations, 2011
concert • Understanding the methods including strategy for such acquisitions
• Control • Events requiring the Open offer to be made to shareholders of
• Acquisition Target Company
• Understanding the process of making open offer
• Offer period and
tendering period • Statutory Obligations of Acquirer / Directors of the Target Company
/ Manager of the Offer
• Offer size
• Disclosure requirements by promoters / certain persons
• Certain exemptions from this Regulations

Lesson Outline • Obligations on Further

Acquisition
• Introduction • Completion of Acquisition
• Genesis • Disclosures for Acquisition
• SEBI (Substantial Acquisition during Offer period
of Shares and Takeovers) • Provision of Escrow
Regulations, 2011
• Mode of Payment
• Important Definitions
• Competing Offer
• Applicability & Exception
• Withdrawal of Open Offer
• Trigger point for making an
open offer by an acquirer • Obligations of the Target
Company
• Open Offer
• Obligations of the Acquirer
• Minimum Offer Size
• Obligations of the Managers
• Conditional Offer
• Disclosures
• Public Announcement
• Exemptions
• Offer Price
• Power of SEBI to relax strict
• Filing of letter of Offer with enforcement of the
the SEBI Regulations
• Dispatch of Letter of Offer • LESSON ROUND-UP
• Opening of the Offer • GLOSSARY
• TEST YOURSELF
• Completion of Requirements
• LIST OF FURTHER READINGS
• Process at glance • OTHER REFERENCES
 180  Lesson 6 • EP-SLCM

Regulatory Framework
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
• SEBI (Delisting of Equity Shares) Regulations, 2021
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

INTRODUCTION
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [SEBI Takeover Regulations or SEBI
(SAST) Regulations] prescribes a systematic framework for acquisition of stake in listed companies. By these laws
the regulatory system ensures that the interests of the shareholders of listed companies are not compromised in
case of an acquisition or takeover by acquirer. It also protect the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle. Evidently, it is equally important to note that in this highly
competitive business world, it is critical for each of the stakeholders in a company to guard their interests in the
company from all forms of third party. So, in case third party (Acquirer) proposes any such acquisition or control
over listed companies, such Acquirer would provide exit opportunity to Shareholders of that listed company prior
to completion of such transaction.

Acquirer / Person
Acting in Concert (PAC) Listed Company

The SEBI Takeover Regulations ensures that public shareholders of a listed company are treated fairly and equitably
in relation to a substantial acquisition in, or takeover of, a listed company thereby maintaining stability in the
securities market. The objective of the takeover regulations is to ensure that the public shareholders of a company
are mandatorily offered an exit opportunity at the best possible terms in case of a substantial acquisition in, or
change in control of, a listed company.
Corporate takeovers may be classified under three broad classes:

Friendly Takeover:
This type of takeover takes place with the consent of target listed company. It be either by way of agreement
between two management or between two groups. Friendly takeover often termed as negotiated takeover.
Hostile Takeover:
This is the takeover which usually takes place when the acquirer does not offer the target listed company the
proposal. Rather the acquirer continues to acquire silently to have control over the target listed company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 181

Unlike Friendly Takeover, this type of takeover takes place without consent between the management of both
acquirer and target listed company.
Bailout Takeover:
As the name suggest, this takeover is made by a financially strong acquirer to takeover sick or financially sick
company. In this takeover, generally the acquirer has advantage of negotiating the price as all lenders / creditors /
suppliers of financially sick company would like to recover their amount.
GENESIS
The existence of an efficient and smooth-functioning market for takeovers plays an important role in the economic
development of a country. It is a widely recognized fact that one of the key elements of a robust corporate governance
regime in any country is the existence of an efficient and well-administered set of Takeover Regulations. Regulations
on takeovers seek to ensure that the takeover markets operate in a fair, equitable and transparent manner.
The evolution of SEBI Takeover Regulations can be summarised as follows:

1980s Initial threads of regulation were incorporated in the late 1980s through Listing Agreement
1992 The SEBI Act, 1992 expressly mandated SEBI to regulate substantial acquisition of shares and takeovers
by suitable measures
1994 Takeover Regulations of 1994
1995 SEBI appointed a committee to review the Takeover Regulations of 1994 under the chairmanship of
Justice P.N. Bhagwati (the Bhagwati Committee). Bhagwati Committee submitted its report in January 1997.
1997 Taking into consideration its recommendations of Bhagwati Committee, the SEBI (SAST) Regulations of
1997 were notified by SEBI on February 20, 1997, repealing the Takeover Regulations of 1994
2001 A review of the Takeover Regulations of 1997 was carried out by a reconstituted committee chaired by
Justice P.N. Bhagwati. The reconstituted Bhagwati committee submitted its report in May 2002.
SEBI(SAST) Regulation, 1997 was amended 23 times.
2009 SEBI constituted the Takeover Regulations Advisory Committee with the mandate to examine and review
the Takeover Regulations of 1997 and to suggest suitable amendments, as deemed fit. The Committee
was chaired by Mr. C. Achutan.
2011 Taking into consideration its recommendations of C. Achutan Committee, the SEBI (SAST) Regulation of
2011 were notified by SEBI on September 23, 2011, repealing the Takeover Regulations of 1997
C. Achutan Committee had provided for following objectives of the then proposed Takeover SEBI (SAST), Regulation, 2011:
a. To provide a transparent legal framework for facilitating takeover activities;
b. To protect the interests of investors in securities and the securities market, taking into account that both the
acquirer and the other shareholders or investors and need a fair, equitable and transparent framework to
protect their interests;
c. To balance the various, and at times, conflicting objectives and interests of various stakeholders in the context
of substantial acquisition of shares in, and takeovers of, listed companies.
d. To provide each shareholder an opportunity to exit his investment in the target company when a substantial
acquisition of shares in, or takeover of a target company takes place, on terms that are not inferior to the
terms on which substantial shareholders exit their investments;
e. To provide acquirers with a transparent legal framework to acquire shares in or control of the target company
and to make an open offer;
f. To ensure that the affairs of the target company are conducted in the ordinary course when a target company
is subject matter of an open offer;
g. To ensure that fair and accurate disclosure of all material information is made by persons responsible for
making them to various stakeholders to enable them to take informed decisions;
 182  Lesson 6 • EP-SLCM

h. To regulate and provide for fair and effective competition among acquirers desirous of taking over the same
target company; and
i. To ensure that only those acquirers who are capable of actually fulfilling their obligations under the Takeover
Regulations make open offers.
SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011
1. Chapter I Preliminary (Regulation 1 and 2)
2. Chapter II Substantial acquisition of Shares, Voting Rights or Control, Threshold limit for open offer,
Exemptions (Regulations 3 to 11)
3. Chapter III Open offer process (Regulations 12 to 23)
4. Chapter IV Obligations of Directors, Target Company, Acquirer, Manager (Regulations 24 to 27)
5. Chapter V Disclosures of Shareholding and Control (Regulations 28 to 31)
6. Chapter V-A Power to Relax Strict Enforcement of the Regulations (Regulation 31A)
7. Chapter VI Miscellaneous (Regulations 32 to 35)

Trigeer of
Open Offer

Process of
Disclosures Open Offer

Takeover
Regulations

Voluntary
Exemption
Offer

Competitive
Offer

IMPORTANT DEFINITIONS

Acquirer
“Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or
through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.
[Reg. 2(1)(a)]
Acquisition
“Acquisition” means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control
over, a target company. [Reg. 2(1)(b)]
Control
“Control” includes the right to appoint majority of the directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 183

their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
However, a director or officer of a target company shall not be considered to be in control over such target company,
merely by virtue of holding such position. [Reg. 2(1)(e)]
Enterprise value
Enterprise value means the value calculated as market capitalization of a company plus debt, minority interest and
preferred shares, minus total cash and cash equivalents. [Reg. 2(1)(h)]

Enterprise Value= Market capitalization+ Debt+ Minority Interest + Preferred Shares- Total Cash and Cash
Equivalents

Frequently traded shares

"Frequently traded shares" means shares of a target company, in which the traded turnover on any stock exchange
during the twelve (12) calendar months preceding the calendar month in which the public announcement is
required to be made under these regulations, is at least ten percent of the total number of shares of such class of the
target company. However, where the share capital of a particular class of shares of the target company is not identical
throughout such period, the weighted average number of total shares of such class of the target company shall
represent the total number of shares. [Reg. 2(1)(j)]
Maximum permissible non-public shareholding
“Maximum permissible non-public shareholding” means such percentage shareholding in the target company
excluding the minimum public shareholding required under the Securities Contracts (Regulation) Rules, 1957.
Fugitive Economic Offender
"Fugitive economic offender” shall mean an individual who is declared a fugitive economic offender under section
12 of the Fugitive Economic Offenders Act, 2018. [Reg. 2(1)(ja)]
Identified Date
"Identified date” means the date falling on the tenth working day prior to the commencement of the tendering
period, for the purposes of determining the shareholders to whom the letter of offer shall be sent. [Reg. 2(1)(k)]
Immediate Relative
“Immediate relative” means any spouse of a person, and includes parent, brother, sister or child of such person or
of the spouse. [Reg. 2(1)(l)]
Offer period
“Offer period” means the period between the date of entering into an agreement, formal or informal, to acquire
shares, voting rights in, or control over a target company requiring a public announcement, or the date of the
public announcement, as the case may be, and the date on which the payment of consideration to shareholders
who have accepted the open offer is made, or the date on which open offer is withdrawn, as the case may be.
[Reg. 2(1)(p)]

Tendering Period and Offer Period both are different. Offer Period is wider and includes tendering
period.

Persons Acting in Concert [Reg. 2(1)(q)]

"Person acting in concert" may be classified in two category as follows :

Depending on common objective or purpose

PAC

Deemed PAC as per sub-regulation (2)

 184  Lesson 6 • EP-SLCM

“Persons acting in concert” means, –

(1) persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising
control over a target company, pursuant to an agreement or understanding, formal or informal, directly or
indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target
company.
(2) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall
be deemed to be persons acting in concert with other persons within the same category, unless the contrary
is established, –
(i) a company, its holding company, subsidiary company and any company under the same
management or control;
(ii) a company, its directors, and any person entrusted with the management of the company;
(iii) directors of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors;
(iv) promoters and members of the promoter group;
(v) immediate relatives;
(vi) a mutual fund, its sponsor, trustees, trustee company, and asset management company;
(vii) a collective investment scheme and its collective investment management company, trustees and
trustee company;
(viii) a venture capital fund and its sponsor, trustees, trustee company and asset management company;
(ix) an alternate investment fund and its sponsor, trustees, trustee company and manager;
(x) a merchant banker and its client, who is an acquirer;
(xi) a portfolio manager and its client, who is an acquirer;
(xii) banks, financial advisors and stock brokers of the acquirer, or of any company which is a holding
company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate
relative of such individual. However, this shall not apply to a bank whose sole role is that of providing
normal commercial banking services or activities in relation to an open offer under these regulations;
(xiii) an investment company or fund and any person who has an interest in such investment company or
fund as a shareholder or unitholder having not less than 10 per cent of the paid-up capital of the
investment company or unit capital of the fund, and any other investment company or fund in which
such person or his associate holds not less than 10 per cent of the paid-up capital of that investment
company or unit capital of that fund. However, this shall not be applicable to holding of units of mutual
funds registered with the SEBI.

Judicial Pronouncement: Supreme Court in the case of M/S Daiichi Sankyo Company vs. Jayaram Chigurupati
& Ors. [2010] INSC 470 (8 July 2010) held that what does the deeming provision do? The deeming provision simply
says that in case of specified kinds of relationships, in each category, the person paired with the other would be deemed
to be acting in concert with him/it. What it means is that if one partner in the pair makes or agrees to make substantial
acquisition of shares etc. in a company it would be presumed that he/it was acting in pursuance of a common objective
or purpose shared with the other partner of the pair. For example, if a company or its holding company makes or agrees
to make a move for substantial acquisition of shares etc. of a certain target company then it would be presumed that
the move is in pursuance of a common objective and purpose jointly shared by the holding company and the subsidiary
company. But the mere fact that two companies are in the relationship of a holding company and a subsidiary company,
without anything else, is not sufficient to comprise "persons acting in concert". Something more is required to comprise
"persons acting in concert" than the mere relationship of a holding company and a subsidiary company. There may be
hundreds of instances of a company having a subsidiary company but to dub them as "persons acting in concert" would
be quite ridiculous unless another company is identified as the target company and either the holding company or the
subsidiary make some positive move or show some definite inclination for substantial acquisition of shares etc. of the
target company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 185

Target company
"Target Company" means a company and includes a body corporate or corporation established under a Central
legislation, State legislation or Provincial legislation for the time being in force, whose shares are listed on a stock
exchange. [Reg. 2(1)(z)]
Tendering period
"Tendering period" means the period within which shareholders may tender their shares in acceptance of an open
offer to acquire shares made under these regulations. [Reg. 2(1)(za)]
Volume weighted average market price
"Volume weighted average market price" means the product of the number of equity shares traded on a stock
exchange and the price of each equity share divided by the total number of equity shares traded on the stock
exchange. [Reg. 2(1)(zb)]
Number of shares traded on the Stock Exchange on a particular day: X, Market Price: Y

Volume Weighted Average Market Price =

Volume weighted average price

"Volume weighted average price" means the product of the number of equity shares bought and price of each such
equity share divided by the total number of equity shares bought. [Reg. 2(1)(zc)]
Weighted average number of total shares
"Weighted average number of total shares" means the number of shares at the beginning of a period, adjusted for
shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor. [Reg. 2(1)
(zd)]
Wilful defaullter
“wilful defaulter” means any person who is categorized as a wilful defaulter by any bank or financial institution or
consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India and
includes any person whose director, promoter or partner is categorized as such [Reg. 2(1)(ze)]

APPLICABILITY & EXCEPTION

These regulations shall apply to direct and indirect acquisition of shares or voting rights, in or control over Target
Company.

Direct Indirect
acquisition of acquisition of
shares / voting shares / voting
rights rights

Control

The Regulations therefore, gets triggered on the following event (on case basis)
• Direct acquisition of shares / voting rights
• Indirect acquisition of shares / voting rights
• Control
 186  Lesson 6 • EP-SLCM

Further it may be triggered by Acquirer alone OR along with Person acting in concert.
However, these regulations shall not apply to direct and indirect acquisition of shares or voting rights in, or control over
a company listed without making a public issue, on the Innovators Growth platform of a recognized stock exchange.
TRIGGER POINT FOR MAKING AN OPEN OFFER BY AN ACQUIRER
25% Shares or Voting Rights
An acquirer, along with Persons acting in concert (PAC), if any, who intends to acquire shares which along with his
existing shareholding would entitle him to exercise 25% or more voting rights, can acquire such additional shares
only after making a Public Announcement (PA) to acquire minimum twenty six percent shares of the Target Company
from the shareholders through an Open Offer.
For example –
Mr. A is presently holding 1% in Ram Enterprises Limited, a listed entity and he further desires to acquire the shares
as tabulated below :

Case Pre Holding Proposed Acquisition Post Holding Applicability of SEBI Takeover
Regulation, 2011
1 1% 26% 27% Open offer required
2 1% 23% 24% Open offer NOT required

Creeping Acquisition Limit

An acquirer who holds 25% or more but less than maximum permissible non-public shareholding of the Target
Company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in
any financial year ending March 31 only after making a Public Announcement to acquire minimum twenty six
percent shares of Target Company from the shareholders through an Open Offer.

Name Per Holding Creeping Acquisition Post Holding Applicability of SEBI Takeover
Regulation, 2011
A 26% 3% 29% Open offer NOT required
B 26% 6% 32% Open Offer required

From exceeding 25% to 75% Only 5%

Within 25%, no need
in a financial year can be acquired
to make open offer
without making open offer

Initial threshold of 25% 75% of listed company

of listed company

OPEN OFFER
SEBI Takeover Regulations, 2011 provides certain trigger events wherein the Acquirer is required to give Open
Offer to the shareholders of the Target Company to provide them exit opportunity. However, it also allows the
Acquirer to make voluntary offer as well.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 187

I. Mandatory Open Offer

Acquisition of Shares (Regulation 3)
SEBI Takeover Regulations, 2011 provides a threshold for mandatory Open Offer. These regulations provides that
whenever an acquirer acquires the shares in excess of the threshold as prescribed under regulation 3 ando in case
of control Regulation 4 of SEBI Takeover Regulations, 2011, the acquirer is required to make a public announcement
of offer to the shareholders of the Target Company.
Regulation 3 of the SEBI Takeover Regulations, 2011 provides the Acquirer to give an open offer to the shareholders
of Target Company on the acquisition of shares or voting rights entitling the Acquirer along with the persons acting
in concert with him to exercise 25% or more voting rights in the Target Company.
Further any Acquirer who holds shares between
ONE TIME EXEMPTION FOR CREEPING ACQUISITION -
25%-75%, together with PACs can acquire further
5% shares as creeping acquisition without giving The acquisition beyond 5% but up to 10% of the voting rights in the
target company shall be permitted for the financial year 2020-21
an Open Offer to the shareholders of the Target only in respect of acquisition by a promoter pursuant to preferential
Company upto a maximum of 75%. The quantum issue of equity shares by the target company.
of acquisition of additional voting rights shall be This exemption was only permitted through preferential issue to
calculated after considering the following: promoters and not otherwise.

(a) No Netting off allowed:

For the purpose of determining the quantum of acquisition of additional voting rights, the gross acquisitions without
considering the disposal of shares or dilution of voting rights owing to fresh issue of shares by the target company
shall be taken into account.
Case of Mr. A for FY 2020-21:

Details of Acquirer Present holding Acquisition Disposal Post Holding

A 27% 3% - 30%
A 30% 1% - 31%
A 31% - 4% 27%
A 27% 3% - 30%
The shareholding of Mr. A at the beginning of FY 2020-21 was 27% and at the closure of FY 2020-21 was 30%.
Therefore, during the year he has increased holding by (30-27=3%).
 188  Lesson 6 • EP-SLCM

However, netting is not permitted under Takeover Regulations, therefore if you add all acquisitions i.e. 3%, 1%, 3%,
it amounts to 7%. Therefore, the 4th transaction whereby Mr. A further acquires 3% would trigger the Open offer
requirements.
(b) Incremental voting rights in case of fresh issue
In the case of acquisition of shares by way of issue of new shares by the target company, the difference between the
pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional
acquisition. [Regulation 3(2)]

Question:
What is the basis of computation of the creeping acquisitions limit under Regulation 3(2) of Takeover
Regulations 2011?
Answer:
For computing acquisitions limits for creeping acquisition specified under regulation 3(2), gross acquisitions/
purchases shall be taken in to account thereby ignoring any intermittent fall in shareholding or voting rights
whether owing to disposal of shares or dilution of voting rights on account of fresh issue of shares by the target
company. SEBI in the interpretative letter dated 18th September, 2015 issued under the SEBI (Informal Guidance)
Scheme, 2003 as requested by M/s Adani Properties Private Limited has held that an exempt acquisition would not
be counted towards computing acquisitions on a gross basis.

Acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceed
the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the
target company irrespective of where there is a change in the aggregate shareholding with persons action in concert.
[Regulation 3(3)]

Example:
Mr. A is contemplating acquisition of XYZ Limited, a listed entity. He presently holds 23% and his brother, who
is having common objective holds 3%. Together their holding is 26%.
Mr. A, in view of creeping acquisition limits, desires to further acquire 3% assuming the 5% ceiling in every
financial year.
Answer:
In view of Regulation 3(3) as discussed above, though together they hold 26% and can avail 5% ceiling, but in case
Mr. A on individual basis crossing the threshold of 25% or more (since presently he holds 23% and further
contemplates to acquire 3% more), he will be required to make open offer.
However, in given case, if his brother only acquires 3% and increase their total holding to 29% then their will be
no requirement of Open Offer.

This entire Regulation shall not apply to acquisition of shares or voting rights of a company by the promoters or
shareholders in control, in terms of the provisions of Schedule XX of the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018. [Regulation 3(4)]
Further for the purpose of this regulation, any reference to “twenty-five per cent” in case of listed entity which has
listed its specified securities on Innovators Growth Platform shall be read as “forty-nine per cent”.
Acquisition of Control
Regulation 4 of the SEBI Takeover Regulations, 2011 specifies that if any acquirer acquires, directly or indirectly,
control over the Target Company irrespective of the fact whether there has been any acquisition of shares or not, then he
has to give public announcement to acquire shares from shareholders of the Target Company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 189

Indirect Acquisition of Shares or control

The concept of Indirect acquisition of shares has been recognized under Regulation 5 of the SEBI Takeover
Regulations, 2011. It explains indirect acquisition as the acquisition of shares, voting rights or control over any
other company which would enable the acquirer of shares, voting rights or control to exercise such percentage of
voting rights, which would otherwise have triggered an open offer process over which would enable the acquirer to
exercise control over a company.
Certain indirect acquisitions are regarded as ‘deemed direct acquisitions’ if such indirect acquisition satisfy the
following conditions such as:

proportionate NAV of the target proportionate sales turnover of proportionate market cap. of
company as % of the the target company as % of the the target company as % of
consolidated NAV of the entity consolidated sales turnover of the enterprise value of the
or business being acquired the entity or business being entity or business being
exceeds 80 % acquired exceeds 80 % acquired exceeds 80 %

The ‘deemed direct acquisition’ has to follow the same mandatory open offer related requirements as a direct
acquisition of shares, voting rights or control.

Delisting Offer
Acquirer may opt to delist the target listed company by declaring such intention upfront.

Declare intention at the time of • To comply with delisting regulations

detailed public statement • Under delisting offer, public

• Make public announcement within 2 working days

If offer of delisting is not successful
• To comply with Takeover Regulations

In case of delisting offer not being successful, the timelines will be revised from such Public Announcement
AND
Acquirer will be required to enhance the offer price for the difference of days between the actual date of payment
as per open offer and the revised date of payment (at the rate of 10% p.a.)

Regulation 5A deals with delisting in case of certain cases arising out of open offer which is discussed below:
In the event the acquirer makes a public announcement of an open offer for
acquiring shares of a target company in terms of regulations 3, 4 or 5, he may Intention to delist shall be disclosed
delist the company in accordance with provisions of the SEBI (Delisting of upfront i.e. shall be published in the
Equity Shares) Regulations, 2009, but the acquirer shall have declared upfront detailed public statement.
his intention to so delist at the time of making the detailed public statement Subsequent intention will not be
and a subsequent declaration of delisting for the purpose of the offer proposed accepted
to be made under sub regulation (1) of regulation 5A will not suffice.
 190  Lesson 6 • EP-SLCM

Where an offer made is not successful-

(i) On account of non–receipt of prior approval of shareholders in terms of regulation 8(1)(b) of SEBI (Delisting
of Equity Shares) Regulations, 2009; or
(ii) In terms of regulation 17of SEBI (Delisting of Equity Shares) Regulations, 2009; or
(iii) On account of the acquirer rejecting the discovered price determined by the book building process in terms
of regulation 16(1) of SEBI (Delisting of Equity Shares) Regulations, 2009,

the acquirer shall make an announcement within 2 working days in respect of such failure in all the newspapers in
which the detailed public statement was made and shall comply with all applicable provisions of these regulations.
In the event of failure of the delisting offer, the open offer obligations shall be fulfilled by the acquirer in the following
manner:
(i) the acquirer, through the manager to the open offer, shall within five working days from the date of the
announcement, file with the SEBI, a draft of the letter of offer; and
(ii) shall comply with all other applicable provisions of these regulations.

However, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten per
cent per annum for the period between the scheduled date of payment of consideration to the shareholders
and the actual date of payment of consideration to the shareholders.
Explanation: For the purpose of this sub-regulation, scheduled date shall be the date on which the payment of
consideration ought to have been made to the shareholders in terms of the timelines in these regulations.
Where a competing offer is made -
(a) the acquirer shall not be entitled to delist the company;
(b) the acquirer shall not be liable to pay interest to the shareholders on account of delay due to competing offer;
(c) the acquirer shall comply with all the applicable provisions of these regulations and make an announcement
in this regard, within two working days from the date of public announcement made, in all the newspapers in
which the detailed public statement was made.

Shareholders who have tendered shares in acceptance of the offer, shall be entitled to withdraw such shares
tendered, within 10 working days from the date of the announcement. Shareholders who have not tendered their
shares in acceptance of the offer shall be entitled to tender their shares in acceptance of the offer made under these
regulations.

II. Voluntary Offer

Voluntary Offer means the Open Offer given by the acquirer voluntarily without triggering the mandatory Open
Offer obligations as envisaged under these regulations. Voluntary Offers are an important means for substantial
shareholders to consolidate their stake and therefore recognized the need to introduce a specific framework for
such Open Offers.
Regulation 6 of the Takeover Regulations provides the threshold and conditions for making the Voluntary Open
Offer which are detailed below:
Prior holding of at least 25 % shares and shareholding of the acquirer and persons acting in concert (PAC)
post completion of Open Offer
An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company
entitling them to exercise twenty-five per cent or more but less than the maximum permissible non- public
shareholding, shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares in
accordance with these regulations, subject to their aggregate shareholding after completion of the open offer not
exceeding the maximum permissible non-public shareholding.
Therefore, under Voluntary Offer the size of the Offer would be as such that the minimum public shareholding shall
be maintained even after acquisition of shares by the Acquirer.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 191

Further for the purpose of this regulation, any reference to “twenty-five per cent” in case of listed entity which has
listed its specified securities on Innovators Growth Platform shall be read as “forty-nine per cent”.
Acquisition of shares prior to the voluntary open offer
However, where an acquirer or any person acting in concert with him has acquired shares of the target company in
the preceding fifty-two weeks without attracting the obligation to make a public announcement of an open offer, he
shall not be eligible to voluntarily make a public announcement of an open offer for acquiring shares under this
regulation.
Prohibition on the acquisition of shares during the Offer Period
SEBI Takeover Regulations, 2011 prohibits the acquirer who has made a Voluntary Open Offer from further acquiring
the shares during the Offer Period otherwise than under the Open Offer.
Restriction of the acquisition of shares after completion of open offer
An acquirer and persons acting in concert with him, who have made a public announcement under this regulation
to acquire shares of a target company shall not be entitled to acquire any shares of the target company for a period
of six months after completion of the open offer except pursuant to another voluntary open offer.
However, such restriction shall not prohibit the acquirer from making a competing offer upon any other person
making an open offer for acquiring shares of the target company. Shares acquired through bonus issue or stock
splits shall not be considered for purposes of the dis-entitlement set out in this regulation.
Wilful Defaulter
No person who is a wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter
into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring
shares under these regulations.
However, this regulation shall not prohibit the wilful defaulter from making a competing offer in accordance with
regulation 20 of these regulations upon any other person making an open offer for acquiring shares of the target company.
Therefore, for willful defaulter the only route available is making competing offer.
Fugitive Economic Offender
Notwithstanding anything contained in these regulations, no person who is a fugitive economic offender shall make
a public announcement of an open offer or make a competing offer for acquiring shares or enter into any transaction,
either directly or indirectly, for acquiring any shares or voting rights or control of a target company.

Key differences between Compulsory and Voluntary Open Offer

Particulars Compulsory Open Offer Voluntary Open Offer

Eligibility Can be triggered through both Can be triggered by acquirer
direct and indirect acquisition. holding in excess of 25% or more.
Further the acquirer or PAC should
not have acquired shares of target
Company without the obligation to
make mandatory offer during the
preceding 52 weeks
Applicability On crossing the threshold or the No such applicability is required
creeping acquisition or by way of
control
Minimum size of Open Offer Minimum size shall be 26% of the Minimum size shall be 10% of the
total shares of the target company total shares of the target company
 192  Lesson 6 • EP-SLCM

MINIMUM OFFER SIZE

The minimum offer size for an open offer is as under:

Open offer when triggered Minimum open offer size

Direct acquisition under Regulation 3 & 4 or 26% of the total shares of the Target Company as on the 10th
Indirect acquisition under Regulation 5 working day from the closure of the tendering period.
Voluntary under Regulation 6 10% of the voting rights in the Target Company of the company.
The post offer shareholding of the Acquirer and PACs in such
case shall not exceed the maximum permissible non-public
shareholding.

CONDITIONAL OFFER
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.

Minimum level of acceptance implies minimum number of shares which the acquirer desires under the said
conditional offer. If the number of shares validly tendered in the conditional offer, are less than the minimum level
of acceptance stipulated by the acquirer, then the acquirer is not bound to accept any shares under the offer. In a
conditional offer, if the minimum level of acceptance is not reached, the acquirer shall not acquire any shares in the
target company under the open offer or the Share Purchase Agreement which has triggered the open offer.

PUBLIC ANNOUNCEMENT
SEBI (SAST) Regulation, 2011 provides that whenever acquirer acquires the shares or voting rights of the Target
Company in excess of the limits prescribed under these Regulations, Acquirer is required to give a Public
Announcement of an Open Offer to the shareholder of the Target Company as stated under Regulation 13. During
the process of making the Public Announcement of an Open Offer, the Acquirer is required to give Public
Announcement and publish Detailed Public Statement. The regulations have prescribed separate timelines for
Public Announcement as well as for Detailed Public Statement.
I. Public Announcement
II. Detailed Public Statement
Timing of Pubic Announcement
The Public Announcement shall be sent to all the stock exchanges on which the shares of the target company are
listed. Further, a copy of the same shall also be sent to the SEBI and to the target company at its registered office
within one working day of the date of the public announcement. The time within which the Public Announcement
is required to be made to the Stock Exchanges under different circumstances is tabulated below:

PUBLIC ANNOUNCEMENT
Regulation Particulars of Compliances Time frame within which it shall be complied
13(1) Agreement to acquire shares or voting rights or On the same day of entering into agreement to
control over the Target Company. acquire share, voting rights or control over the
Target Company.
13(2)(a) Market Purchase of shares. Prior to the placement of purchase order with the
stock broker to acquire the shares.
13(2)(b) Acquisition pursuant to conversion of Convertible On the same day when the option to convert such
Securities without a fixed date of conversion or securities into shares of the target company is
upon conversion of depository receipts for the exercised.
underlying shares of the target company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 193

13(2)(c) Acquiring shares or voting rights or control On the second working day preceding the
pursuant to conversion of Convertible Securities scheduled date of conversion of such securities
with a fixed date of conversion. into shares of the target company.
13(2)(d) In case of disinvestment. On the date of execution of agreement for
acquisition of shares or voting rights or control
over the target company.

13(2)(e) In case of Indirect Acquisition of shares or At any time within four working days of the
voting rights in, or control over the target following dates, whichever is earlier:
company where none of the parameters a. When the primary acquisition is contracted;
mentioned in Regulation 5(2) are met. and
b. Date on which the intention or decision to
make the primary acquisition is announced
in the public domain.
13(2)(f) In case of Indirect Acquisition of shares or On the following dates, whichever is earlier:
voting rights in, or control over the target a. When the primary acquisition is contracted;
company where any of the parameters and
mentioned in Regulation 5(2) is / are met. b. Date on which the intention or decision to
make the primary acquisition is announced
in the public domain.
13(2)(g) Acquisition of shares, voting rights or control On the date when the board of directors of the
over the Target Company pursuant to an target company authorizes such preferential
Preferential Issue. issue.
13(2)(h) An increase in voting rights consequential to a Not later than the 90th day from the date of
buy-back not qualifying for exemption under closure of the buy-back offer by the target
Regulation 10. company.
13(2)(i) Acquisition of shares, voting rights or control Not later than two working days from the date of
over the Target Company where the specific receipt of such intimation of having acquired
date on which title to such shares, voting rights such title.
or control is acquired is beyond the control of
the acquirer.
13(2A) Pursuant to regulation 3 and regulation 4 for a On the date of first such acquisition.
proposed acquisition of shares or voting rights
(Provided the acquirer discloses in the public
in or control over the target company through a
announcement the details of the proposed
combination of,–
subsequent acquisition.)
(i) an agreement and any one or more modes
of acquisition referred to in sub-regulation
(2) of regulation 13, or
(ii) any one or more modes of acquisition
referred in clause (a) to (i) of sub-
regulation (2) of regulation 13.
13(3) Voluntary Offer. On the same day when the Acquirer decides to
make Voluntary Offer.
Timing of Detailed Public Statement
In terms of Regulation 13(4) of SEBI (SAST) Regulations, 2011, a Detailed Public Statement shall be published by
the acquirer through the Manager to the Open Offer, not later than 5 working days of the Public Announcement.
However, in case of Indirect Acquisition where none of condition specified in Regulation 5(2) are satisfied, the
Detailed Public Statement shall be published not later than five working days of the completion of the primary
acquisition of shares or voting rights in or control over the company or entity holding shares or voting rights in, or
control over the target company.
 194  Lesson 6 • EP-SLCM

Publication of Public Announcement and Detailed Public Statement

Regulation 14 of SEBI (SAST) Regulation, 2011 provides the requirements relating to publication of Public
Announcement and Detailed Public Statement which are tabulated below :

Regulation Particulars of Compliances Time frame within which it shall be

complied
14(1) Public Announcement shall be sent to the Stock On the same day
Exchange, all the stock exchanges and same
information disseminate to public.
14(2) Copy of Public Announcement shall also be Within one working day of the date of the
sent to the SEBI and target company at its public announcement
Registered Office
14(3) Detailed Public Statement pursuant to the Within 5 working days from the date of Public
public announcement shall be published in Announcement
all Editions of any one of English Newspaper,
any one Hindi Newspaper and any one regional
language newspaper, where the registered
office of the target company is situated and any
one regional language newspaper at place of
stock exchange where highest volume of
trading in shares of the target company are
recorded during the sixty trading days
preceding the date of the public announcement.
14(4) Within the publication of such detailed public Immediately
statement in the newspapers, a copy of the
same shall be sent to -
a) SEBI through the manager to the
open offer ;
b) All the stock exchanges on which the
shares of the target company are listed and
the stock exchanges shall forthwith
disseminate such information to the public;
c) the target company at its registered office
and the target company shall forthwith
circulate it to the members of its board.

OFFER PRICE
Offer price is the price at which the acquirer announces to acquire shares from the public shareholders under the
open offer.
(1) The offer price shall not be less than the price as calculated under regulation 8 of the SAST Regulations, 2011
for frequently or infrequently traded shares.
(2) In the case of direct acquisition of shares or voting rights in, or control over the target company, and indirect
acquisition of shares or voting rights in, or control over the target company where the parameters referred to
in sub-regulation (2) of regulation 5 are met, the offer price shall be the highest of,—
(a) the highest negotiated price per share of the target company for any acquisition under the agreement
attracting the obligation to make a public announcement of an open offer;
(b) the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any
person acting in concert with him, during the fifty-two weeks immediately preceding the date of the
public announcement;
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 195

(c) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, during the twenty-six weeks immediately preceding the date of the public
announcement;
(d) the volume-weighted average market price of such shares for a period of sixty trading days immediately
preceding the date of the public announcement as traded on the stock exchange where the maximum
volume of trading in the shares of the target company are recorded during such period, provided such
shares are frequently traded;
(e) where the shares are not frequently traded, the price determined by the acquirer and the manager to
the open offer taking into account valuation parameters including, book value, comparable trading
multiples, and such other parameters as are customary for valuation of shares of such companies; and
(f) the per share value computed under sub-regulation (5), if applicable.

(3) In the case of an indirect acquisition of shares or voting rights in, or control over the target company, where
the parameter referred to in sub-regulation (2) of regulation 5 are not met, the offer price shall be the highest
of, –
(a) the highest negotiated price per share, if any, of the target company for any acquisition under the
agreement attracting the obligation to make a public announcement of an open offer;
(b) the volume-weighted average price paid or payable for any acquisition, whether by the acquirer or by
any person acting in concert with him, during the fifty-two weeks immediately preceding the earlier
of, the date on which the primary acquisition is contracted, and the date on which the intention or the
decision to make the primary acquisition is announced in the public domain;
(c) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, during the twenty-six weeks immediately preceding the earlier of, the date on
which the primary acquisition is contracted, and the date on which the intention or the decision to
make the primary acquisition is announced in the public domain;
(d) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, between the earlier of, the date on which the primary acquisition is contracted,
and the date on which the intention or the decision to make the primary acquisition is announced in
the public domain, and the date of the public announcement of the open offer for shares of the target
company made under these regulations;
(e) the volume-weighted average market price of the shares for a period of sixty trading days immediately
preceding the earlier of, the date on which the primary acquisition is contracted, and the date on
which the intention or the decision to make the primary acquisition is announced in the public domain,
as traded on the stock exchange where the maximum volume of trading in the shares of the target
company are recorded during such period, provided such shares are frequently traded; and
(f) the per share value computed under sub-regulation (5).

(4) In the event the offer price is incapable of being determined under any of the parameters specified in sub-
regulation (3), without prejudice to the requirements of sub-regulation (5), the offer price shall be the fair
price of shares of the target company to be determined by the acquirer and the manager to the open offer
taking into account valuation parameters including, book value, comparable trading multiples, and such
other parameters as are customary for valuation of shares of such companies.
(5) In the case of an indirect acquisition and open offers under sub-regulation (2) of regulation 5 where,–
(a) the proportionate net asset value of the target company as a percentage of the consolidated net asset
value of the entity or business being acquired;
(b) the proportionate sales turnover of the target company as a percentage of the consolidated sales
turnover of the entity or business being acquired; or
(c) the proportionate market capitalization of the target company as a percentage of the enterprise value
for the entity or business being acquired;
 196  Lesson 6 • EP-SLCM

is in excess of fifteen per cent, on the basis of the most recent audited annual fi statements, the acquirer shall,
notwithstanding anything contained in sub-regulation (2) or sub-regulation (3), be required to compute and
disclose, in the letter of off , the per share value of the target company taken into account for the acquisition,
along with a detailed description of the methodology adopted for such computation.
Explanation. – For the purposes of computing the percentages referred to in clause (c) of this sub- regulation,
the market capitalisation of the target company shall be taken into account on the basis of the volume-
weighted average market price of such shares on the stock exchange for a period of sixty trading days
preceding the earlier of, the date on which the primary acquisition is contracted, and the date on which the
intention or the decision to make the primary acquisition is announced in the public domain, as traded on the
stock exchange where the maximum volume of trading in the shares of the target company are recorded
during such period.
(6) For the purposes of sub-regulation (2) and sub-regulation (3), where the acquirer or any person acting in
concert with him has any outstanding convertible instruments convertible into shares of the target company
at a specific price, the price at which such instruments are to be converted into shares, shall also be considered
as a parameter under sub-regulation (2) and sub-regulation (3).
(7) For the purposes of sub-regulation (2) and sub-regulation (3), the price paid for shares of the target company
shall include any price paid or agreed to be paid for the shares or voting rights in, or control over the target
company, in any form whatsoever, whether stated in the agreement for acquisition of shares or in any
incidental, contemporaneous or collateral agreement, whether termed as control premium or as non-compete
fees or otherwise.
(8) Where the acquirer has acquired or agreed to acquire whether by himself or through or with persons acting
in concert with him any shares or voting rights in the target company during the offer period, whether by
subscription or purchase, at a price higher than the offer price, the offer price shall stand revised to the
highest price paid or payable for any such acquisition.
However, no such acquisition shall be made after the third working day prior to the commencement of the
tendering period and until the expiry of the tendering period.
(9) The price parameters under sub-regulation (2) and sub-regulation (3) may be adjusted by the acquirer in
consultation with the manager to the offer, for corporate actions such as issuances pursuant to rights issue,
bonus issue, stock consolidations, stock splits, payment of dividend, de-mergers and reduction of capital,
where the record date for effecting such corporate actions falls prior to three working days before the
commencement of the tendering period.
However, no adjustment shall be made for dividend declared with a record date falling during such period
except where the dividend per share is more than fi per cent higher than the average of the dividend per
share paid during the three fi years preceding the date of the public announcement.
(10) Where the acquirer or persons acting in concert with him acquires shares of the target company during the
period of twenty-six weeks after the tendering period at a price higher than the offer price under these
regulations, the acquirer and persons acting in concert shall pay the difference between the highest acquisition
price and the offer price, to all the shareholders whose shares were accepted in the open offer, within sixty
days from the date of such acquisition:
However, this provision shall not be applicable to acquisitions under another open offer under these
regulations or pursuant to the SEBI (Delisting of Equity Shares) Regulations, 2009, or open market purchases
made in the ordinary course on the stock exchanges, not being negotiated acquisition of shares of the target
company whether by way of bulk deals, block deals or in any other form.
(11) Where the open offer is subject to a minimum level of acceptances, the acquirer may, subject to the other
provisions of this regulation, indicate a lower price, which will not be less than the price determined under
this regulation, for acquiring all the acceptances despite the acceptance falling short of the indicated minimum
level of acceptance, in the event the open offer does not receive the minimum acceptance.
(12) In the case of any indirect acquisition, other than the indirect acquisition referred in sub-regulation (2) of
regulation 5, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 197

per cent per annum for the period between the earlier of the date on which the primary acquisition is
contracted or the date on which the intention or the decision to make the primary acquisition is announced
in the public domain, and the date of the detailed public statement, provided such period is more than five
working days.
(13) The offer price for partly paid up shares shall be computed as the difference between the offer price and the
amount due towards calls-in-arrears including calls remaining unpaid with interest, if any, thereon.
(14) The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and
the manager to the open offer with full disclosure of justification for the price so determined, being set out in
the detailed public statement and the letter of offer.
However, such price shall not be lower than the amount determined by applying the percentage rate of
premium, if any, that the offer price for the equity shares carrying full voting rights represents to the price
parameter computed under clause (d) of sub-regulation 2, or as the case may be, clause (e) of sub-regulation
3, to the volume-weighted average market price of the shares carrying differential voting rights for a period
of sixty trading days computed on the same terms as specified in the aforesaid provisions, subject to shares
carrying full voting rights and the shares carrying differential voting rights, both being frequently traded
shares.
(15) In the event of any of the price parameters contained in this regulation not being available or denominated in
Indian rupees, the conversion of such amount into Indian rupees shall be effected at the exchange rate as
prevailing on the date preceding the date of public announcement and the acquirer shall set out the source of such
exchange rate in the public announcement, the detailed public statement and the letter of offer.
(16) For purposes of clause (e) of sub-regulation (2) and sub-regulation (4), the SEBI may, at the expense of the
acquirer, require valuation of the shares by an independent merchant banker other than the manager to the open
offer or an independent chartered accountant in practice having a minimum experience of ten years.

FILING OF LETTER OF OFFER WITH THE SEBI

The Acquirer shall submit a draft letter of offer to the SEBI within 5 working days from the date of detailed public
statement along with a non-refundable fee as applicable. [Regulation 16(1)]
Simultaneously, a copy of the draft letter of offer shall be send to the Target Company at its registered office and to
all the Stock Exchanges where the shares of the Company are listed. [Regulation 18(1)]

Sr. No. Consideration payable under the Open Offer Fees (Rs.)
1. Up to ten crore rupees Five lakh rupees (Rs. 5,00,000)
2. More than ten crore rupees but less than or equal to 0.5 per cent of the offer size
one thousand crore rupees
3. More than one thousand crore rupees Five crore rupees (Rs. 5,00,00,000) plus 0.125
per cent of the portion of the offer size in excess
of one thousand crore rupees (1000,00,00,000)
The consideration payable under the open offer shall be calculated at the offer price, assuming full acceptance of the
open offer, and in the event the open offer is subject to differential pricing, shall be computed at the highest offer
price, irrespective of manner of payment of the consideration.
However in the event of consideration payable under the open offer being enhanced owing to a revision to the offer
price or offer size the fees payable shall stand revised accordingly, and shall be paid within five working days from
the date of such revision.
DISPATCH OF LETTER OF OFFER
The Acquirer shall ensure that the letter of offer is dispatched to the shareholders whose names appear on the
register of members of the Target Company as of the identified date, not later than 7 working days from the date of
receipt of communication of comments from the SEBI or where no comments are offered by the SEBI, within 7
working days from the expiry of 15 working days from the date of receipt of draft letter of offer by SEBI.
 198  Lesson 6 • EP-SLCM

Explanation
(i) Letter of offer may also be dispatched through electronic mode in accordance with the provisions of Companies
Act, 2013.
(ii) On receipt of a request from any shareholder to receive a copy of the letter of offer in physical format, the
same shall be provided.
(iii) The aforesaid shall be disclosed in the letter of offer.
Simultaneously with the dispatch of the letter of offer to Shareholders, the acquirer shall send the letter of offer to
the custodian of shares underlying depository receipts, if any, of the target company. [Regulation 18(3)]

The target company shall furnish to the acquirer within two working days from the identified date, a list of
shareholders as per the register of members of the target company containing names, addresses, shareholding and
folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for registration
of transfer of shares are pending with the target company.
However, the acquirer shall reimburse reasonable costs payable by the target company to external agencies in order
to furnish such information.

However, it is provided that where a shareholder holding less than 5% of the voting rights of the Target Company is
resident outside India and local laws or regulations of such jurisdiction may expose the acquirer or the target
company to material risk of civil, regulatory or criminal liabilities in the event, then the letter of offer in its final form
were to be sent without material amendments or modifications into such jurisdiction, then the acquirer may refrain
from dispatch of the letter of offer into such jurisdiction. [Regulation 18(2)]

OPENING OF THE OFFER

The tendering period shall start not later than 12 working days from date of receipt of comments from SEBI and
shall remain open for 10 working days. [Regulation 18(8)]
Shareholders who have tendered shares in acceptance of the open offer shall not be entitled to withdraw such
acceptance during the tendering period. [Regulation 18(9)]
COMPLETION OF REQUIREMENTS
Within 10 working days from the last date of the tendering period, the acquirer shall complete all requirements as
prescribed under these regulations and other applicable law relating to the Open Offer including payment of
consideration to the shareholders who have accepted the open offer. [Regulation 18(10)]

PROCESS AT GLANCE

Appointment of Merchant Banker prior to Public Announcement (PA)

Public Announcement depending on transaction

Opening of Escrow Account - 2 working days prior to the date of the detailed public statement
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 199

Detailed Public Statement – within 5 working days from the date of public announcement

Filing of Draft Letter of Offer with SEBI and send a copy to Target Company and Stock
Exchanges within 5 working days from detailed public statement

Dispatch Letter of Offer - Within 7 working days of receiving comments from SEBI or in case no
comments are received within 7 working days from expiry of 15 days from filing of the draft LoF.

Upward revision of Offer price, if any by Acquirer - prior to the commencement of the last 1
working day before the commencement of the tendering period.

Recommendation of Committee of Independent Directors to be published -at least two working

days before the commencement of the tendering period

Tendering Period : Commencement - shall start not later than 12 working days from date of
receipt of comments from the Board and to remain open for 10 working days

Tendering Period to be closed after 10 working days

Payment of consideration - within 10 working days from the last date of the tendering period

Post Offer Advertisement – within 5 working days from closure of offer period

OBLIGATIONS ON FURTHER ACQUISITION

If the acquirer or persons acting in concert (PAC) with him acquires shares of the target company during the period
of 26 weeks after the tendering period at a price higher than the offer price, then the acquirer and PAC shall pay the
difference between the highest acquisition price and the offer price, to all the shareholders whose shares were
accepted in the open offer, within 60 days from the date of such acquisition.
However, such provisions shall not be applicable if the acquisition is made through another open offer under these
regulations or pursuant to the SEBI (Delisting of Equity Shares) Regulations, 2009 or open market purchase in the
 200  Lesson 6 • EP-SLCM

ordinary course on the stock exchange not being negotiated acquisition of shares of the target company whether by
way of bulk deals, block deals or in any other form. [Regulation 8(10)]

COMPLETION OF ACQUISITION

The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company,
whether by way of subscription to shares or a purchase of shares attracting the obligation to make an open offer for
acquiring shares, until the expiry of the offer period, provided that in case of an offer made under sub-regulation (1)
of regulation 20, pursuant to a preferential allotment, the offer shall be completed within the period as provided
under sub-regulation (1) of regulation 170 of Securities and Exchange Board of India (Issue of Capital and Disclosure)
Regulations, 2018.
In case of a delisting offer made under regulation 5A, the acquirer Example-
shall complete the acquisition of shares attracting the obligation
Mr. A agreed to purchase shares of XYZ
to make an offer for acquiring shares in terms of regulations 3, 4
Limited, listed entity pursuant to Share
or 5, only after making the public announcement regarding the
Purchase Agreement (SPA) and accordingly
success of the delisting proposal made in terms of sub-regulation
made open offer. However, he cannot
(1) regulation 18 of Securities and Exchange Board of India
complete the transactions as agreed in the
(Delisting of Equity Shares) Regulations, 2009.
SPA till completion of open offer
EXCEPTION TO ABOVE:
Subject to the acquirer depositing in the escrow account, cash of an amount equal to the entire consideration
payable under the open offer assuming full acceptance of the open offer, the parties to such agreement may after the
expiry of twenty-one working days from the date of detailed public statement, act upon the agreement and the
acquirer may complete the acquisition of shares or voting rights in, or control over the target company as
contemplated.
An acquirer may acquire shares of the target company through preferential issue or through the stock exchange
settlement process subject to such shares being kept in an escrow account. The acquirer shall not exercise any voting
rights on the shares kept in the escrow account.
DISCLOSURES FOR ACQUISITION DURING OFFER PERIOD
The acquirer shall disclose during the offer period every acquisition made by the acquirer or persons acting in
concert with him of any shares of the target company in such form as may be specified, to each of the stock exchanges
on which the shares of the target company are listed and to the target company at its registered office within twenty-four
hours of such acquisition, and the stock exchanges shall forthwith disseminate such information to the public.
However the acquirer and persons acting in concert with him shall not acquire or sell any shares of the target
company during the period between three working days prior to the commencement of the tendering period and
until the expiry of the tendering period.
PAYMENT OF INTEREST IN CASE OF DELAY
In case the acquirer is unable to make payment to the shareholders who have accepted the open offer within such
period, the acquirer shall pay interest for the period of delay to all such shareholders whose shares have been
accepted in the open offer, at the rate of ten per cent per annum. However, in case the delay was not attributable to
any act of omission or commission of the acquirer, or due to the reasons or circumstances beyond the control of
acquirer, the Board may grant waiver from the payment of interest.
Provided further that the payment of interest would be without prejudice to the SEBI taking any action under
regulation 32 of these regulation or under the Act [Regulation 18(11A)].

PROVISION OF ESCROW
Not later than two working days prior to the date of the detailed public statement of the open offer for acquiring
shares, the acquirer shall create an escrow account towards security for performance of his obligations under these
regulations, and deposit in escrow account such aggregate amount as per the following scale:
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 201

On first Rs. 500 Cr • An amount equal to 25% of the consideration

On balance consideration after • An additional amount equal to ten per cent of the balance
initial Rs. 500 Cr consideration.

Requirement for Conditional Offer

However, where an open offer is made conditional upon minimum level of acceptance, hundred percent of the
consideration payable in respect of minimum level of acceptance or fifty per cent of the consideration payable
under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

100% payable under

minimum acceptance
condition
Higher shall be
deposited in case in
escrow account 50% payable under
open offer

Requirement for Indirect Acquisition

In case of indirect acquisitions where public announcement has been made in terms of clause (e) of sub-regulation
(2) of regulation 13 of these regulations i.e. indirect acquisition where none of the parameters of Regulation 5 (2)
are met, an amount equivalent to hundred per cent of the consideration payable in the open offer shall be deposited
in the escrow account.
The escrow account may be kept in following form –

Bank
Cash deposited guarantee in
in bank favour of
manager

Deposit of
tradeable
securities

Regulation 17 (3) prescribes that the escrow account may be in the form of, –

(a) cash deposited with any scheduled commercial bank;

(b) bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or
(c) deposit of frequently traded and freely transferable equity shares or other freely transferable securities with
appropriate margin.
 202  Lesson 6 • EP-SLCM

However, deposit of securities shall not be permitted in respect of indirect acquisitions where public announcement
has been made.
Explanation : The cash component of the escrow account as referred to in clause (a) above may be maintained in an
interest bearing account, subject to the merchant banker ensuring that the funds are available at the time of making
payment to the shareholders.
In the event of the escrow account being created by way of a bank guarantee or by deposit of securities, the acquirer
shall also ensure that at least one per cent of the total consideration payable is deposited in cash with a scheduled
commercial bank as a part of the escrow account.
For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the
acquirer shall while opening the account, empower the manager to the open offer to instruct the bank to issue a
banker’s cheque or demand draft or to make payment of the amounts lying to the credit of the escrow account, in
accordance with requirements under these regulations.
For such part of the escrow account as is in the form of a bank guarantee, such bank guarantee shall be in favour of
the manager to the open offer and shall be kept valid throughout the offer period and for an additional period of
thirty days after completion of payment of consideration to shareholders who have tendered their shares in
acceptance of the open offer.
For such part of the escrow account as is in the form of securities, the acquirer shall empower the manager to the
open offer to realise the value of such escrow account by sale or otherwise, and in the event there is any shortfall in
the amount required to be maintained in the escrow account, the manager to the open offer shall be liable to make
good such shortfall.
The manager to the open offer shall not release the escrow account until the expiry of thirty days from the completion
of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, save
and except for transfer of funds to the special escrow account as required under regulation 21.

Forfeiture of Escrow Account

In the event of non-fulfillment of obligations under these regulations by the acquirer the Board may direct the
manager to the open offer to forfeit the escrow account or any amounts lying in the special escrow account, either
in full or in part.
MODE OF PAYMENT

Cash

Issue, exchange or transfer of listed shares in the equity shares of

acquirer
Payment mode

Issue, exchange or transfer of listed secured debt instruments issued by acquirer

issue, exchange or transfer of convertible debt securities of acquirer

Combination of above
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 203

Certain case requires only cash mode payment

However, where any shares have been acquired or agreed to be acquired by the acquirer and persons acting in
concert with him during the fifty-two weeks immediately preceding the date of public announcement constitute
more than ten per cent of the voting rights in the target company and has been paid for in cash, the open offer shall
entail an option to the shareholders to require payment of the offer price in cash, and a shareholder who has not
exercised an option in his acceptance shall be deemed to have opted for receiving the offer price in cash.
Amount to be deposited in case of revision of offer
In case of revision in offer price the mode of payment of consideration may be altered subject to the condition that
the component of the offer price to be paid in cash prior to such revision is not reduced.
Therefore, say Mr. A as an acquirer announced earlier offer for Rs. 50 Crore with cash mode only and subsequent to
revision in offer price totaling to open offer for Rs. 70 Crore, he may alter the payment mode. However, he needs to
ensure that earlier announced cash mode of Rs. 50 Crore shall not be reduced. For Balance Rs. 20 Crore he may opt for
other mode of payment.

COMPETING OFFER
Upon a public announcement of an open offer for acquiring shares of a target company being made, any person,
other than the acquirer who has made such public announcement, shall be entitled to make a public announcement
of an open offer within fifteen working days of the date of the detailed public statement made by the acquirer who
has made the first public announcement. [Regulation 20(1)]
However, the open offer made under this regulation shall be for such number of shares which, when taken together
with shares held by such acquirer along with persons acting in concert with him, shall be at least equal to the
holding of the acquirer who has made the first public announcement, including the number of shares proposed to
be acquired by him under the offer and any underlying agreement for the sale of shares of the target company
pursuant to which the open offer is made.

Revision of original offer in case of competing offer

Upon the public announcement of a competing offer, an acquirer who had made a preceding competing offer shall
be entitled to revise the terms of his open offer provided the revised terms are more favourable to the shareholders
of the target company.
However, the acquirers making the competing offers shall be entitled to make upward revisions of the offer price at
any time up to one working day prior to the commencement of the tendering period.

Timelines in case of competing offer

The schedule of activities and the tendering period for all
competing offers shall be carried out with identical timelines The timeline i.e. starting from Public
and the last date for tendering shares in acceptance of the Announcement of Competing offer would be
every competing offer shall stand revised to the last date for revised and accordingly will be extended
tendering shares in acceptance of the competing offer last including the tendering period.
made.

WITHDRAWAL OF OPEN OFFER

An open offer for acquiring shares once made shall not be withdrawn except under any of the following
circumstances,–
(a) statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to
make an open offer under these regulations having been finally refused, subject to such requirements for
approval having been specifically disclosed in the detailed public statement and the letter of offer;
 204  Lesson 6 • EP-SLCM

(b) the acquirer, being a natural person, has died;

(c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is
not met for reasons outside the reasonable control of the acquirer, then it should be disclosed in the detailed
public statement and the letter of offer; or
However, an acquirer shall not withdraw an open offer pursuant to a public announcement made under
clause (g) of sub-regulation (2) of regulation 13 i.e. relating to preferential issue, even if the proposed
acquisition through the preferential issue is not successful.
(d) such circumstances as in the opinion of the SEBI, merit withdrawal.
SEBI shall pass a reasoned order permitting withdrawal and such order shall be listed by SEBI on its official website.
Obligations on withdrawal of offer
In the event of withdrawal of the open offer, the acquirer shall through the manager to the open offer, within two
working days, –
(a) make an announcement in the same newspapers in which the public announcement of the open offer was
published, providing the grounds and reasons for withdrawal of the open offer; and
(b) simultaneously with the announcement, inform in writing to,–
(i) SEBI;
(ii) all the stock exchanges on which the shares of the target company are listed, and the stock exchanges
shall forthwith disseminate such information to the public; and
(iii) the target company at its registered office. [Regulation 23]

OBLIGATIONS OF THE TARGET COMPANY

(1) Upon a public announcement of an open offer for acquiring shares of a target company being made, the board
of directors of such target company shall ensure that during the offer period, the business of the target
company is conducted in the ordinary course consistent with past practice.
(2) During the offer period, unless the approval of shareholders of the target company by way of a special
resolution by postal ballot is obtained, the board of directors of either the target company or any of its
subsidiaries shall not, –
(a) alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any
agreement therefore outside the ordinary course of business;
(b) effect any material borrowings outside the ordinary course of business;
(c) issue or allot any authorised but unissued securities entitling the holder to voting rights. However, the
target company or its subsidiaries may, –
(i) issue or allot shares upon conversion of convertible securities issued prior to the publi
announcement of the open off , in accordance with pre-determined terms of such conversion;
(ii) issue or allot shares pursuant to any public issue in respect of which the red herring
prospectus has been filed with the Registrar of Companies prior to the public announcement
of the open offer; or
(iii) issue or allot shares pursuant to any rights issue in respect of which the record date has
been announced prior to the public announcement of the open offer;
(d) implement any buy-back of shares or effect any other change to the capital structure of the target
company;
(e) enter into, amend or terminate any material contracts to which the target company or any of its
subsidiaries is a party, outside the ordinary course of business, whether such contract is with a
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 205

related party, within the meaning of the term under applicable accounting principles, or with any
other person; and
(f) accelerate any contingent vesting of a right of any person to whom the target company or any of its
subsidiaries may have an obligation, whether such obligation is to acquire shares of the target company
by way of employee stock options or otherwise.

(3) In any general meeting of a subsidiary of the target company in respect of the matters referred to in sub-
regulation (2), the target company and its subsidiaries, if any, shall vote in a manner consistent with the
special resolution passed by the shareholders of the target company.
(4) The target company shall be prohibited from fixing any record date for a corporate action on or after the third
working day prior to the commencement of the tendering period and until the expiry of the tendering period.
(5) The target company shall furnish to the acquirer within two working days from the identified date, a list of
shareholders as per the register of members of the target company containing names, addresses, shareholding
and folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for
registration of transfer of shares are pending with the target company.
However, the acquirer shall reimburse reasonable costs payable by the target company to external agencies
in order to furnish such information.
(6) Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a
committee of independent directors to provide reasoned recommendations on such open offer, and the target
company shall publish such recommendations.
However, such committee shall be entitled to seek external professional advice at the expense of the target
company. Provided further that while providing reasoned recommendations on the open offer proposal, the
committee shall disclose the voting pattern of the meeting in which the open offer proposal was discussed.
(7) The committee of independent directors shall provide its written reasoned recommendations on the open
offer to the shareholders of the target company and such recommendations shall be published in such form
as may be specified, at least two working days before the commencement of the tendering period, in the same
newspapers where the public announcement of the open offer was published, and simultaneously, a copy of
the same shall be sent to, –
(i) the SEBI;
(ii) all the stock exchanges; and
(iii) to the manager to the open offer, and where there are competing offers, to the manager to the open
offer for every competing offer.

(8) The board of directors of the target company shall facilitate the acquirer in verification of shares tendered in
acceptance of the open offer.
(9) The board of directors of the target company shall make available to all acquirers making competing offers,
any information and co-operation provided to any acquirer who has made a competing offer.
(10) Upon fulfilment by the acquirer, of the conditions required under these regulations, the board of directors of
the target company shall without any delay register the transfer of shares acquired by the acquirer in physical
form, whether under the agreement or from open market purchases, or pursuant to the open offer.

Clarification: In case an acquirer or any person acting in concert with the acquirer who proposes to acquire shares
under the offer is not eligible to acquire shares through stock exchange due to operation of any other law, such
offers would follow the existing ‘tender offer method. In case of competing offers under Regulation 20 of the
Takeover Regulations, in order to have a level playing field, in the event one of the acquirers is ineligible to acquire
shares through stock exchange mechanism, then all acquirers shall follow the existing ‘tender offer method.
[Circular No. CIR/CFD/POLICYCELL/1/2015 dated 13th April, 2015]
 206  Lesson 6 • EP-SLCM

OBLIGATIONS OF THE ACQUIRER

(1) Prior to making the public announcement of an open offer for acquiring shares under these regulations, the
acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations
under the open offer and that the acquirer is able to implement the open offer, subject to any statutory
approvals for the open offer that may be necessary.
(2) In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer
to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale,
lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired
control over the target company, shall be debarred from causing such alienation for a period of two years
after the offer period.
However, in the event the target company or any of its subsidiaries is required to so alienate assets despite
the intention to alienate not having been expressed by the acquirer, such alienation shall require a special
resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such
postal ballot shall inter alia contain reasons as to why such alienation is necessary.
(3) The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the
letter of off and the post-off advertisement are true, fair and adequate in all material aspects and not
misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.
(4) The acquirer and persons acting in concert with him shall not sell shares of the target company held by them,
during the offer period.
(5) The acquirer and persons acting in concert with him shall be jointly and severally responsible for fulfilment
of applicable obligations under these regulations.

OBLIGATIONS OF THE MANAGER TO THE OPEN OFFER

(1) Prior to public announcement being made, the manager to the open offer shall ensure that,—
(a) the acquirer is able to implement the open offer; and
(b) firm arrangements for funds through verifiable means have been made by the acquirer to meet the
payment obligations under the open offer.
(2) The manager to the open offer shall ensure that the contents of the public announcement, the detailed
public statement and the letter of offer and the post-offer advertisement are true, fair and adequate in
all material aspects, not misleading in any material particular, are based on reliable sources, state the
source wherever necessary, and are in compliance with the requirements under these regulations.
(3) The manager to the open offer shall furnish to the Board a due diligence certificate along with the draft
letter of offer filed under regulation 16.
(4) The manager to the open offer shall ensure that market intermediaries engaged for the purposes of the open
offer are registered with the Board.
(5) The manager to the open offer shall exercise diligence, care and professional judgment to ensure
compliance with these regulations.
(6) The manager to the open offer shall not deal on his own account in the shares of the target company during
the offer period.
(7) The manager to the open offer shall file a report with the Board within fifteen working days from the
expiry of the tendering period, in such form as may be specified, confirming status of completion of
various open offer requirements.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 207

DISCLOSURES
In the SEBI Takeover Regulations, 2011, the obligation to give the disclosures on the acquisition of certain limits, is
only on the acquirer and not on the Target Company. Further as against the Open Offer obligations where the
individual shareholding is also to be considered, the disclosure shall be of the aggregated shareholding and voting
rights of the acquirer or promoter of the target company or every person acting in concert with him.
EVENT BASED DISCLOSURES

Regulation Made by Trigger Time Period Made to

Regulation Acquirer Acquirer + persons acting in concert (PAC) Within two Every Stock
29(1) acquiring 5% or more of the shares or voting working days of Exchange
rights of the target company shall disclose to their the receipt of where the
aggregate shareholding and voting rights in such intimation of shares of the
target company. allotment of target
shares, or the company are
This disclosure is like an initial disclosure which
acquisition or the listed and the
is required to be given on acquiring 5% or more
disposal of shares target
shares or voting rights of Target Company.
or voting rights in company at its
Further in case of listed entity which has listed its the target registered
specified securities on Innovators Growth company. office.
Platform, any reference to “five per cent” shall be
read as “ten per cent”.
Regulation Acquirer Any person + persons acting in concert (PAC), holds Within two Every Stock
29(2) shares or voting rights entitling them to five per cent working days of Exchange
or more of the shares or voting rights in a target the receipt of where
company, shall disclose the number of shares or intimation of the shares
voting rights held and change in shareholding or allotment of of the target
voting rights, even if such change results in shares or the company are
shareholding falling below five percent, if there has acquisition or the listed and the
been change in such holdings from the last disclosure disposal of shares target
made under sub-regulation (1) or under this sub- or voting rights in company at its
regulation; and such change exceeds two per cent of the target registered
total shareholding or voting rights in the target company. office.
company.
Further in case of listed entity which has listed its
specified securities on Innovators Growth Platform,
any reference to “five per cent” shall be read as “ten
per cent” and any reference to “two per cent” shall
be read as “five per cent”.
Note :
• Shares taken by way of encumbrance shall be treated as an “acquisition”.
• Share given upon release of encumbrance shall be treated as a “disposal”
• The requirement as listed above shall not apply to a Scheduled Commercial bank or public financial institution
or a housing finance company or a systematically important non-banking financial company as pledgee in
connection with a pledge of shares for securing indebtness in the ordinary course of business.
 208  Lesson 6 • EP-SLCM

Example:
Disclosure
Requirement

CONTINUAL DISCLOSURES / YEARLY DISCLOSURES

Regulation Trigger Time Period Made to

Regulation Every Person + PAC holding more than Within 7 working days Every Stock Exchange
30(1) 25% shares or voting rights in a target from the financial year where the shares of the
company to disclose their aggregate ending 31st March every target company are listed
shareholding and voting rights as on 31st year. and the target company at
March. its registered office.
Regulation Promoter +PAC disclose their aggregate Within 7 working days Every stock exchange
30(2) shareholding and voting rights as of the from the financial year where the shares of the
31st March, in such target company. ending 31st March every target company are listed
This disclosure is to be made irrespective and the target company
year. at its registered office.
of the holding of Promoters + PAC.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 209

DISCLOSURES OF ENCUMBERED SHARES

Regulation Who will Trigger Time Period Made to

make
Regulation Promoter Promoter + PAC creating Within 7 working Every Stock
31(1) encumbrance on the shares of the days from the exchange where the
target company. creation or shares
invocation or release
of encumbrance as
the case may be.
Regulation Promoter Invocation of such encumbrance or Within 7 working Every Stock
31(2) release of such encumbrances of the days from the exchange where the
shares of the target company. creation or shares
invocation or release
of encumbrance as
the case may be.
Regulation Promoter Promoter + PAC shall declare on a Within 7 working Every Stock
31(4) yearly basis that he, along with days from the exchange where the
persons acting in concert, has not financial year ending shares are listed and
made any encumbrance, directly or 31st March every the Audit Committee
indirectly, other than those already year. of the Target
disclosed during the financial year. Company.

EXEMPTIONS
While the fundamental objective of the SEBI Takeover Regulations is investor protection, the SEBI Takeover
Regulations also provides for certain exemptions from the open offer obligation without deviating from its objective.

Exemptions

Automatic Exemptions Exemptions by SEBI

(Regulation 10) (Regulation 11)

Regulation 10 - Automatic Exemptions

Regulation 10 of the SEBI Takeover Regulations, 2011 provides for automatic exemptions from the applicability of
making Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the
compliance of certain conditions specified therein.
Further, Regulation 11 of SEBI Takeover Regulations, 2011 provides the provisions whereby the acquirer can apply
to SEBI for availing the exemption from the Open Offer obligations and the Target Company can apply for relaxation
from strict compliance with any procedural requirement relating to Open Offer as provided under Chapter III and
IV of these regulations.
Some of the important exemptions provided therein regulation 10 along with their conditions for exemption is
detailed below.
The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and
regulation 4 subject to fulfillment of the conditions stipulated therefor :
 210  Lesson 6 • EP-SLCM

(1) (a) acquisition pursuant to inter se transfer of shares amongst qualifying persons, being, –
(i) immediate relatives;
(ii) persons named as promoters in the shareholding pattern filed by the target company in terms of the
listing regulations or as the case may be, the listing agreement or these regulations for not less than
three years prior to the proposed acquisition;
It is necessary that promoters should have shown as such in the filing for a period of at least 3
years prior to the acquisition.
(iii) a company, its subsidiaries, its holding company, other subsidiaries of such – holding company, persons
holding not less than fifty per cent of the equity shares of such company, other companies in which
such persons hold not less than fifty per cent of the equity shares, and their subsidiaries subject to
control over such qualifying persons being exclusively held by the same persons;
For this sub-regulation, the company shall include a body corporate, whether Indian or foreign.
(iv) persons acting in concert for not less than three years prior to the proposed acquisition, and disclosed
as such pursuant to filings under the listing regulations or as the case may be, the listing agreement;
It is necessary that persons acting in concert should have shown as such in the filing for a
period of at least 3 years prior to the acquisition.
(v) shareholders of a target company who have been persons acting in concert for a period of not less
than three years prior to the proposed acquisition and are disclosed as such pursuant to fi under the
listing regulations or as the case may be, the listing agreement, and any company in which the entire
equity share capital is owned by such shareholders in the same proportion as their holdings in the
target company without any differential entitlement to exercise voting rights in such company.

However, for purposes of availing of the exemption under this clause, –

(i) If the shares of the target company are frequently traded, the acquisition price per share shall
not be higher by more than twenty-five per cent of the volume-weighted average market price
for a period of sixty trading days preceding the date of issuance of notice for the proposed inter
se transfer, as traded on the stock exchange where the maximum volume of trading in the shares
of the target company are recorded during such period, and if the shares of the target company
are infrequently traded, the acquisition price shall not be higher by more than twenty-five
percent of the price determined; and
(ii) the transferor and the transferee shall have complied with applicable disclosure requirements
set out in these regulations.
(b) acquisition in the ordinary course of business by, –
(i) an underwriter registered with the SEBI by way of allotment pursuant to an underwriting agreement
in terms of the SEBI (ICDR) Regulations, 2018;
(ii) a stock broker registered with SEBI on behalf of his client in exercise of lien over the shares purchased
on behalf of the client under the bye-laws of the stock exchange where such stock broker is a member;
(iii) a merchant banker registered with SEBI or a nominated investor in the process of market making or
subscription to the unsubscribed portion of issue in terms of the SEBI (ICDR) Regulations, 2018;
(iv) any person acquiring shares pursuant to a scheme of safety net in terms of the then existing SEBI
(ICDR) Regulations, 2009;
(v) a merchant banker registered with SEBI acting as a stabilising agent or by the promoter or pre-issue
shareholder in terms of the SEBI (ICDR) Regulations, 2018;
(vi) by a registered market-maker of a stock exchange in respect of shares for which he is the market
maker during the course of market making;
(vii) a Scheduled Commercial Bank, acting as an escrow agent; and
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 211

(viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee.
(c) acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offer for
acquiring shares pursuant to an agreement of disinvestment, as contemplated in such agreement.
However, (i) both the acquirer and the seller are the same at all the stages of acquisition; and (ii) full
disclosures of all the subsequent stages of acquisition, if any, have been made in the public announcement of
the open offer and in the letter of offer.
(d) acquisition pursuant to a scheme, –
(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 or any statutory
modification or re-enactment thereto;
(ii) of arrangement involving the target company as a transferor company or as a transferee company, or
reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an
order of a court or a tribunal under any law or regulation, Indian or foreign; or
(iii) of arrangement not directly involving the target company as a transferor company or as a transferee
company, or reconstruction not involving the target company’s undertaking, including amalgamation,
merger or demerger, pursuant to an order of a court or a tribunal or under any law or regulation,
Indian or foreign, subject to, –
A. the component of cash and cash equivalents in the consideration paid being less than twenty-
five per cent of the consideration paid under the scheme; and
B. where after implementation of the scheme of arrangement, persons directly or indirectly
holding at least thirty-three per cent of the voting rights in the combined entity are the same as
the persons who held the entire voting rights before the implementation of the scheme.
(da) acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code,
2016.
(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
(f) acquisition pursuant to the provisions of SEBI (Delisting of Equity Shares) Regulations, 2009.
(g) acquisition by way of transmission, succession or inheritance.
(h) acquisition of voting rights or preference shares carrying voting rights arising out of the operation of sub-
section (2) of section 47 of the Companies Act, 2013.
(i) acquisition of shares by the lenders pursuant to conversion of their debt as part of a debt restructuring
implemented in accordance with the guidelines specified by RBI.

However, the conditions specified under sub-regulation (6) of regulation 158 of the SEBI (ICDR) Regulations,
2018 are complied with.
(j) increase in voting rights arising out of the operation of sub-section (1) of section 106 of the Companies Act,
2013 or pursuant to a forfeiture of shares by the target company, undertaken in compliance with the
provisions of the Companies Act, 2013 and its articles of association.

(2A) An increase in the voting rights of any shareholder beyond the threshold limits stipulated in sub-regulations
(1) and (2) of regulation 3, without the acquisition of control, pursuant to the conversion of equity shares
with superior voting rights into ordinary equity shares, shall be exempted from the obligation to make an
open offer under regulation 3.
(2B) Any acquisition of shares or voting rights or control of the target company by way of preferential issue in
compliance with regulation 164A of the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018 shall be exempt from the obligation to make an open offer under sub-
regulation (1) of regulation 3 and regulation 4.
 212  Lesson 6 • EP-SLCM

Explanation.- The above exemption from open offer shall also apply to the target company with infrequently traded
shares which is compliant with the provisions of sub-regulations (2), (3), (4), (5),(6), (7) and (8) of regulation 164A
of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
The pricing of such infrequently traded shares shall be in terms of regulation 165 of the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
(3) An increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation
to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of shares by the target
company shall be exempt from the obligation to make an open offer provided such shareholder reduces his
shareholding such that his voting rights fall to below the threshold referred to in regulation 3(1) within ninety
days from the date of the closure of the said buy back offer.
(4) The following acquisitions shall be exempt from the obligation to make an open offer –
(a) acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to a rights issue;
(b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant to a rights
issue, subject to fulfilment of the following conditions, –
(i) the acquirer has not renounced any of his entitlements in such rights issue; and
(ii) the price at which the rights issue is made is not higher than the ex-rights price of the shares of the
target company, being the sum of, –
(A) the volume weighted average market price of the shares of the target company during a period
of sixty ending on the day prior to the date of determination of the rights issue price, multiplied
by the number of shares outstanding prior to the rights issue, divided by the total number of
shares outstanding after allotment under the rights issue. However, such volume weighted
average market price shall be determined on the basis of trading on the stock exchange where the
maximum volume of trading in the shares of such target company is recorded during such period;
and
(B) the price at which the shares are offered in the rights issue, multiplied by the number of shares
so offered in the rights issue divided by the total number of shares outstanding after allotment
under the rights issue.
(c) increase in voting rights in a target company of any shareholder pursuant to buy-back of shares. However:
(i) such shareholder has not voted in favour of the resolution authorising the buy-back of securities
under section 68 of the Companies Act, 2013;
(ii) in the case of a shareholder resolution, voting is by way of postal ballot;
(iii) where a resolution of shareholders is not required for the buy-back, such shareholder, in his capacity
as a director, or any other interested director has not voted in favour of the resolution of the board of
directors of the target company authorising the buy-back of securities under section 68 of the
Companies Act, 2013; and
(iv) the increase in voting rights does not result in an acquisition of control by such shareholder over the
target company.
However, where the aforesaid conditions are not met, in the event such shareholder reduces his shareholding
such that his voting rights fall below the level at which the obligation to make an open offer would be attracted
under sub-regulation (2) of regulation 3, within ninety days from the date of closure of the buy-back offer by
the target company, the shareholder shall be exempt from the obligation to make an open offer.
(d) acquisition of shares in a target company by any person in exchange for shares of another target company
tendered pursuant to an open offer for acquiring shares under these regulations;
(e) acquisition of shares in a target company from state-level financial institutions or their subsidiaries or
companies promoted by them, by promoters of the target company pursuant to an agreement between such
transferors and such promoter;
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 213

(f) acquisition of shares in a target company from a venture capital fund or Category I Alternative Investment
Fund or a foreign venture capital investor registered with the SEBI, by promoters of the target company
pursuant to an agreement between such venture capital fund or category I Alternative Investment Fund or
foreign venture capital investor and such promoters.

(5) In respect of acquisitions under clause (a) of sub-regulation (1), and clauses (e) and (f) of sub-regulation (4),
the acquirer shall intimate the stock exchanges where the shares of the target company are listed, the details
of the proposed acquisition in such form as may be specified, at least four working days prior to the proposed
acquisition, and the stock exchange shall forthwith disseminate such information to the public.
(6) In respect of any acquisition made pursuant to exemption provided for in this regulation, the acquirer shall
file a report with the stock exchanges where the shares of the target company are listed, in such form as may
be specified not later than four working days from the acquisition, and the stock exchange shall forthwith
disseminate such information to the public.
(7) In respect of any acquisition of or increase in voting rights pursuant to exemption provided for in clause (a)
of sub-regulation (1), sub-clause (iii) of clause (d) of sub-regulation (1), clause (h) of sub-regulation (1), sub
regulation (2), sub-regulation (3) and clause (c) of sub-regulation (4), clauses (a), (b) and (f) of sub-regulation
(4), the acquirer shall, within twenty-one working days of the date of acquisition, submit a report in such
form as may be specified along with supporting documents to SEBI giving all details in respect of acquisitions,
along with a non- refundable fee of rupees one lakh fifty thousand by way of direct credit in the bank account
through NEFT/ RTGS/IMPS or any other mode allowed by RBI or by way of a, banker’s cheque or demand
draft payable in Mumbai in favour of SEBI.
Explanation : For the purpose of sub-regulation (5), (6) & (7), in case the convertible securities the date of the
acquisition shall be the date of conversion of such securities.
However, certain exemptions require PRIOR disclosures / intimation to stock exchanges as tabulated below:

Particulars Timeline
Regulation 10(1): At least four working days prior to
the proposed acquisition, intimate
(a) acquisition pursuant to inter se transfer of shares amongst qualifying the Stock Exchanges and the Target
persons, being, – company with details of proposed
(i) immediate relatives; acquisition.

(ii) persons named as promoters in the shareholding pattern filed by the

target company in terms of the listing regulations or as the case may
be, the listing agreement or these regulations for not less than three
years prior to the proposed acquisition;
(iii) a company, its subsidiaries, its holding company, other subsidiaries of
such – holding company, persons holding not less than fifty per cent of
the equity shares of such company, other companies in which such
persons hold not less than fifty per cent of the equity shares, and their
subsidiaries subject to control over such qualifying persons being
exclusively held by the same persons;
(iv) persons acting in concert for not less than three years prior to the
proposed acquisition, and disclosed as such pursuant to filings under the
listing regulations or as the case may be, the listing agreement;
(v) shareholders of a target company who have been persons acting in
concert for a period of not less than three years prior to the proposed
acquisition and are disclosed as such pursuant to fi under the listing
regulations or as the case may be, the listing agreement, and any
company in which the entire equity share capital is owned by such
shareholders in the same proportion as their holdings in the target
company without any differential
 214  Lesson 6 • EP-SLCM

Regulation 10(4) At least four working days prior to

the proposed acquisition, intimate
(e) acquisition of shares in a target company from state-level financial the Stock Exchanges and the Target
institutions or their subsidiaries or companies promoted by them, by company with details of proposed
promoters of the target company pursuant to an agreement between acquisition.
such transferors and such promoter;

(f) acquisition of shares in a target company from a venture capital fund or

Category I Alternative Investment Fund or a foreign venture capital
investor registered with the SEBI, by promoters of the target company
pursuant to an agreement between such venture capital fund or
category I Alternative Investment Fund or foreign venture capital
investor and such promoters.
In all exemptions a report is to be submitted to Stock Exchanges: In respect of any acquisition made pursuant
to exemption provided, the acquirer shall file a report with the stock exchanges where the shares of the target
company are listed, in such form as may be specified not later than four working days from the acquisition.

In certain exemptions a detailed report also to be submitted to stock exchanges: In respect of any acquisition
of or increase in voting rights pursuant to exemption provided for in clause (a) of sub-regulation (1), sub-clause
(iii) of clause (d) of sub-regulation (1), clause (h) of sub-regulation (1), sub-regulation (2),
sub-regulation (3) and clause (c) of sub-regulation (4), clauses (a), (b) and (f) of sub- This Report is in
regulation (4), the acquirer shall, within twenty-one working days of the date of acquisition, addition to Report
submit a report in such form as may be specified along with supporting documents to the which is applicable
Board giving all details in respect of acquisitions, along with a non-refundable fee of rupees for all exemptions.
one lakh fifty thousand.

Question: Mr. X is Promoter of ABC (India) Limited (Target Company). Mr. X is presently holding 53,073 shares
constituting 0.52% of the paid up equity capital of the Target Company. Further, Mr. X has been allotted 75,000
convertible warrants, convertible in to equity. After conversion of warrant in to equity the shareholding of Mr.
X will increase from 0.52% to 1.26% of the paid up equity capital. Further, Ms. Z who is Mr. X's elder sister's
daughter and holding 7,80,000 equity shares constituting 7.76% of the paid up equity share capital of the
Company. Ms. Z is a foreign shareholder and she wanted to gift (Off Market Transaction) her entire shareholding
to her mother Mrs. Y and in turn Mrs. Y wanted to gift the entire shareholding to Mr.

X. If the entire transaction as contemplated, if concluded, then the shareholding of Mr. X will increase from
0.52% to 9.02% and the shareholding of the promoter group will increase from 34.28% to 43.30%. You
have been engaged as Practising Company Secretary by Mr. X to advise on the following:
a) Is this increase in the promoter group shareholding would trigger open offer requirements in
terms of Regulation 3(2) of the SEBI (SAST) Regulation, 2011.
b) Further, Whether such transaction would be exempted under Regulation 10 of the SEBI (SAST)
Regulations, 2011.

Answer: The set of facts as disclosed in the question contains three transactions. First, conversion of convertible
warrants in to equity. Secondly, transfer of shares through off market transaction from Ms. Z to Mrs. Y and
thirdly, transfer of shares through off market transaction from Mrs. Y to Mr. X. Regarding the first transaction,
the trigger and open offer requirements, if any has to be considered at the time of conversion of warrants in to
equity as the same would depends on the shareholding pattern of the promoter and promoter’s group prevailing
at the time of conversion of warrants in to equity shares. Regarding the second and third transaction, considering
that Ms. Z, Mrs. Y and Mr. X are immediate relative thus they would be considered as PAC in terms of Regulation
2(1)(q) of the SEBI (SAST) Regulations, 2011. Therefore, the shareholding of the promoters along with PACs
would increase more than 5% limit and would trigger open offer requirements under Regulation 3(2) of the
SEBI (SAST), 2011. However, the transaction is between immediate relatives, the transaction would be exempt
from the obligation to make an open offer as per Regulation 10(1)(a)(i) of the SEBI (SAST), Regulations, 2011
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 215

subject to the compliance with the conditions as mentioned under the proviso to Regulation 10(1)(a)(i) and
Regulation 10(5), (6) and (7) of the SEBI (SAST), Regulations, 2011. Further, SEBI in the interpretative letter
dated 18th September, 2015 issued under the SEBI (Informal Guidance) Scheme, 2003 as requested by M/s
Adani Properties Private Limited has held that an exempt acquisition would not be counted towards computing
acquisitions on a gross basis.

Regulation 11 – Exemption by SEBI

Regulation 11 provides that on an application being made by the acquirer in writing giving the details of the
proposed acquisition and grounds on which the exemption is sought along with duly sworn affidavit, SEBI may
grant exemption to the acquirer from the Open Offer obligations subject to the compliance with such conditions as
it deems fits. For instance, in case where the exemptions is sought from the Open Offer obligations which has been
triggered pursuant to the issue of shares by way preferential allotment, SEBI may require that the approval of
shareholders should be obtained by way of postal ballot. Further, along with the application, the acquirer is also
required to pay a non-refundable fee of Rs.5,00,000,by way of direct credit in the bank account through NEFT/
RTGS/IMPS or any other mode allowed by or by way of banker‘s cheque or demand draft in favour of SEBI payable
at Mumbai. Further SEBI has prescribed a standard format for application under Regulation 11(1) of the SEBI
(SAST) Regulations, 2011 in order to ensure uniformity of disclosures in such application vide circular No. SEBI/
HO/CFD/DCR1/CIR/P/2017/131 dated 22nd December, 2017.
However, it is to be noted that the Acquirer is not exempted from making other compliances related to the disclosure
requirements as provided under regulation 29, 30 and 31 of the SEBI Takeover Regulations, 2011.

Points to ponder:
M/s ABC Ltd is a listed Company on the Bombay Stock Exchange Limited. The promoter of M/s ABC Ltd is M/s
BCD Private Limited which holds 49.84% of the total paid up capital of the M/s ABC Ltd and the remaining
shares are held by the public. M/s BCD Private Limited is in turn promoted by one Mr. X and M/s DEF Private
Limited. The shareholding of M/s BCD is divided between Mr. X and M/s DEF Private Limited in the ratio of
60% and 40% respectively. Mr. X has approached M/s DEF Private Limited to sell 40% of its shares in the M/s
BCD Private Limited to M/s DEF Private Limited. After this transaction the shareholding of M/s BCD Private
Limited will be divided between Mr. X and M/s DEF Private Limited in the ratio of 20% and 80% respectively.
This transaction had resulted in the indirect acquisition of control of M/s ABC Limited in the favour of M/s DEF
Private Limited. Now, M/s DEF Private Limited is planning to make an application to the SEBI under Regulation
11 of the SEBI (SAST), Regulation, 2011 for obtaining the exemption for making an open offer in terms of the
provision of the SEBI (SAST), Regulation, 2011. In these circumstances, you are asked to put your argument, if:
a) you are representing M/s DEF Private Limited before the whole-time Member of SEBI.
b) You are working as a representative of the SEBI and presenting your argument before the whole- time
Member of SEBI.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases

SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations
for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new
products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities
markets.
Any exemption granted by the SEBI shall be subject to the applicant satisfying such conditions as may be specified
by the SEBI including conditions to be complied with on a continuous basis.
 216  Lesson 6 • EP-SLCM

Explanation. — For the purposes of these regulations, “regulatory sandbox” means a live testing environment where
new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the Board.
This exemption is to promoter further innovation and accordingly, SEBI may from time to time grant such relaxations
as stated above. The relaxation may also be provided to acquirer / PAC on application to SEBI, however that has been
covered earlier in this chapter.

CASE LAWS
1 07.07.2020 M/s Sungold Capital Limited vs. SEBI Whole Time Member, Securities and
Exchange Board of India
One of the principles underlying under SAST Regulations is exit opportunity to the public shareholders
of the Target Company at the best price and accordingly, the provisions of SAST Regulations deals with
offer price, that offer price in an open offer highest of the prices of shares of the Target Company derived
through various methods.
Facts of the case:
The respective acquirers/PAC’s after acquiring shares/voting rights of Sungold Capital Limited (“Target
Company”) beyond the threshold of initial/creeping acquisition have failed to make an open offer in terms of
Regulation 10 and 11(1) of SAST Regulations, 1997, on, April 1, 2007 and September 14, 2007, respectively. As
per Regulation 21(19) of SAST Regulations, 1997, the acquirer and the PAC’s were jointly and severally liable for
discharge of obligations under SAST Regulations, 1997.
SAST Regulations, 1997 has been repealed by Regulation 35(1) of SAST Regulations, 2011 and has been replaced
by SAST Regulations, 2011. Regulation 35(2)(b) of SAST Regulations, 2011, provides that all obligations incurred
under the SAST Regulations, 1997, including the obligation to make an open offer, shall remain unaffected as if the
repealed regulations has never been repealed.
Therefore, the obligations to make open offer, incurred by the acquirers/PAC’s under SAST Regulations, 1997,
are saved and can be enforced against them by virtue of Regulation 35 of SAST Regulations, 2011.
Order:
SEBI directed acquirers/PAC’s of the target company to make a public announcement of a combined open offer
for acquiring shares of Sungold Capital Ltd., under Regulation 10 and 11(1) of the SAST Regulations, 1997,
within a period of 45 days from the date when this order comes into force, in accordance with SAST Regulations,
1997. The acquirers/PAC’s shall along with the offer price, pay interest at the rate of 10% per annum for delay
in making of open offer, for the period starting from the date when the Noticees incurred the liability to make
the public announcement and till the date of payment of consideration, to the shareholders who were holding
shares in the Target Company on the date of violation and whose shares are accepted in the open offer, after
adjustment of dividend paid, if any.

2. 17.03.2020 Susheel Somani & Ors. (Appellant) vs. Securities Appellate Tribunal
SEBI (Respondent)
Penalty imposed by SEBI on violating SAST Regulations, further reduced by SAT considering it a technical
breach
Facts of the case:
Aggrieved by the order of the Adjudicating Officer (AO) of the respondent SEBI dated December 27, 2017
imposing a penalty of Rs. 15 lacs for violation of provisions of public announcement of an open offer under
Regulation 3(2) read with Regulation 13(1) of the SEBI (SAST) Regulations, 2011, the present appeal is preferred.
Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 217

The appellants contended before the AO that there was no violation of Regulation 3(2) read with Regulation
13(1) of the SAST Regulations, 2011 since the transfer was inter se between the promoters, the same was
exempted from making a public announcement as provided by Regulation 10 of the SAST Regulations.
As regard the exemption, the AO found that while Regulation 10 of the SAST Regulations provides for making
disclosures to the stock exchanges and to the company within a period of two working days. In the present case,
the appellants made the disclosures on 7th day as against the provisions of Regulation 29(3).
[Reg. 29(3) - the disclosures are required to be made within two working days]
Order:
Thus, technically the appellants were not exempted from making public announcement and, thus, are in violation
of the relevant regulations. The AO has observed that as the condition of making disclosures within two working
days is not fulfilled the act was not find for grant of exemption. In the circumstances, the penalty was imposed.
The appellants made the disclosures though belatedly after five days as required by Regulation 29 of the SAST
Regulations.
Thus, it was a technical breach and, therefore, AO instead of imposing a penalty of Rs. 15 lacs, imposed a penalty
of Rs. 5 lacs which would have been just and sufficient. The appeal was partly allowed.

3. 07.09.2017 Mega Resources Ltd. (Appellant) vs. Securities Appellate Tribunal

SEBI (Respondent)
Ignorance of law will not excuse the appellant to escape the liability of violating the law
Facts of the case:
The Appellant, Mega Resources Limited, is aggrieved by the order dated 13.08.2014 passed by the Adjudicating
Officer (AO), SEBI imposing a penalty of Rs. 2,00,000/- under Section 15A(b) of the SEBI Act and Rs. 50,00,000/-
under Section 15 H(ii) of the SEBI Act for failure on the part of the appellant to comply with the provisions of
Regulation 7(1) read with Regulation 7(2) and Regulation 11(1) read with Regulation 14(1) of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The appellant has admitted that pursuant to the acquisition of 25000 equity shares through off-market
transactions the shareholding of the Promoters/Promoter Group of the Company had increased from 50.46% to
60.46% of the Target Company. This triggered Regulation 11(1) of the erstwhile SAST Regulations along
with the requirement of submission of certain disclosures under Regulation 7(1) and 7(2) of the erstwhile
Regulations. It is admitted by the appellant that the non compliance with the disclosure requirements in
respect of acquisition of shares and failure to make an open offer to the shareholders of the Company was
due to lack of awareness of the erstwhile regulations on the part of the Appellant and purely unintentional
and without any malafide intentions. However, It is trite law that ignorance of law will not excuse the
appellant to escape the liability of violating the law nor ever absolve the wrongdoer of his crime or
misconduct.
Further, the appellant contended that in the matter of imposition of penalty, the Section 15(H)(ii) of the
SEBI Act, 1992 was amended dated October 29, 2002 and the penalty for non-disclosure of acquisition of
shares and takeovers was enhanced from a maximum of Rs. Five Lakh to Rs. Twenty Five crore. It is argued
that since the violation in Appeal was committed in February, 2001, the appellant would be governed by
the erstwhile provisions of Section 15H(ii) of the SEBI Act, which existed on the date of violation in question.
Order:
It is true that the maximum monetary penalty imposable for non disclosure of acquisition of shares and
takeovers under the erstwhile SEBI Act on the date of violation by the Appellant was Rs. Five Lakh and by
the amendment dated October 29, 2002 it is up to Rs. Twenty Five Crore or three times of the amount of
218  Lesson 6 • EP-SLCM

profits made out of such failure, whichever is higher. However, the moot point in this connection to be
noted is that as on October 29, 2002 the obligation to make disclosure and public announcement under
Regulations 7(1) read with 7(2) and 11(1) read with 14(1) continued. Therefore, because the violation was
continued even after October 29, 2002, the appellant has been rightly imposed penalty under the amended
provisions of Section 15H(ii) of the SEBI Act. Since the punishment imposable now for such non-disclosure
and public announcement is up to Rs. Twenty Five Crore, SAT finds that the penalty of Rs. Fifty Lakh is just
and reasonable and not disproportionate. The contention of the appellant in this regard is, therefore, liable
to be turned down. Therefore, in the peculiarity of the facts and circumstances of the case and, in particular,
the continuity of the obligation to make disclosure and public announcement, the penalty of Rs. Fifty Lakh
is upheld and the appeal is dismissed.

4. 16.03.2020 G P Shah Investment Private Limited & Securities Appellate Tribunal

Ors. (Appellant) vs. SEBI (Respondent)
Facts of the case:
The present appeal has been filed against the order of the Adjudicating Officer (AO), SEBI dated March 13, 2019
imposing a penalty of 5 crores to be paid by the appellants jointly and severally, under Section 15H (ii) of the
SEBI Act, 1992 for violation of Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeover)
Regulations, 2011 (“SAST Regulations, 2011” for convenience).
This Tribunal held that the date on which the appellants acquired the shares triggered the provisions of
Regulation 3(2) of the SAST Regulations, 2011 and consequently incurred an obligation to make a combined
public announcement of an open offer for acquiring the shares of the target company.
Order:
SAT finds that no relief can be granted to the appellants as AO granted several opportunities but the appellants
chose not to appear or file any reply. In the light of the aforesaid, SAT are of the opinion that sufficient opportunity
was given to the appellants to contest the matter which they failed to do so. Thus, remanding the matter
back to the AO in the given circumstances does not arise. With regard to the quantum of penalty, SAT finds
that the order of the Whole Time Member (WTM) directing the appellants to make a public announcement
was issued as far back as on July 08, 2013 which after 7 years has not as yet been complied with. Considering
the aforesaid and the admitted violations, SAT did not find any error in the imposition of penalty imposed
by the AO though, under Section 15HB a maximum penalty of Rs. 25 crores or three times the amount of
profits could have been imposed. In view of the aforesaid, SAT do not find any merit in the appeal and the
same is dismissed with no order as to costs.

LESSON ROUND-UP

• The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, aims at protecting interest
of the investors in securities of a listed company providing amongst others, an opportunity for the public
shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a
listed company, consolidation of holdings by existing shareholders and related disclosures and penalties
for non- compliance etc.
• The Takeover Regulations, 1997 stands repealed from October 22, 2011, i.e. the date on which SAST
Regulations, 2011 came into force.
• The SEBI Takeover Regulations, 2011 provides certain trigger events wherein the Acquirer is required to
give Open Offer to the shareholders of the Target Company to provide them exit opportunity.
• Regulation 6 of the Takeover Regulations provides the threshold and conditions for making the Voluntary
Open Offer.
Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 219

• An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional
offer.
• Regulation 10 & 11 provides for automatic exemptions and exemptions by SEBI.
• The public announcement shall be sent to all the stock exchanges on which the shares of the target
company are listed, and the stock exchanges shall forthwith disseminate such information to the public.
The Acquirer also need to publish Detailed Public Statement within 5 working days.
• The Tendering Period remains open for 10 working days.
• In SEBI Takeover Regulations, 2011, the obligation to give the disclosures on the acquisition of certain
limits is only on the acquirer and not on the Target Company.

GLOSSARY

Competitive Bid An offer made by a person other than the acquirer who has made the first public
announcement.
Control of management The right to appoint directly or indirectly or by virtue of agreements or in any other
manner majority of directors on the Board of the target company or to control
management or policy decisions affecting the target company.
Corporate restructuring Involves making radical changes in the composition of the businesses in the
company’s portfolio.
Disinvestment Disinvestment means the direct or indirect sale by the Central Government or any
State Government or by a government company, as the case may be, of shares or
voting rights in, or control over, a target company, which is a public sector
undertaking;
Encumbrance It shall include a pledge, lien or any such transaction, by whatever name called.
Public Announcement A public announcement is an announcement made in the newspapers by the
acquirer primarily disclosing his intention to acquire shares of the target company
from existing shareholders by means of an open offer.
Takeover Takeover is a corporate device whereby one company acquires control over another
company, usually by purchasing all or majority of its shares.
Weighted Weighted means the number of shares at the beginning average number of a period, adjusted
average number of for shares cancelled, bought back or issued during the aforesaid of total shares
total shares period, multiplied by a time-weighing factor.

TEST YOURSELF

(These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation)
1. What do you mean by Persons Acting in Concert under the SEBI (SAST) Regulations, 2011?
2. What are the conditions for making Voluntary open offer?
3. What are the provisions relating to Public announcement under the Takeover regulations?
4. Discuss about the continuous disclosure required to be made under these regulations.
220  Lesson 6 • EP-SLCM

5. Briefly explain the conditions on which SEBI can grant exemption to an acquirer.
6. What do you mean by creeping acquisition?
7. Briefly explain the obligations of the Manager under the Open Offer?
8. Discuss on the minimum size of offer to be made by the Acquirer and exception to it, if any.
9. Briefly explain the provisions relating to Escrow Account.
10. Mr. A, the acquirer who proposes to acquire 27% shares of ABC Limited, listed company. Mr. A wants to
nominate a person on the Board of ABC Limited. Please advise whether Mr. A can appoint Director on the
Board of ABC Limited and what are the conditions / compliance required related thereto.
11. M/s A Limited is listed Company. Mr. X is promoter of the M/s A Limited and holding 71% of the paid up
equity share capital of the Company. Mr. X as part of the succession planning and family settlement has
decided to transfer his shares to the Mr. X family trust. The trustees of the Trust are Mr. X, his wife and his
daughter and beneficiaries of the Trust are Mr. X’s son. Mr. X approached you and seeking your advice
whether the transfer of shares from Mr. X to Mr. X family trust is attracting the open offer obligations
under the SEBI (SAST) Regulations, 2011. If yes, whether the Mr. X family trust can get exemption under
Regulation 10 or 11 of the SEBI (SAST) Regulations, 2011.
12. M/s XYZ is public sector bank. Government of India is holding 82.23% and intending to further acquire
16,83,09,689 shares to maintain minimum 8% Tier I Capital to Risk-weighted Assets Ratio (CRAR). The
entire infusion of capital by Government of India is being made to comply with Basel III requirements
and there would be no change in control in the management of the Bank. As the difference between the
post-allotment and pre-allotment shareholding of the Government of India in the Bank may be over 5%.
therefore the Bank filed an application with the SEBI, on behalf of its promoter, the Government of India,
under regulation 11(1) of the SEBI (SAST) Regulations, 2011, seeking exemption for the Government of
India from the applicability of regulation 3(2) of the Takeover Regulations in respect of its proposed
acquisition of 16,83,09,689 shares. Please advise whether Bank can get the exemption under Regulation
11 of the SEBI (SAST) Regulations, 2011.

LIST OF FURTHER READINGS

• SEBI Manual
• SEBI Circulars
• SEBI Notifications

OTHER REFERENCES (Including Websites/Video Links)

www.sebi.gov.in
www.nseindia.com
www.bseindia.com
 SEBI (Buy-Back of Securities)
Lesson 7 Regulations 2018
Key Concepts One Learning Objectives Regulatory Framework
Should Know
To understand: • SEBI (Buy-Back of
• Associate Securities) Regulations,
• Conceptual understanding 2018
• Buy-back Period on buy-back of securities
• Control • Companies Act, 2013
• Provisions of the SEBI
• Small (Buy-Back of Securities) • Companies (Share Capital
Shareholder Regulations 2018 and Debenture) Rules, 2014

• Odd Lots • Regulatory prescriptions • SEBI (Substantial

on conditions/methods/ Acquisition of shares and
• Specified sources of buy-back of Takeovers) Regulations,
Securities securities 2011
• Tender Offer • Obligations of the • SEBI (Listing obligations and
Company/Merchant Banker disclosure Requirements)
for buy-back of shares Regulations, 2015

Lesson Outline
• Introduction • Odd-lot Buy-back
• Objectives of Buy-Back • Buy-back from the Open
Market
• Buy-back provisions under
Companies Act, 2013 • Obligations of the Company/
Merchant Banker for all
• Applicability
buy-back of shares or other
• Important Definitions specified securities
• Conditions for Buy-back of • Power of SEBI to relax
Shares or Other Securities strict enforcement of the
• Methods of buy-back regulations.

• Sources for buy-back • Buy-back vis-a-vis compliance

under SEBI (SAST)
• Prohibitions for buy-back Regulations, 2011
• Authorisation for buy-back • LESSON ROUND-UP
• Explanatory Statement • GLOSSARY
• Additional Disclosures • TEST YOURSELF
• Buy-back Process • LIST OF FURTHER READINGS
• Buy-back through Tender • OTHER REFERENCES
Offer
 222  Lesson 7 • EP-SLCM

INTRODUCTION
Meaning of Buy-back
The term buy-back implies the act of purchasing its own shares/securities by a company. This facility enables the
Company to go back to the holders of its own shares/securities and make an offer to purchase such shares/ securities
from them.
The corporates adopts various tools, viz., mergers, amalgamations and takeovers for restructuring the business. All
these activities, in turn, impacts the functioning of the capital market, more particularly the movement of share
prices. As the shares of companies are held by different segments of society, viz., entrepreneurs, Body Corporates,
institutional investors and individual shareholders including small investors, it is reasonable that there should be
equality of treatment and opportunities to all shareholders, transparency, proper disclosure and above all protection
of interests of small and minority shareholders.
Similarly, buy-back of securities is a corporate financial strategy which involves repurchase of its outstanding shares
by a company.
There are generally two ways a company can return cash to its shareholders –
• declaration of dividend or
• through buy-back of shares.
A buy-back represent a more flexible way of returning surplus cash to its shareholders as it is governed by a
process laid down by law, it is carried out through the stock exchange mechanism and is more tax efficient as it does
not involve the company to make payment of dividend distribution tax and it has the benefits of long term capital gains.
Buy-back leads to reduction in outstanding number of equity shares, which may lead to improvement in earnings
per equity share and enhance return on net worth and create long term value for continuing shareholders. In India,
while buy-back of securities is not permitted as a treasury option under which the securities may be reissued later, a
company can resort to buy-back to reduce the number of shares issued and return surplus cash to the shareholders.
The buy-back of securities is governed by Section 68, 69 and 70 of the Companies Act, 2013 and Rule 17 of the
Companies (Share Capital and Debentures) Rules, 2014. For Listed Companies, the SEBI Regulations for Buy Back
will also be applicable.

Buy-back of
Securities

to reorganise its return cash to enhance overall

capital structure shareholders shareholders'
value

Question: Why do Companies Buy-back Securities?

Answer: Buyback is a fast route to raise money to meet divestment targets of the government. Hence, buyback
is often used by PSUs whenever the government wants to raise money without undergoing the tedious process
of initial public offering (IPOs), follow-on public offer (FPOs), offer for share (OFS). While deciding the mode of
raising money, the government has also to consider the extent to which its stake in the company can go down.
Buy backs are an efficient way to raise money as it involves reduction in the equity capital, increase in earnings
per share (EPS), and increase in return ratios of the company, all of which can help in improving valuations of
the company. The biggest buyback offers in FY21 were Tata Consultancy Services ( ₹16,000 crore) and Wipro
(₹9,500 crore). Six out of 10 biggest buyback offers in FY21 were by PSUs.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 223

Recent Trends of Industry

A rise in buy-backs in the FY 2021 was seen as a global phenomenon with companies such as Apple and Berkshire
doubling their share buy-backs. Another reason for the jump in buy-backs is dividend distribution taxation (DDT)
being in the hands of shareholders, who are mandated to pay tax on dividends received at the applicable tax rate
compared to a low (capital gains) tax rate in case of buy-backs.
The FY 2020 budget put dividend taxation in the hands of shareholders while keeping buy-back taxation in hands
of companies. This led to buy-backs being a favoured option to reward shareholders while managing the
recapitalization of companies and improving promoter shareholding and return on capital employed (ROCE)
through reduction in overall capital, Khetan and Sonchhatra said.

If companies find it difficult to opt for investment opportunities that would help them to increase ROCE, it would
not be advisable to continue to remain seated on a big pile of cash for long without optimum returns. This will
negatively impact Return on Capital Employed (ROCE) In that case, it would be optimal for companies to return the
capital to shareholders.

OBJECTIVES OF BUY-BACK
Buy-back is a process whereby a company purchases its own shares or other specified securities from the lable the
holders thereof.

• To strategically increase promoters’ shareholding subject to compliance with

1. SEBI (SAST) Regulations

2.

3.

4.

5.
surples;
6.

7.

8.

9.

thinly traded.
10.

The decision to buy-back is also influenced by various other factors relating to the company, such as growth
opportunities, capital structure, sourcing of funds, cost of capital and optimum allocation of funds generated.
 224  Lesson 7 • EP-SLCM

PROVISIONS OF THE COMPANIES ACT, 2013

Buy back of securities are governed by Section 68, 69 and 70 of the Companies Act, 2013 and Rule 17 of
Companies (Share Capital and Debentures) Rules, 2014. Listed companies have to comply with the regulations laid
down by SEBI also in this behalf. Pursuant to Section 68(1) of the Companies Act, 2013, a company may purchase
its own shares or other specified securities (hereinafter referred to as buy-back) out of –
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities:
However no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other specified securities.
Conditions for Buy-Back pursuant to section 68(2) of the Companies Act, 2013
(a) the buy-back is authorised by its articles.
(b) Buy back must be authorized by a Special Resolution. But if the buy-back amounts to 10% or less of the total
paid-up equity capital and free reserves of the company then the Board resolution is enough and the
company is not required to pass any special resolution.
(c) the buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company.
However in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per
cent in this clause shall be construed with respect to its total paid-up equity capital in that financial year.
(d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves.
However the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves
for a class or classes of companies.
(e) all the shares or other specified securities for buy-back are fully paid-up.
(f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in
accordance with the regulations made by the Securities and Exchange Board in this behalf.
(g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in
accordance with such rules as may be prescribed. However no offer of buy-back mentioned above shall be
made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an
explanatory statement.
Every buy-back shall be completed within a period of one year from the date of passing of the special resolution or
Board Resolution as the case may be.

SEBI (BUY-BACK) REGULATIONS, 2018

The objective of notifying the SEBI (Buy-back of Securities) Regulations, 2018 was to simplify the language of Buy-
back Regulations, 1998, removing redundant provisions and inconsistencies, updating the references to the new
Companies Act, 2013/ other new SEBI Regulations, and incorporating the circulars, FAQs and informal guidance in
the Buy-back Regulations, wherever possible.
Considering that a significant number of provisions as outlined under Section 68, 69 and 70 of the Companies Act,
2013 were proposed to be incorporated in the Buy-back Regulations to make it self-contained and more
comprehensive, it was proposed to re-frame an entirely new set of Buy-back Regulations in lieu of the extant 1998
version of the regulations. Further, the existing provisions have also been re-structured and re-sequenced to give a
better flow in the new Buy-back Regulations.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 225

In line with the aforesaid mandate, the SEBI in its Board Meeting held on March 28, 2018 approved the proposal to
undertake public consultation process before coming out with new Buy-back Regulations for reviewing the SEBI
(Buy-Back of Securities) Regulations, 1998.
Thereafter, SEBI vide its Notification dated September 11, 2018, notified the changes proposed by it in the
discussion paper, through the SEBI (Buy-Back of Securities) Regulations, 2018.

SEBI (Buy-Back) Regulations, 2018 are applicable only on Listed Entities and the unlisted entities shall continue
to be governed by applicable provisions of Companies Act, 2013.

Regulatory Framework
• SEBI (Buy-Back of Securities) Regulations, 2018

Chapter Deals with

I Definitions
II Conditions of Buy-back
III Buy-Back Through Tender Offer
IV Buy-Back From the Open Market
V General Obligations
VI Miscellaneous
• Companies Act, 2013

Section Deals with

Section 68 Power of Company to purchase it’s own securities
Section 69 Transfer of certain sums to capital redemption reserve account
Section 70 Prohibition for Buy-Back in certain circumstances

• Rule 17 of the companies (Share Capital and Debenture) Rules, 2014

APPLICABILITY
SEBI (Buy-back of Securities) Regulations, 2018 shall apply to buy-back of shares or other specified securities of a
company in accordance with the applicable provisions of the Companies Act, 2013.
Explanation: For the purposes of these regulations, the term “shares” shall include equity shares having superior
voting rights.

IMPORTANT DEFINITIONS

It includes a person, –
• who directly or indirectly by himself or in combination with relatives, exercise
Associate
control over the company; or
• whose employee, officer or director is also a director, officer or employee of company.
The period between the date of board of directors resolution; or date of declaration
of results of the postal ballot for special resolution, as the case may be, to authorize
Buy-back Period
buy-back of shares of the company and the date on which the payment of consideration to
shareholders who have accepted the buy-back offer is made.
 226  Lesson 7 • EP-SLCM

It has the same meaning as defined in clause (e) of sub-regulation (1) of regulation (2)
Control of the Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011;
‘Odd Lots’ mean the lots of shares or other specified securities of a company, whose shares
Odd Lots are listed on a recognised stock exchange, which are smaller than such marketable lots, as
may be specified by the stock exchange
A shareholder of a company, who holds shares or other specified securities whose market
value, on the basis of closing price of shares or other specified securities, on the recognised
Small Shareholder
stock exchange in which highest trading volume in respect of such securities, as on record
date is not more than two lakh rupee.
It includes employees’ stock option or other securities as may be notified by the Central
Specified Securities Government from time to time.

An offer by a company to buy-back its own shares or other specified securities through
Tender offer a letter of offer from the holders of the shares or other specified securities of the
company.

CONDITIONS FOR BUYBACK OF SHARES OR OTHER SECURITIES

The maximum limit of any buy-back shall be 25% or less of the aggregate of paid-up capital and free reserves of
the company, based on both standalone and consolidated financial statements of the company
All shares or other specified securities for buy-back shall be fully paid-up.

Note:
• In respect of the buy-back of equity shares in any financial year, the reference to 25% in this regulation shall
be construed with respect to its total paid-up equity capital in that financial year.
• The ratio of the aggregate of secured and unsecured debts owed by the company to the paid-up capital and
free reserves after buy-back shall,-
(a) be less than or equal to 2:1, based on both standalone and consolidated financial statements of the
company. However if a higher ratio of the debt to capital and free reserves for the company has been
notified under the Companies Act, 2013, the same shall prevail; or
(a) be less than or equal to 2:1, based on both standalone and consolidated financial statements of
the company, after excluding financial statements of all subsidiaries that are non-banking financial
companies and housing finance companies regulated by Reserve Bank of India or National Housing
Bank, as the case may be. However buy-back of securities shall be permitted only if all such excluded
subsidiaries have their ratio of aggregate of secured and unsecured debts to the paid-up capital and
free reserves of not more than 6:1 on standalone basis.

Additional Conditions for Buy-back of Shares or Other Securities

• A company shall not buy-back its shares or other specified securities :
(a) so as to delist its shares or other specified securities from the stock exchange.
(b) from any person through negotiated deals, whether on or off the stock exchange or through spot
transactions or through any private arrangement.
• A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry
of buy-back period of the preceding offer of buy-back, if any.
• A company shall not allow buy-back of its shares unless the consequent reduction of its share capital is effected.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 227

Illustration:
Extract of Balance Sheet of X Ltd consist of:
Equity Share Capital = Rs. 6,00,000 of Rs. 10 each
12% Preference Share Capital = Rs. 1,00,000 of Rs. 100 each
14% Debenture Capital = Rs. 3,00,000 of Rs. 100
What is the maximum equity share capital and number of equity shares that can be bought back?
Solution:

(i) Maximum equity share capital that can be bought back

= Rs. 6,00,000*25%
= Rs. 1,50,000
(ii) Maximum number of equity shares that can be bought back
= Rs. 1,50,000/10
= 15,000 equity shares

METHODS OF BUY-BACK
A company may buy-back its shares or other specified securities by any one of the following methods:

from the existing shareholders

or other specified securities
holders on a proportionate basis
Methods of Buy-back

through the tender offer

Book-building Process

from the open market through

Stock Exchange

from odd-lot holders

No offer of buy-back for fifteen percent or more of the paid up capital and free reserves of the company, based on
both standalone and consolidated financial statements of the company, shall be made from the open market.
Section 68(5)(c) of the Companies Act, 2013 permits buy-back of equity shares by purchasing the securities
 228  Lesson 7 • EP-SLCM

SOURCES
issued OF BUY-BACK
to employees of the company pursuant to a scheme of stock option or sweat equity.

the securities
premium
account or
the proceeds of
the issue of any
its free reserves shares or other
specified
securities
A Company
may buy-back
shares or other
securities out
of-

Note: Buy-back shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of
other specified securities.

PROHIBITIONS FOR BUY-BACK

The Company shall not directly or indirectly purchase its own shares or other specified securities:
• through any subsidiary company including its own subsidiary companies;
• through any investment company or group of investment companies; or
• if a default is made by the company in the repayment of deposits accepted either before or after the
commencement of the Companies Act, interest payment thereon, redemption of debentures or preference
shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon
to any financial institution or banking company.

The buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such
default ceased to subsist.

AUTHORISATION FOR BUY-BACK

The company shall not authorise for any buy-back whether by way of tender offer or from open market or odd lot
unless:

No special resolution is required

where the buy-back is 10% or
A special resolution is less of the total paid-up equity
required to passed at a capital and free reserves of the
Authorisation for Buyback in
general meeting of the company and such buy-back has
the Articles of the Company.
company for such been authorised by the board of
authorisation. directors by means of a
resolution passed at its meeting.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 229

Note:
• In case of Special Resolution, a copy of the resolution passed at the general meeting shall be filed with SEBI
and the stock exchanges where the shares or other specified securities of the company are listed, within
seven days from the date of passing of the resolution.
• In case of only Board Resolution, a copy of Board Resolution passed in the meeting of the Board of Directors,
shall file with SEBI and the stock exchanges, where the shares or other specified securities of the company
are listed, within two working days of the date of the passing of the resolution.
Every buy-back shall be completed within a period of one year from the date of passing of the special resolution at
general meeting, or the resolution passed by the board of directors of the company, as the case may be.
The company shall, after expiry of the buy-back period, file with the Registrar of Companies and SEBI, a return
containing such particulars relating to the buy-back within thirty days of such expiry, in the format as specified in
the Companies (Share Capital and Debentures) Rules, 2014.
Where the buy-back is from open market either through the stock exchange or through book building, the resolution
of board of directors shall specify the maximum price at which the buy-back shall be made. However where there is
a requirement for the Special Resolution as specified in clause (b) of sub-regulation 1 of regulation 5 of these
Regulations, the special resolution shall also specify the maximum price at which the buy-back shall be made.
No insider shall deal in shares or other specified securities of the company on the basis of unpublished price
sensitive information relating to buy-back of shares or other specified securities of the company.

EXPLANATORY STATEMENT
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an
explanatory statement pursuant to section 102 of the Companies Act containing mandatory disclosures as specified
under sub-section 3 of section 68 of the Companies Act –
• a full and complete disclosure of all material facts;
• the necessity for the buy-back;
• the class of shares or securities intended to be purchased under the buy-back;
• the amount to be invested under the buy-back; and
• the time-limit for completion of buy-back.

ADDITIONAL DISCLOSURES
The company is required to provide an additional disclosure as per Schedule I to these regulations, in addition to
disclosures mentioned above under sub section 3 of section 68 of the Companies Act, 2013 as discussed below:
(i) Date of the Board meeting at which the proposal for buy-back was approved by the Board of Directors of the
company;
(ii) Necessity for the buy-back;
(iii) Maximum amount required under the buy-back and its percentage of the total paid up capital and free reserves;
(iv) Maximum price at which the shares or other specified securities are proposed be bought back and the basis
of arriving at the buy-back price;
(v) Maximum number of securities that the company proposes to buy-back;
(vi) Method to be adopted for buy-back as referred to in sub-regulation (iv) of regulation 4;
(vii) (a) the aggregate shareholding of the promoter and of the directors of the promoters, where the promoter
is a company and of persons who are in control of the company as on the date of the notice convening
the General Meeting or the Meeting of the Board of Directors;
(b) aggregate number of shares or other specified securities purchased or sold by persons including
persons mentioned in (a) above from a period of six months preceding the date of the Board Meeting
at which the buy-back was approved till the date of notice convening the general meeting;
 230  Lesson 7 • EP-SLCM

(c) the maximum and minimum price at which purchases and sales referred to in (b) above were made
along with the relevant dates;
(viii) Intention of the promoters and persons in control of the company to tender shares or other specified
securities for buy-back indicating the number of shares or other specified securities, details of acquisition
with dates and price;
(ix) A confirmation that there are no defaults subsisting in repayment of deposits, redemption of debentures or
preference shares or repayment of term loans to any financial institutions or banks;
(x) A confirmation that the Board of Directors has made a full enquiry into the affairs and prospects of the
company and that they have formed the opinion:
(a) that immediately following the date on which the General Meeting or the meeting of the Board of Directors
is convened there will be no grounds on which the company could be found unable to pay its debts;
(b) as regards its prospects for the year immediately following that date that, having regard to their
intentions with respect to the management of the company’s business during that year and to the
amount and character of the financial resources which will in their view be available to the company
during that year, the company will be able to meet its liabilities as and when they fall due and will not
be rendered insolvent within a period of one year from that date; and
(c) in forming their opinion for the above purposes, the directors shall take into account the liabilities as if
the company were being wound up under the provisions of the Companies Act, 1956 or Companies Act,
2013 or the Insolvency and Bankruptcy Code 2016 (including prospective and contingent liabilities);
(xi) A report addressed to the Board of Directors by the company’s auditors stating that-
(a) they have inquired into the company’s state of affairs;
(b) the amount of the permissible capital payment for the securities in question is in their view properly
determined; and
(c) the Board of Directors have formed the opinion as specified in clause (x) on reasonable grounds and
that the company will not, having regard to its state of affairs, will not be rendered insolvent within a
period of one year from that date.

BUY-BACK PROCESS

1 2 3

Appointment of Public Announcement to

Filing the Resolution be released in
Merchant Banker(s)/ with SEBI/ Stock newspapers and
Regist rar Exchanges(s) simultaneous filing with
SEBI/Stock Exchnage

4 5 6

Determination of Offer Extinguishment of

Acceptance and Certificates and
Price, Opening and Payment to Security intimation to Stock
Closure of the Buyback Holders Exchange
Offer
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 231

7 8 9

File the return with ROC Issue of Public

Merchant Banker to file advertisement in
and SEBI Final Report with SEBI National daily on
Completion of Buy-back
process

BUY-BACK THROUGH TENDER OFFER

A company may buy-back its shares or other specified securities from its existing securities holders on a
proportionate basis in accordance with the provisions of these Regulations.
However fifteen percent of the number of securities which the company proposes to buy-back or number of
securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.

Additional Disclosures

In addition to the disclosures provided in Schedule I to these regulations, the following disclosure are required to
be made in the explanatory statement:
• the maximum price at which the buy-back of shares or other specified securities shall be made and whether
the board of directors of the company is being authorised at the general meeting to determine subsequently
the specific price at which the buy-back may be made at the appropriate time;
• if the promoter intends to offer his shares or other specified securities, the quantum of shares or other
specified securities proposed to be tendered and the details of their transactions and their holdings for the
last six months prior to the passing of the special resolution for buy-back including information of number of
shares or other specified securities acquired, the price and the date of acquisition.

Disclosures, filing requirements and timelines for public announcement and draft letter of offer

1. Public • The company shall make a public announcement within two working days from
Announcement the date of declaration of results of the postal ballot for special resolution/
board of directors resolution in at least one English National Daily, one Hindi
National Daily and one Regional language daily, all with wide circulation at the
place where the Registered Office of the company is situated.
• A copy of the public announcement along with the soft copy, shall also be
submitted to SEBI, simultaneously, through a merchant banker.

2. Filing with SEBI The company shall within five working days of the public announcement file the
following :
• A draft letter of offer, along with a soft copy, containing disclosures as specified
in these regulations through a merchant banker who is not associated with the
company.
• A declaration of solvency in specified form and in a manner provided in Section
68(6) of the Companies Act, 2013.
• Prescribed fees as specified in these regulations.
SEBI may provide its comments on the draft letter of offer within seven working days
of the receipt of the draft letter of offer. Letter of Offer shall be dispatch to the
shareholders after making changes suggested by SEBI, if any.
 232  Lesson 7 • EP-SLCM

Offer Procedure
• While making buy-back offer, the company shall announce a record date in the public announcement for the
purpose of determining the entitlement and the names of the security holders, who are eligible to participate
in the proposed buy-back offer.
• The company shall dispatch the letter of offer along with the tender form to all securities holders which are
eligible to participate in the buy-back offer not later than five working days from the receipt of communication
of comments from SEBI.
Note:
» Letter of Offer may also be dispatched through electronic mode in accordance with the
provisions of the Companies Act, 2013.
» On receipt of a request from any shareholder to receive a copy of the letter of offer in physical
form, the same shall be provided.
• If case an eligible public shareholder does not receive the tender offer/off form, even though he can participate
in the buy-back off and tender shares in the manner as provided by the SEBI.
• The date of the opening of the offer shall be not later than five working days from the date of dispatch of the
letter of offer. It shall be remain open for a period of ten working days.
• The company shall provide the facilities for tendering of shares by the shareholders and settlement of the
same, through the stock exchange mechanism in the manner as provided by the SEBI.
• The company shall accept shares or other specified securities from the securities holders on the basis of their
entitlement as on record date.
• The shares proposed to be bought back shall be divided into two categories;
a. Reserved category for small shareholders; and
b. General category for other shareholders, and the entitlement of a shareholder in each category shall be
calculated accordingly.
Note:
Holdings of multiple demat accounts would be clubbed together for identification of small shareholder if
sequence of Permanent Account Number for all holders is matching. Similarly, in case of physical shareholders,
if the sequence of names of joint holders is matching, holding under such folios should be clubbed together
for identification of small shareholder.
• After accepting the shares or other specified securities tendered on the basis of entitlement, shares or other
specified securities left to be bought back, if any in one category shall first be accepted, in proportion to the
shares or other specified securities tendered over and above their entitlement in the offer by securities
holders in that category and thereafter from securities holders who have tendered over and above their
entitlement in other category.

Yes, unregistered shareholder

Can unregistered may also tender his shares for
shareholder tender his buy-back by submitting the
shares for buy- back? duly executed Transfer Deed
for transfer of shares in his
name, along with the offer
form and other relevant
documents as required for
transfer, if any.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 233

Please note that shareholders holding shares in physical form will not be eligible to tender shares under the offer,
unless the shares held by them are dematerialised.
Escrow Account
The company shall as and by way of security for performance of its obligations under the regulations, on or
before the opening of the offer, deposit in an escrow account such sum as specified under SEBI Regulations.
The amount in the escrow shall be deposited in the following manner:
Amount of Consideration % of amount to be deposited
Consideration not more than Rs. 100 crores 25 per cent of the consideration payable;
Consideration exceeds Rs. 100 crores 25 percent upto Rupees 100 crores and 10 percent
thereafter.

The escrow account referred to above shall consist of

Cash deposited with • The company shall, while opening the account
a scheduled
empower the merchant banker to instruct the bank
commercial bank,
to make payment the amount lying to the credit of the
OR
escrow account, as provided in the regulations.

Bank guarantee in • Such bank guarantee shall be in favour of the merchant

favour of the banker and shall be valid until thirty days after the
merchant banker,
expiry of buyback period.
OR

Deposit of acceptable • The Company shall empower the merchant banker

securities with to realise the value of such escrow account by sale or
appropriate margin, otherwise and if there is any deficit on realisation of
with the merchant the value of the securities, the merchant banker shall
banker, be liable to make good any such deficit.
OR

• In case the escrow account consists of bank guarantee

or approved securities, these shall not be returned by
the merchant banker till completion of all obligations
under the regulations.
A combination of all
• Where the escrow account consists of bank guarantee
ABOVE
or deposit of approved securities, the company shall
also deposit with the bank in cash a sum of at least one
per cent of the total consideration payable, as and by
way of security for fulfillment of the obligations under
the regulations by the company.

Note: The cash component of the escrow account may be maintained in an interest bearing account. However, the
merchant banker shall ensures that the funds should be available at the time of making payment to shareholders.
After the payment of consideration to all the securities holders who have accepted the offer and after completion of
all formalities of buy-back, the amount, guarantee and securities in the escrow, if any, shall be released to the company.
In case of non-fulfilment of obligations under the regulations, SEBI in the interest of the securities holders may
forfeit the escrow account either in full or in part. Such forfeited amount may be distributed amongst the securities
holders who accepted the offer and balance, if any, on pro rata which shall be utilised for investor protection.
 234  Lesson 7 • EP-SLCM

Closure and Payment to Securities Holders

• The company shall open a special account with a banker to an issue, registered with the SEBI
immediately after the date of closure of the offer, and deposit therein, such sum as would, together with ninety
percent of the amount lying in the escrow account, make-up the entire sum due and payable as consideration
for buy-back in terms of these regulations and for this purpose, may transfer the funds from the escrow
account.
• The company shall complete the verification of offers received and make payment of consideration to those
holders of securities whose offer has been accepted and return the remaining shares or other specified
securities to the securities holders within seven working days of the closure of the offer.

Extinguishment of Certificate and other Closure Compliances

Period of fifteen days shall

not extend beyond seven days
of expiry of buy-back period
in any case.

The company shall furnish a certificate to the SEBI within 7 days extinguishment and
destruction of the certificates, certifying compliance as specified above, and duly
certified and verified by:
a) Registrar and whenever there is no registrar, by the merchant banker;
b) Two directors of the company, one of whom shall be a managing director, where
there is one; and
c) the statutory auditor of the company.

Note:
• The company shall ensure that all the securities bought-back are extinguished within seven days of expiry of
buy-back period.
• If the shares or other specified securities offered for buy-back is already dematerialised, then it shall be
extinguished and destroyed in the manner specified under SEBI (Depositories and Participants) Regulations,
1996, and the bye-laws, the circulars and guidelines framed thereunder.
• Where a company buys-back its shares or other specified securities under these regulations, it shall maintain
a register of the shares or securities so bought, in Form SH. 10 in pursuance of section 68(9) of the Companies
Act, 2013.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 235

ODD-LOT BUY-BACK
The provisions pertaining to buy-back through tender offer as specified above shall be apply mutatis mutandis to
odd-lot shares or other specified securities.
BUY-BACK FROM THE OPEN MARKET
The company may buy-back of shares or other specified securities from the Open Market may be in any of
the following methods:

Through Stock
Exchaange
Book-building
Process

The company shall ensure that at least 50% of the amount earmarked for buy-back, as specified in the resolution of the
board of directors or the special resolution, as the case may be, is utilized for buying-back shares or other specified
securities.
Buy-back of Shares Through Stock Exchange
1. Pre-conditions • The company may buy-back only on stock exchanges having nationwide
trading terminals.
• The buy-back of the shares or other specified securities through the stock exchange
shall not be made from the promoters or persons in control of the company
• The buy-back of shares or other specified securities shall be made only
through the order matching mechanism except ‘all or none’ order matching
system.
2. Disclosures, filing • The company shall appoint a merchant banker and make a public
requirements and announcement in manner as specified in buy-back of shares through
timelines of public tender offer.
announcement
• The public announcement shall be made within two working days from
the date of passing the board of director’s resolution or date of declaration of
results of the postal ballot for special resolution, as relevant and shall contain
disclosures as specified in these regulations.
• Simultaneously with the issue of such public announcement, the company shall file
a copy of the public announcement with SEBI along with the prescribed fees.
• The public announcement shall also contain disclosures regarding details of
the brokers and stock exchanges through which the buy-back of shares or other
specified securities would be made.
Note: In case of the buy-back from open market, no draft letter of offer/ letter
of offer is required to be filed with SEBI.
3. Opening of the • The identity of the company as a purchaser shall be appeared on the
offer on stock electronic screen when the order is placed.
exchange
• The buy-back offer shall be opened not later than seven working days from
the date of public announcement and shall be closed within six months
from the date of opening of the offer.
236  Lesson 7 • EP-SLCM

4. Subsequent • The company shall submit the information regarding the shares or other
compliances specified securities bought-back, to the stock exchange on a daily basis
in such form as may be specified by SEBI and the same shall be uploaded
immediately on the official website stock exchange and on Company’s
website.
5. Procedure for buy-back • A separate window shall be created by the stock exchange, which shall
shares or other specified remain open during the period of buy-back, for buy-back of shares or
securities in Physical form other specified securities in physical form.
• The Company shall buyback shares or other securities holding physical
shares only through this separate window after verification of identity
and address of eligible shareholders by broker.
• The price at which the shares or other specified securities are bought
back shall be the volume weighted average price of the shares or other
specified securities bought-back, other than in the physical form, during
the calendar week in which such shares or other specified securities were
received by the broker.
However, the price of shares or other specified securities tendered during
the first calendar week of the buy-back shall be the volume weighted average
market price of the shares or other specified securities of the company during
the preceding calendar week.
Note: In case no shares or other specified securities were bought back in
the normal market during calendar week, the preceding week when the
company has last bought back the shares or other specified securities may
be considered.
6. Escrow Account • The company shall, before opening of the offer, create an escrow
account towards security for performance of its obligations under
these regulations, and deposit in escrow account 25 per cent of the
amount earmarked for the buy-back as specified in the resolution of the
board of directors or the special resolution, as the case may be.
• The escrow account may be in the form of:
a) cash deposited with any scheduled commercial bank; or
b) bank guarantee issued in favour of the merchant banker by any
scheduled commercial bank.
• For such part of the escrow account as is in the form of a cash deposit
with a scheduled commercial bank, the company shall while opening
the account, empower the merchant banker to instruct the bank to
make payment of the amounts lying to the credit of the escrow account,
to meet the obligations arising out of the buy-back.
• For such part of the escrow account as is in the form of a bank guarantee;
a) the same shall be in favour of the merchant banker and shall be
kept valid for a period of thirty days after the expiry of buy-back
period of the offer or till the completion of all obligations under
these regulations, whichever is later.
b) the same shall not be returned by the merchant banker till
completion of all obligations under the regulations.
• Where part of the escrow account is in the form of a bank guarantee,
the company shall deposit with a scheduled commercial bank, in cash,
a sum of at least 2.5 per cent of the total amount earmarked for buy-
back as specified in the resolution of the board of directors or the
special resolution, as the case may be, as and by way of security for
fulfillment of the obligations under the regulations by the company.
Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 237

• The amount may be released from escrow account for making of

payment to the shareholders subject to at least 2.5 per cent of the
amount earmarked for buy-back as specified in the resolution of the
board of directors or the special resolution, as the case may be,
remaining in the escrow account at all points of time.
• After utilisation of at least 50 % of the amount earmarked for buy-back
as specified in the resolution of the Board of Directors or Special
Resolution, as case may be, the amount and the guarantee remaining in
the escrow account, if any, shall be released to the company.
• In the event of non-compliance as specified above, SEBI may direct the
merchant banker to forfeit the escrow account, subject to a maximum
of 2.5 percent of the amount earmarked for buy-back as specified in the
resolution of the board of directors or the special resolution, as the case
may be, except in cases where,-
a) volume weighted average market price (VWAMP) of the shares
or other specified securities of the company during the buy-back
period was higher than the buy-back price as certified by the
merchant banker based on the inputs provided by the Stock
exchanges.
b) sell orders were inadequate despite the buy orders placed by the
company as certified by the merchant banker based on the inputs
provided by the stock exchanges.
c) such circumstances existed which were beyond the control of
the company and in the opinion of SEBI merit consideration.
d) In the event of forfeiture for non-fulfilment of obligations as
specified in these regulation, the amount forfeited shall be
deposited in the Investor Protection and Education Fund of
Securities and Exchange Board of India.
7. Extinguishment of • The provisions pertaining to the extinguishment of certificates for
certificates tender offers specified above shall apply for extinguishment of
certificates for buy-back from open market.
• The verification of acceptances shall be completed by the company
within fifteen days of the payout.
• The company shall extinguish and physically destroy the securities
certificates so bought back during the month in the presence of a
Merchant Banker and the Statutory Auditor, on or before the fifteenth
day of the succeeding month.
However, the company shall ensure that all the securities bought-back are
extinguished within seven days of expiry of buy-back period.

Buy-back through Book Building

1. Pre-conditions • Special resolution or Board Resolution, as the case may be, shall be passed
for authorisation of Buy-back of shares or other specified securities in the
manner as specified under these regulations.
2. Disclosures, filing • The company shall appoint a merchant banker and make a public announcement
requirements and made disclosures in public announcement under these regulations.
and timelines
• The public announcement shall be made at least 7 days prior to the
for public
commencement of buy-back.
announcement
• The public announcement shall also contain the detailed methodology of
the book-building process, the manner of acceptance, the format of
acceptance to be sent by the securities holders pursuant to the public
announcement and the details of bidding centres.
238  Lesson 7 • EP-SLCM

3. Escrow Account • The provisions with respect to deposit of amount in escrow account as
specified in buy-back through tenders offers shall also apply to buy back of
shares or other specified securities through book building process.
• The deposit in the escrow account shall be made before the date of the public
announcement.
• The amount to be deposited in the escrow account shall be determined with
reference to the maximum price as specified in the public announcement.
The cash component of the escrow account may be maintained in an interest
bearing account. However, the merchant banker shall ensures that the funds
should be available at the time of making payment to shareholders.
4. Filing with SEBI • A copy of the public announcement shall be filed with SEBI within two days
of such announcement along with the prescribed fees.
5. Offer Procedure • The book-building process shall be made through an electronically linked
transparent facility.
• The number of bidding centers shall not be less than thirty and there shall be
at least one electronically linked computer terminal at all the bidding centers.
• The offer for buy-back shall remain open to the securities holders for a period
not less than fifteen days and not exceeding thirty days.
• The merchant banker and the company shall determine the buy-back price
based on the acceptances received.
• The final buy-back price, which shall be the highest price accepted shall be paid
to all holders whose shares or other specified securities have been accepted
for buy-back.
• The provisions pertaining to verification of acceptences and the provisions
pertaining to opening of special account and payment of consideration for
tender offer shall be applicable mutatis mutandis to the buy-back through
book building.
6. Extinguishment of • The provisions pertaining to extinguishment of certificates for tender offer
certificates shall be applicable mutatis mutandis to the buy-back through book building.

OBLIGATIONS FOR ALL BUY-BACK OF SHARES OR OTHER SPECIFIED SECURITIES

The Company The Merchant General

Banker Obligations
Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 239

Obligations of the Merchant

Obligations of the Company
Banker
• The company shall ensure that, – The merchant banker shall
ensure that –
» the letter of offer, the public announcement of the offer or any
other advertisement, circular, brochure, publicity material shall
contain true, factual and material information and shall not • the company is able to
contain any misleading information and must state that the implement the offer;
directors of the company accept the responsibility for the • the provision relating to
information contained in such documents; escrow account has been
» the company shall not issue any shares or other specified complied with;
securities including by way of bonus till the date of expiry of buy- • firm arrangements for
back period for the offer made under these regulations; monies for payment to fulfill
» the company shall pay the consideration only by way of cash; the obligations under the
offer are in place;
» the company shall not withdraw the offer to buy-back after the
draft letter of offer is filed with SEBI or public announcement of • the public announcement of
the offer to buy-back is made; buy-back is made in terms of
the regulations;
» the promoter(s) or his/their associates shall not deal in the shares
or other specified securities of the company in the stock exchange • the letter of offer has
or off-market, including inter-se transfer of shares among the been filed in terms of the
promoters during the period from the date of passing the regulations;
resolution of the board of directors or the special resolution, as • a due diligence certificate
the case may be, till the closing of the offer. along with the draft letter of
» the company shall not raise further capital for a period of one offer has been furnished to
year from the expiry of buy-back period, except in discharge of its SEBI;
subsisting obligations. • the contents of the public
announcement of offer as
• No public announcement of buy-back shall be made during the
well as the letter of offer are
pendency of any scheme of amalgamation or compromise or
true, fair and adequate and
arrangement pursuant to the provisions of the Companies Act, 2013.
quoting the source wherever
• The company shall nominate a compliance officer and investors service necessary;
centre for compliance with the buy-back regulations and to redress the • due compliance of sections
grievances of the investors. 68, 69 and 70 of the
• particulars of the security certificate extinguished and destroyed shall Companies Act and any
be furnished by the company to the stock exchanges where the shares other laws or rules as may be
or other specified securities of the company are listed within seven applicable in this regard has
days of extinguishment and destruction of the certificates. been made;

• The company shall not buy-back the locked-in shares or other specified • the bank with whom the
securities and non-transferable shares or other specified securities till escrow or special amount
the pendency of the lock-in or till the shares or other specified securities has been deposited releases
become transferable. the balance amount to
the company only upon
• The company shall within two days of expiry of buy-back period issue fulfilment of all obligations
a public advertisement in a national daily, inter alia, disclosing: by the company under the
regulations;
 240  Lesson 7 • EP-SLCM

a) number of shares or other specified • a final report is submitted to SEBI in the form
securities bought; specified within fifteen days from the date of
expiry of buy-back period.
b) price at which the shares or other specified
securities bought;
c) total amount invested in the buy-back;
d) details of the securities holders from whom
shares or other specified securities exceeding
one percent of total shares or other specified
securities are bought back; and
e) the consequent changes in the capital
structure and the shareholding pattern after
and before the buy-back.
• The company in addition to these regulations
shall comply with the provisions of buy-back
as contained in the Companies Act and other
applicable laws.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

1. SEBI may, in the interest of investors and the securities market, relax the strict enforcement of any requirement
of these regulations except the provisions incorporated from the Companies Act, if the SEBI is satisfied that:
(a) the requirement is procedural in nature; or
(b) the requirement may cause undue hardship to investors;
For seeking relaxation as above, the company shall file an application with the SEBI, supported by a duly
sworn affidavit, giving details and the grounds on which such relaxation has been sought.
2. The SEBI may, exempt any person or class of persons from -
• the operation of all or
• any of the provisions of these regulations
for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing
new products, processes, services, business models, etc. in live environment of regulatory sandbox in the
securities markets.
Any exemption granted by the SEBI shall be subject to the applicant satisfying such conditions as may be
specified by the SEBI including conditions to be complied with on a continuous basis.

"regulatory sandbox" means a live testing environment where new products, processes, services, business models,
etc. may be deployed on a limited set of eligible customers for a specified period of time, for furthering innovation
in the securities market, subject to such conditions as may be specified by the SEBI.

BUY-BACK VIS-A-VIS COMPLIANCE UNDER SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND

TAKEOVERS) REGULATIONS, 2011
• An increase in voting rights in a target company of any shareholder beyond 25%, pursuant to buy-back of
shares by the target company shall be exempt from the obligation to make an open offer provided such
shareholder reduces his shareholding such that his voting rights fall to below the threshold within ninety
days from the date of the closure of the said buy-back offer.
 Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 241

• In case the acquirer’s initial shareholding was more than 25% and the increase in shareholding due to buy-
back is beyond the permissible creeping acquisition limit of 5% per financial year, the acquirer can get an
exemption from making an open offer, subject to the following:
(i) such shareholder has not voted in favour of the resolution authorising the buy-back of securities under
section 68 of the Companies Act, 2013;
(ii) in the case of a shareholder resolution, voting is by way of postal ballot;
(iii) where a resolution of shareholders is not required for the buy-back, such shareholder, in his capacity
as a director, or any other interested director has not voted in favour of the resolution of the board of
directors of the target company authorising the buy-back of securities under section 68 of the
Companies Act, 2013; and
(iv) the increase in voting rights does not result in an acquisition of control by such shareholder over the
target company. However where the aforesaid conditions are not met, in the event such shareholder
reduces his shareholding such that his voting rights fall below the level at which the obligation to make
an open offer would be attracted, within ninety days from the date of closure of the buy-back offer by
the target company, the shareholder shall be exempt from the obligation to make an open offer.
Note:
It is important to note that while the above key considerations are to be kept in mind while undertaking a
buy- back under various methods, the listed company is also required to comply with the requirements
specified under the Companies Act, 2013, the Securities and Exchange Board of India (Listing Obligations and
Disclosure Requirements) Regulations, 2015, the Foreign Exchange Management Act, 1999, the Securities
and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, the Securities and Exchange
Board of India (SAST) Regulations, 2011 and other applicable securities laws including other jurisdictions.
Additionally, listed company specific issues such as employee stock option schemes, share based schemes or
depository receipts may also have an impact on buy-backs undertaken by a listed company.

ROLE OF COMPANY SECRETARY

Being a Company Secretary of a company it is very important to know about the various procedural requirements
of Buy-back by a Company because a Company Secretary can only then be able to make the directors understand
the real effects of buy back when deciding to return cash to shareholders or to pursue other investment options. A
buy-back’s impact on share price comes from changes in a company’s capital structure and, more critically, from the
signals a buy-back sends. Investors are generally relieved to learn that companies don’t intend to do something
wasteful such as make an unwise acquisition or a poor capital expenditure with the excess cash.

LESSON ROUND-UP

• “Buy-back” means the purchase of its own shares or other specified securities by a company.
• Buy-back of securities is a corporate financial strategy which involves capital restructuring and is
prevalent globally with the underlying objectives of increasing earnings per share, averting hostile
takeovers, improving returns to the stakeholders and realigning the capital structure.
• Buy-back of securities is regulated by the SEBI (Buy-Back of Securities) Regulations, 2018 in case of listed
companies.
• The main objective of buy-back may be to improve earnings per share; to improve return on capital,
return on net worth and to enhance the long-term shareholder value; to provide an additional exit route
to shareholders when shares are undervalued or are thinly traded; to enhance consolidation of stake in
the company; to prevent unwelcome takeover bids; to return surplus cash to shareholders; to achieve
optimum capital structure; to support share price during periods of sluggish market conditions and to
service the equity more efficiently.
242  Lesson 7 • EP-SLCM

• Buy-back of securities may be made :

a) from the existing shareholders or other specified securities holders on a proportionate basis
through the tender offer; or
b) from the open market through book-building and Stock exchange ; or
c) from odd lots holders.
• A company may undertake a buy-back of its own shares or other specified securities out of its free reserves
or the securities premium account; or the proceeds of the issue of any shares or other specified securities.
• The company shall not make any buy-back unless it is authorised by the company’s articles. In case of no
authorisation, the company may authorise the articles by passing of special resolution in the General Meeting.
• Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution at general meeting, or the resolution passed by the board of directors of the company, as the
case may be.
• The company shall, after expiry of the buy-back period, file with the Registrar of Companies and SEBI,
a return containing such particulars relating to the buy-back within thirty days of such expiry, in the
format as specified in the Companies (Share Capital and Debentures) Rules, 2014.

GLOSSARY

Bid An offer of a price to buy as in an auction. Business on the Stock Exchange is done
through bids. Bid also refers to the price one is willing to pay for a security.
Company A company as defined under the Companies Act, 1956 or 2013 as the case may be,
whose shares or other specified securities are listed on a Stock Exchange and which
buys or intends to buy such shares or other specified securities in accordance with
these regulations;
Earnings per It is the portion of a company’s profit allocated to each outstanding share of common
share (EPS) stock and it serves as an indicator of a company’s profitability.
Odd Lots The lots of shares or other specified securities of a company, whose shares are listed
on a recognised stock exchange, which are smaller than such marketable lots, as may
be specified by the stock exchange;

Open Market Purchase or sale of government securities by the monetary authorities (RBI in India
to increase or decrease the domestic money supply.

Stakeholder Any individual or group who has an interest in a firm; in addition to shareholders
and bondholders, includes labour, consumers, suppliers, the local community and
so on.
Working Day It means any working day of the SEBI.
Lesson 7 • SEBI (Buy-Back of Securities) Regulations 2018 243

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. What do you mean by buy-back of Securities? Can a company buy-back its own shares or any specified
securities through negotiated deals or through any private arrangements? Comment with methods
allowed for buy-back.
2. XYZ Ltd., has equity share capital of Rs. 20,00,000 of face value of Rs. 10 each, listed in BSE Ltd. The
company has proposed for buy-back of its shares up to 25%. As a Company Secretary explain the conditions
for buy-back of shares.
3. Explain the provisions for opening of Escrow Account with respect to buy-back of shares through Tender
Offer?
4. Can a company buy-back its shares without passing shareholders’ resolution?
5. What are the sources available for buy-back of shares or other specified securities under the SEBI (Buy-
back of securities) Regulations, 2018?
6. Elucidate the provisions with respect to Buy-back of physical shares under the SEBI (Buy-back of
Securities) Regulations, 2018?
7. Explain the obligations of a company under the SEBI (Buy-back of Securities) Regulations, 2018?
8. The financial data of a listed company as on 31st March, 2018 are as follows :
Authorized equity share capital Rs. 10 crore (1 crore shares of Rs.10 each)
Paid-up equity share capital Rs. 5 crore
General reserve Rs. 3 crore
Debenture redemption reserve Rs. 2 crore
The Board of directors of the company passed resolution by circulation for buy-back of shares to the
extent of 9% of the company’s paid-up share capital and free reserves. You are required to examine the
validity of the proposal with reference to the provisions of the SEBI Regulations.
9. The following is an extract of Balance Sheet of ABC Ltd. :
Equity Shares Capital — 50,000 Equity Share of Rs. 10 each.
10% Debenture Capital — 20,000 Debenture of Rs. 10 each.
On 21st April, 2018, the Board of Directors decided to buy-back 5,000 equity shares for which they would
call Extra-ordinary General Meeting. In the year 2016, the company has defaulted in payment of interest
on secured loan to Bank amounted to Rs. 25 crore, which was remedied in the year 2017. Comment on the
above situation.
244  Lesson 7 • EP-SLCM

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI FAQs

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• https://www.nseindia.com/
• https://www.bseindia.com/
• https://www.sebi.gov.in/reports/reports/mar-2018/discussion-paper-on-review-of-buy-back-
regulations-1998-and-takeover-regulations-2011_38479.html
 SEBI (Delisting of Equity
Lesson 8 Shares) Regulations, 2021
Key Concepts One Learning Objectives Regulatory
Should Know Framework
To understand:
• Bidding
• Meaning of Delisting • SEBI (Delisting of Equity
Mechanism
Shares) Regulations, 2021
• Reverse Book • Types of Delisting
Building • Delisting Regulations at
• Exit Opportunity various points of time in
2003, 2009 and the latest
• Discovered Price amendment in 2021.
• Escrow Account • Various requirements to be
• Counter Offer complied for delisting.
• Initial Public • Various provisions of
Announcement delisting.
• Detailed Public • Conditions and procedure
Announcement for delisting where exit
opportunity is required and
• Floor Price not required.
• Innovators • Consequences of delisting in
Growth Platform case of compulsory delisting.
• Small Company • Special powers of SEBI.

Lesson Outline
• Introduction • Compulsory Delisting
• Genesis • Special provisions for Small
Companies
• Regulatory Framework of
SEBI (Delisting of Equity • Special provisions for
Shares) Regulations, 2021 companies listed on
Innovators Growth Platform
• Applicability
• Powers of SEBI
• Non-Applicability
• Role of Company Secretary
• Conditions for delisting in delisting
• Voluntary delisting • LESSON ROUND-UP
• Conditions and Procedure • GLOSSARY
for delisting where exit
opportunity is not required • TEST YOURSELF
• LIST OF FURTHER READINGS
• Conditions and Procedure
for delisting where exit • OTHER REFERENCES
opportunity is required
 246  Lesson 8 • EP-SLCM

INTRODUCTION
Listing means admission of a Company’s securities to the trading platform of a Stock Exchange, so as to provide
marketability and liquidity to the security holders.

“Delisting” which is totally the reverse of listing denotes removal of the securities of a listed company from the
platform of Stock Exchange. Delisting is different from suspension or withdrawal of admission to dealings of
listed securities, which is for a limited period.
The Companies choose to list themselves to grab the advantages of listing viz; lower cost of capital, greater
shareholder base, liquidity in trading of shares, prestige etc. But the companies need to be contended that the
benefits of listing outweigh the listing costs, the compliance requirements do not overburden the companies and do
not expose them to disciplinary actions.

Whereas, ‘Suspension’ of trading in securities means that no trade can take place in the securities of the company
suspended for a temporary period. Suspension is not done at the instance of company but it is action taken by the
Stock Exchanges against the company, generally for non-compliance of listing conditions as stipulated under the
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) for which the Stock
exchanges may impose fines or freeze promoter/promoter group holding of designated securities, as may be
applicable in coordination with depositories. Once, the company makes good the compliance of the listing conditions
under the LODR Regulations, stock exchange withdraws the suspension and permits trading.

On the other hand, ‘delisting’ of securities means removal of the name of the company from the stock exchange and
no trade can take place in the securities of the company delisted. Delisting of securities can be done either by
company voluntarily or by the stock exchange, compulsorily. Generally, stock exchange, in order to impose severe
punishment on companies compulsorily delists securities of a company, as a last resort. Compulsory delisting
affects reputation of company and the extent of liquidity in trading those shares.

Company ceasing to carry on the business, bankruptcy, merger are also some of the reasons behind delisting of a
company. Delisting curbs the securities of the delisted company from being traded on the stock exchange. It can be
done either on voluntary decision of the company or forcibly done by SEBI on account of some wrong doing by the
company. There are certain norms which a company needs to follow while listing on the stock exchange.

In case the company fails to do so, then SEBI takes the action which generally leads to delisting of the company from
the stock exchange. Whenever there is transfer of Business or Regulators demands or there is lack of trading volume
in regional exchanges the need of Delisting arises. At times change in Investors Profile and funding patterns may
also trigger Delisting.

GENESIS
In its continuous endeavor to ease the process of delisting, SEBI in the year 2002 constituted a committee on
delisting of shares to inter alia examine and review the conditions for delisting of securities of companies listed on
recognized stock exchanges and suggest norms and procedures in connection therewith. The Report of the
Committee was considered and accepted by SEBI. Pursuant to the same, SEBI issued the SEBI (Delisting of Securities)
Guidelines, 2003.

The said Guidelines, although to a great extent, covered the issues involved in Delisting of Securities. Various
representations and views, from intermediaries, stock exchanges, shareholders’ associations, chambers of
commerce, etc., were given to the Regulators on the operational issues and procedural complications in the guidelines.

SEBI circulated Concept Paper on the proposed SEBI (Delisting of Securities) Regulations, 2006, asking for public
comments on the proposed Regulations. SEBI received various comments, opinions and suggestions on the subject
and finally, by its publication dated June 10, 2009 in the Official Gazette, the SEBI notified the SEBI (Delisting of
Equity Shares) Regulations, 2009, thereby superseding the earlier SEBI (Delisting of Securities) Guidelines, 2003.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 247

Since then, several amendments have been carried out in the Delisting Regulations according to the changing needs
and developments in the securities market.

To further streamline and strengthen the delisting process / regulations, a comprehensive review of
the delisting regulations is proposed with the following key objectives:
• Enhance disclosures to help investors to take informed investment decisions
• Refine process
• Rationalize the existing timelines, so as to complete the delisting in time bound manner
• Streamline the delisting regulations to make it robust, efficient, transparent and investor’s friendly
• Plug gaps
• Update references to the Companies Act, 2013 and other securities laws.
Taking note of the above objectives, SEBI vide its notification dated June 10, 2021 had notified the SEBI (Delisting
of Equity Shares) Regulations, 2021 which have now completely replaced the SEBI (Delisting of Equity Shares)
Regulations, 2009.

REGULATORY FRAMEWORK OF SEBI (DELISTING OF EQUITY SHARES) REGULATIONS, 2021

These regulations contain 8 chapters and 4 schedules dealing with the following:

1. Chapter I Preliminary (Definitions)

2. Chapter II Delisting of Equity Shares

3. Chapter III Voluntary Delisting

4. Chapter IV Exit Opportunity

5. Chapter V Compulsory Delisting

6. Chapter VI Special Provisions for Small Companies

7. Chapter VII Miscellaneous

8. Chapter VIII Powers of Board, Directions by the Board, Repeal and Savings

9. Schedule I Contents of the detailed Public Announcement

10. Schedule II The Reverse Book Building Process

11. Schedule III Guidelines for Compulsory Delisting

12. Schedule IV Timelines for Counter Offer

APPLICABILITY (REGULATION 3)
These regulations shall be applicable to delisting of equity shares of a company including equity shares having
superior voting rights from all or any of the recognized stock exchanges where such shares are listed.
 248  Lesson 8 • EP-SLCM

NON-APPLICABILITY
These regulation shall not be applicable to :–
• securities listed and traded on the innovators growth platform of a recognised stock exchange, without
making a public issue;
• any delisting of equity shares of a listed entity made pursuant to a resolution plan approved under section 31
of the Insolvency Code, if such plan, –
(a) provides for delisting of such share; or
(b) provides an exit opportunity to the existing public shareholders at a specified price.

However, the existing public shareholders shall be provided an exit opportunity at a price which shall not be less
than the price, by whatever name called, at which a promoter or any entity belonging to the promoter group or any
other shareholder, directly or indirectly, is provided an exit opportunity:
Provided also that, the details of delisting of such shares along with the justification for exit price in respect of
delisting proposed shall be disclosed to the recognized stock exchanges within one day of resolution plan being
approved under section 31 of the Insolvency Code.
CONDITIONS FOR DELISTING
Regulation 4 provides that neither any company shall apply for nor any recognised stock exchange shall permit
delisting of equity shares of a company-

Pursuant to Buy-back of equity shares by the company1

Pursuant to Preferential allotment made by the company2

1. Unless a period of 6 months has lapsed from the date of completion of such buyback.
2. Unless a period of 6 months has lapsed from the date of completion of such allotment.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 249

Unless a period of three years has elapsed since the listing of that
class of equity shares

Instruments which are convertible into the same class of equity shares that are sought to
be delisted are outstanding

No acquirer shall directly or indirectly employ the funds of the company to finance an exit
opportunity or an acquisition of shares made pursuant to delisting provided under these
regulation

An acquirer shall not propose delisting of equity shares of a company, if the acquirer had
sold equity shares of the company during the a period of six months prior to the date of
the initial public announcement

No acquirer shall, directly or indirectly-

• Employ any device, scheme or artifice to defraud any shareholder or other person; or
• Engage in any transaction or practice that operates as a fraud or deceit upon any
shareholder or other person; or
• Engage in any act or practice that is fraudulent, deceptive or manipulative in connection with
any delisting of equity shares.

VOLUNTARY DELISTING
“Voluntary Delisting” means the delisting of equity shares of a company voluntarily on an application made by the
company under Chapter III of these regulations. In voluntary delisting, the promoters of the listed company decides
on their own to permanently remove its securities from a stock exchange.
Conditions and procedure for delisting where exit opportunity is not required
Regulation 5 of SEBI (Delisting of Equity Shares) Regulations, 2021 provides that a company may delist its equity
shares from one or more of the recognised stock exchanges on which it is listed without providing an exit opportunity
to the public shareholders, if after the proposed delisting, the equity shares remain listed on any recognised stock
exchange that has nationwide trading terminals. Any company desirous of delisting its equity shares where no exit
opportunity is required shall-

obtain the prior approval of its Board of Directors

make an application to the relevant recognised stock exchange for delisting its equity shares

issue a public notice of the proposed delisting in at least one English national newspaper, one Hindi national
newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where
the relevant stock exchange is located
 250  Lesson 8 • EP-SLCM

disclose the fact of delisting in its first annual report post delisting

an application for delisting shall be disposed of by the recognised stock exchange within a period not
exceeding thirty working days from the date of receipt of such application that is complete in all respects

The following details shall be provided in the above mentioned Public notice:
(a) The names of the recognized stock exchanges from where the equity shares of the company are intended to
be delisted.
(b) The reasons for such delisting.
(c) The fact of continuation of listing of equity shares on recognized stock exchange having nationwide trading
terminals.

Conditions and procedure for delisting where exit opportunity is required

Regulation 7 provides that the equity shares of a company may be delisted from all the recognised stock exchanges
having nationwide trading terminals on which they are listed, after an exit opportunity has been provided by the
acquirer to all the public shareholders holding the equity shares sought to be delisted, in accordance with Chapter
IV of these regulations.
Initial public announcement (Regulation 8)
On the date when the acquirer decides to voluntarily delist the equity shares of the company, it shall make an initial
public announcement to all the stock exchanges on which the shares of the company are listed and the stock
exchanges shall forthwith disseminate the same to the public.
A copy of the initial public announcement shall also be sent to the company at its registered office not later than one
working day from the date of the initial public announcement.
The initial public announcement shall contain:—
(a) the reasons for delisting;
(b) an undertaking with respect to compliance with regulations 4(2) and 4(5) of these regulations;
(4) the initial public announcement shall not omit any relevant information or contain any misleading information.

Appointment of the manager to the offer (Regulation 9)

Prior to making an initial public announcement, the acquirer shall appoint a merchant banker registered with the
SEBI as the Manager to the offer. The Manager to the offer shall not be an associate of the acquirer.
The initial public announcement and the subsequent activities as required under these regulations shall be
undertaken by the acquirer through the Manager to the offer.
Obligation of the manager to the offer (Regulation 29)
Before making the detailed public announcement, the Manager to the offer for delisting of equity shares shall ensure
that, —
• the acquirer is able to implement the delisting offer.
• firm arrangements for funds through verifiable means have been made by the acquirer to meet the payment
obligations under the delisting offer.
• the contents of the initial public announcement, the detailed public announcement, the letter of offer and the
post-bidding advertisement(s) are complete, true, fair and adequate in all material aspects, based on reliable
sources and are in compliance with the requirements under these regulations and other applicable securities
laws.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 251

• market intermediaries engaged for the purpose of the delisting of equity shares are registered with the SEBI.
• the Manager to the offer shall exercise due diligence, care and professional judgment to ensure compliance
with these regulations.
• the Manager to the offer shall not, either directly or indirectly through its associates, deal in its own account
in the shares of the company after its appointment as Manager to the offer till the conclusion of the delisting offer.
• the Manager to the offer to ensure that the acquirer complies with the provisions of these regulations.

Approval by the Board of Directors (Regulation 10)

The company shall obtain the approval of its Board of Directors in respect of the proposal, not later than twenty one
days from the date of the initial public announcement.
The Board of Directors of the company, while considering the proposal for delisting, shall certify that—
(a) the company is in compliance with the applicable provisions of securities laws;
(b) the acquirer and its related entities are in compliance with the applicable provisions of securities laws in
terms of the Company Secretary including compliance with sub-regulation (5) of regulation 4 of these
regulations;
(c) the delisting, in their opinion, is in the interest of the shareholders of the company.

While communicating the decision of the Board of Directors on the proposal for delisting of equity shares, the
company shall also submit to the recognized stock exchanges on which the equity shares of the company are listed,
the due - diligence report of the Company Secretary and the audit report as per regulation 76 of the SEBI (Depositories
and Participants) Regulations, 2018.
Upon receipt of the above mentioned communication from the company, the stock exchanges shall forthwith
disseminate the same to the public.
Appointment of peer reviewer Company Secretary to carry out the Due-Diligence
The Board of Directors of the company, before considering the proposal of delisting, shall appoint a Peer Reviewer
Company Secretary and provide the following information to such Company Secretary for carrying out due-
diligence: -
(a) the details of buying, selling and dealing in the equity shares of the company by the acquirer or its related
entities during the period of two years prior to the date of board meeting held to consider the proposal for
delisting, including the details of the top twenty five shareholders, for the said period;
(b) the details of off-market transactions of all the shareholders mentioned in clause (a) for a period of two years;
(c) any additional information if the Company Secretary is of the opinion that the information provided under
clauses (a) and (b) is not sufficient for providing the certification.
After obtaining the information from the Board of Directors of the company, the Company Secretary shall carry out
the due-diligence and submit a report to the Board of Directors of the company certifying that the buying, selling
and dealing in the equity shares of the company carried out by the acquirer or its related entities and the top twenty
five shareholders is in compliance with the applicable provisions of securities laws including these regulations.
Approval by shareholders (Regulation 11)
The company shall obtain the approval of the shareholders through a
special resolution, not later than forty five days from the date of obtaining The special resolution shall be
the approval of Board of Directors. The special resolution shall be passed acted upon only if the votes cast by
through postal ballot and / or e-voting as per the applicable provisions of the public shareholders in favour
the Companies Act, 2013 and the rules made thereunder. The company of the proposal are at least two
shall disclose all material facts in the explanatory statement sent to the times the number of votes cast by
shareholders in relation to such a resolution. the public shareholders against it.
 252  Lesson 8 • EP-SLCM

In-principle approval of the stock exchange (Regulation 12)

The company shall make an application to the relevant recognised stock exchange for in-principle approval of the
proposed delisting of its equity shares in the Form specified, not later than fifteen working days from the date of
passing of the special resolution or receipt of any other statutory or regulatory approval, whichever is later.
The application seeking in-principle approval for the delisting of equity shares shall be accompanied by an audit
report as required under regulation 76 of the SEBI (Depositories and Participants) Regulations, 2018 in respect of
the equity shares sought to be delisted, covering a period of six months prior to the date of the application.
Such application seeking in-principle approval for the delisting of the equity shares shall be disposed of by the
recognised stock exchange within a period not exceeding, fifteen working days from the date of receipt of such
application that is complete in all respects.
Escrow account (Regulation 14)
The acquirer shall open an interest bearing escrow account with a Scheduled Commercial Bank, not later than
seven working days from the date of obtaining the shareholders’ approval, and deposit therein an amount equivalent
to twenty five percent of the total consideration, calculated on the basis of the number of equity shares outstanding
with the public shareholders multiplied with the floor price or the indicative price, if any given by the acquirer in
terms of these regulations, whichever is higher.
The acquirer shall enter into a tripartite agreement with the Manager to the offer and the Bank for the purpose of
opening the escrow account and shall authorize the Manager to the offer to operate such account as per the
provisions of these regulations.
Before making the detailed public announcement, the acquirer shall deposit in the escrow account, the remaining
consideration amount being seventy five percent calculated on the basis of the number of equity shares outstanding
with the public shareholders multiplied with the floor price or the indicative price, if any given by the acquirer in
terms of these regulations, whichever is higher.
On determination of the discovered price and making of the public
announcement accepting the discovered price, the acquirer shall forthwith The escrow account shall consist
deposit in the escrow account such additional sum as may be sufficient to of either the cash deposited with a
make up the entire sum due and payable as consideration in respect of Scheduled Commercial Bank or a
equity shares outstanding with the public shareholders. bank guarantee in favour of the
Manager to the offer or a
In case of failure of the delisting offer, ninety nine percent of the amount combination of both.
lying in the escrow account shall be released to the acquirer within one
working day from the date of public announcement of such failure. The remaining one percent amount lying in the
escrow account shall be released post return of the shares to the public shareholders or confirmation of revocation
of lien marked on their shares by the Manager to the offer as per the timelines provided in these regulations.
Detailed public announcement (Regulation 15)
The acquirer shall, within one working day from the date of receipt of in-principle approval for delisting of equity
shares from the recognised stock exchange, make a detailed public announcement in at least one English national
newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and
one vernacular newspaper of the region where the relevant recognised stock exchange is located.
The detailed public announcement shall contain all material information including the information specified in
Schedule I of these regulations and shall not contain any false or misleading statement.
The detailed public announcement shall also specify a date, being a day not later than one working day from the
date of the detailed public announcement, which shall be the ‘specified date’ for determining the names of the
shareholders to whom the letter of offer shall be sent. The detailed public announcement shall be dated and signed
by the acquirer.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 253

Letter of offer (Regulation 16)

The acquirer shall dispatch the letter of offer to the public shareholders not later than two working days from the
date of the detailed public announcement made. The letter of offer shall be sent to all public shareholders, holding
equity shares of the class sought to be delisted, whose names appear on the register of the company or depository
as on the date specified in the detailed public announcement.
A copy of the letter of offer shall also be made available on the websites of the company and the Manager to the offer
for the benefit of the public shareholders. The letter of offer shall contain all the disclosures made in the detailed
public announcement and such other disclosures as may be necessary for the shareholders to take an informed
decision.
Bidding mechanism (Regulation 17)
The bidding period shall start not later than seven working days from the date of the detailed public announcement
and shall remain open for five working days. The acquirer shall facilitate tendering of shares by the shareholders
and settlement of the same, through the stock exchange mechanism as specified by the SEBI.
The Manager to the offer shall ensure that the outcome of the reverse book building process is announced within
two hours of the closure of the bidding period. Within two working days from the closure of the bidding period, the
acquirer shall, through the Manager to the offer, make a public announcement in the same newspapers in which the
detailed public announcement was made, disclosing the success or failure of the reverse book building process,
along with the discovered price accepted by the acquirer in the event of success of the said process.
Manner of tendering shares (Regulation 18)
The equity shares shall be tendered/offered by the public shareholders, including by way of marking a lien through
the stock exchange mechanism, in the manner specified by the SEBI.
Right of shareholders to participate in the reverse book building process (Regulation 19)

Public shareholders holding the equity shares of the company, which are sought to be delisted, shall be entitled to
participate in the reverse book building process in the manner specified in Schedule II of these regulations. The
Manager to the issue shall take necessary steps to ensure compliance with the same.
Any holder of depository receipts issued on the basis of underlying equity shares and a custodian keeping custody
of such equity shares shall not be entitled to participate in the reverse book building process.
However, any holder of depository receipts may participate in the reverse book building process after converting
such depository receipts into equity shares of the company that are proposed to be delisted.

Discovered price (Regulation 20)

The floor price shall be determined in terms of regulation 8 of Takeover Regulations as may be applicable.
After fixation of the floor price, the discovered price shall be determined through the reverse book building process
in the manner specified in Schedule II of these regulations, and the Manager to the offer shall disclose the same in
the detailed public announcement and the letter of offer.
The acquirer shall have the option to provide an indicative price in respect of the delisting offer, which shall be
higher than the floor price. The acquirer shall also have the option to revise the indicative price upwards before the
start of the bidding period and the same shall be duly disclosed to the shareholders.
The acquirer may, if it deems fit, pay a price higher than the discovered price.

In case the discovered price is not acceptable to the acquirer, a counter offer may be made by the acquirer to the
public shareholders within two working days of the closure of bidding period
 254  Lesson 8 • EP-SLCM

Minimum number of equity shares to be acquired (Regulation 21)

An offer made or a counter offer made by the acquirer, as the case may be, shall be deemed to be successful if,-
(a) the post offer promoter shareholding (along with the persons acting in concert with the promoter) taken
together with the shares accepted through eligible bids at the final price determined, reaches 90% of the total
issued shares of that class excluding the following:
(i) shares which are held by a custodian and against which depository receipts have been issued overseas;
and
(ii) shares held by a Trust set up for implementing an Employee Benefit scheme under the Securities and
Exchange Board of India (Share Based Employee Benefits) Regulations, 2014;
(iii) shares held by inactive shareholders such as vanishing companies and struck off companies, shares
transferred to the Investor Education and Protection Fund’s account and shares held in terms of sub-
regulation (4) of regulation 39 read with Schedule VI of the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations 2015.

However, such shareholders shall be certified by the Peer Review Company Secretary appointed by the Board of
Directors of the company for due-diligence.
Explanation,— The cut-off date for determination of inactive shareholders shall be the date on which the in-principle
approval of the Stock Exchange is received, which shall be adequately disclosed in the public announcement.

An illustration for arriving at the discovered price is given as under:

Bid Price Number of Demand (Number of Cumulative demand

(Rs.) investors shares) (Number of shares)

550 5 2,50,000 2,50,000

565 8 4,00,000 6,50,000

575 10 2,00,000 8,50,000

585 4 4,00,000 12,50,000

595 6 1,20,000 13,70,000

600 5 1,30,000 15,00,000 Final Offer Price

605 3 2,10,000 17,10,000

610 3 1,40,000 18,50,000

615 3 1,50,000 20,00,000

620 1 5,00,000 25,00,000

Total 48 25,00,000

In the given illustration, assuming floor price of Rs.550/- per share, promoter/ acquirer shareholding at 75%
and number of shares required for successful delisting as 15,00,000, the final price would be the price at which
the promoter reaches the threshold of 90%, i.e., it would be Rs.600/- per share.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 255

Option to accept or reject the discovered price or counter offer (Regulation 22)
The acquirer shall be bound to accept the equity shares tendered or offered in the delisting offer, if the discovered
price determined through the reverse book building process is equal to the floor price or the indicative price, if any,
offered by the acquirer.
The acquirer shall be bound to accept the equity shares, at the indicative price, if any offered by the acquirer, even
if the price determined through the reverse book building process is higher than the floor price but less than the
indicative price.
However, the abovementioned provisions shall not apply if the discovered price is higher than the indicative price.
In case the discovered price is not acceptable to the acquirer, a counter The counter offer price shall not be
offer may be made by the acquirer to the public shareholders within two less than the book value of the
working days of the closure of bidding period and thereafter, the acquirer company as certified by the Manager
shall ensure compliance with the provisions of these regulations in to the offer.
accordance with the timelines provided in Schedule IV.
Timelines for counter offer (Schedule IV)

Sr. Activity Timelines

No.
1. Public announcement of counter offer by the Within 2 working days from the date of closure of reverse
acquirer through stock exchange mechanism book building bidding process
2. Publication of counter offer public announcement Within 4 working days from the closure of the reverse
in the same newspapers where the detailed book building bidding process
public announcement was made
3. Option to withdraw the shares tendered during Within 10 working days from the counter offer public
the reverse book building process announcement
4. Dispatch of “Letter of offer for counter offer” Within 4 working days from the closure of the reverse
book building bidding process
5. Opening of counter offer bidding process Not later than 7 working days from the date of public
announcement
6. Closing of counter offer bidding process Not later than 5 working days from the opening of
counter offer bidding process

7. Public announcement of success/failure of Not later than 5 working days of the closing of the
counter offer in the same newspaper in which counter offer bidding process
detailed public announcement was made
8. Payment of consideration Not later than 10 working days from the closing of
counter offer or through the secondary market
settlement mechanism, as the case may be
9. Release of equity shares On the date of making public announcement of the
success or failure of the counter offer

Failure of offer (Regulation 23)

if the minimum number of shares

are not tendered/offered
The delisting offer shall be
considered to have failed
if the price discovered through the
reverse book building process is
rejected by the acquirer
 256  Lesson 8 • EP-SLCM

1) Where the delisting offer fails the equity shares tendered / offered as the case may be, shall be released-
• on the date of disclosure of the outcome of the reverse book building process if the minimum number of
shares are not tendered / offered;
• on the date of making public announcement for the failure of the delisting offer if the price discovered
through the reverse book building process is rejected by the acquirer;
• in accordance with Schedule IV of these regulations if a counter offer has been made by the acquirer.
However, the acquirer shall not be required to return the shares if the offer is made pursuant to regulation 5A of the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
2) Where the delisting offer fails-

The acquirer,
The expenses whose delisting
relating to the offer has failed,
offer for delisting shall not make
shall be borne by another delisting
the acquirer offer until the
expiry of six
months

Payment upon success of the offer (Regulation 24)

All the public shareholders, whose bids are accepted, shall be paid the discovered price or a higher price, if any,
offered by the acquirer, as stated in the public announcement in the following manner -
(i) In case the discovered price is equal to the floor price or the indicative price or in case the acquirer is bound
to accept the equity shares in the delisting offer, the payment shall be made through the secondary market
settlement mechanism;
(ii) In case the discovered price or the price, if any, offered by the acquirer, is higher than the floor price or the
indicative price, as the case may be, the payment shall be made within five working days from the date of the
public announcement.

The acquirer shall be liable to pay interest at the rate of ten percent per annum to all the shareholders, whose bids
have been accepted in the delisting offer, if the price payable is not paid to all the shareholders within the time
specified thereunder.
However, in case the delay was not attributable to any act or omission of the acquirer or was caused due to the
circumstances beyond the control of the acquirer, the SEBI may grant waiver from the payment of such interest.
Final application to the stock exchange after successful delisting (Regulation 25)
Within 5 working days from the date of making the payment to the public shareholders, the acquirer shall make the
final application for delisting to the relevant recognised stock exchange in the Form specified by such stock exchange
from time to time.
The final application for delisting shall be accompanied with necessary details / information, as the recognised
stock exchange may require, of having provided the exit opportunity.

The final application for delisting shall be disposed of by the recognised stock exchange within 15 working days
from the date of receipt of such application that is complete in all respects. Upon disposal of the final application for
delisting by the stock exchange, the equity shares of the company shall be permanently delisted from the stock
exchange.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 257

Right of the remaining public shareholders to tender equity shares (Regulation 26)
The remaining public shareholders, whose shares were either not accepted or were not tendered at all during the
bidding period, shall have a right to tender their equity shares for a minimum period of 1 year from the date of
delisting.
The acquirer shall be under an obligation during such period to accept the shares of the remaining public
shareholders, at the same price at which the equity shares had been delisted. The payment of consideration for
equity shares accepted shall be made out of the balance amount lying in the escrow account.
The Manager to the offer shall ensure that the amount lying in the escrow account or the bank guarantee shall not
be released to the acquirer for a minimum period of one year or till the time payment has been made to the remaining
public shareholders, whichever is earlier.
Cancellation of outstanding depository receipts (Regulation 31)
After delisting of equity shares from all the recognized stock exchanges having nationwide trading terminals, the
company shall be required to compulsorily cancel all the outstanding depository receipts issued overseas and
change them into the underlying equity shares in the home jurisdiction after termination of the depository receipts
program(s), within 1 year of such delisting.

OBLIGATIONS OF Upon receipt of the detailed public announcement, the Board of Directors of the company shall
THE COMPANY constitute a Committee of independent directors to provide reasoned recommendations on
(REGULATION 28) the delisting offer.
The Committee of independent directors shall provide its written reasoned recommendations
on the proposal for delisting of equity shares to the Board of Directors of the company and in
relation thereto, the Committee may also seek external professional advice at the expense of
the company.
The Committee of independent directors, while providing reasoned recommendations on the
delisting proposal, shall disclose the voting pattern of the meeting in which the said proposal
was discussed.
The company shall publish such recommendations of the Committee of independent
directors, along with the details of the voting pattern, at least 2 working days before the
commencement of the bidding period, in the same newspapers in which the detailed public
announcement of the offer for delisting of equity shares was published, and simultaneously,
a copy of the same shall be sent to the stock exchange(s) and the Manager to the offer.

OBLIGATIONS OF Prior to making the initial public announcement of the offer for the delisting of equity
THE ACQUIRER shares, the acquirer shall ensure that firm financial arrangements have been made for
(REGULATION 30) fulfilling the payment obligations under the delisting offer and that the acquirer is able to
implement the delisting offer, subject to any statutory approvals for the delisting offer that
may be necessary.
The acquirer shall ensure that the contents of the initial public announcement, the detailed
public announcement, the letter of offer and announcement about success or failure of the
offer for delisting are true, fair and adequate in all material aspects, not misleading and
based on reliable sources that shall be mentioned wherever necessary.
The acquirer and the persons acting in concert with it shall be jointly and severally
responsible for the fulfilment of the applicable obligations under these regulations.
The acquirer shall ensure to acquire the shares offered by the remaining public shareholders
at the same price at which the equity shares had been delisted for a minimum period of one year.
No acquirer or persons acting in concert with it shall sell shares of the company during the
delisting period.
 258  Lesson 8 • EP-SLCM

Procedure for Voluntary delisting from all the stock exchanges

Initial Public Announcement [IPA] by the acquirer [Reg. 8]

Appointment of Manager prior to announcement [Reg. 9]

Approval by Board of Director [Reg. 10]

[Not later than 21 days from the date of IPA]

Approval by Shareholders [Reg. 11]

[Not later than 45 days of Board Resolution]

Application to relevant recognised stock exchange for in-principle approval of proposed delisting [Reg. 12]
[Not later than 15 days from the date of special Resolution OR receipt of other regulatory approval
whichever is later ]

Opening of Escrow Account [Reg.14]

[Not later than 7 working days from the date of Special Resolution]

Detailed Public Announcement [Reg. 15]

[Within 1 working day of receipt of in-principle approval from recognised stock exchange]

Dispatch of letter of offer [Reg. 16]

[Not later than 2 working days from the date of detailed public announcement, to the public shareholders]

Commencement of Bidding Mechanism[Reg. 17]

[Not later than 7 working days from the date of detailed public announcement-which shall
remain open for 5 working days]

Discovered price shall be determined through Reverse book Building [Reg. 20]

Counter offer by the acquirer [Reg.22]

[Within 2 working days of closure of bidding period]

Release of shares in case failure of offer[Reg. 23]

Payment to shareholders upon success of offer [Reg. 24]

Final Delisting Application to the stock exchange [Reg. 25]

[within in 5 working days from the date of making the payment to the public shareholders]

Delisting by the stock exchange

 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 259

COMPULSORY DELISTING
Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a
penalizing measure at the behest of the stock exchange for not making submissions/comply with various
requirements set out in the Listing agreement within the time frames prescribed.
As per Regulation 32(1) a recognized stock exchange may, by a reasoned order, delist any equity shares of a company
on any ground prescribed in the rules made under the Securities Contracts (Regulation) Act, 1956 .
However, no order of compulsory delisting shall be issued unless the company has been given a reasonable
opportunity of being heard.

Constitution of Panel [Regulation 32(2)]

The decision regarding compulsory delisting shall be taken by a panel to be constituted by the recognized stock
exchange consisting of -
a. Two Directors of the recognized stock exchange (one of whom shall be a public representative);
b. One representative of an investor association recognised by the SEBI;
c. One representative of the Ministry of Corporate Affairs or Registrar of Companies; and
d. The Executive Director or Secretary of the recognized stock exchange.

Public notice before delisting order [Regulation 32(3)]

Before passing an order, the recognised stock exchange shall give a notice in at least one English national newspaper
with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one
vernacular newspaper of the region where the relevant recognised stock exchange is located, of the proposed
delisting, giving a time period of not less than fifteen working days from the date of such notice, within which
representations, if any, may be made to the recognised stock exchange by any person aggrieved by the proposed
delisting and shall also display such notice on its trading systems and website.
Time period of making representation [Regulation 32(3)]
Time period of not less than fifteen working days from the date of such notice, within which representations, if any,
may be made to the recognised stock exchange by any person aggrieved by the proposed delisting and shall also
display such notice on its trading systems and website.
Delisting Order by the Recognised Stock Exchange [Regulation 32 (4)]
The recognised stock exchange shall, while passing any order of compulsory delisting, consider the representation,
if any, made by the company and also any representation received in response to the notice, and shall comply with
the guidelines provided in these regulations.
GUIDELINES FOR COMPULSORY DELISTING

The recognised stock exchange shall take into account the grounds prescribed in the
rules made under the Securities Contracts (Regulation) Act, 1956 while compulsorily
delisting the equity shares of the company.

The recognised stock exchange shall take all reasonable steps to trace the promoters of a
company whose equity shares are proposed to be delisted.

The recognised stock exchange shall consider the nature and extent of the alleged
noncompliance by the company and the number and percentage of public shareholders
who may be affected by such non-compliance.
 260  Lesson 8 • EP-SLCM

The recognised stock exchange shall take reasonable efforts to verify the status of compliance
with the provisions of the Companies Act, 2013 and the rules and regulations made
thereunder, by the company with the office of the concerned Registrar of Companies.

The names of the companies whose equity shares are proposed to be delisted and their
promoters shall be displayed in a separate section on the website of the recognised stock
exchange. If delisted, the names shall be shifted to another separate section on the website.

The recognised stock exchange shall in appropriate cases file prosecutions under
relevant provisions of the Securities Contracts (Regulation) Act, 1956 or any other law
for the time being in force against identifiable promoters and directors of the company
for the alleged non-compliances.

The recognised stock exchange shall, in appropriate cases, under the applicable
provisions of the Companies Act, 2013, file a petition for winding up the company or
make a request to the Registrar of Companies to strike off the name of the company from
the register.

Public notice after Delisting Order [Regulation 32 (5)]

Where the recognized stock exchange passes the delisting order, it shall, -
(a) forthwith publish a notice in one English national newspaper with wide circulation, one Hindi national
newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where
the relevant recognised stock exchange is located.
The following disclosures are to be made in the notice –
• The fact of such delisting;
• The name and address of the company;
• The fair value of the delisted equity shares; and
• The names and addresses of the promoters of the company who would be liable under sub-regulation (4)
of regulation 33 of these regulations.
(b) inform all other stock exchanges where the equity shares of the company are listed, about such delisting; and
(c) upload a copy of the said order on its website.
Rights of public shareholders in case of compulsory delisting (Regulation 33)
Where the equity shares of a company are compulsorily delisted by a recognised stock exchange, the recognised
stock exchange shall appoint an independent valuer who shall determine the fair value of the delisted equity shares.
The recognised stock exchange shall form a Panel of expert valuers and from the said Panel, the valuer shall be
appointed. The value of the delisted equity shares shall be determined by the valuer as prescribed.
The promoter of the company shall acquire the delisted equity shares from the public shareholders by paying them
the value determined by the valuer, within three months of the date of delisting from the recognised stock exchange,
subject to the option of the public shareholders to retain their shares.
The promoter shall be liable to pay interest at the rate of ten percent per annum to all the shareholders, who offer
their shares under the compulsory delisting offer, if the price payable is not paid to all the shareholders within the
time specified.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 261

However, in case the delay was not attributable to any act or omission of the acquirer or was caused due to the
circumstances beyond the control of the acquirer, the SEBI may grant waiver from the payment of such interest.

CONSEQUENCES OF COMPULSORY DELISTING

Where a company has been compulsorily delisted, the company, its whole-time directors, persons responsible for
ensuring compliance with the securities laws, its promoters and the companies which are promoted by any of them
shall not directly or indirectly access the securities market or seek listing of any equity shares or act as an
intermediary in the securities market for a period of 10 years from the date of such delisting.

Procedure for Compulsory Delisting

Constitution of Panel by Recognised stock exchange to take decision regarding the

compulsory delisting by the exchange

Public notice of compulsory delisting by recognized stock exchange in one English

national, one Hindi national and one vernacular newspaper of the region where the
relevant recognized stock exchange is located

The recognised stock exchange shall give above mentioned notice giving a time
period of not less than 15 working days from the date of such notice, within which
representations may be made to the recognised stock exchange by any person
aggrieved by the proposed delisting

Delisting order by the recognized stock exchange

Public notice after delisting order by recognized stock exchange in one English
national, one Hindi national and one vernacular newspaper of the region where the
relevant recognized stock exchanges is located, of the fact of such delisting and
information to all the stock exchanges where the equity shares of the company
listed and also on its website

Appointment of independent Valuer

Determination of the fair value of the delisted equity shares by the Independent
valuers appointed by the recognized stock exchange

Acquisition of shares by the promoters from the public shareholders at determined

fair value

Company/ whole-time directors/ persons responsible for ensuring compliance

with the securities laws/ Promoters can neither access securities market nor seek
listing for a period of 10 years
 262  Lesson 8 • EP-SLCM

SPECIAL PROVISIONS FOR DELISTING

Delisting of equity shares of small Companies (Regulation 35)

Equity shares of a company may be delisted from all the recognised stock exchanges where they are listed, without
following the procedure in Chapter IV (Exit Opportunity) of these regulations, if,-

the company has a paid the number of equity shares of the company has not
up capital not exceeding the company traded on each been suspended by any
10 crore rupees and net such recognised stock exchange of the recognised
worth not exceeding 25 during the 12 calendar months stock exchanges having
crore rupees as on the immediately receding the date nationwide trading
last date of preceding of board meeting held for terminals for any non-
financial year consideration of the proposal compliance in the
of delisting, is less than 10% of preceding one year
the total number of shares of
the company

Delisting of equity shares may be made if, in addition to fulfilment of the requirements of regulation 10 (Approval
by the Board of Directors) and regulation 11 (Approval by shareholders), the following conditions are fulfilled:-
(a) acquirer appoints a Manager to the offer and decides an exit price after consultation;
(b) the exit price offered to the public shareholders shall not be less than the floor price determined in terms of
clause (e) of sub-regulation (2) of regulation 8 of the Takeover Regulations;
(c) the acquirer writes individually to all the public shareholders of the company informing them of its intention
to get the equity shares delisted, the exit price together with the justification therefor and seeking their
consent for the proposal for delisting;
(d) the public shareholders, irrespective of their numbers, holding ninety percent or more of the public
shareholding give their consent in writing to the proposal for delisting, and consent either to sell their equity
shares at the price offered by the acquirer or to continue to hold the equity shares even if they are delisted;
(e) the acquirer completes the process of inviting the positive consent and finalisation of the proposal for
delisting of equity shares within seventy five working days of the first communication made under clause (c);
(f) the acquirer makes payment of consideration in cash within fifteen working days from the date of expiry of
seventy five working days mentioned in clause (e).

The communication made to the public shareholders under clause (c) shall contain justification for the offer price
and specifically mention that consent for the proposal would include consent for dispensing with the exit price
discovery through reverse book building method.
The acquirer shall be liable to pay interest at the rate of ten percent per annum to all the shareholders, whose bids
have been accepted in the delisting offer, is not paid to all the shareholders within the time specified thereunder.
However, in case the delay was not attributable to any act or omission of the acquirer or was caused due to the
circumstances beyond the control of the acquirer, the SEBI may grant waiver from the payment of such interest.
The relevant recognised stock exchange may delist such equity shares upon satisfying itself of compliance with this
regulation.
 Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 263

Delisting of Equity Shares of Companies Listed on Innovators Growth Platform after making an Initial
Public Offer (Regulation 36)
A company whose equity shares are listed and traded on the innovators growth platform pursuant to an initial
public offer may be delisted from the innovators growth platform, if –
(a) such delisting is approved by the Board of Directors of the company;
(b) such delisting is approved by the shareholders of the company by a special resolution passed through postal
ballot or e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholders
in relation to such resolution. However, the special resolution shall be acted upon only if the votes cast by the
majority of public shareholders are in favour of such exit proposal;
(c) delisting price is based on a floor price determined in terms of regulation 8 of Takeover Regulations, as may
be applicable, and an additional delisting premium justified by the acquirer;
(d) the post offer shareholding of the acquirer along with the persons acting in concert with it, taken together
with the shares tendered reaches seventy five per cent of the total issued shares of that class and at least fifty
per cent shares of the public shareholders as on date of the board meeting are tendered and accepted; and
(e) the recognised stock exchange, on which its shares are listed, approves of such delisting.

Delisting in case of winding up of a company and de-recognition of a stock exchange

In case of winding up proceedings of a company whose equity shares are listed on a recognised stock exchange,
the rights, if any, of the shareholders of such company shall be in accordance with the laws applicable to those
proceedings. Where the SEBI withdraws recognition granted to a stock exchange or refuses renewal of
recognition to it, the SEBI may, in the interest of investors pass appropriate order in respect of the status of
equity shares of the companies listed on that stock exchange.

Question:
The equity Shares of XYZ limited have been delisted from the stock exchange. When can an application
be made for listing of equity sahres of XYZ limited?
Answer:
No application for listing shall be made in respect of equity shares of a company which have been delisted under
Chapter III (Voluntary Delisting) or under Chapter VI (Exit Opportunity in case delisting of equity shares of a
company from all the recognised stock exchanges), for a period of 3 years from the delisting and which have
been delisted under Chapter V (Compulsory Delisting), for a period of 10 years from the delisting, except the
following:
(a) whose equity shares have been delisted pursuant to a resolution plan under section 31 of the Insolvency
Code;
(b) whose equity shares are listed and traded on the innovators growth platform pursuant to an initial public
offer and which is delisted from the said platform;
(c) whose equity shares have been delisted in terms of regulation 35 (Delisting of equity shares of small
companies).

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS (REGULATION 42)

The SEBI may, in the interest of investors or for the development of the securities market, relax the strict enforcement
of any requirement of these regulations, if the SEBI is satisfied that-
a) the requirement is procedural in nature; or
b) any disclosure requirement is not relevant for a particular class of industry or company; or
 264  Lesson 8 • EP-SLCM

c) the non-compliance was caused due to factors beyond the control of the acquirer.

For seeking above mentioned relaxation, the acquirer or the company shall file an application with the SEBI,
supported by a duly sworn affidavit, providing details of such relaxation of the regulations and the grounds on
which the relaxation has been sought and pay a non-refundable fee of rupees one lakh along with the application.
Further, the SEBI may also exempt any person or class of persons from the operation of all or any of the provisions
of these regulations for a period as may be specified but not exceeding twelve months, for furthering innovation
relating to testing new products, processes, services, business models, etc. in live environment of regulatory sandbox
in the securities markets.
Explanation,- For the purposes of these regulations, “regulatory sandbox” means a live testing environment where
new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the Board.
ROLE OF COMPANY SECRETARY IN DELISTING
The Board of Directors of the company, before considering the proposal of delisting, shall appoint a Peer Review
Company Secretary, who shall carry out the due-diligence and submit a report to the Board of Directors of the
company certifying that the buying, selling and dealing in the equity shares of the company carried out by the
acquirer or its related entities and the top twenty five shareholders is in compliance with the applicable provisions
of securities laws including compliance with these regulations.
The SEBI has widen the area of responsibilities of a Company Secretary by mandating a listed company to appoint
Company Secretary to act as compliance officer under the SEBI (LODR) Regulations. Being a compliance officer, it is
the responsibility of a Company Secretary to look after and ensure timely compliances of various SEBI regulations.
In case of non-compliance with the listing regulation a stock exchange may delist the securities of a company.
Apart from this, a Company Secretary has to appoint and co-ordinate with various intermediaries, regulators, etc.
and advise the Board of Directors, the various requirements of Delisting.

LESSON ROUND-UP

• Delisting of securities means permanent removal of securities of a listed company from a stock exchange.
As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.
• Delisting can be voluntary or compulsory.
• SEBI has notified the SEBI (Delisting of Equity Shares) Regulations, 2021 by its notification dated June
10, 2021.
• The delisting regulations are applicable to delisting of equity shares of a company from all or any of the
recognised stock exchanges where such shares are listed.
• SEBI (Delisting of Equity Shares) Regulations, 2021 provides the special provisions for small companies,
companies listed on innovators growth platform and for delisting by operation of law.
• There are certain circumstances as prescribed by the SEBI where delisting is not permissible.
• In voluntary delisting, a company decides its own to permanently remove its securities from stock exchange.
• A recognised stock exchange may by order delist any equity shares of a company on any grounds
prescribed under the Securities Contracts (Regulation) Act, 1956.
• When a company has been compulsorily delisted the company, its whole-time directors, persons
responsible for ensuring compliance with the securities laws, its promoters and the companies which are
promoted by any of them shall not directly or indirectly access the securities market or seek listing of any
equity shares or act as an intermediary in the securities market for a period of ten years from the date of
such delisting.
Lesson 8 • SEBI (Delisting of Equity Shares) Regulations, 2021 265

GLOSSARY

Bid An offer of a price to buy it as an auction. Business on the stock exchange is done
through bids. Bid also refers to the price one is willing to pay.
Delisting Exchange The exchange from which securities of a company are proposed to be delisted.
Offer Price Price at which units in trust can be bought it often includes an entry fee. It also refers
to the price at which securities are offered to the public.
Public Public means persons other than, the promoter and promoter group; subsidiaries and
associates of the company.
Public Shareholding Means equity shares of the company held by public including shares underlying the
depository receipts if the holder of such depository receipts has the right to issue
voting instruction and such depository receipts are listed on an international exchange
in accordance with the Depository Receipts Scheme, 2014.
Working Days It means the working days of the SEBI.

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation)
1. Discuss the conditions and procedure for delisting where exit opportunity is required.
2. Explain the conditions for delisting under SEBI (Delisting of Equity Shares) Regulations, 2021.
3. Can cash component of the escrow account in the delisting offer process be maintained in an interest
bearing account?
4. What are the rights of public shareholders in case of compulsory delisting of securities?
5. Write a note on the following-
a. Obligations of the Manager to the offer
b. Discovered Price
c. Counter Offer
d. Public announcement in Voluntary Delisting from all the Stock Exchanges
6. Hawai Ltd. is public company with a paid-up share capital of Rs.8 crores as per the latest audited balance
sheet. The net worth of the company for the year 2020-21 was 22 crores. The company is listed on Bombay
Stock Exchange (BSE). The Board plans for the delisting of its Equity Shares from the exchange. As a
Company Secretary, advice the Board.
266  Lesson 8 • EP-SLCM

LIST OF FURTHER READINGS

• SEBI Notifications
• SEBI Circulars

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/
• https://www.nseindia.com/
• https://www.bseindia.com/
 SEBI (Share Based Employee
Benefits Regulations, 2014 –
Lesson 9 An Overview
Key Concepts One Learning Objectives
Should Know
To understand the:
• Appreciation
• Various provisions of SEBI (Share Based Employee Benefits)
• Employee Regulations, 2014 in respect of various types of Schemes and its
• Employee Stock applicability
Option Scheme
• Provisions covered under Companies Act, 2013
• Employee Stock • Scheme implementation and process
Purchase Scheme
• Administration of Specific Scheme
• General Employee
Benefits Scheme • Powers of SEBI
• Direction of SEBI
• Exercise
• Provisions related to stock options under SEBI (Listing Obligations
• Exercise Period & Disclosure Requirements) Regulations, 2015 and SEBI
• Exercise Price (Prohibition of Insider Trading) Regulations, 2015
• Grant
• Grant Date
Lesson Outline
• Introduction • Administration of Specific
• Option Schemes
• Genesis
• Option Grantee • Power of SEBI to Relax Strict
• Provisions under Companies
• Relevant Date Act,2013 Enforcement of the
Regulations
• Retirement • SEBI (Share Based Employee
Benefit Scheme Benefits) Regulations, 2014 • Directions by SEBI & Action in
case of Default
• Stock • Applicability & Non-
Applicability • Provisions under SEBI (Listing
Appreciation
Obligations & Disclosure
Right or SAR • Important Definitions Requirements) Regulations,
• Stock • Schemes – Implementation 2015 for ESOP/ ESPS
Appreciation &Process • Provisions under SEBI
Right Scheme • Eligibility Criteria (Prohibition of Insider
• Vesting • Compensation Committe Trading) Regulations, 2015 for
ESOP/ESPS
• Vesting period • Shareholders approval
• Procedure for issuing ESOP by
• Variations of terms of the a Listed Company
schemes
• Role of Company Secretary
• Winding up of the schemes
• LESSON ROUND-UP
• Non-Transferability
• GLOSSARY
• Listing
• TEST YOURSELF
• Schemes implemented by
unlisted companies • LIST OF FURTHER READINGS
• Compliances and conditions • OTHER REFERENCES
 268  Lesson 9 • EP-SLCM

Regulatory Framework
Section 1- Applicability of the Companies Act, 2013
Section-2 Key Definitions
Section 3-Formation of Company
Section 406- Nidhi Companies
Section 455- Dormant Company

INTRODUCTION
A company always wants to retain the top talent in the company those working for the future success of the
organization. Further, the human capital or the work force is always the vital component of a business organization
and those executives who possess the potential to take the organization to newer height need to be remunerated
suitably. One of the key non-financial remuneration or incentive may be issued to the employee in form of Employee
Stock Option.
SEBI (Share Based Employee Benefits) Regulations,2014 provide for regulation of all schemes by companies for the
benefit of their employees involving dealing in shares, directly or indirectly, with a view to facilitate smooth
operation of such schemes while preventing any possible manipulation and matters connected therewith or
incidental thereto.
Employee stock option plan (ESOP) is an employee-ownership plan that provides an option with an opportunity to
company’s workforce to gain ownership interest in the company. It develops the sense of belongingness between
the workforce and company. In an ESOP, companies provide their employees with stock options, often at no up-front
cost to the employees. ESOP shares, however, are part of employees’ remuneration for work performed. Shares are
allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. This can
be one of the retirement plans created by the companies for their work force.
GENESIS
SEBI had (i) issued the SEBI (ESOS & ESPS) Guidelines, 1999 (“ESOS Guidelines”) to enable listed companies to
reward their employees through stock option schemes and stock purchase schemes; and (ii) notified the SEBI (Issue
of Sweat Equity) Regulations, 2002 (“Sweat Equity Regulations”) to regulate issuance of sweat equity shares by
listed companies in accordance with Section 54 of the Companies Act, 2013.
Under the ESOS Guidelines, an ESOS/ESPS trust can only distribute options/shares to its employees issued by the
company. However, ESOS Guidelines, till recently, were silent regarding acquisition of shares from secondary
market. It came to the notice of SEBI that some listed companies were framing their own employees benefit schemes
wherein trusts were set up to deal in their own securities in the secondary market, which was not envisaged within
the purview of the ESOS Guidelines.
Therefore, to regulate the listed companies from framing any employee benefit scheme involving acquisition of own
securities from the secondary market, it was felt that secondary market acquisitions by trusts being an internationally
accepted practice should be considered subject to necessary safeguards to prevent misuse. It was also recognized
that there are many kinds of employee benefit schemes involving own securities which being outside the purview
of extant ESOS Guidelines are unregulated.
Accordingly, taking into account the wider perspective of employee benefit scheme in India as well as overseas and
with the intent to align the provisions of the extant regulations with the Companies Act, 2013, the SEBI notified the
SEBI (Share Based Employee Benefits) Regulations, 2014.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 269

PROVISIONS UNDER COMPANIES ACT, 2013

Section 2(37) of the Companies Act, 2013 defines “employees’ stock option” as the option given to the directors, officers or
employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors,
officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-
determined price.

As per Section 62(1) (b) of Companies Act 2013, a Company can offer shares through employee stock option to
their employees through special resolution subject to the conditions specified under Rule 12 and Rule 16 of
Companies (Share Capital and Debentures) Rules 2014. However, pursuant to notification dated 5th June, 2015,
the private company can issue said shares to its employee by passing ordinary resolution in the General Meeting.
For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’ means –

However, in case of Startup Company, as defined in notification number G.S.R. 127(E), dated 19th February, 2019
issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry,
Government of India, the conditions mentioned in table point (i) and (ii) shall not apply upto ten years from the date
of its incorporation or registration.

Question: In terms of the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014
and the Companies Act, 2013, independent directors are not entitled to ESOPs. However,
prior to commencement of these provisions, independent directors were eligible to receive
ESOPs. In light of this, if an independent director has been granted ESOPs before
commencement of the said provisions and such options remains to be exercised, can he/she
still exercise such ESOPs?
Answer: Yes, the restriction on grant of ESOPs to independent director applies only on fresh grants of
ESOPs after commencement of the aforesaid provisions. Any grant already made prior to
commencement of these provision shall remain valid, i.e., an independent director can exercise
such ESOPs subject of fulfil of terms and conditions of the ESOPs schemes framed by the Companies
in terms of the relevant regulations.

SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014

The SEBI (Share Based Employee Benefits) Regulations, 2014 provides for regulation of all schemes by companies
for the benefit of their employees involving dealing in shares, directly or indirectly, with a view to facilitate smooth
operation of such schemes while preventing any possible manipulation and matters connected therewith or
incidental thereto.
 270  Lesson 9 • EP-SLCM

Regulatory Framework

Chapter Deals with

I Definitions
II Schemes – Implementation and Process
III Administration of Specific Schemes
III-A Power to Relax Strict Enforcement of the Regulations
IV Miscellaneous Provisions

APPLICABILITY

COMPANIES COVERED
The provisions of these regulations shall apply to any company whose shares are listed on a recognised stock
exchange in India, and has a scheme:

NON- APPLICABILITY
• Shares issued to employees in compliance with the provisions pertaining to preferential allotment as specified
in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• The provisions pertaining to preferential allotment as specified in SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018 shall not be applicable in case of a company issuing new shares in pursuance
and compliance of these regulations.

IMPORTANT DEFINITIONS
“Appreciation” means the difference between the market price of the share of a company on the date of exercise of
stock appreciation right (SAR) or vesting of SAR, as the case may be, and the SAR price.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 271

“Employee”
(i) a permanent employee of the company who has been working in India or outside India; or
(ii) a director of the company, whether a whole time director or not but excluding an independent director; or
(iii) an employee as defined in clause (i) or (ii) of a subsidiary, in India or outside India, or of a holding company
of the company
but does not include—
(a) an employee who is a promoter or a person belonging to the promoter group; or
(b) a director who either himself or through his relative or through any body corporate, directly or indirectly,
holds more than ten per cent of the outstanding equity shares of the company.
“Employee Stock Option Scheme or ESOS” means a scheme under which a company grants employee stock option
directly or through a trust.
“Employee Stock Purchase Scheme or ESPS” means a scheme under which a company offers shares to employees,
as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the
purposes of the scheme.
“General Employee Benefits Scheme or GEBS” means any scheme of a company framed in accordance with these
regulations, dealing in shares of the company or the shares of its listed holding company, for the purpose of employee
welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident,
disability, death or scholarship funds, or such other benefit as specified by such company.
“Exercise” means making of an application by an employee to the company or to the trust for issue of shares or
appreciation in form of cash, as the case may be, against vested options or vested SARs in pursuance of the schemes
covered under Part A or Part C of Chapter III of these regulations, as applicable.
“Exercise period” means the time period after vesting within which an employee should exercise his right to apply
for shares against the vested option or appreciation against vested SAR in pursuance of the schemes covered under
Part A or Part C of Chapter III of these regulations, as applicable.
“Exercise price” means the price, if any, payable by the employee for exercising the option or SAR granted to him in
pursuance of the schemes covered under Part A or Part C of Chapter III of these regulations, as the case may be.
“Grant” means the process by which the company issues options, SARs, shares, or any other benefits under any of
the schemes.
“Grant Date” means the date on which the compensation committee approves the grant.
“Option” means the option given to an employee which gives him a right to purchase or subscribe at a future date,
the shares offered by the company, directly or indirectly, at a pre-determined price.
“Option Grantee” means an employee having a right but not an obligation to exercise an option in pursuance of
ESOS.
“Relevant Date” means,-
(i) in the case of grant, the date of the meeting of the compensation committee on which the grant is made; or
(ii) in the case of exercise, the date on which the notice of exercise is given to the company or to the trust by the
employee.
“Retirement Benefit Scheme or RBS” means a scheme of a company, framed in accordance with these regulations,
dealing in shares of the company or the shares of its listed holding company, for providing retirement benefits to the
employees subject to compliance with existing rules and regulations as applicable under laws relevant to retirement
benefits in India.
 272  Lesson 9 • EP-SLCM

“Stock Appreciation Right or SAR” means a right given to a SAR grantee entitling him to receive appreciation for a
specified number of shares of the company where the settlement of such appreciation may be made by way of cash
payment or shares of the company.
Explanation – An SAR settled by way of shares of the company shall be referred to as equity settled SAR.
“Stock Appreciation Right Scheme” means a scheme under which a company grants SAR to employees.
“Vesting” means the process by which the employee becomes entitled to receive the benefit of a grant made to him
under any of the schemes.
“Vesting period” means the period during which the vesting of option, SAR or a benefit granted under any of the
schemes takes place.

SCHEMES - IMPLEMENTATION AND PROCESS

A company may implement schemes either :-
(a) directly or
(b) by setting up an irrevocable trust(s).
Direct Route

Direct Rout For esop's

• Company forms an Compensation commitee and define the eligibility criteria of ESOPs
• Issue fresh shares for ESOPs.
• After vesting period employees can exercise the option.
• On exercise of an option company issue the shares to the employees.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 273

Trust Route

TRUST ROUT FOR ESOP's

• Company forms an Employee Welfare Trust.
• Company grants Loan to the trust for subscribing shares.
• Company issues fresh shares to the Trust and options to the Employees.
• Employees exercies the options.
• Trust Transfers the Shares to the employee upon receipt of exercise price.
• Trust repays the loan to the company.

IMPLEMENTATION OF SCHEMES THROUGH TRUST

1. If a company has implemented the scheme through a trust and the same has to be decided upfront at the time
of taking approval of the shareholders for setting up the schemes.
However, if the scheme involves secondary acquisition or gift or both, then it is mandatory for the company
to implement such scheme(s) through a trust(s).
2. A company may implement several schemes as permitted under these regulations through a single trust.
However, such single trust shall keep and maintain-
• proper books of account;
• records and documents;
for each such scheme so as to explain its transactions and to disclose at any point of time the financial position
of each scheme and in particular give a true and fair view of the state of affairs of each scheme.
3. SEBI may specify the minimum provisions to be included in the trust deed under which the trust is formed,
and such trust deed and any modifications thereto shall be mandatorily filed with the stock exchange in India
where the shares of the company are listed.
 274  Lesson 9 • EP-SLCM

4. A person shall not be appointed as a trustee, if he-

(I) is a director, key managerial personnel or promoter of the company or its holding, subsidiary or
associate company or any relative of such director, key managerial personnel or promoter; or
(ii) beneficially holds ten percent or more of the paid-up share capital of the company;
However, where individuals or ‘one person companies’ as defined under the Companies Act, 2013 are
appointed as trustees, there shall be a minimum of two such trustees, and in case a corporate entity is
appointed as a trustee, then it may be the sole trustee.
5. The trustees of a trust, which is governed under these regulations, shall not vote in respect of the shares held
by such trust, so as to avoid any misuse arising out of exercising such voting rights.
6. The trustee should ensure that appropriate approval from the shareholders has been obtained by the
company in order to enable the trust to implement the scheme(s) and undertake secondary acquisition for
the purposes of the scheme(s).
7. The trust shall not deal in derivatives, and shall undertake only delivery based transactions for the purposes
of secondary acquisition as permitted by these regulations.
8. The company may lend monies to the trust on appropriate terms and conditions to acquire the shares either
through new issue or secondary acquisition, for the purposes of implementation of the scheme(s).
9. For the purposes of disclosures to the stock exchange, the shareholding of the trust shall be shown as ‘non-
promoter and non-public’ shareholding.
Explanation: Shares held by the trust shall not form part of the public shareholding which needs to be
maintained at a minimum of twenty five percent as prescribed under the Securities Contracts (Regulations)
Rules, 1957
10. Secondary acquisition in a financial year by the trust shall not exceed two percent of the paid up equity
capital as at the end of the previous financial year.
11. The total number of shares under secondary acquisition held by the trust shall at no time exceed the below
mentioned prescribed limits as a percentage of the paid up equity capital as at the end of the financial year
immediately prior to the year in which the shareholder approval is obtained for such secondary acquisition:

Sl. No. Particulars Limit

A For the schemes enumerated in Part A, Part B or Part C of Chapter III of these 5%
regulations
B For the schemes enumerated in Part D, or Part E of Chapter III of these regulations 2%
C For all the schemes in aggregate 5%
Explanation 1.- The above limits shall automatically include within their ambit the expanded capital of the
company where such expansion has taken place on account of corporate action including issue of bonus
shares, split or rights issue.
Explanation 2.- If a company has multiple trusts and schemes, the aforesaid ceiling limit shall be applicable for all
such trusts and schemes taken together at the company level and not at the level of individual trust or scheme.
Explanation 3.- The above ceiling limit will not be applicable where shares are allotted to the trust by way of
new issue or gift from promoter or promoter group or other shareholders.
Explanation 4.- In the event that the options, shares or SAR granted under any of the schemes exceeds the
number of shares that the trust may acquire through secondary acquisition, then such shortfall of shares
shall be made up by the company through new issue of shares to the trust in accordance with the provisions
of new issue of shares under the applicable laws.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 275

12. The un-appropriated inventory of shares which are not backed by grants, acquired through secondary
acquisition by the trust under Part A, Part B or Part C of these regulations, shall be appropriated within a
reasonable period which shall not extend beyond the end of the subsequent financial year.
However, if such trust (s) existing as on the date of notification of these regulations are not able to appropriate
the un-appropriated inventory within one year of such notification, the same shall be disclosed to the stock
exchange(s) at the end of such period and then the same shall be sold on the recognized stock exchange(s) where
shares of the company are listed, within a period of five years from the date of notification of these regulations.

Keeping in view point No. 12, for the purpose of clarifying the inventory as un-appropriated, whether
the appropriation made to scheme can be considered as compliance?
Appropriation towards ESPS/ESOP/SAR General Employee Benefit Scheme/Retirement Benefit Scheme
by October 27, 2015 would be considered as compliance with proviso to regulation 3(12). The company
may appropriate towards individual employees or sell in the market during next four years so that no un-
appropriated inventory remains thereafter.

13. The trust shall be required to hold the shares acquired through secondary acquisition for a minimum period
of six months except where they are required to be transferred in the circumstances enumerated in this
regulation, whether off market or on the platform of stock exchange.

Shares have been acquired by the trust from secondary market and held for the minimum period of
six months in terms of regulation 3(13) of SEBI (SBEB) Regulations, 2014 pursuant to which the
same are transferred to employees under ESPS. Whether the requirement of Lock- in, in terms of
regulation 22(2) of these regulations, shall be applicable to shares received by employees?
No, lock-in shall not be applicable to the shares received by employees.

14. The trust shall be permitted to undertake off-market transfer of shares only under the following circumstances:
a) transfer to the employees pursuant to scheme(s);
b) when participating in open offer under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, or when participating in buy-back, delisting or any other exit offered by the
company generally to its shareholders.
15. The trust shall not become a mechanism for trading in shares and hence shall not sell the shares in secondary
market except under the following circumstances:
a) cashless exercise of options under ESOS as prescribed in these regulations;
b) on vesting or exercise, as the case may be, of SAR under ESPS as prescribed in these regulations;
c) in case of emergency for implementing the General Employee Benefits Scheme (GEBS) and Retirement
Benefit Scheme (RBS) as mentioned in these regulations, and for this purpose -
(i) the trustee shall record the reasons for such sale; and
(ii) money so realised on sale of shares shall be utilised within a definite time period as stipulated
under the scheme or trust deed.
d) participation in buy-back or open offers or delisting offers or any other exit offered by the company
generally to its shareholders, if required;
e) for repaying the loan, if the un-appropriated inventory of shares held by the trust is not appropriated
within the timeline as provided above.
f) winding up of the scheme(s); and
g) based on approval granted by the SEBI to an applicant, for the reasons recorded in writing in respect
of the schemes covered in these regulations, upon payment of a non-refundable fee of rupees one lakh
along with the application by way of direct credit in the bank account through NEFT/RTGS/IMPS or
 276  Lesson 9 • EP-SLCM

any other mode allowed by RBI or by way of a banker’s cheque or demand draft payable at Mumbai in
favour of SEBI.
16. The trust shall be required to make disclosures and comply with the other requirements applicable to insiders
or promoters under the SEBI (Prohibition of Insider Trading) Regulations, 2015 or any modification or re-
enactment thereto.

ELIGIBILITY CRITERIA
An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee.
“Employee” means –

Explanation - Where such employee is a director nominated by an institution as its representative on the board
of directors of the company –
(i) The contract or agreement entered into between the institution nominating its employee as the director
of a company, and the director so appointed shall, inter alia, specify the following:-
a. whether the grants by the company under its scheme(s) can be accepted by the said employee in his
capacity as director of the company;
b. that grant if made to the director, shall not be renounced in favour of the nominating institution; and
c. the conditions subject to which fees, commissions, other incentives, etc. can be accepted by the
director from the company.
(ii) The institution nominating its employee as a director of a company shall file a copy of the contract or
agreement with the said company, which shall, in turn file the copy with all the stock exchanges on which
its shares are listed.
(iii) The director so appointed shall furnish a copy of the contract or agreement at the first board meeting of
the company attended by him after his nomination.

COMPENSATION COMMITTEE

• A company shall constitute a compensation committee for administration and

superintendence of the schemes.
• However, the company may designate such of its other committees as compensation
committee if they fulfil the criteria as prescribed in these regulations. Further that
1 where the scheme is being implemented through a trust the compensation committee
shall delegate the administration of such scheme(s) tothe trust.

• The compensation committee shall be a committee of such members of the board of

directors of the company as provided under section 178 of the Companies Act, 2013,
as amended or modified from time to time.
2

• The compensation committee shall, inter alia, formulate the detailed terms and
conditions of the schemes which shall include the provisions as specified by the SEBI
in this regard.
3

• The compensation committee shall frame suitable policies and procedures to ensure
that there is no violation of securities laws, as amended from time to time, including
the SEBI (Prohibition of Insider Trading) Regulations, 2015 and the SEBI (Prohibition
of Fraudulent and Unfair Trade Practices Relating to the Securities Market)
4 Regulations, 2003 by the trust, the company and its employees, as applicable.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 277

SHAREHOLDERS APPROVAL
A Scheme shall not be offered to employees of a
company unless the shareholders of the
company approve it by passing a special
resolution in the general meeting.

Explanatory statement shall be annexed with

notice and the resolution proposed to be
passed by shareholders for the schemes shall
Requirement for Shareholders Approval
include the information as specified by the
SEBI in this regard.

Approval of shareholders by way of

separate resolution in the general meeting
shall be obtained by the company in
4 below mention cases.

a) Secondary acquisition for implementation of the schemes.

Such approval shall mention the percentage of secondary acquisition (subject to limits specified under these
regulations) that could be undertaken;
b) Secondary acquisition by the trust in case the share capital expands due to capital expansion undertaken by
the company including preferential allotment of shares or qualified institutions placement, to maintain the
five percent cap as prescribed in these regulations of such increased capital of thecompany;
c) Grant of option, SAR, shares or other benefits, as the case may be, to employees of subsidiary or holding company;
d) Grant of option, SAR, shares or benefits, as the case may be, to identified employees, during any one year,
equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of
the company at the time of grant of option, SAR, shares or incentive, as the case maybe.

VARIATION OF TERMS OF THE SCHEMES

The Company shall not vary the terms of the schemes unless special resolution is to be passed
in the General Meeting provided that such variation is not prejudicial to the interests of the
employees

The Company may by special resolution in a general meeting vary the terms of the schemes
offered pursuant to an earlier resolution of the general body but not yet exercised by the employee
provided such variation such variation is not prejudicial to the interests of the employees

Notice for passing special resolution for variation of terms of the schemes shall disclose full details
of the variation, the rationale therefore, and the details of the employees who are beneficiaries of
such variation

Variation may be includes reprice the options, SAR or shares, as the case may be which are not
exercised, whether or not they have been vested if the schemes were rendered unattractive due to
fall in the price of the shares in the stock market; and

The company shall ensures that such repricing shall not be detrimental to the interest of the
employees and approval of the shareholders in general meeting has been obtained for such
repricing

Note : The provisions of shareholders’ approval shall apply to such variation of terms as they apply to the original
grant of option, SAR, shares or other benefits, as the case may be.
 278  Lesson 9 • EP-SLCM

WINDING UP OF THE SCHEMES

In case of winding up of the schemes being implemented by a company through trust, the excess monies or shares
remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment of loan or by way of
distribution to employees as recommended by the compensation committee.

NON-TRANSFERABILITY
• Option, SAR or any other benefit granted to an employee under the regulations shall not be transferable to any person.
• No person other than the employee to whom the option, SAR or other benefit is granted shall be entitled to
the benefit arising out of such option, SAR, benefit etc.
• However, in case of ESOS or SAR, under cashless exercise, the company may itself fund or permit the
empanelled stock brokers to fund the payment of exercise price which shall be adjusted against the sale
proceeds of some or all the shares, subject to the provisions of the applicable law or regulations.
• The option, SAR, or any other benefit granted to the employee shall not be pledged, hypothecated, mortgaged
or otherwise alienated in any other manner.
• In the event of death of the employee while in employment, all the options, SAR or any other benefi granted
to him under a scheme till such date shall vest in the legal heirs or nominees of the deceased employee.
• In case the employee suffers a permanent incapacity while in employment, all the options, SAR or any other
benefit granted to him under a scheme as on the date of permanent incapacitation, shall vest in him on that day.
• In the event of resignation or termination of the employee, all the options, SAR, or any other benefit which are
granted and yet not vested as on that day shall expire.
• However, an employee shall, subject to the terms and conditions formulated by the compensation committee,
be entitled to retain all the vested options, SAR, or any other benefi covered by these regulations.
• In the event that an employee who has been granted benefits under a scheme is transferred or deputed to an
associate company prior to vesting or exercise, the vesting and exercise as per the terms of grant shall
continue in case of such transferred or deputed employee even after the transfer or deputation.

LISTING
In case new issue of shares is made under any scheme, shares so issued shall be listed immediately in any recognised
stock exchange.

In case of the existing shares are listed, following conditions need to be fulfilled :-

Scheme is in compliance A statement specified by the As and when an exercise is

with these regulations SEBI in this regard, is filed made, the company notifies the
and the company has concerned stock exchange as
obtained an in-principle per the statement as specified
approval from the stock by the SEBI in this regard
exchanges

SCHEMES IMPLEMENTED BY UNLISTED COMPANIES

The shares arising after the initial public offering (“IPO”) of an unlisted company, out of options or SAR granted
under any scheme prior to its IPO to the employees shall be listed immediately upon exercise in all the recognised
stock exchanges where the shares of the company are listed subject to compliance with the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2018.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 279

COMPLIANCES AND CONDITIONS

1. The company shall not make any fresh grant which involves allotment or transfer of shares to its employees under
any schemes formulated prior to its IPO and prior to the listing of its equity shares (‘pre-IPO scheme’) unless:
• Such pre-IPO scheme is in conformity with these regulations; and
• Such pre-IPO scheme is ratified by its shareholders subsequent to the IPO. However, the ratification
under clause (ii) may be done at any time prior to grant of new options or shares orSAR under such
pre-IPO scheme.
2. No change shall be made in the terms of options or shares or SAR issued under such pre-IPO schemes,
whether by repricing, change in vesting period or maturity or otherwise unless prior approval of the
shareholders is taken for such a change, except for any adjustments for corporate actions made in accordance
with these regulations.
3. For listing of shares issued pursuant to ESOS, ESPS or SAR , the company shall obtain the in-principle approval
of the stock exchanges where it proposes to list the said shares.
4. When holding company issues option, share, SAR or benefits to the employee of its subsidiary, the cost
incurred by the holding company for issuing such option, share, SAR or benefits shall be disclosed in the
‘notes to accounts’ of the financial statements of the subsidiary company.
5. In a case, if the subsidiary reimburses the cost incurred by the holding company in granting option, share,
SAR or benefits to the employees of the subsidiary, both the subsidiary as well as the holding company shall
disclose the payment or receipt, as the case may be, in the ‗notes to accounts‘ to their financial statements.
6. The company shall appoint a registered merchant banker for the implementation of schemes covered by
these regulations till the stage of obtaining in-principle approval from the stock exchanges in accordance
with clause (b) of regulation 10.
CERTIFICATE FROM AUDITORS
In case of company which has passed a resolution for the schemes under these regulations, the board of directors
shall at each annual general meeting place before the shareholders a certificate from the auditors of the company
that the scheme(s) has been implemented in accordance with these regulations and in accordance with the
resolution of the company in the general meeting.

DISCLOSURES
In addition to the information that a company is required to disclose, in relation to employee benefits under the
Companies Act, 2013, the board of directors of such a company shall also disclose the details of the scheme(s) being
implemented, as specified by the SEBI in this regard.

ACCOUNTING POLICIES
Any company implementing any of the share based schemes shall follow the requirements of the ‘Guidance Note on
Accounting for employee share-based Payments’ (Guidance Note)or Accounting Standards as may be prescribed by
the Institute of Chartered Accountants of India (ICAI) from time to time, including the disclosure requirements
prescribed therein.
Where the existing Guidance Note or Accounting Standard do not prescribe accounting treatment or disclosure
requirements for any of the schemes covered under these regulations, then the company shall comply with the
relevant Accounting Standard as may be prescribed by the ICAI from time to time.
 280  Lesson 9 • EP-SLCM

ADMINISTRATION OF SPECIFIC SCHEMES

Employee Stock Option Scheme (ESOS)

• The ESOS shall contain the details of the manner in which the scheme
will be implemented and operated. ESOS shall not be offered unless the
Administration and
disclosures, as specified by SEBI in this regard, are made by the company
Implementation to the prospective option grantees.

• The company granting option to its employees pursuant to ESOS will

Pricing have the freedom to determine the exercise price subject to conforming
to the accounting policies as specified in these regulation.

• There shall be a minimum vesting period of one year in case of ESOS.

Vesting Period • The company may specify the lock-in period for the shares issued
pursuant to exercise of option.

• The employee shall not have right to receive any dividend or to vote or in
Rights of the option holder any manner enjoy the benefits of a shareholder in respect of option
granted to him, till shares are issued upon exercise of option.

• The amount payable by the employee, if any, at the time of grant of option, -
» may be forfeited by the company if the option is not exercised by the
Consequence of failure to employee within the exercise period; or
exercise option » may be refunded to the employee if the options are not vested due to
non- fulfilment of conditions relating to vesting of option as per the
ESOS.
Note : In regards to Vesting period, where options are granted by a company under an ESOS in lieu of options held
by a person under an ESOS in another company which has merged or amalgamated with that company, the period
during which the options granted by the transferor company were held by him shall be adjusted against the
minimum vesting period.

EMPLOYEE STOCK PURCHASE SCHEME (ESPS)

Administration and Implementation Pricing and Lock-In

• The ESPS scheme shall contain the details of • The company may determine the price of
the manner in which the scheme will be shares to be issued under an ESPS, provided
implemented and operated. they conform to the provisions of accounting
policies under these regulations.
• Shares issued under an ESPS shall be locked-
in for a minimum period of one year from
the date of allotment.
• If ESPS is part of a public issue and the
shares are issued to employees at the same
price as in the public issue, the shares issued
to employees pursuant to ESPS shall not be
subject to lock-in.

Note : In regards to pricing and Lock-in,where shares are allotted by a company under an ESPS in lieu of shares
acquired by the same person under an ESPS in another company which has merged or amalgamated with the first
mentioned company, the lock-in period already under gone inrespect of shares of the transferor company shall be
adjusted against the lock-in period.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 281

Regulation 22(2) of the SEBI (SBEB) Regulations, 2014 prescribes lock-in of shares issued under ESPS for a
minimum period of one year from the date of allotment. Whether the said lock-in is applicable to the Trust,
if an ESPS scheme is implemented through Trust Route?
No, the Lock-in requirement is applicable at the level of employee and not at the level of trust. Lock-in in terms
of regulation 22(2) shall be applicable from the day shares are received by the employees.

STOCK APPRECIATION RIGHTS SCHEME (SARS)

Administration and Implementation

• The SAR scheme shall contain the details of the manner in which the scheme will be
implemented and operated;
• A company shall have the freedom to implement cash settled or equity settled SAR scheme;
• No SAR shall be offered unless the disclosures, as specified by Board in this regard, are made
by the company to the prospective SAR grantees.

Vesting

• There shall be a minimum vesting period of one year in case of SAR scheme.

Rights of the SAR holder

• The employee shall not have right to receive dividend or to vote or in any manner enjoy the
benefits of a shareholder in respect of SAR granted to him.

Note :
• In Point No. 1, in case of equity settled SAR scheme, if the settlement results in fractional shares, then the
consideration for fractional shares should be settled in cash.
• In Point No. 2, in a case where SAR is granted by a company under a SAR scheme in lieu of SAR held by the
same person under a SAR scheme in another company which has merged or amalgamated with the first
mentioned company, the period during which the SAR granted by the transferor company were held by the
employee shall be adjusted against the minimum vesting period.

GENERAL EMPLOYEE BENEFITS SCHEME (GEBS)

General Employee Benefits scheme or GEBS has been defined as any scheme of a company framed in accordance
with SBEB regulations, dealing in shares of the company or the shares of its listed holding company, for the purpose
of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness,
accident, disability, death or scholarship funds, or such other benefit as specified by such company. Therefore, any
employee welfare scheme holding / dealing in shares of the company or the shares of its listed holding company is
covered under the scope of SEBI (Share Based Employee Benefits) Regulations, 2014, including the timelines
prescribed thereunder.

Administration and Implementation

GEBS shall contain the details of the scheme and the manner in which the scheme shall be implemented and
operated. At no point in time, the shares of the company or shares of its listed holding company shall exceed ten
percent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as
appearing in its latest balance sheet for the purposes of GEBS.
 282  Lesson 9 • EP-SLCM

RETIREMENT BENEFIT SCHEME (RBS)

Administration and Implementation

Retirement benefit scheme may be implemented by a company provided it is incompliance with these regulations,
and provisions of any other law in force in relation to retirement benefits. The retirement benefit scheme shall
contain the details of the benefits under the scheme and the manner in which the scheme shall be implemented and
operated.
At no point in time, the shares of the company or shares of its listed holding company shall exceed ten per cent of
the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its
latest balance sheet for the purposes of RBS.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases.

SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations
for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new
products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities
markets.
Any exemption granted by the Board under sub-regulation (1) shall be subject to the applicant satisfying such
conditions as may be specified by the Board including conditions to be complied with on a continuous basis.

Explanation. — For the purposes of these regulations, “regulatory sandbox” means a live testing environment
where new products, processes, services, business models, etc. may be deployed on a limited set of eligible
customers for a specified period of time, for furthering innovation in the securities market, subject to such
conditions as may be specified by the Board.

Power to Relax Strict Enforcement of the Regulations

SEBI may suo motu or on an application made by a company, for reasons recorded in writing, grant relaxation from
strict compliance with any of these regulations subject to such conditions as the SEBI deems fit to impose in the
interests of investors in securities and the securities market.
A company making an application, shall pay a non-refundable fee of rupees one lakh by way of direct credit in the
bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by way of a banker’s cheque or
demand draft payable at Mumbai in favour of the Board.

DIRECTIONS BY THE SEBI AND ACTION IN CASE OF DEFAULT

The SEBI may issue any direction or order or undertake any measure in the interests of the investors or the securities
market, and deal with any contravention of these regulations, in exercise of its powers under the SEBI Act, 1992, the
Securities Contracts (Regulation) Act, 1956 or the Companies Act, 2013 and any statutory modification or re-
enactment thereto.
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 283

SEBI (LISTING OBLIGATIONS & DISCLOSURE REQUIREMENTS) REGULATIONS, 2015 FOR ESOP/ESPS
Regulation 17: Board of Directors

Sub-regulation 6 (a)
The board of directors shall recommend all fees or compensation, if any, paid to non-
executive directors, including independent directors and shall require approval of
shareholders in general meeting.

Sub-regulation 6 (c)
The approval of shareholders mentioned in clause (a), shall specify the limits for the
maximum number of stock options that may be granted to non-executive directors, in
any financial year and in aggregate. The approval of shareholders by special
resolution shall be obtained every year, in which the annual remuneration payable
to a single non-executive director exceeds fifty per cent of the total annual
remuneration payable to all non-executive directors, giving details of the remuneration
thereof.

Regulation 30: Disclosure of events or information

• Every listed entity shall make disclosures of any events or information which, in the opinion of the board of
directors of the listed company, is material, based on application of the guidelines for materiality. A listed
company shall disclose the following to stock exchange regarding options to purchase securities (including
any Share Based Employee Benefit (SBEB) Scheme) at the time of instituting the scheme and vesting or
exercise of options:
a) brief details of options granted;
b) whether the scheme is in terms of SEBI (SBEB) Regulations, 2014 (if applicable);
c) total number of shares covered by these options;
d) pricing formula;
e) options vested;
f) time within which option may be exercised;
g) options exercised;
h) money realized by exercise of options;
i) the total number of shares arising as a result of exercise of option;
j) options lapsed;
k) variation of terms of options;
l) brief details of significant terms;
m) subsequent changes or cancellation or exercise of such options;
n) diluted earnings per share pursuant to issue of equity shares on exercise of options.

SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 FOR ESOP/ESPS

No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession
of unpublished price sensitive information. However the insider may prove his innocence by demonstrating the
circumstances that the transaction in question was undertaken pursuant to the exercise of stock options in respect
of which the exercise price was pre-determined in compliance with applicable regulations.
 284  Lesson 9 • EP-SLCM

Does the contra trade restriction (for a period not less than six months) under clause 10 of Schedule B of the
SEBI (Prohibition of Insider Trading) Regulation, 2015 also apply to the exercise of ESOPs and the sale of
shares so acquired?
Exercise of ESOPs shall not be considered to be “trading” except for the purposes of Chapter III of the SEBI
(Prohibition of Insider Trading) Regulations, 2015 (“the Regulations”) . However, other provisions of the
Regulations shall apply to the sale of shares so acquired.
For Example:
(i) If a designated person has sold/ purchased shares, he can subscribe and exercise ESOPs at any time after
such sale/purchase, without attracting contra trade restrictions.
(ii) Where a designated person acquires shares under an ESOP and subsequently sells/pledges those shares,
such sale shall not be considered as contra trade, with respect to exercise of ESOPs.
(iii) Where a designated person purchases some shares (say on August 01, 2015), acquires shares later under
an ESOP (say on September 01, 2015) and subsequently sells/pledges (say on October 01, 2015) shares so
acquired under ESOP. The sale will not be a contra trade but will be subject other provisions of the
Regulations, however, lie will not be able to sell the shares purchased on August 01, 2015 during the
period of six months from August 01, 2015.
(iv) Where a designated person sells shares (say on August 01, 2015), acquires shares later under an ESOP
(say on September 01, 2015) the acquisition under ESOP shall not be a contra trade. Further, he can sell/
pledge shares so acquired at any time thereafter without attracting contra trade restrictions. He, however,
will not be able to purchase further shares during the period of six months from August 01, 2015 when he
had sold shares.

PROCEDURE FOR ISSUING ESOP BY A LISTED COMPANY

• An advance notice of the Board Meeting at least two working days before to the stock exchange where
securities of the company are listed and formation of Compensation Committee;
• Compensation committee shall plan draft the scheme of ESOP;
• Hold Board meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the
General meeting for shareholders approval by passing special resolution;
• Outcome of the Board Meeting is also to be notified within twenty-four hours of the conclusion of the Board
meeting.
• An advance notice of the General meeting at least two working days before to the Stock Exchanges where
securities of the Company are listed.
• Hold General Meeting for approval of shareholders;
• Outcome of the General Meeting is also to be notified within twenty-four hours of the conclusion of the
meeting to the Stock exchange.
• File e-form MGT-14 within 30 days of passing the special resolution with ROC.
• For listing of shares issued pursuant to ESOS, the company shall obtain the in-principle approval of the stock
exchanges before issuing shares as per Regulation 28 of LODR where it proposes to list the said shares.
• Issue of letter of grant of option to the eligible employees along with the letter of acceptance of option;
• On receipt of letter of acceptance of option along with upfront payment (if any), from the employee issue the
option certificates;
• After expiry of vesting period, not less than one year the options shall vest in the employee. At that time,
• the Company shall issue a letter of vesting along with the letter of exercise of options;
• Receipt to letter of exercise from the employee;
 Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 285

• Hold a Board Meeting at the suitable Interval during the exercise period for allotment of shares on options
exercised by the optioness;
• Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the
Depositories;
• Make an application to the Stock exchange for listing of the Shares so allotted; and
• Receipt of Listing of the shares from the Stock exchange.
• File a return of allotment in form PAS 3 with the ROC within 30 days from the date of allotment.

ROLE OF COMPANY SECRETARY

For listing of equity shares issued pursuant to exercise of options granted under ESPS/ESOS/SARS/ GEBS/RBS
basis- Post issue
• A Certificate from Company Secretary for receipt of money.
• A quarterly certificate from the practising Company Secretary specifically certifying that the company has
received the application/allotment monies from the applicants of these shares. [Source: www.bseindia.com]

LESSON ROUND-UP

• As per Section 62(1) (b) of Companies Act 2013, a Company can offer shares through employee stock
option to their employees through special resolution subject to the conditions specified under Rule 12 of
Companies (Share Capital and Debentures) Rules 2014.
• Issue of Employee Stock option by a listed entity is regulated by the SEBI (Share Based Employee Benefits)
Regulations, 2014.
• SEBI has, on October 28, 2014 notified the SEBI (Share Based Employee Benefits) Regulations 2014, for
regulation of all schemes by companies for the benefit of their employees involving dealing in shares,
directly or indirectly, with a view to facilitate smooth operation of such schemes while preventing any
possible manipulation and matters connected therewith or incidental thereto.
• A company may implement schemes either directly; or by setting up an irrevocable trust(s).
• An employee shall be eligible to participate in the schemes of the company as determined by the
compensation committee.
• In case of winding up of the schemes being implemented by a company through trust, the excess monies
or shares remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment
of loan or by way of distribution to employees as recommended by the compensation committee.
• A listed company shall disclose to stock exchange “the options to purchase securities including any ESOP/
ESPS Scheme” upon application of the guidelines for materiality.
• No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in
possession of unpublished price sensitive information. However, the insider may prove his innocence by
demonstrating the circumstances that the transaction in question was undertaken pursuant to the
exercise of stock options in respect of which the exercise price was pre-determined in compliance with
applicable regulations.
286  Lesson 9 • EP-SLCM

GLOSSARY

Grant It means issue of option to employees under the scheme.

Option grantee It means an employee having a right but not an obligation to exercise an option in
pursuance of ESOS.
Secondary Market The market for previously issued securities or financial instruments.
Trustee Legal Custodian who looks after all the monies invested in a unit trust or mutual fund.
Vesting The process by which the employee is given the right to apply for shares of the
company against the option granted to him in pursuance of ESOS.
Vesting Period It means the period during which the vesting of option, SAR or a benefit granted under
any of the schemes takes place.

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. What are applicability and non-applicability of the SEBI (Share Based Employee Benefits) Regulations, 2014?
2. ABC Ltd. is a public company which has its equity shares listed on NSE. The Company wants to implement
Employee Stock Option Plan (ESOP) for its employees. ESOP Plan will be operated through a trust in
accordance with the SEBI (Share Based Employee Benefits) Regulations, 2014. The company is willing to
issue shares under ESOP scheme to one of its whole time director, Mr. X. Mr. X holds 12% of the outstanding
equity shares of the company. In view of the above facts, answer the following questions :
(i) Can the company issue shares to its director, Mr. X under ESOP scheme ?
(ii) Prepare a brief note on the process of implementation of ESOP scheme through Trust route.
3. Whether registered stock broker under SEBI (Stock Broker) Regulations, 1992 is permitted to fund the
securities to be issued under the SEBI (Share Based Employee Benefits) Regulations 2014 by a listed
company, to its employees who propose to avail cashless option?
4. A company has implemented Employee Stock Option Scheme to retain the best talent in the company.
After one year of implementation of the scheme, the company desires to increase the vesting period from
2 year to 3 year. Is it possible for the company to vary the terms and condition of the option after
implementation of the scheme under SEBI regulation?
5. State briefly the provisions of pricing and lock-in period under ESPS.
6. Your Board of directors is contemplating to take-up the agenda to issue ESOS in next meeting. Being a
Company Secretary, advise your Board of directors about brief procedure for issuing of securities under
SEBI Employees Stock Option Scheme (ESOS) by a listed Company.
Lesson 9 • SEBI (Share Based Employee Benefits Regulations, 2014 – An Overview 287

LIST OF FURTHER READINGS

• SEBI Circulars / Notifications

• SEBI FAQs

OTHER REFERENCES (Including Websites and Video Links)

• https://www.sebi.gov.in/index.html
• https://www.nseindia.com/
• https://www.bseindia.com/
288  Lesson 9 • EP-SLCM
 SEBI (Issue of Sweat Equity)
Lesson 10 Regulations, 2002 – An Overview
Key Concepts One Learning Objectives
Should Know
To understand:
• Sweat Equity • Issuance of Sweat Equity Shares in accordance with the SEBI
Shares
(Issue of Sweat Equity) Regulations, 2002
• Employee • Issuance of Sweat Equity Shares in accordance with the
• Value Additions Companies Act, 2013
• Intellectual • Applicability & non- applicability of SEBI (Issue of Sweat Equity)
Property Regulations, 2002
• Relevant Date • Issuance of Sweat Equity Shares to employee, directors & promoters
• Accounting • The requirement of Special Resolution
Treatment • Pricing of Sweat Equity Shares
• Accounting Treatment of Sweat Equity Shares
• Lock-In and listing requirements

Regulatory Framework
• SEBI (Issue of Sweat Equity) Regulations, 2002
• Companies Act, 2013

Lesson Outline
• Introduction • Accounting Treatment
• Sweat Equity Shares • Placing of Auditors before
provisions under Companies Annual General Meeting
Act, 2013
• Ceiling on Managerial
• SEBI (Issue of Sweat Equity) Remuneration
Regulations, 2002
• Lock-in
• Applicability
• Listing
• Sweat equity shares may be
issued to employee and • Applicability of Takeover
directors • Power to relax strict
• Special Resolution enforcement of the
regulations
• Issue of Sweat Equity Shares
to Promoters • LESSON ROUND-UP
• Pricing of Sweat Equity • GLOSSARY
Shares • TEST YOURSELF
• Valuation of Intellectual • LIST OF FURTHER READINGS
Property
• OTHER REFERENCES
 290  Lesson 10 • EP-SLCM

INTRODUCTION
Factors behind the success of any company is its ability to attract top talent while retaining those already working
within the company. One of the ways in which companies attract and retain key employees is by rewarding them
with equity shares.
‘Sweat equity shares’ are such equity shares, which are issued by a Company to its directors or employees at a
discount or for consideration, other than cash, for providing their know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever name called.
Sweat equity shares refers to equity shares given to the company’s employees on favourable terms, in recognition
of their work. Sweat equity shares is one of the modes of making share based payments to employees of the company.
The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services.
Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the
development of the company.
Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it
encourages the employees to contribute more towards the company in which they feel they have a stake.
Companies Act, 2013 empowers companies to issue sweat equity shares to its employees and directors, subject to
the conditions stated therein. In case of a company whose equity shares are listed on a recognized stock exchange,
the issuer company is required to conform to the Regulations made by SEBI.

Sweat Equity Shares are administered by

The SEBI (Issue of Sweat Equity) Regulations, The Companies Act, 2013, in
2002, in case of a listed company case of unlisted company

Question: Which companies can issue sweat equity shares?

Answer: Any company can issue like:-
• One person Company
• Private Company
• Public Company
• Section 8 Company
• Listed/unlisted Company

SWEAT EQUITY SHARES PROVISIONS AS UNDER COMPANIES ACT, 2013

Section 2 (88) of the Companies Act, 2013 defines “sweat equity shares” which means such equity shares
as are issued by a company to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature of intellectual property rights
or value additions, by whatever name called.
In accordance with Rule 8 of Companies (Share Capital and Debenture) Rules, 2014 the ‘‘Employee’’
means-
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India,
or of a holding company of the company.
 Lesson 10 • SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview 291

According to Section 54 of the Companies Act, 2013 a company may issue sweat equity shares of a class of shares
already issued, if the following conditions are fulfilled:
(a) The issue is authorized by a special resolution passed by the company in the general meeting.
(b) The resolution specifies the number of shares, current market price, consideration if any and the class or
classes of directors or employees to whom such equity shares are to be issued.
(c) The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in
accordance with the regulations made by SEBI in this regard and if they are not listed the sweat equity shares are
to be issued in accordance with Companies Act, 2013.
(d) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall
be applicable to the sweat equity shares issued and the holders of such shares shall rank pari passu with
other equity shareholders.
The Companies (Share Capital and Debentures) Rules, 2014  have defined ‘value additions’ to mean actual or
anticipated economic benefits derived or to be derived by the company from an expert and/or a professional for
providing know-how or making available rights in the nature of intellectual property rights, by such person to
whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration
payable under the contract of employment, in the case of an employee.

Question: Whether Issue of sweat equity shares can be in the form of preferential Issue?
Answer: Issue of Sweat Equity Shares is not a ‘preferential issue’ as per regulation 2(1) (nn) of SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2018 which gives the meaning of a preferential
issue excludes an issue of sweat equity shares there from, which means issue of sweat equity shares
is not a preferential issue within the meaning of preferential issue.
Further Rule 13 of The Companies (Share Capital and Debentures) Rules, 2014, clearly excludes
issue of sweat equity shares from the definition of preferential offer.

SEBI (ISSUE OF SWEAT EQUITY) REGULATIONS, 2002

SEBI (Issue of Sweat Equity) Regulations, 2002 have been notified on September 24, 2002 in order to
streamline the process of issue of sweat equity shares.

Regulatory Framework

Chapter Deals with

I. Definitions of various terms
II. Issue of sweat equity by a Listed company
III. General Obligations
IV. Penalties and Procedure
V. Power to relax strict enforcement of the Regulations.

APPLICABILITY

SWEAT EQUITY SHARES MAY

 292  Lesson 10 • EP-SLCM

SWEAT EQUITY SHARES MAY BE ISSUED TO EMPLOYEE AND DIRECTORS

SPECIAL RESOLUTION
For the purposes of passing a special resolution under clause (a) of sub section (1) of Section 54 of the Companies
Act, 2013, the Board of Directors at the time of sending notice to the shareholders shall send additional information
for approving the issuance of sweat equity shall, inter alia, contain the following information:
a) The total number of shares to be issued as sweat equity.
b) The current market price of the shares of the company.
c) The value of the intellectual property rights or technical know how or other value addition to be received
from the employee or director along with the valuation report / basis of valuation.
d) The names of the employees or directors or promoters to whom the sweat equity shares shall be issued and
their relationship with the company.
e) The consideration to be paid for the sweat equity.
f) The price at which the sweat equity shares shall be issued.
g) Ceiling on managerial remuneration, if any, which will be affected by issuance of such sweat equity.
h) A statement to the effect that the company shall conform to the accounting policies as specified by SEBI.
i) Diluted Earning Per Share pursuant to the issue of securities to be calculated in accordance with
International Accounting Standards / standards specifi by the Institute of Chartered Accountants of India.

ISSUE OF SWEAT EQUITY SHARES TO PROMOTERS

In case of Issue of sweat equity shares to promoters, the same shall also be approved by simple majority of the
shareholders in General Meeting.
Further, the promoters to whom such Sweat Equity Shares are proposed to be issued shall not participate in such
resolution and separate resolution shall be passed for each transaction of issue of Sweat Equity. Such resolution
shall be valid for a period of not more than twelve months from the date of passing of the resolution. For the
purposes of passing the resolution, the explanatory statement shall contain the disclosures as specified in the
Schedule (given in above para).
 Lesson 10 • SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview 293

PRICING OF SWEAT EQUITY SHARES

“Relevant date” for this purpose means the date which is thirty days prior to the date on which the
meeting of the General Body of the shareholders is convened, in terms of clause (a) of sub section (1)
of section 54 of the Companies Act, 2013.

VALUATION OF INTELLECTUAL PROPERTY

• The valuation of the intellectual property rights or of the know how provided or other value addition
mentioned in Explanation II of sub-rule (1) of Rule (8) of the Companies (Share Capital and Debentures)
Rules, 2014 shall be carried out by a merchant banker.
• The merchant banker may consult such experts and valuers, as he may deem fit having regard to the nature
of the industry and the nature of the property or other value addition.
• The merchant banker shall obtain a certificate from an independent Chartered Accountant that the valuation
of the intellectual property or other value addition is in accordance with the relevant accounting standards.
 294  Lesson 10 • EP-SLCM

ACCOUNTING TREATMENT
Where the sweat equity shares are issued for a non-cash consideration, such non cash consideration shall be treated
in the following manner in the books of account of the company:-

1.

2.

LACING OF AUDITORS BEFORE ANNUAL GENERAL MEETING

In the General meeting subsequent to the issue of sweat equity, the Board of Directors shall place before the
shareholders, a certificate from the auditors of the company that the issue of sweat equity shares has been made in
accordance with the Regulations and in accordance with the resolution passed by the company authorizing the
issue of such Sweat Equity Shares.

CEILING ON MANAGERIAL REMUNERATION

The amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the purpose of
sections 197 of the Companies Act, 2013, if the following conditions are fulfilled:
(i) the Sweat Equity shares are issued to any director or manager; and
(ii) they are issued for non-cash consideration, which does not take the form of an asset which can be carried to
the balance sheet of the company in accordance with the relevant accounting standards.

LOCK-IN
The Sweat Equity shares shall be locked in for a period of three years from the date of allotment. The SEBI (Issue of
Capital and Discloure Requirements) Regulations, 2018 on public issue in terms of lock-in and computation of
promoters’ contribution shall apply if a company makes a public issue after it has issued sweat equity.

LISTING
The Sweat Equity issued by a listed company shall be eligible for listing only if such issues are in accordance with
these regulations.
APPLICABILITY OF TAKEOVER
Any acquisition of Sweat Equity Shares shall be subject to the provision of the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.
POWER TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS
Exemption from enforcement of the regulations in special cases.
SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations
for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new
products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities
markets.
 Lesson 10 • SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview 295

Any exemption granted by the SEBI as mentioned above shall be subject to the applicant satisfying such conditions
as may be specified by the SEBI including conditions to be complied with on a continuous basis.

Explanation — For the purposes of these regulations, “regulatory sandbox” means a live testing environment
where new products, processes, services, business models, etc. may be deployed on a limited set of eligible
customers for a specified period of time, for furthering innovation in the securities market, subject to such
conditions as may be specified by the Board.

LESSON ROUND-UP

• Section 2 (88) of the Companies Act, 2013 defines “sweat equity shares” which means such equity shares
as are issued by a company to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature of intellectual property rights
or value additions, by whatever name called.
• Where the equity shares of the company are listed on a recognized stock exchange, sweat equity shares
should be issued in accordance with regulations made by the Securities and Exchange Board of India in
this regard.
• These regulations shall not apply to an unlisted company. However, unlisted company coming out with
initial public offering and seeking listing of its securities on the stock exchange, pursuant to issue of sweat
equity shares, shall comply with the SEBI (ICDR) Regulations, 2009.
• In case of Issue of sweat equity shares to promoters, the same shall also be approved by simple majority
of the shareholders in General Meeting.
• The Sweat Equity shares shall be locked in for a period of three years from the date of allotment.
• The Sweat Equity issued by a listed company shall be eligible for listing only if such issues are in accordance
with these regulations.

GLOSSARY

Accounting Standard Accounting Standards are codified or written statements of accounting rules and
guidelines for preparation and presentation of financial statements. They are policy
documents issued by an expert accounting body or by the Government or other
regulatory body.
Diluted Earning Per EPS is which accuses to the shareholder of the company. Dilution is a reduction in
Shares Shares EPS or an increase in loss per share resulting from the assumption, that
convertible instruments are converted, that options or warrants are exercised or the
ordinary shares are issued.
Intellectual Property It is a category of property that includes intangible creations of the human intellect,
and primarily encompasses copyrights, patents, and trademarks. It also includes other
types of rights, such as trade secrets, publicity rights, moral rights, and rights against
unfair competition.
Special Resolution A special resolution is a resolution of a company’s shareholders which requires at
least 75% of the votes cast by the shareholders in favour of it in order to pass.
Valuer It means a Chartered Accountant or a merchant banker appointed to determine the
value of the intellectual property rights or other value addition.
 296  Lesson 10 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation)
1. What are applicability and non-applicability of the SEBI (Issue of Sweat Equity) Regulations, 2002?
2. Which employees are covered under the sweat equity allotment scheme?
3. Explain the requirements for issue of Sweat Equity shares to promoters.
4. ABC Ltd. has issued Sweat Equity Shares for a non-cash consideration. What are the possible accounting
treatments in the books of ABC Ltd. ?
5. A listed NBFC has been granted licence to run as small finance bank by the Reserve Bank of India under
recently announced policy to improve the financial inclusion of the country. During the last three years,
the attrition rate for top level management employees was not too high As, RBI has granted licences to
many small banks, therefore, the promoters of the Bank feels that attrition rate will be high in coming
period. The Board of directors wishes to allot Sweat Equity shares to employees. You, being compliance
officer of the Bank, advise the Board about pricing of the Sweat Equity shares.

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notofications

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• https://www.nseindia.com/
• https://www.bseindia.com/
 SEBI (Prohibition of Insider
Lesson 11 Trading) Regulations, 2015
Key Concepts One Learning Objectives Regulatory Framework
Should Know
To understand: • Section 12 A and 15 G of
• Unpublished price • Meaning insider trading SEBI Act,1992
sensitive
information • Legislative history of insider • SEBI (Prohibition of Insider
trading Trading) Regulations, 2015
• Insider • Conceptual Understanding on
• Connected Person Important Terminologies
• Designated Person • Meaning of important
terminologies under
• Insider Trading SEBI(Prohibition of Insider
• Trading Window Trading) Regulations and its
application through case laws
• Pre clearance
• Regulatory prescriptions on
• Compliance Officer communication of unpublished
price sensitive information
• Regulatory mandates on trading
by insiders/designated persons
• Disclosure requirements by
certain persons

Lesson Outline
• Introduction • Codes of Fair Disclosure and
Conduct
• Genesis
• Penalty Provisions for violations
• Regulatory Framework
of the Regulations
o Provisions of SEBI Act, 1992
• Appeal to Securities Appellate
o SEBI (Prohibition of Insider Tribunal
Trading) Regulations, 2015
• Role of Company Secretary as
– An overview
Compliance Officer
• Restrictions
• Checklists under SEBI
o Communication or (Prohibition of Insider Trading)
Procurement of Regulations 2015
Unpublished Price Sensitive
• LESSON ROUND-UP
Information (UPSI)
• GLOSSARY
o Restrictions on Trading
when in possession of UPSI • TEST YOURSELF
• Approval of Trading Plans • LIST OF FURTHER READINGS
• Mandatory Disclosures • OTHER REFERENCES
• Informant Incentives and
Rewards
 298  Lesson 11 • EP-SLCM

INTRODUCTION
Insider trading essentially denotes dealing in a company’s securities on the basis of confidential information,
relating to the company, which is not published or not known to the public (known as ‘unpublished price- sensitive
information’), used to make personal profits or avoid loss.
The practice of Insider Trading came into existence ever since the very concept of trading of securities of a company
became prevalent among the investors worldwide and has now become a formidable challenge for investors all
over the world. The growing magnitude of the world’s securities markets in the past decades has further raised the
concerns of the securities market regulators across the globe.
Genesis
The United States of America was the first country to formally
The history of Insider Trading in India dates
enact a legislation to effectively tackle the menace of insider
trading. Over the years, most of the jurisdictions around the
back to the 1940’s with the formulation of
world have recognized the requirement to restrict insider
government committees such as the Thom-
trading in one form or other and accordingly put in place legal
as Committee under the chairmanship of
restrictions to this effect so as to maintain investors’ confidence
in the capital market. Mr. P.J.Thomas, to evaluate restrictions that
India was not late in recognizing the detrimental impact of can be imposed on short swing profit.
insider trading. The history of Insider Trading in India dates
back to the 1940’s with the formulation of government committees such as the Thomas Committee under the
chairmanship of Mr. P.J.Thomas, to evaluate restrictions that can be imposed on short swing profit of 1948, which
evaluated inter alia, the regulations in the US on short swing profits (profits made by the purchase and sale both, of
the company’s securities simultaneously within a prescribed time frame) under Section 16 of the Securities
Exchange Act, 1934..
Committees Recommending Prohibition of Insider Trading

• Under the chairmanship of P.J. Thomas, the then Economic Adviser to

1948 the Finance Ministry. On the basis of Recommendations of the
Thomas Committee Committee Section 307 and 308 of Companies Act 1956 dealing is
disclosure of shareholdings of directors/managers introduced.

• The Bhaba Committee report made a distinction between the directors

1950 who buy or sell shares while in possession of general information and
those who buy or sell shares based on the specific information, such as
Bhabha Committee the conclusion of a favourable contract or the intention a company’s
board to recommend an increased dividend.

• Recommended  comprehensive amendments to sections 307 and 308

with a view to  strengthening the provisions thereof. The Committee
1977 made two-fold  recommendations - one relating to fuller disclosure of
Sachar  Committee transactions by those  who have price-sensitive information and
another  prohibi­ tion  of  transactions by such persons
during   certain   specified period  unless there are exceptional
circumstances.

• Recom­mended measures to prohibit the practice of insider trading

1984 and suggested draft legislation by way of amendments to the Securities
Patel Committee Contracts (Regulation) Act.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 299

• The Companies Act should facilitate disclosure of actual control

structures and prohibition of insider trading as well as management
JJ Irani Committee entrenchment. We feel that international best practices should be
adapted to the Indian situation while enabling a framework that
ensures credibility of corporate operations in the minds of the
stakeholders.

• The committee proposed that insider trading should be regarded as a

major offence, punishable with civil as well as criminal penalties. The
1989 - Abid Hussain committee recommended that the SEBI should be asked to formulate
the necessary legislation, empowering itself with the authority to
enforce the provisions.

• The Committee has made a range of recommendations to the legal

2014 framework for prohibition of insider trading in India and has focused
Sodhi Committee on making this area of regulation more predictable, precise and clear
by suggesting a combination of principles-based regulations and rules
that are backed by principles.

• The committee various recommendations including compliance

2018 officer to be financially literate, insertion of structured digital data
Vishwanathan base containing names of persons with whom information is shared.
Committee

REGULATORY FRAMEWORK
SEBI ACT 1992
Section 12A.
No person shall directly or indirectly—
d) engage in insider trading;
e) deal in securities while in possession of material or non-public information or communicate such
material or non-public information to any other person, in a manner which is in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
Section 15 G
Penalty for insider trading.
If any insider who,—
• either on his own behalf or on behalf of any other person, deals in securities of a body
• corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or
• communicates any unpublished price-sensitive information to any person, with or without his request
for such information except as required in the ordinary course of business or under any law; or
• counsels, or procures for any other person to deal in any securities of any body corporate on the basis of
unpublished price-sensitive information, shall be liable to a penalty [which shall not be less than ten lakh
rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher.
 300  Lesson 11 • EP-SLCM

SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 – REGULATORY FRAMEWORK

KEY DEFINITIONS
Compliance officer
Compliance Officer means:
any senior officer, designated so and reporting to Extracts from interpretive letter dated 21st October,
the board of directors or head of the organization 2015 issued under the SEBI (Informal Guidance)
in case board is not there, who is financially Scheme, 2003 in the matter of Mindtree Ltd.
literate and is capable of appreciating
Question: Can a senior person, say a Chief Financial
requirements for legal and regulatory compliance
Officer (CFO) or a Company Secretary (CS), who is not
under these regulations, and who shall be
reporting to the Board, act as compliance officer and
responsible for:
update the Board on the transactions related to Insider
(a) compliance of policies, procedures, Trading Quarterly. Can the company appoint more
maintenance of records, monitoring than one person as the Compliance Officer under the
adherence to the rules for the preservation Code?
of unpublished price sensitive information;
Answer: In the current scenario, can CS as well as CFO be
appointed as a Compliance Officer, so that one can sign and
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 301

(b) monitoring of trades and the implementation submit the documents if the other person is on travel?
of the codes specified in these regulations Guidance from SEBI: Regulation 2(1)(c) of SEBI (PIT)
under the overall supervision of the board of Regulations, 2015 defines Compliance Officer as any
directors of the listed company or the head of senior officer, designated so and reporting to the board of
an organization, as the case may be. directors or head of the organisation in case board is not
Connected person there, who is financially literate and is capable of
appreciating requirements for legal and regulatory
Connected person means: compliance under these regulations and who shall be
• any person who is or has during six months responsible for compliance of policies, procedures,
prior to the concerned Act has been associated maintenance of records, monitoring adherence to the
with a company, directly or indirectly; rules for the preservation of UPSI, monitoring of trades
and the implementation of the codes specified in these
• in any capacity (including by reason of regulations underthe overall supervision of the board of
frequent communication with its officers or directors of the listed company or the head of the
by being in any contractual, fiduciary or organisation, as the case may be. The functions and
employment relation); or responsibility of the Compliance Officer are specified in
• is a director, officer or an employee of the Regulation 2(1)(c) of the SEBI (PIT) Regulations, 2015.
company or holds any position including a The company may at its discretion appoint any senior
professional or business relationship between officer as the Compliance Officer, necessarily report to the
himself and the company, whether temporary Board of directors or head of the organization as the case
or permanent; or may be. Appointing any other person shall not be in
accordance with the Regulations. In case of appointing
that allows such person, directly or indirectly, access more than one person as Compliance Officer they shall be
to unpublished price-sensitive information or held jointly and severally responsible.
reasonably expected to allow such access.
It is important to note here that SEBI has in its recent judgments considered nexus and relationship of various persons
through social media networking websites to identify the Connected Persons.
Insider
“Insider” means any person who is:
(i) a connected person; or
(Ii) in possession of or having access to unpublished price sensitive information.
Person deemed to be connected person
“Person is deemed to be a connected person” unless the contrary is established, if such person is –
(a) an immediate relative of connected person(s); or
(b) a holding company or associate company or subsidiary company; or
(c) an intermediary as specified in Section 12 of the SEBI Act or an employee or director thereof; or
(d) an investment company, trustee company, asset management company or an employee or director thereof; or
(e) an official of a stock exchange or of clearing house or corporation; or
(f) a member of board of trustees of a mutual fund or a member of the board of directors of the asset management
company of a mutual fund or is an employee thereof; or
(g) a member of the board of directors or an employee, of a public financial institution as defined in Section 2(72)
of the Companies Act, 2013; or
(h) an official or an employee of a self-regulatory organization recognised or authorized by the SEBI; or
(i) a banker of the company; or
 302  Lesson 11 • EP-SLCM

(j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a
company or his immediate relative or banker of the company, has more than ten percent of the holding or
interest.
It is to be noted that the above definition intends to bring into its ambit persons who may not seemingly occupy any
position in a company but are in regular touch with the company and its officers and are involved in the know of the
company’s operations.
Immediate Relative
Question: If a spouse is financially independent and
“Immediate Relative” means
does not consult an insider while taking trading
• spouse of a person, decisions is that spouse exempted from the
definition of ‘immediate relative’?
• parents,
Answer: A spouse is presumed to be an ‘immediate
• sibling, and
relative’, unless rebutted so.
• child of such person or of the spouse,
• any of whom is either dependent financially on such person,
• or consults such person in taking decisions relating to trading in securities.
“Proposed to be listed” shall include securities of an unlisted company:
(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the SEBI,
stock exchange(s) or registrar of companies in connection with the listing; or
(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of
such scheme of merger or amalgamation under the Companies Act, 2013.
Trading
“Trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any
securities, and “trade” shall be construed accordingly.
Unpublished price sensitive information
“Unpublished price sensitive information” means any information, relating to a company or its securities,
directly or indirectly, that is not generally available which upon becoming generally available, is likely to
materially affect the price of the securities and shall, ordinarily including but not restricted to, information
relating to the following–
(i) Financial results;
(ii) Dividends;
(iii) Change in capital structure;
(iv) Mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions;
(v) Changes in key managerial personnel.

Extracts from SAT Order dated 12th July 2019 in the matter of Mr. G. Bala Reddy v/s SEBI [Appeal No. 509 of 2015]
In this case a Company had secured work orders but the same were not disclosed to stock exchange as the contract was
not yet issued to the Company and the Company was only found to be the lowest price bidder. During this period,
certain entities had dealt in the shares of this Company with a contention that being the lowest bidder of a contract is
a usual course of business and hence, does not amount to UPSI. SAT held that considering that the promoter was aware
that the Company was L1 (lowest bidder), this information was UPSI and hence it was incumbent upon Promoters not
to deal in the scrips of the Company directly or indirectly.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 303

RESTRICTION ON COMMUNICATION OR PROCUREMENT OF UNPUBLISHED PRICE SENSITIVE

INFORMATION (UPSI) (REGULATIONS 3)

RESTRICTIONS ON COMMUNNICATION

On Communication or procurement of unpublished

price sensitive information (UPSI) (Regulation 3)

Insider not to communicate any No person to procure or cause the

UPSI except for performing communications by an insider of
duties/legal obligations UPSI except for performing duties/
legal obligations

Exceptions in connection with a

transaction that would

1. entail an obligation to make an open offer under the takeover regulations where
the board of directors of the listed company is of informed opinion that the
sharing of such information in the best interests of the company.
2. not attract the obligation to make an open offer under the takeover regulations
but where the board of directors of the company is of informed opinion that
sharing of such information is in the best interests of the company and the
information that constitute UPSI is disseminated to be made generally available
at least two trading days prior to the proposed transaction being effected. In such
form as the Board of directors may determine to be adequate and take to cover
relevant material facts.
3. The above exceptions mandates execution of confidentiality agreement between
parties.

Restriction on Communication
No insider to communicate UPSI (Regulation 3)
(1) No insider shall communicate, provide, or allow access to any unpublished price sensitive information,
relating to a company or securities listed or proposed to be listed, to any person including other insiders
except where such communication is in furtherance of legitimate purposes, performance of duties or discharge
of legal obligations.
Policy for determination of Legitimate Purposes [Regulation 3(2A)]
The board of directors of a listed company shall make a policy for determination of “legitimate purposes” as
a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8. Explanation – For the purpose
of illustration, the term “legitimate purpose” shall include sharing of unpublished price sensitive information
in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers,
merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided
that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
 304  Lesson 11 • EP-SLCM

Recipient of UPSI received on legitimate purpose is also an insider (Regulation 32B)

(2B) Any person in receipt of unpublished price sensitive information pursuant to a “legitimate purpose” shall be
considered an “insider” for purposes of these regulations and due notice shall be given to such persons to maintain
confidentiality of such unpublished price sensitive information in compliance with these regulations.
No person shall procure from or cause the communication by any insider of unpublished price sensitive
information (Regulation 3(2)
(2) No person shall procure from or cause the communication by any insider of unpublished price sensitive
information, relating to a company or securities listed or proposed to be listed, except in furtherance of
legitimate purposes, performance of duties or discharge of legal obligations.
Note: This provision is intended to impose a prohibition on unlawfully procuring possession of unpublished
price sensitive information. Inducement and procurement of unpublished price sensitive information not in
furtherance of one’s legitimate duties and discharge of obligations would be illegal under this provision.
Exceptions:
(3) Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be
communicated, provided, allowed access to or procured, in connection with a transaction that would:–
(i) entail an obligation to make an open offer under the takeover regulations where the board of directors
of the listed company is of informed opinion that sharing of such information is in the best interests of
the company; .
(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of
directors of the listed company is of informed opinion that sharing of such information is in the best
interests of the company and the information that constitute unpublished price sensitive information
is disseminated to be made generally available at least two trading days prior to the proposed
transaction being effected in such form as the board of directors may determine to be adequate and fair
to cover all relevant and material facts.
Note: It is intended to permit communicating, providing, allowing access to or procuring UPSI also in
transactions that do not entail an open offer obligation under the takeover regulations when authorised by
the board of directors if sharing of such information is in the best interests of the company. The board of
directors, however, would cause public disclosures of such unpublished price sensitive information well
before the proposed transaction to rule out any information asymmetry in the market.
Execution of confidentiality agreement - A mandate
(4) For purposes of sub-regulation (3), the board of directors shall require the parties to execute agreements to
contract confidentiality and non-disclosure obligations on the part of such parties and such parties shall keep
information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise
trade in securities of the company when in possession of unpublished price sensitive information.
Maintenance of structured database with names of persons with whom UPSI is shared and names of persons
who shared the same

Question: What information should a listed Company maintain in its structured digital database under
Regulation 3(5), in case the designated person is a fiduciary or intermediary?
Answer: The listed company should maintain the names of the fiduciary or intermediary with whom they have
shared information along with the Permanent Account Number (PAN) or other unique identifier authorized by
law, in case PAN is not available. The fiduciary / intermediary, shall at their end, be required to maintain details
as required under the Schedule C in respect of persons having access to UPSI.
For example: If the listed company has appointed a law firm or Merchant Banker in respect of fund raising
activity, it should obtain the name of the entity, so appointed, along with the PAN or other identifier, in case PAN
is not available. The law firm or the Merchant Banker would in turn maintain its list of persons along with PAN
or other unique identifier (in case PAN is not available), in accordance with Regulation 9A(2)(d) and as required
under Schedule C, with whom they have shared the unpublished price sensitive information.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 305

(5) The Board of Directors or head(s) of the organisation of every person required to handle unpublished price
sensitive information shall ensure that a structured digital database is maintained containing the nature of
unpublished price sensitive information and the names of such persons who have shared the information and
also the names of such persons with whom information is shared under this regulation along with the
Permanent Account Number or any other identifier authorized by law where Permanent Account Number is
not available. Such database shall not be outsourced and shall be maintained internally with adequate internal
controls and checks such as time stamping and audit trails to ensure non-tampering of the database.
(6) The board of directors or head(s) of the organisation of every person required to handle unpublished price
sensitive information shall ensure that the structured digital database is preserved for a period of not less
than eight years after completion of the relevant transactions and in the event of receipt of any information
from the Board regarding any investigation or enforcement proceedings, the relevant information in the
structured digital database shall be preserved till the completion of such proceedings.

TRADING WHEN IN POSSESSION OF UNPUBLISHED PRICE SENSITIVE INFORMATION (UPSI):

PERMISSION & LIMITATION:

RESTRICTIONS ON TRADING

Trading when in possession of unpublished price

sensitive information. (Regulation 4)

No insider to trade while in Connected persons to establish that

possession of UPSI they were not in the possession of
UPSI

Exceptions (Defenses)

Insider providing innocence demonstrating circumstances including

In case of Insider inter-se off-market transfers without breach of regulation 3
In the case of non-individual insiders: –
(a) the individuals who were in possession of such UPSI were different from the
individuals taking trading decisions and such decision-making individuals were
not in possession of such UPSI when they took the decision to trade; and
(b) appropriate and adequate arrangements were in place to ensure that these
regulations are not violated and no unpublished price sensitive information was
communicated by the individuals possessing the information to the individuals
taking trading decisions and there is no evidence of such arrangements having
been breached;
Otherwise Trades were as per trading plan in accordance with Regulation 5

Insider not to trade in securities while in possession of unpublished price sensitive information
• Regulation 4 prescribes that an insider shall not trade in securities, which are listed or proposed to be listed
on stock exchange, when in possession of unpublished price sensitive information, except in the following
situations:
 306  Lesson 11 • EP-SLCM

• where there is an off-market inter-se transfer between insiders

who were in possession of the same UPSI, or Block deal is a trade, with a
minimum quantity of 5 lakh
• the transaction was carried through the block deal window shares or minimum value of Rs. 5
mechanism between persons who were in the possession of the crore, executed through a single
UPSI. transaction, on the special "Block
Provided that: Deal window".
a. there should be no breach of Regulation 3;
b. both the parties had made a conscious and informed trade decision;
c. UPSI should not have been obtained under Regulation (3).
Provided further that, off-market trades shall be reported by the insiders to the Company within two working days
which shall further notify the particulars of these trades to the stock exchange(s) where the securities are listed
within two working days of receipt of such disclosure or from becoming aware of such information.
• the transaction in question, was carried out pursuant to a statutory or regulatory obligation to carry out a
bona-fide transaction,
• the transaction in question, was undertaken pursuant to the exercise of stock options in respect of which the
exercise price was pre-determined in compliance of with applicable regulations,
• in case of non-individual insiders, individuals taking the trade decision & individuals possessing the UPSI
are different from each other and while taking the trade decision the individuals were not in possession of
such UPSI and appropriate & adequate precautionary arrangements were made to ensure that these
regulations are not violated and there are no evidence also of such arrangements having been breached,
• the trades were in accordance to trading plan set up in accordance with Regulation 5.
Explanation, for the purpose of above Regulation:
• When a person who has traded in securities has been in
possession of unpublished price sensitive information, his
Question: Whether creation of a pledge or trades would be presumed to have been motivated by the
invocation of pledge is allowed when knowledge and awareness of such information in his possession.
trading window is closed?
• In the case of connected persons the onus of
Answer: Yes, however, the pledgor or pledgee establishing, that they were not in possession of unpublished
may demonstrate that the creation of the price sensitive information, shall be on such connected
pledge or invocation of pledge was bona-fide persons and in other cases, the onus would be on the SEBI.
and prove this innocence under proviso to
sub-regulation (1) of Regulation 4. • The SEBI may specify such standards and requirements,
from time to time, as it may deem necessary for the purpose of
these regulations.

TRADING PLANS
As per Regulation 5, an insider shall be entitled to formulate a trading plan in advance and present it to the
compliance officer for approval and public disclosure pursuant to
which trades may be carried out on his behalf in accordance with
Mr. X traded in shares of company as
such plan.
per trading plan approved by the
The compliance officer shall review the trading plan to assess compliance officer. If at a later stage
whether the plan would have any potential for violation of these any unpublished price sensitive
regulations and shall be entitled to seek such express undertakings information comes to his knowledge, it
as may be necessary to enable such assessment and to approve and will not affect the transaction, since Mr.
monitor the implementation of the plan. X has already determined to make such
However, pre-clearance of trades shall not be required for a trade transaction as per trading plan.
executed as per an approved trading plan.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 307

Further, trading window norms and restrictions on contra trade shall not be applicable for trades carried out in
accordance with an approved trading plan.

• The trading plan once approved shall be irrevocable and the

insider shall mandatorily have to implement the plan, without Mr. A submitted his trading plan for
being entitled to either deviate from it or to execute any trade approval after declaring the UPSI in his
in the securities outside the scope of the trading plan. possession. The trading plan was
approved subject to the condition that
However, the implementation of the trading plan shall not be
the UPSI in his possession would
commenced if any unpublished price sensitive information
become generally available before
in possession of the insider at the time of formulation of the
commencement of trading. If due to
plan has not become generally available at the time of the
some reasons, the said UPSI has not
commencement of implementation and in such event the
become generally available till the date
compliance officer shall confirm that the commencement
of trade indicated in the approved
ought to be deferred until such unpublished price sensitive
trading plan, the commencement of
information becomes generally available information so as
trading by Mr. A should be deferred
to avoid a violation of sub-regulation (1) of Regulation 4.
until such UPSI becomes generally
Upon approval of the trading plan, the compliance officer shall available information.
notify the plan to the stock exchanges on which the securities
are listed.
 308  Lesson 11 • EP-SLCM

Question: Whether contra trade is allowed within the duration of the trading plan?
Answer: Any trading plan opted by a person under trading plan can be done only to the extent and in the
manner disclosed in the plan, save and except for pledging of securities.

Guidance from SEBI (dated 24th August 2015)

Question: Who will be approving authority for trades done by the Compliance Officer or his immediate
relatives, as Insiders?

Guidance: The Board of Directors of the company shall be the approving authority in such cases and may
stipulate such procedures as are deemed necessary to ensure compliance with these regulations.

Extracts from SEBI’s Interpretive Letter dated 19th July, 2018 issued under the SEBI (Informal Guidance)
Scheme, 2003 in the matter of Hawkins Cookers Ltd. (HCL) regarding sale of shares by an Independent
Director.

Facts of the case:

a) One of the company’s independent directors wants to sell his equity shares of the company.

b) The sale shall be done as per a trading plan in accordance with regulation 4(iii) of the SEBI (PIT) Regulations,
2015.

c) As per para 8 of Schedule B to the PIT Regulations, while applying for preclearance, the said director will have
to submit an undertaking to the company to the effect that he is not in possession of any Unpublished Price
Sensitive Information (UPSI).

d) By virtue of participation in the Board meetings and access to the information that is shared at such meetings,
the said director is deemed to be perpetually in possession of UPSI. Therefore, the said undertaking is not
possible.

Question: a) Whether the said director may submit a trading plan as required for a plan to trade shares above
INR 20 lakh in value and proceed with executing the same without giving the said undertaking.

b) What procedure should be followed by the company and/ or the said director such that the said director may
lawfully execute the trade?

Guidance from SEBI: a) Regulation 5 of the PIT Regulations provides exception to the general rule that prohibits
trading by insiders when in possession of UPSI. Further, regulation 5, inter alia, states that the trading plan shall
be approved by the compliance officer and shall not entail trading in securities for market abuse. In this regard,
regulation 5 (3) especially states that the compliance officer shall review the trading plan to assess whether the
plan would have any potential for violation of PIT Regulations and shall be entitled to seek such express
undertakings as may be necessary to enable such assessment and to approve and monitor the implementation
of the plan.

b) In the absence of an approved trading plan, designated persons are subject to the requirements of code of
conduct formulated by the company in terms of regulation 9 read with schedule B to the PIT Regulations.

DISCLOSURE REQUIREMENTS
A pictorial representation of disclosure requirements under Regulation 7, covering initial, continual disclosures
and disclosures by connected persons are given below.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 309

INITIAL DISCLOSURES DISCLOSURES BY OTHER

CONTINUED DISCLOSURES
CONNECTED PERSONS

Promoter / Member of Every promoter/ Member of Promoter Any other connected person
Promoter Group / Group/Designated Person / director to or class of connected
Director / Key Managerial disclose to the company the number of such persons to make disclosures
personnel to disclose securities acquired or disposed of within of holdings and trading in
holding of their securities two trading days of such transaction if the listed securities as
to the company value of the securities traded, whether in prescribed.
one transaction or a series of transactions
Within 7 days from the date
over any calendar quarter, aggregates to a
of their appointment/
traded value in excess of ten lakh rupees or
becoming promoter or
such other value as may be specified
member of promoter group.
Company to notify to the exchange within 2
trading days of receipt of intimation.

Initial Disclosures [Regulation 7(1)]

(a) Every promoter, member of the promoter group, key managerial personnel and director of every company
whose securities are listed on any recognised stock exchange shall disclose his holding of securities of the
company as on the date of these regulations taking effect, to the company within thirty days of these
regulations taking effect;
(b) Every person on appointment as a key managerial personnel or a director of the company or upon becoming
a promoter or member of the promoter group shall disclose his holding of securities of the company as on the
date of appointment or becoming a promoter, to the company within seven days of such appointment or
becoming a promoter.
Continual Disclosures [Regulation 7(2)]
(a) Every promoter, member of the promoter group, designated person and director of every company shall
disclose to the company the number of such securities acquired or disposed of within two trading days of
such transaction if the value of the securities traded, whether in one transaction or a series of transactions
over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may
be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are
listed within two trading days of receipt of the disclosure or from becoming aware of such information.
Explanation. — It is clarified for the avoidance of doubts that the disclosure of the incremental transactions
after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior
disclosure cross the threshold specified in clause (a) of sub-regulation (2).
Disclosures by other connected persons [Regulation 7(3)]
Any company whose securities are listed on a stock exchange may, at its discretion require any other connected
person or class of connected persons to make disclosures of holdings and trading in securities of the company in
such form and at such frequency as may be determined by the company in order to monitor compliance with these
regulations.
This is an enabling provision for listed companies to seek information from those to whom it has to provide
unpublished price sensitive information. This provision confers discretion on any company to seek such information.
For example, a listed company may ask that a management consultant who would advise it on corporate strategy
and would need to review unpublished price sensitive information, should make disclosures of his trades to the
company.
 310  Lesson 11 • EP-SLCM

Disclosures - Who, what and when?

Who What When

Promoter/member of Initial disclosure Within 7 days from the date of their appointment/becoming
Promoter Group promoter or member of promoter Group

Continual the number of such securities acquired or disposed of within two

Disclosure trading days of such transaction if the value of the securities traded,
whether in one transaction or a series of transactions over any
calendar quarter, aggregates to a traded value in excess of ten lakh
rupees or such other value as may be specified

Director Initial disclosure Within 7 days from the date of their appointment

Continual the number of such securities acquired or disposed of within two

Disclosure trading days of such transaction if the value of the securities traded,
whether in one transaction or a series of transactions over any
calendar quarter, aggregates to a traded value in excess of ten lakh
rupees or such other value as may be specified

Key Managerial Initial disclosure Within 7 days from the date of their appointment
personnel
Continual the number of such securities acquired or disposed of within two
Disclosure( as trading days of such transaction if the value of the securities traded,
Designated whether in one transaction or a series of transactions over any
Person) calendar quarter, aggregates to a traded value in excess of ten lakh
rupees or such other value as may be specified

Designated Person Continual the number of such securities acquired or disposed of within two
Disclosure trading days of such transaction if the value of the securities traded,
whether in one transaction or a series of transactions over any
calendar quarter, aggregates to a traded value in excess of ten lakh
rupees or such other value as may be specified

Other Connected Any company whose securities are listed on a stock exchange may, at its discretion
persons require any other connected person or class of connected persons to make disclosures of
holdings and trading in securities of the company in such form and at such frequency as
may be determined by the company in order to monitor compliance with these regulations.

Company Company to notify to the exchange within 2 trading days of receipt of disclosure.

INFORMANT INCENTIVES AND REWARDS

Chapter IIIA has been added to SEBI (Prohibition of Insider Trading ) Regulations 2015 vide SEBI (Prohibition of
Insider Trading (Thrid Amendment) Regulations, 2019 w.e.f December 26, 2019, prescribing for incentive and
reward for the informants who submits to the SEBI a Voluntary Information Disclosure relating to any alleged
violation of insider trading laws that has occurred, in occurring or has a reasonable belief that it is about to occur.
The new provisions prescribe the manner of submitting information, various forms and procedure for determination
of rewards and confidentiality of informants.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 311

Brief process flow of submission to the SEBI [Regulation 7 (B)]

An Informant shall submit The format and manner of If the Informant does not
Original Information in the Form shall be as set out submit the Form through a
Voluntary Disclosure in Schedule D and may be legal representative SEBI may
Information Form to the submitted by a legal require the Informant to
Office of Informant representative of the appear in person to ascertain
Protection of the SEBI. his/her identity & veracity of
Informant.
the information.

The Informant while submitting If expunging the information

the Voluntary Disclosure is not possible the Informant
Information Form shall may identify such
expunge the information in information /document
the Form which could that he believes could
reasonably be expected to reasonably be expected to
reveal his/her identity. reveal his/her identity.

CODES OF FAIR DISCLOSURE AND CONDUCT

A. Code of Fair Disclosure [Regulation 8]
Chapter IV of SEBI (Prohibition of Insider Trading) Regulations 2015 deals with codes to be documented and
followed by listed companies/market intermediaries.

Codes Prescribed

Codes of Fair disclosure (Principles of Code of conduct - Minimum standards

Fair disclosure prescribed) for code of conduct prescribed.

SCHEDULE A- Principles for fair disclosure shall be as follows:

1. Prompt public disclosure of unpublished
price sensitive information that would impact Question: Whether Chief Investor Relations Officer
price discovery no sooner than credible and (CIRO) will also be responsible along with
concrete information comes into being in order Compliance Officer for not disseminating
to make such information generally available. information or non-disclosure of UPSI?
2. Uniform and universal dissemination of Answer: Regulation 2(c) clearly provides the
unpublished price sensitive information to functions and responsibilities of the compliance
avoid selective disclosure. officer. Specific responsibilities to deal with
3. Designation of a senior officer as a chief dissemination of information and disclosure of UPSI
investor relations officer to deal with are given to CIRO under clause 30 of Schedule A. It is
dissemination of information and disclosure of company’s discretion to designate two separate
unpublished price sensitive information. persons as CIRO and compliance officer, respectively
for fulfilling specified responsibilities in cases
4. Prompt dissemination of unpublished price where CIRO and compliance officer have been
sensitive information that gets disclosed designated for overlapping functions, they shall be
selectively, inadvertently or otherwise to make jointly and severally responsible.
such information generally available.
 312  Lesson 11 • EP-SLCM

5. Appropriate and fair response to queries on news reports and requests for verification of market rumours
by regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not unpublished price sensitive
information.
7. Developing best practices to make transcripts or records of proceedings of meetings with analysts and
other investor relations conferences on the official website to ensure official confirmation and documentation
of disclosures made.
8. Handling of all unpublished price sensitive information on a need-to-know basis.
CODE OF FAIR DISCLOSRE
Board of directors of listed company to formulate and publish a code of practices and procedures for fair
disclosure of UPSI on the official website of the company.
Regulatory intent
This provision intends to require every company whose securities are listed on stock exchanges to formulate a
stated framework and policy for fair disclosure of events and occurrences that could impact price discovery in the
market for its securities. Principles such as, equality of access to information, publication of policies such as those
on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such calls and
meetings, and the like are set out in the schedule.
The Regulation
Regulation 8 (1) states that the board of directors of every company, whose securities are listed on a stock exchange,
shall formulate and publish on its official website, a code of practices and procedures for fair disclosure of
unpublished price sensitive information that it would follow in order to adhere to each of the principles set out in
Schedule A to these regulations, without diluting the provisions of these regulations in any manner.
To notify the code of fair disclosure/amendment thereof to the stock exchanges.
Regulation 8(2) states that every such code of practices and procedures for fair disclosure of unpublished price
sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the
securities are listed.
The board of directors of a listed company shall make a policy for determination of “legitimate purposes”
as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.
The term “legitimate purpose” shall include sharing of unpublished price sensitive information in the ordinary
course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers,
legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has
not been carried out to evade or circumvent the prohibitions of these regulations.
CODE OF CONDUCT
Board of Directors of every listed company and the board of directors or head(s) of the organisation of
every intermediary ensure that the chief executive officer or managing director formulate code of conduct
with their approval to regulate, monitor and report trading by its designated persons and immediate
relatives of designated persons.
Regulatory intent
It is intended that every company whose securities are listed on stock exchanges and every intermediary registered
with SEBI is mandatorily required to formulate a code of conduct governing trading by designated persons and
their immediate relatives. The standards set out in the schedules are required to be addressed by such code of
conduct.
The Regulation
Regulation 9 (1) states that the board of directors of every listed company and the board of directors or head(s) of
the organisation of every intermediary shall ensure that the chief executive officer or managing director shall
formulate a code of conduct with their approval to regulate, monitor and report trading by its designated persons
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 313

and immediate relatives of designated persons towards achieving compliance with these regulations, adopting the
minimum standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary)
to these regulations, without diluting the provisions of these regulations in any manner.
Explanation – For the avoidance of doubt it is clarified that intermediaries, which are listed, would be required to
formulate a code of conduct to regulate, monitor and report trading by their designated persons, by adopting the
minimum standards set out in Schedule B with respect to trading in their own securities and in Schedule C with
respect to trading in other securities.
The board of directors or head(s) of the organisation, of every other person who is required to handle
unpublished price sensitive information in the course of business operations shall formulate a code of
conduct.
Regulatory intent
It is intended to mandate persons other than listed companies and intermediaries that are required to handle
unpublished price sensitive information to formulate a code of conduct governing trading in securities by their
designated persons. These entities include professional firms such as auditors, accountancy firms, law firms,
analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies. Even
entities that normally operate outside the capital market may handle unpublished price sensitive information. This
provision would mandate all of them to formulate a code of conduct.
The Regulation
Regulation 9 (2) states the board of directors or head(s) of the organisation, of every other person who is required
to handle unpublished price sensitive information in the course of business operations shall formulate a code of
conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated
persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule
C to these regulations, without diluting the provisions of these regulations in any manner.
Explanation - Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional
entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries
for the purpose of these regulations.
B. Code of Conduct [Regulation 9]
• The board of directors or head(s) of the organisation, of every other person who is required to handle
unpublished price sensitive information in the course of business operations shall mandatorily formulate a
code of conduct to regulate, monitor and report trading by their designated persons and immediate relative
of designated persons towards achieving compliance with these regulations, adopting the minimum standards
set out in Schedule C to these regulations, without diluting the provisions of these regulations in any manner.
Explanation - Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency
professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively
referred to as fiduciaries for the purpose of these regulations. Even entities that normally operate outside the
capital market may handle unpublished price sensitive information. This provision would mandate all of
them to formulate a code of conduct.
• Every listed company, intermediary and other persons formulating a code of conduct shall identify and
designate a compliance officer to administer the code of conduct and other requirements under these
regulations.
• The board of directors or such other analogous authority shall in consultation with the compliance officer
specify the designated persons to be covered by the code of conduct on the basis of their role and function
in the organisation and the access that such role and function would provide to unpublished price sensitive
information in addition to seniority and professional designation and shall include:-
(i) Employees of such listed company, intermediary or fiduciary designated on the basis of their functional
role or access to unpublished price sensitive information in the organization by their board of directors
or analogous body;
 314  Lesson 11 • EP-SLCM

(ii) Employees of material subsidiaries of such listed companies designated on the basis of their functional
role or access to unpublished price sensitive information in the organization by their board of directors;
(iii) All promoters of listed companies and promoters who are individuals or investment companies for
intermediaries or fiduciaries;
(iv) Chief Executive Officer and employees upto two levels below Chief Executive Officer of such listed
company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in
the company or ability to have access to unpublished price sensitive information;
(v) Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who
have access to unpublished price sensitive information.

Minimum Standards for Code of Conduct

Schedule B of these regulations lays down the following
minimum standards for Code of Conduct for listed companies
to regulate, monitor and report trading by designated
persons:-
1. The Compliance Officer shall report to the board of
directors and in particular, shall provide reports to the
Chairman of the Audit Committee, if any, or to the
Chairman of the board of directors at such frequency as
may be stipulated by the board of directors but not less
than once in a year.
2. All information shall be handled within the organisation
on a need-to-know basis and no unpublished price
sensitive information shall be communicated to any
person except in furtherance of legitimate purposes,
performance of duties or discharge of legal obligations.
3. The code of conduct shall contain norms for appropriate
Failure to close trading window by the
Chinese Walls procedures, and processes for permitting
Compliance Officer, during the occurring of
any designated person to “cross the wall”.
an event that generates price-sensitive
4. Designated persons and immediate relatives of information is a violation of the said Code of
designated persons in the organisation shall be governed by Conduct which holds the Compliance Officer
an internal code of conduct governing dealing in securities. liable for adjudicating proceedings.
5. Designated persons may execute trades subject to [Edelweiss Financial Services Ltd.]
compliance with these regulations. Towards this end, a
notional trading window shall be used as an instrument
of monitoring trading by the designated persons.
6. The trading window shall be closed when the compliance officer
determines that a designated person or class of designated persons can When the trading window
reasonably be expected to have possession of unpublished price sensitive is open, trading by
information. Such closure shall be imposed in relation to such securities to designated persons shall
which such unpublished price sensitive information relates. be subject to pre-clearance
by the compliance officer,
7. Designated persons and their immediate relatives shall not trade in if the value of the proposed
securities when the trading window is closed. trades is above such
8. Trading restriction period shall be made applicable from the end of every thresholds as the board of
quarter till 48 hours after the declaration of financial results. The gap directors may stipulate
between clearance of accounts by audit committee and board meeting
should be as narrow as possible and preferably on the same day to avoid leakage of material information.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 315

9. The trading window restrictions mentioned above shall not apply in respect of –
(a) transactions specified in clauses (i) to (iv) and (vi) of the proviso to sub-regulation (1) of regulation 4
and in respect of a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-
clearance by the compliance officer and compliance with the respective regulations made by the Board;
(b) transactions which are undertaken in accordance with respective regulations made by the SEBI such
as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public
issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer or
transactions which are undertaken through such other mechanism as may be specified by the SEBI
from time to time.

10. The timing for re-opening of the trading window shall be determined by the compliance officer taking into
account various factors including the unpublished price sensitive information in question becoming generally
available and being capable of assimilation by the market, which in any event shall not be earlier than forty-
eight hours after the information becomes generally available.
11. When the trading window is open, trading by designated persons shall be subject to pre-clearance by the
compliance officer, if the value of the proposed trades is above such thresholds as the board of directors
may stipulate.
12. Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that
the applicant for pre-clearance is not in possession of any unpublished price sensitive information.
13. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.
14. The code of conduct shall specify any reasonable timeframe, which in any event shall not be more than seven
trading days, within which trades that have been pre-cleared have to be executed by the designated person,
failing which fresh pre-clearance would be needed for the trades to be executed.
15. The code of conduct shall specify the period, which in any event shall not be less than six months, within
which a designated person who is permitted to trade shall not execute a contra trade. The compliance
officer may be empowered to grant relaxation from strict application of such restriction for reasons to be
recorded in writing provided that such relaxation does not violate these regulations. Should a contra trade be
executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be
liable to be disgorged for remittance to SEBI for credit to the Investor Protection and Education Fund
administered by the SEBI under the Act.
However, this shall not be applicable for trades pursuant to exercise of stock options.
16. The code of conduct shall stipulate such formats as the board of directors deems necessary for making
applications for pre-clearance, reporting of trades executed, reporting of decisions not to trade after securing
pre-clearance, and for reporting level of holdings in securities at such intervals as may be determined as
being necessary to monitor compliance with these regulations.
17. Without prejudice to the power of the SEBI under the Act, the code of conduct shall stipulate the sanctions
and disciplinary actions, including wage freeze, suspension, recovery, etc., that may be imposed, by the listed
company required to formulate a code of conduct under subregulation (1) of regulation 9, for the contravention
of the code of conduct. Any amount collected under this clause shall be remitted to the Board for credit to the
Investor Protection and Education Fund administered by the SEBI under the Act.
18. The code of conduct shall specify that in case it is observed by the listed company required to formulate a
code of conduct, that there has been a violation of these regulations, it shall inform the SEBI promptly.
19. Designated persons shall be required to disclose names and Permanent Account Number or any other
identifier authorized by law of the following persons to the company on an annual basis and as and when the
information changes:
(a) immediate relatives,
(b) persons with whom such designated person(s) shares a material financial relationship,
(c) phone, mobile and cell numbers which are used by them.
 316  Lesson 11 • EP-SLCM

In addition, the names of educational institutions from which designated persons have graduated and names
of their past employers shall also be disclosed on a one time basis.
Explanation – The term “material financial relationship” shall mean a relationship in which one person is
a recipient of any kind of payment such as by way of a loan or gift from a designated person during the
immediately preceding twelve months, equivalent to at least 25% of the annual income of such designated
person but shall exclude relationships in which the payment is based on arm’s length transactions.
20. Listed entities shall have a process for how and when people are brought ‘inside’ on sensitive transactions.
Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside
Information, and the liability that attaches to misuse or unwarranted use of such information.
• When trading window should be closed? How long it should be closed?
• What is the time limit to execute the trade once that have been pre-cleared?

Institutional Mechanism for Prevention of Insider trading [Regulation 9A]

• The Chief Executive Officer, Managing Director or such other analogous person of a listed company,
intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure
compliance with the requirements given in these regulations to prevent insider trading.
The internal controls shall include the following:
(a) all employees who have access to unpublished price sensitive information are identified as designated
person;
(b) all the unpublished price sensitive information shall be identified and its confidentiality shall be
maintained as per the requirements of these regulations;
(c) adequate restrictions shall be placed on communication or procurement of unpublished price sensitive
information as required by these regulations;
(d) lists of all employees and other persons with whom unpublished price sensitive information is shared
shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such
employees and persons;
(e) all other relevant requirements specified under these regulations shall be complied with;
(f) periodic process review to evaluate effectiveness of such internal controls.

• The board of directors of every listed company and

the board of directors or head(s) of the organisation Every listed company shall formulate written policies
of intermediaries and fiduciaries shall ensure that and procedures for inquiry in case of leak of
the Chief Executive Officer or the Managing Director unpublished price sensitive information or suspected
or such other analogous person ensures compliance leak of unpublished price sensitive information, which
with these regulations. shall be approved by board of directors of the company
• The Audit Committee of a listed company or other The listed company shall have a whistle-blower policy
analogous body for intermediary or fiduciary shall and make employees aware of such policy to enable
review compliance with the provisions of these employees to report instances of leak of unpublished
regulations at least once in a financial year and shall price sensitive information.
verify that the systems for internal control are
adequate and are operating effectively.
• Every listed company shall formulate written policies and procedures for inquiry in case of leak of
unpublished price sensitive information or suspected leak of unpublished price sensitive information,
which shall be approved by board of directors of the company and accordingly initiate appropriate inquiries
on becoming aware of leak of unpublished price sensitive information or suspected leak of unpublished price
sensitive information and inform the Board promptly of such leaks, inquiries and results of such inquiries.
• The listed company shall have a whistle-blower policy and make employees aware of such policy to enable
employees to report instances of leak of unpublished price sensitive information.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 317

• If an inquiry has been initiated by a listed company in case of leak of unpublished price sensitive information
or suspected leak of unpublished price sensitive information, the relevant intermediaries and fiduciaries
shall co-operate with the listed company in connection with such inquiry conducted by listed company.

PENALTY PROVISIONS FOR VIOLATIONS OF THE REGULATIONS

If any person violates provisions of these regulations, he shall be liable for appropriate action under Sections 11, 11
B, 11D, Chapter VIA and Section 24 of the SEBI Act.
Penalty for insider trading under section 15G of the SEBI Act, 1992

If any insider who, –

• either on his own behalf or on behalf of any other person, deals in
securities of a body corporate listed on any stock exchange on the
basis of any unpublished price sensitive information; or
• communicates any unpublished price sensitive information to any
person, with or without his request for such information except as
required in the ordinary course of business or under any law; or
• counsels, or procures for any other person to deal in any securities of any
body corporate on the basis of unpublished price sensitive information.

shall be liable to a penalty which shall not be less than ten lakh rupees
but which may extend to twenty-five crore rupees or three times the
amount of profits made out of insider trading, whichever is higher.

APPEAL TO SECURITIES APPELLATE TRIBUNAL

Violation of the provisions of these regulations attract huge monetary penalty and may lead to criminal prosecution.
However those aggrieved by an order of SEBI, may prefer an appeal to the Securities Appellate Tribunal within a
period of forty-five days of the order.
 318  Lesson 11 • EP-SLCM

ROLE OF COMPANY SECRETARY AS COMPLIANCE OFFICER

The obligations cast upon the Company Secretary in relation to insider trading regulations can be summarized as
under. The Company Secretary shall:
1. Ensure compliance with SEBI (Prohibition of insider Trading) Regulations, 2015 including maintenance of
various documents.
2. Frame a Code of Fair Disclosure in line with the model code specified in the Schedule A of the regulations, get
the same approved by the board of directors of the company and submit to the stock exchanges
3. Frame Code of Conduct for the listed company to regulate, monitor and report trading by designated persons
in accordance with the minimum standards as enumerated in the Schedule B to these regulations.
4. Receive initial disclosure from every Promoter, KMP and director or every person on appointment as KMP or
director or becoming a Promoter shall disclose its shareholding in the prescribed form within :
– 30 days from these regulations taking effect, or
– 7 days of such appointment or becoming a promoter
5. Receive from every Promoter, designated persons and director, continual disclosures of the number of
securities acquired or disposed of and changes therein, even if the value of the securities traded, exceeds Rs.
10 lakh with single or series of transaction in any calendar quarter in prescribed form within two trading
days of :
– receipt of the disclosure, or
– from becoming aware of such information
Submit the disclosures received as above to the stock exchanges as applicable.
6. Pre Clear the trade pursuant to the requests received from the designated persons and also monitor trading
in accordance with the regulations.
7. Ensure that no trading shall between 20th day prior to closure of financial period and 2nd trading day after
disclosure of financial results.
8. Approve the trading plan and after the approval of the trading plan, as compliance officer shall notify the plan
to the stock exchanges on which the securities are listed.
9. Maintain records, as a Compliance Officer, of all the declarations given by the directors/designated employees/
partners in the appropriate form for a minimum period of three years.
10. Take additional undertakings, as a compliance officer, from the insiders for approval of the trading plan. Such
trading plan on approval will also be disclosed to the Stock Exchanges, where the securities of the company
are listed.
11. Monitor trades and the implementation of the code of conduct under the overall supervision of the Board of
Directors of the listed company.
12. Frame and then monitor adherence to the rules for the preservation of “Price sensitive information”.
13. Ensure that proper internal control system is in place and continuously monitor and review of its functioning.
14. Suggest any improvements required in the policies, procedures, etc. to ensure effective implementation of the
code.
15. Assist in addressing any clarifications regarding the SEBI (Prohibition of Insider Trading) Regulations, 2015
and the company’s code of conduct.
16. Maintain a list of all information termed as ‘price sensitive information’.
17. Maintain a record of names of files containing confidential information deemed to be price sensitive
information and persons in charge of the same.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 319

18. Ensure that files containing confidential information are kept secured.
19. Keep records of periods specified as ‘Close period’ and the ’Trading window’.
20. Ensure that the trading restrictions are strictly observed and all directors/officers/designated employees
conduct all their dealings in the securities of the company only in a valid trading window and do not deal in
the company’s securities during the period when the trading window is closed.
21. Receive and maintain records of periodic and annual statement of holdings from directors/officers/
designated employees and their dependent family members.
22. Ensure that the “Trading Window” is closed at the time of :
a) Declaration of financial results (quarterly, half-yearly and annual).
b) Declaration of dividends (interim and final).
c) Issue of securities by way of public/right/bonus etc.
d) Any Major expansion plans or execution of new projects.
e) Amalgamation, mergers, takeovers and buy-back.
f) Disposal of whole or substantially whole of the undertaking.
g) Any change in policies, plans or operations of the compamy.
23. Maintain a structured digital database of name(s) of persons and entities with whom unpublished price
sensitive information are shared along with their PAN and other details.
24. Serve due notices to maintain confidentiality for every such person(s) with whom information are shared for
legitimate purposes.
25. Educate the employees, board of directors regarding the provisions of the regulations and amendments from
time to time for their better understanding and compliances.
26. Assist the board of directors to undertake enquiry or investigation in case of any suspected violation of the
regulation and advising on taking appropriate disciplinary actions including transfer of all unlawful gain to
the SEBI Investor Protection and Education Fund.
27. Place before the Chief Executive Officer/Partner or a committee notified by the organization/firm, as a
Compliance Officer, on a monthly basis all the details of the dealing in the securities by designated employees/
directors/partners of the organization/firm.

CHECKLISTS UNDER SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS 2015

• Checklists for KMP and other employees(including Company Secretary)
• Checklists for Board of Directors
• Checklists for PCS firms, advocates, auditors and practicing professionals.
A. CHECKLIST FOR COMPLAINCE OFFICER
“financially literate” shall
As per Regulation 2(c) “compliance officer” means any senior officer, mean a person who has the
designated so and reporting to the board of directors or head of the ability to read and understand
organization in case board is not there, who is financially literate and is basic financial statements i.e.
capable of appreciating requirements for legal and regulatory compliance balance sheet, profit and loss
under these regulations and who shall be responsible for- account, and statement of cash
• compliance of policies, procedures, flows.

• maintenance of records,
• monitoring adherence to the rules for the preservation of unpublished price sensitive information,
• monitoring of trades, and
 320  Lesson 11 • EP-SLCM

• the implementation of the codes specified in these regulations.

under the overall supervision of the board of directors of the listed company or the head of an organization, as the
case may be;
I. Compliance of polices and procedures
(a) Whether the Company has formulated code of practices and procedures for fair disclosure of UPSI as
per the principles set out in the regulations.
(b) Whether the code of fair disclosure is published on the website of the company.
(c) Whether the code of fair disclosure and amendments thereof has been intimated to the stock exchanges.
(d) Whether the company has formulated code of conduct to regulate, monitor and report trading by its
designated persons and immediate relatives of designated persons.
(e) Whether the Board has designated the chief executive officer or managing director to formulate the
code of conduct with their approval.
(f) Whether the company has designated a compliance office to administer the code of conduct and other
requirements.
(g) It is advisable to train the employees on principles of fair disclosure and code of conduct.

II. Maintenance of records

(a) Ensure that disclosures of trades by insiders are maintained for a minimum period of five years.

III. Monitoring UPSI

(a) Identify the nature of information, whether it is an Unpublished Price Sensitive Information or
Generally available information.
(b) Designate a senior officer as Chief investor relations officer to deal with dissemination of information
and disclosure of UPSI.
(c) Ensure to handle the UPSI on need to know basis.
(d) Do not share UPSI with analysts and research personnel.
(e) Disseminate UPSI uniformly to avoid selective disclosure.
(f) Identify the designated persons (Employees designated on the basis of their functional role) to monitor
the use of UPSI.
(g) Declaration from persons seeking pre-celarance that they are not in possession of UPSI.

IV. To Advise the Board on Minimum Standards for Code of Conduct.

V. To advise on designated persons who shall be governed by the code of conduct. Employees designated on the
basis of their functional role (“designated persons”) in the organisation shall be governed by an internal
code of conduct governing dealing in securities.
VI. To advise on mechanism for dissemination of information on need-to-know basis.
VII. To advise on the closure of trading window.
VIII. To advise on the format of applications of pre-clearance, reporting of trades etc.
IX. To maintain restricted list of securities which shall be used as the basis for approving/rejecting applications
for pre-clearance.
X. To prescribe norms for Chinese wall procedures.
XI. To prescribe the time limit within which the trades are to be executed from the date of pre-clearance which
should not be more than seven days.
 Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 321

XII. Trading plans.

(a) Monitoring of Trading Plans.
(b) Approval of Trading plans.

XIII. Intimation to stock exchanges

(a) Intimation of Initial disclosures by Directors/KMP/Promoters/member of promoter group.
(b) Intimation of continual disclosures by Promoter/member of promoter group/directors/designated
persons (including KMP as designated person).
(c) Intimation of disclosures by other connected persons.

B. CHECKLISTS FOR KMP AND OTHER EMPLOYEES (INCLUDING COMPANY SECRETARY)

• To make initial and continual disclosures as prescribed.

C. CHECKLISTS FOR BOARD OF DIRECTORS

(a) To formulate Code of Fair disclosure.
(b) To formulate Code of Conduct.
(c) Communication of UPSI in the best interest of the Company relating to transaction as given in
Regulation 3(3) .
(d) Obtaining non-disclosure agreement from parties to whom the UPSI is communicated as given in
Regulation 3(4).
(e) in consultation with the compliance officer, to specify the designated persons to be covered by such
code on the basis of their role and function in the organisation.
(f) To fix thresholds for pre-clearance.
(g) To prescribe format for application for pre-clearance, reporting of trades executed, reporting of
decisions not to trade after securing pre-clearance, recording of reasons for such decisions and for
reporting level of holdings in securities at such intervals as may be determined as being necessary to
monitor compliance with these regulations.

RECENT JUDGEMENTS AND DEVELOPMENTS

• During the year 2018 it was came to the knowledge of the SEBI that several unpublished price sensitive
information were circulated in private social media networking groups about certain companies ahead of
their official announcements to the respective stock exchanges. This calls for immediate change in ongoing
PIT Regulations with newer requirements like Policy for leak of unpublished price sensitive information,
maintaining structure digital database of persons with whom information are shared, reward and incentive
system for informants etc.
• In the matter of Insider Trading in the Scrip of Deep Industries Ltd., the SEBI during the investigation go
beyond the prescribed definition of Connected Persons under the regulation and establishes relationships
and nexus of persons, leak of information on the basis of social media network websites and KYC documents
with intermediaries of suspected persons and entities involved in the insider trading.

MAJOR CASE STUDIES ON INSIDER TRADING

A Hindustan Lever Ltd. Vs. SEBI
Facts of the Case:
• Hindustan Lever Ltd. (HLL) purchased 8 lakh shares of Brooke Bond India Ltd. (BBIL) from UTI two
weeks prior to the public announcement of the merger of the two companies,
• SEBI, suspecting insider trading, conducted inquiries & issued a show cause notice against HLL’s Chairman,
all executive directors & company secretary alleging them with the charge of insider trading,
 322  Lesson 11 • EP-SLCM

• SEBI also awarded compensation to be paid by HLL to UTI,

• HLL files an appeal to the appellate authority against SEBI order of imposition of penalty, pleading that an
information to be UPSI should fulfill two major criteria as per the definition provided in the Insider Trading
Regulations which are:
(a) information must not be generally known or published by the company, and
(b) if published or known, is likely to materially affect the price of securities of that company in the market
(i.e. it should be a price sensitive information).

• (HLL further adds that since the possibility of merger of the two companies appeared to have been generally
speculated about & was probably already discounted by the market, this information (purchase of 8 lakh
shares of BBIL) was not likely to have significantly impacted on the price at which the transaction between
HLL & UTI concluded which was further strongly evidenced by the fact that UTI continued to sell the shares
of BBIL in the market, after the merger, at prices close to the price at which they had sold shares to HLL.
Decision of the Case:
In its judgment, Appellate Authority decided that on the basis of above facts, it is not a sufficient ground to
impose penalty on HLL as the information about the merger of two companies was a generally known
(speculated about) information & further also did not affected the prices of securities of BBIL, materially (i.e.
it was not a price sensitive information).
B. Dilip Pendse vs. SEBI
Facts of the Case:
• Tata Finance Ltd. (TFL), a listed public company had a wholly owned subsidiary “Nishkalpa”,
• Nishkalpa incurred huge losses which was bound to affect the balance sheet of TFL, significantly,
• Well being aware of this fact, Mr.Dilip Phendse, MD of the company passed this information to his wife, who
in turn sold off all her & her father-in-law’s holdings in TFL, including all other shares held by them in other
group companies, at a significant gain, before this information became public,
• Post disclosure of financial statements & the above information becoming public, there was a considerable
fall in the market price of shares of TFL because of which the general investors of TFL suffered losses.
Decision of the Case:
SEBI found Mr. Dilip Phendse guilty of offence of Insider Trading in the above case.

LESSON ROUND-UP

• To curb insider trading SEBI formulated SEBI (Prohibition of Insider Trading) Regulations, 2015 and
which prescribes code of fair disclosure and conduct to be followed by listed companies and entities
connected with them.
• The Insider Trading Regulations comprises of five chapters and five schedules encompassing the
various regulations relating to Insider Trading.
• Insider means and includes deemed to be a connected person. The definition of deemed to be a
connected person is inclusive and very elaborate.
• The regulations not only seeks to curb dealing in securities, they also seek to curb communicating or
counseling about securities by the insiders.
• The regulations provide for initial as well as continual disclosures by members of the company by the
directors/ employees/ designated employees/promoter/promoter group at regular interval.
Lesson 11 • SEBI (Prohibition of Insider Trading) Regulations, 2015 323

GLOSSARY

Book Closure
The periodic closure of the Register of Members and Transfer Books of the company, to take a record of the
shareholders to determine their entitlement to dividends or to bonus or right shares or any other rights
pertaining to shares.
Chinese Walls
Artificial barriers to the flow of information set up in large firms to prevent the movement of sensitive
information between departments.
Contra Trade
Contra trading involves buying and selling the same shares without paying for them.
Interim
A dividend payment made during the course of a company’s financial year. Interim
Dividend
Dividend, unlike the final dividend, does not have to be agreed in a general meeting.
Punitive
It implies involving or inflicting punishment.

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. All designated persons are insiders, but all insiders are not designated persons. Do you agree ?
2. The compliance officer wants to get his trading plans approved. What is the process of getting the
approval?
3. Pre-approved trading plans does not require pre-clearance. Elucidate the statement. .
4. The onus is on the insider to prove the innocence of use of unpublished price sensitive information.
Explain the statement.
5. Attempt the following:
a. Insider Trading normally means trading in shares of a company by the persons who are in the
management of the company or close to them on the basis of price sensitive information which they
possess but not others. In light of this, state whether the following information is price sensitive:
i. The CEO of the company met with an accident and has been hospitalized,
ii. Intended declaration of bonus issue,
iii. Increase in Repo rate by RBI by 15 basis point,
iv. Company is planning for diversification through opening of another plant.
b. Sandy was the Finance Manager of Quick Works Ltd. a public listed company. He was alleged in the
case of insider trading though however he left the company 110 days prior to the allegation imposed
on him. He contended that he cannot be treated as the “connected person” as he has left the
organization prior to the act of insider trading. Was his contention valid? Answer with reasons, in
brief.
(Practical Questions can be picked from last three years question papers)
324  Lesson 11 • EP-SLCM

LIST OF FURTHER READINGS

• SEBI Manual
• SEBI Circulars
• SEBI Notifications
• SEBI Orders

OTHER REFERENCES (Including Websites/Video Links)

www.sebi.gov.in
www.icsi.edu
www.nseindia.com
www.bseindia.com
www. nsdl.co.in
www.cdslindia.com
www.sat.gov.in
Lesson 12 Mutual Funds
Key Concepts One Learning Objectives Regulatory Framework
Should Know
To understand: • SEBI (Mutual Funds)
• Mutual Fund Regulations, 1996
• Meaning of Mutual Fund
• Asset
Management • The trend of mutual funds in
Company India over a period of time
• Sponsor • Structure of a Mutual Fund
• Trustees • Various schemes of mutual
funds
• Close-Ended
Scheme • Advantages and risk
involved in Mutual Fund
• Open-Ended
Scheme • SEBI laws governing mutual

• Exchange Traded
Fund
• Fund of Funds Lesson Outline
Scheme
• Introduction • Schemes of Mutual Fund
• Money Market • Structure of a Mutual Fund • Code of Conduct of Mutual Funds
Mutual Fund
• Overview of Mutual Funds • Advertisement Code
• Real Estate Industry in India
Mutual Fund • Restriction on Investiment by
Scheme • Types of Mutual Funds Mutual Fund
• Schemes according to • Pricing of Units of Mutual Fund
• Unit
Investment Objective • Facilitating Transaction in
• Unit Holder • Advantages of Mutual Funds Mutual Fund Schemes through
• Offer Document • Risks involved in Mutual Funds the Stock Exchange
Infrastructure
• Key Players in Mutual Fund • Power to relax strict enforcement
• Mutual Fund Terminology of the Regulations
• Net Asset Value • SEBI (Listing Obligations &
• Expense Ratio Disclosure Requirements)
Regulations, 2015
• Holding Period Return
• LESSON ROUND-UP
• Evaluating Performance of
Mutual Fund • GLOSSARY
• SEBI (Mutual Fund) Regulations, • TEST YOURSELF
1996 – Overview • LIST OF FURTHER READINGS
• Registration of Mutual Funds • OTHER REFERENCES
• Constitution and Management of
Asset Management Company
and Custodian
 326  Lesson 12 • EP-SLCM

INTRODUCTION
As our Economy continues to grow there is a huge amount of wealth creating opportunities surfacing everywhere.
A Mutual fund is a professionally managed form of collective investment that pools money from many investors and
invest in stocks, bonds, short-term money market instruments and other securities.
The major reason investor chooses mutual funds are professional and management diversification. The investors
should compare the risks and expected yields after adjustment of tax on various instruments while taking investment
decisions.
SEBI (Mutual Fund) Regulations, 1996, define “mutual fund” as a fund established in the form of a trust to raise
monies through the sale of units to the public or a section of the public under one or more schemes for investing in
securities, money market instruments, gold or gold related instruments, real estate assets and such other assets as
specified by the SEBI.
Mutual Funds are a vehicle that collects money from investors to buy securities. These investors have a common
objective, and this pool of money is advised by the fund manager who decides how to invest the money. With good
fund management, the Mutual Fund Manager (or Portfolio Manager) generates returns for the investors, which are
passed back to investors. Diversification reduces the risk because all stocks may not move in the same direction in
the same proportion at the same time. The mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time. A mutual fund is required to be registered with SEBI
before it can collect funds from public.

Investors
Fund Manager
(Pool in their
(Invest in Securities)
money)

Returns Securities
(Passed back to (Generates return)
Investors)

What is a mutual fund?

As the two words, Mutual connotes getting together and Fund connotes money. Hence by definition, a Mutual Fund
is a vehicle for investing money for investors with a common objective.
A Mutual Fund is a trust that collects money from investors who share a common financial goal, and invest the
proceeds in different asset classes, as defined by the investment objective. Simply put, mutual fund is a financial
intermediary, set up with an objective to professionally manage the money pooled from the investors at large. By
pooling money together in a mutual fund, investors can enjoy economies of scale and can purchase stocks or bonds
at a much lower trading costs compared to direct investing in capital markets. The other advantages are
diversification, stock and bond selection by experts, low costs, convenience and flexibility.
 Lesson 12 • Mutual Funds 327

List of all stakeholders in Indian mutual fund industry is as follows:

• Reserve Bank of India (RBI)
• Securities and Exchange Board of India (SEBI)
• Association of Mutual Funds in India ( AMFI)
• Ministry of Finance
• Self Regulatory Organization (SROs)
• Income Tax Regulations
• Investors‘ Associations

STRUCTURE OF A MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (“AMC”) and
a custodian. SEBI prescribes comprehensive set of guidelines in the functioning of a mutual fund through the SEBI
(Mutual Funds) Regulations, 1996. These regulations stipulate that a mutual fund must consist of five important entities:
 328  Lesson 12 • EP-SLCM

1. Sponsor - Sponsor is the principal body, who brings the capital as per the guideline issued by SEBI to start a
mutual fund
2. Trust & Trustee - Trust is created by sponsor and trustees are appointed to manage the operations of a trust.
The trustees’ job is to ensure that all the funds are managed as per the defined objective and investors’
interest is protected.
3. Asset Management Company (AMC) - Trustee appoints AMC to manage the funds of the investors and, in
return, get the fee to manage the fund.
4. Custodian - Custodian job is to the safekeeping of the investors’ fund and securities and to ensure that it
would be used for intended purpose only.
5. Registrar and Transfer Agent (RTA) - RTAs job is to manage the backend operation of the mutual fund and
managing investors’ transaction request and other related services.

Mutual Fund Structure

(Managed by Trustees)

Mutual Fund Structure - Example

Description Entity
Mutual Fund Trust IDBI Mutual Fund
Sponsor IDBI Bank Limited
Trustee IDBI MF Trustee Company Limited
Asset Management Company IDBI Asset Management Limited
Registrar Karvy Computershare Private Limited
Custodian Stock Holding Corporation of India Limited
The Bank of Nova Scotia

Regulator & Industry Body

Regulator: Securities and Exchange Board of India (SEBI)
• Regulates mutual funds, custodians and registrars & transfer agents
• The applicable guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations, 1996; updated
periodically
 Lesson 12 • Mutual Funds 329

Industry Body: Association of Mutual Funds in India (AMFI)

• As of now, all 45 AMCs are members of AMFI (Source: www.amfiindia.com)
• Recommends and promotes best business practices and code of conduct
• Disseminates information and carries out studies/research on mutual fund industry

OVERVIEW OF MUTUAL FUNDS INDUSTRY IN INDIA

• The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an
initiative of the Government of India and the Reserve Bank of India.
• Much later, in 1987, SBI Mutual Fund became the first non-UTI mutual fund in India.
• Subsequently, the year 1993 heralded a new era in the mutual fund industry. This was marked by the entry of
private companies in the sector. Franklin Templeton (erstwhile Kothari Pioneer) was the first of its kind.
• After the Securities and Exchange Board of India (SEBI) Act was passed in 1992, the SEBI Mutual Fund
Regulations came into being in 1996.
• As the industry expanded, a non-profit organization, the Association of Mutual Funds in India (AMFI), was
established on 1995. Its objective is to promote healthy and ethical marketing practices in the Indian mutual
fund Industry. SEBI has made AMFI certification mandatory for all those engaged in selling or marketing
mutual fund products.

TYPES OF MUTUAL FUNDS

Types of Mutual Funds

Open Ended Close Ended

• Can be purchased on any transaction day • Can be purchased only during NFO
• Can be redeemed on any transaction day [Except • Can be redeemed only at maturity
when units are locked-in in the case of Equity-Linked
Savings Scheme (ELSS) funds]
• High liquidity • Low on liquidity
Types of Mutual Fund Plans
 330  Lesson 12 • EP-SLCM

Regular Plans Direct Plans

• Sold through a distributor • Sold directly by the Asset Management Company
(AMC)
• Higher Expense Ratio (Due to commissions paid • Lower Expense Ratio (No commission paid to
to distributor) distributor)
• Potentially lower returns to the investor (Due to • Potentially higher returns
higher expenses) (Due to lower expenses)
Categories of Mutual Funds

SCHEMES ACCORDING TO INVESTMENT OBJECTIVE

Besides these, there are other types of mutual funds also to meet the investment needs of several groups of investors.
Some of them include the following:
(a) Income Oriented Schemes: The fund primarily offer fixed income to investors. Naturally enough, the main
securities in which investments are made by such funds are the fixed income yielding ones like bonds,
corporate debentures, Government securities and money market instruments, etc.
(b) Growth Oriented Schemes: These funds offer growth potentialities associated with investment in capital
market namely: (i) high source of income by way of dividend and (ii) rapid capital appreciation, both from
holding of good quality scrips. These funds, with a view to satisfying the growth needs of investors, primarily
concentrate on the low risk and high yielding spectrum of equity scrips of the corporate sector.
(c) Hybrid Schemes: These funds cater to both the investment needs of the prospective investors – namely fixed
income as well as growth orientation. Therefore, investment targets of these mutual funds are judicious mix
of both the fixed income securities like bonds and debentures and also sound equity scrips. In fact, these
funds utilise the concept of balanced investment management. These funds are, thus, also known as “balanced
funds”.
(d) High Growth Schemes: As the nomenclature depicts, these funds primarily invest in high risk and high
return volatile securities in the market and induce the investors with a high degree of capital appreciation.
 Lesson 12 • Mutual Funds 331

(e) Capital Protection Oriented Scheme: It is a scheme which protects the capital invested in the mutual fund
through suitable orientation of is portfolio structure.
(f) Tax Saving Schemes: These schemes offer tax rebates to the investors under tax laws as prescribed from
time to time. This is made possible because the Government offers tax incentive for investment in specified
avenues. For example, Equity Linked Saving Schemes (ELSS) and pensions schemes.
(g) Special Schemes: This category includes index schemes that attempt to replicate the performance of
particular index such as the BSE, Sensex or the NSE-50 or industry specific schemes (which invest in specific
industries) or sectoral schemes (which invest exclusively in segment such as ‘A’ Group or initial public
offering). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to
that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in particular
sector or segment.
(h) Real Estate Funds: These are close ended mutual funds which invest predominantly in real estate and
properties.
(i) Off-shore Funds: Such funds invest in securities of foreign companies with RBI permission.
(j) Leverage Funds: Such funds, also known as borrowed funds, increase the size and value of portfolio and
offer benefits to members from out of the excess of gains over cost of borrowed funds. They tend to indulge
in speculative trading and risky investments.
(k) Hedge Funds: They employ their funds for speculative trading, i.e. for buying shares whose prices are likely
to rise and for selling shares whose prices are likely to fall.
(l) Fund of Funds: They invest only in units of other mutual funds. Such funds do not operate at present in India.
(m) New Direction Funds: They invest in companies engaged in scientific and technological research such as
birth control, anti-pollution, oceanography etc.
(n) Exchange Trade Funds (ETFs) are a new variety of mutual funds that first introduced in 1993. ETFs are
sometimes described as mere “tax efficient” than traditional equity mutual funds, since in recent years, some
large ETFs have made smaller distribution of realized and taxable capital gains than most mutual funds.
(o) Money Market Mutual Funds: These funds invest in short- term debt securities in the money market like
certificates of deposits, commercial papers, government treasury bills etc. Owing to their large size, the funds
normally get a higher yield on such short term investments than an individual investor.
(p) Infrastructure Debt Fund: They invest primarily in the debt securities or securitized debt investment of
infrastructure companies.

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a mutual fund are:
1. Professional Management: Investors avail the services of experienced and skilled professionals who are
backed by a dedicated investment research team which analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme.
2. Diversification: Mutual funds invest in a number of companies across a broad cross-section of industries
and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and
in the same proportion. Investors achieve this diversification through a Mutual Fund with far less money than
one can do on his own.
3. Convenient Administration: Investing in a mutual fund reduces paper work and helps investors to avoid
many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and
companies. Mutual funds save investors time and make investing easy and convenient.
4. Return Potential: Over a medium to long term, Mutual funds have the potential to provide a higher return as
they invest in a diversified basket of selected securities.
5. Low Costs: Mutual funds are a relatively less expensive way to invest compared to directly investing in the
capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs
for investors.
 332  Lesson 12 • EP-SLCM

6. Liquidity: In open ended schemes, investors can get their money back promptly at net asset value related
prices from the mutual fund itself. With close ended schemes, investors can sell their units on a stock exchange
at the prevailing market price or avail of the facility of direct repurchase at net asset value (NAV) related
prices which some close ended and interval schemes offer periodically or offer it for redemption to the fund
on the date of maturity.
7. Transparency: Investors get regular information on the value of their investment in addition to disclosure
on the specific investments made by scheme, the proportion invested in each class of assets and the fund
manager’s investment strategy and outlook.

RISKS INVOLVED IN MUTUAL FUNDS

The fundamental reason which makes mutual fund risky lies in the fact that it puts money in a variety of investment
instruments – debt, equity and corporate bonds, among others. Since the prices of these investment instruments
tend to fluctuate in response to several factors, investors may be subjected to loss. In a broader sense, mutual fund
risk can be categorized as – systematic risk and unsystematic risk

Types of Risks Cause of Risk

Volatility risk Typically, equity-based funds invest in the shares of companies that are listed on stock
exchanges. The value of such funds is based on companies’ performance, which often gets
affected due to the prevalent microeconomic factors.
Credit risk Credit risk in mutual fund investment often results from a situation, wherein, the issuer of
the scheme fails to pay the promised interest. In case of debt funds, typically, fund managers
include investment-grade securities with high credit ratings.
Liquidity risk Mutual funds with a long-term and rigid lock-in period like ELSS often come with liquidity
risk. Such a risk signifies that investors often find it challenging to redeem their investments
without incurring a loss.
Concentrated risk This mutual fund risk is also prevalent among investors. It can be described as the situation
when investors tend to put all their money into a single investment scheme or in one sector.
For instance, investing entirely in just one company’s stocks often bears a substantial risk
of losing capital if caught amidst bad market situations.
Inflation risk It can be best described as the risk of losing one’s purchasing power, mainly due to the
rising inflation rate. Typically, investors are exposed to the impact of this risk when the rate
of returns earned on investments fails to keep up with the increasing inflationary rate.
Also, Mutual funds may face the following risks, leading to non-satisfactory performance:
1. Excessive diversification of portfolio, losing focus on the securities of the key segments.
2. Too much concentration on blue-chip securities.
3. Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage
and commission.
4. Poor planning of investment returns.
5. Unresearched forecast on income, profits and Government policies.
6. Fund managers being unaccountable for poor results.
7. Failure to identify clearly the risk of the scheme as distinct from risk of the market.
8. Under performance in comparison to peers.

KEY PLAYERS IN MUTUAL FUND

A mutual fund is a professionally-managed investment scheme, usually run by an asset management company
that brings together a group of people and invests their money in stocks, bonds and other securities. It is formed by
trust body.
 Lesson 12 • Mutual Funds 333

There are five principal constituents and three market intermediaries in the formation and functioning of mutual
fund:
Five principal constituents
• Sponsor
A sponsor is an influential investor who creates demand for a security because of their positive outlook on
it. The sponsor brings in capital and creates a mutual fund trust and sets up the AMC. The sponsor makes an
application for registration of the mutual fund and contributes at least 40% of the net worth of the AMC.

• Asset Management Company

An asset management company (AMC) is a company that invests its clients’ pooled funds into securities that
match declared financial objectives. Asset management companies provide investors with more
diversification and investing options than they would have themselves. AMCs manage mutual funds, hedge
funds and pension plans, these companies earn income by charging service fees or commissions to their
clients.
The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset management company,
which has been approved by the SEBI. The appointment of an asset management company can be terminated
by majority of the trustees or by seventy-five per cent of the unit holders of the scheme. Any change in the
appointment of the asset management company shall be subject to prior approval of the SEBI and the
unitholders.
 334  Lesson 12 • EP-SLCM

• Trustee
A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. A
trustee may be appointed for a wide variety of purposes, such as in case of bankruptcy, for a charity, for a trust
fund or for certain types of retirement plans or pensions.

• Unit Holders
A unitholder is an investor who owns the units issued by a trust, like a real estate investment trust or a
master limited partnership (MLP). The securities issued by trusts/MF are called units, and investors in units
are called unitholders. The unit in turn reflect share of the investor in the Net Assets of the fund.

• Mutual fund
A mutual fund established under the Indian Trust Act to raise money through, the sale of units to the public
for investing in the capital market The funds thus collected as per the directions of asset management
company for invested. The mutual fund has to be SEBI registered.

Three market intermediaries are:

• Custodian
A custodian is a person who carries on the business of providing custodial services to the client. The custodian
keeps the custody of the securities of the client. The custodian also provides incidental services such as
maintaining the accounts of securities of the client, collecting the benefits or rights accruing to the client in
respect of securities.
Every custodian should have adequate facilities, sufficient capital and financial strength to manage the
custodial services. The SEBI (Custodian of Securities) Regulations, 1996 prescribe the roles and responsibilities
of the custodians.
According to the SEBI the roles and responsibilities of the custodians are to Administrate and protect the
assets of the clients; Open a separate custody account and deposit account in the name of each client; Record
assets; and Conduct registration of securities.

• Transfer Agents
A transfer agent is a person who has been granted a Certificate of Registration to conduct the business of
transfer agent under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993. Transfer
agents’ services include issue and redemption of mutual fund units, preparation of transfer documents and
maintenance of updated investment records. They also record transfer of units between investors where
depository does not function. They also facilitate investors to get customized reports.

• Depository
A depository facilitates the smooth flow of trading and ensure the investor`s about their investment in
securities.

Mutual Fund Terminology

A . Offer Document
• AMC raises money in new schemes through New Fund Offer (NFO)
• Offer document contains key details about the NFO – open and close dates, scheme objective, nature of
the scheme, etc.
• Filed with SEBI
Two parts:
1. Scheme Information Document (SID) - A document that contains the details of the scheme. SID
has to be updated every year
 Lesson 12 • Mutual Funds 335

Key Contents:
• Scheme name on the cover page, along with scheme structure (open / closed-ended) and expected
scheme nature (equity / debt / balanced / liquid / ETF)
• Highlights of the scheme
• Risk factors
o Standard
o Scheme specific

• Due diligence certificate issued by the AMC

• Fees and expenses
• Rights of unit holders
• Penalties, litigations, etc.

2. Statement of Additional Information - A document that contains statutory information about the
fund house offering the scheme. SAI has to be updated the end of every quarter

Key Contents:
• Information about sponsor, mutual fund, trustees, custodian and registrar & transfer agents
• Condensed financial information for schemes launched in the last three financial years
• Information on how to apply
• Rights of unit holders
• Details of the fund managers
• Tax, legal and other general information
B. Key Information Memorandum (KIM)
• Essentially a summary of SID & SAI
• As per SEBI regulations, every application form should be accompanied by the KIM
• The KIM has to be updated at least once a year
Contents
• Name of the AMC, Mutual Fund Trust, Trustee, Fund Manager(s) and Scheme details
• Open and close dates of the issue
• Issue price of the scheme
• Plans and options available in the scheme
• Risk profile of the scheme
• Benchmark
• Dividend policy
• Performance of the scheme and benchmark over last 1, 3, 5 years and since inception
• Loads and expenses
• Contact information and registrars
C. Fact Sheets
Usually provided on a monthly basis by AMCs
 336  Lesson 12 • EP-SLCM

Contains the following:

• NAV and AUM
• Expense ratio, exit loads, average maturity, YTM, modified duration
• Benchmark & Fund manager details
• Past performance
• Scheme’s allocation & portfolios
• Style box
• Other scheme attributes – like risk category, minimum investment amount, scheme objective, etc.
D. Assets under Management (AUM)
What is AUM?
It is the total market value of the assets managed by a mutual fund scheme as on a particular date
Periodic AUM Available
• Month-end
• Quarterly average
E. Know Your Client (KYC)
What is KYC?
• A one-time process made mandatory to invest in mutual funds
• Key details required: PAN, Address proof, contact details, occupation and income details
Where can it be done?
• CDSL Ventures Limited KRA
• CAMS KRA
• Karvy KRA
• NDML KRA (wholly owned subsidiary of NSDL)
• DOTEX KRA (wholly owned subsidiary of NSE)
F. Foreign Account Tax Compliance Act (FATCA)
What is FATCA?
• Requires that all financial institutions (including Indian mutual funds) need to report financial
transactions of US persons and entities in which US persons hold a substantial ownership.
• Enacted to prevent tax evasion through foreign investments.
• Key details required: Country of birth, Country of citizenship, country of tax residence, TIN from
such country.
• Currently made mandatory for all investors (existing and new) in Indian mutual funds.
• For non-individual investors, Ultimate Beneficial Ownership (UBO) details have to be provided.
G. Modes of Holding
• Single
• Either or Survivor
o Signature of any of the applicants is sufficient for making transactions
 Lesson 12 • Mutual Funds 337

• Joint
o Signature of all the applicants is required for making transactions

H. Nomination
• Up to 3 nominees can be registered for a folio.
• Units get transferred to the nominees (in the proportion specified) in case of the investor’s demise.
• Nomination can be updated as and when required by the investor.
• A minor can also be nominated, provided the guardian is specified.
• If nomination is not registered, in case of death of the investor, the legal heir has to produce documents
such as Will, Legal Heir Certificate, No-Objection Certificate from other legal heirs, etc.

Systematic Investment Plan (SIP) in Mutual Fund

An SIP allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual
fund scheme. An SIP helps investor to stagger the investments in equity mutual fund schemes over a period. Most
mutual fund advisors do not recommend investing a lumpsum in equity mutual funds.

NET ASSET VALUE

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). In simple words, NAV
is the market value of the securities held by the scheme.
Mutual funds invest the money collected from investors in securities markets. Since market value of securities
changes every day, NAV of a scheme also varies on day to day basis.
The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on
any particular date.
For example, if the market value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has
issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10
lakh). NAV is required to be disclosed by the mutual funds on a daily basis.
Unlike stocks (where the price is driven by the market and changes from minute-to-minute), mutual funds don’t
declare NAVs through the day. Instead, NAVs of all mutual fund schemes are declared at the end of the trading day
after markets are closed, in accordance with SEBI Mutual Fund Regulations. Further, as per SEBI Mutual Fund
Regulations, for all mutual fund schemes, other than liquid fund schemes, the mutual fund Units are allotted only at
prospective NAV, i.e., the NAV that would be declared at the end of the day, based on the closing market value of the
securities held in the respective schemes.
How is it calculated?
Net Asset Value = Net Asset of the Scheme
Number of units outstanding
Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income+ other assets – Accrued
Expenses- Other Payables- Other Liabilities
Net Asset Value (NAV) – Cut-off Timeline
Type of Transaction Before/ Cut-off Applicable NAV
After Time
Equity-oriented & Debt funds (except liquid funds)
Purchase & Switch-in (value 3 pm Before Same day NAV
<Rs.2 lakhs) After Next business day NAV
Purchase & Switch-in (value > 3 pm Before NAV of the business day on which funds are available for
Rs.2 lakhs) After utilization
338  Lesson 12 • EP-SLCM

Redemption & Switch-out 3 pm Before Same day NAV

After Next business day NAV
Liquid Funds
Purchase & Switch-in 2 pm Before Previous day NAV if funds are realized
After NAV of the day previous to the funds realized
Redemption & Switch-out 3 pm Before NAV of the day immediately preceding the next
After business day
NAV of the day preceding the second business day
from submission

Illustration:

1. Name of the Scheme XYZ

Size of the Scheme Rs.100 Lacs
Face Value of the Share Rs.10
Number of the outstanding shares 10 Lacs
Market value of the fund’s investments Receivables Rs.180 Lacs
Accrued Income Rs.1 lakhs
Receivables Rs.1 lakhs
Liabilities Rs.50,000
Accrued expenses Rs.50,000
Find NAV per unit?
Solution
NAV per unit = (Investment + Recoverable + Accrued Income – Liabilities – Accrued exp)/No of units
(mutual fund)
= (180 lacs + 1 lacs + 1 – 0.50 lacs – 0.50 lacs)/10 Lacs
NAV = Rs.18.10 per unit
2. ABC mutual Fund has the following assets in scheme XYZ at the close business on 31st March, 2021.

Company No. of Shares Market Price Per Share

N Ltd 25000 Rs 20
D Ltd 35000 Rs 300
S Ltd 29000 Rs 380
C Ltd 40000 Rs 500
The total number of units of scheme XYZ are 10 Lakh. The Scheme XYZ has accrued expenses of Rs. 2,50,000
and other Liabilities of Rs 2,00,000. Calculate the NAV per unit of the scheme XYZ
Solution

Company No. of Shares Market Price Per Share Value of Assets/ Liabilities
N Ltd 25000 Rs. 20 500000
D Ltd 35000 Rs. 300 10500000
 Lesson 12 • Mutual Funds 339

S Ltd 29000 Rs. 380 11020000

C Ltd 40000 Rs. 500 20000000

Accrued Expenses (250000)

Liabilities (200000)
Net Assets 41570000
No. of Units 1000000
NAV 41.57
3. The redemption price of mutual fund unit is ₹ 48 while the front end load and back end load charges are
2% and 3% respectively. Compute:
i) NAV per unit
ii) Public offer price of the unit.

Solution:

Redemption Price = NAV Public Offer Price = N A V

(1+ Back End Load) (1- Front End Load)
48 = NAV = 49.44
(1+0.03) (1-0.02)
= 48x1.03 = 49.44
NAV= ₹ 49.44 0.98
Public Offer Price = ₹ 50.45

EXPENSE RATIO

• The fees charged by the scheme to manage investors’ money.

What does it contain?
• Fees paid to service providers like trustees, Registrar & Transfer Agents, Custodian, Auditor, etc.
• Asset management expenses
• Commissions paid to distributors
• Other selling expenses including advertising expenses
• Expenses on investor communication, account statements, dividend / redemption cheques / warrants
• Listing fees and Depository fees
• Service tax
Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur / charge certain operating
expenses for managing a mutual fund scheme – such as sales & marketing / advertising expenses, administrative
expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage
of the fund’s daily net assets.
This is commonly referred to as ‘Expense Ratio’. In short, Expense ratio is the cost of running and managing a
mutual fund which is charged to the scheme. All expenses incurred by a Mutual Fund, AMC will have to be managed
within the limits specified under Regulation 52(6) & (6A) of the SEBI Mutual Funds Regulations.
 340  Lesson 12 • EP-SLCM

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a
mutual fund is disclosed after deducting the expenses. Thus, the expense ratio has a direct bearing on a scheme’s
NAV – the lower the expense ratio of a scheme, the higher the NAV.

HOLDING PERIOD RETURN

Holding period return is the total return received from holding an asset or portfolio of assets over a period of time,
generally expressed as a percentage. Holding period return is calculated on the basis of total returns from the asset
or portfolio – i.e. income plus changes in value. It is particularly useful for comparing returns between investments
held for different periods of time.
Calculation of HPR
HPR = (Income + (end of period value- original value) x 100

Original Value
Illustration : 2 Calculate HPR for a unit holder who bought a unit at ₹ 17.60 and received a dividend of ₹ 2
per unit during the period. Face value of the unit is ₹ 10and current unit price is ₹19.875
HPR= Dividend+ (NAV at present- NAV at purchase) x 100

NAV at purchase
= 2+ (19.875- 17.60) 17.60
HPR = 24.29%

EVALUATING PERFORMANCE OF MUTUAL FUND

While looking at a mutual fund scheme’s performance, one must not be led by the scheme’s return in isolation. A
scheme may have generated 10% annualised return in the last couple of years. But then, even the market indices
would have gone up in similar way during the same period. Under-performance in a falling market, i.e. when the NAV of
the scheme falls more than its benchmark (or the market), is the time when one must review his/her investment.
One must compare the scheme’s return as against its benchmark return. It is better to be rid of investment in a
scheme that consistently under-performs as compared to its benchmark over a period of time, from one’s portfolio.
It is important to identify under-performers over the longer time horizon (as also out-performers).
In addition, one may also consider evaluating the ‘category average returns’ as well. Even if a scheme has
outperformed its benchmark by a decent margin, there could be better performers in the peer group. The category
average returns will reveal how good (or bad) is one’s investment is against its peers which help in deciding whether
it is time shift the investment to better performers.
One may be holding a too little or too much-diversified portfolio. Even the expense ratio of some of the schemes that
one could be holding may be high compared to others within the same category.

SEBI (MUTUAL FUNDS) REGULATIONS, 1996 – OVERVIEW

SEBI (Mutual Fund) Regulations, 1996 has been notified on December 09, 1996 with objective to improve the
working and regulation of the mutual fund industry, so that mutual funds could provide a better performance and
service to all categories of investors and offer a range of innovative products in a competitive manner to match
investor needs and preferences across various investor segments. SEBI (Mutual Funds) Regulations, 1996 deals
with 10 Chapters and 12 schedules.
Important Definitions
“Mutual Fund” means a fund established in the form of a trust to raise monies through the sale of units to the public
or a section of the pubic under one or more schemes for investing in securities, money market instruments, gold or
gold related instruments, real estate assets and such other assets and instruments as may be specified by the Board
from time to time:
Provided that infrastructure debt fund schemes may raise monies through private placement of units, subject to
conditions specified in these regulations;
 Lesson 12 • Mutual Funds 341

Provided further that mutual fund schemes investing in exchange traded commodity derivatives may hold the
underlying goods in case of physical settlement of such contracts.
“Unit” means the interest of the unit holders in a scheme, which consists of each unit representing one undivided
share in the assets of a scheme.
“Unit Holder” means a person holding unit in a scheme of a mutual fund.
“Asset Management Company” means a company formed and registered under the Companies Act, 1956
and approved as such by the Board under sub-regulation (2) of regulation 21.
“Close-ended scheme” means any scheme of a mutual fund in which the period of maturity of the scheme is
specified.
“Open-ended scheme” means a scheme of a mutual fund which offers units for sale without specifying any duration
for redemption.
“Money Market Instruments” includes commercial papers, commercial bills, treasury bills, Government securities
having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other
like instruments as specified by the Reserve Bank of India from time to time.
“Sponsor” means any person who, acting alone or in combination with another body corporate, establishes a
mutual fund.
“Trustees” mean the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust
for the benefit of the unit holders.
“Offer document” means any document by which a mutual fund invites public for subscription of units of a scheme.

REGISTRATION OF MUTUAL FUNDS

Eligibility Criteria for Registration of Mutual Funds
For the purpose of grant of a certificate of registration, the applicant has to fulfill the following, namely –
•
The sponsor should have a sound track record and general reputation of fairness and integrity in all his
business transactions.
Explanation: For the purposes of this clause “sound track record” shall mean the sponsor should –
(i) be carrying on business in financial services for a period of not less than five years; and
(ii) the networth is positive in all the immediately preceding five years; and
(iii) the networth in the immediately preceding year is more than the capital contribution of the sponsor in
the asset management company; and
(iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately
preceding five years, including the fifth year.

• The applicant is a fit and proper person

• In the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved
by the Board the sponsor has contributed or contributes at least 40% to the net worth of the asset management
company.
However, any person who holds 40% or more of the net worth of an asset management company shall be
deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in these regulations.

• The sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have
been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found
guilty of any economic offence.
• Appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the
regulations appointment of asset management company to manage the mutual fund and operate the scheme
 342  Lesson 12 • EP-SLCM

of such funds in accordance with the provisions of these regulations appointment of custodian in order to
keep custody of the securities or goods or gold and gold related instrument or other assets of the mutual fund
held in terms of these regulations, and provide such other custodial services as may be authorised by the
trustees.

Norms for Shareholding & Governance in Mutual Funds

(1) No sponsor of a mutual fund, its associate or group company including the asset management company of the
fund, through the schemes of the mutual fund or otherwise, individually or collectively, directly or indirectly,
have –
(a) 10% or more of the share-holding or voting rights in the asset management company or the trustee
company of any other mutual fund; or
(b) representation on the board of the asset management company or the trustee company of any other
mutual fund.
(2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company
or the trustee company of a mutual fund, shall not have, directly or indirectly, -
(a) 10% or more of the share-holding or voting rights in the asset management company or the trustee
company of any other mutual fund; or
(b) representation on the board of the asset management company or the trustee company of any other
mutual fund.
However in the event of a merger, acquisition, scheme of arrangement or any other arrangement involving
the sponsors of the mutual funds, shareholders of the asset management companies or trustee companies,
their associates or group companies which results in the incidental acquisition of shares, voting rights or
representation on the board of the asset management companies or trustee companies, this regulation shall
be complied with within a period of one year of coming into force of such an arrangement.

Terms and Conditions of Registration

• the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions
of SEBI (Mutual Fund) Regulations, 1996
• the mutual fund shall forthwith inform the SEBI, if any information or particulars previously submitted to the
SEBI was misleading or false in any material respect
• the mutual fund shall forthwith inform the SEBI, of any material change in the information or particulars
previously furnished, which have a bearing on the registration granted by it payment of fees as specified in
the SEBI (Mutual Fund) Regulations, 1996

Constitution and Management of MutualFunds and Operation of Trustees

(i) A mutual fund shall be constituted in the form of a trust and the instrument shall be in the form of a deed duly
registered under the Registration Act.
(ii) The trust deed shall not contain any clause which has the effect of limiting or extinguishing the obligations
and liabilities of the trusts or indemnifying the trustees/ asset management company for loss or damage
caused to the unitholders by their acts of negligence or acts of commission or omission.

Disqualification from Being Appointed as Trustees

A mutual fund shall appoint trustees in accordance with these regulations. A person shall not be eligible to be
appointed as a trustee unless—
(a) he is a person of ability, integrity and standing; and
(b) has not been found guilty of moral turpitude; and
 Lesson 12 • Mutual Funds 343

(c) has not been convicted of any economic offence or violation of any securities laws; and
(d) has furnished particulars as specified in Form C.

• No asset management company and no director (including independent director), officer or employee of an
asset management company shall be eligible to be appointed as a trustee of any mutual fund.
• No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as a trustee of any
other mutual fund.
• Two-thirds of the trustees shall be independent persons and shall not be associated with the sponsors or be
associated with them in any manner whatsoever.
• In case a company is appointed as a trustee then its directors can act as trustees of any other trust provided
that the object of the trust is not in conflict with the object of the mutual fund.

APPROVAL OF THE SEBI FOR APPOINTMENT OF TRUSTEE

• No trustee shall initially or any time thereafter be appointed without prior approval of the SEBI

CONSTITUTION AND MANAGEMENT OF ASSET MANAGEMENT COMPANY AND CUSTODIAN

Appointment of an Asset Management Company

• The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset management company,
which has been approved by the SEBI.
• The appointment of an asset management company can be terminated by majority of the trustees or by
seventy-five per cent of the unitholders of the scheme.
• Any change in the appointment of the asset management company shall be subject to prior approval of the
SEBI and the unitholders.

Eligibility Criteria for Appointment of Asset Management Company

• in case the asset management company is an existing asset management company it has a sound track record,
general reputation and fairness in transactions;
• the asset management company is a fit and proper person;
• the directors of the asset management company are persons having adequate professional experience in
finance and financial services related field and not found guilty of moral turpitude or convicted of any
economic offence or violation of any securities laws;
• the key personnel of the asset management company have not been found guilty of moral turpitude or
convicted of economic offence or violation of securities laws or worked for any asset management company
or mutual fund or any intermediary during the period when its registration has been suspended or cancelled
at any time by the Board;
• the board of directors of such asset management company has at least fifty per cent directors, who are not
associate of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees;
• the Chairman of the asset management company is not a trustee of any mutual fund;
• the asset management company has a net worth of not less than rupees fifty crore;

Appointment of Custodian

• The mutual fund shall appoint a Custodian to carry out the custodial services for the schemes of the fund and
sent intimation of the same to the Board within fifteen days of the appointment of the Custodian.
• However in case of a gold exchange traded fund scheme, the assets of the scheme being gold or gold related
instruments may be kept in the custody of a custodian registered with the SEBI.
 344  Lesson 12 • EP-SLCM

Agreement with Custodian

• However in case of a real estate mutual fund scheme, the title deed of real estate assets held by it may be kept
in the custody of a custodian registered with the SEBI.
• The mutual fund shall enter into a custodian agreement with the custodian, which shall contain the clauses
which are necessary for the efficient and orderly conduct of the affairs of the custodian.
• However the agreement, the service contract, terms and appointment of the custodian shall be entered into
with the prior approval of the trustees.

SCHEMES OF MUTUAL FUND

Procedure for Launching of Schemes
• No scheme shall be launched by the asset management company unless such scheme is approved by the
trustees and a copy of the offer document has been filed with the SEBI.
• The offer documents shall contain adequate disclosures to enable the investors to make informed decisions.
• The mutual fund shall pay the minimum filing fee to the SEBI while filing the offer document and the balance
filing fee within such time as may be specified by the SEBI.
• The sponsor or asset management company shall invest not less than one percent of the amount which would
be raised in the new fund offer or fifty lakh rupees, whichever is less, and such investment shall not be
redeemed unless the scheme is wound up. However the investment by the sponsor or asset management
company shall be made in such option of the scheme, as may be specified by the SEBI. l The mutual fund ,
which intends to list units of its scheme on the recognised stock exchange(s), shall obtain ‘in-principle’
approval from recognised stock exchange(s) in the manner as specified by the recognised stock exchange(s)
from time to time.
• Every mutual fund desirous of listing units of its schemes on a recognised stock exchange shall execute an
agreement with such stock exchange.
• The listing of close-ended schemes is mandatory and these should be listed on a recognised stock exchange
within such time period and subject to such conditions as specified by the SEBI.
• Units of a close-ended scheme can be opened for sale or redemption at a predetermined fixed interval if the
minimum and maximum amount of sale, redemption and periodicity is disclosed in the offer document.
• Units of a close-ended scheme can be converted into an open-ended scheme if the offer document of such
scheme discloses the option and the period of such conversion or the unitholders are provided with an option
to redeem their units in full.
• Units of close-ended scheme may be rolled over in the case of those unitholders who express their consent in
writing and the unitholders who do not opt for the roll over or have not given written consent shall be allowed
to redeem their holdings in full at net asset value based price.
• No scheme other than equity-linked saving scheme can be opened for subscription for more than 15 days.
Further, the minimum subscription and the extent of over subscription that is intended to be retained should
be specified in the offer document. In the case of over-subscription, all applicants applying up to 5,000 units
must be given full allotment subject to over subscription.
• The AMC is required to refund the application money if minimum subscription is not received, and also the
excess over subscription within five working days of closure of subscription.
• A close-ended scheme shall be wound up on redemption date, unless it is rolled over, or if 75% of the unit-
holders of a scheme pass a resolution for winding up of the scheme; if the trustees on the happening of any
event require the scheme to be wound up; or if SEBI, so directs in the interest of investors.
 Lesson 12 • Mutual Funds 345

CODE OF CONDUCT OF MUTUAL FUNDS

(i) The schemes should not be organized, operated and managed in the interest of sponsors or the directors of
AMC or special class of unit holders;
(ii) It shall ensure the adequate dissemination of adequate, fair, accurate and timely information of all the stake
holders;
(iii) The excessive concentration of business with the broking firm or associates should be avoided;
(iv) The scheme - wise segregation of bank accounts and securities accounts must be ensured;
(v) The investment should be made in accordance with the investment objectives stated on the offer documents;
(vi) It must not use any unethical means to sell, market or induce any investor to buy their schemes.
(vii) The high standards of integrity and fairness in all the dealings should be maintained by the trustees and
AMCs;
(viii) The AMCs shall not make any exaggerated statements.

ADVERTISEMENT CODE

(i) Advertisement shall be accurate, true, fair, clear, complete, unambiguous and concise.
(ii) Advertisement shall not contain statement which are false,misleading, biased or deceptive, based on
assumptions and shall not contain any testimonials or any ranking based on any criteria.
(iii) No celebrities shall form part of advertisement.
(iv) No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.
(v) Advertisements shall be accompanied by a standard warning in legible fonts which states “Mutual fund
investments are subject to market risks, read all schemes related document carefully.” No addition or deletion
of words shall be made to the standard warning.
(vi) In audio visual media based advertisements, the standard warning in visual and accompanying voice over
reiteration shall be audible in a clear and understandable manner. For example, in standard warning both the
visual and the voice over reiteration containing 14 words running for at least 5 seconds may be considered
as clear and understandable.
(vii) Advertisement shall not be so designed as likely to be misunderstood or likely to be disguise the significance
of any statement.

RESTRICTION ON INVESTMENT BY MUTUAL FUNDS

(i) The schemes shall not invest more than 10% of its NAV in debt instruments issued by a single issuer which
are rated not below investment grade by a CRA.
However, such limit can be increased to 12% of its NAV with prior approval of Board of Trustee and Board of
Directors of AMC.
(ii) A mutual fund scheme shall not invest in unlisted debt instruments including commercial papers, except
Government Securities and other money market instruments.
However, Mutual Fund Schemes may invest in unlisted non- convertible debentures up to a maximum of 10%
of the debt portfolio of the scheme subject to such conditions as may be specified by the SEBI.
(iii) Mutual fund shall not own more than 10% of company’s paid - up capital carrying voting rights.
(iv) The transfer of investments from one scheme to another shall be done only at the prevailing market price &
the securities so transferred shall be in conformity with the investment objective of the scheme to which such
transfer has been made;
 346  Lesson 12 • EP-SLCM

(v) A scheme may invest in another scheme under the same asset management company or any other mutual
fund without charging any fees. However, the aggregate inter-scheme investments made by all schemes shall
not exceed 5% of the NAV of the mutual fund. (This shall not apply to funds of funds scheme)
(vi) The buy and sell by all the mutual funds shall be made on the basis of the deliveries.
(vii) All securities shall be purchase or transferred in the name of the mutual fund scheme.
(viii) No mutual fund scheme shall make any investment in:
(a) any unlisted security of an Associate or Group Company of the Sponsor;
(b) any security issued by way of private placement by an associate or group company of the sponsor;
(c) the listed securities of group companies of the sponsor which is in excess of 25 per cent of the net
Assets.
(ix) No mutual fund shall make any investment in the funds of fund scheme.
(x) No mutual fund shall invest more than 10% of its NAV in the equity shares or equity related instruments of
any company.
(xi) All investments by a mutual fund scheme in equity shares and equity related instruments shall only be made
provided such securities are listed or to be listed
(xii) A fund of funds scheme shall be subject to the following investment restrictions:
(a) A fund of funds scheme shall not invest in any other fund of funds scheme;
(b) A fund of funds scheme shall not invest its assets other than in schemes of mutual funds, except to the
extent of funds required for meeting the liquidity requirements for the purpose of repurchases or
redemptions, as disclosed in the offer document of fund of funds scheme.

Question: What are the avenues available to Indian Mutual Funds for investment abroad?
Answer: Indian Mutual Funds registered with SEBI are permitted to invest in the following:
(i) ADRs and GDRs;
(ii) Equity of overseas company;
(iii) Foreign debt securities;
(iv) Money market instruments;
(v) Government securities;
(vi) Derivative;
(vii) Short - term deposits;
(viii) Units issued by overseas mutual funds.

PRICING OF UNITS OF MUTUAL FUND

(1) The price at which the units may be subscribed or sold and the price at which such units may at any time be
repurchased by the mutual fund shall be made available to the investors in the manner specified by the SEBI.
(2) The mutual fund shall provide the methodology of calculating the sale and repurchase price of units in the
manner specified by the SEBI.
(3) While determining the prices of the units, the mutual fund shall ensure that the repurchase price is
not lower than 95% of the Net Asset Value.
 Lesson 12 • Mutual Funds 347

FACILITATING TRANSACTION IN MUTUAL FUND SCHEMES THROUGH THE STOCK EXCHANGE

INFRASTRUCTURE
SEBI vide its Circulars dated October 04, 2013, and dated December 09, 2014 had permitted mutual fund distributors
to use recognised stock exchanges’ infrastructure to purchase and redeem mutual fund units directly from Mutual
Fund / Asset Management Companies.
In order to further increase the reach of this platform, SEBI vide its Circular dated February 26, 2020 had decided
to allow investors to directly access infrastructure of the recognised stock exchanges to purchase and redeem
mutual fund units directly from Mutual Fund/ Asset Management Companies.

POWER TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases.
(1) SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these
regulations for a period as may be specified but not exceeding twelve months, for furthering innovation
relating to testing new products, processes, services, business models, etc. in live environment of regulatory
sandbox in the securities markets.
(2) Any exemption granted by the SEBI as above shall be subject to the applicant satisfying such conditions as
may be specified by the SEBI.

Explanation. – For the purposes of these regulations, “regulatory sandbox” means alive testing environment where
new products, processes, services, business models, etc. maybe deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the SEBI.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

The provisions of chapter IX of the SEBI LODR Regulations, 2015 applies to the asset management company
managing the mutual fund scheme whose units are listed on the recognised stock exchange(s).
Notwithstanding anything contained in this chapter, the provisions of the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1996 and directions issued thereunder shall apply on the listed entity and to the
schemes whose units are listed on the recognised stock exchange(s).

Submission of Documents
The listed entity shall intimate to the recognised stock exchange(s), the information relating to daily Net Asset
Value, monthly portfolio, half yearly portfolio of those schemes whose units are listed on the recognised stock
exchange(s) in the format as specified under SEBI (Mutual Funds) Regulations, 1996 and directions issued there
under.
The listed entity shall intimate to the recognised stock exchange(s) in the manner specified by the recognized stock
exchange(s) of:
(a) movement in unit capital of those schemes whose units are listed on the recognised stock exchange(s);
(b) rating of the scheme whose units are listed on the recognised stock exchange(s) and any changes in the rating
thereof (wherever applicable);
(c) imposition of penalties and material litigations against the listed entity and Mutual Fund; and
(d) any prohibitory orders restraining the listed entity from transferring units registered in the name of the unit
holders.

Dissemination on the website of stock exchange(s)

The listed entity shall submit such information and documents, which are required to be disseminated on the listed
entity’s website in terms of SEBI (Mutual Funds) Regulations, 1996 and directions issued thereunder, to the
recognized stock exchange for dissemination.
348  Lesson 12 • EP-SLCM

CASE LAW
1 09.07.2020 Mr. Mayank Prakash Adjudicating Order,
In the matter of Fixed Maturity Plans Series 127 & Securities and Exchange
183 of Kotak Mahindra Mutual Fund Board of India
Facts of the case
Securities and Exchange Board of India (hereinafter be referred to as, the “SEBI”), initiated adjudication
proceedings under Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter be referred
to as, the “SEBI Act”) for the violations of various provisions of SEBI (Mutual Funds) Regulations, 1996
(hereinafter be referred to as, the “MF Regulations”) and various Circulars issued thereunder, alleged to have
been committed by Mr. Mayank Prakash (hereinafter be referred to as, the “Noticee ”).
Kotak Mahindra Mutual Fund (hereinafter be referred to as, the “Kotak MF”) is a mutual fund having a certificate
of registration granted by SEBI, which offered certain Fixed Maturity Plans (hereinafter be referred to as, the
“FMP”) viz. FMP Series 127 and Series 183 inter alia.
Kotak Mahindra Asset Management Company Limited (hereinafter be referred to as, the “Kotak AMC”) is the
asset management company of Kotak MF. Noticee was fund managers of the two Fixed Maturity Plans (hereinafter
be referred to as, the “FMP”) schemes, i.e. FMP Series 127 & 183 who decided to invest in securities.
Regulation 25(6B) of the MF Regulations provide that, “The fund managers (whatever the designation may be)
shall ensure that the funds of the schemes are invested to achieve the objectives of the scheme and in the interest
of the unit holders.”
In the context of investments made by FMP 127 and FMP 183, Mr. Mayank Prakash, being fund manager of the
aforesaid schemes of Kotak AMC, was alleged to have –
(i) failed to ensure that the funds of the FMPs were invested to achieve the objectives of the FMPs and in the
interest of the unit holders with the high standards of service and due diligence required of them, thus
violating Regulation 25(6B) of the MF Regulations.
(ii) failed to ensure that the basis for taking individual scrip-wise investment decisions were recorded or that
detailed research reports for each investment decision for initial and subsequent investments were
prepared, and that the funds of the schemes were invested to achieve the objectives of the scheme and in
the interest of the unit holders, thus violating Regulation 25(6B) of the MF Regulations read with SEBI
Circular: MFD/CIR/6/73/2000 dated July 27, 2000.

In response to the SCN, Noticee replied vide letter dated August 21, 2019 that he had resigned as an employee
of Kotak AMC effective close of business hours on August 12, 2015. Since August 13, 2015 till date, Noticee is
employed with BNP Paribas Asset Management India Private Limited.
Kotak AMC also confirmed the in its letter dated October 23, 2016 that the Noticee resigned from the services of
the AMC with effect from August 12, 2015 and hence was not involved as Fund Manager of the referred FMP
schemes. As such, he was neither involved in the decision to invest nor at the time of the said investment.
Order of SEBI
SEBI note from the reply of the Noticee that he had resigned from the services of the Kotak AMC with effect from
August 12, 2015. As Noticee was not the fund manager in respect of relevant transaction, Noticee cannot be held
responsible under Regulation 25(6B) of the MF Regulations for ensuring that the funds of the schemes are
invested to achieve the objectives of the scheme and in the interest of the unit holders.
In view of the above, SEBI find that the Noticee cannot be held to have violated Regulation 25(6B) of the MF
Regulations read with SEBI Circular: MFD/CIR/6/73/2000 dated July 27, 2000.
In light of the findings noted hereinabove, the adjudication proceedings initiated against the Noticee vide SCN
dated May 16, 2019 were disposed of.
Lesson 12 • Mutual Funds 349

LESSON ROUND-UP

• Mutual fund is a trust that collects money from a number of investors who share a common investment
• objective and invests the same in equities, bonds, money market instruments and/or other securities.
• Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.
• Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or passively managed.
• There are five principal constituents and three market intermediaries in the formation and functioning
• of mutual fund.
• A mutual fund shall be constituted in the form of a trust and the instrument shall be in the form of a deed
duly registered under the Registration Act.
• The mutual fund shall enter into a custodian agreement with the custodian, which shall contain the
• clauses which are necessary for the efficient and orderly conduct of the affairs of the custodian.
• No scheme shall be launched by the asset management company unless such scheme is approved
• by the trustees and a copy of the offer document has been filed with the SEBI.
• The SEBI LODR Regulations, 2015 is applicable to the AMC managing the mutual fund scheme
• whose units are listed on the recognised stock exchange.

GLOSSARY

Annual Return The change in percentage in the Net Asset Value (NAV) of a fund over one year based
on the assumption that distributions such as dividend payment and bonuses have been
reinvested.
Diversification The process of investing across different asset classes (equity, debt, property, etc.) and
across different investments within each asset class (for instance, investing across equity
shares of various companies in case of equity) to reduce risk.
Investment
Every mutual fund scheme has an investment objective according to which the fund manager
objective has to make investments for the scheme. For example, in case of an equity fund, the
investment objective may be to invest in large cap companies across a range of sectors in
order to give investors capital appreciation.
Maturity Some investments such as close-ended funds have a maturity date, which is the date on
which the investor is paid back his principal amount as well as all income due to him on that
investment.

Repurchase/ When a mutual fund investor wants to exit from his mutual fund investment, he can sell back
Redemption the units to the mutual fund and receive cash. The mutual fund ‘repurchases’ his units and
the investor is said to ‘redeem’ his units.
350  Lesson 12 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Elucidate the key players of Mutual funds in the formation and functioning of mutual fund.
2. What do you mean by Net Asset Value? How to calculate NAV?
3. Distinguish between Open ended Mutual Funds and Close ended Mutual funds.
4. What is the Eligibility Criteria for Registration of Mutual Funds?
5. What is the Procedure for Launching of Mutual Funds Schemes?
6. Write short notes on the followings:
a) Asset Management Company
b) Holding Period Return
c) Expense Ratio
d) Code of Conduct of Mutual Fund
7. S is holding 2000 units of a equity-oriented scheme of a mutual fund and 1000 units of a debt scheme of
a mutual fund. On 7th June, 2020 he is interested to redeem these units. Prevailing net asset value (NAV)
of these units are as under :

Date Net Asset Value (NAV)

Equity-oriented scheme (in ₹) Debt scheme (in ₹)
6th June 45 35
7th June 46 34
8th June 47 33
He makes an application for redemption of above units on 7th June, 2020 at 2:30 pm. Based on given information
answer the following :
(i) What do you mean by cut-off time ? What are the cut-off time for equity-oriented & Debt funds (except
liquid funds) ?
(ii) What will be the applicable NAV in his case ?
(iii) What will be applicable NAV if application for redemption is made at 3:15 pm ?

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI Orders
• SEBI FAQs

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/
• https://www.amfiindia.com/
Lesson 13 Collective Investment Schemes
Key Concepts One Learning Objectives
Should Know
To understand:
• Collective
• Meaning of Collective Investment Scheme
Investment Scheme
• Genesis of SEBI (Collective Investment Schemes) Regulations, 1999
• Collective
Investment • Conceptual Understanding on Important Terminologies
Management • Regulatory prescriptions on Collective Investment Scheme and how
Company they are regulated
• Closed-ended • Business Activities and Obligations of Collective Investment
Collective Management Company
Investment Scheme • Trustees and their obligations
• Collective • Collective Investment Schemes of Collective Investment Management
Investment Scheme Company
Property • Penal provisions for violations
• Appraising Agency
• Unit
• Unit Holder Regulatory Framework
• SEBI Act, 1992
• SEBI (Collective Investment Schemes) Regulations, 1999

Lesson Outline
• Introduction • General Obligations of
• Genesis Collective Investment
Management Company
• SEBI (Collective Investment
Schemes) Regulations, 1999 – • Procedure for action in case of
An Overview default
• Important Definitions • Penal Provisions
• Registration of Collective • Key Aspects for launching
Investment Management collective Investment Scheme
Company
• Role of Company Secretary
• Business Activities and
Obligations of Collective • Case Laws
Investment Management • LESSON ROUND-UP
Company • GLOSSARY
• Trustees and their obligations
• TEST YOURSELF
• Collective Investment Schemes
of Collective Investment • OTHER REFERENCES
Management Company • LIST OF FURTHER READINGS
 352  Lesson 13 • EP-SLCM

MEANING OF COLLECTIVE INVESTMENT SCHEME (CIS)

The increasing complexity of the financial markets witnessed unravelled financial schemes that defrauded investors
by promising exorbitantly high returns on their principal investment. It was in response to these Ponzi Schemes
that the SEBI formulated regulations encompassing Collective Investment Schemes (CIS) that specifically
characterized a unique manner of financial manipulations.
A collective investment scheme is a scheme that comprises a pool of assets that is managed by a collective investment
scheme manager and is governed by the Collective Investment Schemes Regulations given by SEBI. Section 11AA of
the SEBI Act was amended to include a new proviso which gave SEBI the power to regulate all pooling of funds
under any scheme or arrangement in excess of Rs. 100 crores not regulated by any other law, thus slipping into the
net of a CIS.

GENESIS
The Last many years have witnessed initiative by private entrepreneurs to undertake plantation activities on a
commercial scale. The effort per se commendable as its supplements the Government’s efforts to prevent erosion of
forest base and also channelizes private instruments towards agro plantation activity. However, it was noticed that
the promoters themselves invested a minimal amount in such venture and sourced a majority of the funds from
ordinary investors. The high returns promised by these schemes coupled with questionable claims of fiscal
incentives and effective rural marketing helped many of these companies to mobilize large amounts over a period
of time. The initial succession mobilizing funds by some of these companies lead to a mushrooming of such schemes
through the country.
The Government, after detailed consultations with the regulatory bodies, decided that the appropriate regulatory
framework for regulating entities which issue instruments like Agro Bonds, Plantation Bonds, etc. has to be put in
place. A press release was issued by the Government on November, 18, 1997, conveying that such schemes should
be treated as Collective Investment Scheme coming under the SEBI Act, 1992. In order to regulate such Collective
Investment Schemes, both from the point of view of investor protection as well as promotion of legitimate investment
activity, SEBI was asked to formulate the draft regulations for them. The Press release further states that once these
regulations come into force, it is expected that they will promote legitimate investment activity in plantation and
other agriculture based business, while at the same time giving investors and adequate degree of protection for
their investments.

In order to examine and finalize the draft regulation for collective investment schemes, SEBI appointed committee
under the Chairmanship of Dr. S.A.Dave. The committee contained representations from the Government Ministries,
Regulatory Bodies, Consumer Forum, Professional Bodies and Plantation Industries. The Committee held its first
meeting of January 28, 1998 and began its task by reviewing the information submit the existing schemes to gather
an insight into the structuring of the offerings by some of the large collective investment schemes. The data
submitting by the existing schemes and its analysis provided by the SEBI helped the committee in analysing the
aspects relating to schemes features, disclosures, background of promoters etc. The members of committee were
also conducted the site visits of some of the plantations.
As per the date available it was noticed that large sums of monies had been collected by entities which did not
necessarily have sufficient experience in agro based activities. The schemes were typically open ended and the
disclosure made to the investors was not adequate to enable informed decisions. There were high risks associated
with these ventures due to the long gestation period involved coupled with crop risks. The committee members felt
that some interim majors of investor’s protection must be notified pending finalisation of regulations.
Considering the huge risk associated with such schemes, the Government of India felt that it was necessary to
regulate such financial schemes and set up an appropriate regulatory framework and therefore government
amended various laws such as SEBI Act and also framed SEBI (Collective Investment Schemes) Regulations 1999
(“CIS Regulations”) for regulating such entities. The committee made a recommendation for mandatory credit
rating for existing schemes desiring to mobilize further funds. This provision was expected to provide a degree of
risk assessment of the future cash flows by the independent and accredited agencies.
Lesson 13 • Collective Investment Schemes 353

SEBI (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS, 1999 – AN OVERVIEW

Regulatory Framework

1. Chapter I Preliminary (Important Definitions)

2. Chapter II Registration of Collective Investment Management Company

3. Chapter III Business Activities and Obligations of Collective Investment Management Company

4. Chapter IV Trustees and their Obligations

5. Chapter V Collective Investment Schemes of Collective Investment Management Company

6. Chapter VI General Obligations

7. Chapter VII Inspection and Audit

8. Chapter VIII Procedure for Action in case of Default

9. Chapter IX Existing Collective Investment Schemes

10. Chapter IX-A Existing Schemes or Arrangements deemed to be a Collective Investment Scheme

11. Chapter IX-B Power to relax strict enforcement of the Regulations

12. Chapter X Miscellaneous

Important Definitions

‘Collective Investment Scheme’ means any scheme or

arrangement which satisfies the conditions specifies
in section 11AA of SEBI Act, 1992

Section 11AA(1) of SEBI Act, 1992 provides that any

Collective scheme or arrangement which satisfies the conditions
Investment Scheme referred to in sub-section(2) or sub-section (2A)
shall be a collective investment scheme.

However, any pooling of funds under any scheme or

arrangement, which is not registered with SEBI or is
not covered under sub-section (3), involving a corpus
amount of Rs. 100 crore or more shall be deemed to
be a collective investment scheme.
354  Lesson 13 • EP-SLCM

Section 11AA

Sub-Section 2A
Sub-Section 2 Sub-Section 3

Any scheme or arrangement made or offered by any

person satisfying the conditions as may be specified in
accordance with the regulations made under SEBI Act.

Any scheme or arrangement made or offered by any person under which,—

(i) the contributions, or payments made by the investors, by whatever name called, are
pooled and utilized for the purposes of the scheme or arrangement;
(ii) the contributions or payments are made to such scheme or arrangement by the investors
with a view to receive profits, income, produce or property, whether movable or
immovable, from such scheme or arrangement;
(iii) the property, contribution or investment forming part of scheme or arrangement, whether
identifiable or not, is managed on behalf of the investors;
(iv) the investors do not have day-to-day control over the management and operation of the
scheme or arrangement.

The following shall not be Collective Investment Scheme (CIS):

(i) made or offered by a co-operative society registered under the Co- operative Societies Act, 1912 or a
society being a society registered or deemed to be registered under any law relating to co-operative
societies for the time being in force in any State;
(ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of
section 45-I of the Reserve Bank of India Act, 1934;
(iii) being a contract of insurance to which the Insurance Act, 1938, applies;
(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees
Provident Fund and Miscellaneous Provisions Act, 1952;
(v) under which deposits are accepted under section 74 of the Companies Act, 2013;
(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under
section 406 of the Companies Act, 2013;
(vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act,
1982;
(viii) under which contributions made are in the nature of subscription to a mutual fund;
(ix) such other scheme or arrangement which the Central Government may, in consultation with SEBI,
notify, shall not be a collective investment scheme.
 Lesson 13 • Collective Investment Schemes 355

Other Important Definitions

• Collective Investment Management Company
Collective Investment Management Company means a company incorporated under the Companies Act, 1956
(now Companies Act, 2013) and registered with SEBI under these regulations, whose object is to organize,
operate and manage a collective investment.

• Closed-ended Collective Investment Scheme

Closed-ended collective investment scheme means any collective investment scheme launched by a Collective
Investment Management Company, in which the period of maturity of the collective investment scheme is
specified and there is no provision for re-purchase before the expiry of the maturity of the collective investment
scheme.

• Collective Investment Scheme Property

Collective investment scheme property includes:
(i) subscription of money, or money’s worth (including bank deposits) to the collective investment scheme;
(ii) property acquired, directly or indirectly, with, or with the proceeds of, subscription of money referred to
in item (i); or
(iii) income arising, directly or indirectly from, subscription money or property referred to in item (i) or (ii).

• Appraising Agency
Appraising Agency means an agency empanelled with the Board for the purpose of conducting technical or
financial appraisal of the collective investment scheme.

• Unit
Unit includes any instrument issued under a collective investment scheme, by whatever name called, denoting
the value of the subscription of a unit holder.

• Unit Holder
Unit holder means a person holding a unit in a collective investment scheme.

REGISTRATION OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

No person other than Collective Investment Management Company to launch Collective

Investment Scheme
No person other than a Collective Investment Management Company which has obtained a certificate under these
regulations shall carry on or sponsor or launch a collective investment scheme.

Registration Provisions under SEBI Act, 1992

Section 12 (1B) of the SEBI Act states that-
“No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds
or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the
SEBI in accordance with the regulations”
With this provision, a ban was imposed on a person carrying on any CIS, unless a certificate of registration is
obtained in accordance with the regulations framed by SEBI.
 356  Lesson 13 • EP-SLCM

Application for Grant of Certificate

Regulation 4 provides that any person proposing to carry any activity as a Collective Investment Management
Company on or after the commencement of these regulations shall make an application to the SEBI for the grant of
registration as specified under these regulations.

Application by a Scheme or Arrangement Deemed to be a Collective Investment Scheme

Regulation 4A provides that-
(1) Any person proposing to carry on or sponsor or launch any scheme or arrangement which would be deemed
to be a collective investment scheme shall make an application for grant of registration as a Collective
Investment Management Company as specified under these regulations. However, any scheme or arrangement
which is otherwise regulated or prohibited under any other law shall not be deemed to be a collective
investment scheme.
(2) All other provisions of these regulations and the guidelines and circulars issued there under, shall apply to any
scheme or arrangement deemed to be a collective investment scheme.

APPLICATION BY EXISTING COLLECTIVE INVESTMENT SCHEMES

Any person who immediately prior to the commencement of these regulations was operating a collective investment
scheme, shall make an application to the SEBI for the grant of a certificate within a period of two months from such
date.
Any person who has been operating a collective investment scheme at the time of commencement of these
regulations shall be deemed to be an existing collective investment scheme and shall also comply with the
provisions of these regulations.

Explanation: The expression ‘operating a collective investment scheme’ shall include carrying out the obligations
undertaken in the various documents entered into with the investors who have subscribed to the collective
investment scheme.
An existing collective investment scheme shall make an application to the SEBI in the manner specified In these
regulations. The application made shall be dealt with in any of the following manner:
(a) by grant of provisional registration by SEBI ;
(b) by grant of a certificate of registration by the SEBI ;
(c) by rejection of the application for registration by the SEBI .

Winding up uf Existing Collective Investment Scheme (CIS)

has not been granted

provisional registration by
the SEBI

An existing collective
investment scheme shall
wind up the existing
collective investment
scheme which-

has failed to make an having obtained provisional

application for registration registration fails to comply with
to the SEBI the conditions of SEBI
 Lesson 13 • Collective Investment Schemes 357

Grand of Certificate
Regulation 10 provides that the SEBI may on receipt of an application and on being satisfied that the applicant
complies with the eligibility conditions shall grant a certificate on such terms and conditions as are in the interest
of investors.

Procedure where Registration is not Granted

Where an application made under regulation 4 for grant of registration does not satisfy the conditions specified
under these regulations, the SEBI may reject the application after giving the applicant a reasonable opportunity of
being heard and inform the applicant of the same. The decision shall be communicated to the applicant by the SEBI
within 30 days of such decision stating therein the grounds on which the application has been rejected.

BUSINESS ACTIVITIES AND OBLIGATIONS OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

Restrictions on Business Activities

act as a trustee of any CIS

Obligations of Collective Investment Management Company

Every Collective Investment be responsible for managing the funds or properties of the CIS on behalf of the unit
Management Company holders and take all reasonable steps and exercise due diligence to ensure that the
should: CIS is managed in accordance with the provisions of these regulations, the offer
document and the trust deed.
 358  Lesson 13 • EP-SLCM

exercise due diligence and care in managing assets and funds of the CIS and also
be responsible for the acts of commissions and omissions by its employees or the
persons whose services have been availed by it

remain liable to the unit holders for its acts of commission or omissions.

be incompetent to enter into any transaction with or through its associates, or

their relatives relating to the CIS. However, in case the CIMC enters into any
transactions relating to the CIS with any of its associates, a report to that effect
shall immediately be sent to the trustee and to SEBI.

appoint registrar and share transfer agents and should also abide by their
respective Code of Conducts.

give receipts for all monies received and report of the receipts and payments to
SEBI, on monthly basis.

hold a meeting of Board of Directors to consider the affairs of CIS, at least twice in
every three months and also ensures that its officers or employees do not make
improper use of their position or information to gain, directly or indirectly, an
advantage for themselves or for any other person or to cause detriment to the CIS.

obtain adequate insurance against the properties of the CIS and comply with such
guidelines, directives, circulars and instructions as may be issued by SEBI from
time to time on the subject of Collective Investment Scheme.

Submission of Information and Documents

• The Collective Investment Management Company should prepare quarterly reports of its activities and the
status of compliance of SEBI regulations and submit the same to the trustees within one month of the expiry
of each quarter.
• The Collective Investment Management Company should file with the trustees and the SEBI, particulars of all
its directors along with their interest in other companies within fifteen days of their appointment.
• It should furnish a copy of the Balance Sheet, Profit and Loss Account and a copy of the summary of the yearly
appraisal report to the unit holders within 2 months from the closure of financial year.
• The Collective Investment Management Company shall furnish to the SEBI and the trustee such information
and documents to the SEBI and the trustee as may be required by them concerning the affairs of the collective
investment scheme.

TRUSTEES AND THEIR OBLIGATIONS

A Collective Investment Scheme (CIS) should be constituted in the
form of a trust and the instrument of trust should be framed in the Trustee means a person who holds the
form of a deed duly registered under the provisions of the Indian property of the collective investment
Registration Act, 1908 executed by the CIMC in favour of the scheme in trust for the benefit of the unit
trustees named in such an instrument. CIMC can appoint a trustee holders, in accordance with these
under the deed to hold the assets of the scheme for the benefit of regulations.
unit holders.

Contents of Trust Deed

The trust deed should contain such clauses as are specified and other clauses as are necessary for safeguarding the
interests of the unit holders.
 Lesson 13 • Collective Investment Schemes 359

Eligibility for Appointment as Trustee

No trust deed should contain a clause which has the effect of limiting or extinguishing the obligations and liabilities
of the Collective Investment Management Company in relation to any scheme or the unit holders; or indemnifying
the trustee or the Collective Investment Management Company for loss or damage caused to the unit holders by
their acts of negligence or acts of commissions or omissions.

Eligibility for appointment as trustee

The persons registered with the SEBI as Debenture Trustee under SEBI (Debenture Trustee) Regulations, 1993 are
only eligible to be appointed as trustees of collective investment schemes. However, no person is eligible to be
appointed as trustee, if he is directly or indirectly associated with the persons who have control over the CIMC. The
CIMC shall furnish to SEBI particulars in respect of trustees appointed in the prescribed form.

Appointment of Trustee not Found Guilty

No person should be appointed as trustee of a collective investment scheme, if he has been found guilty of an
offence under the securities laws or the SEBI or any authority to which the SEBI has delegated its power has passed
against such person, an order under the Act for violation of any provision of the Act or of regulations made hereunder.

Agreement with Collective Investment Management Company

The trustee and the Collective Investment Management Company should enter into an agreement for managing the
collective investment schemes’ property. The agreement for managing the collective investment scheme property
should contain clauses as specified and such other clauses as are necessary for the purpose of fulfilling the objectives
of the collective investment scheme.

Rights and Obligations of The Trustee

to obtain from the CIMC such
information as is considered
necessary by the trustee
The trustee shall
have a right
to inspect the books of accounts and
other records relating to the collective
investment scheme

• The trustee should ensure that the CIMC has:

(i) the necessary office infrastructure;
(ii) appointed all key personnel including managers for the collective investment schemes and submitted
their bio-data which shall contain the educational qualifications and past experience in the areas
relevant for fulfilling the objectives of the collective investment schemes;
(iii) appointed auditors from the list of auditors approved by SEBI to audit the accounts of the CIS;
(iv) appointed a compliance officer to comply with the provisions of the Act and these regulations and to
redress investor grievances;
(v) appointed registrars to an issue and share transfer agent;
(vi) prepared a compliance manual and designed internal control mechanisms including internal audit
systems;
(vii) taken adequate insurance for the assets of the collective investment scheme;
(viii) not given any undue or unfair advantage to any associates of the company or dealt with any of the
associates in any manner detrimental to the interest of the unit holders;
(ix) operated the collective investment scheme in accordance with the provisions of the trust deed, these
regulations and the offer document of the collective investment scheme(s);
 360  Lesson 13 • EP-SLCM

(x) undertaken the activity of managing collective investment schemes only;

(xi) taken adequate steps to ensure that the interest of investors of one collective investment scheme are
not compromised with the object of promoting the interest of investors of any other collective
investment scheme;
(xii) minimum networth on a continuous basis and shall inform the SEBI immediately of any shortfall;
(xiii) been diligent in empanelling the marketing agents and in monitoring their activities.
• The trustee should forthwith take such remedial steps as are necessary and immediately inform the SEBI of
the action taken where the trustee believes that the conduct of business of the collective investment scheme
is not in accordance with these regulations.
• The trustee should be accountable for, and act as the custodian of the funds and property of the respective
collective investment schemes and should hold the same in trust for the benefit of the unit holders in
accordance with these regulations and the provisions of trust deed.
• The trustee should be responsible for the calculation of any income due to be paid to the collective investment
scheme and also for any income received in the Collective Investment Scheme to the unit holders.
• The trustee shall convene a meeting of the unit holders -
(a) whenever required to do so by the SEBI in the interest of the unit holders; or
(b) whenever required to do so on the requisition made by unitholders holding at least one-tenth of
nominal value of the unit capital of any collective investment scheme; or
(c) when any change in the fundamental attributes of any collective investment scheme.
However no such change shall be carried out unless the consent of unit holders holding at least three - fourths
of nominal value of the unit capital of the collective investment scheme is obtained.
Explanation:- For the purposes of this clause “fundamental attributes” means the investment objective and
terms of a collective investment scheme.
• The trustee shall review -
(a) on a quarterly basis (i.e., by the end of March, June, September and December) every year all activities
carried out by the Collective Investment Management Company;
(b) periodically all service contracts relating to registrars to an issue and share transfer agents and satisfy itself
that such contracts are fair and reasonable in the interest of the unit holders;
(c) investor complaints received and the redressal of the same by the Collective Investment Management
Company.
• The trustee should ensure that -
a) net worth of CIMC is not deployed in a manner which is detrimental to interest of unit holders;
b) the property of each collective investment scheme is clearly identifiable as collective investment
scheme property and held separately from property of the CIMC;
c) Clearances or no objection certificate should be obtained, in respect of transactions relating to property
of the scheme from such authority as is competent to grant such clearance or no objection certificate.
• The trustee should abide by the Code of Conduct as specified in the Third Schedule.
• The trustee is required to furnish to SEBI on a quarterly basis every year -
a) a report on the activities of the collective investment scheme;
b) a certificate stating that the trustee has satisfied himself that affairs of the Collective Investment
Management Company and of the various collective investment schemes are conducted in accordance
with these regulations and investment objective of each collective investment scheme.
• The trustee should cause:
(a) The profit and loss accounts and balance sheet of the collective investment schemes to be audited at
the end of each financial year by an auditor empanelled with the SEBI.
 Lesson 13 • Collective Investment Schemes 361

(b) Each collective investment scheme to be appraised at the end of each financial year by an appraising
agency.
(c) Collective investment scheme to be rated by a credit rating agency.
• A meeting of the trustees to discuss the affairs of the collective investment scheme should be held at least
twice in every three months in a financial year.
• The trustee should report to SEBI any breach of these regulations that has, or is likely to have, made materially
adverse effect on the interests of unit holders, as soon as they become aware of the breach.
• The trustee should ensure that –
a) the fees and expenses of the collective investment scheme are within the limits as specified;
b) accounts of the collective investment schemes are drawn up in accordance with the accounting norms
as specified;
c) accounts of the collective investment scheme and the format of the balance sheet and the profit and
loss account as specified under these regulation.

Termination of Trusteeship
The trusteeship of a trustee should come to an end –
(a) If the trustee ceases to be trustee under SEBI (Debentures Trustees) Regulations, 1993; or
(b) if the trustee is in the course of being wound up; or
(c) if unit holders holding at least three-fourths of the nominal value of the unit capital of the collective investment
scheme pass a resolution for removing the trustee and SEBI approves such resolution;or
(d) if in the interest of the unit holders, SEBI, for reasons to be recorded in writing decides to remove the trustee
for any violation of the Act or these regulations committed by them or the trustee should be afforded
reasonable opportunity of being heard before action is taken under this clause;
(e) if the trustee serves on the Collective Investment Management Company, a notice of not less than three
months expressing intention of not to continue as trustee.

On termination, another If CIMC in unable to The new trustee

trustee should be appoint trustee in appointed should stand
appointed by the CIMC on requisite time period of substituted as trustee in
the termination of the
trusteeship. The three months, then the all the documents, to
appointment of the new SEBI can appoint any which the trustee so
trustee should be person as a trustee from removed was a party.
completed within three its empanelled list.
months from the date of
termination of the
previous trusteeship.

The person appointed by A trust deed in the The trustees so removed

SEBI should apply to the prescribed form as shall from such date be
Court for an order specified in these discharged from
regulation shall be
directing the CIMC to executed by the CIMC in complying with the
wind up the collective favour of the trustee so obligations under the
investment scheme. appointed and from the trust deed but shall
date of such appointment remain liable for any
trustees shall be subject to action taken by them
all the rights and duties as
specified in these before such removal.
regulations.
 362  Lesson 13 • EP-SLCM

Termination of the Agreement with the Collective Investment Management Company

The agreement entered into by the trustee with the Collective Investment Management Company may be terminated –
(a) if the CIMC is in the course of being wound up as per the provisions of the Companies Act, 2013 or
(b) if unit holders holding at least three-fourth of the nominal value of the unit capital of the collective investment
scheme pass a resolution for terminating the agreement with the CIMC and the prior approval of SEBI has
been obtained, or
(c) if in the interest of the unit holders, SEBI or the trustee after obtaining prior approval of SEBI, and after giving
an opportunity of being heard to the Collective Investment Management Company, decide to terminate the
agreement with the CIMC.
Another CIMC registered with SEBI, should be appointed upon the termination of agreement by the trustee within
three months from the date of such termination. The CIMC so removed continues to act as such at the discretion of
trustee or the trustee itself may act as CIMC till such time as new CIMC is appointed.
The CIMC appointed should stand substituted as a party in all the documents to which the CIMC so removed was a
party. The CIMC so removed should continue to be liable for all acts of omission and commissions notwithstanding
such termination. If, none of the CIMC, registered under the regulations, consent to be appointed as CIMC within a
further period of three months, then the trustee may wind up the collective investment scheme. An agreement for
managing collective investment scheme property should be executed in favour of the new CIMC subject to all the
rights and duties as specified in the regulations.

COLLECTIVE INVESTMENT SCHEMES OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

Procedure for launching of collective investment schemes

No collective investment scheme

shall be launched by the Collective
Investment Management Company

Unless such Collective Investment without obtaining rating from a without getting the collective
Scheme (CIS) is approved by credit rating agency. investment scheme appraised by
trustee. an appraising agency.

Close ended collective investment scheme and collective investment scheme duration

Collective Investment Management Company shall:-

(a) launch only close ended collective investment schemes;
(b) the duration of the collective investment schemes shall not be of less than three calendar years.

Insurance
Collective Investment Management Company shall obtain adequate insurance policy for protection of the collective
investment schemee property.
 Lesson 13 • Collective Investment Schemes 363

No guaranteed returns
No collective investment scheme shall provide guaranteed or assured returns. However indicative return may be
indicated in the offer document only, if the same is assessed by the appraising agency and expressed in monetary terms.

Disclosures in the offer Document

• The CIMC shall before launching any collective investment scheme file a copy of the offer document of the
collective investment scheme with the SEBI and pay filing fees as specified. The offer document should
contain such information as specified in the Sixth Schedule.
• The offer document should also contain true and fair view of the collective investment scheme and adequate
disclosures to enable the investors to make informed decision.
• SEBI may in the interest of investors require the CIMC to carryout such modifications in the offer document
as it deems fit.
• In case no modifications are suggested by SEBI in the offer document within 21 days from the date of filing,
the Collective Investment Management Company may issue the offer document to the public.

Advertisement material
Advertisements in respect of every collective investment scheme shall be in conformity with the Advertisement
Code as specified in the Seventh Schedule. The advertisement for each collective investment scheme shall disclose
in addition to the investment objectives, the method and periodicity of valuation of collective investment scheme
property.

Appraising Agency
The appraising agency whose appraisal report forms part of the offer document and has given a written consent for
the inclusion of the appraisal report in the offer document shall be liable for any statement in the appraisal report
which is misleading, incorrect or false.

Misleading Statements
The offer document and advertisement materials shall not be misleading or contain any statement or opinion which
are incorrect or false. Where an offer document or advertisement includes any statement or opinions which are
incorrect or false or misleading, every person -
(i) who is a director of the Collective Investment Management Company at the time of the issue of the offer document;
(ii) who has issued the offer document and shall be punishable under the Act unless he proves either that the
statement or opinion was immaterial or that he had reasonable ground to believe at the time of the issue of
the offer document or advertisement that the statement was true.

Offer period
No collective investment scheme shall be open for subscription for more than 90 days.

Allotment of units and Refunds of Moneys

The Collective Investment Management Company should specify in the offer document –
a) the minimum and the maximum subscription amount it seeks to raise under the collective investment scheme; and
b) in case of oversubscription, the process of allotment of the amount oversubscribed.
 364  Lesson 13 • EP-SLCM

The CIMC should refund the application

money to the applicants

if the collective investment scheme fails to receive

the minimum subscription amount.

Any amount refundable should be refunded within a period of

six weeks from the date of closure of subscription list, by
Registered A.D. and by cheque or demand draft.

In the event of failure to refund the amounts within the period

specified, the CIMC has to pay interest to the applicants at a
rate of fifteen percent per annum on the expiry of six weeks
from the date of closure of the subscription list.days.

Unit Certificates
The Collective Investment Management Company should issue to the applicant whose application has been
accepted, unit certificates as soon as possible but not later than six weeks from the date of closure of the subscription
list. However, if the units are issued through a depository, a receipt in lieu of unit certificate will be issued as per
provisions of SEBI (Depositories and Participants) Regulations, 1996 and bye-laws of the depository.

Transfer of Units
A unit certificate issued under the collective investment scheme should be freely transferable. The CIMC on
production of instrument of transfer together with relevant unit certificates, register the transfer and return the
unit certificate to the transferee within thirty days from the date of such production. However, if the units are held
in a depository such units shall be transferable in accordance with the provisions of the SEBI (Depositories and
Participants) Regulations, 1996 and bye-laws of the depository.

Money to be kept in separate account and utilisation of money

(1) The subscription amount received should be kept in a separate bank account in the name of the collective
investment scheme and utilised for –
(a) adjustment against allotment of units only after the trustee has received a statement from the registrars
to the issue and share transfer agent regarding minimum subscription amount, as stated in the offer
document, having been received from the public, or
(b) for refund of money in case minimum subscription amount, as stated in the offer document, has not
been received or in case of over-subscription.
(2) The minimum subscription amount as specified in the offer document couldn’t be less than the minimum
amount, as specified by the appraising agency, needed for completion of the project for which the collective
investment scheme is being launched.
(3) The moneys credited to the account of the collective investment scheme should be utilised for the purposes
of the scheme and as specified in the offer document.
(4) Any unutilised amount lying in the account of the collective investment scheme should be invested in the
manner as disclosed in the offer document.
 Lesson 13 • Collective Investment Schemes 365

Investments and Segregation of Funds

The Collective Investment Management Company should:
(a) not invest the funds of the collective investment scheme for purposes other than the objective of the collective
investment scheme as disclosed in the offer document.
(b) segregate the assets of different collective investment schemes.
(c) not invest corpus of a collective investment scheme in other collective investment schemes.
(d) not transfer funds from one collective investment scheme to another collective investment scheme.

However, it has been provided that inter-scheme transfer of collective investment scheme property may be
permitted at the time of termination of the collective investment scheme with prior approval of the trustee and
the SEBI.

Listing of Collective Investment Schemes

The units of every scheme shall be listed immediately after the date of allotment of units and not later than six
weeks from the date of closure of the scheme on each of the stock exchanges as mentioned in the offer document.

Winding up of Collective Investment Scheme

A scheme should be wound up on the expiry of duration specified in the collective investment scheme or on the
accomplishment of the objective of the collective investment scheme as specified in the offer document.
A collective investment scheme may be wound up :
(a) on the happening of any event which, in the opinion of the trustee, requires the collective investment scheme
to be wound up and the prior approval of the SEBI is obtained; or
(b) if unit holders of a collective investment scheme holding at least three-fourth of the nominal value of the unit
capital of the collective investment scheme, pass a resolution that the scheme be wound up and the approval
of SEBI is obtained thereto; or
(c) if in the opinion of SEBI, the continuance of the collective investment scheme is prejudicial to the interests of
the unit-holders; or
(d) if in the opinion of the CIMC, the purpose of the collective investment scheme cannot be accomplished and it
obtains the approval of the trustees and that of the unit holders of the collective investment scheme holding
at least three-fourth of the nominal value of the unit capital of the collective investment scheme with a
resolution that the collective investment scheme be wound up and the approval of SEBI is obtained thereto.

Where a collective investment scheme is to be wound up, the trustee shall give notice disclosing the circumstances
leading the winding up of the collective investment scheme in a daily newspaper having nationwide circulation and
in the newspaper published in the language of the region where the CIMC is registered.
The trustee should dispose of the assets of the collective investment scheme concerned in the best interest of the
unit holders of that collective investment scheme. The proceeds of sale realised, should be first utilised towards the
discharge of such liabilities as are due and payable under the collective investment scheme and after making
appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the
unit holders in proportion to their unit holding.
After the completion of the winding up, the trustee should forward to SEBI and the unit holders –
(a) a report on the steps taken for realisation of assets of the collective investment scheme, expenses for winding
up and net assets available for distribution to the unit holders, and
(b) a certificate from the auditors of the collective investment scheme to the effect that all the assets of the
collective investment scheme are realised and the details of the distribution of the proceeds.
 366  Lesson 13 • EP-SLCM

The unclaimed money, if any at the time of winding up, should be kept separately in a bank account by the trustee
for a period of three years for the purpose of meeting investors’ claims and thereafter, should be transferred to
investor protection fund, as may be specified by the SEBI.

Effect of commencement of winding up proceedings

On and from the date of the publication of notice, the trustee or the CIMC as the case may be, shall cease to carry on
any business activities in respect of the collective investment scheme so wound up.

Cessation of the collective investment scheme

If SEBI is satisfied that all the measures for winding up of the collective investment scheme have been complied
with, the collective investment scheme shall cease to exist.

GENERAL OBLIGATIONS OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

Maintain proper books of account and records, etc.
(1) Every Collective Investment Management Company shall-
(a) keep and maintain proper books of account, records and documents, for each collective investment
scheme so as to explain its transactions and to disclose any point of time the financial position of each
collective investment scheme and in particular give a true and fair view of the state of affairs of the
collective investment scheme, and
(b) intimate to the SEBI and the trustees the place where such books of account, records and documents
including computer records are maintained.
(2) Every Collective Investment Management Company shall continue to maintain and preserve, for a period of
five years after the close of each collective investment scheme, its books of account, records, computer data
and documents.

Financial year
The financial year for all the collective investment schemes shall end as on March 31 of each year.
Dispatch of warrants and proceeds
The Collective Investment Management Company shall-
(a) Dispatch to the unit holders the warrants within 42 days of the declaration of the interim returns.
(b) Dispatch the redemption proceeds within 30 days of the closure or the winding up of the collective investment
scheme.

Statement of Accounts and Annual Report

The Collective Investment Management Company shall:
(a) not exceed the ceilings on expenses or fees in respect of the collective investment scheme as specified;
(b) prepare the accounts of the collective investment scheme in accordance with accounting norms as specified;
(c) comply with format of balance sheet and profit and loss accounts as specified.

An annual report and annual statement of accounts of each collective investment scheme shall be prepared in
respect of each financial year. Every Collective Investment Management Company shall within two months from the
date of closure of each financial year forward to the SEBI a copy of the Annual Report.
Auditor’s Report
Every collective investment scheme shall have the annual statement of accounts audited by an auditor who is
empanelled with the SEBI and who is not in any way associated with the auditor of the Collective Investment
Management Company. The auditor shall be appointed by the trustee. The auditor shall forward his report to the
trustee and such report shall form part of the Annual Report.
 Lesson 13 • Collective Investment Schemes 367

Publication of Annual Report and summary thereof

The collective investment scheme wise annual report or an abridged form thereof shall be published in a national
daily as soon as possible but not later than two calendar months from the date of finalisation of accounts. The
annual report shall contain details as specified and such other details as are necessary for the purpose of providing
a true and fair view of the operations of the collective investment scheme.
The report if published in abridged form shall carry a note that full annual report shall be available for inspection
at the Head Office and all branch offices of the Collective Investment Management Company.

Periodic and continual disclosures

The Collective Investment Management Company and the trustee, shall make such disclosures or submit such
documents as they may be called upon by the SEBI to make or submit.
The Collective Investment Management Company on behalf of the collective investment scheme shall furnish the
following periodic reports to the SEBI, namely:
(a) copies of the duly audited annual statements of account including the balance sheet and the profit and loss
account in respect of each collective investment scheme, once a year;
(b) a copy of quarterly unaudited accounts;
(c) a quarterly statement of changes in net assets for each of the collective investment schemes.

Quarterly disclosures
A Collective Investment Management Company, on behalf of the collective investment scheme shall before the
expiry of one month from the close of each quarter that is 31st March, 30th June, 30th September and 31st December
publish its unaudited financial results in one daily newspaper having nationwide circulation and in a newspaper
published in the language of the region where the Head Office of the Collective Investment Management Company
is situated.
However, the quarterly unaudited report shall contain details as specified in the regulations and such other details
as are necessary for the purpose of providing a true and fair view of the operations of the collective investment
scheme.

Disclosures to the investors

The trustee shall ensure that the Collective Investment Management Company shall make such disclosures to the
unit holders as are essential in order to keep them informed about any matter which may have an adverse bearing
on their investments.

Calling of meeting of unit holders, transfer and transmission of units

The calling of meeting of unit holders as well as transfer and transmission of units of collective investment scheme
shall be as per the provisions of the Eighth Schedule.

PROCEDURE FOR ACTION IN CASE OF DEFAULT

Liability for action in case of default

In case a Collective Investment Management Company

contravenes any provision of the Act or these regulations

furnishes any information which is false or misleading or

suppresses any material information
 368  Lesson 13 • EP-SLCM

does not co-operate in any inspection, investigation or inquiry

conducted by the SEBI under the Act or these regulations

fails to comply with any directions issued by the SEBI under the Act
or the regulations

fails to resolve the complaints of the investors or fails to furnish to

the SEBI a satisfactory reply in this behalf when called upon to do
so by the SEBI

commits a breach of any provision of the Code of Conduct

fails to pay the fees

commits a breach of the conditions of registration

fails to make an application for listing or fails to list units of a

collective investment scheme in a recognized stock exchange

Such CIMC may be liable for cancellation or suspension of its

registration on

Directions by the SEBI

The SEBI may, in the interests of the securities market and the investors and without prejudice to its right to initiate
action, including initiation of criminal prosecution under section 24 of the SEBI Act, 1992, give such directions as it
deems fit in order to ensure effective observance of these regulations, including directions:

requiring the person concerned not to collect any money from

investors or to launch any collective investment scheme

prohibiting the person concerned from disposing of any of the

properties of the collective investment scheme acquired in violation
of these regulations

requiring the person concerned to dispose of the assets of the

collective investment scheme in a manner as may be specified in
the directions
 Lesson 13 • Collective Investment Schemes 369

requiring the person concerned to refund any money or the assets

to the concerned investors along with the requisite interest or
otherwise, collected under the collective investment scheme

prohibiting the person concerned from operating in the capital

market or from accessing the capital market for a specified period.

Action against intermediaries

SEBI may initiate action for suspension or cancellation of registration of an intermediary holding a certificate of
registration under section 12 of the Act who fails to exercise due diligence in the performance of its functions or
fails to comply with its obligations under these regulations. However no such certificate of registration shall be
suspended or cancelled unless the procedure specified in the regulations applicable to such intermediary is
complied with.

Appeal to the Central Government

Any person aggrieved by an order of the SEBI made under these regulations may prefer an appeal to a Securities
Appellate Tribunal having jurisdiction in the matter.

PENAL PROVISIONS
As per Section 15D of the SEBI Act, 1992 –

Contravention Penalty
If any person, who is required under SEBI Act or any He shall be liable to a penalty which shall not be less
rules or regulations made thereunder to obtain a than one lakh rupees but which may extend to one lakh
certificate of registration from the SEBI for sponsoring rupees for each day during which he sponsors or carries
or carrying on any collective investment scheme, on any such collective investment scheme including
including mutual funds, sponsors or carries on any mutual funds subject to a maximum of one crore rupees
collective investment scheme, including mutual funds,
without obtaining such certificate of registration
If any person, registered with the SEBI as a collective He shall be liable to a penalty which shall not be less
investment scheme, including mutual funds, for than one lakh rupees but which may extend to one lakh
sponsoring or carrying on any investment scheme, fails rupees for each day during which such failure continues
to comply with the terms and conditions of certificate of subject to a maximum of one crore rupees
registration
If any person, registered with the SEBI as a collective He shall be liable to a penalty which shall not be less
investment scheme, including mutual funds, fails to than one lakh rupees but which may extend to one lakh
make an application for listing of its schemes as rupees for each day during which such failure continues
provided for in the regulations governing such listing subject to a maximum of one crore rupees
If any person, registered as a collective investment He shall be liable to a penalty which shall not be less
scheme, including mutual funds, fails to despatch unit than one lakh rupees but which may extend to one lakh
certificates of any scheme in the manner provided in rupees for each day during which such failure continues
the regulation governing such despatch subject to a maximum of one crore rupees
 370  Lesson 13 • EP-SLCM

If any person, registered as a collective investment He shall be liable to a penalty which shall not be less
scheme, including mutual funds, fails to refund the than one lakh rupees but which may extend to one lakh
application monies paid by the investors within the rupees for each day during which such failure continues
period specified in the regulations subject to a maximum of one crore rupees
If any person, registered as a collective investment He shall be liable to a penalty which shall not be less
scheme, including mutual funds, fails to invest money than one lakh rupees but which may extend to one lakh
collected by such collective investment schemes in the rupees for each day during which such failure continues
manner or within the period specified in the regulations subject to a maximum of one crore rupees

KEY ASPECTS FOR LAUNCHING COLLECTIVE INVESTMENT SCHEME

1. The company floating CIS shall have to seek registration with SEBI as Collective Investment Management
Company (CIMC).
2. CIS shall be constituted as a two tiered structure comprising of a trust and a CIMC.
3. At the time of application for Registration as CIMC, these entities should have a minimum networth of Rs. 3 crores
which shall have to be increased to Rs. 5 crores within three years from the date of grant of registration.
4. Compulsory Filing of Offer Documents: Every collective investment Scheme shall have to file offer
documents with SEBI containing adequate disclosures to enable the investors to take informed investment
decisions.
5. Mandatory Rating Requirement: Each collective investment scheme shall have to obtain a rating from
recognised credit rating agencies such as CRISIL Limited, Fitch Ratings India Private Limited, ICRA Limited,
CARE, SMERA.
6. The projects being undertaken must also be appraised by an empanelled appraising agency such as
Agricultural Finance Corporation Ltd., North Eastern Development Finance Corporation Ltd. (NEDFI), Indian
Institute of Forest Management, The Forest Research Institute (FRI).
7. No Assured Return: The collective investment schemes are prohibited from guaranteeing assured returns.
Indicative returns, if any, provided by the collective investment scheme shall be based on the projections in
the appraisal report.
8. Advertisement Code: Advertisements in respect of every collective investment scheme shall have to conform
to the SEBI’s advertisement code.
9. Subscription Period: No collective investment scheme shall be kept open for subscription for a period of
more than 90 days. The collective investment schemes shall be close ended in nature. The collective investment
schemes must indicate the minimum and maximum amount proposed to be raised over this period.
10. Duration of collective investment Schemes: The duration of the collective investment schemes shall be for
a minimum period of 3 years.
11. Insurance: Compulsory Insurance cover for the assets of the collective investment scheme and personal
indemnity cover for the CIMC shall be obtained.
12. Listing: Units issued under the Collective Investment Schemes are to be compulsorily listed on recognised
stock exchanges.
Accounting/Valuation norms: Accounting/valuation norms as stipulated shall have to be followed by Collective
Investment Schemes.

ROLE OF COMPANY SECRETARY

The Company Secretary shall ensure that the money mobilization carried out by the company will not trigger the
parameters of CIS Regulations.
Lesson 13 • Collective Investment Schemes 371

CASE LAWS
1 05.06.2020 • Dairyland Plantations (India) Limited – Noticee No. 1 Whole Time Member
• Mrs. Roshan D. Nariman – Noticee No. 2
Securities and Exchange
• Ms. Taz N. Nariman – Noticee No. 3
Board of India
• Ms. Jeroo Nariman – Noticee No. 4
• Mrs. Silloo R. Nariman – Noticee No. 5
• Mr. Urvaksh Naval Hoyvoy – Noticee No. 6
• Mrs. Shernaz Kershasp patel – Noticee No. 7
• Mrs. Meher Khushru Patel – Noticee No. 8
• Mrs. Rukhshana Meher Anklesaria – Noticee No. 9
Whole Time Member

Facts of the Case:

Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted an examination into the
business activities being carried out by Dairyland Plantations (India) Limited (hereafter referred to as
“Company/DPL/Noticee no.1”). The examination of the business activities of the Company revealed that the
Company had launched a scheme named as Green Gold Bonds scheme (hereinafter referred to as “Scheme”)
which apparently possessed the requisite ingredients of a collective investment scheme (hereinafter referred to
as “CIS”). It was noticed that the said Scheme entailed a one-time payment of Rs. 5 000 in lieu of a unit of 5
Teakwood trees with a holding period of 20 years and on maturity, the contributor/ investor had the option to
get the teak trees or the realised sale proceeds thereof. The examination of the details of the scheme further
revealed that the Company had mobilised approx. Rs. 1,00,82,000/- (Rs One Crore and Eighty-Two Thousand)
from 1660 contributors/investors. It was observed that the Scheme was launched by the Company during the
period from 1992 to 1996 and during the said period as well as subsequently thereafter during the operation of
the Scheme, the Noticees no. 2 to 9 were its Directors and were responsible for the affairs of the management of
the business of the Company. It was also noticed that the said Scheme was being carried on without obtaining
registration from SEBI, in violation of provisions of Securities and Exchange Board of India Act, 1992 (hereinafter
referred to as “SEBI Act”) and SEBI (Collective Investment Schemes) Regulations, 1999 (hereafter referred to as
“CIS Regulations”).
It is noted that Section 12 (1B) of SEBI Act, which came into effect on January 25, 1995 prohibited a person from
carrying out any CIS, unless he obtains registration from SEBI. However, the section permitted existing entity
who were carrying out CIS activities prior to the commencement of the aforesaid provision to continue with the
existing scheme till Regulations governing CIS are promulgated. Subsequently a separate CIS Regulations of
SEBI was enacted which came into force on October 15, 1999 in terms of which, all the existing CIS (prior to the
commencement of CIS Regulations) were required to apply for registration or else, were required to wind up the
existing CIS after making repayment to the contributors/investors and also were further required to file a
Winding Up and Repayment report (hereinafter referred to as “WRR”) with SEBI in terms of the said CIS
Regulations. Accordingly, various companies including the Noticee Company, which were running CIS schemes
at the time of promulgation of the afore-stated CIS Regulations, were asked vide several letters and public
notices, to abide by the provisions of the CIS Regulations and submit their compliance reports as mandated
under the said Regulations. However, the Noticee Company neither obtained provisional registration, nor
applied for registration of its CIS Scheme by the prescribed date of March 31, 2000, and did not even take
necessary steps for winding up of the Scheme. Therefore, a Show Cause Notice dated May 12, 2000 (hereinafter
referred to as “SCN”) was issued to the Company calling upon it to show cause as to why suitable directions shall
not be issued against it for continuing with its CIS activities, in violations of the provisions of SEBI Act the CIS
Regulations.
372  Lesson 13 • EP-SLCM

Order:
SEBI issue following directions:-
a) The Noticee Company shall, within a month from the date of issue of this order, cause to effect a newspaper
publication in one national daily in English and in Hindi each, and in a local daily with wide circulation in
each of the States wherein the investors reside, mentioning in bold letters the name of the Scheme i.e
‘Green Gold Bonds Scheme’ in the said News Papers and inviting complaints/claims from any investor in
respect of the said Green Gold Scheme from contributors/investors that are still outstanding. The
newspaper publications shall also contain an advisory, informing the investors to forward a copy of their
complaints/claims, with the superscription “Complaints/Claims in the Matter of Dairyland Plantations
(India) Ltd.”, to SEBI.
b) A period of one month from the date of the advertisement shall be provided to contributors/investors for
submitting any claim/complaint as stated aforesaid.
c) The Company shall furnish to SEBI the details of the investors viz; name of the investors, amount invested,
year of investment, address and other material information etc., within a period of 15 days from the date
of this order.
d) An interest bearing escrow account shall be opened by the Noticee Company in a nationalised public
sector bank and the entire outstanding amount payable to the investors under the above stated Scheme
shall be transferred/deposited to this escrow account within one month from the date of this order.
e) The Company shall wind up its existing CIS and refund the money collected by the Company under the
Scheme to the contributors/investors which are due to them strictly as per the terms of offer of the
scheme. Those investors who want to opt for repayment in the form of 5 Teak-wood trees and not in cash,
the Noticees shall refund them in the form of Teak-wood Trees on a best efforts basis but in the event the
repayments cannot be made in the form of Teak-wood trees for want of permission/authorisation to cut
the trees or any other genuine hardships, those investors shall also be repaid their dues in cash as per the
terms of the scheme.
f) The present incumbent Directors (Noticees no. 4 to 6) shall ensure that the aforesaid directions are
complied with.
g) Noticee Company and present incumbent Directors shall submit to SEBI a final Winding Up and Repayment
Report ( WRR) in the prescribed format for the purpose along with information on the claims so received,
contributors/ investors so refunded and other details of escrow account duly supported by list of all
contributors/investors, their contact details, details of investments and corresponding refunds made to
the investors, bank account statements of the company indicating refunds so made to the investors and
receipts taken from the investors acknowledging such refunds along with a consolidated statement of
such repayments having been made, duly certified by two Independent Chartered Accountants, within a
period of six (06) months from the date of this Order.
h) Any amount remaining balance in the aforesaid escrow account after making repayment to contributors/
investors, shall be transferred to Investor Protection and Education Fund established under the SEBI
(Investor Protection and Education Fund) Regulations, 2009 after a lapse of 1 year from the date of this
order.
i) All the Noticee Directors along with the Company (Noticee No.1) except for the Noticee no. 2 and 3 (against
whom the proceedings stand abated on account of death), are restrained from accessing the Securities
Market including by issuing prospectus, offer document or advertisement soliciting money from the
public and are further prohibited from buying, selling or otherwise dealing in securities, directly or
indirectly in any manner, for a period of one (01) year with effect from the date of filing of WRR to SEBI. It
is clarified that during the period of restraint, the existing holding of securities of the Noticees including
units of mutual funds, shall remain frozen.
j) In the event the Noticee Company and the present Directors fail to carry out the directions issued at sub-
paragraph (a) to (h) above or any complaint is received hereinafter suggesting that the Company has
Lesson 13 • Collective Investment Schemes 373

failed to pay all the dues to the investors, the Noticee Company and its Directors (Noticees no. 4, 6, 7, 8 and
9) shall be jointly and severally liable to refund to the contributors/ investors such amounts in the manner
provided under the direction in sub-para (e) above within a period of 03 months from the end of the six
(06) months as directed under sub-para (g) above.
k) The Noticee Company and its present Directors shall not divert any funds raised from public at large and
shall not alienate or dispose of or sell any of the assets of the Company except for the purpose of making
refund to its investors as directed above.
l) The Noticee Company and Director Noticees no. 4, 6, 7, 8 and 9 shall provide inventory of details of all
their assets (movable and immovable) within a period of one (01) month from the date of this order.

2 25.02.2019 Nicer Green Housing Infrastructure Securities Appellate Tribunal

Developers Ltd. &Ors. (Appellant) vs. SEBI
(Respondent)
In the absence of any evidence that the appellants had refunded and that they are ready and willing to
pay the balance amount to investors in a time bound manner, SAT is of the opinion that there is no
infirmity in the order passed by SEBI disposing of their representations.
Facts of the case:
The Nicer Green Housing Infrastructure Developers Ltd., Appellant No. 1 is a company incorporated under the
Companies Act, 1956 as a public limited company and is engaged in the business of acquiring agricultural land
and developing the same for the purpose of re-sale. SEBI found that the activity of fund mobilization by the
appellant no. 1 under its scheme fell within the ambit of “Collective Investment Scheme” as defined under
Section 11AA of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as, ‘SEBI Act’).
SEBI issued an order dated November 9, 2015 under Section 19 read with Sections 11(1), 11B and 11(4) of the
SEBI Act read with Regulation 65 of Securities and Exchange Board of India (Collective Investment Schemes)
Regulations, 1999 issuing a slew of directions restraining the appellant and its directors from collecting any
money from the investors or to launch or to carry out any investments schemes.
SEBI further directed to refund the money collected under its scheme to the investors and thereafter wind up
the company. The appellants being aggrieved by the said order filed an Appeal before the Securities Appellate
Tribunal wherein the appellants contended that they are ready and willing to comply with the order passed by
SEBI contending that out of an amount of Rs. 31.71 crore collected the appellants have already refunded
Rs. 27.48 crore and that the appellants are ready and willing to refund the balance amount in a time bound
manner.
Order:
SAT finds that no proof has been filed either before SEBI or even before this Tribunal to show that the appellants
had refunded a sum of Rs. 27.48 crore and that they are ready and willing to pay the balance amount in a time
bound manner. In the absence of any evidence being filed, SAT is of the opinion that there is no infirmity in the
order passed by SEBI disposing of their representations. The appeal lack merit and is dismissed summarily.
374  Lesson 13 • EP-SLCM

LESSON ROUND-UP

• A collective investment scheme is a trust based scheme that comprises a pool of assets that is managed by
a collective investment scheme manager and is governed by the Collective Investment Schemes Regulations
given by the SEBI.
• A collective investment scheme should be constituted in the form of a trust and the instrument of trust
should be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908
executed by the Collective Investment Management Company in favour of the trustees named in such an
instrument.
• Collective Investment Management Company is regulated by the SEBI (Collective Investment Schemes)
Regulations, 1999.
• The SEBI (Collective Investment Schemes) Regulations, 1999 defines Collective Investment Management
Company to mean a company incorporated under the Companies Act, 2013 and registered with SEBI
under these regulations, whose object is to organize, operate and manage a collective investment scheme.
• Trustee means a person who holds the property of the collective investment scheme in trust for the benefit
of the unit holders, in accordance with these regulations.
• The units of every collective investment scheme shall be listed immediately after the date of allotment of
units and not later than six weeks from the date of closure of the collective investment scheme on each of
the stock exchanges as mentioned in the offer document.
• No collective investment scheme shall provide guaranteed or assured returns.
• No collective investment scheme shall be open for subscription for more than 90 days.
• The trustee shall ensure that the Collective Investment Management Company shall make such disclosures
to the unit holders as are essential in order to keep them informed about any matter which may have an
adverse bearing on their investments.
• Any person aggrieved by an order of the SEBI made under these regulations may prefer an appeal to a
Securities Appellate Tribunal having jurisdiction in the matter.

GLOSSARY

Fundamental Attributes It means the investment objective and terms of a scheme.

Pooling Pooling is the basic concept behind collective investments. The money of
thousands of individual investors, who share a common investment objective,
is pooled together to form a CIS portfolio.
Ponzi Scheme A ponzi scheme is an investment from where clients are promised a large
profit in short term at little or no risk at all.
Scheme It means Collective Investment Scheme.
Unit Holders Investors in unit trust/mutual funds.
Lesson 13 • Collective Investment Schemes 375

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation)
1. What are the restrictions imposed on business activities for Collective Investment Management Company?
2. Discuss the schemes and arrangements which are not coming under the ambit of collective investment
scheme.
3. What are the obligations of Collective Investment Management Company under the SEBI (Collective
Investment Scheme) Regulations, 1999?
4. State the provisions relating to allotments of units and refund of money under the SEBI (Collective
Investment Scheme) Regulations, 1999.
5. What should be the contents of the trust deed which is required to be executed under the SEBI (Collective
Investment Scheme) Regulations, 1999.
6. What are the General Obligations of Collective Investment Scheme Company?
7. What the procedure of action by SEBI in case of default by Collective Investment Management Company?
8. “Co-ordination of Trustee and Collective Investment Management Company is absolutely necessary for
success of a Collective Investment Scheme.” Explain in this context, the rights available to the trustee.

LIST OF FURTHER READINGS

• SEBI Circulars

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• https://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846814724.pdf
376  Lesson 13 • EP-SLCM
 Resolution of Complaints and
Lesson 14 Guidance
Key Concepts One Learning Objectives Regulatory Framework
Should Know
To understand: • SEBI (Ombudsman)
• SCORES • SCORES Framework Regulations, 2003
• Grievances • Process of lodging complaints • SEBI (Informal Guidance)
• Ombudsman on SCORES and time line for Scheme, 2003
• Stipendiary lodging complaints on SCORES • SEBI Circulars
Ombudsman • Matters that not considered
as complaints in SCORES
• Informal • Complaints against which
Guidance type of companies cannot be
• No-action letters dealt on SCORES
• Imperative • Manner of handling the
Letters complaints by Listed Entities,
intermediaries and Stock
Exchange
• Concept of Ombudsman
• Power and Functions for SEBI
Ombudsman and procedure
for resolution before
Ombudsman
• Informal Guidance Scheme

Lesson Outline
• Introduction
• Matters not considered as complaints in Scores
• Type of companies not covered under Scores
• Timeline for lodging complaint on SCORES
• Process for lodging complaint online in SCORE by investors
• Handling of the complaints by listed entities and SEBI registered
intermediaries
• Handling of SCORES Complaints by Stock Exchange
• When are Investor Complaints Disposed of?
• When can SEBI take action for non- resolution of investor
complaints?
• When can a case be referred for Arbitration?
• SEBI mobile application : Recent Development
• Case Laws
• SEBI (Ombudsman) Regulations, 2003
• SEBI (Informal Guidance) Scheme, 2003
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
• LIST OF FURTHER READINGS
• OTHER REFERENCES
 378  Lesson 14 • EP-SLCM

INTRODUCTION

SCORES (SEBI Complaints Redress System) is an online platform designed to help investors to lodge their
complaints, pertaining to securities market, online with SEBI against listed companies and SEBI registered
intermediaries. All complaints received by SEBI against listed companies and SEBI registered intermediaries are
dealt through SCORES.

SEBI launched a centralized web based complaints redress system ‘SCORES’ in June 2011. The purpose of SCORES
is to provide a platform for aggrieved investors, whose grievances, pertaining to securities market, remain
unresolved by the concerned listed company or registered intermediary after a direct approach. SCORES also
provides a platform, overseen by SEBI through which the investors can approach the concerned listed company or
SEBI registered intermediary in an endeavor towards speedy redressal of grievances of investors in the securities
market. It would, however, be advisable that investors may initially take up their grievances for redressal with the
concerned listed company or registered intermediary, who are required to have designated persons/officer for
handling issues relating to compliance and redressal of investor grievances.

The salient features of SCORES are:

• Centralised database of investor complaints
• Online movement of complaints to the concerned listed company or SEBI registered intermediary
• Online upload of Action Taken Reports (ATRs) by the concerned listed company or SEBI registered
intermediary
• Online viewing by investors of actions taken on the complaint and its current status
• 5. SCORES is web enabled and provides online access 24 x7;
• Complaints and reminders thereon can be lodged online at the above website at anytime from anywhere;
• An email is generated instantaneously acknowledging the receipt of complaint and allotting a unique
• complaint registration number to the complainant for future reference and tracking;
• The complaint forwarded online to the entity concerned for its redressal;

MATTERS NOT CONSIDERED AS COMPLAINTS IN SCORES

• Complaint not pertaining to investment in securities market. Question: Which are the
• Anonymous Complaints (except whistleblower complaints). complaints that come under the
• Incomplete or un-specific complaints. purview of SEBI?
• Allegations without supporting documents. Answer: Complaints arising out of
issues that are covered under SEBI
• Suggestions or seeking guidance/explanation.
Act, Securities Contract
• Not satisfied with trading price of the shares of the companies. Regulation Act, Depositories Act
• Non-listing of shares of private offer. and rules and regulation made
• Disputes arising out of private agreement with companies/ there under and relevant
intermediaries. provisions of Companies Act, 2013
are under the purview of SEBI
• Matter involving fake/forged documents.
• Complaints on matters not in SEBI purview.
• Complaints about any unregistered/ un-regulated activity.
 Lesson 14 • Resolution of Complaints and Guidance 379

TYPE OF COMPANIES NOT COVERED UNDER SCORES

Complaints against the following companies cannot be dealt through SCORES even though the complaint may be
against a listed entity/ SEBI registered intermediary:-
• Complaints against the companies which are unlisted/delisted, placed on the Dissemination Board of Stock
Exchange.
• Complaints against a sick company or a company where a moratorium order is passed in winding up /
insolvency proceedings.
• Complaints against the companies where the name of company is struck off from Registrar of Companies
(RoC) or a Vanishing Company as per list published by Ministry of Corporate Affairs (MCA).Suspended
companies, companies under liquidation, BIFR etc.
• Complaints that are sub-judice i.e. relating to cases which are under consideration by court of law, quasi-
judicial proceedings etc.
• Complaints against companies, falling under the purview of other regulatory bodies viz. The Reserve Bank of
India (RBI), The Insurance Regulatory and Development Authority of India (IRDAI), the Pension Funds
Regulatory and Development Authority (PFRDA), Competition Commission of India (CCI), etc., or under the
purview of other ministries viz., MCA, etc.
Question: Which companies are required to obtain SCORES authentication?
Answer: All registered intermediaries and listed companies are required to take SCORES authentication
except stock brokers, sub brokers and Depository Participants. Stock Brokers, Sub-Brokers
and Depository Participants are not required to obtain SCORES authentication since complaints
against these intermediaries shall continue to be routed through the platforms of the concerned
Stock Exchange/Depository.

TIME LINE FOR LODGING COMPLAINT ON SCORES

From 1st August 2018, an investor may lodge a complaint on
SCORES within three years from the date of cause of EXAMPLE
complaint, where;
• Investor has approached the listed company or If the date of declaration of dividend by a
registered intermediary for redressal of the complaint company is 01.01.2015, as per the Companies
and, Act, 2013 the Company has to pay the dividend
within 30 days from the declaration of the
• The concerned listed company or registered dividend date to all its registered shareholder. If
intermediary rejected the complaint or, the Company fails to pay the declared dividend
• The complainant does not receive any communication within 30 days i.e. 31.01.2015 as the dividend
from the listed company or intermediary concerned was declared on 01.01.2015, the date of cause of
or, complaint would be 31.01.2015 and a complaint
can be lodged on SCORES within 3 years from
• The complainant is not satisfied with the reply given
31.01.2015 i.e. on or before 30.01.2018.
to him or redressal action taken by the listed company
or an intermediary.

Question: What happen if an investor fails to lodge a complaint on SCORES within three years?
Answer: In case investor fails to lodge a complaint within the stipulated time of three years, he may
directly take up the complaint with the entity concerned or may approach appropriate court
of law.
 380  Lesson 14 • EP-SLCM

PROCESS FOR LODGING COMPLAINT ONLINE ON SCORE BY INVESTORS

SCORES Portal
http://www.scores.gov.in/

CLICK
User Registration
(Under "Register Here)

Press submit to complete the registration. An Email/SMS

informing User ID andPassword will be sent to investor.

CLICK

(As per nature of complaint) Login to SCORES and Click on

"Complaint Registration"

Enter
Details like Period of cause of event, Date of grievance taken up with the entity,
address of direct complaint to the entity, Share certificate number/ folio number etc.

TYPE
Complaint details in brief
(1000 Characters)

Upload supporting documents

(upto 2 MB in PDF format)

CLICK
Add

Enter Character shown in image

CLICK
Submit

Complaint Registration Number is generated and sent

to email id and to mobile number of the complainnant.

HANDLING OF THE COMPLAINTS BY LISTED ENTITIES AND SEBI REGISTERED INTERMEDIARIES

It was seen that investors frequently lodged complaint on SCORES without actually taking the matter up with the
concerned company/ intermediary. In view of the same, from August 01, 2018, complaints will be handled as follows:-
 Lesson 14 • Resolution of Complaints and Guidance 381

Has the investor  lodged a complaint with the concerned

intermediary / listed company for redressal

NO YES

• The complaint will be routed directly to • The complainant has to provide the date
the concerned entity. Since this is the first of taking up the complaint and also the
time the issue will be raised with the address where the communication was
concerned entity, such “Direct complaints” last made.
will be addressed by the concerned entity
• The complaint will be routed to SEBI.
and the response will come to the investor
When the complaint comes to SEBI, the
without any interference of SEBI officials.
complaint is examined and its decided
• The concerned entity is required to send a whether the subject matter falls under
response to the investor directly within 30 the purview of SEBI and whether it needs
days. to be referred to concerned entity. After
• If the concerned entity fails to send a examination, SEBI forwards the complaint
response within 30 days to the investor, to the concerned entity with an advice to
then the complaint will be routed to SEBI send a written reply to the investor and
automatically. Thereafter, the complaint file an action taken report in SORES.
will have a new SCORES registration
number.
• In case the investor is dissatisfied with the
redressal of the complaint, the investor
has to indicate the same against the
complaint and then the complaint will
come to SEBI. If the investor does not
indicate the same within 15 days of receipt
of reply from the company, it will be
assumed that the investor is satisfied with
the redressal and the complaint will be
closed.

Question: How long does it take the entity to respond to investor complaint?
Answer: Entities are required to submit the action taken report within a reasonable period but not later than 30
days.

HANDLING OF SCORES COMPLAINTS BY STOCK EXCHANGE

Stock exchanges will be the first recourse for the following categories of complaints against listed companies.
• Non updation of address /Signature or Corrections etc
• Non-receipt of Bonus
• Non receipt of Dividend
• Non receipt duplicate debt securities certificate
• Non-receipt of duplicate share certificate
 382  Lesson 14 • EP-SLCM

• Non receipt of fractional entitlement

• Non receipt of interest for delay in dividend
• Non receipt of interest for delay in payment of interest on debt security
• Non receipt of interest for delay in redemption proceeds of debt security
• Non receipt of interest for delay in refunds
• Non receipt of interest on securities
• Non receipt of redemption amount of debt securities
• Non receipt of refund in Public/ Rights issue
• Non receipt of Rights Issue form
• Non receipt of securities after conversion/ endorsement/ consolidation/ splitting
• Non receipt of securities after transfer
• Non receipt of securities in public/ rights issue
• Non receipt of shares after conversion/ endorsement/ consolidation/ splitting
• Non receipt of shares after transfer
• Non receipt of shares after transmission
• Non receipt of shares in public/ rights issue (including allotment letter)
• Non-receipt of interest for delay in dispatch/credit of securities
• Receipt of refund/ dividend in physical mode instead of electronic mode
• Receipt of shares in physical mode instead of electronic mode
• Demat/Remat

Procedure for handling complaints by the stock exchanges

Investors are encouraged to initially take up their grievances for redressal with the concerned listed company
directly. SCORES platform can also be used to submit grievances directly to the company for resolution, if the
complainant has not approached the company earlier. Companies are expected to resolve the complaint directly.

In case the company does not redress the complaint within 30 days from the date of receipt of the complaint,
such direct complaints shall be forwarded to Designated Stock Exchange (DSE) through SCORES.

At the time of lodging the complaint through SCORES platform, in case the complainant had approached the
company earlier, the complainant shall submit all such details of the complaint in SCORES i.e., period of cause of
event, date of grievance taken up with the entity, address of the company corresponded earlier, etc. Such
complaints shall be forwarded to the DSE.

Upon receipt of the complaint through SCORES platform, the DSE shall take up the complaint with the company.
The company is required to redress the complaint and submit an Action Taken Report (ATR) within 30 days from
the date of receipt of such complaint.

In case the ATR is not submitted by the company within 30 days or DSE is of the opinion that the complaint is not
adequately redressed and the complaint remains pending beyond 30 days, a reminder shall be issued by DSE to
the listed company through SCORES directing expeditious redressal of the grievance within another 30 days.
 Lesson 14 • Resolution of Complaints and Guidance 383

On being adequately satisfied with the response of the company with respect to the complaint, the stock exchange
shall submit an ATR to SEBI.

For any failure to redress investor grievances pending beyond 60 days by listed companies, stock exchange shall
initiate appropriate action against the listed company.

Action of Stock Exchange for Failure to Redress Investor Complaints

In terms of SEBI circular SEBI/HO/CFD/CMD/CIR/P/2020/12 dated 22 January, 2020, Stock Exchanges shall,
having regard to the interest of investors and the securities market, inter alia take action against listed companies
for non- compliance with the provisions of the Listing Regulations and circulars/guidelines issued thereunder, including
failure to ensure expeditious redressal of investor complaints under Regulation 13 of the Listing Regulations.
Stock exchanges shall levy a fine of Rs. 1000 per day per complaint on the listed entity for violation of Regulation 13
(1) of SEBI (LODR) Regulations, 2015 read with SEBI circular no. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated 22
January, 2020. Fines shall also be levied on companies which are suspended from trading.

Timelines for handling of complaints and actions in case of non compliances

Sr No. Activity No of calendar days

1. Complaint handling:
a. Complaint received in SCORES by the listed company T
b. Response to be obtained from Listed Company Within T+30
c. If no response received, alert to Listed Company in the form of reminder for T+31
non-redressal of complaint
d. Response to be obtained from Listed Company Within T+60
2. Action in case of non-compliances:
a. Notice to Listed company intimating the fine @ Rs. 1000/- per day, per T+61
complaint to be levied for not resolving the complaints within 60 days
b. Notice to Promoters for non-resolution of complaints and nonpayment of T+76
fine to the stock exchange.
c. Freezing of promoters shareholdings (i.e. entire shareholding of the T+86
promoters in listed company as well as all other securities held in the demat
account of the promoters) in demat account.
d. Stock exchanges may take any other actions, as deemed appropriate.
e. Once Stock exchange has exhausted all options and if number of pending
complaints exceed 20 or the value involved is more than Rs. 10 lakhs, the Exchange
to forward the details of such Listed companies to SEBI for further action, if any

WHEN ARE INVESTOR COMPLAINTS DISPOSED OF?

Complaints are disposed of by SEBI

a. On receipt of satisfactory action taken report along with supporting documents, if any, from the concerned
entity responsible for resolving the complaint.
b. On failure by the investor/complainant to give complete details/documents required for redressal of their
complaint within the prescribed time.
c. When the concerned entity’s case is pending with court/ other judicial authority.
 384  Lesson 14 • EP-SLCM

WHEN CAN SEBI TAKE ACTION FOR NON-RESOLUTION OF INVESTOR COMPLAINTS?

For listed companies: SEBI has empowered stock exchanges to levy fine for non-redressal of investor complaints in
terms of the relevant provisions of SEBI (Listing and Disclosure Requirements) Regulations, 2015 to be read with
SEBI circular No. SEBI/HO/OIAE/IGRD/CIR/P/2020/152 dated August 13, 2020 and circular No. SEBI/HO/CFD/
CMD/CIR/P/2020/12 dated January 22, 2020.
If the complaint is not redressed/ fine is not paid, the stock exchanges can direct the depositories to freeze the
entire shareholding of the promoter and promoter group in such entity as well as all other securities held in the
demat account of the promoter and promoter group. If non-compliance continues, the stock exchanges may refer
such cases to SEBI for enforcement actions, if any.
Notwithstanding the above, while the entity is directly responsible for redressal of investor complaints, SEBI can
initiate action against recalcitrant entities including registered intermediaries and listed companies on the grounds
of their failure to redress investor complaints.

WHEN CAN A CASE BE REFERRED FOR ARBITRATION?

If there is any dispute (claims, complaints, differences, etc.) between a client and a member of Stock Exchange (i.e.
Stock Broker, Trading Member and Clearing Member) / a member of Depository [i.e. depository participant (DP)]
which has not been resolved to their satisfaction, either party can prefer for an arbitration proceedings for settlement
of their disputes.
Arbitration is a quasi-judicial process for settlement of disputes. Stock Exchanges/ Depositories provide an
arbitration mechanism for settlement of disputes (claims, complaints, differences, etc.) between a client and a
member/depositories participant (DP) through arbitration proceedings in accordance with the provisions of SEBI
Act/ Regulations/ Circulars/ guidelines read with Section 2(4) of the Arbitration and Conciliation, Act, 1996.
The limitation period for filing an arbitration reference is governed by the law of limitation, i.e., The Limitation Act,
1963. To obtain information about how to file an arbitration claim, the following links may be seen:-
BSE: https://www.bseindia.com/static/investors/arbitration_mechanism.aspx

NSE: https://www.nseindia.com/invest/content/about_arbitration.htm

SEBI MOBILE APPLICATION: RECENT DEVELOPMENT

In its efforts to improve the ease of doing business, SEBI dated March 5, 2020, launched a Mobile
Application for the convenience of investors to lodge their grievances in SEBI Complaints Redress System (SCORES).
SCORES mobile app will make it easier for investors to lodge their grievances with SEBI, as they can now access
SCORES at their convenience of a smart phone. The Mobile App will encourage investors to lodge their complaints
on SCORES rather than sending letters to SEBI in physical mode.
This is another effort of SEBI in improving digitalization in securities market. The App has all the features of SCORES
which is presently available electronically where investors have to lodge their complaints by using internet medium.
After mandatory registration on the App, for each grievance lodged, investors will get an acknowledgement via SMS
and e-mail on their registered mobile numbers and e-mail ID respectively.
Investors can, not only file their grievances but also track the status of their complaint redressal. Investors can also
key in reminders for their pending grievances. Tools like FAQs on SCORES for better understanding of the complaint
handling process can also be accessed. Connectivity to the SEBI Toll Free Helpline number has been provided from
the App for any clarifications/help that investors may require.
SCORES is a platform designed to help investors to lodge their complaints online with SEBI, pertaining to securities
market, against listed companies, SEBI registered intermediaries and SEBI recognized Market Infrastructure
Institutions. Since its launch in June 2011, SEBI on an average has received about 40,000 complaints every year. A
total of 3,57,000 complaints has been resolved using SCORES platform, so far. As per SEBI norms, entities against
 Lesson 14 • Resolution of Complaints and Guidance 385

whom complaints are lodged are required to file an Action Taken Report with SEBI within 30 days of receipt of
complaints.
The Mobile App “SEBI SCORES” is available on both iOS and Android platforms.

CASE LAWS

1. 17.03.2020 Usha India Limited. (Noticee) vs. SEBI Adjudicating Officer, Securities and
Exchange Board of India

Fact of the Case:

Securities and Exchange Board of India (hereinafter referred to as, “SEBI”) vide Circular No. CIR/OIAE/2/2011
dated June 03, 2011, directed all listed companies to obtain SEBI Complaints Redressal System (hereinafter
referred to as, “SCORES”) authentication and also redress any pending investor grievances in that platform only.
Subsequently, SEBI also vide Circulars No CIR/OIAE/1/2012 dated August 13, 2012, No. CIR/OIAE/1/2013
dated April 17, 2013 and No CIR/OIAE/1/2014 dated December 18, 2014, (hereinafter referred to as, “SEBI
circulars”) inter alia directed all companies whose securities were listed on Stock Exchanges to obtain SCORES
authentication within a period of 30 days from the date of issue of this circular and also to redress the pending
investor grievances within the stipulated time period.
It was alleged that Usha India Limited (hereinafter referred to as, “Noticee/Company”) had failed to obtain the
SCORES authentication and to redress investor grievances pending therein within the timelines stipulated by
SEBI, therefore not complying with the aforesaid SEBI Circulars.
Order
After taking into consideration all the facts and circumstances of the case, Adjudicating officer imposed a penalty
of Rs. 1,00,000/- (Rupees One Lakh Only) under Section 15HB of the SEBI Act and Rs. 1,00,000/- (Rupees One
Lakh Only) under section 15C of the SEBI Act, i.e. penalties totalling to Rs. 2,00,000/- (Rupees Two Lakh Only)
on the Noticee viz. Usha India Limited, which will be commensurate with its non compliances.

2. 29.11.2017 Shikhar Consultants Ltd. (Noticee) vs. SEBI Adjudicating Officer, Securities and
Exchange Board of India

Facts of the Case:

Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had issued its first circular viz. CIR/
OIAE/2/2011 dated June 03, 2011 for inter alia obtaining authentication on SEBI Complaints Redress System
(hereinafter referred to as “SCORES”) for processing investor complaints received by SEBI. Thereafter, SEBI
issued two more Circulars, i.e. CIR/OIAE/1/2012 dated August 13, 2012 and CIR/OIAE/1/2013 dated April 17,
2013 inter alia directing all the companies whose securities were listed on stock exchanges to obtain SCORES
authentication and also redress the pending investor grievances within the stipulated time period. On December
18, 2014, SEBI issued Circular No. CIR/OIAE/1/2014 dated December 18, 2014 consolidating the earlier
Circulars/ directions. The said Circular dated December 18, 2014 further inter alia stated that failure by any
listed company to obtain SCORES authentication would not only be deemed as non-redressal of investor
grievances, but, also indicate willful avoidance of the same and that failure to take action under the rescinded
circulars before the date of issuance of SEBI Consolidated Circular, shall be deemed to have been done or taken
or commenced under the provisions of Circular dated December 18, 2014. The aforenamed SEBI Circulars are
hereinafter collectively referred to as the “SEBI Circulars”.
SEBI observed that Shikhar Consultants Ltd. (hereinafter referred to as the “Noticee”/ “Company”) had failed to
comply with the said provisions of the SEBI Circulars.
It was, therefore, alleged that the Noticee has failed to obtain SCORES authentication and thereby violated the
SEBI Circulars, thus, making the Noticee liable for imposition of penalty under Section 15HB of the Securities
and Exchange Board of India Act, 1992 (hereinafter referred to as “the SEBI Act”).
 386  Lesson 14 • EP-SLCM

ORDER BY SEBI
After taking into consideration all the facts and circumstances of the case, Adjudicating Officer imposed a penalty
of Rs. 8,00,000/- (Rupees Eight Lakh Only) on the Noticee, Shikhar Consultants Ltd., under Section 15HB of the
SEBI Act, which will be commensurate with the violations committed by the Noticee.
APPEAL TO SAT AGAINST ORDER OF SEBI
Shikhar Consultants Ltd. - Appellant Versus Securities and Exchange Board of India - Respondent
The appeal was filed to challenge the order passed by the Adjudicating Officer (‘A. O.’ for short) of Securities and
Exchange Board of India (‘SEBI’ for short) on November 29, 2017. By the said order penalty of Rs. 8 lac was
imposed on the appellant under Section 15HB of Securities and Exchange Board of India Act, 1992 (‘SEBI Act’
for short), inter-alia, for not complying with the directions contained in the SEBI circular dated August 13, 2012.
As per SEBI circular dated August 13, 2012, it was obligatory on part of all the listed companies including the
appellant to obtain SCORES authentication by September 14, 2012.
Admittedly, the appellant did not apply for and obtain SCORES authentication within the time stipulated under
the SEBI circular dated August 13, 2012. Appellant applied for SCORES authentication belatedly on July 26, 2017
and the same was granted to the appellant on July 31, 2017.
As the appellant failed to obtain SCORES authentication within the time stipulated in the circular August 13,
2012, the A. O. has held that the appellant is guilty of violating the SEBI’s circular dated August 13, 2012 and,
accordingly, imposed penalty of Rs. 8 lac on the appellant.
SAT ORDER DATED APRIL 9, 2018
By failing to obtain SCORES authentication within the stipulated time, appellant has violated the SEBI circular
dated August 13, 2012 is not in dispute. However, apart from various mitigating factors set out hereinabove, it is
seen that in several similar cases, the A. O. of SEBI has deemed it fit not to impose any penalty against those
entities even though the minimum penalty imposable is Rs. 1 lac under Section 15HB of SEBI Act.
In these circumstances, while directing the adjudicating Officers of SEBI to ensure that they pass orders in
consonance with the provisions of SEBI act, in the facts of present case, having regard to the mitigating factors
set out hereinabove, SAT deem it proper to reduce the penalty from Rs. 8 lac to Rs. 1 lac being the minimum penalty
imposable under Section 15HB of SEBI Act. Appeal is partly allowed in the aforesaid terms with no order as to costs.

OMBUDSMAN
Introduction

In terms of section 11 of the SEBI Act it is one of the duties of SEBI to protect the interests of investors in securities
market by taking necessary steps as it deems fit. SEBI had been receiving complaints form the investors against
listed companies particularly with respect to non receipt of refund orders, non receipt of shares certificates / unit
certificates, non receipt of dividend and many more matters. The complaints against intermediaries regarding
deficiency of service have been in a large number.
For redressal of the investor grievance, SEBI has been advising the companies or the intermediaries to redress
the same. The investors have also been claiming damages / compensation / interest etc. The other course of
action against the listed company is prosecution or imposition of monetary penalty of the erring companies.
The available action against intermediaries is the suspension and cancellation of registration or imposition of
monetary penalty. The above does not redress the grievance of investors or give any compensation to the
investors. Therefore, issue of an alternative redressal mechanism which is cheap, fast, informal and efficient has
been engaging the attention of SEBI.
 Lesson 14 • Resolution of Complaints and Guidance 387

Question: Who is Ombudsman?

Answer:Ombudsman in its literal sense is an independent person appointed to hear and act upon citizen’s
complaint about government services. This concept was invented in Sweden and the idea has been widely
adopted. For example, various banks, insurance companies have appointed Ombudsman to attend to the
complaints of their customers.

The SEBI has issued the SEBI (Ombudsman) Regulations, 2003. Regulation 2(l) of these Regulations defines
Ombudsman as under:
“Ombudsman” means any person appointed under regulation 3 of these regulations and unless the context
otherwise requires, includes stipendiary Ombudsman.
Regulation 2(n) of the Regulations defines stipendiary Ombudsman as a person appointed under regulation 9 for
the purpose of acting as Ombudsman in respect of a specific matter or matters in a specific territorial jurisdiction and for
which he may be paid such expenses, honorarium, sitting fees as may be determined by the SEBI from time to time.
The regulations further deal with establishment of office of Ombudsman, powers and functions of Ombudsman,
procedure for redressal of Grievances and implementation of the award.
The term “complaint” under these Regulation means a representation in writing containing a grievance as specified
in regulation 13 of these regulations; and “complainant” means any investor who lodges complaint with the
Ombudsman and includes an investors association recognised by the SEBI.
An “investor” means a person who invests or buys or sells or deals in securities.
“Listed company” has been defined in the Regulations to mean a company whose securities are listed on a
recognised stock exchange and includes a public company which intends to get its securities listed on a recognised
stock exchange.
Territorial Jurisdiction
Every Ombudsman or Stipendiary Ombudsman exercises jurisdiction in relation to an area as may be specified by
the SEBI by an order.
Powers and Functions of Ombudsman
 388  Lesson 14 • EP-SLCM

Procedure for filing a complaint

Any person who has a grievance against a listed company or an intermediary relating to any of the matters specified
above may himself or through his authorised representative or any investors association recognised by the SEBI:

No complaint to the Ombudsman shall lie –

(a) unless the complainant had, before making a complaint to the SEBI or the Ombudsman concerned, made a
written representation to the listed company or the intermediary named in the complaint and the listed
company or the intermediary, as the case may be, had rejected the complaint or the complainant had not
received any reply within a period of one month after the listed company or intermediary concerned received
his representation or the complainant is not satisfied with the reply given to him by the listed company or an
intermediary;
(b) unless the complaint is made within six months from the date of the receipt of communication of rejection of
his complaint by the complainant or within seven months after the receipt of complaint by the listed company
or intermediary under clause (a) above;
(c) if the complaint is in respect of the same subject matter which was settled through the Office of the SEBI or
Ombudsman concerned in any previous proceedings, whether or not received from the same complainant or
along with any one or more or other complainants or any one or more of the parties concerned with the
subject matter;
(d) if the complaint pertains to the same subject matter for which any proceedings before the SEBI or any court,
tribunal or arbitrator or any other forum is pending or a decree or award or a final order has already been
passed by any such competent authority, court, tribunal, arbitrator or forum;
(e) if the complaint is in respect of or pertaining to a matter for which action has been taken by the SEBI under
Section 11(4) of the Act or Chapter VIA or Section 12(3) of the Act or any other regulations made thereunder.

Power to call for information

• An Ombudsman may require the listed company or the intermediary named in the complaint or any other
person, institution or authority to provide any information or furnish certified copy of any document relating
to the subject matter of the complaint which is or is alleged to be in its or his possession.
• In the event of the failure of a listed company or the intermediary to comply with the requisition made
without any sufficient cause, the Ombudsman may, if he deems fit, draw the inference that the information, if
provided or copies if furnished, would be unfavourable to the listed company or intermediary.
 Lesson 14 • Resolution of Complaints and Guidance 389

• The Ombudsman is required to maintain confidentiality of any information or document coming to his
knowledge or possession in the course of discharging his duties and shall not disclose such information or
document to any person except and as otherwise required by law or with the consent of the person furnishing
such information or document.
• The Ombudsman has been empowered to disclose information or document furnished by a party in a
complaint to the other party or parties, to the extent considered by him to be reasonably required to comply
with the principles of natural justice and fair play in the proceedings.
• However, these provisions shall not apply in relation to the disclosures made or information furnished by the
Ombudsman SEBI or to the publication of Ombudsman’s award in any journal or newspaper or filing thereof
before any Court, Forum or Authority.

Settlement by Mutual Agreement

As soon as it may be practicable so to do, the Ombudsman shall cause a notice of the receipt of any complaint along
with a copy of the complaint sent to the registered or corporate office of the listed company or office of the
intermediary named in the complaint and endeavour to promote a settlement of the complaint by agreement or
mediation between the complainant and the listed company or intermediary named in the complaint.
• If any amicable settlement or friendly agreement is arrived at between the parties, the Ombudsman may pass
an award in terms of such settlement or agreement within one month from the date thereof and direct the
parties to perform their obligations in accordance with the terms recorded in the award.
• For the purpose of promoting a settlement of the complaint, the Ombudsman may follow such procedure and
take such actions as he may consider appropriate.

Award and Adjudication

• In case the matter is not resolved by mutually acceptable agreement within a period of one month of
the receipt of the complaint or such extended period as may be permitted by the Ombudsman.
• He may, based upon the material placed before him and after giving opportunity of being heard to
the parties, give his award in writing or pass any other directions or orders as he may consider
appropriate.
• Such award shall be made within a period of three months from the date of the filing of the complaint.
• The Ombudsman should send his award to the parties to the adjudication to perform their obligations
under the award.
• Within fifteen days from the receipt of the award a party, with notice to the other party, may request
the Ombudsman to correct any computation errors, any clerical or typographical errors or any other
errors of a similar nature occurring in the award.
• If the Ombudsman considers the request made above to be justified, he shall make the correction
within fifteen days from the receipt of the request which shall form part of the award.

Finality of Award

• An award given by the Ombudsman shall be final and binding on the parties and persons claiming
under them respectively.
• Any party aggrieved by the award on adjudication may file a petition before SEBI within one month
from the receipt of the award or corrected award setting out the grounds for review of the award.
 390  Lesson 14 • EP-SLCM

Review of Award

• The SEBI may review the award if there is substantial mis-carriage of justice, or there is an error
apparent on the face of the award.
• Where a petition for review of the award, such petition shall not be entertained by the SEBI unless
the party filing the petition has deposited with SEBI seventy-five percent of the amount mentioned
in the award.
• Further, the SEBI may for reasons to be recorded in writing, waive or reduce the amount to be
deposited.
• The SEBI may review the award and pass such order as it may deem appropriate, within a period of
forty five days of the filing of the petition for review.
• The party so directed shall implement the award within 30 days of receipt of the order of SEBI on
review or within such period as may be specified by the SEBI in the order disposing off the review
petition.
• The award passed by the Ombudsman shall remain suspended till the expiry of period of one month
for filing review petition or till the review petition is disposed off by the SEBI, as the case may be.

Evidence Act not to apply in the Proceedings before Ombudsman

In proceedings before the Ombudsman strict rules of evidence under the Evidence Act shall not apply and the
Ombudsman may determine his own procedure consistent with the principles of natural justice.
Ombudsman shall decide whether to hold oral hearings for the presentation of evidence or for oral argument or
whether the proceeding shall be conducted on the basis of documents and other materials.
However, it shall not be necessary for an investor to be present at the oral hearing of proceedings under these
regulations and the Ombudsman may proceed on the basis of the documentary evidence submitted before him.
No legal practitioner shall be permitted to represent the defendants or respondents at the proceedings before the
Ombudsman except where a legal practitioner has been permitted to represent the complainants by the Ombudsman.

Cost and Interest

The Ombudsman or the SEBI, as the case may be, have been empowered to award reasonable compensation along
with interest including future interest till date of satisfaction of the award at a rate which may not exceed one
percent per mensem.
The Ombudsman in the case of an award, or the SEBI in the case of order passed in petition for review of the award,
as the case may be, may determine the cost of the proceedings in the award and include the same in the award or, in
the order as the case may be. The Ombudsman or the SEBI may impose cost on the complainant for filing complaint
or any petition for review, which is frivolous.

Implementation of the Award

The award will be implemented by the party so directed within one month of receipt of the award from the
Ombudsman or an order of the SEBI passed in review petition or within such period as specified in the award or
order of SEBI. If any person fails to implement the award or order of the SEBI passed in the review petition, without
reasonable cause –
(1) he shall be deemed to have failed to redress investors’ grievances and shall be liable to a penalty under
Section 15C of the SEBI Act;
(2) he shall also be liable for –
(a) an action under Section 11(4) of the SEBI Act ; or
(b) suspension or delisting of securities; or
(c) being debarred from accessing the securities market; or
 Lesson 14 • Resolution of Complaints and Guidance 391

(d) being debarred from dealing in securities; or dealing in securities; or

(e) an action for suspension or cancellation of certificate of registration; or
(f) such other action permissible which may be deemed appropriate in the facts and circumstances of the
case.

Display of the Particulars of the Ombudsman

Every listed company or intermediary is required to display the name and address of the Ombudsman as specified
by the SEBI to whom the complaints are to be made by any aggrieved person in its office premises in such manner
and at such place, so that it is put to notice of the shareholders or investors or unit holders visiting the office
premises of the listed company or intermediary. The listed company or intermediary is required to give full
disclosure about the grievance redressal mechanism through Ombudsman in its offer document or client agreement.
Any failure to disclose the grievance redressal mechanism through Ombudsman or any failure to display the
particulars would attract the penal provisions contained in Section 15A of SEBI Act.

SEBI (INFORMAL GUIDANCE) SCHEME, 2003

In the interests of better regulation of and orderly development of the Securities market, SEBI has issued SEBI
(Informal Guidance) Scheme 2003 w.e.f. 24.6.2003. The following persons may make a request for informal Guidance
under the scheme:
(a) any intermediary registered with the SEBI.
(b) any listed company.
(c) any company which intends to get any of its securities listed and which has filed either a listing application
with any stock exchange or a draft offer document with the SEBI or the Central Listing authority.
(d) any mutual fund trustee company or asset management company.
(e) any acquirer or prospective acquirer under the SEBI (Substantial Acquisition of Shares & Takeovers)
Regulations, 1997. (Now the SEBI Takeover Regulation, 2011)
The Guidance Scheme, further deals with various aspects such as the nature of request, fees to be accompanied
alongwith request letter, disposal of requests, the SEBI’s discretion not to respond certain types of requests and
confidentiality of requests etc.
The informal guidance may be sought for and given in two forms:

• No-action letters: The SEBI indicates that the Department would or would not recommend any action under
any Act, Rules, Regulations, Guidelines, Circulars or other legal provisions administered by SEBI to the Board
if the proposed transaction described in a request made under para 6 is consummated.
• Interpretive letters: The SEBI provides an interpretation of a specific provision of any Act, Rules, Regulations,
Guidelines, Circulars or other legal provision being administered by the SEBI in the context of a proposed
transaction in securities or a specific factual situation.
 392  Lesson 14 • EP-SLCM

The request seeking informal guidance should state that it is being made under this scheme and also state whether
it is a request for a no-action letter or an interpretive letter and should be accompanied with prescribed fees and
addressed to the concerned Department of the SEBI.
It should also describe the request, disclose and analyse all material facts and circumstances involved and mention
all applicable legal provisions. The SEBI may dispose off the request as early as possible and in any case not later
than 60 days after the receipt of the request.
The Department may give a hearing or conduct an interview if it feels necessary to do so. The request or shall be
entitled only to the reply. The internal records or views of the SEBI shall be confidential.

The SEBI may not respond to the following types of requests:

(a) those which are general and those which do not completely and sufficiently describe the factual situation;
(b) those which involve hypothetical situations;
(c) those requests in which the requestor has no direct or proximate interest;
(d) where the applicable legal provisions are not cited;
(e) where a no-action or interpretive letter has already been issued by that or any other Department on a
substantially similar question involving substantially similar facts, as that to which the request relates;
(f) those cases in which investigation, enquiry or other enforcement action has already been initiated;
(g) those cases where connected issues are pending before any Tribunal or Court and on issues which are
subjudice; and
(h) those cases where policy concerns require that the Department does not respond.
Where a request is rejected for non-compliance, the fee, if any, paid by the requestor shall be refunded to him after
deducting therefrom a sum of Rs. 5,000/- towards processing charges. However, SEBI is not be under any obligation
to respond to a request for guidance made under this scheme, and shall not be liable to disclose the reasons for
declining to reply the request.

Confidentiality of Request
• Any person submitting a letter or written communication under this scheme may request that it receive
confidential treatment for a specified period of time not exceeding 90 days from the date of the Department’s
response.
• The request shall include a statement of the basis for confidential treatment.
• If the Department determines to grant the request, the letter or written communication will not be available
to the public until the expiration of the specified period.
• If it appears to the Department that the request for confidential treatment should be denied, the requestor
will be so advised and such person may withdraw the letter or written communication within 30 days of
receipt of the advise, in which case the fee, if any, paid by him would be refunded to him.
• In case a request has been withdrawn under clause (c), no response will be given and the letter or written
communication will remain with the SEBI but will not be made available to the public.
• If the letter or written communication is not withdrawn, it shall be available to the public together with any
written staff response.
• A no-action letter or an interpretive letter issued by a Department constitutes the view of the Department but
will not be binding on the SEBI, though the SEBI may generally act in accordance with such a letter.
• The letter issued by a Department under this scheme should not be construed as a conclusive decision or
determination of any question of law or fact by the SEBI.
• Such a letter cannot be construed as an order of the SEBI under Section 15T of the Act and shall not be appealable.
• Where a no action letter is issued by a Department affirmatively, it means that the Department will not
recommend enforcement action to the SEBI, subject to other provisions of this scheme.
 Lesson 14 • Resolution of Complaints and Guidance 393

• The guidance offered through the letters issued by Departments is conditional upon the requestor acting
strictly in accordance with the facts and representations made in the letter.
• The SEBI shall not be liable for any loss or damage that the requestor or any other person may suffer on
account of the request not being replied or being belatedly replied or the SEBI taking a different view from
that taken in a letter already issued under this scheme.
• Where the Department finds that a letter issued by it under this scheme has been obtained by the requestor
by fraud or misrepresentation of facts, notwithstanding any legal action that the Department may take, it may
declare such letter to be non est and thereupon the case of the requestor will be dealt with as if such letter
had never been issued.
• Where the SEBI issues a letter under this scheme, it may post the letter, together with the incoming request,
on the SEBI website in accordance with the Guidance Scheme.

LESSON ROUND-UP

• In the developing countries, the growing number of investors, technically advanced financial markets,
liberalised economy etc. necessitates imparting of financial education for better operation of markets and
economy and in the interest of investor.
• SEBI has also launched a comprehensive securities market awareness campaign for educating investors
through workshops, audio-visual clippings, distribution of educative investor materials/ booklets,
dedicated investor website etc.
• SCORES is a web based centralized grievance redress system of SEBI which enables investors to lodge and
follow up their complaints and track the status of redressal of such complaints online from the above
website from anywhere.
• SEBI has issued SEBI (Ombudsman) Regulations, 2003 which deals with establishment of office of
Ombudsman, powers and functions of Ombudsman, procedure for redressal of Grievances and
implementation of the award.
• SEBI (Informal Guidance) Scheme, 2003 deals with various aspects such as the nature of request fees to
be accompanied along with letter disposal of requests, SEBI discretion not request and certain types of
request and confidentiality of requests, etc.

GLOSSARY

Arbitration Arbitration is a procedure in which a dispute submitted, by agreement of the parties

to one or more arbitrators who make a binding decision on the dispute.
Award It means a finding in the form of direction or an order of an Ombudsman given in
accordance with these regulations.
Complainant It means any investor who lodges complaint with the Ombudsman and includes an
investors association recognised by the Board.
Grievance Redress Grievance Redress mechanism is part and parcel of the machinery of any administration.
The grievance redress mechanism of an organisation is the gauge to measure its
efficiency and effectiveness as it provides important feedback on the working of the
administration
Petition A formal written request, typically one signed by many people, appealing to authority
in respect of a particular cause.
394  Lesson 14 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. What is SCORES? Briefly discuss the salient features of SCORES.
2. Who are eligible to make a request under the SEBI (Informal Guidance) Scheme, 2003?
3. SEBI Complaints Redress System (SCORES) has been established to resolve the grievances of the
Investors. What is the procedure for redressal of investor grievances using SCORES platform ? State the
revised features.
4. What are the matters that cannot be considered as complaints under SCORES? Specify details.
5. Who is an Ombudsman? What is the powers and functions of an Ombudsman?
6. Discuss the various grounds under which a person can lodge a complaint either to the SEBI or to the
Ombudsman.
7. Explain the types of requests which may not responded by SEBI under Informal Guidance Scheme.

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notification
• SEBI Orders
• SEBI Frequently Asked Question (FAQs)

OTHER REFERENCES (Including Websites/Video Links)

• https://scores.gov.in/scores/Welcome.html
• Sebi.gov.in
Lesson 15 Structure of Capital Market
Part I-Primary Market
Key Concepts One Learning Objectives
Should Know
To understand:
• Financial Market
• The role of financial market in the overall development of a
• Money Market country’s economy
• Capital Market • The impact of financial sector on the economic performance of
• Market Country. Financial sector mobilizes the savings and channelize
Regulators these savings across sectors that are in need of the same. This
boosts the economy at global platform as well
• Participants
• The financial institutions that provide a variety of financial
• Instruments products and services to cater to needs of the commercial sector
• Unified Payments
Interface (UPI) • The categories of financial institutions e.g. Insurance Companies,
Pension Fund, Mutual Fund, Capital Market Intermediaries etc.
• Foreign Portfolio
Investors • Various types of new instruments like REITs and InvITs

• Alternate • Various regulators in the financial market including SEBI, RBI,

Investment Funds IRDAI and PFRDA

• Private Equity • The different categories of Investment Institutions include Venture

Capital, Private Equity, Hedge Funds, Qualified Institutional Buyer,
• Anchor Investors Pension Funds, Foreign Portfolio Investor etc.
• Real Estate
• The Capital market instruments including different instruments
Investment like equity shares, shares with differential voting rights, preference
Trusts shares, debentures, bonds, etc.
• Infrastructure
Investment
Trusts
Lesson Outline
• Applications
supported by • Financial Market of India
Blocked Amount • Need for regulators in Capital Market
• Investment Institutions in India
• Participants of Capital Markets
• Capital Market Instruments
• Mechanism for issuance of Securities in Primary Market
• Other market terminologies, like
• Book Building
• Applications Supported by Blocked Amount (ASBA)
• UPI
• Green Shoe Option
 396  Lesson 15 • EP-SLCM

Regulatory Framework
• Securities & Exchange Board of India Act, 1992
• Reserve Bank of India Act, 1934
• SEBI (Foreign Portfolio Investors) Regulations, 2019
• SEBI (Alternative Investment Funds) Regulations, 2012
• Companies Act, 2013 and the rules made thereunder
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

FINANCIAL MARKETS IN INDIA

Introduction
Indian Financial Market, has been one of the oldest across the globe
and is definitely the fastest growing and best among other financial
markets of the emerging economies. The history of Indian capital
markets is more than 200 years old, around the end of the 18th
century. It was at this time that India was under the rule of the East
India Company. The capital market of India initially developed
around Mumbai; with around 200 to 250 securities brokers
participating in active trade during the second half of the 19th
century. Today we have our Bombay Stock Exchange (BSE), one
among the world’s largest exchange in terms of trading turnover in
the same city. Indian Financial market is one of the well-developed markets in the world.
A Financial market enables efficient trade of securities, and transfer of funds, between lenders and borrowers and
also creates securities for investment. People who have surplus funds invests in these securities to earn return on
their investments.

Functions of Financial Market

• It facilitates mobilisation and channelization of savings into the most productive uses.
• It helps in determining the price of the securities, on the basis of their demand and supply in the market.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 397

• It provides liquidity to tradable assets, by facilitating the exchange, as the investors can readily sell their
securities and convert assets into cash.
• It reduces cost by providing valuable information, regarding the securities traded in the financial market.
• It facilitates exchange of assets without physical delivery.
The financial markets are mainly divided into:

a. Money Market
Money Market is a segment of the financial market where
borrowing and lending of short-term funds take place. The
maturity of money market instruments ranges from one day to
one year. In India, this market is regulated by both RBI (the
Reserve bank of India) and SEBI (the Security and Exchange
Board of India). The nature of transactions in this market is
such that they are large in amount and high in volume. Thus,
we can say that the entire market is dominated by a small
number of large players.
The market consists of negotiable instruments having
characteristics of liquidity (quick conversion into money),
minimum transaction costs and no loss in value such as
treasury bills, commercial papers, certificate of deposit, etc.
It performs the crucial role of providing an equilibrating mechanism to even out the short-term liquidity, surpluses
& deficits & therefore facilitates the conduct of monetary policy of an economy.

b. Capital Market
Capital Market is that part of the financial system that is
concerned with the industrial security market, government
securities markets, and long- term loan market.
A market that serves the medium & long-term liquidity
needs of borrowers & lenders and therefore embraces all
terms of lending & borrowing. The capital market comprises
institutions and mechanisms through which intermediate
terms funds and long-term funds are pooled and made
available to business, government and individuals. The
capital market also encompasses the process by which
securities already outstanding are transferred. This market is also referred to as the Barometer of the Economy.
It deals with instruments like shares, stocks, debentures and bonds. Companies turn to capital markets to raise
funds needed to finance for the infrastructure facilities and corporate activities.
The capital market is a vital part of any financial system. The wave of economic reforms initiated by the government
has influenced the functioning and governance of the capital market. The Indian capital market has undergone
structural transformation since liberalisation. The chief aim of the reforms exercise is to improve market efficiency,
make stock market transactions more transparent, curb unfair trade practices and to bring our financial markets up
to international standards. Further, the consistent reforms in Indian capital market, especially in the secondary
market resulting in modern technology and online trading have revolutionized the stock exchange.

Securities Market
Securities Market is a place where companies can raise funds by issuing securities such as equity shares, debt
securities, derivatives, mutual funds, etc. to the investors (public) and also is a place where investors can buy or sell
various securities (shares, bonds, etc.). It is therefore, a market where financial instruments/claims are commonly
 398  Lesson 15 • EP-SLCM

& readily available for transfer by means of sale. Once the shares (or securities) are issued to the public, the company
is required to list the shares (or securities) on the recognized stock exchanges. Securities Market is a part of the
Capital Market.
The primary function of the securities market is to enable allocation of savings from investors to those who need it
for business purposes. This is done when investors make investments in securities of companies/entities that are
in need of funds. The investors are entitled to get benefits like interest, dividend, capital appreciation, bonus, etc.
Such investments contribute to the economic development of the country.
Securities market has two inter-dependent & inseparable segments which are as follows-
1. Primary Market : The primary market deals with the issue of new instruments by the corporate sector such as
equity shares, preference shares and debt instruments. Central and State Governments, various public sector
undertakings (PSUs), statutory and other authorities such as state electricity boards and port trusts also issue
bonds/debt instruments.
This market is of great significance for the economy of a country as it is through this market that funds flows for
productive purposes from investors to entrepreneurs. The strength of the economy of a country is gauged by the
activities of the Stock Exchanges. The primary market creates and offers the merchandise for the secondary market.
The primary market in which public issue of securities is made through a prospectus is a retail market and there is
no physical location. Offer for subscription to securities is made to the investing community. It is also known as
Initial Public Offer (IPO) Market.
There are two major types of issuers of securities:
• Corporate Entities (companies) which mainly issue equity instruments (shares) and debt instruments
(bonds, debentures, etc.).
• Government (Central as well as State) which issues debt securities (dated securities and treasury bills).
In addition to IPOs, the Company has other options to raise capital:
• Qualified institutional placements (listed company issuing shares to Qualified Institutional Buyers (QIB).
• In International markets through the issuance of American Depository Receipts (ADR), Global Depository
Receipts (GDRs), External Commercial Borrowings (ECB) etc.
2. Secondary Market : The secondary market or stock exchange is a market for trading and settlement of securities
that have already been issued. The investors holding securities sell securities through registered brokers/sub-
brokers of the stock exchange. Investors who are desirous of buying securities, purchase them through registered
broker/sub-broker of the stock exchange. It may have a physical location like a stock exchange or a trading floor.
Since 1995, trading in securities is screen-based and Internet-based trading has also made an appearance in India.
The secondary market provides a trading place for the securities already issued, to be bought and sold. It also
provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at any
price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and
capital formation because investors in the primary market are assured of a continuous market and they can liquidate
their investments. It is also known as Further Public Offer Market (FPO).
Difference between Primary and Secondary Market
Basis for comparison Primary Market Secondary Market
Meaning The market place for issuing fresh The market place for trading already
securities issued securities
Objectives To raise funds Capital Appreciation
Scope Includes issuance of new securities Includes the further trading of
through Initial Public Offer (IPO) securities already offered to the public
Another name New issue market / IPO Market After issue market / FPO Market
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 399

Purchasing of securities Investors can purchase securities Purchase and sale of securities is
directly from the Company done by the investors among
themselves
Financing Primary market provides funds to new It does not provide funding to
and old companies for their expansion companies
and diversification
Parties to transactions Company and Investors Investors among themselves
Major Intermediaries Underwriters Brokers
Price Price as given in the offer document / Price fluctuates i.e. depends on demand
red herring prospectus and supply forces
Utilisation of fund Fund gained from primary market Fund received from secondary market
becomes the capital of the company becomes income of investors

NEED FOR REGULATORS IN CAPITAL MARKET

In 1980’s the development of stock markets attracted investments by individual shareholders. Once the stock
markets started flourishing, there were many malpractices like non adherence to rules and regulation, price rigging,
unofficial self-modulated merchant bankers, delayed delivery issues, etc. As a result, investors felt deceived and
were losing trust in securities.

It was also this time when the Indian Financial Markets witnessed one of the biggest scams of the century – The
Harshad Mehta Scam or other wise called as the Scam, 1992 which involved more than Rs. 4000 crores of
market manipulations. The Indian Stock Market gradually crashed when the information came out.

As a measure, the Government sensed an urgent need to regulate the smooth and systematic functioning of
exchanges and thus resulting in formation of SEBI. Before formation of SEBI, controller of capital issues was
responsible for regulation of capital markets.
Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and Exchange Board
of India and The Reserve Bank of India.
The Ministry of Finance regulates through the Department of Economic Affairs - Capital Markets Division. The
division is responsible for formulating the policies related to the orderly growth and development of the securities
markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In particular, it is
responsible for :
• institutional reforms in the securities markets,
• building regulatory and market institutions,
• strengthening investor protection mechanism, and
• providing efficient legislative framework for securities markets.
Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through
the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider
trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve
the fairness of the capital market.

SEBI – The Capital Markets Regulator

The Securities and Exchange Board of India (SEBI) was established in 1988 through an administrative order, but the
Act was passed after about four years and it became a statutory and really powerful Institution only since 1992. The
Controller of Capital Issues was repealed and its office was abolished in 1992 and SEBI was established on 21
February, 1992 through an ordinance issued on 30 January, 1992. The SEBI Act replaced the ordinance on 4 April,
1992. Certain powers under certain sections of Securities Contracts Regulation Act (SCRA) and Companies Act (CA)
have been delegated to the SEBI.
 400  Lesson 15 • EP-SLCM

The regulatory powers of the SEBI were increased through the Securities Laws (Amendment) Ordinance of January
1995, which was subsequently replaced by an Act of Parliament.
The SEBI is under the overall control of the Ministry of Finance, and has its head office at Mumbai. It has now
become a very important constituent of the financial regulatory framework in India. After the 2002 amendment,
SEBI has been given powers to even pass interim orders, to investigate and to hold an enquiry and then to pass a
final order, which can be a cease and desist order or it can be a monetary penalty. In the area of policy making, SEBI
consults the government, RBI, IRDA, PFRDA etc. and after those consultations it can come out with its policy.
SEBI was established with the statutory powers to:
• Protecting the interest of investors;
• Promoting the development of the securities market; and
• Regulating the securities market.
SEBI acts as a watchdog for all the capital market participants and its main purpose is to provide such an environment
for the financial market enthusiasts that facilitate efficient and smooth working of the securities market.
Through SEBI, the regulation model which is sought to be put in place in India is one in which every aspect of
securities market regulation is entrusted to a single highly visible and independent organization, which is
backed by a statute, and which is accountable to the Parliament and in which investors can have trust.
To ensure this the three main participants of the financial market should be taken care of, i.e. issuers of securities,
investor, and financial intermediaries.

Issuers of securities: These are entities in the corporate field that raise funds from various
sources in the market. SEBI makes sure that they get a healthy and transparent environment
for their needs.

Investor: Investors are the ones who keep the markets active. SEBI is responsible for
maintaining an environment that is free from malpractices to restore the confidence of
general public who invest their hard-earned money in the markets.

Financial Intermediaries: These are the people who act as middlemen between the issuers
and investors. They make the financial transactions smooth and safe.

SEBI necessarily has the twin task of regulation and development. Its regulatory measures are always meant to be
subservient to the needs of the market development. Underlying those measures is the logic that rapid and healthy
market development is the outcome of well-regulated structures. In this spirit, the SEBI endeavors to create an
effective surveillance mechanism and encourage responsible and accountable autonomy on the part of all players
in the market, who are expected and required to discipline themselves and observe the rules of the market.

Functions of SEBI
1. Protective Functions
As the name suggests, these functions are performed by SEBI to protect the interest of investors and other
financial participants, including:
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 401

• Checking price rigging,

• Prevent insider trading,
• Promote fair practices,
• Create awareness among investors,
• Prohibit fraudulent and unfair trade practices.
2. Regulatory Functions
These functions are basically performed to keep a check on the functioning of the business in the financial
markets, including:
• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and
corporate,
• Regulation of takeover of companies,
• Conducting inquiries and audit of exchanges,
• Registration of brokers, sub-brokers, merchant bankers etc.,
• Levying of fees,
• Performing and exercising powers,
• Register and regulate credit rating agency.
3. Development Functions
SEBI performs certain development functions also that include but they are not limited to –
• Imparting training to intermediaries,
• Promotion of fair trading and reduction of malpractices,
• Carry out research work,
• Encouraging self-regulating organizations,
• Buy-sell mutual funds directly from AMC through a broker.

Powers of SEBI

Quasi-Judicial (enforcement): Quasi-Legislative:

With this authority, SEBI can conduct hearings and pass Powers under this segment allow SEBI to draft rules
Orders in cases of unethical and fraudulent trade and regulations for the protection of the interests of
practices. This ensures transparency, fairness, the investor.
accountability and reliability in the capital market.
Example: SEBI (Listing Obligation and Disclosure
Example: SEBI vs. PACL Ltd. where SEBI with its order Requirements) Regulations, 2015 is an example of the
abstained the promoters and directors of PACL Ltd. from same. It aims at consolidating and streamlining the
collecting any money from investors or launch or carry provisions of existing listing agreements for several
out any Collective Investment Schemes and shall wind up segments of the financial market like equity shares,
all the existing Collective Investment Schemes of PACL debentures, bonds and warrants, etc.. Such regulations
Limited and refund the monies collected by the said formulated by SEBI aims to prevent any malpractice
company under its schemes. and fraudulent trading.
 402  Lesson 15 • EP-SLCM

Quasi-Executive: Power to issue informal guidance:

SEBI is authorised to file a case against anyone who SEBI introduced the SEBI (Informal Guidance)
violates its rules and regulation. It is empowered to Scheme, 2003, which enables any participant or
inspect account books and other documents if it finds intermediary registered with SEBI to make a request
traces of any suspicious activity. for informal guidance. The intermediary can be a
listed company, a company seeking listing, a mutual
fund, a trustee company, an asset management
company or an acquirer/prospective acquirer. The
scheme enables an applicant to seek guidance from a
department of SEBI. They can request the department
of SEBI to issue either an interpretive letter and/or a
no-action letter.

Other Capital Market Regulators

Reserve Bank of India (RBI): The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s
bank. The RBI controls monetary and other banking policies of the Indian government. It was established on April
1, 1935, in accordance with the Reserve Bank of India Act, 1934. The Preamble of the RBI describes its basic
functions as:
• Regulating the issue of Bank notes,
• Securing monetary stability in India,
• Modernising the monetary policy framework to meet economic challenges.
Insurance Regulatory and Development Authority of India (IRDAI): IRDAI is a statutory body formed under an
Act of Parliament, i.e., Insurance Regulatory and Development Authority Act, 1999 (IRDAI Act 1999) for overall
supervision and development of the Insurance sector in India. The key objectives of the IRDAI include promotion of
competition so as to enhance customer satisfaction through increased consumer choice and fair premiums, while
ensuring the financial security of the Insurance market. The Insurance Act, 1938 is the principal Act governing the
Insurance sector in India. It provides the powers to IRDAI to frame regulations which lay down the regulatory
framework for supervision of the entities operating in the sector. Further, there are certain other Acts which govern
specific lines of Insurance business and functions such as Marine Insurance Act, 1963 and Public Liability Insurance
Act, 1991.
Pension Fund Regulatory and Development Authority (PFRDA): PFRDA is a statutory regulatory body set up
under The Pension Fund Regulatory and Development Authority Act, 2013 with an objective to promote old age
income security and protect the interests of NPS subscribers.

A. CAPITAL MARKET INVESTMENT INSTITUTIONS

Introduction
In any economy, financial institutions play an important role because all the financial dealings and matters are
handled and monitored by such institutions. These institutions provide a variety of financial products and services
to fulfil the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and
medium scale enterprises as well as industries established in backward areas. Thus, they have helped in reducing
regional disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has
evolved a well-developed structure of financial institutions in the country. These financial institutions can be
broadly categorized into all India institutions and State level institutions, depending upon the geographical coverage
of their operations. At the national level, they provide long and medium-term loans at reasonable rates of interest
and at state level they facilitate project financing.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 403

National Level Institutions

A wide variety of financial institutions have been set up at the national level. These institutions cater to the diverse
financial requirements of the entrepreneurs. They include development banks like IDBI, SIDBI, FIs like IFCI, IIBI;
TFCI and Insurance Companies like LIC, GIC, UTI; etc. They can further be classified into following types:
1. All-India Development Banks (AIDBs):- Includes those development banks which provide institutional credit
not only to large and medium scale enterprises but also help in promotion and development of small scale industrial
units.
Following are the banks which caters to the need for the growth of different sectors on India :
• Industrial Development Bank of India (IDBI):- It was established in July 1964 as an apex financial
institution for industrial development in the country. It caters to the diversified needs of medium and large
scale industries in the form of financial assistance, both directly and indirectly and also promote institutions
engaged in industrial development. Direct assistance is provided by way of project loans, underwriting of and
direct subscription to industrial securities, soft loans, technical refund loans, etc. Indirect assistance is
provided in the form of refinance facilities to industrial concerns.
• Industrial Finance Corporation of India (IFCI):- It is a financial institution set up under the IFCI Act 1948,
in order to pioneer long-term institutional credit to medium and large scale enterprises. It aims to provide
financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the
issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has also diversified its activities
in the financing of merchant banking, syndication of loans, formulation of rehabilitation programmes,
assignments relating to amalgamations and mergers, etc.
• Small Industries Development Bank of India (SIDBI):- It was set up by the Government of India in April
1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for promotion, financing
and development of small scale industries in the economy. It aims to empower the Micro, Small and Medium
Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment
generation and balanced regional development.
• Industrial Investment Bank of India Ltd (IIBI):- It was set up in 1985 under the Industrial Reconstruction
Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units. It was
converted into IIBI on March 17, 1997, as a full-fledged development financial institution. It assists industry
mainly in medium and large sector through wide ranging products and services. Besides project finance, IIBI
also provides short duration non-project asset-backed financing in the form of underwriting/direct
subscription, deferred payment guarantees and working capital/ other short-term loans to companies to
meet their fund requirements.
2. Specialised Financial Institutions (SFIs):- These are the institutions which have been set up to serve the
increasing financial needs of trade and commerce in the area of venture capital, credit rating and leasing, etc.
Following institutions are considered as SFIs in our country:
• IFCI Venture Capital Funds Ltd (IVCF):- IVCF formerly known as Risk Capital & Technology Finance
Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening
entrepreneurial base in the country by facilitating funding to ventures involving innovative product/ process/
technology. Initially, it started providing financial assistance by way of soft loans to promoters under its ‘Risk
Capital Scheme’. Since 1988, it also started providing finance under ‘Technology Finance and Development
Scheme’ to projects for commercialization of indigenous technology for new processes, products, market or
services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects.
• ICICI Venture Funds Ltd:- Formerly known as Technology Development & Information Company of India
Limited (TDICI), it was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became
a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance
for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/
polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.
 404  Lesson 15 • EP-SLCM

• Tourism Finance Corporation of India Ltd. (TFCI):- It is a specialised financial institution set up by the
Government of India for promotion and growth of tourist industry in the country. Apart from conventional
tourism projects, it provides financial assistance for non-conventional tourism projects like amusement
parks, ropeways, car rental services, ferries for inland water transport, etc. It has also expanded the scope of
its activities by including financing of real estate projects, infrastructure projects and manufacturing projects.
3. Investment Institutions:- These are the most popular form of financial intermediaries, which particularly Cater
to the needs of small savers and investors. They deploy their assets largely in marketable securities.
Following are the Investment Institutions established by the Government :
• Life Insurance Corporation of India (LIC):- It was established in 1956 as a wholly-owned corporation of
the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of
spreading life insurance much more widely and in particular to the rural area. It also extends assistance for
development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In
addition, it extends resource support to other financial institutions through subscription to their shares and
bonds, etc.
• Unit Trust of India (UTI):- It was set up as a body corporate under the UTI Act, 1963, with a view to encourage
savings and investment. It mobilises savings of small investors through sale of units and channelises them
into corporate investments mainly by way of secondary capital market operations.
For more than two decades it remained the sole vehicle for investment in the capital market by the Indian
citizens. Thus, its primary objective is to stimulate and pool the savings of the middle and low income groups
and enable them to share the benefits of the rapidly growing industrialisation in the country. In December
2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from
1st February, 2003.
• General Insurance Corporation of India (GIC):- It was formed by the
enactment of the General Insurance Business (Nationalisation) Act, Test your Knowledge:
1972(GIBNA), for the purpose of superintending, controlling and Differentiate between the
carrying on the business of general insurance or non-life insurance such All-India Development Banks
as accident, fire, etc. Initially, GIC had four subsidiary branches, namely, and Specialized Financial
National Insurance Company Ltd, The New India Assurance Company Institutions.
Ltd, The Oriental Insurance Company Ltd and United India Insurance
Company Ltd . But these branches were delinked from GIC in 2000 to form an association known as ‘GIPSA’
(General Insurance Public Sector Association).

State Level Institutions

Several financial institutions have been set up at the State level which supplement the financial assistance provided
by the All India institutions. They act as a catalyst for promotion of investment and industrial development in the
respective States. They broadly consist of ‘State financial corporations’ and ‘State industrial development
corporations’.
• State Financial Corporations (SFCs):- These are the State-level financial institutions which play a crucial
role in the development of small and medium enterprises in the concerned States. They provide financial
assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of
bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalysing higher
investment, generating greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue culture, poultry
farming, commercial complexes and services related to engineering, marketing, etc. There are around 18
State Financial Corporations (SFCs) in the country.
• State Industrial Development Corporations (SIDCs):- These corporations have been established under
the erstwhile Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set
up with the objectives of promoting industrial development in the respective States and providing financial
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 405

assistance to small entrepreneurs. They are also involved in setting

up of medium and large industrial projects in the joint sector/ Test your Knowledge:
assisted sector in collaboration with private entrepreneurs or State Financial Corporations are
wholly-owned subsidiaries. They undertake a variety of different from State Industrial
promotional activities such as preparation of feasibility reports; Development Corporations. If yes,
conducting industrial potential surveys; entrepreneurship how? Enumerate giving examples.
training and development programmes; as well as developing
industrial areas and industrial estates.

PARTICIPANTS OF CAPITAL MARKET

Qualified Institutional Buyers

Qualified Institutional Buyers (QIBs) are investment institutions who buy the shares of a company on a large scale.
QIBs are those institutional investors who are generally perceived to possess expertise and the financial proficiency
to evaluate and to invest in the Capital Markets.
If the investor is not capable, either by his/her individual financial limit or not permitted, to invest individually till
he invests a specified statutorily fixed amount, then he usually participates indirectly through certain institutions,
through which he can invest limited sums according to the viability of both, himself and institution.
The institution is usually a collective group of people in which a large number of investors repose faith and the
institution collects a large investible sum from various investors to invest in the market. When investing through
the institution, investors usually have limited control on their investments in comparison to the individual
investment as they hand over the amount for investment to the institution and they, in turn, engage experts to have
a vigil on the market.
There are various types of institutions defined in the rules and regulations, but to qualify as a ‘Qualified Institutional
Buyer’ (QIB), certain regulations formulated by the SEBI needs to be kept in mind. As the name itself suggests, it is
in the form of an institution and under the institutionalized mechanism, they invest in the company.
According to Regulation 2(1)(ss) of Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, Qualified Institutional Buyer comprises of —
(i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor
registered with SEBI;
(ii) foreign portfolio investor other than individuals, corporate bodies and family offices;
(iii) a public financial institution;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development Authority;
(viii) a provident fund with minimum corpus of twenty five crore rupees;
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by the Government of India;
(xi) Insurance funds set up and managed by army, navy or air force of the Union of India;
(xii) Insurance funds set up and managed by the Department of Posts, India;
(xiii) Systemically important non-banking financial companies.
 406  Lesson 15 • EP-SLCM

Foreign Portfolio Investor

Foreign Portfolio Investor (FPI) means a person who has been registered under Chapter II of SEBI (Foreign Portfolio
Investors) Regulations, 2019 which shall be deemed to be an intermediary in terms of the provisions of the SEBI
Act, 1992.
Categories of FPI
Category I FPIs include:
(i) Government and Government related investors such as central banks, sovereign wealth funds, international
or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly
owned by such Government and Government related investor(s);
(ii) Pension funds and university funds;
(iii) Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management
companies, investment managers, investment advisors, portfolio managers, broker dealers and swap dealers;
(iv) Entities from the Financial Action Task Force member countries, or from any country specified by the Central
Government by an order or by way of an agreement or treaty with other sovereign Governments, which are–
I. appropriately regulated funds;
II. unregulated funds whose investment manager is appropriately regulated and registered as a Category
I foreign portfolio investor. However the investment manager undertakes the responsibility of all the
acts of commission or omission of such unregulated fund;
III. university related endowments of such universities that have been in existence for more than five
years;

(v) An entity (A) whose investment manager is from the Financial Action Task Force member country and such
an investment manager is registered as a Category I foreign portfolio investor; or (B) which is at least seventy-
five per cent owned, directly or indirectly by another entity, eligible under sub-clause (ii), (iii) and (iv) of
clause (a) of this regulation and such an eligible entity is from a Financial Action Task Force member country.
However such an investment manager or eligible entity undertakes the responsibility of all the acts of
commission or omission of the applicants seeking registration under this sub-clause.
Category II FPIs include all the investors not eligible under Category I foreign portfolio investors such as –
(i) appropriately regulated funds not eligible as Category-I foreign portfolio investor;
(ii) endowments and foundations;
(iii) charitable organisations;
(iv) corporate bodies;
(v) family offices;
(vi) individuals;
(vii) appropriately regulated entities investing on behalf of their client, as per conditions specified by the Board
from time to time;
(viii) Unregulated funds in the form of limited partnership and trusts.
Explanation: An applicant incorporated or established in an International Financial Services Centre shall be deemed
to be appropriately regulated.

Alternative Investment Funds

Alternative investment funds (AIFs) are defined in Regulation 2(1)(b) of the SEBI (Alternative Investment Funds)
Regulations, 2012. It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 407

the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP) which are not presently
covered by any Regulation of SEBI governing fund management (like, Regulations governing Mutual Fund or
Collective Investment Scheme) nor coming under the direct regulation of any other sectoral regulators in India-
IRDA, PFRDA, RBI. Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of
any regulatory agency in India.
According to SEBI (AIF) Regulations, 2012, “Alternative Investment Fund” means any fund established or
incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate
which,-
(i) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for
investing it in accordance with a defined investment policy for the benefit of its investors; and
(ii) is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes)
Regulations, 1999 or any other regulations of SEBI to regulate fund management activities.
However, the following shall not be considered as Alternative Investment Fund for the purpose of these regulations;
–
(i) Family trusts set up for the benefit of ‘relatives’ as defined under Companies Act, 2013.
(ii) ESOP Trusts set up under the SEBI (Shares Based Employee Benefits) Regulations, 2014 or as permitted
under Companies Act, 2013.
(iii) Employee welfare trusts or gratuity trusts set up for the benefit of employees.
(iv) Holding companies within the meaning of Section 2(46) of the Companies Act, 2013.
(v) Other special purpose vehicles not established by fund managers, including securitization trusts, regulated
under a specific regulatory framework.
(vi) Funds managed by securitisation company or reconstruction company which is registered with the Reserve
Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002.
(vii) Any such pool of funds which is directly regulated by any other regulator in India.
Thus, the definition of AIFs includes venture capital fund, hedge funds, private equity funds, commodity funds, Debt
Funds, infrastructure funds, etc., while, it excludes Mutual funds or collective investment schemes, family trusts,
employee benefit schemes, employee welfare trusts or gratuity trusts, ‘holding companies’ within the meaning of
Section 2(46) of the Companies Act, 2013, securitization trusts regulated a specific regulatory framework, and
funds managed by securitization company or reconstruction company which is registered with the RBI under
Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.
One AIF can float several schemes. Investors in these funds are large institutions, high net worth individuals and
corporates. In India AIF is regulated by the SEBI (Alternative Investment Funds) Regulations, 2012.
 408  Lesson 15 • EP-SLCM

Categories of Alternative Investment Funds

• Category I : which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or
other sectors or areas which the government or regulators consider as socially or economically desirable and
shall include venture capital funds (VCF), SME Funds, social venture funds (SVF), infrastructure funds and
such other Alternative Investment Funds as may be specified;
• Category II : which does not fall in Category I and III and which does not undertake leverage or borrowing
other than to meet day-today operational requirements and as permitted in these regulations;
• Category III : which employs diverse or complex trading strategies and may employ leverage including
through investment in listed or unlisted derivatives.

Venture Capital
Venture Capital is one of the innovative financing resource for a company in which the promoter has to give up some
level of ownership and control of business in exchange for capital for a limited period, say, 3-5 years. Venture Capital
is generally equity investments made by Venture Capital funds, at an early stage in privately held companies, having
potential to provide a high rate of return on their investments. It is a resource for supporting innovation, knowledge-
based ideas and technology and human capital-intensive enterprises.

“Venture Capital Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of
start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services,
technology or intellectual property right based activities or a new business model and shall include an angel
fund.

Essentially, a venture capital company is a group of investors who pool investments focused within certain
parameters. The participants in venture capital firms can be institutional investors like pension funds, insurance
companies, foundations, corporations or individuals but these are high risk investments which may give high
returns or high loss.

Areas of Investment
Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion
while others focus on exit financing. Biotechnology, medical services, communications, electronic components and
software companies seem to be the most likely attraction of many venture firms and receiving the most financing.
Venture capital firms finance both early and later stage investments to maintain a balance between risk and
profitability.
In India, software sector has been attracting a lot of venture finance. Besides media, health and pharmaceuticals,
agri-business and retailing are the other areas that are favoured by a lot of venture companies.

Private Equity
Private equity is a type of equity (finance) and one of the asset classes who takes securities and debt in operating
companies that are not publicly traded on a stock exchange. Private equity is essentially a way to invest in some
assets that isn’t publicly traded, or to invest in a publicly traded asset with the intention of taking it private. As a
source of investment capital, private equity comes from High Net-worth Individuals (HNI) & firms that purchase
stakes in private companies or acquire control of public companies with plans to make them private & consequently
delist from the stock exchange. Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more
illiquid assets companies.
By purchasing companies, the firms gain access to those assets and revenue sources of the company, which can lead
to very high returns on investments. Another feature of private equity transactions is their extensive use of debt in
the form of high-yield bonds. By using debt to finance acquisitions, private equity firms can substantially increase
their financial returns.
Private equity consists of investors and funds that make investments directly into private companies or conduct
buyouts of public companies. Capital for private equity is raised from retail and institutional investors, and can be
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 409

used to fund new technologies, expand working capital within an owned company, make acquisitions, or to
strengthen a balance sheet. The major of private equity consists of institutional investors and accredited investors
who can commit large sums of money for long periods of time.
Private equity investments often demand long holding periods to allow for a turn around of a distressed company
or a liquidity event such as IPO or sale to a public company. Generally, the private equity fund raise money from
investors like angel investors, institutions with diversified investment portfolio like – pension funds, insurance
companies, banks, funds of funds etc.

Types of Private Equity

Private equity investments can be divided into the following categories:
• Leveraged Buyout (LBO): This refers to a strategy of making equity investments as part of a transaction in
which a company, business unit or business assets is acquired from the current shareholders typically with
the use of financial leverage. The companies involved in these type of transactions that are typically more
mature and generate operating cash flows.
• Venture Capital: It is a broad sub-category of private equity that refers to equity investments made, typically
in less mature companies, for the launch, early development, or expansion of a business.
• Growth Capital: This refers to equity investments, mostly minority investments, in the companies that are
looking for capital to expand or restructure operations, enter new markets or finance a major acquisition
without a change of control of the business.

Angel Fund

Angel fund refers to money pool created by high networth individuals or companies (generally known as Angel
Investor), for investing in start up business. Angel fund is defined in SEBI (Alternate Investment Funds)
(amendment) Regulations, 2013 as a sub-category of Venture Capital Fund under category I-AIF that raises
funds from angel investors and invests in accordance with rugulations specified by SEBI.

An angel investor or angel (also known as a business angel, informal investor, angel funder, private investor, or seed
investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible
debt or ownership equity. A small but increasing number of angel investors invest online through equity crowd
funding or organize themselves into angel groups or angel networks to share research and pool their investment
capital, as well as to provide advice to their portfolio companies.
Angel investments are typically the earliest equity investments made in start-up companies. They commonly band
together in investor networks. Often these networks are based on regional, industry investor or academic affiliation.
Angel Investors are often former entrepreneurs themselves, and typically enjoy working with companies at the
earliest stages of business formation.
The effective Angels help entrepreneurs to shape business models, create business plans and connect to resources
- but without stepping into a controlling or operating role. Often Angels are entrepreneurs who have successfully
built companies, or have spent a part of their career in coaching young companies.

Anchor Investors
Anchor investor means a Qualified Institutional Buyer (QIB) who makes an application for a value of at least 10
crore rupees in a public issue on the main board made through the book building process or makes an application
for a value of atleast Rs. 2 crore for an public issue on the SME exchange made in accordance with Chapter IX of the
SEBI (ICDR) Regulations, 2018.
Allocation to anchor investors shall be on a discretionary basis and subject to the following:
(I) In case of public issue on the main board, though the book building process:
(i) Maximum of 2 such investors shall be permitted for allocation upto Rs.10 crore.
 410  Lesson 15 • EP-SLCM

(ii) Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above Rs.2 crore
and upto Rs. 25 crore, subject to minimum allotment of Rs.1 crore per such investor.
(iii) In case of allocation above Rs.25 crore; a minimum of 5 such investors and a maximum of 15 such
investors for allocation upto Rs.25 crore and an additional 10 such investors for every additional Rs.25
crore or part thereof, shall be permitted, subject to a minimum allotment of Rs.1 crore per such
investor.

(II) In case of public issue on the SME exchange, through the book building process:
(i) Maximum of 2 such investors shall be permitted for allocation up to two crore rupees;
(ii) Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above 2 crore
rupees and up to 25 crore rupees, subject to minimum allotment of 1 crore rupees per such investor;
(iii) In case of allocation above 25 crore rupees; a minimum of 5 such investors and a maximum of 15 such
investors for allocation up to 25 crore rupees and an additional 10 such investors for every additional
25 crore rupees or part thereof, shall be permitted, subject to a minimum allotment of 1 crore rupees
per such investor.

The bidding for anchor investors shall open one day before the issue opening date allocation to Anchor Investors
shall be completed on the day of bidding by Anchor Investors. Shares allotted to the Anchor Investor shall be locked-
in for 30 days from the date of allotment in the public issue.
Upto 60% of the portion available for allocation to QIB shall be available Test your Knowledge:
to anchor investor(s) for allocation/ allotment (“anchor investor State the differeces between Angel
portion”) and one-third of the anchor investor portion shall be reserved Funds and Anchor Investors
for domestic mutual funds.

High Net Worth Individuals

HNIs or high net worth individuals is a class of individuals who are distinguished from other retail segment based
on their net wealth, assets and investible surplus. While there is no standard put forth for the classification, the
definition of HNIs varies with the geographical area as well as financial markets and institutions.
Though there is no specific definition, generally in the Indian context, individuals with over Rs. 2 crore investible
surplus may be considered to be HNIs while those with investible wealth in the range of Rs. 25 lac - Rs. 2 crore may
be deemed as Emerging HNIs.

If you apply for amount under Rs. 2 lakhs, you are considered as a retail investor. There may
be so many ways in which HNIs are categorized and defined, there is no single bracket that
could put them under one roof.

Pension Fund
Pension Fund means a fund established by an employer to facilitate and organize the investment of employees’
retirement funds which is contributed by the employer and employees. The pension fund is a common asset pool
meant to generate stable growth over the long term, and provide pensions for employees when they reach the end
of their working years and commence retirement. Pension funds are commonly run by some sort of financial
intermediary for the company and its employees like National Pension Scheme (NPS) is managed by UTIAMC
(Retirement Solutions), although some larger corporations operate their pension funds in-house. Pension funds
control relatively large amounts of capital and represent the largest institutional investors in many nations.
Pension funds play a huge role in development of the economy and it play active role in the Indian equity market.
This pension fund ensures a change in their investment attitudes and in the regulatory climate, encouraging them
to increase their investment levels in equities and would have a massive impact on capital market and on the
economy as a whole.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 411

Legislations
There are three defining Acts for pensions in India:
1. Pensions under the EPF & MP Act 1952: These include the Employees Provident Fund, Employees Pension
Scheme, and Employees Deposit Linked Insurance Scheme.
2. Pensions under the Coal mines PF & MP Act 1948: These include Coal mines provident fund, Coal mines
pension scheme & Coal mines linked insurance scheme.
3. Gratuity under the Payment of Gratuity Act, 1972: There are other provident funds in India like Assam Tea
Plantations PF, J&K PF, and Seamens PF etc.
Pensions broadly divided into two sector:
A-Formal sector Pensions
Formal sector pensions in India can be divided into three categories; viz pensions under an Act or Statute,
Government pensions and voluntary pensions.
B-Informal sector Pensions
This scheme will cover unorganized workers who are working or engaged as home based workers, street vendors,
agriculture workers, construction workers, among others.

Atal Pension Yojana (APY)

Government of India (GoI) is concerned about the old age income security of the working poor and is focused on
encouraging and enabling them to save for their retirement. To address the longevity risks among the workers in
unorganized sector and to encourage the workers in unorganized sector to voluntarily save for their retirement, the
GoI has announced a new scheme called Atal Pension Yojana (APY) in 2015-16 budget. The APY is focused on all
citizens in the unorganized sector. The scheme is administered by the Pension Fund Regulatory and Development
Authority (PFRDA) through NPS architecture. Under the APY, there is guaranteed minimum monthly pension for the
subscribers ranging between Rs. 1000 and Rs. 5000 per month. The benefit of minimum pension would be
guaranteed by the GoI.

Government Pension
Government pensions in India are referred under the Directive Principles of State Policy and are therefore not
covered under a Statute. The Government amended the regulations to put in place the new pension system.
The old scheme continues for the existing employees (i.e. those who joined service prior to January 1, 2004).
Pensions for government employees would include employees of the central as well as the state governments.
(a) Central Government Pensions like Civil servants’ pensions, Defenses, Railways, Posts.
(b) State Government Pensions, Bank pensions like Reserve Bank of India (RBI), Public Sector Banks, National
Bank for Agriculture and Rural Development (NABARD) and other banks pensions.
Superannuation schemes are also sold in the market. These are typically the retirement plans sold by Mutual funds
and Insurance companies (Life Insurance & Postal Life Insurance).

CAPITAL MARKET INSTRUMENTS

Equity shares
Equity shares, commonly referred to as ordinary share also represents the form of fractional ownership in which a
shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business
venture. The holder of such shares is the member of the company and has voting rights.
According to explanation (i) to Section 43 of Companies Act, 2013 ‘‘equity share capital’’, with reference to any
company limited by shares, means all share capital which is not preference share capital. Section 43 further provides
 412  Lesson 15 • EP-SLCM

for equity share capital (i) with voting rights, or (ii) with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed.
Equity capital and further issues of equity capital by a company are generally based on the condition that they will
rank pari passu along with the earlier issued share capital in all respects. However, as regards dividend declared by
the company such additional capital shall be entitled to dividend ratably for the period commencing from the date
of issue to the last day of the accounting year, unless otherwise specified in the articles or in the terms of the issue.

Equity share holders enjoy different rights as members under the Companies Act, 2013 such as:
(a) The right to vote on every resolution placed before the company – (Section 47)
(b) The rights to subscribe to shares at the time of further issue of capital by the company (Pre-emptive Right)
– (Section 62)
(c) Right to appoint proxy to attend and vote at the meeting on his behalf – (Section 105)
(d) Right to receive copy of annual accounts of the company – (Section 136)
(e) Right to receive notice of the meeting of members – (Section 101)
(f) Right to inspection of various statutory registers maintained by the company – (Section 94)
(g) Right to requisition extraordinary general meeting of the company – (Section 100)
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 also specifies that the listed entity shall
seek to protect and facilitate the exercise of the following rights of shareholders:
(a) right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate
changes,
(b) opportunity to participate effectively and vote in general shareholder meetings,
(c) Being informed of the rules, including voting procedures that govern general shareholder meetings,
(d) opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and
to propose resolutions, subject to reasonable limitations,
(e) Effective shareholder participation in key corporate governance decisions, such as the nomination and
election of members of board of directors,
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 413

(f) exercise of ownership rights by all shareholders, including institutional investors,

(g) adequate mechanism to address the grievances of the shareholders,
(h) protection of minority shareholders from abusive actions by, or in the interest of, controlling shareholders
acting either directly or indirectly, and effective means of redress.

Shares with Differential Voting Rights

Shares with differential voting rights (“DVR”) refer to equity shares holding differential rights as to dividend and/
or voting. Section 43 (a) (ii) of the Companies Act, 2013 allows a company limited by shares to issue DVRs as part
of its share capital. Introduced for the first time in 2000 and issued by Tata Motors first, DVRs are seen as a viable
option for raising investments and retaining control over the company at the same time Section 43(2) of the
Companies Act 2013 read with Companies ( Share Capital & Debenture) Rules, 2013 provides that companies can
issue equity shares with differential rights subject to the following conditions including:

• Articles of association of the company must authorize the issue;

• The voting power in respect of shares with differential rights of the Company shall not exceed 74% of total
voting power including voting power in respect of equity shares with diffential rights issued at any point of
time;
• Approval of shareholders by passing ordinary resolution in General Meeting;
• The Company should not have defaulted in:
• filing annual returns and financial statements for the last three years;
• repayment of matured deposits or declared dividend;
• redemption of its preference shares/debentures which are due for redemption;
• repayment of term loan taken from any public financial institution or state level financial institution or
from a scheduled bank that has become due and payable;
• statutory dues of the employees of the company.

Preference Shares
Preference shares are that part of a company’s share capital which carry a preferential right to:
• dividend at a fixed rate or amount; and
• repayment of capital in case of winding-up of the company.
Preference shares enjoy a preferential right to dividend and repayment of capital in case of winding-up of the
company. Governed by the provisions of Section 55 of the Companies Act, the main drawback of preference shares
is that they carry limited voting rights. Generally, an equity share confers on its holder a right to vote on all resolutions
that require shareholder approval under the Act, any other law, or the articles of association of the company. A
preference share carries voting rights only with respect of matters which directly affect the rights of the preference
shareholders.

In this regard, the Act clarifies a resolution relating to winding-up and repayment or reduction of capital is deemed
to directly affect the rights of the preference shareholders. Due to these limitations on voting rights, a preference
shareholder does not have much control over the company. However, a preference shareholder may acquire voting
rights on par with an equity shareholder if the dividend on preference shares is in arrears.
 414  Lesson 15 • EP-SLCM

KINDS OF
PREFERENCE
SHARES

Participating

shares

Issuer desirous of making an offer of non-convertible redeemable preference shares to the public is required to list
on one or more recognized stock exchanges. Issuer may list its non-convertible redeemable preference shares
issued on private placement basis on a recognized stock exchange. [This section has been discussed in Lesson No. 2
of Company Law Subject (Executive Programme)]

Debentures
Section 2(30) of the Companies Act, 2013 defines debentures. “Debenture” includes debenture stock, bonds or any
other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or
not.
However,
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve
Bank of India, issued by a company, shall not be treated as debenture.
The important features of a debenture are:
1. It is issued by a company as a certificate of indebtedness.
Debenture is a document evidencing
2. It usually indicates the date of redemption and also provides for a debt or acknowledging it and any
the repayment of principal and payment of interest at specified document which fulfils either of these
date or dates. conditions is a Debenture.
3. In case of secured debentures, it creates a charge on the
undertaking or the assets of the company.
4. Debentures holders do not have any voting rights.
5. Company shall pay interest, irrespective of profits.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 415

6. While issuance of debentures, the company shall ensure that the parameters for designation of deposits
under Companies (Acceptance of Deposits) Rules, 2014 are not triggered.

Categories of Debentures
Based on convertibility, debentures can be classified under three categories:
• Fully Convertible Debentures (FCDs) : These are converted into equity shares of the company with or
without premium as per the terms of the issue, on the expiry of specified period or periods. If the conversion
is to take place at or after eighteen months from the date of allotment but before 36 months, the conversion
is optional on the part of the debenture holders in terms of SEBI (ICDR) Regulations. Interest will be payable
on these debentures upto the date of conversion as per transfer issue.
• Non Convertible Debentures (NCDs) : These debentures do not carry the option of conversion into equity
shares and are therefore redeemed on the expiry of the specified period or periods. The issuer is required to
list its Public issue of NCDs on stock exchange as per SEBI (Issue and Listing of Debt Securities) Regulations,
2008. NCDs can be also issued on private placement basis.
• Partly Convertible Debentures (PCDs) : These may consist of two kinds namely-convertible and non-
convertible. The convertible portion is to be converted into equity shares at the expiry of specified period.
However, the non-convertible portion is redeemed at the expiry of the stipulated period. If the conversion
takes place at or after 18 months, the conversion is optional at the discretion of the debenture holder.

Optionally Fully Convertible Debenture (OFCD)

The Optionally Fully Convertible Debenture is a kind of debenture which can be converted into shares at the expiry
of a certain period at a predetermined price, if the debt holder (investor) wishes to do so. The “securities” as defined
u/s 2(81)) of Companies Act, 2013 means securities as defined in clause (h) of section 2 of the Securities Contracts
(Regulation) Act, 1956, and includes hybrids. Hence after analysing the above definition of “OFCD”, “hybrid” and
“securities” it could be rightly concluded that an OFCD being a hybrid security falls under the definition of “securities”
as defined u/s 2 (h) of securities Contract (Regulation) Act, 1956 and u/s 2(81) of Companies Act, 2013 as it inherits
the characteristics of debentures initially and also that of the shares at a later stage if the option to convert the
securities into shares being exercised by the security holder. [This section has been discussed in Lesson No. 4 of
Company Law Subject (Executive Programme)]

Bonds
Bonds are the debt security where an issuer is bound to pay a specific rate of interest agreed as per the terms of
payment and repay principal amount at a later time. The bond holders are generally like a creditor where a company
is obliged to pay the amount. The amount is paid on the maturity of the bond period. Generally these bonds duration
would be for 5 to 10 years.

Characteristics of a Bond
1. Bond has a fixed face value, which is the amount to be returned to the investor upon maturity.
2. Fixed maturity date, which can range from a few days to 20-30 years or even more.
3. All bonds repay the principal amount after the maturity date.
4. Provides regular payment of interest, semi-annually or annually.
5. Interest is calculated as a certain percentage of the face value known as a ‘coupon payment’.
6. Generally considered as less risky investment as compared to equity.
7. It helps to diversify and grow investor’s money.
 416  Lesson 15 • EP-SLCM

Types of Bond

These are the bonds issued either directly by Government of India or by

the Public Sector Undertakings (PSU’s) in India. These bonds are secured
Government Bonds
as they are backed up with security from Government. These are generally
offered with low rate of interest compared to other types of bonds.

These are the bonds issued by the private corporate companies.

Indian corporates issue secured or non secured bonds. However
Corporate Bonds
care to be taken to consider the credit rating given by Credit Rating
Agencies before investing in these bonds.

Banks and other These bonds are issued by banks or any financial institution. The
financial institutions financial market is well regulated and the majority of the bond
bonds markets are from this segment.

In India, the tax saving bonds are issued by the Government of India
for providing benefit to investors in the form of tax savings. Along
with getting normal interest, the bond holder would also get tax
Tax saving bonds benefit. In India, all these bonds are listed in National Stock Exchange
and Bombay Stock Exchange in India, hence they can be easily
liquidated and sold in the open market.

Test your Knowledge:

How is a Bond different from a Debenture?

Foreign Currency Convertible Bonds (FCCBS)

‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued by an Indian company expressed in foreign
currency, and the principal and interest in respect of which is payable in foreign currency.
The FCCBs are unsecured instruments which carry a fixed rate of interest and an option for conversion into a fixed
number of equity shares of the issuer company. Interest and redemption price (if conversion option is not exercised)
is payable in dollars. FCCBs shall be denominated in any freely convertible Foreign Currency. However, it must be
kept in mind that FCCB, issue proceeds need to conform to ECB end use requirements.
Foreign investors also prefer FCCBs because of the Dollar denominated servicing, the conversion option and, the
arbitrage opportunities presented by conversion of the FCCBs into equity shares at a discount on prevailing Indian
market price. In addition, 25% of the FCCB proceeds can be used for general corporate restructuring.

Example
Suppose a company ‘A’ issues bonds with following terms –
Issue Price of the Bond Rs. 1000 Coupon rate 2%
Maturity 2 years
Convertible into equity shares @ Rs.800 per share
Now suppose an investor subscribes to 4 of these bonds. Thus the total investment is Rs.4000. On this investment,
he is entitled to get an interest @ 2% for 2 years. On the maturity date, i.e. after 2 years, the investor will have an
option – to either claim full redemption of the amount from the company or get the bonds converted into fully
paid equity shares @ Rs. 800 per share. Thus if he goes for the conversion he will be entitled to 5 (4000/800)
equity shares. The choice he makes will depend on the market price of the share on the date of conversion.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 417

If the shares of the company ‘A’ is trading at lower than Rs.800, let’s say Rs.500, the investor will be better off by
claiming full redemption of his bonds and buying the shares from the market. In this case, he will get 8 (4000/500)
equity shares as against 5 which he was getting on conversion. Similarly if the market price of the share is higher
than Rs. 800, the investor will benefit by getting its shares converted. Thus, on the day of maturity, an investor
will seek full redemption if the conversion price is higher than the current market price, and will go for conversion
if the conversion price is less than the current market price.

Foreign Currency Exchangeable Bonds (FCEBs)

The FCEB is used to raise funds from the international markets against the security and exchangeability of shares
of another company. Foreign Currency Exchangeable Bond (FCEB) means –
• A bond expressed in foreign currency.
• The principal and the interest in respect of which is payable in foreign currency.
• Issued by an issuing company, being an Indian company.
• Subscribed by a person resident outside India.
• Exchangeable into equity shares of another company, being offered company which is an Indian company.
Either wholly or partly or on the basis of any equity related warrants attached to debt instruments. It may be noted
that issuing company to be the part of promoter group of offer or company and the offeror company is to be listed
and is to be eligible to receive foreign investment. Under this option, an issuer company may issue FCEBs in foreign
currency, and these FCEBs are convertible into shares of another company (off company) that forms part of the
same promoter group as the issuer company.

Example: Company ABC Ltd. issues FCEBs, then the FCEBs will be convertible into shares of company XYZ Ltd.
that are held by company ABC Ltd. and where companies ABC Ltd. and XYZ Ltd. form part of the same promoter
group. Unlike FCCBs that convert into shares of issuer itself, FCEBs are exchangeable into shares of Offered
Company (OC). Also, relatively, FCEB has an inherent advantage that it does not result in dilution of shareholding
at the OC level.

Can you now differentiate between Foreign Currency Convertible Bond (FCCB) and Foreign
Currency Exchangeable Bond (FCEB)?

Indian Depository Receipts

According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt” means any instrument in the
form of a depository receipt created by a domestic depository in India and authorized by a company incorporated
outside India making an issue of such depository receipts.
An IDR is an instrument denominated in Indian Rupee in the form
of a depository receipt created by a domestic depository (Custodian
Section 390 of the Companies Act, 2013
of securities registered with SEBI) against the underlying equity of
and rule 13 of Companies (Registration
issuing company to enable foreign companies to raise funds from
of Foreign Companies) Rules, 2014 lays
Indian Securities Markets. In an IDR, foreign companies would
down the procedure for issue of Indian
issue shares, to a domestic (Indian) depository, which would in
Depository Receipts. Apart from this a
turn issue depository receipts to investors in India. The actual
company has to comply with Chapter X
shares underlying the IDRs would be held by an Overseas
and XA of SEBI (ICDR) Regulations, 2018
Custodian, which shall authorize the Indian depository to issue
to issue IDRs or a rights issue of IDRs.
the IDRs. To that extent, IDRs are derivative instruments because
they derive their value from the underlying shares. Standard
Chartered PLC is only company to offer IDR in the Indian market. The foreign company issuing IDRs need to
 418  Lesson 15 • EP-SLCM

comply with the requirements of rules prescribed under Companies Act, SEBI Regulations and RBI notifications/
circulars.

Derivatives
Derivatives can be of different types like futures, options, swaps, caps,
floor, collars etc. The most popular derivative instruments are futures A derivative is a financial instrument
and options. that derives its value from an
underlying asset. This underlying
The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:- asset can be stocks, bonds, currency,
commodities, metals and even
Derivative includes: -
intangible, assets like stock indices.
(A) a security derived from a debt instrument, share, loan, whether
secured or unsecured, risk instrument or contract for differences
or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central Government to be derivatives.
Currency derivatives :
Currency derivatives are financial contracts between the buyer and seller involving the exchange of two currencies
at a future date, and at a stipulated rate. Currency Derivative trading is similar to Stock Futures and Options trading.
However, the underlying asset are currency pairs (such as USDINR or EURINR) instead of stocks. Currency Options
and Currency Futures trading is done in the Foreign Exchange markets. Forex rates are the value of a foreign
currency relative to domestic currency. The major participants of Currency trading in India are banks, corporations,
exporters and importers.
Benefits of Currency derivatives:

• Diversification of investments
• Easy investment in currencies

• Hedging opportunity to importers & exporters

• Trading opportunity due to volatility in currency

• Exchange-traded and hence systematically regulated

• Provides transperant rates

Commodity Derivatives:
Commodity is a physical good attributable to a natural resource that is tradable and supplied without substantial
differentiation by the general public. Commodities trade in physical (spot) markets and in futures and forward
markets. Spot markets involve the physical transfer of goods between buyers and sellers; prices in these markets
reflect current (or very near term) supply and demand conditions.

Commodity derivatives are financial instruments whose value is based on underlying commodities,
such as oil, gas, metals, agricultural products and minerals. Other assets such as emissions trading
credits, freight rates and even the weather can also underlie commodity derivatives.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 419

Commodity Derivatives markets are a good source of critical information and indicator of market sentiments. Since,
commodities are frequently used as input in the production of goods or services, uncertainty and volatility in
commodity prices and raw materials makes the business environment erratic, unpredictable and subject to
unforeseeable risks.
Volatility in raw material costs affects businesses and can be significant given that commodity prices are driven by
supply and demand from domestics as well as global markets. Ability to manage or mitigate risks by using suitable
hedging in commodity derivative products, can positively affect business performance.

Futures
Future refers to a future contract which means an exchange traded forward contract to buy or sell a predetermined
quantity of an asset on a predetermined future date at a predetermined price. Contracts are standardized and
there’s centralized trading ensuring liquidity.
The idea behind financial future contracts is to transfer future changes is security prices from one party in the
contract to the other and hence it offers a means to manage risk in participating financial market. It is a means for
reducing risk or assuming risk in the hope of profit and it basically transfer value rather than create it.
There are two positions that one can take in a future contract:
• Long Position- This is when a futures contract is purchased and the buyer agrees to receive delivery of the
underlying asset. (Stock/Indices/Commodities)
• Short Position- This is when a futures contract is sold and the seller agrees to make delivery of the underlying
asset. (Stock/Indices/Commodities)
Currency Futures:
A currency future, also known as FX future, is a futures contract to exchange one currency for another at a specified
date in the future at a price (exchange rate) that is fixed on the purchase date. Generally, the price of a future
contract is in terms of INR per unit of other currency e.g. US Dollars. Currency future contracts allow investors to
hedge against foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD),
Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Cross Currency Futures & Options contracts on
EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency Derivatives segment.
Currency Future and Options Contracts (involving Indian Rupee) on Exchanges in International Financial
Services Centers (IFSC)
SEBI (International Financial Services Centers) Guidelines, 2015 specified currency derivatives as permissible
securities in which dealing may be permitted by stock exchanges in IFSC. RBI, announced its decision to allow
Rupee derivatives (with settlement in foreign currency) to be traded in IFSC.
Currency futures and options contracts involving Indian Rupee (with settlement in foreign currency), the position
limits for eligible market participants, per currency pair per stock exchange, shall be as follows:
• Trading Members (positions on proprietary basis as well as clients’ position) – Gross open position
across all contracts not to exceed 15% of the total open interest or USD 1 billion equivalent, whichever is
higher.
• Institutional Investors – Gross open position across all contracts not to exceed 15% of the total open interest
or USD 1 billion equivalent, whichever is higher.
• Eligible Foreign Investors – Gross open position across all contracts not to exceed 15% of the total open
interest or USD 1 billion equivalent, whichever is higher.
• Other Clients – Gross open position across all contracts not to exceed 6% of the total open interest or USD
100 million equivalent, whichever is higher.
 420  Lesson 15 • EP-SLCM

Options
Options Contract give its holder the right, but not the obligation, to take or make delivery on or before a specified
date at a stated price. But this option is given to only one party in the transaction while the other party has an
obligation to take or make delivery. Since the other party has an obligation and a risk associated with making good
the obligation, he receives a payment for that. This payment is called as option premium.
Unlike future contracts which is an obligation, option contract is a general right to buy or sale wherein the right to
buy is referred to as a call option, whereas the right to sell is known as a put option.
Option contracts are classified into two types on the basis of which party has the option:
• Call option - A call option is with the buyer and gives the holder a right to take delivery.
• Put option - The put option is with the seller and gives the right to take delivery.
Option Contracts are classified into two types on the basis of time at which the option can be exercised:–
• European Option – European style options are those contacts where the option can be exercised only on the
expiration date. Options traded on Indian stock exchanges are of European Style.
• American Option – American style options are those contacts where the option can be exercised on or before
the expiration date.

Example
Case 1
Rajesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of Rs. 250. This contract
allows Rajesh to sell 100 shares of Infosys at Rs. 3000 per share at any time between the current date and the
end of May. In order to avail this privilege, all Rajesh has to do is pay a premium of Rs. 25,000 (Rs. 250 a share
for 100 shares).
Case 2
If an investor is of the opinion that a particular stock say “Ray Technologies” is currently overpriced in the month
of February and hence expect that there will be price corrections in the future. However he doesn’t want to take
a chance, just in case the prices rise. So the best option for the investor would be to take a Put option on the
stock.
Lets assume the quotes for the stock are as under:
Spot Rs. 1040
May Put at 1050 Rs.10
May Put at 1070 Rs. 30
So the investor purchases 1000 “Ray Technologies” Put at strike price of Rs.1070 and Put price of Rs. 30/-. The
investor pay Rs. 30,000 as Put premium.
The position of investor in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = Rs.1020
2. May Spot price of Ray Technologies = Rs.1080
In the first situation you have the right to sell 1000 “Ray Technologies” shares at Rs.1,070/-the price of which is
Rs. 1020/-. By exercising the option the investor earn Rs. (1070-1020) =Rs.50 per Put, which amounts to Rs.
50,000/. The net income in this case is Rs. (50000-30000) =Rs. 20,000.
The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 421

In the second price situation, the price is more in the spot market, so the investor will not sell at a lower price by
exercising the Put. He will have to allow the Put option to expire unexercised. In the process the investor only
lose the premium paid which is Rs. 30,000.
While buyer of an options has limited risk (Premium Amount), seller of an option has very high rick (Market
Price- Strike Price or Strike Price - Market Price), as the case may be, depending on whether it is an call or put
option.
As of now, all futures and options are Cash settled.

Warrant
Warrant means an option issued by a company whereby the buyer is granted the right to purchase a number of
shares (usually one) of its equity share capital at a given exercise price during a given period.
The holder of a warrant has the right but not the obligation to convert them into equity shares. Thus in the true
sense, a warrant signifies optional conversion. In case the investor benefits by conversion of warrant, then he will
convert the warrants, else he may simply let the warrant lapse. The companies listed on the Exchange can issue
warrants in accordance with SEBI (ICDR) Regulations, 2018.

For example if the conversion price of the warrant is Rs. 70/-and the current market price is Rs.110/-, then the
investor will convert the warrant and enjoy the capital gain of Rs.40/-. In case the conversion is at Rs.70/- and
the current market price is Rs.40/-, then the investor will simply let the warrant lapse without conversion.

Real Estate Investment Trusts (‘REITs’)

A real estate investment trust (“REIT”) is a collective investment scheme that owns, operates or finances income-
producing real estate. REITs provide all investors the chance to own valuable real estate, present the opportunity to
access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through
the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders
of a REIT earn a share of the income produced through real estate investment – without buying any finance property.
Benefits of REITs include:
• Less Capital Intensive: Direct investment in real estate property is very capital intensive. But each shares of
REITs will be comparatively more affordable (it will not require large capital outflows).
• Suitable for small Investors: Investing through REITs will eliminate dealing with builders, thereby avoiding
potential exposure to big builders.
• Transparency: REITs stocks are listed in stock market, hence details will be available on public domain
• Assured Dividends: REITs generates income in form of dividend. REITs dividend payment is relatively
assured as most of their income is in the form of rental (lease) income.
• Tax Free: Dividend earned by the investors of REIT will be tax free.
• Fast Capital Appreciation: Capital appreciation can be phenomenal.
• Easy to buy: Investment in REITS easier than investment in Real Estate properties

REITs are similar to mutual funds and shares and they provide income by way of :
• Dividend to its shareholders.
• Capital Appreciation as REIT stocks are listed in BSE and NSE
 422  Lesson 15 • EP-SLCM

Infrastructure Investment Trusts (‘InvITs’)

Considering the importance of infrastructure sector with an aim to provide a suitable platform for financing /
refinancing infrastructure projects and allow the investors to participate in the growth story of infrastructure, the
Government introduced a new investment vehicle named Infrastructure Investment Trusts (‘InvITs’) in 2014.
The primary objective of InvITs is to promote the infrastructure sector of India by encouraging more individuals to
invest in it. Typically, such a tool is designed to pool money from several investors to be invested in income-
generating assets. The cash flow thus generated is distributed among investors as dividend income. When compared
to Real Estate Investment Trust or REITs, the structure and operation of both are quite similar.
An InvIT is established as a trust and is registered with the SEBI. Typically, infrastructure investment trust SEBI
comprises 4 elements, namely –
• Trustee : They are required to be registered with SEBI as debenture trustees. Also, they are required to invest
at least 80% into infra assets that generate steady revenue.
• Sponsor : Typically, a body corporate, LLP, promoter or a company with a net worth of at least Rs. 100 crore
classifies as a sponsor. Further, they must hold at least 15% of the total InvITs with a minimum lock-in period
of 3 years or as notified by any regulatory requirement. When it comes to a public-private partnership or PPP
projects, sponsors serve as a Special Purpose Vehicle (SPV).
• Investment manager : As a body corporate of LLP, an investment manager supervises all the operational
activities surrounding InvITs.
• Project manager : The authority is mostly responsible for executing projects. However, in the case of PPP
projects, it serves as an entity that also supervises ancillary responsibilities.

Securitized Debt Instruments

Securitized debt instruments are financial securities that are created by securitizing individual loans (debt).
Securitization is a financial process that involves issuing securities that are backed by assets, most commonly debt.
The assets are transformed into securities, and the process is called securitization. The owner of the securities
receives an income from the underlying assets; hence, the term asset-backed securities.
Securitized debt instruments come with various advantages over conventional forms of investing and are more
valuable to a portfolio. One of the most common types of securitized debt is mortgage-backed securities.
Securitized debts can lower interest rates and free up capital for the bank, but they can also encourage lending for
reasons other than making a profit. SEBI had laid down the framework for public offer and listing of securitized
debt instruments vide SEBI (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008 and had
specified listing agreement for Securitized Debt Instruments. A few privately placed SDIs have already been listed
on exchanges.

Municipal Bonds
Municipal bonds are also referred to as ‘muni bonds’. The urban local
government and agencies issue these bonds. Municipal bonds are issued
when a government body wants to raise funds for projects such as infra-
related, roads, airports, railway stations, schools, and so on. SEBI issued
guidelines in 2015 for the urban local bodies to raise funds by issuing
municipal bonds. Municipal bonds exist in India since the year 1997.
Bangalore Municipal Corporation is the first urban local body to issue
municipal bonds in India. Ahmedabad followed Bangalore in the
succeeding years. The municipal bonds lost the ground after the initial
investors’ attraction it received and failed to raise the desired amount of funds. To revive the municipal bonds, SEBI
came up with guidelines for the issue of municipal bonds in 2015.
Municipality should meet the following eligibility criteria to issue municipal bonds in India:
• The municipality must not have a negative net worth in each of the three previous years.
• The municipality must have no default in the repayment of debt securities and loans availed from the banks or
non-banking financial companies in the last year.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 423

• The municipality, promoter and directors must not be enlisted in the willful defaulters published by the Reserve
Bank of India (RBI). The municipality should have no record of default in the payment of interest and repayment
of principal with respect to debt instruments.

Exchange Traded Funds (ETF)

• An Exchange Traded fund (ETF) is a security that tracks an index, commodity, bonds, or a basket of assets like
an index fund and is traded in the securities market. In simple words, ETFs are funds that track indexes such
as Sensex, Nifty, etc.
• When you buy shares/units of an ETF, you actually buy shares/units of a portfolio that tracks the performance
of the index. ETFs just reflect the performance of the index they track.
• Unlike regular mutual funds, ETFs trade like a common stock on the stock exchange and the price of an ETF
changes as per the trading in the market takes place.
• The trading value of an ETF depends on the net asset value of the underlying stock that it represents.
ETFs, generally, have higher daily liquidity and lower fees than mutual fund schemes.

MECHANISM FOR ISSUANCE OF SECURITIES IN PRIMARY MARKET

Book Building
Book building is a systematic process of generating, capturing and recording investor’s demand for shares during
IPO or other securities during their issuance process in order to support efficient price discovery. This process is
also known as price discovery method.
The SEBI (ICDR) Regulations, 2018 defines book building as follows:
Book building means a process undertaken to elicit demand and to assess the price for determination of the
quantum or value of specified securities or Indian Depository Receipts, as the case may be, in accordance with the
SEBI (ICDR) Regulations, 2018.
The book building process in India is very transparent. All investors including small investors can see demand for
the shares of the company at various price points on the website of the Exchange before applying. According to this
method, share prices are determined on the basis of real demand for the shares at various price levels in the market.
Net Offer to Public through Book Building Process

In case of an issue made through

• not less than 35 % to retail individual investors
the book building process as per
• not less than 15 % to non-institutional investors
regulation 26(1), then the
allocation in the net offer to public • not more than 50% to qualified institutional buyers, 5 % of
category shall be as follows: which shall be allocated to mutual fund

In case of an issue made through

• not more than 10% to retail individual investors
the book building process under
• not more than 15% to non-institutional investors
regulation 26(2), the allocation in
the net offer to public category • not less than 75% to qualified institutional buyers, 5% of
shall be as follows: which shall be allocated to mutual fund

• Minimum 50% to retail individual investors; and

In an issue made other than Remaining to:
through the book building process, (i) individual applicants other than RII and
allocation in the net offer to public
(ii) other investors including corporate bodies or
category shall be made as follows: institutions, irrespective of the number of specified
securities applied for
 424  Lesson 15 • EP-SLCM

Note: -
1. In case of an issue made through Book Building process under regulation 6(1) and 6(2), addition of 5%
allocation available to mutual funds shall be eligible for allocation under the balance available for qualified
institutional buyers.
2. The issuer may allocate up to 60% of the portion available for allocation to qualified institutional buyers to an
anchor investor.
3. For above purpose, if the retail individual investor category is entitled to more than 50% on proportionate
basis, the retail individual investors shall be allocated that higher percentage.
Book building Process
• Company appoints Lead Book Runners/Co Book Runners, Lead Merchant Banker (LMB) to act as Lead Book
Runner. If more than one LBM/LBR, inter-se, allocation of responsibilities to be decided.
• Filing of draft offer document with SEBI for obtaining observation and, application to Exchanges for in-
principle approval for listing.
• Filing of Red herring prospectus with SEBI, Stock Exchange and Registrar of Companies (ROC).
• Lead Book Runners (LBR) appoints Syndicate members (SM), to underwrite the issue.
• LBR/SM to finalise bidding/collection centers who are either:
(a) SEBI Registered stock broker.
(b) Self-certified Syndicate Bank (for ASBA facility).
• Pre issue advertisement shall be made.
• Bidding and allocation for anchor investors one day before opening of issue.
• Issue opens and Investor submits forms at bidding centers.
• Electronic Bidding Process and determination of price.
• Registration of final prospectus with ROC.
• Allocation/Manner of Allotment.
• In case of Book Built Issue, the issuer in consultation with merchant banker, fixes the price band.
• In case of Fixed Price Issue, the issuer in consultation with merchant banker, fixes the price of the shares to
be offered (Face Value + Share Premium) and makes on offer. If the investors subscribes minimum 90% of the
offer, the issue will be successful else the entire application money has to be refunded back.

Example
Let’s take an example.
Number of shares issued by the Company = 100. Price band = Rs. 30 – Rs. 40.
Now let’s check what individuals have bid for.

Bid Number of shares Price per share (Rs.) Cumulative demand

1 20 40 20
2 10 38 30
3 20 37 50
4 30 36 80
5 20 35 100
6 20 33 120
7 20 30 140
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 425

The shares will be sold at the Bid 5 price of 20 shares for Rs.35.
Because Bidders 1 to 5 are willing to pay at least Rs. 35 per share. The total bids from Bidders 1 to 5 ensure all
100 shares will be sold (20 + 10 + 20 + 30 + 20). The cut-off price is therefore Bid 5’s price = Rs. 35.
Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don’t get an allotment because their bids are below
the cut-off price. On allotment, the extra amount paid will be refunded to the investor. Since the cut- off price is
Rs. 35, the 10 shares will cost Rs. 350 (10 x Rs. 35). The balance Rs. 50 will be refunded to the investor.

Application Supported by Block Amount (ASBA)

ASBA means “Application Supported by Blocked Amount”.
ASBA is an application by an investor containing
If an investor is applying through ASBA, his application an authorization to Self-Certified Syndicate Bank
money shall be debited from the bank account only if (SCSB) to block the application money in the bank
his/her application is selected for allotment after the account, for subscribing to an issue.
basis of allotment is finalized.

Self-Certified Syndicate Bank

Self-Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying through the ASBA process. A bank
desirous of offering ASBA facility shall submit a certificate to SEBI as per the prescribed format for inclusion of its
name in SEBI’s list of SCSBs.
A SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall submit ASBA form and shall
also identify the Controlling Branch (CB) which shall act as a coordinating branch for the Registrar to the issue,
Stock Exchanges and Merchant Bankers. The SCSB, its DBs and CB shall continue to act as such, for all issues to
which ASBA process is applicable. The SCSB may identify new DBs for the purpose of ASBA process and intimate
details of the same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained by it. The SCSB shall
communicate the following details to Stock Exchanges for making it available on their respective websites; these
details shall also be made available by the SCSB on its website:
(i) Name and address of all the SCSB.
(i) Addresses of DBs and CB and other details such as telephone number, fax number and email ids.
(i) Name and contacts details of a nodal officer at a senior level from the CB.

ASBA Process
An ASBA investor submits an ASBA physically or electronically through the internet banking facility, to the SCSB
with whom the bank account to be blocked is maintained, then the SCSB blocks the application money in the bank
account specified in the ASBA, on the basis of an authorization to this effectgiven by the account holder in the ASBA
The application money remains blocked in the bank account till finalization of the basis of allotment in the issue or
till withdrawal/failure of the issue or till withdrawal/rejection of the application, as the case may be.
The application data shall thereafter be uploaded by the SCSB in the electronic bidding system through a web
enabled interface provided by the Stock Exchanges. Once the basis of allotment of finalized, the Registrar to the
issue sends an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the
requisite amount to the issuer’s account. In case of withdrawal/failure of the issue, the amount shall be unblocked
by the SCSB on receipt of information from the pre-issue merchant bankers.
A retail investor has the option of making application through ASBA or through cheque. However, non-retail
investors i.e. Qualified Institutional Buyers and Non-Institutional Investors, shall mandatorily make use of ASBA
facility for making application in public/rights issue.
 426  Lesson 15 • EP-SLCM

Advantages of ASBA facility:

Applying through ASBA facility has the following advantages:
• The investor need not pay the application money by cheque rather the investor submits ASBA which
accompanies an authorization to block the bank account to the extent of the application money.
• The investor does not have to bother about refunds, as in ASBA only that much money to the extent required
for allotment of securities, is deducted from the bank account only when his application is selected for
allotment after the basis of allotment is finalized.
• The investor continues to earn interest on the application money as the same remains in the bank account,
which is not the case in other modes of payment.
The investor deals with the known intermediary, i.e., its own bank.

Use of Unified Payments Interface (UPI) with ASBA in Public Issue Process
UPI
Unified Payments Interface (UPI) is an instant payment system developed by the National Payments Corporation
of India (NPCI), an RBI regulated entity. UPI is built over the IMPS (Immediate Payment Service) infrastructure and
allows you to instantly transfer money between any two parties’ bank accounts. UPI as a payment mechanism is
available for all public issues for which Red Herring Prospectus is filed after January 01, 2019.

How is public issue application using UPI different from public issue application using ASBA submitted
with intermediaries?
Public issue application using UPI is a step towards digitizing the offline processes involved in the application
process by moving the same online. This requires you to create a UPI ID and PIN using any of the UPI enabled
mobile application. The UPI ID can be used for blocking of funds and making payment in the public issue process.
One can accept the request to block the funds for the amount they have bid by entering their UPI PIN in the
mobile application.
The money shall be blocked and shall be automatically remitted to the Escrow Bank, in case of allotment. UPI in
public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.
 Lesson 15 • Structure of Capital Market - Part - I Primary Market 427

Some FAQs related to UPI

(A) How can “UPI as a payment option” be used in the public issue process?
1. UPI as part of bidding :
• Investor will fill in the bid details in the application form as per the existing process along with his
UPI ID.
• As per the existing process, investor may submit the application with any of the intermediary
(Syndicate Member / Registered Stock Brokers / Registrar and Transfer Agents / Depository
Participants), who, on receipt of application will upload the bid details along with UPI id in the
stock exchange bidding platform.
• The stock exchange will electronically share the bid details, along with investors UPI id, with the
Escrow/ Sponsor Bank appointed by the issuer company.
2. UPI as part of blocking:
• The Escrow/Sponsor Bank will initiate a mandate request on the investor i.e. request the investor
to authorize blocking of funds equivalent to applicant amount and subsequent debit of funds in
case of allotment.
• The request raised by the Escrow/Sponsor Bank, would be electronically received by the investor
as SMS/intimation on his/her bank provided mobile no. linked to UPI ID.
• Upon validation of block request by the investor, the said information would be electronically
received by the investors’ bank, where the funds, equivalent to application amount, would get
blocked in investors account. Intimation regarding confirmation of such block of funds in investors
account would also be received by the investor.
3. UPI as part of payment for shares post allocation process:
• The registrar to the issue, based on information of bidding and blocking received from stock
exchange, would undertake reconciliation and prepare the basis of allotment.
• Upon approval of such basis the instructions would be sent to sponsor bank to initiate process for
credit of funds in the public issue escrow account and unblocking excess money.
• Based on authorization given by investor using UPI PIN at the time of blocking, the funds, equivalent
to the allotment, would be debited from investors account and remaining funds, if any, would be
unblocked.
(B) Whether use of UPI, as a payment mechanism in public issues, is mandatory?
The applicability of UPI as a payment mechanism has been prescribed in a Phased manner as under:
• Phase I: From January 01, 2019, the UPI mechanism for retail individual investors through intermediaries
will be made effective along with the existing process and existing timeline of T+6 days. The same will
continue, for a period of 3 months or floating of 5 main board public issues, whichever is later.
• Phase II: Thereafter, for applications by retail individual investors through intermediaries, the existing
process of physical movement of forms from intermediaries to Self-Certified Syndicate Banks (SCSBs) for
blocking of funds will be discontinued and only the UPI mechanism with existing timeline of T+6 days
will continue, for a period of 3 months or floating of 5 main board public issues, whichever is later.
• Phase III: Subsequently, final reduced timeline will be made effective using the UPI mechanism.
(C) Up to what limit one can apply for a public issue in UPI?
The limit for IPO application is 2 Lakhs per transaction on UPI.
(D) Are all category of investors eligible to apply in public issues using UPI for payment?
No. Only retail individual investors are allowed to use UPI for payment in public issues. Qualified Institutional
Buyers and High Net-worth Individuals shall continue to apply as per the existing process.
 428  Lesson 15 • EP-SLCM

GREEN SHOE OPTION

A company desirous of availing this option, should in the Green Shoe Option (GSO) means an option of
resolution of the general meeting authorising the public allocating shares in excess of the shares included in
issue, seek authorization also for the possibility of the public issue and operating a post-listing price
allotment of further shares to the ‘Stabilizing Agent’ (SA) stabilizing mechanism in accordance with the
at the end of the stabilization period.
provisions of Regulations 45 of the SEBI (ICDR)
GSO in the system of IPO using book-building method Regulations, 2018.
was recognised by SEBI in India through its new
guidelines on 14th August 2003 (vide SEBI/ CFD/DIL/DIP/ Circular No. 11). ICICI bank was the first to use Green
Shoe Option in its public issue through book building mechanism in India.

ILLUSTRATION
Consider a company planning an IPO of say, 100,000 shares, at a book-built price of Rs. 100/-, resulting in an
IPO size of Rs. 100,00,000. As per the ICDR Regulations, the over-allotment component under the Green Shoe
mechanism could be up to 15% of the IPO, i.e. up to 15,000 shares, i.e. Green Shoe shares. Prior to the IPO, the
stabilising agent would borrow such number of shares to the extent of the proposed Green Shoe shares from
the pre- issue shareholders. These shares are then allotted to investors along with the IPO shares. The total
shares issued in the IPO therefore stands at 115,000 shares. IPO proceeds received from the investors for the
IPO shares, i.e. Rs.100,00,000–100,000 shares at the rate of Rs.100 each, are remitted to the Issuer Company,
while the proceeds from the Green Shoe Shares (Rs.15,00,000/-, being 15,000 shares x Rs.100/-) are parked in
a special escrow bank account, i.e. Green Shoe Escrow Account. During the price stabilisation period, if the
share price drops below Rs.100, the stabilising agent would utilise the funds lying in the Green Shoe Escrow
Account to buy these back shares from the open market. This gives rise to the following three situations:
• Situation #1 - where the stabilising agent manages to buyback all of the Green Shoe Shares, i.e.,15,000
shares;
• Situation #2 - where the stabilising agent manages to buyback none of the Green Shoe Shares;
• Situation #3 - where the stabilising agent manages to buy-back some of the Green Shoe Shares, say
10,000 shares.
Let us examine each of these situations separately:
Situation #1 – Where all Green Shoe Shares are bought back: In this situation, funds in the Green Shoe Escrow
Account (Rs.15,00,000, in this case) would be deployed by the stabilising agent towards buying up shares from
the open market. Given that the prices prevalent in the market would be less than the issue price of Rs. 100, the
stabilising agent would have sufficient funds lying at his disposal to complete this operation. Having bought
back all of the 15,000 shares, these shares would be temporarily held in a special depository account with the
depository participant (Green Shoe Demat Account), and would then be returned back to the lender shareholders,
within a maximum period of two days after the stabilisation period.
Situation #2 – Where none of the Green Shoe Shares are bought back: This situation would arise in the (very
unlikely) event that the share prices have fallen below the Issue Price, but the stabilising agent is unable to find
any sellers in the open market, or in an event where the share prices continue to trade above the listing price,
and therefore there is no need for the stabilising agent to indulge in price stabilisation activities.
In either of the above-said situations, the stabilising agent is under a contractual obligation to return the 15,000
shares that had initially been borrowed from the lending shareholder(s). Towards meeting this obligation, the
issuer company would allot 15,000 shares to the stabilising agent into the Green Shoe Demat Account (the
consideration being the funds lying the Green Shoe Escrow Account), and these shares would then be returned
by the stabilising agent to the lending shareholder(s), thereby squaring off his responsibilities.
Situation #3 – Where some of the Green Shoe Shares are bought back, say 10,000 shares: This situation could
arise in an event where the share prices witness a drop in the initial stages of the price stabilisation period, but
recover towards the latter stages.
Lesson 15 • Structure of Capital Market - Part - I Primary Market 429

In this situation, the stabilising agent has a responsibility to return 15,000 shares to the lending shareholder(s),
whereas the stabilising activities have yielded only 10,000 shares.
Similar to the instance mentioned in Situation #2 above, the issuer company would allot the differential 5,000
shares into the Green Shoe Demat Account to cover up the shortfall, and the stabilising agent would discharge
his obligation to the lending shareholder(s) by returning the 15,000 shares that had been borrowed from them.
Both in Situation #2 and #3, the issuer company would need to apply to the exchanges for obtaining listing/
trading permissions for the incremental shares allotted by them, pursuant to the Green Shoe mechanism.
Any surplus lying in the Green Shoe Escrow Account would then be transferred to the Investor Protection and
Education Fund established by SEBI, as required under ICDR Regulations and the account shall be closed
thereafter.
430  Lesson 15 • EP-SLCM
 Part II- Secondary Market

Key Concepts One Learning Objectives Regulatory

Should Know To understand: Framework
• Stock Exchange • Operation of stock • Securities & Exchange
• Trading Mechanism exchanges, Board of India Act, 1992
• Market Participants • Stock Exchange Trading
• Margins • Securities Contracts
Mechanism,
• Book Closure & (Regulation) Act, 1956
• Various market
Record Date participants in the • The Companies Act, 2013
• Bulk Deal/Block securities market and the rules made
Deal thereunder
• How NIFTY and SENSEX
• SENSEX/NIFTY are calculated,
• NIFTY Sectoral • Basics of trading in
Indices securities market,
• NIFTY Thematic
• Grievance redressal in a
Indices
securities market, etc
• Market Surveillance
• Impact of various policies
in securities market

Lesson Outline
• Stock Exchanges in India
• Trading Mechanism in the Stock Exchange
• Types of securities
• Market participants
• Margin
• Block Deal/Bulk Deal
• SENSEX/NIFTY
• Basics of Investing
• Market surveillance
• Grievance redressal in Securities Market
• Risk Management in Secondary Market
• Impact of various policies on Stock Markets
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
• LIST OF FURTHER READINGS
• OTHER REFERENCES
 432  Lesson 15 • EP-SLCM

STOCK EXCHANGE
Stock exchange is a market place for buying and selling of securities and ensuring liquidity to them in the interest
of the investors. The stock exchanges are virtually the nerve center of the capital market and reflect the health of the
country’s economy as a whole.
The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as:
(a) any body of individuals, whether incorporated or not, constituted before corporatization and demutualization
under Sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 2013 whether under a scheme of corporatization
and demutualization or otherwise, for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities.
Stock exchange as an organized security market provides marketability and price continuity for shares and helps in
a fair evaluation of securities in terms of their intrinsic worth. Thus it helps orderly flow and distribution of savings
between different types of investments.
Stock markets play a significant role in the development of any economy. They facilitate mobilization of funds from
small investors & channelize them into various development needs of various sectors of the economy.
This institution performs an important part in the economic-upliftment of a country, acting as a free market for
securities where prices are determined by the forces of supply and demand. Apart from the above basic function it
also assists in mobilizing funds for the Government and the Industry and to supply a channel for the investment of
savings in the performance of its functions.
The Stock exchanges in India as elsewhere have a vital role to play in the development of the country in general and
industrial growth of companies in the private sector in particular and helps the Government to raise internal
resources for the implementation of various development programmes in the public sector. As a segment of the
capital market it performs an important function in mobilizing and channelizing resources which remain otherwise
scattered. Thus the Stock Exchanges trap the new resources and stimulate a broad based investment in the capital
structure of industries.
Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close of 18th century
when the East India Company used to transact loan securities. In the 1830s, trading on corporate stocks and shares
in Bank and Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly half
dozen during 1840 and 1850. An informal group of 22 stockbrokers began trading under a banyan tree opposite the
Town Hall of Bombay from the mid1850s, each investing a (then) princely amount of Rs. 1. This banyan tree still
stands in the Horniman Circle Park, Mumbai. In 1860, the
exchange flourished with 60 brokers.
In fact the ‘Share Mania’ in India began with the American
Civil War broke and the cotton supply from the US to Europe
stopped. Further the brokers increased to 250. The informal
group of stockbrokers organized themselves as the Native
Share and Stockbrokers Association which, in 1875, was
formally organized as the Bombay Stock Exchange (BSE). In
1956, the Government of India recognized the Bombay Stock
Exchange as the first stock exchange in the country under the
Securities Contracts (Regulation) Act. National Stock
Exchange of India Ltd. (NSE) was given recognition as a stock
exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE is India’s 1st demutualized stock
exchange and was demutualized from the date of its inception. NSE commenced operations in the Wholesale Debt
Market (WDM) segment in June, 1994 and commenced electronic trading in Capital Market 1st time in India in
November, 1994. NSE is also instrumental in bringing the dematerialization of trading in India.
Since the initiation of the financial liberalisation programme in 1992, there have been substantial regulatory,
structural, institutional and operational changes in the securities market of the country. These reforms were carried
out with the objective of improving market efficiency, enhancing transparency, preventing unfair trade practices
and bringing the Indian securities market up to international standards.
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 433

Role of Stock Exchanges

• Acts as a continuous market for securities: Investors can invest in any securities, but in case of any risk,
they can exit from that security and freshly re-enter into whichever security they feel as secure.
• Responsible for securities evaluation: The stock price indicates the performance and stability of the
company. Through these investors decide according to their risk appetite whether to enter or exit or hold. The
stock exchange acts as a regulator for the securities price evaluation for all the listed stocks.
• Mobilizes savings: Most of the public cannot invest the bulk amount in securities, so they invest in indirect
ways such as mutual funds and investment trusts, and these are mobilized by stock exchanges.
• Enables healthy speculation: Stock exchange encourages businessmen and provides healthy speculation
opportunities to speculate and gain profits from fluctuations in stock prices.
• Protect investors: Stock exchange ensures the protection of the funds of investors by allowing only genuine
companies to be listed in the stock exchange.
• Ensures liquidity: Banks and some other institutions like Life Insurance Corporation (LIC) invest their funds
in the stocks and earn a profit within a short period and are sold immediately if there is any necessity of
funds. Thus there is an opportunity to liquidate immediately at any time if required in the stock market.
• Acts as an economic barometer: The country’s economic growth is measured with the trends in the stock
market. An upward trend in the stock market denotes growth potential and downward trend denotes the fall
in the economy. Hence the stock exchange is called as an economic barometer as it indicates conditions
prevailing in the country.
• Exercise vigilance/control on companies: Every company listed on an exchange must produce their annual
reports and an audited balance sheet to the stock exchange Such. reports being available in public domain
promotes transparency.
• Attracts foreign capital: Foreign Institutional Investors (FII) are likely to invest in developing economy as
the rate of returns will be high in developing economies due to growth opportunities.
• Stock exchanges ensure Safety of Capital and Fair Dealing: The transactions made in the stock exchange
are made available to the public under well-defined rules and regulations abided by laws. This ensures safety
and fair dealings for the average investors.
• Regulate company management: The firms wanting to get their securities listed must follow certain rules
and fulfil certain conditions. Stock exchanges safeguard the interest of the investors and regulate the company
management.
Indian Stock Exchanges
Trading in the Indian stock market majorly takes place in the below two stock exchanges -
• BSE - BSE Limited (Formerly Bombay Stock Exchange)
• NSE - National Stock Exchange of India
The Bombay Stock Exchange (BSE) has been in existence since 1875, whereas the National Stock Exchange (NSE),
on the other hand, was founded in 1992 and started trading in 1994. However, both BSE and NSE exchanges follow
the same trading mechanism, trading hours, settlement process, etc.

TRADING MECHANISM
In the Indian securities market various products are trading like equity shares, warrants, debenture, etc. The trading
in the securities of the company takes place in dematerialised form in India. Dematerialization is the process by
which physical certificates of an investor are converted to an equivalent number of securities in electronic form and
credited to the investor’s account with his Depository Participant (DP). Trading in the securities of the company
takes place on the screen based platforms provided by the Exchanges. Currently for equity shares the settlement
cycle is (T+2 days) ( T means trading day/Transaction day). Any shares which are traded on the Exchange are
required to be settled by the clearing corporation of the exchange on 2 working day.
 434  Lesson 15 • EP-SLCM

In electronic trading order received are matched electronically on a strict price/time priority and hence cuts down
on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It enables market
participants, irrespective of their geographical locations, to trade with one another simultaneously. It provides full
anonymity by accepting orders, big or small, from brokers without revealing their identity, thus providing equal
access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade
execution process in entirety.
Regulation 40 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 stipulates that
except in case of transmission or transposition of securities, requests for effecting transfer of securities shall not be
processed unless the securities are held in the dematerialized form with a depository.
In accordance with the Rule 9A of The Companies (Prospectus and Allotment of Securities) Rules, 2014, every
unlisted public company shall issue the securities only in dematerialised form and facilitate dematerialisation of all
its existing securities in accordance with provisions of the Depositories Act, 1996 and regulations made there under.
Every unlisted public company making any offer for issue of any securities or buyback of securities or issue of bonus
shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters,
directors, key managerial personnel has been demateriarised in accordance with provisions of the Depositories Act,
1996 and regulations made there under.
Every holder of securities of an unlisted public company, who intends to transfer such securities on or after 2nd
October, 2018, shall get such securities dematerialised before the transfer or who subscribes to any securities of an
unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd
October, 2018 shall ensure that all his existing securities are herd in dematerialized form before such subscription.

TYPES OF SECURITIES

Listed Securities The securities of companies, which have signed the listing agreement with
a stock exchange, are traded as “Listed Securities” in that exchange.
Permitted Securities To facilitate the market participants to trade in securities of such companies,
which are actively traded at other stock exchanges in India but are not listed
on an exchange, trading in such securities is facilitated as “permitted securities”
provided they meet the relevant norms specified by the stock exchange.

MARKET PARTICIPANTS
Market Participants in Securities Market include buyers, seller and various intermediaries between the
buyers and sellers. Some of these entities are briefed below:
• Market Intermediaries
Intermediaries are service providers and are an integral part of any financial system. The Market Regulator,
i.e., SEBI regulates various intermediaries in the primary and secondary markets through its regulations for
these respective intermediaries. SEBI has defined the role of each of the intermediary, the eligibility criteria
for granting registration, their functions and responsibilities and the code of conduct to which they are bound.
These regulations also empower SEBI to inspect the functioning of these intermediaries and to collect fees
from them and to impose penalties on erring entities.
The objectives of these intermediaries are-
• To smoothen the process of investment.
• To establish a link between the investors and the users of funds.
• Corporations and Governments do not market their securities directly to the investors. Instead, they hire the
services of the market intermediaries to represent them to the investors.
• Investors, particularly small investors, find it difficult to make direct investment. A small investor desiring to
invest may be able to diversify across issuers to reduce risk. He may not be equipped to assess and monitor
the credit risk of issuers. Market intermediaries help investors to select investments by providing investment
consultancy, market analysis and credit rating of investment instruments.
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 435

• In order to operate in secondary market, the investors have to transact through share brokers. Registrars and
Share Transfer Agents, Custodians and Depositories Participants are capital market intermediaries that
provide important infrastructure services for both primary and secondary markets.

• Stock Exchanges
Stock Exchanges offer a trading platform for buyers and sellers to carry out transaction in issued securities.
Trading occurs on the stock exchanges like NSE, BSE through electronic trading terminals which attribute
anonymous order matching. Stock exchanges also appoint clearing and settlement agencies and clearing
banks that manage the funds and securities settlement that arise out of these trades.
• Depositories
Depositories are institutions that hold securities (like shares, debentures, bonds, government securities,
mutual fund units) of investors in electronic form.

Currently there are

two Depositories
operating in India
 436  Lesson 15 • EP-SLCM

• Depository Participant
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investors and
provides depository services. Investors enable depository participants to hold and transact in securities in the
dematerialized form. While the investor-level accounts in securities are held and maintained by the DP, the
company level accounts of securities issued is held and maintained by the depository.
With the approval of SEBI Depository Participants are appointed by the depository. Investors can open a
demat account with a registered Depository Participant. They also provide services related to transactions in
the securities held in dematerialized form. Demat account is essential as:
» No stocks can be brought or sold without a demat account
» Direct investment cannot be made without a demat account
» Mandated by SEBI for transactions of listed company securities.
• Trading Members/Stock Brokers & Sub-Brokers
» Trading members or Stock Brokers are registered members of a Stock Exchange, who assist the investors
in buying/selling of securities. All secondary market transactions on stock are conducted through
registered brokers of the stock exchange. Trading members can be individuals (sole proprietor),
Partnership Firms or Corporate bodies, who are permitted to become members of recognized stock
exchanges subject to completion of prescribed requirements.
» A sub-broker is an entity who is not a member of Stock Exchange but who acts on behalf of a trading
member or Stock Broker as an agent for assisting the investors in buying, selling or dealing in securities
all the way through such trading member or Stock Broker with whom he is connected. Sub-brokers assist
in increasing the reach of brokers to a larger number of investors.
» Trades have to be routed only through the trading terminals of registered brokers of an exchange, to be
accepted and executed on the electronic system.
» SEBI registration to a broker is approved based on aspects such as capital competence, availability of
adequate office space, equipment and manpower to successfully perform his activities, experience in
securities trading etc.
» Brokers receive a commission for their services, which is called as brokerage. Maximum brokerage
chargeable to customers is fixed by individual stock exchanges.
» Several brokers offer research, analysis and advice about securities to buy and sell, to their investors.
• Custodians
A Custodian is a body that is charged with the accountability of holding funds and securities of its large clients,
characteristically institutions such as banks, insurance companies, and foreign portfolio investors. In addition
to safeguarding securities, a custodian also settles transactions in these securities and keeps record of
corporate actions on behalf of its clients and aids in:
» Maintaining a client’s securities and funds account
» Collecting the benefits or rights accruing to the client in respect of securities held
» Keeping the client informed of the actions taken or to be taken on their portfolios.
• Clearing Corporation
Clearing Corporations play a vital role in protecting the interest of investors in the securities market. Clearing
agencies ensure that members on the Stock Exchange meet their obligations to deliver funds or securities.
These agencies act as a legal counter party to all trades and guarantee settlement of all transactions on the
Stock Exchanges. It can be a part of an exchange or a separate entity.
• Merchant Bankers Test your Knowledge:
Prepare a note explaining
Merchant bankers are bodies registered with SEBI and act as issue
in brief, the role of various
managers, investment bankers or lead managers. Investors were enabled
intermediaries in the Stock
through depository participants to hold and transact in securities in the
Market.
dematerialized form. They are single point contact for issuers during a
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 437

new issue of securities. They connect and co-ordinate with other mediators such as registrars, brokers,
bankers, underwriters and credit rating agencies in managing the issue process.

MARGINS
An advance payment of a portion of the value of a stock transaction. The amount of credit a broker or lender extends
to a customer for stock purchase.
“Initial margin” in this context means the minimum amount, calculated as a percentage of the transaction value, to
be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to
meet full settlement obligations.
“Maintenance margin” means the minimum amount, calculated as a percentage of market value of the securities,
calculated with respect to last trading day’s closing price, to be maintained by client with the broker.
When the balance deposit in the client’s margin account falls below the required maintenance margin, the broker
shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any
increase in the market value of the securities.
The broker may liquidate the securities if the client fails to meet the margin calls made by the broker or fails to
deposit the cheques on the day following the day on which the margin call has been made or the cheque has been
dishonored.
The broker may also liquidate the securities in case the client’s deposit in the margin account (after adjustment for
mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between
making of the margin call and receipt of payment from the client.
The broker must disclose to the stock exchange details on gross exposure including the name of the client, unique
identification number, name of the scrip and if the broker has borrowed funds for the purpose of providing margin
trading facilities, name of the lender and amount borrowed, on or before 12 Noon on the following day.
Stock exchanges disclose scrip wise gross outstanding in margin accounts with all brokers to the market. Such
disclosures regarding margin trading done on any day shall be made available after the trading hours on the
following day through the website.

BOOK CLOSURE AND RECORD DATE

Book closure is the periodic closure of the Register of Members and Transfer Books of the company, to take a record
of the shareholders to determine their entitlement to dividends or to bonus or right shares or any other rights
pertaining to shares.
Record date is the date on which the records of a company are closed for the purpose of determining the stock
holders to whom dividends, proxy rights etc. are to be sent.
In accordance with Section 91 of the Companies Act, 2013 a company may close the register of members for a
maximum of 45 days in a year and for not more than 30 days at any one time subject to giving of previous notice by
advertisement at least once in a vernacular newspaper in the principal vernacular language of the district and
having a wide circulation in the place where the registered office of the company is situated, and at least once in
English language in an English newspaper circulating in that district and having wide circulation in the place where
the registered office of the company is situated. Book closure/record date is necessary for the purpose of paying
dividend, rights issue, bonus issue, etc. For the companies whose securities are listed on the Exchange are required
to comply with the SEBI (LODR) Regulation 2015. As per SEBI (LODR) Regulation 2015 the companies are required
to give 7 working days advance notice of book closure or record date to stock exchange where the securities of the
companies are listed.

BLOCK DEAL
The SEBI vide letter MRD/DoP/SE/Cir - 19/05 dated September 02, 2005 and CIR/MRD/DP/118/2017 dated
October 26, 2017 guidelines outlining a facility of allowing Stock Exchanges to provide separate trading window to
facilitate execution of large trades. The Exchanges have introduced new block window mechanism for the block
trades from January 01, 2018.
 438  Lesson 15 • EP-SLCM

• Session Timings:
(a) Morning Block Deal Window: This window shall operate between 08:45 AM to 09:00 AM.
(b) Afternoon Block Deal Window: This window shall operate between 02:05 PM to 2:20 PM.

• In the block deal the minimum order size for execution of trades in the Block deal window shall be Rs.10 Crore.
• The orders placed shall be within ±1% of the applicable reference price in the respective windows as stated
above.
• The stock exchanges disseminates the information on block deals such as the name of the scrip, name of the
client, quantity of shares bought/sold, traded price, etc to the general public on the same day, after the market
hours.

BULK DEAL
Bulk deal is a trade, where total quantity bought or sold is more than 0.5% of the number of equity shares of a listed
company.
Bulk deal can be transacted by the normal trading window provided by brokers throughout the trading hours in a
day. Bulk deals are market driven and take place throughout the trading day.
The stock broker, who facilitates the trade, is required to reveal to the stock exchange about the bulk deals on a daily
basis.
Bulk orders are visible to everyone. If the bulk deal happens through a single trade, it should be notified to the
exchange immediately upon the execution of the order. If it happens through multiple trades, it should be notified
to the exchange within one hour from the closure of the trading.

STOCK MARKET INDEX

An Index is used to give information about the price movements of products in the financial, commodities or any
other markets. Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other
forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock
market index is created by selecting a group of stocks that are representative of the whole market or a specified
sector or segment of the market. An Index is calculated with reference to a base period and a base index value.

Stock market indexes are useful for a variety of reasons. Some of them are :
• They provide a historical comparison of returns on money invested in the stock market against other
forms of investments such as gold or debt.
• They can be used as a standard against which to compare the performance of an equity fund.
• It is a lead indicator of the performance of the overall economy or a sector of the economy.
• Stock indexes reflect highly up to date information.
• Modern financial applications such as Index Funds, Index Futures, Index Options play an important role
in financial investments and risk management.

BASIS OF SENSEX
Sensitive Index or Sensex is the stock market index indicator for the BSE. It is also sometimes referred to as BSE S&P
Sensex. It was first published in 1986 and is based on the market weighed stock index of 30 companies based on the
financial performance. The large, established companies that represent various industrial sectors are a part of this.
The calculation of Sensex is done by a Free-Float method that came into existence from September 1, 2003. The
level of Sensex is a direct indication of the performance of 30 stocks in the market. The free-float method takes into
account the proportion of the shares that can be readily traded in the market. This does not include the ones held
by various shareholders and promoters or other locked-in shares not available in the market.
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 439

Steps to calculate Sensex:

• The market capitalization is taken into account. This is done by multiplying all the shares issued by the
company with the price of its stock.
• BSE determines a Free-Float factor that is a multiple of the market capitalization of the company. This helps
in determining the Free-Float market capitalization based on the details submitted by the company.
• Ratio and Proportion are used based on the base index of 100. This helps to determine the Sensex.

NIFTY
National Stock Exchange Fifty or Nifty is the market indicator of NSE. It is a collection of 50 stocks. It is also referred
to as Nifty 50. It is owned and managed by India Index Services and Products Ltd. (IISL).
Nifty is calculated through the Free-Float market capitalization weighted method. It multiples the Equity capital
(expressed in terms of number of shares outstanding) with a price, to derive the market capitalization. To determine
the Free-Float market capitalization, equity capital (as stated earlier) is multiplied by a price which is further
multiplied with IWF (Investible Weight Factors) which is the factor for determining the number of shares available
for trading freely in the market. The Index is determined on a daily basis by taking into consideration the current
market value (Free Float market capitalization) divided by base market capital and then multiplied by the Base
Index Value of 1000.
These indices are broad-market indices, consisting of the large, liquid stocks listed on the Exchange. They serveas a
benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments. Some of
them are:
• NIFTY 50 Index
• NIFTY Next 50 Index
• NIFTY 100 Index
• NIFTY 200 Index
• NIFTY 500 Index
• NIFTY Midcap 150 Index
• NIFTY Midcap 50 Index
• NIFTY Midcap 100 Index
• NIFTY Smallcap 250 Index
• NIFTY Smallcap 50 Index
• NIFTY Smallcap 100 Index
• NIFTY Large Midcap 250 Index
• NIFTY Mid Smallcap 400 Index

BASICS OF INVESTING – A GUIDANCE TO BUDDING INVESTORS

Before one starts investing in securities market, one needs to understand and identify their investment goals,
objectives and risk appetite (the extent up to which they are willing to take risk). Every investment decision should
reflect needs and requirements and should be as per investors desired preferences. For example, whether investor
is willing to invest in safe products which give steady returns or if he want to take slightly higher risk and invest in
products which may give you higher returns. Every investment comes with the risk of change in the inherent value
of that investment. For example, investment in shares of automobile industry will attract the risk attached with the
automobile industry (sales may go up or down or one brand of cars may be sold more than other brand, etc.). Once
investor decides goals and identifies risk appetite, they need to decide the amount they want to invest and the time
period over which they want to invest. The ability to take risk differs from investor to investor and could be
dependent on the goals as well as the age of the investor. The investors should also be well informed about their
rights, responsibilities.
 440  Lesson 15 • EP-SLCM

Investors should make informed decision before investing in the shares of a company. They should carefully read all
the information related to the company such as disclosures related to the company, its promoters, the project
details, financial details, etc. These details can be found on the websites of the stock exchanges.
Key risks in investing in securities market:
• Market risk or Systematic Risk: It means that an investor may experience losses due to factors affecting the
overall performance of financial markets and general economy of the country.
• Unsystematic Risk: Unsystematic risk can be described as the uncertainty attached with a particular
company or industry.
• Inflation risk: Inflation risk is also called as purchasing power risk. It is defined as the chance that the cash
flows from an investment would lose their value in future because of a decline in its purchasing power due to
inflation.
• Liquidity risk: Liquidity risk arises when an investment can’t be bought or sold quickly enough.
• Business Risk: It refers to the risk that a business of a company might be affected or may stop its operations
due to any unfavorable operational, market or financial situation.
• Volatility Risk: Volatility risk arises as the Companies’ stock prices may fluctuate over time.
• Currency Risk: It refers to the potential risk of loss from fluctuating foreign exchange rates that an investor
may face when he has invested in foreign currency or made foreign currency-traded investments.
Pre-requisites for investing in securities market:

Bank Account

Trading Account

Demat Account

• Bank account.
• Trading account or broking account with a SEBI registered stock broker of a recognized Stock Exchange. This
account is used to buy and sell securities on the Stock Exchanges. To open a trading account, you have to fill
account opening form and submit the signed Know Your Client (KYC) documents.
• Demat account provides the facility of holding of securities in dematerialized/electronic form. The demat
account can be opened with depository participant (DP) of any of the Depositories.
Know Your Client (KYC) process for opening an account:
• KYC is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder.
• While opening of Demat / Trading / Bank account, client have to submit officially valid documents (OVDs) as
proof of identity and proof of address and these documents form a part of the KYC requirements.
• An investor can establish his identity and address through relevant supporting prescribed documents such as
PAN card / Unique Identification (UID) (Aadhaar) / Passport / Voter ID card / Driving license, etc.
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 441

• Once the KYC form is submitted, a unique KYC Identification Number (KIN) is generated and
communicated to the client by SMS/Email.
• KYC is a one-time process and is valid across all the intermediaries.

MARKET SURVEILLANCE
Market surveillance plays a vital role in ensuring market integrity which is the core objective of regulators. Market
integrity is achieved through combination of surveillance, inspection, investigation and enforcement of relevant
laws and rules.
Globally market surveillance is either conducted by the Regulators or Exchanges or both. In India, the primary
responsibility of market surveillance has been entrusted to Stock Exchanges and is being closely monitored by SEBI.
Millions of orders are transmitted electronically every minute and therefore surveillance mechanisms to detect any
irregularities must also be equally developed. Exchanges adopt automated surveillance tools that analyze trading
patterns and are installed with a comprehensive alerts management system.
Market Surveillance is broadly categorised in 2 parts viz, Preventive Surveillance and Post trade Surveillance.
A. Preventive Surveillance –
• Stringent On boarding norms for Trading Members - Stringent net worth, back ground, viability etc.
checks while on boarding Trading Members.
• Index circuit filters - It brings coordinated trading halt in all equity and equity derivative markets at 3 stages
of the index movement, either way viz., at 10%, 15% and 20% based on previous day closing index value.
• Trade Execution Range - Orders are matched and trades take place only if the trade price is within the
reference price and execution range.
• Order Value Limitation - Maximum Order Value limit allowed per order.
• Cancel on logout - All outstanding orders are cancelled, if the enabled user logs out.
• Kill switch - All outstanding orders of that trading member are cancelled if trading member executes kill
switch.
• Risk reduction mode - Limits beyond which orders level risk management shall be initiated instead of trade
level.
• Compulsory close out - Incoming order, if it results in member crossing the margins available with the
exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading
member to create fresh positions.
• Capital adequacy check - Refers to monitoring of trading member’s performance and track record, stringent
margin requirements, position limits based on capital, online monitoring of member positions and automatic
disablement from trading when limits are breached.
• Fixed Price Band/Dynamic Price band - Limits applied within which securities shall move; so that volatility
is curbed orderliness is bought about. For non-derivative securities price band is 5%, 10% & 20%. For
Derivative products an operating range of 10% is set and subsequently flexed based on market conditions.
• Trade for Trade Settlement - The settlement of scrip’s available in this segment is done on a trade for trade
basis and no netting off is allowed.
• Periodic call auction - Shifting the security form continuous to call auction method.
• Rumour Verification - Any unannounced news about listed companies is tracked on online basis and letter
seeking clarification is sent to the companies and the reply received is disseminated.
 442  Lesson 15 • EP-SLCM

B. Post trade surveillance -

• End of day alert – Alerts generated using statistical tools. The tool highlights stocks which have behaved
abnormally form its past behaviour.
• Pattern recognition model – Models designed using high end tools and trading patterns which itself
identifies suspects involving in unfair trading practice.
• Transaction alerts for member - As part of surveillance obligation of members the alerts are downloaded
to members under 14 different heads.
Preventive approach adapted by Stock Exchange/SEBI has been fruitful. However, they are fully aware that the suite
of measure in force have to be upgraded, expanded and added to be able to successful in this preventive approach.
SEBI has introduced various market surveillance measure like price band, circuit filter, trade for trade segment.

GRIEVANCE REDRESSAL IN SECURITIES MARKET - SCORES

There will be occasions when an investor has a complaint against, a listed company or an intermediary registered
with the SEBI. In the event of such complaint, the investor should first approach the concerned company/
intermediary against whom there is a complaint. Sometimes the response received may not be satisfactory.
Therefore, investors should know as to which authority they should approach, to get their complaints redressed.
SEBI launched a centralized web based complaints redress system SEBI Complaints Redress System ‘SCORES’ in
June 2011. The purpose of SCORES is to provide a platform for aggrieved investors, whose grievances, pertaining to
securities market, remain unresolved by the concerned listed company or registered intermediary after a direct
approach. SCORES also provides a platform, overseen by SEBI through which the investors can approach the
concerned listed company or SEBI registered intermediary in an endeavor towards speedy redressal of grievances
of investors in the securities market. It would, however, be advisable that investors may initially take up their
grievances for redressal with the concerned listed company or registered intermediary, who are required to have
designated persons/officials for handling issues relating to compliance and redressal of investor grievances. SEBI
has issued various circulars/directions from time to time with respect to SCORES.

Complaints arising out of issues that are covered under SEBI Act, Securities Contract Regulation Act, Depositories
Act and rules and regulation made there under and relevant provisions of Companies Act, 2013 come under the
purview of the SEBI.
The salient features of SCORES are:
1. Centralised database of investor complaints;
2. Online movement of complaints to the concerned listed company or SEBI registered intermediary;
3. Online upload of Action Taken Reports (ATRs) by the concerned listed company or SEBI registered
intermediary;
4. Online viewing by investors of actions taken on the complaint and its current status;
5. SCORES is web enabled and provides online access 24 x7;
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 443

6. Complaints and reminders there on can be lodged online at the above website at anytime from anywhere;
7. An email is generated instantaneously acknowledging the receipt of complaint and allotting a unique
complaint registration number to the complainant for future reference and tracking;
8. The complaint forwarded online to the entity concerned for its redressal.

RISK MANAGEMENT IN SECONDARY MARKET

The performance of secondary market has a vital bearing on the performance of primary market. A number of
measures were taken to modernise the stock exchanges in the country. These measures focused on infrastructure
development, transparency, efficiency and enhanced investor protection. Risk management was further strengthened
during the year by implementing a comprehensive system of margins, exposure limits and improving the efficiency
of clearing and settlement systems through the introduction of settlement guarantee funds. With a view to enhancing
market safety, SEBI fixed intra-day trading and gross exposure limits for brokers. SEBI continued to maintain a
constant interface with the stock exchanges on various issues concerning investor protection, automated market
infrastructure and overall improvement in quality of intermediation. SEBI also directed its efforts towards
encouraging the stock exchanges to become effective as self-regulatory institutions. Automated screen based
trading which was introduced in the country through the setting up of the OTCEI and NSE and subsequently
introduced by the BSE had brought about a qualitative improvement in the market and its transparency. Transaction
costs and time were also significantly reduced. During the year several of the smaller exchanges also introduced
on-line screen based trading.
The key risk management measures initiated by SEBI include-
• Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and
volatility.
• VaR (value at risk) based margining system.
• Specification of mark to Market margins.
• Specification of Intra-day trading limits and Gross Exposure Limits.
• Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges.
• Specification of time limits of payment of margins.
• Collection of margins on upfront basis.
• Index based market wide circuit breakers.
• Automatic de-activation of trading terminals in case of breach of exposure limits.
• VaR based margining system has been put in place based on the categorization of stocks based on the liquidity
of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market.
• Additional margins have also been specified to address the balance 1% cases.
• Collection of margins from institutional clients on T+1 basis.

IMPACT OF VARIOUS POLICIES ON STOCK MARKETS

1. FED Policy
The Federal Reserve System is the central bank of the United States. It performs five general functions to promote
the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve:
• conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-
term interest rates in the U.S. economy;
• promotes the stability of the financial system and seeks to minimize and contain systemic risks through active
monitoring and engagement in the U.S. and abroad;
 444  Lesson 15 • EP-SLCM

• promotes the safety and soundness of individual financial institutions and monitors their impact on the
financial system as a whole;
• fosters payment and settlement system safety and efficiency through services to the banking industry and the
U.S. government that facilitate U.S. dollar transactions and payments; and
• promotes consumer protection and community development through consumer-focused supervision and
examination, research and analysis of emerging consumer issues and trends, community economic
development activities, and the administration of consumer laws and regulations.

How change in US Fed rate can impact India?

The Fed Funds Rate is the interest rate at which the top US banks borrow overnight money from common reserves.
All American banks are required to park a portion of their deposits with the Federal Reserve in cash, as a statutory
requirement.
Actually, fed fund rate gives the direction in which US interest rates should be heading at any given point of time. If
the Fed is increasing the interest rates, lending rates for companies and retail borrowers will go up and vice versa.
In India, hike in repo rate may not impact the countries outside India. On the other hand, US interest rates matter a
lot to global capital flows. Some of the world’s richest institutions and investors have their base in USA. They
constantly compare Fed rates with interest rates across the world to make their allocation decisions.
In the globalised world, markets are connected. An increase in Fed rates will be negative in general for the US stock
market and if it leads to another round of sell-offs, it will also have ripple effects on the Indian market.
Any changes in the Fed Fund Rates impact the domestic borrowing market to a large extent. For instance, if the Fed
rates go up, it will make the RBI hesitant in cutting rates at that time. The reason is that if RBI cut rates it will lead
to heavy pullout of foreign investors from the Indian bond market.

An important discussion: Rupee vs. Dollar:

If the Fed rates are hiked, the value of the dollar would go up, thus weakening Indian rupee in
comparison. This might hurt India’s forex reserves and imports. However, the weaker rupee is good
for India’s exports but low global demand and stiff competition would not leave much room for Indian
exporters to capitalise the situation. DBS said that India’s financing requirements will keep the rupee
vulnerable to rising US rates this year.

Bond market pressure:

Due to the higher Fed rates, US’ 10-year bond yields are expected to go up, which will also put pressure on India’s
10-year government bond yields.
RBI repo rate:
With higher Fed rates weakening the Rupee, India’s imports bill is likely to go up putting pressure on the RBI to
either increase repo rates or at least refrain from cutting rates in the upcoming monetary policy meetings.

2. Credit Policy of RBI

The Reserve Bank of India has a credit policy which aims at pursuing higher growth with price stability. Higher
economic growth means to produce more quantity of goods and services in different sectors of an economy; The
term monetary policy is also known as RBI’s credit policy or money management policy. It is basically the central
bank’s view on what should be the supply of money in the economy and also in what direction the interest rates
should move in the banking system. It refers to the use of credit policy instruments which are at the disposal of
central bank to regulate the availability, cost and use of money and credit to promote economic growth, price
stability, optimum levels of output and employment, balance of payments equilibrium, stable currency or any other
goal of government’s economic policy.
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 445

The credit policy aims at increasing finance for the agriculture and industrial activities. When credit policy is
implemented, the role of other commercial banks is very important. Commercial banks flow of credit to different
sectors of the economy depends on the actual cost of credit and arability of funds in the economy.
The objectives of a monetary policy are similar to the five year plans of our country. In a nutshell it is basically a plan
to ensure growth and stability of the monetary system. The significance of the monetary policy is to attain the
following objectives.
• Rapid Economic Growth: It is an important objective as it can play a decisive role in the economic growth of
country. It influences the interest rates and thus has an impact on the investment. If the RBI adopts an easy
credit policy, it would be doing so by reducing interest rates which in turn would improve the investment
outlook in the country. This would in turn enhance the economic growth. However faster economic growth is
possible if the monetary policy succeeds in maintaining income and price stability.
• Exchange Rate Stability: Another important objective is maintaining the exchange rate of the home currency
with respect to foreign currencies. If there is volatility in the exchange rate, then the international community
loses confidence in the economy. So it is necessary for the monetary policy to maintain the stability in
exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign
exchange and tries to maintain the exchange rate stability.
• Price Stability: The monetary policy is also supposed to keep the inflation of the country in check. Any
economy can suffer both inflation and deflation both of which are harmful to the economy. So the RBI has to
maintain a fair balance in ensuring that during recession it should adopt an ‘easy money policy’ whereas
during inflationary trend it should adopt a ‘dear money policy’
• Balance of Payments (BOP) Equilibrium: Another key objective is to maintain the BOP equilibrium which
most of the developing economies don’t tend to have. The BOP has two aspects which are ‘BOP surplus’ and
‘BOP deficit’. The former reflects an excess money supply in the domestic economy, while the later stands for
stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP
equilibrium can be achieved.
• Neutrality of Money: RBI’s policy should regulate the supply of money. It is possible that the change in
money supply causes disequilibrium and the monetary policy should neutralize it. However this objective of
a monetary policy is always criticized on the ground that if money supply is kept constant then it would be
difficult to attain price stability.
Bank Rate: is the rate at which RBI discount bills for commercial banks. This banking system involves commercial
and Co-operative Banks, Industrial Development Bank of India, IFC, EXIM Bank and other approved financial
institutions. Funds are provided through lending directly or rediscounting or buying money market instruments
like Commercial Bills or Treasury Bills. Increase in Bank Rate increases the cost of borrowing by commercial banks
which results in the reduction of credit volume to the banks and hence declines the money supply. Increase in Bank
Rate means tightening of RBI’s Monetary Policy.
Various Quantitative instrument of Credit Policy:
• Repo Rate: The rate at which the Commercial Banks borrow money from RBI. Reduction in Repo Rate helps
the Commercial Banks to get money at a cheaper rate and an Increase in Repo Rate discourages the Commercial
Banks to get money as the rate increases and becomes expensive. The increase in the Repo Rate will increase
the cost of borrowing and lending of the banks which will discourage the public to borrow money and
encourages them to deposit.
• Cash Reserve Ratio (CRR) : Cash reserve ratio is the amount which the commercial banks have to maintain
as cash deposit with the Reserve Bank of India. RBI may increase the CRR if it thinks that there is large
amount of money supply in the economy. Conversely, it will decrease the CRR if it is of the opinion that
inflation is in control and the industry needs a monetary boost up. The reduction in CRR will provide more
money in the hands of commercial banks which it will pass it on to the industry. More money in the hands of
industry will boost up production, consumption and employment.
 446  Lesson 15 • EP-SLCM

• Statutory Liquidity Ratio (SLR) : Statutory Liquidity Ratio is the amount which commercial banks have to
keep it with itself. So, SLR is the amount of money which banks have to keep in its custody at all times. SLR is
also a very powerful tool to control liquidity in the economy. To encourage industries to boost up their
production, SLR may be decreased to put more money in the hands of commercial banks. An increase in SLR
is used as an inflation control measure to control price rise.
• Reverse Repo Rate (RRR): is the rate at which the RBI borrows money from the Commercial Banks. An
increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining
constant. An increase in Reverse Repo Rate means that Commercial Banks will get more incentives to park
their funds with the RBI, therefore decreasing the supply of money in market. An increase in the Repo Rate
and the Reverse Repo Rate indicates strengthening of RBI’s Monetary Policy.

3. Inflation Index
An index is just a collection of data that serves as a baseline for future reference. We use the index model in all areas
of life, from the stock market, to inflation. We index wage levels, corporate profits as a percentage of GDP, and almost
anything else that can be measured. We do this to compare where we are now to where we have been in the past.
An inflation index is an economic tool used to measure the rate of inflation in an economy. There are several different
ways to measure inflation, leading to more than one inflation index with different economists and investors
preferring one method to another, sometimes strongly.
Inflation Indices
In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two major indices for measuring inflation.
In United States, CPI and PPI (Producer Price Index) are two major indices.
The Wholesale Price Index (WPI) was main index for measurement of inflation in India till April 2014 when RBI
adopted new Consumer Price Index (CPI) (combined) as the key measure of inflation.
a. Wholesale Price Index
Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry of Commerce & Industry,
Government of India. It was earlier released on weekly basis for Primary Articles and Fuel Group. However, since
2012, this practice has been discontinued. Currently, WPI is released monthly.
Salient notes on WPI are as follows:
Base Year
Current WPI Base year is 2004-05=100. It’s worth note that the base year for CPI is 2012 currently. This is one
reason for increasing difference between CPI and WPI in recent times.
Items
There are total 676 items in WPI and inflation is computed taking 5482 price quotations. These items are divided
into three broad categories viz. (1) Primary Articles (2) Fuel & power and (3) Manufactured Products.
WPI does not take into consideration the retail prices or prices of the services.
b. Consumer Price Index
Consumer Price Indices (CPI) released at national level are:
• CPI for Industrial Workers (IW)
• CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
• CPI (Rural/Urban/Combined).
While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the
third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation. In India, RBI
uses CPI (combined) released by CSO for inflation purpose. Important notes on this index are as follows:
 Lesson 15 • Structure of Capital Market - Part II-Secondary Market 447

Base Year
Base year for CPI (Rural, Urban, Combined) is 2012=100.
Number of items
The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is
broader than WPI basket. The items in CPI are divided into 6 main groups.
Key differences between WPI & CPI
• Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting
income and expenditure streams for changes in the cost of living.
• WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices
for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution
costs and taxes.
• Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by
visiting markets.
• CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate
goods transacted in the economy.
• WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived
from consumer expenditure survey data.

Impact of Policies on Indian Stock Market

Since monetary policies are influenced by inflation and inflationary expectations in the economy it is therefore,
critical that inflation index should be able to predict future inflation with reasonable accuracy. Generally, when a
country is operating in a low interest rate regime, borrowers can borrow money at a lower interest rate. This aids
in increased purchased power of the consumers. The demand for the goods increase and subsequently sensing a
higher demand, the prices will also raise. This condition drives the inflation rates higher. When the inflation rates
have raised more than the optimal levels, the Reserve Bank of India (RBI) steps in to increase interest rate to control
inflation rate. When inflationary pressure starts building in the economy, RBI hikes the repo rate and/or cash
reserve ratio (CRR) to manage the money supply causing higher inflation.
Maintaining an optimal inflation rate is the primary task of Monetary Policy decision makers of any nation. An
optimal inflation rate ensures a healthy economy. More often than not, the policy makers tend to spur growth in a
stalled economy by slashing the interest rates, thereby increasing the money available in the markets. However, in
order to implement such rate cuts the inflation rate should be at an optimal level. So, it becomes a the prime
responsibility of Reserve Bank to monitor Wholesale Price Index (WPI) and Consumer Price Index (CPI) to ensure
that economy is balance.
A rise in the inflation rate impacts market sentiments. A higher inflation rate drives the interest rates higher and
hence borrowing becomes costly for the banks, corporates and financial institutions. Therefore, the valuations of
capital-intensive companies and sectors may come under pressure as their margins decrease due to the higher
interest burden.
However, the markets are governed by many factors and the direction cannot be determined by reading just one
factor. Global sentiments and global funds inflows are other crucial factors that impact the direction of stock markets
significantly.
448  Lesson 15 • EP-SLCM

LESSON ROUND-UP

• A wide variety of financial institutions have been set up at the national level. They include development
banks like IDBI, SIDBI, IFCI, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI
and investment institutions like LIC, GIC, UTI, etc.
• All FPIs are required to be mandatorily registered into three broad categories i.e. Category I, Category II,
Category III under SEBI (Foreign Portfolio Investors) Regulations, 2014.
• Venture Capital is generally equity investments made by Venture Capital funds, at an early stage in
privately held companies, having potential to provide a high rate of return on their investments.
• Debenture is a document evidencing a debtor acknowledging it and any document which fulfils either of
these conditions is a debenture.
• The FCCBs are unsecured instruments which carry a fixed rate of interest and an option for conversion
into a fixed number of equity shares of the issuer company.
• Issue of IDRs is regulated by section 390 of the Companies Act, 2013, Rule 13 of the Companies (Registration
of Foreign Companies) Rules, 2014 and Chapter X & XA of SEBI (ICDR) Regulations, 2009.
• A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing
real estate.
• Book Building means a process undertaken by which a demand for the securities proposed to be issued
by a body corporate is build up and a ‘Fair Price’ and ‘Quantum’ of securities to be issued is finally
determined.
• ASBA is an application for subscribing to an issue, containing an authorization to block the application
money in a bank account.
• Book closure is the periodic closure of the Register of Members and Transfer Books of the company, to
take a record of the shareholders to determine their entitlement to dividends or to bonus or right shares
or any other rights pertaining to shares.
• UPI as a payment mechanism is available for all public issues for which Red Herring Prospectus is filed
after January 01, 2019.
• Self-Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying through the ASBA
process.
• Stock exchange is a market place for buying and selling of securities and ensuring liquidity to them in the
interest of the investors.
• Securities traded in the stock exchanges can be classified as Listed cleared Securities and Permitted Securities.
• An Index is used to give information about the price movements of products in the financial, commodities
or any other markets.
• National Stock Exchange Fifty or Nifty is the market indicator of NSE. It is a collection of 50 stocks. It is also
referred to as Nifty 50.
• The trading in the securities of the company takes place in dematerialised form in India.
• Market surveillance plays a vital role in ensuring market integrity which is the core objective of regulators.
Market integrity is achieved through combination of surveillance, inspection, investigation and
enforcement of relevant laws and rules.
• There are various factors and monetary policies which has a significant impact on the working of stock
markets in India like RBI Monetary Policy, Consumer Price Index (CPI), Wholesale Price Index (WPI) and
US FED Policy.
Lesson 15 • Structure of Capital Market - Part II-Secondary Market 449

GLOSSARY

Circuit Breaker A system to curb excessive speculation in the stock market, applied by the Stock
Exchange authorities, when the index spurts or plunges by more than a specified per
cent. Trading is then suspended for some time to let the market cool down.
Clearing Settlement or clearance of accounts, for a fixed period in a Stock Exchange.
Closing Price The rate at which the last transaction in a security is struck before the close of the
trading hours.
Credit Risk The risk that a counterparty will not settle an obligation for full value, either when due
or at any time thereafter. Credit risk includes pre-settlement risk (replacement cost
risk) and settlement risk (principal risk).
Demutualization Process of transition from “mutually-owned” association to a company “owned by
shareholders”. In other words, transformation of the legal structure from a mutual
form to a business corporation form and privatisation of the corporations so
constituted, is referred to as demutualization.
Fill or Kill An order that requires the immediate purchase or sale of a specified amount of stock,
(FoK) Order though not necessarily at one price. If the order cannot be filled immediately, it is
automatically cancelled (killed).
Interest Rate Risk The risk that movements in the interest rates may lead to a change in expected return.
Under the scheme, repo auctions (for absorption of liquidity) and reverse repo
Liquidity auctions (for injection of liquidity) will be conducted on a daily basis (except
Adjustment Saturdays). It will be same-day transactions, with interest rates decided on a cut-off
Facility (LAF) basis and derived from auctions on a uniform price basis.
Mark
to market Collected in cash for all futures contracts and adjusted against the available Liquid Net
margin (MTM) worth for option positions. In the case of Futures Contracts MTM may be considered
as Mark to Market Settlement.

Market Maker A member firm who give two way quotation for particular security (ies) and who is
under an obligation to buy and sell them subject to certain conditions such as overall
exposure, spread etc.
Netting: A system whereby outstanding financial contracts can be settled at a net figure, i.e.
receivables are offset against payables to reduce the credit exposure to a counterparty
and to minimize settlement risk.
Screen based trading Form of trading that uses modern telecommunication and computer technology to
combine information transmission with trading in financial markets.
Trading member A member of the derivatives exchange or derivatives segment of a stock exchange who
settles the trade in the clearing corporation or clearing house through a clearing
member.
450  Lesson 15 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Briefly explain about different types of National Level Financial Institutions.
2. What do you understand by private equity? Discuss about different categories of private equity.
3. What do you understand by Book Building? Explain the book building process.
4. Briefly explain about the impact of various monetary policies on Indian stock market.
5. Distinguish between:
(a) Primary and Secondary Market
(b) Repo rate and reverse repo rate
(c) Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
(d) Currency derivatives and Commodity derivatives
(e) Block Deal and Bulk Deal
(f) Debenture Trustee and Custodian of Securities
6. “Bonds are the debt security where an issuer is bound to pay a specific rate of interest.” Explain
7. “Calculation of Sensex is done by a Free-Float method.” Elucidate
8. Define Alternate Investment Fund. Explain in brief different categories of AIF
9. “Indian Stock Market is impacted by change in FED policy and FED rate”. Comment briefly
10. Mr. Zolan wants to invest in stock market. He requests your help in understanding basics of investing.
Explain in details the basics of investing and prerequisites for investing in stock market
11. Write brief notes on:
(a) Green Shoe Option
(b) Exchange Traded Funds
(c) Municipal Bonds
(d) Debenture Trustee
(e) Angel Fund
(f) US FED Policy
12. Explain in detail role of stock exchanges in India
13. Mr. Menon is a HNI, having busines interests across industries. He wanted to use the UPI technology for
investment in IPO of a Company famous for its ice-cream brand. What is the process
14. What are NIFTY sectoral indices. Explain any five such indices
15. Explain in brief the regulators in Indian Capital Markets.
16. How does market surveillance try to ensure market integrity in the securities market? Explain.
17. What are the key risk management measures initiated by SEBI in the secondary market? Describe.
18. How is Pension Fund different from Government Pension ? State the legislations governing pension in India.
Lesson 15 • Structure of Capital Market - Part II-Secondary Market 451

19. Akash Ltd. issued 50 Lakh equity shares at a price of Rs.200 per share. The company provided Green Shoe
Option for stabilizing the post listing price of the shares. The issue was oversubscribed and it was decided
that stabilizing agent would borrow maximum number of shares permitted by SEBI (ICDR) regulations.
Due to rise in price during Green Shoe Option period, only 5 Lakh shares could be bought back at the price
of Rs.180.

You are required to:

i. Calculate the number of shares that the stabilizing agent needs to borrow in this case at the time of
allotment and explain the same with relevant provisions.
ii. Explain the responsibility of Issuer Company in the above case with respect to shortfall while
exercising Green Shoe Option.
iii. Calculate the amount if any, to be transferred to Investor Protection and Education Fund.

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI Orders
• SEBI Manual
• Regulations/Rules/Guidelines/Circulars issued by SEBI, RBI, MCA etc. from time to time

OTHER REFERENCES (Including Websites/Video Links)

www.sebi.gov.in
www.mca.gov.in
www.icsi.edu
www.nseindia.com
www.bseindia.com
www. nsdl.co.in
www.cdslindia.com
452  Lesson 15 • EP-SLCM
Lesson 16 Securities Market Intermediaries
Key Concepts One Learning Objectives
Should Know
To understand:
• Intermediaries • Conceptual Understanding on Intermediaries
• Net Worth • The Process of Registration of Intermediaries
• Self Regulatory • Regulatory framework of the intermediaries operating in the
Organization Primary and the Secondary markets
• Underwriting • The role and responsibilities of various intermediaries
• Custodial • General Obligations of various intermediaries
Services • The Internal audit of various intermediaries.
• Financial
Planning
• Investment Lesson Outline
Advice
• Introduction
• Portfolio
• SEBI (Intermediaries) Regulations, 2008
• Registration of Intermediaries
• Regulatory Framework for Intermediaries
a. Merchant Bankers
b. Registrars and Share Transfer Agents
c. Bankers to an issue
d. Debenture Trustees
e. Stock-brokers
f. Portfolio managers
g. Custodians
h. Investment Advisers
i. Research Analysts
j. Credit Rating Agencies
k. Depository Participant
l. Foreign Portfolio Investor
• Case Laws
• Internal Audit of Intermediaries by Company Secretary in Practice
• Role of Company Secretary
• LESSON ROUNDUP
• GLOSSARY
• TEST YOURSELF
• LIST OF FURTHER READINGS
• OTHER REFERENCES
 454  Lesson 16 • EP-SLCM

Regulatory Framework
• SEBI (Intermediaries) Regulations, 2008
• SEBI (Merchant Bankers) Regulations, 1992
• SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
• SEBI (Bankers to an Issue) Regulations, 1994
• SEBI (Debenture Trustees) Regulations, 1993
• SEBI (Stock Brokers) Regulations, 1992
• SEBI (Portfolio Managers) Regulations, 2020
• SEBI (Custodian) Regulations, 1996
• SEBI (Investment Advisers) Regulations, 2013
• SEBI (Research Analysts) Regulations, 2014
• SEBI (Credit Rating Agencies) Regulations, 1999
• SEBI (Depositories and Participants) Regulations, 2018
• SEBI (Foreign Portfolio Investors) Regulations, 2019
• SEBI {KYC (Know Your Client) Registration Agency (KRA)}, Regulations, 2011
• Prevention of Money Laundering Act, 2002 and SEBI master circular on PMLA

INTRODUCTION
Intermediaries are service providers and are an integral part of any financial system. The Market Regulator, i.e.,
SEBI regulates various intermediaries in the primary and secondary markets through its regulations for these
respective intermediaries. SEBI has defined the role of each of the intermediary, the eligibility criteria for granting
registration, their functions and responsibilities and the code of conduct to which they are bound. These regulations
also empower SEBI to inspect the functioning of these intermediaries and to collect fees from them and to impose
penalties on erring entities.

As per Section 11 of SEBI Act, it is the duty of SEBI to register and regulate the working of stock brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated
with securities market in any manner.

The capital market intermediaries are vital link between investor, issuer and regulator.
 Lesson 16 • Securities Market Intermediaries 455

The objectives of these intermediaries are-

• To smoothen the process of investment;
• To establish a link between the investors and the users of funds;
• Corporations and Governments do not market their securities directly to the investors. Instead, they hire the
services of the market intermediaries to represent them to the investors;
• Investors, particularly small investors, find it difficult to make direct investment. A small investor desiring to
invest may be able to diversify across issuers to reduce risk. He may not be equipped to assess and monitor
the credit risk of issuers. Market intermediaries help investors to select investments by providing investment
consultancy, market analysis and credit rating of investment instruments;
• In order to operate in secondary market, the investors have to transact through share brokers. Registrars and
Share Transfer Agents, Custodians and Depositories Participants are capital market intermediaries that
provide important infrastructure services for both primary and secondary markets.

The following market intermediaries are involved in the Securities Market:

SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008

The SEBI introduced the SEBI Intermediaries Regulations in order to regulate the activities of intermediaries in the
financial markets such as registrars to an issue, participants, asset management companies, clearing member of a
clearing corporation or clearing house, foreign portfolio investors and trading members of a derivative segment or
currency derivatives segment of a stock exchange.
 456  Lesson 16 • EP-SLCM

In order to act as an intermediary, a person is required to apply to the SEBI for the grant of a certificate to act as an
intermediary, as per the SEBI Intermediaries Regulations. The SEBI grants a certificate in the form specified in the
relevant regulations on satisfaction of the eligibility of the applicant. A person may carry on the activities of one or
more intermediaries only if it obtains a separate certificate to carry on each such activity.
Intermediaries are required to provide the SEBI with a certificate on April 1 of each year certifying, inter alia,
compliance with obligations, responsibilities and fulfilment of eligibility criteria on a continuous basis. Further,
they are required to redress investor grievances within 45 days of receipt thereof or within the time specified by the
SEBI, when called upon by the SEBI.
An intermediary and its directors, officers, employees and key management personnel are required to abide by the
code of conduct specified in the SEBI Intermediaries Regulations, under which they are required to, inter alia,
ensure investor protection, promptly disburse dividends on behalf their clients, avoid conflict of interest and ensure
that good corporate policies and corporate governance policies are in place.
SEBI may appoint inspecting authorities to undertake inspection of the books of accounts, records and documents
of an intermediary for any purpose. In case of default, the SEBI may take actions including but not limited to,
suspension of certificate of registration for a specified period, cancellation of registration, warning the intermediary,
prohibit taking up any new assignment or contract or launch a new scheme for a specified period, and debarring a
branch or an office from carrying out activities for a specified period.

According to SEBI (Intermediaries) Regulations, 2008, “intermediary” means a person mentioned in clauses (b)
and (ba) of sub-section (2) of section 11 and sub-section (1) and (1A) of section 12 of the Act and includes an asset
management company in relation to the SEBI (Mutual Funds) Regulations, 1996, a clearing member of a clearing
corporation or clearing house, foreign portfolio investors and a trading member of a derivative segment or
currency derivatives segment of a stock exchange but does not include foreign venture capital investor, mutual
fund, collective investment scheme and venture capital fund.

REGISTRATION OF INTERMEDIARIES
• Application for Registration: An application, for grant of a certificate to act as an intermediary, has to be
made to the SEBI in Form A of Schedule I with such additional information as required to be provided under
the relevant regulations, and the application fee, as specified in the relevant regulations. The applicant seeking
registration to act as a stock broker or sub-broker or a trading member or a clearing member or a depository
participant has to make the application along with certain additional information through the stock exchange
or through the clearing corporation of which the applicant is a member or trading member or through the
depository in which the applicant proposes to act as a participant, as the case may be.
• Process of Application: The stock exchange, the clearing corporation, the depository or the specified self
regulatory organization, as the case may be, has to examine the eligibility of the applicant in terms of these
regulations, relevant regulations and the rules, regulations or bye-laws of the concerned stock exchange,
clearing corporation, depository or the self regulatory organization and forward the application with the
application fees to the SEBI along with its recommendation as early as possible but not later than 30 days of
receipt of the complete application with the specified application fees.
Note: An applicant or an intermediary as the case may be may carry on the activities of one or more
intermediaries only if it obtains a separate certificate to carry on each such activity.
• Additional Information: The SEBI may require the applicant to furnish further information or clarifications,
regarding matters relevant to the activity of such an intermediary or which may otherwise be considered
necessary by the SEBI , to consider and dispose of the application.
• Furnishing of additional information: The applicant has to furnish such information and clarification to
the satisfaction of the SEBI , within the time specified in this regard by the SEBI .
• Verification / Inspection: While considering the application, the information furnished by the applicant
and its eligibility, the SEBI may, if it so desires, verify the information by physical verification of documents,
office space, and inspect the availability of office space, infrastructure, and technological support which the
applicant is required to have.
 Lesson 16 • Securities Market Intermediaries 457

• Consideration of Application
For considering the eligibility of the applicant and grant of certificate to such applicant, the SEBI shall take
into account all matters which it deems relevant to the activities in the securities market, including but not
limited to the following –
s whether the applicant have in the past been refused certificate by the SEBI and if so, the ground for
such refusal;
s whether the applicant, its directors or partners, or trustees, as the case may be or its principal officer
is involved in any pending litigation connected with the securities market which has an adverse bearing
on the business of the applicant or on development or functioning of the securities markets;
s whether the applicant satisfies the eligibility criteria;
s whether the grant of a certificate to the applicant is in the interest of the investors ;
s whether the grant of a certificate to the applicant is in the interest of the development of the securities
market.
• Rejection of Application: Any application for grant of certificate:-
s which is not complete in all respects and does not conform to the requirements in Form A and the
requirements specified in the relevant regulation;
s which does not contain such additional information as required by the SEBI;
s which is incorrect, false or misleading in nature;
s where the applicant is not in compliance with the eligibility requirements as set out under these
regulations or the relevant regulations;
s where the applicant is not a fit and proper person;
s where the principal officer does not have the requisite qualification or experience as required under
the relevant regulations;
s can be rejected by the SEBI for reasons to be recorded by the SEBI in writing;
However, the applicant has to be given an opportunity in writing to make good the deficiencies within
the time specified by the SEBI, for the purpose.
Further, where an application is rejected for the reason that it contains false or misleading information,
no such opportunity may be given and the applicant cannot make any application for grant of certificate
under these regulations or any other regulations for a period of 1 year from the date of such rejection.
• Granting of Certificate: The SEBI on being satisfied that the applicant is eligible, shall grant a certificate in
the form specified in the relevant regulations and send an intimation to the applicant in this regard.
• Conditional Registration: Where a pending proceeding before the Board or any court or tribunal may result
in the suspension or cancellation of the certificate, the SEBI may give a conditional registration.
• Separate Certificate for other activity: When an intermediary, who has been granted a certificate and who
has filed Form A under these regulations, wishes to commence a new activity which requires a separate
certificate under the relevant regulations, it has to, while seeking such certificate, not be required to file Form
A, and has to furnish to the SEBI only such additional information as is required under the relevant regulations.
• Conditions of Certificate: Any certificate granted by the SEBI to an intermediary has to be subject to the
conditions that: -
s where the intermediary proposes to change its status or constitution, it has to obtain prior approval
of the SEBI for continuing to act as an intermediary after such change in status or constitution;
s it has to pay the applicable fees in accordance with the relevant regulations;
s it has to abide by the provisions of the securities laws and the directions, guidelines and circulars as
may be issued thereunder;
 458  Lesson 16 • EP-SLCM

s it has to continuously comply with the requirements of Regulation 4;

s it has to meet the eligibility criteria and other requirements specified in these regulations and the
relevant regulations.
The SEBI may impose other conditions as it may deem fit in the interest of investors or orderly development of
the securities market or for regulation of the working of the intermediary and the intermediary has to comply
with such conditions.
• Deemed Approval: A request for prior approval which is complete in all respects has to be disposed off by
the SEBI within a period of 60 days from the date of receipt of such request and where the decision of the
SEBI has not been communicated to the intermediary within the said period of 60 days, the prior approval
has to be deemed to have been granted.
• Effect of refusal to grant certificate or expiry of certificate: Where an intermediary has failed to make an
application or where an existing intermediary has been refused grant of certificate under these regulations,
the intermediary has to:
s forthwith cease to act as such intermediary;
s transfer its activities to another intermediary which has been granted a certificate for carrying on such
activity and allow its clients or investors to withdraw or transfer their securities or funds held in its
custody without any additional cost to such client or investor;
s make provisions as regards liability incurred or assumed by the intermediary;
s take such other action, within the time period and in the manner, as may be required under the relevant
regulations or as may be directed by the SEBI.
• Period of validity of certificate
The certificate granted to an intermediary has to be permanent unless surrendered by the intermediary or
suspended or cancelled in accordance with these regulations.

GENERAL OBLIGATIONS OF INTERMEDIARIES

(1) An intermediary shall provide the SEBI with a certificate of its compliance officer on the 1st April of each year
certifying:
(a) the compliance by the intermediary with all the obligations, responsibilities and the fulfillment of the
eligibility criteria on a continuous basis under these regulations and the relevant regulations;
(b) that all disclosures made in Form A and under the relevant regulations are true and complete.

(2) Each intermediary shall prominently display a photocopy of the certificate at all its offices including branch
offices.
(3) The intermediary shall also prominently display the name and contact details of the compliance officer to
whom complaint may be made in the event of any investor grievance.
(4) The intermediary shall maintain such books, accounts and records as specified in the relevant regulations.

Redressal of investor grievances

The intermediary shall make endeavours to redress investor grievances promptly but not later than 45 days of
receipt thereof and when called upon by the SEBI to do so it shall redress the grievances of investors within the
time specified by the SEBI .
The intermediary shall maintain records regarding investor grievances received by it and redressal of such
grievances.
The intermediary shall at the end of each quarter of a Financial Year ending on 31st March upload information
about the number of investor grievances received, redressed and those remaining unresolved beyond three months
of the receipt thereof by the intermediary on the website specified by the SEBI .
 Lesson 16 • Securities Market Intermediaries 459

Appointment of compliance officer

An intermediary shall appoint a compliance officer for monitoring the compliance by it of the requirements of the
Act, rules, regulations, notifications, guidelines, circulars and orders made or issued by the SEBI or the Central
Government, or the rules, regulations and byelaws of the concerned stock exchanges, or the self regulatory
organization, where applicable.
However the intermediary may not appoint compliance officer if it is not carrying on the activity of the intermediary.
The compliance officer shall report to the intermediary or its board of directors, in writing, of any material non-
compliance by the intermediary.

Investment advice
An intermediary, its directors, officers, employees or key management personnel shall not render, directly or
indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-
time, unless a disclosure of its interest, direct or indirect, including its long or short position in the said security has
been made, while rendering such advice.
If an intermediary’s directors, officers, employees or key management personnel are rendering such advice, the
intermediary shall ensure that while rendering such advice he discloses his interest, the interest of his dependent
family members and that of the employer including employer’s long or short position in the said security.
An intermediary shall not make a recommendation to any client or investor who may be expected to rely thereon to
acquire, dispose of or retain any securities unless he has reasonable grounds to believe that the recommendation is
suitable.

Code of conduct
An intermediary and its directors, officers, employees and key management personnel shall continuously abide by
the code of conduct specified in Schedule III.

REGULATORY FRAMEWORK FOR INTERMEDIARIES

SEBI has issued regulations in respect of each intermediary to ensure proper services to be rendered by
them to the investors and the capital market.

Sl Intermediary SEBI Net worth

Definition Role and Responsibilities
No. Name Regulation Requirement
1. Merchant ‘Merchant It is necessary for an issuer to SEBI Not less than
Banker Banker’ means appoint a merchant banker for : (Merchant Rs. 5 crore
any person Bankers)
(a) Managing of public issue of
engaged in the Regulations,
securities;
business of issue 1992
management (b) Underwriting connected with
either by making the aforesaid public issue
arrangements management business;
regarding selling (c) Managing/Advising on
buying or international offerings of debt/
subscribing to equity i.e. GDR, ADR, bonds
securities or acting and other instruments;
as manager/ (d) Private placement of securities;
consultant/advisor (e) Primary or satellite dealership of
or rendering government securities;
corporate advisory (f) Corporate advisory services
services in related to securities market
relation to such including takeovers, acquisition
issue management. and disinvestment;
460  Lesson 16 • EP-SLCM

(g) Stock broking;

(h) Advisory services for
projects;
(i) Syndication of rupee term
loans;
(j) International financial
advisory services.
GENERAL OBLIGATIONS • Every merchant banker shall abide by the Code of Conduct.
AND RESPONSIBILITIES • No merchant banker, shall carry on any business other
than that in the securities market.
• Every merchant banker shall keep and maintain the books of
account, records and documents.
• Every merchant banker shall furnish to the SEBI half-
yearly unaudited financial results.
• The merchant banker shall preserve the books of account
and other records and documents for a minimum period of five
years.
• Every merchant banker acting as an underwriter shall
enter into an agreement with each body corporate on
whose behalf it is acting as an underwriter.
• Every merchant banker shall appoint a compliance officer
who shall be responsible for monitoring the compliance of
the Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by the SEBI or the Central
Government and for redressal of investors’ grievances.
grievances.

2. Registrars ‘‘Registrar to an Issue’ Pre-issue Activities SEBI For category

and Share means the person appointed • Sending instructions to (Registrars I is Rs.
Transfer by a body corporate or any Banks for reporting of to an Issue 50,00,000
Agents person or group of persons to collection figures and and Share and category
carry on the following collection of applications. Transfer II is Rs.
activities on its or his or their Agents) 25,00,000.
• Providing Practical inputs
behalf : Regulations,
to the Lead Manager and
(i) collecting application for Printers regarding the 1993
investor in respect of an design of the Bid cum-
issue; Application form.
(ii) keeping a proper record • Facilitate and establish
of applications and information flow system
monies received from between clients , Banks and
investors or paid to the Managers to the issue.
seller of the securities; and • Liaisoning with Regulatory
(iii)assisting body corporate Authorities such as SEBI &
or person or group of Stock Exchanges.
persons in –
(a) determining the basis
of allotment of the
securities in
consultation with the
stock exchange
Lesson 16 • Securities Market Intermediaries 461

(b) finalising the list of Activities during the Issue

person entitled to • Collection and Reporting of
allotment of securities daily Collection figures.
(c) processing and • Collection of Data and
dispatching of Forms from Banks.
allotment letters,
refund orders or • Liaisoning with
certificates and other clients and Intermediaries
related documents in to the Issue.
respect of the issue Post Issue Activities
‘Share Transfer Agent’ • Data capturing & validation
means: • Reconciliation
(i) any person who on • Provide Allotment
behalf of any body Alternatives in consultation
corporate, maintains the with Client / Merchant
records of holders of Banker and Stock Exchanges
securities issued by such • Facilitating Listing
body corporate and deals • Uploading of data to the
with all matters connected Depositories for crediting
with the transfer and of securities electronically
redemption of its
• Dispatch of Refund orders
securities;
/ Share Certificates / Credit
(ii) the department or Advise
division, by whatever
• Periodic Report submission to
name called, of a body
Regulatory Authorities
corporate performing the
activities as share transfer • Reconciliation of
agents if at any time the Refund payments
total number of holders of • Attending to post issue
its securities issued Investor queries
exceed one lakh. • Web-based investor
enquiry system for
allotment / refund details
GENERAL OBLIGATIONS • Every registrar to an issue and share transfer agent holding
AND RESPONSIBILITIES a certificate shall at all times abide by the Code of Conduct.
• Registrar to an issue shall not to act as such registrar for
any issue of securities in case he or it is an associate of the
body corporate issuing the securities.
• Every registrar to an issue and share transfer agent
being a body corporate shall keep and maintain proper
books of accounts and records.
• The registrar to an issue or share transfer agent shall
preserve the books of accounts and other records and
documents maintained for a minimum period of eight
years.
• Every registrar to an issue and share transfer agent shall
appoint a compliance officer who shall be responsible for
monitoring the compliance of the Act, rules and regulations,
notifications, guidelines, instructions etc. issued by the
SEBI or the Central Government and for redressal of
investors’ grievances.
 462  Lesson 16 • EP-SLCM

3. Bankers to 'Banker to an Issue' means a Bankers to the issue, as the SEBI --

an issue scheduled bank or such other name suggests, carries out all (Bankers to
banking company as may be the activities of ensuring that an Issue)
specified by the SEBI from the funds are collected and Regulations,
time to time, carrying on all transferred to the Escrow 1994
or any of the following accounts. While one or more
activities: banks may function as Bankers
to the Issue as well as
(i) Acceptance of application collection banks, others may
and application monies; do the limited work of
(ii) Acceptance of allotment collecting the applications for
or call monies; securities along with the
remittance in their numerous
(iii) Refund of application branches in different centres.
monies; The banks are expected to
(iv) Payment of dividend or furnish prompt information
interest warrants. and records to the company
and to the lead manager for
monitoring and progressing
the issue work.
GENERAL OBLIGATIONS • Every banker to an issue shall maintain books of account,
AND RESPONSIBILITIES records and the documents.
• Every banker to an issue shall furnish the information to
the SEBI when required.
• Every banker to an issue shall enter into an agreement
with the body corporate for whom it is acting as banker to
an issue.
• Every banker to an issue shall inform the SEBI forthwith
if any disciplinary action is taken by the Reserve Bank
against the banker to an issue only in relation to issue
payment work.
• Every banker to an issue shall abide by the code of conduct.
• Every banker to an issue shall appoint a compliance officer
who shall be responsible for monitoring the compliance of
the Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by the SEBI or the Central
Government and for redressal of investors’ grievances.

4. Debenture “Debenture Trustee” means Duties of the debenture SEBI Not less than
Trustees a trustee appointed in respect trustees are: - (Debenture Rs. 10 crore
of any issue of debentures of • satisfy itself that the Trustees)
a body corporate. prospectus or letter of offer Regulations,
does not contain any matter 1993
which is inconsistent with
the terms of the issue of
debentures or with the
trust deed.
• satisfy itself that the
covenants in the trust deed
are not prejudicial to the
interest of the debenture
holders.
Lesson 16 • Securities Market Intermediaries 463

• call for periodical status/

performance reports from
the issuer company within 7
days of the relevant board
meeting or within 45 days
of the respective quarter
whichever is earlier.
• communicate promptly to
the debenture holders
defaults, if any, with regard
to payment of interest or
redemption of debentures
and action taken by the
trustee therefor.
• ensure that the company
does not commit any breach
of the terms of issue of
debentures or covenants of
the trust deed and take such
reasonable steps as may be
necessary to remedy any
such breach.
• inform the debenture
holders immediately of any
breach of the terms of issue
of debentures or covenants
of the trust deed.
• ensure the implementation
of the conditions regarding
creation of security for the
debentures.
• ensure that the assets of the
company issuing
debentures and of the
guarantors, if any, are
sufficient to discharge the
interest and principal
amount at all times and that
such assets are free from
any other encumbrances
except those which are
specifically agreed to by the
debenture holders.
• call for reports on the
utilization of funds raised
by the issue of debentures.
• do such acts as are necessary
in the event the security
becomes enforceable.
464  Lesson 16 • EP-SLCM

• call for reports on the

utilization of funds raised
by the issue of debentures.
• take steps to convene a
meeting of the holders of
debentures as and when
such meeting is required to
be held.
• ensure that the debentures
have been converted or
redeemed in accordance
with the terms of the issue
of debentures.
• perform such acts as are
necessary for the protection
of the interest of the
debenture holders and do
all other acts as are
necessary in order to
resolve the grievances of the
debenture holders.
• take possession of trust
property in accordance with
the provisions of the trust
deed.
• to take appropriate
measures for protecting the
interest of the debenture
holders as soon as any
breach of the trust deed or
law comes to his notice.
• inform the SEBI immediately
of any breach of trust deed
or provision of any law,
which comes to the
knowledge of the trustee.
• exercise due diligence to
ensure compliance by the
body corporate, with the
provisions of the Companies
Act, Securities and Exchange
Board of India (Listing
Obligations and Disclosure
Requirement), Regulations,
2015, the listing agreement
of the stock exchange or the
trust deed or any other
regulations issued by the
SEBI pertaining to debt
issue.
Lesson 16 • Securities Market Intermediaries 465

5. Stock- "Stock Broker" means a A stock broker plays a very SEBI (Stock As specified
brokers person having trading rights important role in the secondary Brokers) in Schedule
in any recognised stock market helping both the seller Regulations, VI of these
exchange and includes a and the buyer of the securities 1992 Regulations.
trading member. to enter into a transaction. The
buyer and seller may be either a
broker or a client. When
executing an order, the stock
broker may on behalf of his
client buy or sell securities from
his own account i.e. as principal
or act as an agent. For each
transaction he has to issue
necessary contract note
indicating whether the
transaction has been entered
into by him as a principal or as
an agent for another. While
buying or selling securities as a
principal, the stock broker has
to obtain the consent of his
client and the prices charged
should be fair and justify by the
conditions of the market. Stock
broker may also act as an
underwriter.
GENERAL OBLIGATIONS • Every Stock Broker shall keep and maintain the proper books
AND RESPONSIBILITIES of account, records and documents.
• Every stock broker shall preserve the books of account and
other records maintained for a minimum period of five years.
• Every stock broker shall appoint a compliance officer who
shall be responsible for monitoring the compliance of the Act,
rules and regulations, notifications, guidelines, instructions,
etc., issued by the SEBI or the Central Government and for
redressal of investors’ grievances.

6. Portfolio "Portfolio manager” means A portfolio manager plays a SEBI Not less than
managers a body corporate, which pivotal role in deciding the best (Portfolio Rs. 5 crores.
pursuant to a contract with a investment plan for an Managers)
individual as per his income,
client, advises or directs or Regulations,
age as well as ability to
undertakes on behalf of the undertake risks. A portfolio 2020
client (whether as a manager is responsible for
discretionary portfolio making an individual aware of
manager or otherwise) the the various investment tools
management or available in the market and
benefits associated with each
administration of a portfolio
plan. Make an individual realize
of securities or goods or why he actually needs to invest
funds of the client, as the case and which plan would be the
may be: best for him. A portfolio
manager is responsible for
designing customized
investment solutions for the
clients according to their
financial needs.
466  Lesson 16 • EP-SLCM

Provided that the Portfolio

Manager may deal in goods
received in delivery against
physical settlement of
commodity derivatives.
“Discretionary portfolio
manager” means a portfolio
manager who under a
contract relating to portfolio
management, exercises or
may exercise, any degree of
discretion as to the
investment of funds or
management of the portfolio
of securities of the client, as
the case may be.
GENERAL OBLIGATIONS • Every portfolio manager shall abide by the Code of
AND RESPONSIBILITIES Conduct as specified Schedule III of SEBI (Portfolio
Managers) Regulations, 2020.
• The portfolio manager shall, before taking up an
assignment of management of funds and portfolio on
behalf of a client, enter into an agreement in writing with
such client that clearly defines the inter se relationship
and sets out their mutual rights, liabilities and obligations
relating to management of portfolio containing the details
as specified in Schedule IV.
• The discretionary portfolio manager shall individually and
independently manage the funds of each client in
accordance with the needs of the client, in a manner which
does not partake character of a Mutual Fund, whereas the
non-discretionary portfolio manager shall manage the
funds in accordance with the directions of the client.
• The portfolio manager shall not accept from the client,
funds or securities worth less than fifty lakh rupees.
However the minimum investment amount per client shall
be applicable for new clients and fresh investments by
existing clients
• The portfolio manager shall act in a fiduciary capacity with
regard to the client's funds.
• The portfolio manager shall segregate each client’s holding
in securities in separate accounts.
• The portfolio manager shall keep the funds of all clients in
a separate account to be maintained by it in a Scheduled
Commercial Bank.
• The portfolio manager shall transact in securities within
the limitation placed by the client himself with regard to
dealing in securities under the provisions of the Reserve
Bank of India Act, 1934.
• The portfolio manager shall not derive any direct or
indirect benefit out of the client's funds or securities.
• The portfolio manager shall not borrow funds or securities
on behalf of the client.
Lesson 16 • Securities Market Intermediaries 467

• The portfolio manager shall not lend securities held on

behalf of the clients to a third person except as provided
under these regulations.
• The portfolio manager shall ensure proper and timely
handling of complaints from his clients and take
appropriate action immediately.
• The portfolio manager shall ensure that any person or
entity involved in the distribution of its services is carrying
out the distribution activities in compliance with these
regulations and circulars issued thereunder from time to
time.
• Every portfolio manager shall keep and maintain the
books of accounts, records and documents as prescribed.
• Every portfolio manager shall furnish to the SEBI a net
worth certificate issued by a chartered accountant as and
when required by the SEBI.
• The portfolio manager shall preserve the books of account
and other records and documents mentioned under this
chapter for a minimum period of five years.
• Every portfolio manager shall appoint a compliance officer
who shall be responsible for monitoring the compliance of
the Act, rules and regulations, notifications, guidelines,
instructions etc., issued by the Board or the Central
Government and for redressal of investors' grievances.

7. Custodians "Custodian" is a person who The custodian- SEBI Minimum of

carries on or propose to carry • Administrate and protect (Custodian) Rs. 50 crores.
on the business of providing the assets of the clients.
Regulations,
custodial services to the client. • Open a separate custody
account and deposit 1996
The custodian keeps the account in the name of each
custody of the securities of client.
the client. The custodian also • Record assets.
provides incidental services • Conduct registration of
such as maintaining t h e securities.
accounts of securities of the
client, collecting the benefits
or rights accruing to the client
in respect of securities.
GENERAL OBLIGATIONS • Every custodian shall abide by the Code of Conduct.
AND RESPONSIBILITIES • Where a custodian is carrying on any activity besides that
of acting as custodian then the activities relating to his
business as custodian shall be separate and segregated
from all other activities.
• Every custodian shall have adequate mechanisms for the
purposes of reviewing, monitoring, evaluating and
inspection the custodian’s controls, systems, procedures
and safeguards.
• No custodian shall assign or delegate its functions as a
custodian to any other person unless such person is a
custodian.
• Every custodian shall open a separate custody account for
each client, in the name of the client whose securities are
in its custody and the assets of one client shall not be
mixed with those of another client.
468  Lesson 16 • EP-SLCM

• Every custodian shall enter into an agreement with each

client on whose behalf it is acting as custodian.
• Every custodian shall have adequate internal controls to
prevent any manipulation of records and documents
including audits for securities, goods and rights or
entitlements arising from the securities and goods held
by it on behalf of its client.
• Every custodian shall maintain the records and
documents.
• Every custodian shall appoint a compliance officer who
shall be responsible for monitoring the compliance of the
Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by the SEBI or the Central
Government and for redressal of investors’ grievances.
• Where any information is called for by the SEBI, it
shall be the duly of the custodian to furnish such
information within such reasonable period as the SEBI
may specify.
8. Investment “Investment Adviser” means Investment advisers are SEBI Investment
Advisers any person, who for those, who provide (Investment advisers who
consideration, is engaged in investment advice. Advisers) are non-
the business of providing “Investment advice” means
Regulations, individuals
investment advice to clients advice relating to investing in, shall have a
purchasing, selling or 2013
or other persons or group of net worth of
otherwise dealing in
persons and includes any not less than
securities or investment
person who holds out himself products, and advice on Rs. 50 lakh
as an investment adviser, by investment portfolio containing
whatever name called. Investment
securities or investment
products, whether written, oral advisers who
or through any other means of are
communication for the benefit of individuals
the client and shall include shall have net
financial planning. tangible
assets of
However, investment advice
given through newspaper, value not less
magazines, any electronic or than Rs. 5
broadcasting or lakh
telecommunications medium,
which is widely available to the
public shall not be considered
as investment advice for the
purpose of these regulations.

GENERAL OBLIGATIONS • An investment adviser shall act in a fiduciary capacity

AND RESPONSIBILITIES towards its clients and shall disclose all conflicts of
interests as and when they arise.
• An investment adviser shall not receive any
consideration by way of remuneration or compensation
or in any other form from any person other than the
client being advised, in respect of the underlying products
or securities for which advice is provided.
• An investment adviser shall maintain an arms-length
relationship between its activities as an investment
adviser and other activities.
Lesson 16 • Securities Market Intermediaries 469

• An investment adviser which is also engaged in activities

other than investment advisory services shall ensure that
its investment advisory services are clearly segregated
from all its other activities, in the manner as prescribed
hereunder.
• An investment adviser shall ensure that in case of any
conflict of interest of the investment advisory activities
with other activities, such conflict of interest shall be
disclosed to the client.
• An investment adviser shall not divulge any confidential
information about its client, which has come to its
knowledge, without taking prior permission of its clients,
except where such disclosures are required to be made in
compliance with any law for the time being in force.
• An investment advisor shall not enter into transactions on
its own account which is contrary to its advice given to
clients for a period of fifteen days from the day of such
advice.
• An investment advisor shall follow Know Your Client
procedure as specified by the SEBI from time to time.
• An investment adviser shall abide by Code of Conduct.
• An investment adviser shall not act on its own account,
knowingly to sell securities or investment products to or
purchase securities or investment product from a client.
• In case of change in control of the investment adviser, prior
approval from the SEBI shall be taken.
• Investment advisers shall furnish to the SEBI information
and reports as may be specified by the SEBI from time to
time.
• It shall be the responsibility of the investment adviser to
ensure compliance with the certification and qualification
requirements.
9. Research “Research analyst” means a Research analyst study SEBI • Body
Analysts person who is primarily Companies and industries, (Research corporate
responsible for,- analyse raw data, and make Analysts) or limited
i. preparation or publication forecasts or recommendations Regulations, liability
of the content of the about whether to buy, hold or 2014 partnership
research report; or sell securities. They analyse firm – not
ii. providing research report; information to provide less than Rs.
or recommendations about 25 Lakh.
investments in securities to • Individual
iii. making ‘buy/sell/hold’
their clients. Investors often or
recommendation; or
view analysts as experts and partnership
iv. giving price target; or important sources of firm shall
v. offering an opinion information about the have net
concerning public offer, securities they review and tangible
with respect to securities that often rely on their advice. assets of
are listed or to be listed in a There are basically three broad value not
stock exchange, whether or not types of analysts, viz. sell-side less than Rs.
any such person has the job analysts, buy-side analysts and 1 Lakh.
title of ‘research analyst’ and independent analysts.
includes any other entities
engaged in issuance of research
report or research analysis.
470  Lesson 16 • EP-SLCM

GENERAL • Research analyst or research entity shall maintain an

RESPONSIBILITIES arms-length relationship between its research activity
and other activities.
• Research analyst or research entity shall abide by Code of
Conduct.
• In case of change in control of the research analyst or
research entity, prior approval from the SEBI shall be
taken.
• Research analyst or research entity shall furnish to the
SEBI information and reports as may be specified by the
SEBI from time to time.
• It shall be the responsibility of the research analyst or
research entity to ensure that its employees or partners,
as may be applicable, comply with the certification and
qualification requirements at all times.
• Research analyst or research entity shall maintain the
records.
• All records shall be maintained either in physical or
electronic form and preserved for a minimum period of
five years.
• Research analyst or research entity shall conduct annual
audit in respect of compliance with these regulations
from a member of Institute of Chartered Accountants of
India or Institute of Company Secretaries of India.
• Research analyst or research entity which is a body
corporate or limited liability partnership firm shall
appoint a compliance officer who shall be responsible for
monitoring the compliance of the provisions of the Act,
these regulations and circulars issued by the SEBI.
10. Credit “Credit rating agency” Credit rating is extremely SEBI (Credit Minimum
Rating means a body corporate important as it not only plays a Rating Rs. 25 crores
Agencies which is engaged in, or role in investor protection but Agencies)
proposes to be engaged in, also benefits industry as a Regulations,
the business of rating of whole in terms of direct 1999
securities that are listed or mobilization of savings from
proposed to be listed on a individuals. Rating also provide
stock exchange recognized by a marketing tool to the
the SEBI. company and its investment
bankers in placing company’s
debt obligations with a
investor base that is aware of,
and comfortable with, the level
of risk. Ratings also encourage
discipline amongst corporate
borrowers to improve their
financial structure and
operating risks to obtain a
better rating for their debt
obligations and thereby lower
the cost of borrowing.
Lesson 16 • Securities Market Intermediaries 471

GENERAL OBLIGATIONS • Every credit rating agency shall abide by the Code of
Conduct.
• Every credit rating agency shall enter into a written
agreement with each client whose securities it proposes
to rate.
• Every credit rating agency shall, during the lifetime of
securities rated by it continuously monitor the rating of
such securities.
• Every credit rating agency shall disseminate information
regarding newly assigned ratings, and changes in earlier
rating promptly through press releases and websites, and,
in the case of securities issued by listed companies, such
information shall also be provided simultaneously to the
concerned regional stock exchange and to all the stock
exchanges where the said securities are listed.
• Every credit rating agency shall disclose Rating
Definitions and Rationale.
• Where any information is called for by the SEBI from a
credit rating agency for the purposes of these regulations,
including any report relating to its activities, the credit
rating agency shall furnish such information to the SEBI.
• Every credit rating agency shall comply with such
guidelines, directives, circulars and instructions as may
be issued by the SEBI from time to time.
• Every credit rating agency shall appoint a compliance
officer who shall be responsible for monitoring the
compliance of the Act, rules and regulations, notifications,
guidelines, instructions etc. issued by the SEBI or the
Central Government.
• Every credit rating agency shall keep and maintain books of
accounts, records and documents for a minimum period of five
years.

11. Depository A DP is an agent of the Depository Participant (DP) is SEBI Depository

Participant depository through which it described as an Agent (law) of (Deposit- participant–
(DP) interfaces with the investor the depository. They are the ories and As specified
and provides depository intermediaries between the Participants) in Regulation
services. depository and the investors. Regulations, 35 to these
2018 Regulations.
They execute pledge requests
and off market transfers and on
market transfer request of the
investors who hold shares in
demat form.
Further transmission requests
of investors shall also be
handled. Demat/Remat
requests also handled in
consultation with RTI/ STAs.
472  Lesson 16 • EP-SLCM

12. Foreign “Foreign Portfolio Investor” SEBI –

Portfolio means a person who has been (a) A foreign portfolio investor (Foreign
Investor registered under Chapter II of shall, at all times, abide by Portfolio
Securities and Exchange the code of conduct: Investors)
Board of India (Foreign (b) comply with the provisions Regulation,
Portfolio Investors) of these regulations, as far 2019
Regulations, 2019 and shall as they may apply, circulars
be deemed to be an issued thereunder and any
intermediary in terms of the other terms and conditions
provisions of the SEBI Act, specified by the SEBI from
1992. time to time;
(c) forthwith inform the SEBI
and designated depository
participant in writing, if any
information or particulars
previously submitted to
the SEBI or designated
depository participant
are found to be false or
misleading, in any material
respect;
(d) forthwith inform the SEBI
and designated depository
participant in writing, if
there is any material
change in the information
including any direct or
indirect change in its
structure or ownership or
control, previously
furnished by him to the
SEBI or designated
depository participant;
(e) as and when required by
the SEBI or any other
Government agency in
India, submit any
information, record or
documents in relation to its
activities as a foreign
portfolio investor;
(f) forthwith inform the SEBI
and the designated
depository participant, in
case of any penalty, pending
litigation or proceedings,
findings of inspections or
investigations for
Lesson 16 • Securities Market Intermediaries 473

which action may have

been taken or is in the
process of being taken by
an overseas regulator
against it;
(g) obtain a Permanent
Account Number from the
Income Tax Department;
(h) in relation to its activities
as foreign portfolio investor,
at all times, subject itself to
the extant Indian laws,
rules, regulations,
guidelines and circulars
issued from time to time;
(i) be a fit and proper person
based on the criteria
specified in Schedule II of
the Securities and Exchange
Board of India
(Intermediaries)
Regulations, 2008;
(j) undertake necessary KYC
on its shareholders/
investors in accordance
with the rules applicable to
it in the jurisdiction where
it is organised;
provide any additional
information or documents
including beneficiary
ownership details of their
clients as may be required
by the designated
depository participant or
the SEBI or any other
enforcement agency to
ensure compliance with
the Prevention of Money
Laundering Act, 2002 and
the rules and regulations
specified thereunder, the
Financial Action Task Force
standards and circulars
issued from time to time by
the SEBI; and
(k) ensure that securities held
by foreign portfolio
investors are free from all
encumbrances.
474  Lesson 16 • EP-SLCM

CASE LAWS
1 01.07.2020 Mr. Vishal Vijay Shah (Noticee) in the Whole Time Member,
Maharashtra Polybutenes Limited vs. SEBI Securities and Exchange Board
of India
Facts of the Case:
In the facts of the instant proceedings, it is observed that the Vishal Vijay Shah (“Noticee”), a registered Stock
Broker had received funds in the client and settlement bank accounts from third parties in cash and had made
payments to third parties on behalf of clients. It is further observed that the Noticee had also made withdrawal
of cash from the client bank accounts. Under the SEBI Circulars, a responsibility has been cast on the Stock
Broker to ensure that payments are received directly from the respective clients and not from third parties.
Accordingly, the Noticee should have taken expedient steps to ensure that funds received from third parties are
exceptionally dealt with and suitable explanations should have been asked from the client when such blatant
third party monetary amounts were received. However, there is nothing on record to suggest that such steps
were indeed taken.
Further, the Noticee in its submissions has itself admitted to having carried out such irregular practices. The
aforementioned conduct of the Noticee clearly demonstrates that it failed to maintain fairness in the conduct of
its business, exercise due skill and care and comply with the statutory requirements. Thus, in addition to the
violation of the SEBI Circulars the Noticee has also violated the provisions of Clauses A(1), (2) & (5) of the Code
of Conduct as specified under Schedule II read with Regulation 9(f) of the Stock Brokers Regulations.
The BSE had earlier conducted inspection of the Noticee and upon a consideration of the BSE Inspection Reports
in light of the Inspection Report, it is observed that the violations committed by the Noticee in the instant
proceedings are repetitive in nature. Further, it is a well settled position of law that SEBI may initiate multiple
proceedings for the same set of violations.
Order:
The Noticee had violated the aforementioned provisions of the Stock Brokers Regulations and aforementioned
SEBI Circulars. Having regard to the facts and circumstances of the instant proceedings, SEBI accepted the
recommendation of the Designated Authority that the Certificate of Registration of the Noticee be suspended
for a period of one year.

2 05.06.2020 Narendra Singh Tanwar, Proprietor of M/s Capital True Whole Time Member, Securities
Financial Services (Noticee) vs. SEBI Exchange Board of India
Facts of the Case:
SEBI had received a complaint against Mr. Narendra Singh Tanwar, Proprietor of M/s Capital True Financial
Services (hereinafter referred to as “Noticee”), a registered Investment
Adviser (hereinafter referred to as “IA”) inter alia alleging that a promise was made on behalf of the Noticee to
the complainant assuring him a huge return of Rs. 28.80 lakh on a meagre investment of Rs. 20,000/- over a
short period of 4 months and 10 days. Pursuant to such an assurance, an amount of Rs. 1,30,000/- was transferred
by the complainant to the Noticee towards first instalment of the service fee, out of total service fee of Rs.
4,47,200/- demanded by the Noticee in instalments. However, after suffering loss on the very first day of availing
the services of the Noticee, the complainant asked the Noticee to return the amount paid to him. As the Noticee
refused to refund the money so taken by it as service fee and also stopped attending the phone calls of the
complainant, a compliant was lodged with SEBI. The said complaint was forwarded to the Noticee for resolution
and to submit an Action Taken Report (ATR) in the SEBI Complaints Redress System (SCORES).
Order:
In view of the foregoing findings and in the interest of investors and for the protection of their rights, SEBI issue
following directions:
Lesson 16 • Securities Market Intermediaries 475

i. The Certificate of Registration as Investment Adviser bearing Registration number INA000009038 issued
in favour of the Noticee was cancelled.
ii. The Noticee shall forthwith cease and desist from acting as an Investment Adviser.
iii. The Noticee shall not use the term ‘Investment Adviser’ directly or indirectly in any manner whatsoever
on the letter-head, on the website, signage board, or otherwise.
iv. The Noticee was debarred from accessing the securities market and is further prohibited from buying,
selling or otherwise dealing in securities, directly or indirectly, or being associated with securities market
in any manner, for a period of 2 years and during the period of restraint, the existing holding of securities
including the holding of units of mutual funds of the Noticees shall remain frozen.

3 29.05.2020 Arihant Capital Markets Ltd. (Noticee) vs. SEBI Adjudicating Officer, Securities
Exchange Board of India
Facts of the case:
SEBI conducted investigation into trading activities of certain entities in the scrip of Moryo Industries Ltd. for
the period of January 15, 2013 to August 31, 2014. Based on the findings of the investigation, SEBI initiated
adjudication proceedings against Arihant Capital Markets Ltd.(hereinafter be referred to as, the “Noticee”)
under Section 15HB of the Securities and Exchange Board of India Act, 1992 , for the alleged violation of
Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7
(as existed at the relevant time) of the Securities and Exchange Board of India (Stock Broker and Sub Brokers)
Regulations, 1992.
Order:
In view of the above, after considering all the facts and circumstances of the case and exercising the powers
conferred upon SEBI under Section 15-I (2) of the SEBI Act, 1992 read with Rule 5 of the Adjudication Rules,
SEBI imposed monetary penalty of Rs.5,00,000/-(Rupees Five Lakhs only) on the Noticee.
4. 31.03.2020 Jaypee Capital Services Ltd (Noticee) vs. SEBI Whole Time Member, Securities
and Exchange Board of India
Facts of the case
Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate of Registration as
a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee) in accordance with provisions of
SEBI (Depositories and Participants) Regulations, 1996 (DP Regulations) initially for a period of five years which
was valid from August 11, 2006 to August 10, 2011. The certificate of registration was, thereafter, renewed in
2011 for a further period of five years and the renewed certificate was valid till August 10, 2016.
SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited (hereinafter
referred to as ‘CDSL’) informing that it has terminated the agreement with the Noticee w.e.f April 04, 2016 due
to non- compliance on the part of JCSL with the bye-laws of CDSL. CDSL vide the said letter also requested SEBI
to cancel the certificate of registration granted to the Noticee at act as a Depository Participant with immediate
effect. Thereafter, National Securities Depositories Limited (hereinafter referred to as “NSDL”) vide its letter
dated April 22, 2016 informed SEBI that it has also terminated the agreement with JCSL w.e.f May 23, 2016 due
to the non-compliance on part of JCSL with the various bye-laws of NSDL.
Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was alleged that the
Noticee was no longer eligible to be admitted as a participant of depository and had failed to inform SEBI about
the termination of its agreements with CDSL and NSDL.
Order
The failure on the part of the Noticee to inform SEBI of the termination of the agreement by the depositories
would therefore have to be considered as a violation of Clause 14 of the Code of Conduct for the DPs as given
under third schedule read with Regulation 20AA of the DP Regulations.
 476  Lesson 16 • EP-SLCM

Whole Time Member, in exercise of powers conferred under Section 19 of the Securities and Exchange Board of
India Act, 1992 read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby cancel the
certificate of registration granted to the Noticee / Jaypee Capital Services Limited (SEBI Registration No. IN-DP-
NSDL-291-2008/IN-DP-CDSL-368- 2006) with immediate effect.

“self regulatory organization” means an organization of a class of intermediaries duly recognised

by or registered with the SEBI and includes a stock exchange.

INTERNAL AUDIT OF INTERMEDIARIES BY COMPANY SECRETARY IN PRACTICE

Efficient internal control systems and processes are pre-requisite for good governance. The governance being a
dynamic concept requires constant evaluation and monitoring of the systems and processes. In the context of
Capital Markets, capital markets intermediaries are an important constituent of overall governance framework.
Being an important link between regulators, investors and issuers, they are expected to ensure that their internal
controls are so efficient that ensure effective investor service at all times and provide regulators comfort as to the
compliance of regulatory prescription. In this direction SEBI has authorised Practising Company Secretaries to
undertake internal audit of various capital market intermediaries and issue quarterly certificate with respect to
reconciliation of share capital audit.
Every market intermediary shall appoint a company secretary as a compliance officer who shall be responsible for
monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by
SEBI or the Central Government and for redressal of investors’ grievances. The compliance officer shall immediately
and independently report to SEBI for any non-compliance observed by him.
A portfolio manager with professional experience and expertise in the field, studies the market and adjusts the
investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns therefrom.
Every Portfolio manager is required to appoint a Practising Company Secretary or a Practising Chartered Accountant
for conducting the internal audit.

ROLE OF COMPANY SECRETARY

Various Capital Market Intermediaries appoint a company secretary as a compliance officer who shall be responsible
for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by
SEBI or the Central Government and for redressal of investors’ grievances. The compliance officer shall immediately
and independently report to SEBI for any non-compliance observed by him.
Lesson 16 • Securities Market Intermediaries 477

LESSON ROUND-UP

• The role of intermediaries makes the market vibrant, and to function smoothly and continuously.
Intermediaries possess professional expertise and play a promotional role in organising a perfect match
between the supply and demand for capital in the market.
• As per Section 11 of SEBI Act, it is the duty of SEBI to register and regulate the working of stock brokers,
sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisors and such other intermediaries
who may be associated with securities market in any manner.
• Merchant Bankers are the key intermediaries between the company and issue of capital. The activities of
the Merchant Bankers in the Indian capital market are regulated by SEBI (Merchant Bankers) Regulation,
1992.
• Underwriting is compulsory for a public issue. It is necessary for a public company which invites public
subscription for its securities to ensure that its issue is fully subscribed.
• Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are
collected and transferred to the Escrow accounts.
• A stock broker plays a very important role in the secondary market helping both the seller and the buyer
of the securities to enter into a transaction.
• A portfolio manager with professional experience and expertise in the field, studies the market and adjusts
the investment mix for his client on a continuing basis to ensure safety of investment and reasonable
returns therefrom.
• Every Portfolio manager is required to appoint a Practising Company Secretary or a Practising Chartered
Accountant for conducting the internal audit.
• Custodian means any person who carries on or proposes to carry on the business of providing custodial
services.
• Investment adviser means any person, who for consideration is engaged in the business of providing
investment advice to clients or other group of persons and includes any person who holds out himself as
an investment adviser, by whatever name called.

GLOSSARY

Financial Planning It includes analysis of client’s current financial situation, identification of their
financial goals, and developing and recommending financial strategies to realize such
goals.

KYC Know your Client (KYC) means the procedure prescribed by SEBI for identifying and
verifying the Proof of Address, Proof of Identity and compliance with rules, regulations,
guidelines and circulars issued by SEBI or any other authority for Prevention of Money
Laundering from time to time.

Netting A system whereby outstanding financial contracts can be settled at a net figure, i.e.
receivables are offset against payables to reduce the credit exposure to a counterparty
and to minimize settlement risk.

Portfolio A collection of securities owned by an individual or an institution (such as a mutual fund)

Investment Profit that may include stocks, bonds and money market securities.
Adviser A financial planner or financial intermediary who offers advice on personal financial
matters. Advisers may be paid an upfront or an ongoing commission for the
investments that they recommend.
478  Lesson 16 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Discuss the types of market intermediaries in the Securities market.
2. Explain the process of granting Certificate of Registration to Intermediaries.
3. What is Deemed approval in case of process of granting Certificate of Registration to Intermediaries
4. The Registrar to an Issue and Share Transfer Agents constitute an important category of intermediaries in
the securities market. List out the ‘pre-issue’ and ‘post-issue’ work undertaken by them.
5. What is meant by Research Analysts? Elucidate the capital adequacy norms laid down under SEBI
(Research Analysts) Regulations, 2014 for registration as a Research Analysts.
6. Briefl discuss about the internal audit of intermediaries required to be conducted by a Company Secretary
in Practice.
7. Write short notes on:
1. Merchant Banker
2. Debenture Trustee
3. Custodian
4. Investment Advisers
5. Foreign Portfolio Investors

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Master Circulars
• Depositories Bye-Laws
• SEBI Annual Reports
• SEBI Monthly Bulletin
• SEBI FAQs
• SEBI Orders

OTHER REFERENCES (Including Websites/Video Links)

• https://www.sebi.gov.in/index.html
• https://www.nseindia.com/
• https://www.bseindia.com/
• http://sat.gov.in/
• https://nsdl.co.in/
• https://www.cdslindia.com/
Test paper 479

EXECUTIVE PROGRAMME
SECURITIES LAWS AND CAPITAL MARKETS
EP-SL&CM
WARNING
It is brought to the notice of all students that use of any malpractice in Examination is misconduct
as provided in the explanation to Regulation 27 and accordingly the registration of such students
is liable to be cancelled or terminated. The text of regulation 27 is reproduced below for
information:
“27. Suspension and cancellation of examination results or registration.
In the event of any misconduct by a registered student or a candidate enrolled for any examination
conducted by the Institute, the Council or any Committee formed by the Council in this regard,
may suo motu or on receipt of a complaint, if it is satisfied that, the misconduct is proved after
such investigation as it may deem necessary and after giving such student or candidate an
opportunity of being heard, suspend or debar him from appearing in any one or more examinations,
cancel his examination result, or registration as student, or debar him from re-registration as a
student, or take such action as may be deemed fit.
 480  EP-SL&CM

EXECUTIVE PROGRAMME
SECURITIES LAWS AND CAPITAL MARKETS
TEST PAPER
(This Test Paper is for recapitulate and practice for the students. Students need not to submit responses/
answers to this test paper to the Institute)
Time allowed: 3 hours  Maximum Mark: 100
PART I – SECURITIES LAWS (70 MARK S)
Question No. 1
(i) Sona Ltd. applied for listing of instruments in a recognized stock exchange. However, permission was
refused by the stock exchange. Can the company appeal to SAT against such refusal? Explain.
(5 marks)
(ii) SEBI has imposed a penalty of Rs. 20 crore on Delta Company Ltd. However, due to problem of
liquidity, the company is unable to pay the amount of penalty. Explain, how the amount can be
recovered by the SEBI under the provisions of SEBI Act, 1992.
(5 marks)
(iii) “The holding of securities in dematerialise form is not mandatory”. Explain the relevant provisions
with reference to the Depositories Act.
(5 marks)
Attempt all parts of either Question No. 2 or 2A
Question No. 2
(i) An IPO is made by ABC Ltd., which is a listed company on the stock exchange. The Managing Director
of the company directs the Company Secretary to prepare details of half yearly compliance
requirements as per the SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015.
Explain the same.
(5 marks)
(ii) An acquirer, holding 25% or more but less than maximum permissible non-public shareholding of
the Target Company can acquire such additional shares as would entitle him to exercise more than
5% of the voting rights in any financial year. Explain the statement indicating the creeping acquisition
limit for making an open offer by an acquirer.
(5 marks)
(iii) Surya Company Ltd. entered into listing agreement on 21st May, 2021 as per SEBI(Listing Obligations
and Disclosure Requirements) Regulations, 2015 with Bombay Stock Exchange (BSE). The Company
is planning to conduct a Board Meeting of its Directors on 28th June, 2021 for consideration of its
Annual Financial Results. Whether the company needs to give prior intimation to the BSE ? Explain
the matters for which prior intimation of the Board Meeting shall be given to the BSE under SEBI
Regulations.
(7 marks)
(iv) What do you mean by Whistle Blower Policy? Explain.
(3 marks)
 Test paper 481

Question No. 2A
(i) The Managing Director of Rakesh Ltd., a listed company wishes to implement the procedure for
voluntary delisting from a few stock exchanges subject to listing of at least one stock exchange having
nationwide terminals. As a Company Secretary prepare a note on your Managing Director in the light
of SEBI (Delisting of Equity Shares) Regulations, 2021.
(5 marks)
(ii) The financial data of XYZ Ltd. as on 31st March, 2019 are as under :
(i) Authorised Share Capital :Rs. 700 crore
(ii) Paid-up Capital :Rs. 300 crore
(iii) Free Reserves :Rs. 800 crore
The company has pending convertible debenture of Rs. 150 crore, due for conversion in financial
year 2019-20. The company proposes to issue bonus shares in the ratio of 1 : 1 after conversion of
debenture. You being a company secretary, advise on the procedure to be followed by referring SEBI
regulations.
( 7 marks)
(iii) An Ombudsman has issued an award in a complaint proceeding to your Company. Aggrieved by the
award of Ombudsman, directors of your company have decided to file petition before the SEBI. As a
company secretary, advise the Board of directors of your company regarding provisions and
procedures to be adopted for filing such petition under the SEBI (Ombudsman) Regulations, 2003.
(8 marks)
Question No. 3
(i) The price of equity share of a listed company viz. ABC Ltd. increased from Rs. 10 to high of Rs. 50 i.e.
a rise of 500% during the period 1st April, 2019 to 30th Sept., 2019. ABC Ltd. had entered into a
Share Purchase Agreement (SPA) with the proposed acquirer(s) to acquire 40% of the subscribed
equity share capital as of 31st Aug., 2019 which would result in change of management. This initial
discussion on the deal was made on 1st April, 2019 but SPA was signed on 25th April, 2019. During
1st April, 2019 to 30th Sept., 2019, the promoter and his wife dealt in the script of ABC Ltd. Referring
to the provisions of SEBI (Prohibition of Insider Trading) Regulations, 2015, answer the following :
(i) Define Unpublished Price Sensitive Information.
(ii) Whether there was any Unpublished Price Sensitive Information (UPSI) ?
(iii) What will be the date of UPSI ?
(iv) What are the factors to be taken into account by the adjudicating officer while imposing penalty
for the act?
(8 marks)
(ii) SEBI Complaints Redress System (SCORES) has been established to resolve the grievances of the
Investors. What is the procedure for redressal of investor grievances using SCORES platform ? What
are the matters that cannot be considered as complaints under SCORES ?
(7 marks)
(iii) Richards Estates Ltd. (“Target Company”) is a listed company. The promoter group shareholding in
the target company is 47%. It proposes to transfer of 2% shares held by one promoter group to
another promoter group. The target company sought your advise as a practicing Company Secretary
on the applicability of exemption provided under SEBI (Substantial Acquisition of Shares and
Takeover) Regulations for making compulsory open offer.
(5 marks)
 482  EP-SL&CM

Question No. 4
(i) Mr. Hira is appointed as the nominee director on the Board of PQ Ltd. by Indra Financial Services
Ltd.? PQ Ltd. has issued ESOS to Mr. Hira as its employee. Whether Mr. Hira is eligible to receive the
option granted by PQ Ltd.? If so, describe the approval and eligibility conditions required to be
comply for ESOS under SEBI (Share Based Employee Benefits) Regulations, 2014?
(10 marks)
(ii) Sweat equity shares may be issued to employee and directors of the company. In light of this statement
explain the provisions with respect to issue of sweat equity shares under SEBI (Issue of Sweat Equity)
Regulations, 2002.
(5 marks)
Attempt all parts of either Question no. 5 or Question no 5A
Question No. 5
(i) What do you mean by ‘Research Analysts’ ? Elucidate the net worth requirements, and role and
responsibilities of Research Analyst as per SEBI (Research Analyst) Regulations, 2014.
(5 marks)
(ii) “An Alternative Investment Fund which has been granted registration under a particular category
cannot change its category subsequent to registration, except with the approval of the SEBI”.
Enumerate the conditions for approval of SEBI.
(5 marks)
(iii) What do you know about Market Surveillance ? How does market surveillance try to ensure market
integrity in the securities market ? Explain.
(5 marks)
OR
Question No. 5A
(i) The stock market of a developing countries is normally attractive for the foreign investors. A foreign
endowments fund is planning to invest in equity shares of Indian companies. State the category
under which this Foreign Portfolio Investor (FPI) be covered. Will your answer be different if it is a
central bank of a foreign country ?
(5 marks)
(ii) What is Unified Payments Interface (UPI)? How is public issue application using UPI different from
public isssue application using ASBA submitted with intermediaries? Explain.
(5 marks)
(iii) The Companies Act, 2013 has authorised equity share capital with differential rights as to dividend,
voting or otherwise read with rules under Companies (Share Capital and Debentures) Rules, 2014.
Briefly explain the conditions for issue of shares with differential voting rights under the Act.
(5 marks)
Question No. 6
(i) What do you understand by Market surveillance? Briefly explain the different types of Market
surveillance.
 (7 marks)
 Test paper 483

(ii) Write short notes on the following:

a) Basis of SENSEX
b) Indian Depository Receipts
(4 marks each)

BIBLIOGRAPHY
https://www.sebi.gov.in/
https://www.rbi.org.in/
http://www.mca.gov.in/
https://www.nseindia.com/
https://www.bseindia.com/
https://www.amfiindia.com/
https://www.nsdl.co.in/
https://www.cdslindia.com/index.html
http://www.financialexpress.com/economy/rupee-dives-market-cautious-how-a-hike-in-us-fed-rates-
tomorrowcan-impact-india/1105381/
https://www.gktoday.in/academy/article/measurement-of-inflation-in-india/
https://www.mbaskool.com/business-articles/finance/175-rbi-credit-policy-significance-and-limitations.
html
https://www.thebalance.com/what-is-an-inflation-index-357609
https://www.federalreserve.gov/
http://miraeassetmf.co.in/uploads/downloads/Impact_of_Inflation.pdf
https://indiacorplaw.in/2015/07/sebis-action-on-illegal-collective.html
http://www.delisting.in