SCHOOL OF MANAGEMENT STUDIES

UNIT-I - SECURITIES LAW - SBAA3010

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INDIAN FINANCIAL SYSTEM AND SECURITIES CONTRACT ACT

Indian financial system - Meaning, Functions Structure; Securities Contract

(Regulation) Act (SCR) 1956 - Objectives, Rules and Regulations - Recognized
Stock Exchanges - Application for recognition of stock exchanges, Grant of
recognition to stock exchanges - Withdrawal of recognition stock exchanges

Meaning of Indian financial system

The financial system enables lenders and borrowers to exchange funds.

India has a financial system that is controlled by independent regulators in the
sectors of insurance, banking, capital markets and various services sectors.

Thus, a financial system can be said to play a significant role in the

economic growth of a country by mobilizing the surplus funds and utilizing them
effectively for productive purposes.

FEATURES OF INDIAN FINANCIAL SYSTEM

➢ It plays a vital role in economic development of a country.

➢ It encourages both savings and investment.
➢ It links savers and investors.
➢ It helps in capital formation.
➢ It helps in allocation of risk.
➢ It facilitates expansion of financial markets.

Main Functions of Financial System

The functions of financial system can be enumerated as follows:

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 ➢ Financial system works as an effective conduit for optimum allocation of
financial resources in an economy.
➢ It helps in establishing a link between the savers and the investors.
➢ Financial system allows ‘asset-liability transformation’. Banks create claims
(liabilities) against themselves when they accept deposits from customers but
also create assets when they provide loans to clients.
➢ Economic resources (i.e., funds) are transferred from one party to another
through financial system.
➢ The financial system ensures the efficient functioning of the payment
mechanism in an economy. All transactions between the buyers and sellers of
goods and services are affected smoothly because of financial system.
➢ Financial system helps in risk transformation by diversification, as in case of
mutual funds.
➢ Financial system enhances liquidity of financial claims.
➢ Financial system helps price discovery of financial assets resulting from the
interaction of buyers and sellers. For example, the prices of securities are
determined by demand and supply forces in the capital market.
➢ Financial system helps reducing the cost of transactions.

As discussed above, financial markets play a significant role in

economic growth through their role of allocation capital, monitoring managers,
mobilizing of savings and promoting technological changes among others.
Economists had held the view that the development of the financial sector is a
crucial element for stimulating economic growth.

Financial development can be defined as the ability of a financial

sector acquire effectively information, enforce contracts, facilitate transactions and

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create incentives for the emergence of particular types of financial contracts,
markets and intermediaries, and all should be at a low cost. Financial development
occurs when financial instruments, markets and intermediaries ameliorate through
the basis of information, enforcement and transaction costs, and therefore better
provide financial services.The financial functions or services may influence saving
and investment decisions of an economy through capital accumulation and
technological innovation and hence economic growth.

Capital accumulation can either be modeled through capital

externalities or capital goods produced using constant returns to scale but without
the use of any reproducible factors to generate steady-state per capita
growth. Through capital accumulation, the functions performed by the financial
system affect the steady growth rate thereby influencing the rate of capital
formation. The financial system affects capital accumulation either by altering the
savings rate or by reallocating savings among different capital producing levels.
Through technological innovation, the focus is on the invention of new production
processes and goods.

COMPONENTS/ CONSTITUENTS OF INDIAN FINANCIAL SYSTEM

The following are the four major components that comprise the Indian Financial
System:

➢ Financial Institutions
➢ Financial Markets
➢ Financial Instruments/ Assets/ Securities
➢ Financial Services.

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FINANCIAL INSTITUTIONS

Financial institutions are the intermediaries who

facilitate smooth functioning of the financial system by making investors and
borrowers meet. They mobilize savings of the surplus units and allocate them in
productive activities promising a better rate of return. Financial institutions also
provide services to entities (individual, business, government) seeking advice on
various issue ranging from restructuring to diversification plans. They provide
whole range of services to the entities who want to raise funds from the markets or
elsewhere.

Financial institutions are also termed as financial

intermediaries because they act as middle between savers by accumulating Funds
them and borrowers by lending these funds.

It is also act as intermediaries because they accept deposits

from a set of customers (savers lend these funds to another set of customers
(borrowers). Like - wise investing institutions such ICCIC, mutual funds also
accumulate savings and lend these to borrowers, thus perform the role of financial
intermediaries.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be classified into two categories:

A. Banking Institutions

B. Non - Banking Financial Institutions

A. BANKING INSTITUTIONS (Reserve Bank of India)

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Indian banking industry is subject to the control of the Central Bank. The RBI as
the apex institution organises, runs, supervises, regulates and develops the
monetary system and the financial system of the country. The main legislation
governing commercial banks in India is the Banking Regulation Act, 1949.

The Indian banking institutions can be broadly classified into two categories:

1. Organised Sector

2. Unorganised Sector.

1. Organised Sector

The organized banking sector consists of commercial banks,

cooperative banks and the regional rural banks.

(a)Commercial Banks

The commercial banks may be scheduled banks or non –

scheduled banks. At present only one bank is a non - scheduled hank. All other
banks are schedule banks. The commercial banks consist of 27 public sector banks,
private sector banks and foreign banks. Prior to 1969, all major banks with the
exception of State Bank of India in the private sector. An important step towards
public sector banking was taken in July 1969, when 14 major private banks with a
deposit base of 50 crores or more were nationalised. Later in 1980 another 6 were
nationalised bringing up the total number banks nationalised to twenty.

(b) Co-operative banks

An important segment of the organized sector of

Indian banking is the co-operative banking. The segment is represented by a group
of societies registered under the Acts of the states relating to cooperative societies.
In fact, co-operative societies may be credit societies or non-credit societies.
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 Different types of co-operative credit societies are
operating in Indian e conomy. These institutions can be classified into two broad
categories:

(i) Rural credit societies- which are primary agriculture

(ii) Urban credit societies- which are primarily non-agriculture.

For the purpose of agriculture credit there are different co-operative credit
institutions to meet different kinds of needs.

(c)Regional Rural Banks (RRBs)

Regional Rural Banks were set by the state

government and sponsoring commercial banks with the objective of developing the
rural economy. Regional rural banks provide banking services and credit to small
farmers, small entrepreneurs in the rural areas. The regional rural banks were set
up with a view to provide credit facilities to weaker sections. They constitute an
important part of the rural financial architecture in India. There were 196 RRBs at
the end of June 2002, as compares to 107 in 1981 and 6 in 1975.

(d)Foreign Banks

Foreign banks have been in India from British days. Foreign

banks as banks that have branches in the other countries and main Head Quarter in
the Home Country. With the deregulation (Elimination of Government Authority)
in 1993, a number of foreign banks are entering India.

Foreign Banks are: Citi Bank. Bank of Ceylon.

2. Unorganised Sector

In the unorganised banking sector are the Indigenous Bankers, Money Lenders.

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1.Indigenous Bankers

Indigenous Bankers are private firms or individual who

operate as banks and as such both receive deposits and given loans. Like bankers,
they also financial intermediaries. They should be distinguished professional
money lenders whose primary business is not banking and money lending. The
indigenous banks are trading with the Hundies, Commercial Paper.

2.Money Lenders

Money lenders depend entirely to on their one funds. Money

Lenders may be rural or urban, professional or non-professional. They include
large number of farmer, merchants, traders. Their operations are entirely
unregulated. They charge very high rate of interest.

B. NON – BANKING INSTITUTIONS

The non – banking institutions may be categorized broadly into two groups:

(a) Organized Non – Banking Financial Institutions.

(b) Unorganized Non – Banking Financial Institutions.

The organised non - banking financial institutions include:

(i) Development Finance Institutions- These include: The institutions like IDBT,
ICICI, IFCI, IIBI, IRDC at all India level.

The State Finance Corporations (SFCs), State Industrial

Development Corporations (SIDCs) at the state level. Agriculture Development
Finance Institutions as NABARD,LDBS etc. Development banks provide medium
and long term finance to the corporate and industrial sector and also take up
promotional activities for economic development

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(ii) Institution
These include those financial institutions which mobilise savings at
the public at large through various schemes and invest these funds in corporate
and government securities. These include LIC, GIC, LTT, and mutual funds.

Unorganised Non - Banking Financial Institution

The unorganised non - banking financial institutions

include number of non - banking financial companies (NBFCs) providing whole
range of financial services. These include hire - purchase 300 consumer finance
companies, leasing companies, housing finance companies, factoring companies,
Credit rating agencies, merchant banking companies etc. NBFCs mobilise public
funds and provide loanable funds.

FINANCIAL MARKET

It is through financial markets and institutions that the

financial system of an economic works. Financial markets refer to the institutional
arrangements for dealing in financial assets and credit instruments of different
types such as currency, cheques, bank deposits, bills, bonds etc.

Functions of financial markets

❖ To facilitate creation and allocation of credit and liquidity

❖ To serve as intermediaries for mobilisaton of savings.
❖ To assist the process of balanced economic growth.
❖ To provide financial convenience.
❖ To cater to the various credit needs of the business houses.
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These organised markets can be further classified into two they are,

(i)Capital Market

(ii)Money Market

CAPITAL MARKET

The capital market is a market for financial assets which have a

long or indefinite maturity. Generally, it deals with long term securities which have
a maturity period of above one year. Capital market may be further divided into
three namely:

➢ Industrial securities market

➢ Government securities market and
➢ Long term loans market

I. INDUSTRIAL SECURITIES MARKET

As the very name implies, it is a market for industrial securities namely:

(i)Equity shares or ordinary shares,

(ii)Preference shares and

(iii)Debentures or bonds.

It is a market where industrial concerns raise their capital

or debt by issuing appropriate instruments. It can be further subdivided into two.

(i)Primary market or New issue market

(ii)Secondary market or Stock exchange

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Primary Market

Securities are created for the first time for investors to purchase. New
securities are issued in this market through a stock exchange, enabling the
government as well as companies to raise capital.

In the primary market, borrowers exchange new financial

securities for long term funds. Thus, primary market facilitates capital formation.
There are three ways by which a company may raise capital in a primary market.
They are:

1) Rights issue
2) Private placement
3) Public issue

The most common method of raising capital by new companies

is through sale of securities to the public. It is called public issue. When an existing
company wants to raise additional capital, securities are first offered to the existing
shareholders on a pre-emptive basis. It is called rights issue. Private placement is a
way of selling securities privately to a small group of investors.

Secondary Market

Secondary market is a market for secondary sale of securities.

In other words, securities which have already passed through the new issue market
are traded in this market. Generally, such securities are quoted the Stock Exchange
and it provides a continuous and regular market to buying and selling of securities.
This market consists of all stock exchanges recognised by the Government of

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India. The stock exchanges in India are regulated under the Securities Contracts
(Regulation) Act 1956. The Bombay Stock Exchange is the principal stock
exchange in India which sets the tone of the other stock markets.

II.GOVERNMENT SECURITIES MARKET

It is otherwise called Gilt - Edged securities market. It is a market where

Government securities are traded. In India there are many kinds of Government
Securities - short term and long term.

Long term securities are traded in this market while short

term securities are traded in the money market. Securities issued by the Central
Government, State Governments, Semi Government authorities like City
Corporations, Port Trusts etc. Improvement Trusts, State Electricity Boards, All
India and State level financial institutions and public sector enterprises are dealt in
this market.

III.LONG TERM LOANS MARKET

Development banks and commercial banks play a

significant role in this market by supplying long term loans to corporate customers.
Long term loans market may further be classified into:

(1)Term loans market

(ii)Mortgages market

(iii)Financial Guarantees market.

Term Loans Market

In India, many industrial financing institutions have been

created by the Government both at the national and regional levels to supply long

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term and medium term loans to corporate customers directly as well as indirectly.
These development banks dominate the industrial finance in India. Institutions like
IDBI, IFCI, ICICI, and other financial corporations come under this category.

Mortgages Market

A mortgage loan is a loan against the security of immovable

property like real estate. The transfer of interest in a specific immovable property to
secure a loan is called mortgage. This mortgage may be equitable mortgage or legal
one.

Financial Gurantees Market

A financial guarantee is a type of promise given by a guarantor

to take responsibility for the borrower in the case of default in payments to the lender
or investor. Generally, insurance companies give guarantee to back the debt of large
corporations (the borrower) in payments to the market (the lender).

MONEY MARKET

Money market is a market for dealing with financial assets and

securities which have a maturity period of upto one year. In other words, it is a
market for purely short term funds. The money market may be subdivided into four.
They are:

(i) Call money market

(ii) Commercial bills market

(iii) Treasury bills market

(iv) Short term loan market.

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Call Money Market

The call money market is a market for extremely short period

loans say one day to fourteen days. So, it is highly liquid. The loans are repayable
on demand at the option of either the lender or the borrower. In India, call money
markets are associated with the presence of stock exchanges and hence, they are
located in major industrial towns like Bombay, Calcutta, Madras, Delhi, Ahmedabad
etc. The special feature of this market is that the interest rate varies from day to day
and even from hour to hour and Centre to Centre. It is very sensitive to changes in
demand and supply of call loans.

Commercial Bills Market

It is a market for Bills of Exchange arising out of

genuine trade transactions. In the case of credit sale, the seller may draw a bill of
exchange on the buyer. The buyer accepts such a bill promising to pay at a later
date specified in the bill. The seller need not wait until the due date of the bill.
Instead, he can get immediate payment by discounting the bill.

Treasury Bills Market

The Treasury bill market is the market that deals in

treasury bills. These bills are short-term (91-day) liability of the Government of
India. In theory, they are issued to meet temporary needs for funds of the
government, arising from temporary excess of expenditure over receipts.

Short - Term Loan Market

It is a market where short - term loans are given to

corporate customers for meeting their working capital requirements. Commercial
banks play a significant role in this market. Commercial banks provide short term

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loans in the form of cash credit and overdraft Over draft facility is mainly given to
business people whereas cash credit is given to industrialists. Overdraft is purely a
temporary accommodation and it is given in the current account itself. But cash
credit is for a period of one year and it is sanctioned in a separate account.

FINANCIAL INSTRUMENTS

Financial instruments refer to those documents which

represents financial claims on assets. As discussed earlier, financial asset refers to
a claim to a claim to the repayment of a certain sum of money at the end of a
specified period together with interest or dividend. Examples: Bill of exchange,
Promissory Note, Treasury Bill. Financial securities can be classified into:

(i)Primary or direct securities.

(ii)Secondary or indirect seurities.

Primary Securities

These are securities directly issued by the ultimate investors

to the ultimate savers. Eg. shares and debentures issued directly to the public.

Secondary Securities

These are securities issued by some intermediaries called

financial intermediaries to the ultimate savers. Eg. Unit Trust of India and mutual
funds issue securities in the form of units to the public and the money pooled is
invested in companies. Again these securities may be classified on the basis of
duration as follows:

(i) Short - term securities - Short - term securities are those which mature
within a period of one year. Eg, Bill of Exchange, Treasury bill, etc.

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(ii) Medium term securities - Medium term securities are those which have a
maturity period ranging between one and five years. Eg. Debentures maturing
within a period of 5 years

(iii) Long - term securities.- , Long - term securities are those which have a
maturity period of more than five years. Eg, Government Bonds maturing after 10
years.

FINANCIAL SERVICES

Efficiency of emerging financial system largely depends

upon the quality and variety of financial services provided by financial
intermediaries. The term financial services can be defined as “activities, benefits,
and satisfactions, connected with the sale of money, that offer to users and
customers, financial related value. within the financial services industry the main
sectors are banks, financial institutions, and non-banking financial companies.

KINDS OF FINANCIAL SERVICES

Financial services provided by various financial

institutions, commercial banks and merchant bankers can be broadly classified into
two categories.

(A)Asset based/fund based services

The asset/fund based services provided by banking and

non - banking financial institutions as discussed below briefly.

1.Equipment Leasing/ Lease Financing

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 Leasing is an arrangement that provides a firm with
the use and control over assets without buying and owning the same. It is a form of
renting assets. However, in making an investment, the firm need not own the asset.
It is basically interested in acquiring the use of the asset. Thus, the firm may
consider leasing of the asset rather than buying it.

In comparing leasing with buying, the cost of leasing the

asset should be compared with the cost of financing the asset through normal
sources of financing, i. e. debt and equity. Since payment of lease rentals is similar
to payment of interest on borrowings and lease financing is equivalent to debt.

2.Hire Purchase and Consumer Credit

Hire purchase means a transaction where goods are

purchased and sold on the terms that

(i) payment will be made it installments,

(ii) the possession of the goods is given to the buyer immediately,

(iii) the property ownership) in the goods remains with the vendor till the last
installment is paid,

(iv) the seller can repossess the goods in case of default in payment of any
instalment, and

(v) each instalment is treated as hire charges till the last instalment is paid.

Consumer credit includes all asset based financing plans

offered to individuals to help them acquire durable consumer goods. In a consumer
credit transaction the individual/ consumer/ buyer pays a part of the cash purchase
price at the time of the delivery of the asset and pays the balance with interest over
a specified period of time.
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3.Venture capital
In the real sense, venture capital financing is one of the most
recent entrants in the Indian capital market. There is a significant scope for venture
capital companies in our country because of increasing emergence of technocrat
entrepreneurs who lack capital to be risked. These venture capital companies
provide the necessary risk capital to the entrepreneurs so as to meet the promoters
contribution as required by the financial institutions. In addition to providing
capital, these VCFS (venture capital firms) take an active interest in guiding the
assisted firms.

4.Insurance Services

Insurance is a contract where by the insurer e. insurance

company agrees/ undertakes, in consideration of a sum of money (premium) to
make good the loss suffered by the insured (policy holder) against a specified risk
such as fire or compensate the beneficiaries (insured) on the happening of a
specified event such as accident or death. The document containing the terms of
contract, in black and white, between the insurer and the insured is called policy.
The property which is insured is the subject matter of insurance. The interest which
the insured has in the subject matter of insurance is known as insurable interest.
Depending upon the subject matter, insurance services are divided into (i) life (ii)
general.

5.Factoring

Factoring, as a fund based financial service provides resources to

finance receivables as well as it facilitates the collection of receivables. It is
another method of raising short - term finance through account receivable credit
offered by commercial banks and factors.

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 A commercial bank may provide finance by discounting the bills or
invoices of its customers. Thus, a firm gets immediate payment for sales made on
credit. A factor is a financial institution which offers services relating to
management and financing of debts arising out of credit sales.

B. FEE BASED ADVISORY SERVICES

(i)Merchant Banking

Merchant Bank is a company that provides services like

fundraising activities like IPOs, FPOs, loans, underwriting, financial advising or
market making for big companies and individuals having huge net worth but they
do not provide for the basic banking services such as checking accounts, etc.

It provides financial services, including underwriting, loan

services, fundraising services, and financial advising to high net-worth individuals
and small/mid-sized corporations.

(ii)Credit Rating

Credit rating is an analysis of the credit risks associated with a

financial instrument or a financial entity. It is a rating given to a particular entity
based on the credentials and the extent to which the financial statements of the
entity are sound, in terms of borrowing and lending that has been done in the past.

(iii)Stock - Broking

Stockbroking is a service which gives retail and institutional

investors the opportunity to buy and sell equities. Stockbrokers will trade shares
both on exchange and over-the-counter, dependent on where they can find the best
price and liquidity. Stock exchanges place strict regulations on who can trade
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shares directly on their books, which is why most individual investors hoping to
trade shares will do so via a stockbroker. Typically, a stockbroking firm will
charge commission on the trades it makes on a client’s behalf, or a fee for retaining
its services.

Securities Contracts (Regulation) Act, 1956 The Securities Contracts

(Regulation) Act, 1956 also known as SCRA is an Act of the Parliament of India
enacted to prevent undesirable exchanges in securities and to control the working
of stock exchange in India. It came into force on 28 February 1957.

DEFINITION OF STOCK EXCHANGE

According to securities contracts regulations Act 1956 “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, 1956 (1 of 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.

FUNCTIONS OF STOCK EXCHANGE

The stock exchanges play an important

role in the economic development of a country. The importance of stock exchange
will be clear from the functions they perform and discussedas follows:

1.Ensure Liquidity of Capital

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 The stock exchanges where buyers and sellers are
converted into cash. The exchanges provide a ready market.Had are always
available and those who are in need of hard cash can sell their holdings this not
been possible then many persons would have feared for blocking their savings in
Securities as they can not again convert them into cash.

2.Continuous Market for Securities

The stock exchanges provide a ready market in

securities. The securities once listed continue to be traded at the exchanges
irrespective the fact that owners go on changing. The exchanges provide a regular
market for trading in securities.

3.Mobilizing Surplus Savings

The stock exchanges provide a ready market for

various securities. The investors do not have any difficulty in investing their
savings by purchasing shares, bonds etc, from the exchanges. If this facility is not
there then many persons who want to invest their savings will not find avenues to
do so. In this way stock exchanges play an important role in mopping up surplus
funds of investors.

4.Helpful in Raising New Capital

The new and existing concerns need capital for

their activities. The new concerns raise capital for the first time and existing units
increase their capital for expansion and diversification purposes. The shares of new
concerns are registered at stock exchanges and existing companies also sell their
shares through brokers etc, at exchanges. The exchanges are helpful in raising
capital both by nets old concerns.

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5.Safety in Dealings

The dealings at stock exchanges are governed by well -

defined rules and regulations of Securities Contract (Regulation) Act, 1956. There
is no scope manipulating transactions. Every contact is done according to the
procedure laid down and there is no fear in the minds of contracting parties.The
safety in dealings brings confidence in the minds of all concerned parties and helps
in increasing various dealings.

6.Listing of Securities

Only listed securities can be purchased at stock exchanges.

Every company desirous of listing its securities will apply to the exchange
authorities. The listing is allowed only after a critical examination of capital
structure, management and prospects of the company. The listing of securities
gives privilege to the company. The investors can form their own views about the
securities because listing a security does not guarantee the financial stability of the
company.

7. Smoothens the Price Movements

A stock exchange smoothens the price

movements of stocks in the market by ensuring a continuous flow of securities,

8. Investor Protection

The stock exchange renders safeguarding activities for

investors in securities. It provides a grievance redressal mechanism for investors.
Stock exchanges also operate a compensation fund for the protection of investors.

BENEFITS OF STOCK EXCHANGE

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 The stock exchange has benefitted
difference stakeholders in the capital market; it has greatly influenced every
country’s section socially, politically and economically. Some of the significant
benefits of the stock exchange are as follows;

BENEFITS FOR COMPANY AND ITS MANAGEMENT

Access to capital

1. The prime objective of the stock exchange its to raise money for the listed
corporation in the market; the stock exchange facilitates an easy rise in
affordable capital to run business
2. Stock exchange’s easy marketability and liquidity ensure a quick and steady
supply of capital to the business through provisioning the buying and selling
of stocks and securities
3. This forum also helps the companies to generate additional capital funds
without any collateral.
4. The stock exchange also facilitates better negotiation in issuing stocks and
securities by providing fair pricing of the published stocks.
5. High profiling and enhanced visibility
6. Stock exchange benefits the stock listed company to gain higher status and
reputation in the business marketplace by enjoying the confidence of the
investing public
7. It brings the company under the limelight and enhances its visibility in the
public sphere, which helps fund capital and provides more significant
support in increasing the market demand and supply.

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 8. Stock exchange creates a continuous display of the listed company’s name
and profiles through marketing its stocks and securities on the stock
exchange platform.
9. More control over the management

A stock exchange facilitates the company to have more

control over its management; by generating capital form the stock exchange, the
company is protected from external control of its managerial affairs.

Unnecessary interference of the financial institutions such as

venture capitals, banks, and others who lend collateral loans are entirely avoided.

Savings in cost

1. High collateral value for bank loans and other capital fundings are wholly
avoided by listing stocks in the stock exchange. Its imposition of huge costs
is saved through public issuing of capitals.
2. The stock exchange allows companies to raise funds through the capital
market instruments at a low cost compared to other loans.
3. Economic Benefits
4. Enhance market liquidity

Liquidity refers to the degree to which an asset can be quickly

bought or sold in the market at a price reflecting its intrinsic value. Stock exchange
market’s performance is measured with market liquidity, analyzing how well the
country’s stock market allows stocks and securities to be bought and sold at stable,
transparent prices. One of the significant advantages of the stock exchange to the
economy is that the stocks traded are liquid circulated into two market -issuers who
indulge in continuous buying a itks and investments by buying and selling the
securities at any time, which is the secondary market

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 INVESTOR BENEFIT

High returns

In stock exchanges, high returns are often supplied by long-term

financial trends, where the price value of the stock occurs after some time but
provide significantly high returns. This factor is one of the most promising benefits
of the stock exchange to investors.

Transparency

• A stock exchange facilitates transparency in managing the stock in the capital

market;
• it evaluates the actual worth of securities and provides the intrinsic value of the
company to avoid deceitful investments
• Safeguarding general public interest by ensuring equitable allotment, easy transfer,
disclosure of proper information, etc.,
• Assures the existence of good faith or an absence of fraud concerning the issue of
securities.
• Providing activities of quick transfer registration and corporate information

Safety in investing

Stock exchanges’ seamless physical and electronic trading

platforms perform to ensure complete safety and security to the market
participants.Its mechanism offers more excellent protection to investors by
adequately investigating the company and the projects before listing and marketing
its stocks to the capital market. Its fundamental function of handling stocks and
securities are governed under proper rules and regulations and is abided by the

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stock exchange to ensure protected tradingAll the fraudulent activities will be duly
enquired and sanctioned.

Tax deferments

Investors have the advantage of deferring from paying tax for the
invested stock; there is no need to include the trading in assessment for the
purchased stocks when filing tax returns.

Accessibility

Since the stock exchange is a growing market and is dynamic; it

creates new opportunities and serves people; it has been designed as a single-
window trading platform accessible to many people throughout the country and
worldwide.

Buying and selling may be resorted to from any part of the world
through online trading platformsIt facilitates faster deal settlement for investors
across the counters spread over the entire county.

OTHER BENEFITS

• The interconnected network of the stock exchange, which the country

creates, facilitates financial operations by integrating the entire capital
market under one roof.
• Boon to closely-held companies whose stocks are held by a small number of
people, these corporations are encouraged to go public because the stocks
can be listed even if only 40 per cent of public capital (now a minimum of
20 per cent in case of closely-held and new companies) is offered for public
trading.

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 • Facilitates wider dispersal of economic activities by encouraging small
companies and small investors to participate in stock exchanges to expand
and diversify their businesses
• Promoting over-all stimulation to venture capital activities there-by
promoting entrepreneurship.

Name of all the approved stock exchange in India is given below

1.U.P.Stock Exchange,Kanpur
2. Vadodara Stock Exchange,Vadodara
3.Koyambtour Stock Exchange,Coimbatore
4. Meerut Stock Exchange,Meerut
5. Mumbai Stock Exchange,Mumbai
6. OverTheCounter Exchange of India,Mumbai
7. National Stock Exchange.Mumbai
8. Ahmedabad Stock Exchange,Ahmedabad
9. Bangalore Stock Exchange,Bangalore
10. Bhubaneshwar Stock Exchange,Bhubaneshwar
11. Calcutta Stock Exchange,Kolkata
12. CochinStockExchange,Cochin
13. DelhiStockExchange,Delhi
14. GuwahatiStockExchange,Guwahati
15. Hyderabad Stock Exchange, Hyderabad

27
16. Jaipur Stock Exchange, Jaipur
17. Canara Stock Exchange, Mangalore
18. Ludhiana Stock Exchange, Ludhiana
19. Chennai Stock Exchange, Chennai
20. M.P.Stock Exchange, Indore
21. Magadh Stock Exchange, Patna
22. Pune Stock Exchange, Pune
23. Capital Stock Exchange Kerala Ltd.,Thiruvananthapuram, Kerala

Application for recognition of stock exchanges

(1) Any stock exchange, which is desirous of being recognised for the purposes of
this

Act, may make an application in the prescribed manner to the Central Government.

(2) Every application under sub-section (1) 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;

28
(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 authorised representatives and clerks.

Grant of recognition to stock exchanges

(1) If the Central Government is satisfied, 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

(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

29
exchange subject to the conditions imposed upon it as aforesaid and in such form
as may be prescribed.

(2) The conditions which the Central Government may prescribe under clause (a)
of sub-section (1) 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.

(3) 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 as of the stock exchange is situate, and such recognition
shall have effect as from the date of its publication in the Gazette of India.

(4) 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.

(5) No rules of a recognised stock exchange relating to any of the matters specified
in sub-section (2) of section 3 shall be amended except with the approval of the
Central Government.

30
Withdrawal of recognition
If the central government finds that the withdrawal of
recognition granted to any stock exchange as per the provisions of this Act will
serve the interests of public or trade in a better way, then a written notice will be
served by the central government to the body that governs the management of the
stock exchange.

The reason for withdrawal has to be stated in the

notice and an opportunity has to be provided to the governing body to make a
representation of its case and henceforth, it is a mandate for the central government
to follow the rules laid down by the principles of natural justice.

The central government has to make an official and

public announcement of the withdrawal of the recognised status by publishing it as
a notification in the official gazette of India. The authority to withdraw the status
of ‘recognised’ from any stock exchange is granted to the central government

(1)If the Central Government is of opinion that the recognition granted to a stock
exchange under the provisions of this Act 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;

Provided that no such withdrawal shall 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

31
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.

(2)Where the recognised stock exchange has not been corporatised or demutualised
or it fails to submit the scheme referred to in sub-section (1) of section 4B within
the specified time therefor or the scheme has been rejected by the Securities and
Exchange Board of India under sub-section (5) of section 4B, the recognition
granted to such stock exchange under section 4, shall, notwithstanding anything to
the contrary contained in this Act, stand withdrawn and the Central Government
shall publish, by notification in the Official Gazette, such withdrawal of
recognition:

Provided that no such withdrawal shall affect the

validity of any contract entered into or made before the date of the notification,
and the Securities and Exchange Board of India 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 under sub-section (5) of section 4B.

QUESTION BANK

UNIT-I

PART-A

1 List the main functions of a financial system.

2 Outline the components of the Indian Financial system.

32
3 Who are Indigenous bankers?

4 Identify the instrument indicate in the given statement? “It is used for inter-bank
transactions. It is short-term finance repayable on demand with a maturity period
of one day to fifteen days”.

5 Name the Factors that affects the capital market.

6 Define Stock Exchange.

7 What is meant by Factoring?

8 What is a Commercial Bills Market?

9 Recall the ways in which a company raises funds through a Primary market.

10 Identify the main functions of NBFC.

PART-B

1 Explain in detail the functions of Stock Exchange.

2 Classify the kinds of financial services.

3 Summarize the components of financial instruments and its types.

4 Explain in detail the functions of Capital Market and its types.

5 Assess in detail the benefits of a Stock Exchange.

6 Discuss the types of Indian Banking institutions in detail.

7 Distinguish between the two segments of financial market on any five bases.
33
8 Illustrate the components of Indian Financial system and explain in brief about
them.

9 Enumerate the objectives of Securities Contract (Regulation) Act (SCR) 1956.

10 Determine the application for recognition of stock exchanges and Grant of a

Recognised Stock Exchange under SCR Act 1956.

REFERENCE

❖ KONDAIAH JONNALAGADD, SECURITIES LAW, LEXIS NEXIS,2015

❖ MS ZAD,SECURITIES LAW AND CAPITAL MARKET,TAXMAN,2019
❖ RAJNISH KUMAR,CAPITAL MARKET AND SECURITIES
LAW,COMMERCIAL LAWPUBLISHERS,9TH EDITION,2018

34
 UNIT 2
SECURITIES MARKET INTERMEDIARIES

Primary Market and Secondary Market Intermediaries - Role, Function - Merchant

Bankers - Stock Brokers - Registrars - Underwriters - Bankers to an Issue -
Portfolio Managers - Debenture Trustees - Foreign Institutional Investor -
Custodians - Credit Rating Agencies - venture capitalists.

SECURITIES MARKET INTERMEDIARIES

Introduction

Intermediary by definition, in any field, is an individual who is in the

role of a mediator facilitating an agreement or a reconciliation. Accordingly,
intermediaries of SEBI too are the bridges or links between the investor and the
stock exchange and/or SEBI.

Section 11 and section 12 of SEBI Act, 1992 defines an Intermediary.

Stockbrokers, sub-brokers, portfolio managers, depositories, investment advisers,
share transfer agents, merchant bankers, underwriters, registrars to an issue,
foreign institutional investors, custodians of securities, venture capital funds,
mutual funds, asset management companies, credit rating agencies, those in
connection and associated with the securities market in any manner, are all broadly
categorised as ‘Intermediaries of SEBI’.

1
 Financial intermediaries and financial markets can in many cases act as
substitute sources of financial services. Lenders/savers in particular have a choice
between the risk, return and liquidity offered by both segments of the financial
system. Each segment is able to offer a different range of investments and offers
services to firms that are not complete substitutes. Broadly speaking, financial
markets provide lower cost arms length debt or equity finance to a smaller group of
firms able to obtain such finance, while financial intermediaries offer finance with
a higher cost reflecting the expense of uncovering information and ongoing
monitoring. Financial intermediaries and markets may also provide complementary
financial services to many firms.

Evolution of how intermediaries came into operation

In the era of closed markets, intermediaries were not common because

buyers and sellers transacted in close proximity to one another and a “middleman”
was not required. However, as financial markets expanded and matured, it was no
longer possible for buyers and sellers to have direct dealing; thus, contemporary
capital markets are substantially dependent on market intermediaries.

To understand this dependence, to comprehend how market

intermediaries are driving the market today, and to ascertain the regulatory
contours of India’s securities market regulator— the Securities and Exchange
Board of India (SEBI)—in respect of intermediary governance, it is imperative to
understand who these market intermediaries are.

In simple terms, market intermediaries operate as the bridge

between capital providers and capital seekers. According to this understanding, any
2
person operating in the capital markets other than the issuer and the investor may
be considered a market intermediary. Interestingly, the SEBI does not offer any
conceptual or exhaustive definition of “market intermediaries.”

“Market Intermediaries” Under SEBI Regulations,2008

It is worthwhile to refer to the definition of intermediaries provided

in the SEBI (Intermediaries) Regulations, 2008 (henceforward, the Intermediaries
Regulations), which in turn makes reference to Sections 11(2)(b), (ba), and Section
12(1), (1A) of the SEBI Act, 1992[ii]. According to these provisions,
intermediaries comprise the following:

● Stockbrokers

● sub-brokers

● portfolio managers

● depositories

● investment advisers

● share transfer agents

● merchant bankers

● underwriters

● registrars to an issue

● foreign institutional investors

3
 ● custodians of securities

● venture capital funds

● mutual funds

● asset management companies

● credit rating agencies

PRIMARY MARKET INTERMEDIARIES

 Merchant bankers

Merchant bankers play an important role in issue management

process. Lead managers (category I merchant bankers) have to ensure correctness
of the information furnished in the offer document. They have to ensure
compliance with SEBI rules and regulations as also Guidelines for Disclosures and
Investor Protection. To this effect, they are required to submit to SEBI a due
diligence certificate confirming that the disclosures made in the draft prospectus or
letter of offer are true, fair and adequate to enable the prospective investors to
make a well informed investment decision. The role of merchant bankers in
performing their due diligence functions has become even more important with the
strengthening of disclosure requirements and with SEBI giving up the vetting of
prospectuses. SEBI's various operational guidelines issued during the year to
merchant bankers primarily addressed the need to enhance the standard of
disclosures.

4
 It was felt that a further strengthening of the criteria for registration
of merchant bankers was necessary, primarily through an increase in the net worth
requirements, so that their capital would be commensurate with the level of
activities undertaken by them. With this in view, the net worth requirement for
category I merchant bankers was raised in 1995-96 to Rs. 5 crore. In 1996-97, the
SEBI (Merchant Bankers) Regulations, 1992 were amended to require the payment
of fees for each letter of offer or draft prospectus that is filed with SEBI. Part III
gives further details of the registration of merchant bankers during 1996-97.

Underwriters

Underwriters are required to register with SEBI in terms of the

SEBI (Underwriters) Rules and Regulations, 1993. In addition to underwriters
registered with SEBI in terms of these regulations, all registered merchant bankers
in categories I, II and III and stockbrokers and mutual funds registered with SEBI
can function as underwriters. Part III gives further details of registration of
underwriters. In 1996-97, the SEBI (Underwriters) Regulations, 1993 were
amended mainly pertaining to some procedural matters.

• Bankers to an Issue

Scheduled banks acting as bankers to an issue are required

to be registered with SEBI in terms of the SEBI (Bankers to the Issue) Rules and
Regulations, 1994. These regulations lay down eligibility criteria for bankers to an
issue and require registrants to meet periodic reporting requirements. Part III gives
further details of registration of bankers to an issue.

5
 • Portfolio managers

Portfolio managers are required to register with SEBI in

terms of the SEBI (Portfolio Managers) Rules and Regulations, 1993. The
registered portfolio managers exclusively carry on portfolio management activities.
In addition all merchant bankers in categories I and II can act as portfolio
managers with prior permission from SEBI. Part III gives further details of the
registration of portfolio managers.

• Debenture trustees

Debenture trustees are registered with SEBI in terms

of the SEBI (Debenture Trustees) Rules and Regulations, 1993. Since 1995-96,
SEBI has been monitoring the working of debenture trustees by calling for details
regarding compliance by issuers of the terms of the debenture trust deed, creation
of security, payment of interest, redemption of debentures and redressal of
complaints of debenture holders regarding non-receipt of interest/redemption
proceeds on due dates. Part III gives further details of the registration of debenture
trustees.

• Registrars to an Issue and Share Transfer Agents

Registrars to an issue (RTI) and share transfer agents

(STA) are registered with SEBI in terms of the SEBI (Registrar to the Issue and
Share Transfer Agent) Rules and Regulations, 1993. Under these regulations,
registration commenced in 1993-94 and is granted under two categories: category I
- to act as both registrar to the issue and share transfer agent and category II - to act
as either registrar to an issue or share transfer agent. With the setting up of the

6
depository and the expansion of the network of depositories, the traditional work of
registrars is likely to undergo a change.

SECONDARY MARKET INTERMEDIARIES

• Stock brokers

All stock brokers dealing in securities are registered with

SEBI in terms of SEBI (Stock Brokers and Sub Brokers) Regulation 1992. During
1996-97, 391 additional brokers were registered with SEBI making the total
registered membership to 8,867 as on March 31, 1997.

• Sub brokers

In many cases, individual investors transact in securities

through sub brokers. It is therefore absolutely imperative to regulate this class of
intermediary. As on March 31, 1997 only 1,798 sub brokers were registered with
SEBI. The main reason for the limited success in registering large number of sub
brokers is that brokers are reluctant to take responsibility of the acts of the sub-
brokers. Measures initiated by SEBI for bringing sub-brokers more fully under the
ambit of regulatory oversight have been described earlier in this Report.

REGULATION OF FINANCIAL INTERMEDIARIES BY SEBI

Financial market in India is developing with speed and being

among the oldest in the world enjoys a good reputation and standing among the
developing economies. Procurement and vending of monetary entitlements,
possessions, services and securities are central to any financial market. Banking
and non-banking financial institutions, merchants, debtors and creditors, depositors
7
and debtors, and negotiators are the contributors on demand and supply side in
these markets. Financial markets may be a definite address or locality, e.g., stock
exchange, or it may merely be an on-mobile-set market. There are governing
institutions outlining rules and regulations in the financial markets for smooth
operations and working of monetary markets.

Ministry of Finance, Ministry of Company Affairs (MCA),

Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) are
the primary regulators ensuring proficiency and efficacy of the financial market.
Besides there are several other regulatory network bodies, i.e., Company Law
Board, Registrar of Companies, the Stock Exchanges. Keeping in view the
dynamic changes in the economy, the regulatory structure also has been modified
to cater to it. Above is a perspective of the regulations in the financial market in
general. In the ensuing paras, the regulation of Intermediaries specifically by SEBI
has been enunciated.

PRIMARY MARKET AND SECONDARY MARKET

Primary Market

The primary market refers to the market where securities are

created, while the secondary market is one in which they are traded among
investors. Various types of issues made by the corporation are a Public issue, Offer
for Sale, Right Issue, Bonus Issue, Issue of IDR, etc. The company that brings the
IPO is known as the issuer, and the process is regarded as a public issue. The
process includes many investment banks and underwriters through which the
shares, debentures, and bonds can directly be sold to the investors.

8
 For example, company XYZ Inc. hires four underwriting firms to
determine the financial details of its IPO. The underwriters detail that the issue
price of the stock will be $20. Investors can then buy the IPO at this price directly
from the issuing company. This is the first opportunity that investors have to
contribute capital to a company through the purchase of its stock. A company’s
equity capital is comprised of the funds generated by the sale of stock on the
primary market.

ROLE AND FUNCTIONS OF PRIMARY MARKET

The functions of such a market are manifold –

New issue offer

The primary market organises offer of a new issue which had not
been traded on any other exchange earlier. Due to this reason, it is also called a
New Issue Market. Organising new issue offers involves a detailed assessment of
project viability, among other factors. The financial arrangements for the purpose
include considerations of promoters’ equity, liquidity ratio, debt-equity ratio and
requirement of foreign exchange

Underwriting services

Underwriting is an essential aspect while offering a new

issue. An underwriter’s role in a primary marketplace includes purchasing unsold
shares if it cannot manage to sell the required number of shares to the public. A
financial institution may act as an underwriter, earning a commission on
underwriting. Investors rely on underwriters for determining whether undertaking

9
the risk would be worth its returns. It may so thus happen that an underwriter ends
up buying all the IPO issue, and subsequently selling it to investors.

Distribution of new issue

A new issue is also distributed in a primary marketing

sphere. Such distribution is initiated with a new prospectus issue. It invites the
public at large to buy a new issue and provides detailed information on the
company, issue, and involved underwriters.

Examples of Primary Stock Market Selling

Company Details

Facebook One of the remarkable IPOs that were

undertaken includes the Facebook
initial public offering. The offer
initiated in 2012 is to date the largest
IPO in the technology sector. The
company successfully raised $16
billion through its initial public
offering. As an effect, its turnover
increased by close to 100%.
Also, there was a high demand for the
stock in the primary market, which led
to the pricing of Facebook’s stock to be
fixed at $38 for each share as
determined by the underwriters. The
valuation of the stock eventually

10
 amounted to $104 billion, highest for a
newly formed public company.

Coal India The biggest IPO undertaken in India

was by Coal India in 2010, which
raised Rs. 15,200 Crore. The shares
were listed at Rs. 287.75 and eventually
increased to Rs.340. The company
offered a 5% discount on the final IPO
price to retail investors, along with the
subsidiaries and employees of the
company.

ADVANTAGES OF PRIMARY MARKET

● Companies can raise capital at relatively low cost, and the securities so
issued in the primary market provide high liquidity as the same can be sold
in the secondary market almost immediately.

● The primary market is an important source for mobilisation of savings in an

economy. Funds are mobilised from commoners for investing in other
channels. It leads to monetary resources being put into investment options.

DISADVANTAGES OF PRIMARY MARKET

● There may be limited information for an investor to access before

investment in an IPO since unlisted companies do not fall under the purview
of regulatory and disclosure requirements of the Securities and Exchange
Board of India.

11
 ● Each stock is exposed to varying degrees of risk, but there is no historical
trading data in a primary market for analysing IPO shares because the
company is offering its shares to the public for the first time through an
initial public offering.

SECONDARY MARKET

This includes the New York Stock Exchange (NYSE),

NASDAQ, and all major exchanges around the world. The defining characteristic
of the secondary market is that investors trade among themselves. In this market
existing shares, debentures, bonds, options, commercial papers, treasury bills, etc.
of the corporates are traded amongst investors. The secondary market can either be
an auction market where trading of securities is done through the stock exchange
or a dealer market, popularly known as Over The Counter where trading is done
without using the platform of the stock exchange.

For example, if you go to buy Amazon (AMZN) stock, you are

dealing only with another investor who owns shares in Amazon. Amazon is not
directly involved with the transaction.

Role and Functions of Secondary Market:A stock exchange provides a platform

to investors to enter into a trading transaction of bonds, shares, debentures and
such other financial instruments.

● Transactions can be entered into at any time, and the market allows for
active trading so that there can be immediate purchase or selling with little
variation in price among different transactions. Also, there is continuity in
trading, which increases the liquidity of assets that are traded in this market.

12
 ● Investors find a proper platform, such as an organised exchange to liquidate
the holdings. The securities that they hold can be sold in various stock
exchanges.

● A secondary market acts as a medium of determining the pricing of assets in

a transaction consistent with the demand and supply. The information about
transactions price is within the public domain that enables investors to
decide accordingly.

● It is indicative of a nation’s economy as well, and also serves as a link

between savings and investment. As in, savings are mobilised via
investments by way of securities.

Examples Of Secondary Market Transactions

Secondary market transactions provide liquidity to all

kinds of investors. Due to high volume transactions, their costs are substantially
reduced. Few secondary market examples related to transactions of securities are
as follows.

In a secondary market, investors enter into a transaction

of securities with other investors, and not the issuer. If an investor wants to buy
Larsen & Toubro stocks, it will have to be purchased from another investor who
owns such shares and not from L&T directly. The company will thus not be
involved in the transaction.Individual and corporate investors, along with
investment banks, engage in the buying and selling of bonds and mutual funds in a
secondary market.

13
ADVANTAGES OF SECONDARY MARKET

● Investors can ease their liquidity problems in a secondary market

conveniently. Like, an investor in need of liquid cash can sell the shares held
quite easily as a large number of buyers are present in the secondary market.

● The secondary market indicates a benchmark for fair valuation of a

particular company.

● Mobilisation of savings becomes easier as investors’ money is held in the

form of securities.

DISADVANTAGES OF SECONDARY MAR KET

● Prices of securities in a secondary market are subject to high volatility, and

such price fluctuation may lead to sudden and unpredictable loss to
investors.

● Before buying or selling in a secondary market, investors have to duly

complete the procedures involved, which are usually a time-consuming
process.

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKET

Basis of Comparison Primary Market Secondary Market

Meaning A marketplace for new The place where formerly

shares is Primary Market issued securities are
traded is Secondary
Market

Another name New Issue Market (NIM) After Market

14
Type of Purchasing Direct Indirect

Financing It helps to supply funds to It does not provide

budding enterprises and funding to enterprises
also to existing
companies for expansion
and diversification

How many times security Only once Multiple times

can be sold?

Buying and Selling Buying & selling is Buying & selling is only
between Company and between Investors
Investors

Who will gain the Company Investors

amount on the sale of
shares?

Intermediary Underwriters Brokers

Price Fixed-price Fluctuates depends on the

demand and supply
forces

Organizational difference Not rooted in any specific It has a physical

spot or geographical existence
location

15
Intermediaries in a stock market

An intermediary in a stock market is a person or an organisation

which helps people to invest their money in various company stocks. A person
involved in such intermediary activities is usually called a fund manager.

Kinds of intermediaries

Further, these intermediaries are again classified into

two broad categories. The primary and secondary Intermediaries. The major role
holders of Primary market intermediaries are briefly defined below:

Merchant bankers

Merchant bankers have a central role in the procedure of issue

management. Lead managers have to confirm perfection of the material supplied in
the offer document. They have to guarantee amenableness and adherence with
SEBI rules, principles and Guidelines for Disclosures and Investor Safeguard. A
due diligence credential is submitted to SEBI confirming that the disclosures are
reliable, unbiased and acceptable to enable the potential stakeholders to make a
well informed investment. SEBI progressively propagates and doctrines the need to
enhance the standard of disclosures. One such requirement is evaluating the net
worth of the intermediary and judging if it is in consonance with the level of
transactions being indulged by it. These are institutions that extend funds to a
company in place of loans and share the ownership of that particular company. So,
they gain a right to have a say in the corporate affairs of that organisation where
they have invested.

Hence, merchant bankers become a link between large organisations

and external markets. For instance, in India, State Bank of India, ICICI Bank,
Punjab National Bank are some of the merchant bankers.
16
REGULATION :SEBI (Merchant Bankers) Regulation), 1992

FUNCTIONS OF MERCHANT BANKERS

Raising Finance for Clients

Merchant Banking helps its clients to raise finance

through issue of shares, debentures, bank loans, etc. It helps its clients to raise
finance from the domestic and international market. This finance is used for
starting a new business or project or for modernization or expansion of the
business.

Brokers in stock exchanges

Merchant bankers act as brokers in the stock exchange.

They buy and sell shares on behalf of their clients. They conduct research on
equity shares. They also advise their clients about which shares to buy, when to
buy, how much to buy and when to sell.

Promotional activities

In India, merchant bankers play the role of promoter of

industrial enterprises. They help entrepreneurs in conceiving ideas, identifying
projects, preparation of feasibility reports, getting Government approvals as well as
incentives, etc. Merchant bankers may, at times, also provide assistance in
financial and technical collaborations and i joint ventures.

Corporate counselling

Merchant bankers render advise to corporate enterprises

from time to time in order to improve performance and build better
image/reputation among investors and to increase the market value of its equity
shares. Counselling laws as applicable to the business unit.
17
Project management or Project Advisor

Merchant bankers help their clients in the many

ways. For e.g. Advising about location of a project, preparing a project report,
conducting feasibility studies, making a plan for financing the project, finding out
sources of finance, estimation of the cost of the project, advising about concessions
and incentives from the government.

Advice on modernization and expansion

Merchant bankers give advice for expansion and

modernization of the business units. They give expert advice on mergers and
amalgamations, acquisition and takeovers, diversification of business, foreign
collaborations and joint-ventures, technology up-gradation, etc.

Managing Public Issue of Companies

Merchant bank advice and manage the public

issue of companies. They provide following services:

● Advise on the timing of the public issue.

● Advise on the size and price of the issue.

● Acting as manager to the issue, and helping in accepting applications and

allotment of securities.

● Help in appointing underwriters and brokers to the issue.

● Listing of shares on the stock exchange, etc.

18
Loan /Credit syndication

Merchant bankers provide specialised services in

preparation of project, loan applications for raising short-term as well as long-term
credit from various banks and financial institutions for financing the project or
meeting the working capital requirements. They also manage Euro-Issues and help
in raising funds abroad.

Portfolio Management

A merchant bank manages the portfolios (investments) of

its clients. This makes investments safe, liquid and profitable for the client. It
offers expert guidance to its clients for taking investment decisions.

Bill Discounting and Acceptance Credit

In foreign countries, acceptance credit and bill discounting

function is another important area which is recognised as a merchant banking
activity. But in India this facility is not provided to the corporate units by the
merchant bankers.

The need for such services was recognised when Banking

Commission 1972, in its report had recommended the establishment of acceptance
and discount house in India following the development of bill market.

Leasing Service

Merchant bankers also help in leasing services. Lease is a contract

between the lessor and lessee, whereby the lessor allows the use of his specific
asset such as equipment by the lessee for a certain period. The lessor charges a fee
called rentals.

19
Revival of Sick Industrial Units

Merchant banks help to revive (cure) sick industrial units. It

negotiates with different agencies like banks, term lending institutions, and BIFR
(Board for Industrial and Financial Reconstruction). It also plans and executes the
full revival package

Corporate Restructuring

It includes mergers or acquisitions of existing business units,

sale of existing unit or disinvestment. This requires proper negotiations,
preparation of documents and completion of legal formalities. Merchant bankers
offer all these services to their clients.

Services to Public Sector Units

Merchant banks offer many services to public sector units and

public utilities. They help in raising long-term capital, marketing of securities,
foreign collaborations and arranging long-term finance from term lending
institutions.Merchant bankers also help companies in raising finance by way of
public deposits.

Promotional activities

In India, merchant bankers play the role of promoter of

industrial enterprises. They help entrepreneurs in conceiving ideas, identifying
projects, preparation of feasibility reports, getting Government approvals as well as
incentives, etc. Merchant bankers may, at times, also provide assistance in
financial and technical collaborations and joint ventures.

20
Stockbroker

It applies to all stock brokers trading in stocks/securities. Such

brokers are part of the stock market as they assist in trading of securities. Although
they charge a specific fee for facilitating such trading, their work is more effective
than others. One of the most viable reasons behind such efficiency is their
knowledge of the stock market.

A trader lacks such knowledge and is likely to end up buying or

selling securities at a higher price than it should be. In such conditions, an
intermediator can help in linking the stock exchanges and traders rightfully.

REGULATION :SEBI (Stock Brokers and Sub Brokers) Regulation 1992

FUNCTION OF STOCKBROKER

Advisory Services

Stock Market brokers possess expertise related to the working

of stock market, performance of stocks, market trends, and so on. Besides, they
have access to the data base and research findings of brokerage firms that they are
associated with. Hence, they can provide excellent investment advice to their
clients.

Limited banking services

Stock market brokers are authorized to provide limited

banking services such as interest-bearing accounts, electronic deposits, and
withdrawals. The clients can avail such banking-related services from the stock
brokers by paying them a nominal brokerage charge.

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Other Investments

Apart from stocks, many stock brokers also deal in other

securities such as mutual funds, bonds, exchange traded funds, futures, options and
commodity trading. They also provide investment advice related to all these
products, to their clients.

Understanding the Role of a Stockbroker

Buying or selling stocks requires access to one of the major

exchanges such as the New York Stock Exchange (NYSE) or the NASDAQ. To
trade on these exchanges you must be a member of the exchange or belong to a
member firm. Member firms and many of the individuals who work for them are
licensed as brokers or broker-dealers by the Financial Industry Regulatory
Authority (FINRA).

Sub Broker

Sub-brokers play a major role in transactions of securities by singular

stockholders/depositors. This also falls under the category of secondary markets
and the need to regulate this market is also unquestionably domineering. Brokers
are hesitant to take accountability of the deeds of the sub-brokers resulting in major
challenges faced in registering them with SEBI.

A sub-broker is not directly linked to the stock exchanges but is a proxy

member who has the necessary knowledge to act on behalf of the trading member.
He can assist trading members and also investors in matters of securities dealing.

22
REGULATION : SEBI (Stock Brokers and Sub Brokers) Regulation 1992

Registrars to An Issue and Share Transfer Agent

It applies to the Registrars to an issue (RTI) and are

share transfer agents (STA). Registration is approved in two categories: category I
– as registrar to the issue plus share transfer agent; category II – as either registrar
to an issue or share transfer agent. Secondary Market Intermediaries.

REGULATION :SEBI (Registrar to the Issue and Share Transfer Agent)

Rules and Regulations, 1993

The role of a ‘Registrar to an issue’

● Collecting applications from investors with respect of an issue.

● Proper maintenance of applications, and any monies received from investors

or paid to the seller of securities, and

● Assisting the body corporate in terms of; determining the basis of allotment
of securities in consultation with the stock exchange, finalizing the list of
persons entitled to allotment of securities and; processing and dispatching
allotment letters, refund orders or certificates and other related documents in
respect of the issue.

● The merchant banker co-ordinates with the Registrar to ensure the proper
execution of the process.

23
The role of Share Transfer Agent

‘Share transfer agent’ is an agent who, on behalf of the

body corporate, maintains recorders of holders of securities issued by such body
corporate and deals with the processes of transfer and redemption of securities.

Certain roles, as per SEBI guidelines, must only be performed

by a ‘Share transfer agent’. These activities are:

● Endorsement of certificates/for allotment/call monies.

● Transmission, consolidation, sub-division of securities.

● Dispatch of transferred securities and securities received for

transmission/consolidation/sub-division etc, directly to the investors.

● Cancel the name and certificate of the shareholder who had sold the shares
of securities, and replace it with the new shareholder.

Underwriter

As the name implies, underwriters are entities directly associated with a

company or an organisation. Their primary function is to manage people and talk
to them regarding investment in multiple schemes or so.

Additionally, all SEBI registered merchant bankers of defined categories,

stockbrokers and mutual funds can also play the role as underwriters.

In India, for instance, an insurance company can be an underwriter. It

charges a certain fee for providing you with insurance services under certain terms
and conditions.
24
REGULATION : SEBI (Underwriters) Rules and Regulations, 1993

FUNCTIONS OF UNDERWRITERS

● The investment banker purchase the entire issue from the issuer and resells
the security to the investing public.

● The firm charges a commission for providing this service

● For municipal bonds, the underwriting function is performed by both

investment banking firms and commercial banks.

TYPES OF UNDERWRITER

Insurance Underwriter

Insurance underwriters asses the risk of insuring a home,

car or driver. They also assess individuals who are applying for life insurance
policies. Insurance underwriters determine if the contract is profitable for the
insurer. They consider if the applicant meets certain criteria to qualify for an
insurance policy. From there, they establish the type of policy for which an
applicant is eligible. Finally, they provide an outline of what the policy covers for
the applicant’s unique circumstance.

Insurance underwriters are insurance professionals. They

understand insurance risks and how to avoid them. They use their risk assessment
to decide if they will insure someone and under what terms they’ll provide a
policy.In cases without special circumstances, underwriting is done through an
automated system. Underwriting programming is similar to a quoting system. It’s
able to determine if an applicant meets the insurer’s specific requirements for
coverage.
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Mortgage Underwriter

Mortgage underwriters are some of the most commonly

used underwriters among the loan industry. Even if a new homeowner has a good
income and great credit score, buying a home is still a risky endeavor. A mortgage
underwriter must do a thorough risk assessment. Once an assessment is done, the
underwriter can confirm if the loan is a manageable undertaking for the applicant.

At any rate, underwriters may review internal information such as

the number of mortgages the company has given out. They also review an
applicant’s credit score and history, proof of steady income, debt-to-income ratio,
overall savings and other important factors that determine their risk. Additionally,
the underwriter will assess features in and outside of the mortgage applicant’s
control, such as the value and type of property. This helps determine if the
mortgage terms are fair for all parties.If an underwriter denies the mortgage, the
applicant can appeal the decision. However, the process can be lengthy and often
requires a large amount of evidence to be overturned.

Loan Underwriter

Similar to mortgage underwriters, loan underwriters asses the

risk involved in lending an applicant a loan such as an auto loan. The objective is
to determine if the loan is safe for all parties. Large banks often use a combination
of underwriters and underwriting software to determine the risk of lending funds to
an applicant. Using the combination of software and an underwriter is a common
practice among big and small banks. In some cases, underwriters may need to
assist financial institutions with underwriting for business loans. Depending on the
size of the business, an underwriter may need to work with multiple banks.

26
Securities Underwriter

A securities underwriter is a different type of

underwriter. Securities underwriters often work with initial public offerings (IPOs).
They asses the investment’s risk to determine an appropriate price for an IPO.
Typically, a securities underwriter is an employee of the investment bank or
another specialist.

One of the biggest risks involved with securities underwriting is the

sales period. For instance, if a security doesn’t sell for the suggested price, the
investment bank is liable for the difference.

Bankers to an Issue

It applies to the scheduled banks standing-in as bankers to an issue. The

eligibility criteria and reporting periodicity for bankers to an issue is documented
in these regulations.

REGULATION :SEBI (Bankers to the Issue) Rules and Regulations, 1994

ROLE OF BANKER TO AN ISSUE

"Banker to an issue” means a scheduled bank

carrying on all or any of the following issue related activities namely:-

● Acceptance of application and application monies

● Acceptance of allotment or call monies;

● Refund of application monies;

● Payment of dividend or interest warrants.

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PORTFOLIO MANAGERS

It applies to registration of portfolio managers with SEBI.

The portfolio management activities are the sole and core responsibility of the
registered portfolio managers. All merchant bankers of categories I and II can act
as portfolio managers with previous authorization from SEBI.

It can be a person or a group of person or even an institution that

manages money to be traded in the stock market. These intermediaries discuss the
entire plan of investment with their team or with the organisation and then they
trade in stocks or securities in the market.

Also, these types of Intermediaries invest in bonds, derivatives,

mutual funds, etc to make more money out of their investments.

REGULATION :SEBI (Portfolio Managers) Rules and Regulations, 1993

Role and Responsibilities of Portfolio Manager

● A portfolio manager plays a pivotal role in deciding the best investment plan
for an individual as per his income,age as well as ability to undertake risks.

● A portfolio manager is responsible for making an individual aware of the

various investment tools.

● portfolio manager is responsible for designing customised investment

solutions for the clients.

● A portfolio manager should keep himself updated with the latest changes in
the financial market.

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Functions

● To frame investment strategies and select investment mix.

● Hedge against inflation and also optimize returns

● To make timely decision about sell and purchase of securities.

● To maximize after tax return by investing part of the portfolio in tax saving
investments.

Factors that influence portfolio decisions

● Investors characteristics

● Liquidity needs

● Tax consideration

● Safety of principal

● Assurance of income

● Investment risk

● Interest rate risk

Debenture Trustees

It shall apply to debenture trustees to be registered with

SEBI. Their active role is in ensuring the amenability by the issuers with the norms
of the deed pertaining to the debenture trust, creation of the security, imbursement
of interest, debenture redemption, handling of grievances of debenture holders
w.r.t interest/redemption proceeds not received on payable dates.

29
 These personnel are registered with the Securities and Exchange
Board of India (or SEBI) and function based on the rules cited in SEBI Guidelines,
1993. These personnel are monitored by SEBI on their functions of creating
security, complaints redressal, interest payments and debenture redemption.

They act as the connecting links between debenture holders and the organisation or
company whose debentures have been purchased by those holders.

REGULATION :SEBI (Debenture Trustees) Rules and Regulations, 1993.

Functions of Debenture Trustees

The function of Debenture Trustees shall generally be to protect the

interests of holders of the Debenture( including the creation of securities within the
stipulated time) and to redress the grievances of holders of Debenture effectively.

● To redress the grievances of holders of Debenture effectively.

● To protect the interests of Debenture holders

● Ensuring that the securities have been created within a stipulated time.

● Inform the Debenture holders immediately if there is breach of terms of

issue of Debenture

● Call upon the meeting of a Debenture holders wherever required

● Call for the report on the utilisation of funds raised by issue of Debentures.\

Foreign Institutional Investors

A foreign institutional investor (FII) is an investor

or investment fund investing in a country outside of the one in which it is

30
registered or headquartered. The term foreign institutional investor is probably
most commonly used in India, where it refers to outside entities investing in the
nation's financial markets. The term is also used officially in China.

Foreign Institutional Investors is an institutional, individual or

group entity seeking to invest in the economy of a country other than where the
entity is headquartered. FIIs are important to emerging economies because they
bring funds and capital to businesses in developing countries.

FIIs can include hedge funds, insurance companies, pension

funds, investment banks, and mutual funds. FIIs can be important sources of
capital in developing economies, yet many developing nations, such as India, have
placed limits on the total value of assets an FII can purchase and the number of
equity shares it can buy, particularly in a single company. This helps limit the
influence of FIIs on individual companies and the nation's financial markets, and
the potential damage that might occur if FIIs fled en masse during a crisis.

Foreign Institutional Investors (FIIs) in India

Some of the countries with the

highest volume of foreign institutional investments are those with developing
economies, which generally provide investors with higher growth potential than
mature economies. This is one reason FIIs are commonly found in India, which has
a high-growth economy and attractive individual corporations to invest in. All FIIs
in India must register with the Securities and Exchange Board of India (SEBI) to
participate in the market.

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 ● A foreign institutional investor is an investor in a financial market outside its
official home country.

● Foreign institutional investors can include pension funds, investment banks,

hedge funds, and mutual funds.

● Some countries place restrictions on the size of investments by foreign

investors.

ADVANTAGES OF FII’S

● FII’s will enhance the flow of capital into the country

● These investors generally prefer equity over debt. So this will also help
maintain and even improve the capital structures of the companies they are
investing in.

● They have a positive effect on the competition in the financial markets

● FII help with the financial innovation of capital markets

● These institutions are professionally managed by asset managers and

analysts. They generally improve the capital markets of the country.

DISADVANTAGES OF FII’S

● The demand for the local currency (rupee) increases. This can cause severe
inflation in the economy.

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 ● These FII’s drive the fortune of big companies in which they invest. But
their buying and selling of securities have a huge impact on the stock
market. The smaller companies are taken along for the ride.

● Sometimes these FII’s seek only short-term returns. When they pull their
investments banks can face a shortage of funds.

ROLE OF FII’S

● FII work on strengths of developing countries and then they invest in

respective countries.

● This also helps developing countries to know about their strengths and
opportunities available. FII investment in India helped in achieving a higher
degree of liquidity at domestic stock market.

● It had increased price earnings ratios .

● Reduced the cost of capital for investment.

● Along with this they also help in improving the functioning of the domestic
stock market.

● Foreign institutional Investors (FIIs) only aid the domestic investment by

increasing capital inflows through the secondary markets and are very
volatile

● FDI provides not only inflow of foreign funds and investments but also
transfer of advanced technology and skills, thus creating job opportunities

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Custodians

Custodians are SEBI-registered market intermediaries, primarily

responsible for safe-keeping of securities (such as shares) of their clients. They
offer a variety of services to clients, such as corporate action reconciliation, post-
trading services of clearing and settlement.

Custodians, as an important market intermediary, help in reducing

systemic risk in the capital market. They also facilitate issuance of cross-border
securities, such as American Depository Receipts and Global Depository Receipts.

Custodians are appointed mostly by institutional clients to avail the

above-mentioned services. They charge fees from their clients for providing these
services, which are mostly based on value of assets held by them on behalf of their
clients.

Some of the leading custodians globally are Bank of New York

Mellon Corp., State Street Corp., etc. In India, the leading custodians are Stock
Holding Corp. of India, HDFC Bank Ltd., ICICI Bank Ltd., et

Role of Custodians

● Custodians are clearing members but not trading members.

● They settle trades on behalf of their clients that are executed through other
trading members.

● A trading member may assign a particular trade to a custodian for

settlement.

34
 ● If the custodian rejects the trade, the obligation is assigned back to the
trading member.

Examples of Custodian responsibilities

● Use cleaning supplies and equipment to keep the interior of the office
building looking clean and professional

● Respond to repair requests quickly and with a professional manner

● Maintain a library of user manuals for office furniture and fixtures that can
be referred to when needed

● Adhere to the company’s safety policies to create a safe work environment

for everyone

● Perform routing cleaning tasks based on a schedule created by the facility

management team.

Credit Rating Agencies

Credit rating agencies (CRAs) play a key role in financial

markets by helping to reduce the informative asymmetry between lenders and
investors, on one side, and issuers on the other side, about the creditworthiness of
companies or countries. A credit rating agency (CRA) evaluates and assesses an
individual’s or a company’s creditworthiness. That is, these agencies consider a
debtor’s income and credit lines to analyse the debtor’s ability to repay the debt or
if there is any credit risk associated. Securities and Exchange Board of India
(SEBI) reserves the right to authorise and regulate credit rating agencies according
to SEBI Regulations, 1999 of the SEBI Act, 1992

35
credit rating:

A credit score is a 3-digit number that represents the creditworthiness of

the borrower. Credit rating is the analysis of the possible credit risks associated
with granting a financial instrument to an individual or a company. Based on the
credit score, a lender determines whether the borrower can repay the loan amount
or not.

The credit score is determined based on the following factors.

● Payment History: 35%

● Credit Utilisation: 30%

● Credit History Duration: 15%

● Credit Mix: 10%

● New Credit: 10%

List of registered credit rating agencies

● CRISIL Limited

● India Ratings and Research Pvt Ltd

● ICRA Limited

● CARE

● Brickwork Ratings India Pvt Ltd

● SMERA Ratings Limited

● Infometrics Valuation and Rating Pvt Ltd

Functions of Credit rating agencies

36
Business Analysis

A credit rating company will analyze the business condition of

the borrowing company not merely by the profits the borrowing concern has made,
but by the use of capital in a more productive purpose. The return on capital and
the cost of capital will be analyzed.

Evaluation of industrial risks

Every industry will have its risks which are due to

natural or market conditions such as competition or due to the substitutes that have
arrived in the market. The extent of risks and measures to overcome them will be
taken into account while judging the credit rating of the company.

Market position of the company within the industry

What is the share of the market of the company

seeking credit rating? A higher percentage of market share will involve more risks
as the company has to be vigilant to maintain its share. So, a credit rating agency
will give due weightage for the market share of the borrowing concern.

Operating efficiency

This is judged from the point of view of utilization of the

capacity. When full capacity is utilized, the company has an advantage over others.
This may be possible due to location advantage or better labor relations. These will
be looked into by the credit rating agency.

37
Legal position in terms of prospectus

The statements made in the prospectus, should be

true and factual. If tall claims are made, they will hamper the growth of the
company and the credit rating agency will not rely on the prospectus of the
company. It may also be construed as a willful fraud for attracting more funds. So,
the contents of prospectus will also be a factor for credit rating considerations.

Financial analysis based on accounting quality

If accrued incomes are taken for making a

window-dressing of balance sheet, it will not reflect well on the quality of
accounting of the borrowing concern. Companies relying on realized income, will
be in a better position to provide a realistic balance sheet.

Statement of profits

There may be over statement or under statement of profits

depending upon the purpose for which the statement is prepared. Here, again the
credit rating agency has to scrutinize the realistic position of the company.

Adequacy of cash flow

Is the cash flow sufficient to meet its current commitments

as well as any other contingencies? This factor is taken into consideration by the
rating agencies.

Capacity to overcome adverse situations (catastrophe management)

Agency studies the available mechanism for recovery with

the company for meeting any sudden unforeseen calamities.

38
Asset quality

Here, the value of assets and the price of the assets according to the
market conditions and the provisions made for these assets will be taken into
account credit rating authorities. Performance of assets will also be taken. The
extent of standard, sub standard, doubtful and bad assets will also be taken into
account while granting credit rating

VENTURE CAPITALIST

Meaning

A venture capitalist (VC) is a private equity investor that provides capital

to companies exhibiting high growth potential in exchange for an equity stake.
This could be funding startup ventures or supporting small companies that wish to
expand but do not have access to equities markets.

● A venture capitalist (VC) is an investor who provides capital to firms that

exhibit high growth potential in exchange for an equity stake.

● VCs target firms that are at the stage where they are looking to
commercialize their idea.

● Well-known venture capitalists include Jim Breyer, an early Facebook (FB)

investor, and Peter Fenton, an investor in Twitter (TWTR).

● VCs experience high rates of failure due to the uncertainty that is involved
with new and unproven companies.

39
Venture capital firms in India

● Blume Ventures

● Accel Partners

● Helion Venture Partners

● Sequoia Capital India Advisors Private Limited

● Sequoia Capital

● Matrix Partners

● Matrix Partners India

ROLE AND FUNCTIONS OF VENTURE CAPITALISTS

● Finance new and rapidly growing company for longer time horizon.

● Purchase equity or securities.

● Assist in the development of new products or services.

● Deplay professional for giving proper input to venture.

● Add value to the company through active participation.

● Obtain finance capital for starts- ups.

● Evaluate projects for other participation in venture.

● Provide expertise for the development of the firm.

● Central coordinator for the participation involved in firms.

40
ADVANTAGES OF VENTURE CAPITALIST

Raising Huge Capital

Venture capital is beneficial for those companies which are

need of enormous funds for growing their business. Expert Advice and Guidance:
A venture capitalist not only finances an organization but also provides the
necessary support and guidance.No Monthly Installments: Unlike loans, the owner
does not need to pay any monthly or fixed instalments (which is charged right from
the borrowing date), in venture capital.

Additional Funding

In case, the business requires more capital; venture capitalists

can either invest themselves or recommend other such firms.

No Collateral Required: Unlike other debt instruments, a venture capitalist does

not ask for mortgaging any personal asset or valuables.

Building Strong Business Network

It also helps the startups to develop a robust network, since

venture capital firms have connections with the top entrepreneurs whom they have
previously funded.

Better Exposure and Publicity: A startup business backed

by venture capitalists receives attention and recognition from the potential
investors, partners, associates, customers and employees.

41
Risk Management and Decision Making

The expert assistance and support to handle various

situations in the initial stage of business reduces the risk level and provides for
effective decision making.

Operational Assistance and Superior Leadership: The

chances of growth and success increase with an experienced team leading the
operational and managerial activities of the organization.

IMPORTANCE OF VENTURE CAPITAL FINANCING

1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory

findings to reality and makes it commercially successful, similarly, an
entrepreneur converts his technical know-how to a commercially viable
project with the assistance of venture capital institutions.
2. Promotes products: New products with modern technology become
commercially feasible mainly due to the financial assistance of venture
capital institutions.
3. Encourages customers: The financial institutions provide venture capital to
their customers not as a mere financial assistance but more as a package deal
which includes assistance in management, marketing, technical and others.
4. Promotes exports: The Venture capital institution encourages export
oriented units because of which there is more foreign exchange earnings of
the country.
5. As Catalyst: A venture capital institution acts as more as a catalyst in
improving the financial and managerial talents of the borrowing concern.The
borrowing concerns will be more keen to become self dependent and will
take necessary measures to repay the loan.

42
6. Creates more employment opportunities: By promoting entrepreneurship,
venture capital institutions are encouraging self employment and this will
motivate more educated unemployed to take up new ventures which have
not been attempted so far.
7. Brings financial viability: Through their assistance, the venture capital
institutions not only improve the borrowing concern but create a situation
whereby they can raise their own capital through the capital market. In the
process they strengthen the capital market also.
8. Helps technological growth: Modern technology will be put to use in the
country when financial institutions encourage business ventures with new
technology.
9. Helps sick companies: Many sick companies are able to turn around after
getting proper nursing from the venture capital institutions.
10. Helps development of Backward areas: By promoting industries in
backward areas, venture capital institutions are responsible for the
development of the backward regions and human resources.
11. Helps growth of economy: By promoting new entrepreneurs and by
reviving sick units, a fillip is given to the economic growth. There will be
increase in the production of consumer goods which improves the standard
of living of the people.

43
 QUESTION BANK

UNIT-II

PART-A

1.What are the challenges faced by merchant bankers?

2.State the advantages and disadvantages of a Primary market.

3.Who regulates rating agencies?

4.Who can be appointed a Debenture Trustee?

5.What services are offered by a Custodian?

6.List any 5 Credit rating Agencies.

7."Venture Capitalists are Angel Investors"- Justify

8.What are the common factors that are taken into account while awarding the
credit rating?

9.Write short note on bankers to an issue

10.Why are intermediary in stock exchange also called as Fund managers?

PART-B

1.Differentiate Primary market from Secondary Market

2.Explain in detail the meaning and Functions of Credit rating Agencies.

3.Determine Venture capital guidelines of SEBI

4. Explain the roles and responsibilities of a Custodian.

44
5.Analyse the functions of an underwriter.

6.Classify the types of Primary Market Intermediaries.

7.Summarize the role of Debenture Trustee in detail.

8.Criticize the role and functions of a Primary Market.

9.Summarize the role and functions of a Secondary Market.

10.Explain about the SEBI Regulations on Merchant Banking

REFERENCE

❖ KONDAIAH JONNALAGADD, SECURITIES LAW, LEXIS NEXIS,2015

❖ MS ZAD,SECURITIES LAW AND CAPITAL MARKET,TAXMAN,2019
❖ RAJNISH KUMAR,CAPITAL MARKET AND SECURITIES
LAW,COMMERCIAL LAWPUBLISHERS,9 TH EDITION,2018

45
 UNIT 3 LISTING OF SECURITIES

Rules relating to Public Issue and Listing of Securities; Issue of Capital and
Disclosure Requirements (ICDR) Procedure for Issue of Various Types of
Shares and Debentures -Employee Stock Option Scheme and Employee Stock
Purchase Scheme.

What is a Security?

A security is a financial instrument, typically any financial

asset that can be traded. The nature of what can and can’t be called a security
generally depends on the jurisdiction in which the assets are being traded.

In the United States, the term broadly covers all traded financial
assets and breaks such assets down into three primary categories:

1) Equity securities – which includes stocks

2) Debt securities – which includes bonds and banknotes
3) Derivatives – which includes options and futures

Types of Securities

1. Equity securities

Equity almost always refers to stocks and a share of ownership

in a company (which is possessed by the shareholder). Equity securities usually
generate regular earnings for shareholders in the form of dividends. An equity

46
security does, however, rise and fall in value in accord with the financial markets
and the company’s fortunes.

2. Debt securities

Debt securities differ from equity securities in an important

way; they involve borrowed money and the selling of a security. They are issued
by an individual, company, or government and sold to another party for a certain
amount, with a promise of repayment plus interest. They include a fixed amount
(that must be repaid), a specified rate of interest, and a maturity date (the date
when the total amount of the security must be paid by).

Bonds, bank notes (or promissory notes), and Treasury

notes are all examples of debt securities. They all are agreements made between
two parties for an amount to be borrowed and paid back – with interest – at a
previously-established time.

3. Derivatives

Derivatives are a slightly different type of security because their

value is based on an underlying asset that is then purchased and repaid, with the
price, interest, and maturity date all specified at the time of the initial transaction.

The individual selling the derivative doesn’t need to own the

underlying asset outright. The seller can simply pay the buyer back with enough
cash to purchase the underlying asset or by offering another derivative that satisfies
the debt owed on the first.

47
 A derivative often derives its value from commodities such as gas or
precious metals such as gold and silver. Currencies are another underlying asset a
derivative can be structured on, as well as interest rates, Treasury notes, bonds, and
stocks.

Derivatives are most often traded by hedge funds to offset risk from
other investments. As mentioned above, they don’t require the seller to own the
underlying asset and may only require a relatively small down payment, which
makes them favorable because they are easier to trade.

Listing of Securities
Listing means the admission of securities of a company to
trading on a stock exchange. Listing is not compulsory under the Companies Act.
It becomes necessary when a public limited company desires to issue shares or
debentures to the public. When securities are listed in a stock exchange, the
company has to comply with the requirements of the exchange.

Objectives of Listing
The major objectives of listing are

1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.

3. To protect shareholders and investors interests.

4. To provide a mechanism for effective control and supervision of trading.

48
Listing requirements
A company which desires to list its shares in a stock
exchange has to comply with the following requirements:

1. Permission for listing should have been provided for in the Memorandum of
Association and Articles of Association.
2. The company should have issued for public subscription at least the minimum
prescribed percentage of its share capital (49 percent).

3. The prospectus should contain necessary information with regard to the opening
of subscription list, receipt of share application etc.

4. Allotment of shares should be done in a fair and reasonable manner. In case of

over subscription, the basis of allotment should be decided by the company in
consultation with the recognized stock exchange where the shares are proposed to
be listed.
5. The company must enter into a listing agreement with the stock exchange. The
listing agreement contains the terms and conditions of listing. It also contains the
disclosures that have to be made by the company on a continuous basis.

Minimum Public Offer

A company which desires to list its securities in a stock
exchange, should offer at least sixty percent of its issued capital for public
subscription. Out of this sixty percent, a maximum of eleven percent in the
aggregate may be reserved for the Central government, State government, their
investment agencies and public financial institutions.

49
 The public offer should be made through a prospectus and through
newspaper advertisements. The promoters might choose to take up the remaining
forty percent for themselves, or allot a part of it to their associates.
Fair allotment
Allotment of shares should be made in a fair and transparent
manner. In case of over subscription, allotment should be made in an equitable
manner in consultation with the stock exchange where the shares are proposed to
be listed.

In case, the company proposes to list its shares in more than one
exchange, the basis of allotment should be decided in consultation with the stock
exchange which is located in the place in which the company’s registered office is
located.

Listing Procedure
The following are the steps to be followed in listing of a
company’s securities in a stock exchange:
1. The promoters should first decide on the stock exchange or exchanges where
they want the shares to be listed.

2.They should contact the authorities to the respective stock exchange/ exchanges
where they propose to list.

3. They should discuss with the stock exchange authorities the requirements and
eligibility for listing.

4. The proposed Memorandum of Association, Articles of Association and

Prospectus should be submitted for necessary examination to the stock exchange
authorities

50
5. The company then finalizes the Memorandum, Articles and Prospectus

6. Securities are issued and allotted.

7. The company enters into a listing agreement by paying the prescribed fees and
submitting the necessary documents and particulars.

8. Shares are then and are available for trading.

Benefits of Listing / Going Public

Listing means the formal admission of
securities of a company to the trading platform of the Exchange. It is a significant
occasion for a company in the journey of its growth and development. It enables a
company to raise capital while strengthening its structure and reputation. It
provides liquidity to investors and ensures effective monitoring of compliance of
the issuer and trading of the securities in the interest of investors.

A LISTING STATUS COULD OFFER A COMPANY THE FOLLOWING

BENEFITS:

Access to Capital for Growth

Most companies reach a level wherein additional

capital is required to be infused to fund the company's growth / expansion plans.
Going public is thereby a method of overcoming these constraints. By listing on a
Stock Exchange, the company increases shareholder base and enhances credibility.

Enhanced Visibility

Going public improves company’s visibility and credibility

among institutions and the investing public due to complying with various
regulatory norms and ensuring transparency while conducting operations.

51
Liquidity

Listing stimulates liquidity, giving shareholders the opportunity to

realize the value of their investments. It allows shareholders to transact in the
shares of the company, sharing risks as well as benefitting from any increase in the
organizational value.

Increase in employee morale

Going public increases visibility and improves

public perception of the organization, thereby increasing employee value and
morale. It may also lead to hiring of new staff and may facilitate stock-based
payments such as ESOPs etc.

Transparency and efficiency

Listing brings transparency and efficiency in the

overall operations of the company. The board and management team of a listed
company has accountability towards it shareholders. Further, listed companies also
need to ensure timely compliance by providing information / disclosure to the
Exchange / shareholders as laid down in the Listing Agreement or applicable
guidelines.

Conditions for Listing

Before listing securities, a company has to fulfill the
following conditions:
1. Shares of the company must be offered to the public through a prospectus and
25% of each class of securities must be offered.

2. The prospectus should clearly mention opening of subscription, receipt of

application, etc.

52
3. The capital structure of the company should be broad-based and there should-be
public interest in securities.

4. The minimum issued capital must be Rs. 3 crores of which Rs. 1.80 crores must
be offered to the public.

5. There must be at least five public shareholders for every Rs. 1 lakh of fresh issue
of capital and 10 shareholders for every Rs. 1 lakh of offer for sale of existing
capital. On the excess application money, the company will have to pay interest
from 4% to 15%, if there is delay in refund and delay should not be more than 10
weeks from the date of closure of subscription list.

6. A company with paid up capital of more than Rs. 5 crores should get itself listed
in more than one stock exchange, it includes the compulsory listing on regional
stock exchange.

7. The auditor or secretary of the company applying for listing should declare that
the share certificates have been stamped so that shares belonging to the promoter’s
quota cannot be sold or hypothecated or transferred for a period of 5 years.

8. Articles of Association of the company must have the following provisions:

▪ A common form of transfer shall be used

▪ Fully paid shares shall be used
▪ No lien on fully paid shares
▪ Calls paid in advance will not carry a right to dividend and will not be
forfeited before the claim becomes time-barred.
▪ Option to call off shares shall be given only after sanction by the general
meeting.

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9. Letter of allotment, Letter of regret and letter of rights shall be issued
simu1taneously.

10. Receipts for all the securities deposited, whether for registration or split and no
charges will be made for the services.

11. The company will issue consolidation and renewal certificates for split
certificate, letter of allotment, letter of rights and transfer, etc. when required.

12. The stock exchange should be notified by the company regarding the date of
board meeting, change in the composition of board of directors, and any new issue
of securities, in place of reissue of forfeited shares.
13. Closing the transfer books for the purpose of declaration of dividend, rights
issue or bonus issue. And for this purpose, due notice should be given to stock
exchange.
14. Annual return of the company to be filed soon after the annual general body
meeting.

Types of Listing of Securities:

1. Initial listing: Here, the shares of the company are listed for the first time on a
stock exchange.
2. Listing for public Issue: When a company which has listed its shares on a stock
exchange comes out with a public issue.
3. Listing for Rights Issue: When the company which has already listed its
shares.in the stock exchange issues securities to the existing shareholders on rights
basis.

54
4. Listing of Bonus shares: When a listed company in a stock exchange is
capitalizing its profit by issuing bonus shares to the existing shareholders.
5. Listing for merger or amalgamation: When the amalgamated company issues
new shares to the shareholders of amalgamated company, such shares are listed.

Procedure for listing requirements

For listing the shares in the stock exchange,
the public limited company will have to submit supporting documents. They are:

1. Certified copies of Memorandum, Articles of Association, prospectus and

agreements with Underwriters.
2. All particulars regarding capital structure.
3. Copies of advertisements offering securities for sale during the last 5 years.

4. Copies of Balance sheet, audited accounts and auditors’ report for the last 5
years.

5.Specimen copies of shares and debentures, certificate letter of allotment, and

letter of regret.

6. A brief history of the company since incorporation with any changes in capital
structure, borrowings, etc.

7. Details of shares and debentures issued for consideration other than cash.

8. Statement showing distribution of shares and particulars of commission,

brokerage, discounts or special terms towards the issue of shares.

9. Any agreement with financial institutions.

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10. Particulars of shares forfeited.

11. Details of shares or debentures for which permission to deal with is applied for.

12. Certified copy of consent from SEBI.

Procedure at the Stock Exchange

After the application is made the Listing
Committee of the stock exchange will scrutinize the application form of the
company. Here, the stock exchange will ensure the following—

1. The financial position of the company is sound

2. Solvency and liquidity positions are good

3. The issue is large and broad based to generate public interest. If the application
for listing is accepted, the listed company will be called to execute listing
agreement with the stock exchange. The company must follow certain obligations
which are:

▪ the company will treat all the applications with equal fairness.
▪ in case of over subscription, the allotment will be decided in consultation
with stock exchanges; and
▪ the company will notify to the stock exchange any change in its
management, business, capital structure or bonus or rights issue of
shares.

56
SEBI (Issue of Capital and Disclosure Requirements) (Amendment)
Regulations, 2021:
These regulations may be called the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) (Amendment)
Regulations, 2021.

As per Securities and Exchange Board of India (Issue of Capital

And Disclosure Requirements) Regulations, 2018, Regulation 112 has been
amended where minimum promoter’s contribution is not required.

After amendment, w.e.f. 08.01.2021, Regulation 112(b) has been

substituted where minimum promoter’s contribution is not required in case of-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:

i. 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;

ii. 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

However, if the issuer has not complied with the provisions of the
SEBI (LODR) Regulations, 2015, relating to composition of board of directors, for
any quarter during the last three years immediately preceding the date of filing of
draft offer document/offer document, but is compliant with such provisions at the
time of filing of draft offer document/offer document, and adequate disclosures are
made in the offer document about such non-compliances during the three years

57
immediately preceding the date of filing the draft offer document/offer document,
it shall be deemed as compliance with the condition

Furthermore, where the promoters propose to subscribe to the

specified securities offered to the extent greater than higher of the two options
available in clause (a) of sub regulation (1) of regulation 113, the subscription in
excess of such percentage shall be made at a price determined in terms of the
provisions of regulation 164 or the issue price, whichever is higher.

Provided further that where the promoters propose to subscribe to

the specified securities offered to the extent greater than higher of the two options
available in clause (a) of sub-regulation (1) of regulation 113, the subscription in
excess of such percentage s hall be made at a price determined in terms of the
provisions of regulation 164 or the issue price, whichever is higher.”

II. In regulation 115, the existing proviso after clause (c), shall be omitted.

III. In regulation 167, after the existing sub-regulation (4), the following new
proviso shall be inserted, namely, –

“Provided that the lock-in provision shall not be applicable to the specified
securities to the extent to achieve 10% public shareholding.”

Issue of shares and debentures

A limited company may raise finance either by issuing

shares or by raising loans. Debentures are simply a type of loan.

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Issue of shares

A share is a unit of ownership in a company or an organisation. It

is also considered as an asset, because in case a company makes a profit, an
amount in proportion to share held by you will be provided to you in the form of a
dividend. Anyone who holds a share is called a shareholder for that specific
organisation.
It should be noted that an organisation is allowed to offer shares to
be purchased by others through the Companies Act 2013 and has to follow the
rules predefined under the act.
Generally, the iss ue of shares is of two kinds - common shares
and preference shares. While the former allows for voting rights to the
shareholders, the latter does not permit the holders of any rights.
However, the dividend is passed on to both in case of a profit. On
another instance, when there is a bankruptcy, the preference shareholders are given
preference in matters of dividend sharing. So, they receive the dividend even
before the common shareholders and have an upper hand.

What is the Issue of Shares?

The meaning of Issue of shares is that the shares of an
enterprise or any financial asset are distributed among shareholders whoever
wishes to purchase it. These shareholders can be either individuals or corporates
who take part in buying the shares at a specific price.

59
Types of shares

A company may have many different types of shares that come

with different conditions and rights in relation to profit entitlement, entitlement
to capital if the business is wound up and voting rights within the business.

Share types
The five main types of shares are:

1. Ordinary shares are the most common type of shares and are standard shares
with no special rights or restrictions. They have the potential to give the highest
financial gains, but also have the highest risk. Ordinary shareholders are entitled to
voting rights, however, they are the last to be paid if the company is wound up.

2. Non-voting ordinary shares carry the same conditions as ordinary shares

except with regards to voting rights. Shareholders may have voting rights under
certain circumstances or they may have no voting rights at all.

3. Preference shares typically carry a right that gives the holder preferential
treatment when annual dividends are distributed to shareholders. Shares in this
category receive a fixed dividend, which means that a shareholder would not
benefit from an increase in the business' profits. However, usually they have rights
to their dividend ahead of ordinary shareholders if the business is in trouble.
Preference shares carry no voting rights.

Classes of Preference Shares with reference to Dividend

With reference to Dividend preference shares are of two types:

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1. Cumulative Preference Shares

Cumulative Preference Shares are those Preference Shares which

carry right to receive arrears of dividend before the company makes payment to
Equity Shareholders.

2. Non- Cumulative Preference Shares

Non-Cumulative Preference Shares do not carry any rights for

receiving arrears of the dividend.

Classes of Preference Shares With reference to Participation in Surplus Profits with

reference to Participation in Surplus Profits Preference Shares are of two types:

1. Participating Preference Shares

The Articles of Association of a company may

provide that after the company pays the dividend to the Equity Shareholders, the
holders of Preference Shares will also have a right to participate in the remaining
profits.The Preference Shares who carries this right are called Participating
Preference Shares.

2. Non-Participating Preference Shares

Preference Shares which do not carry the right to

participate in the profits remaining after Equity Shareholders are paid are called
Non-Participating Preference Shares.

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Classes of Preference Shares With reference to Convertibility

With reference to Convertibility Preference Shares are of two types:

1. Convertible Preference Shares

Those Preference Shares which have the right to be

converted into Equity Shares are called Convertible Preference Shares.

2. Non-Convertible Preference Shares

Non-Convertible Preference Shares do not have the right to

be converted into Equity Shares.Classes of Preference Shares With reference to
Redemption

With reference to Redemption Preference Shares are of two types:

1. Rdeemable Preference Shares

Redeemable Preference Shares are those Preference Shares

which are redeemed by the company at a specific time (not exceeding 20 years
from the date of issue) for the repayment or earlier. We call this repayment of the
amount as Redemption.

2. Irredeemable Preference Shares

The amount returned by the company at the time of wind up

to the holders of such shares is called Irredeemable Preference Shares.

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Equity Shares

Equity Shares are those shares which are other than Preference
Shares. These are the most common class of shares that issues and carries
maximum ‘risks and rewards’ of the business.If a company incur a loss than risk is
of losing part or all the shares and rewards being payment of higher dividends and
appreciation in the market value.

Most companies use ordinary shares, however, it is possible to issue

more than one kind of share class as a way to vary shareholder voting, dividend
and capital rights.

Debentures

Debentures are a debt instrument used by companies and

government to issue the loan. The loan is issued to corporates based on their
reputation at a fixed rate of interest. Debentures are also known as a bond which
serves as an IOU between issuers and purchaser.

Types of Debenture

1. Secured and Unsecured

Secured debenture creates a charge on the assets of the company,

thereby mortgaging the assets of the company. Unsecured debenture does not carry
any charge or security on the assets of the company.

2. Registered and Bearer

A registered debenture is recorded in the register of debenture

holders of the company. A regular instrument of transfer is required for their

63
transfer. In contrast, the debenture which is transferable by mere delivery is called
bearer debenture.

3. Convertible and Non-Convertible

Convertible debenture can be converted into equity shares after

the expiry of a specified period. On the other hand, a non-convertible debenture is
those which cannot be converted into equity shares.

4. First and Second

A debenture which is repaid before the other debenture is known

as the first debenture. The second debenture is that which is paid after the first
debenture has been paid back.

Procedure for Issuing of Shares

The directors on behalf of the company take necessary steps to

raise the capital as-soon-as the company gets the certificate of incorporation. These
steps„ are briefly, described below:

• The directors of a. public limited company issue prospectus inviting the

public to apply for the purchase of the shares of the company.
• The prospective share-holders apply for the purchase of shares on the
prescribed forms.
• The applications along with a specified amount are sent to the company’s
banker by the prescribed date. After the closing date, the banker sends these
applications to the directors of the company.

64
 • The directors scrutinize the applications. If the subscription is within the
issued capital, the directors allot shares to all the applicants. The applicants are
informed about the allotment of the shares by the letter called as “allotment
letter”. The applicants become the shareholders of the company as soon as they
get the letter of allotment from the directors of the company.
• The directors may reject some applications. In that case, the company issues
letters of regret to those applicants. The bank is directed to return the money to
these applicants. The money should be refunded within ten days of the date of
decision regarding allotment of shares.
• If the directors of the company do not want to take the risk of issuing shares,
then they transfer the risk to specialized persons known, as underwriters. The
underwriters in exchange of certain commissiön take the responsibility of issuing
or taking up themselves the shares which can not be sold in the market.
Sale Price of Shares:

Shares can be issued at the following three prices:

At Par
if the shares are issued at the price equal to the nominal value or face
value of the shares are called issuance of shares at par. For instance, a share of $10
is issued at $10.
At Premium
If the shares are issued at price above the nominal value or face
value of the shares it is called issuance of shares at premium. For example a share
of $10 issued at $12, $2 is premium on the issuance of shares.

65
At Discount
If the shares are issued at a price less than the face value, it is called
issuance of shares at discount. For instance a share of $10 issued at $ 8 each, here
$2 is discount.

Payment of Shares:

Payment of shares may be:

• Lump sum payment

• Instalment payment.

PROCEDURE FOR ISSUE OF DEBENTURES

MANDATORY REQUIREMENTS

1.Debentures cannot be issued with voting rights.

2.A Company cannot issue debentures to more than 500 people without
appointing a debenture trustee, whose duty would be to protect the interest of
Debenture Holders and redress their grievances.

3.On issue of debenture, a Company shall create a Debenture Redemption Reserve

(DRR).

4.If there is any default in repayment of amount in the event of maturity or default
in payment of the interest thereon then the Tribunal will be approached by the
Debenture Trustee to take appropriate measures

66
FOLLOWING PROCEDURE IS TO BE FOLLOWED

1. Intimation to the Stock Exchange [Regulation 29 of the SEBI (LODR)

Regulations, 2015]
Listed Companies shall give prior intimation to the stock exchange about the
meeting of the Board of Directors in which the proposal for issue of
debentures through Private Placement is due to be considered at least 2
working days in advance, excluding the date of intimation and date of
meeting.

2. Convene a Meeting of Board of Directors [As per section 173 & SS-1]

a. Issue Notice of Board Meeting to all the Directors of Company at their addresses
registered with the Company, at least 7 days before the date of Board Meeting. A
shorter notice can be issued in case of urgent business.

b. Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.

c.Hold a meeting of Board of Directors of the Company and pass the necessary
Board Resolution

❖ to consider and approve issue of debentures through private placement.

❖ to approve Private Placement, Offer Letter.

❖ to identify the group of persons to whom Private Placement shall be made.

❖ to fix day, date, time and venue for holding General Meeting of the
Company.

❖ to approve the draft notice of General Meeting along with explanatory

statement annexed to the notice as per requirement of the Section 102 of the
Companies Act, 2013.

67
 ❖ to authorize the Director or Company Secretary to sign and issue notice of
the General Meeting and to do such acts, deeds and things as may be necessary
to give effect to the Board’s decision.

a) Listed Company shall submit the outcome of Board Meeting within the
timelines specified therein from the conclusion of the Board Meeting and
post the same on the website of the Company within 2 working
days. [Regulation 30 & 46(3) of the SEBI (LODR) Regulations, 2015]
b) and Circulate Draft Minutes within 15 days from the conclusion of the
Board Meeting, by Hand/Speed Post/Registered Prepare Post/Courier/E-mail
to all the Directors for their comments. [Refer the Procedure for Preparation
and Signing of Minutes of Board Meeting]

d.File Form MGT-14 with ROC

Company shall file copy of Board Resolution to
ROC in Form MGT-14 within 30 days of passing of resolution in Board Meeting.

e.Obtain Shareholders’ Approval

❖ By Convening a General Meeting, OR

❖ By Passing a Resolution by Postal Ballot. [Refer the Procedure for
Passing of a Resolution by Postal Ballot]

3.Convene General Meeting [Section 96, 100 and SS-2]

❖ Notice of General Meeting shall be given at least clear 21 days before the
actual date of a General Meeting in writing, by hand or by ordinary post or
by speed post or by registered post or by courier or by facsimile or by e-mail
or by any other electronic means or a Shorter Notice can be issued with the

68
 consent of at least majority in number and ninety five percent of such part of
the paid up share capital of the company giving a right to vote at such a
meeting in accordance with Section 101.
❖ Notice will be sent to all the Directors, Members, Auditors of Company,
Secretarial Auditor, Debenture Trustees and to others who are entitled to
receive the notice of the General Meeting.
❖ Notice shall specify the day, date, time and full address of the venue of the
Meeting and contain a statement on the business to be transacted at the
Meeting.
❖ Hold the General Meeting on fixed day and pass Special Resolution for issue
of debenture through Private Placement.
❖ Listed Companies shall disclose the proceedings of General Meeting to the
Stock Exchange within 24 hours from the conclusion of General Meeting
and same shall be posted on the website of the company within 2 working
days. [Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015]
❖ Listed Companies shall submit to the stock exchange the details of the
voting results within two working days from the conclusion of the meeting
and post the same on the website of the Company. [Regulation 44 of the
SEBI (LODR) Regulations, 2015]
❖ Prepare the minutes of General Meeting, get them signed and compile
accordingly. [Refer the Procedure for Preparation and Signing of Minutes of
General Meeting].

File Form MGT-14 with ROC

Company shall file Form MGT-14 with the ROC within 30
days of passing Special Resolution in General Meeting along with fee as specified

69
in the Companies (Registration offices and fees) Rules, 2014 and with the
following attachments

❖ Certified True Copies of the Special Resolution passed along with

Explanatory Statement.
❖ Copy of the Notice of meeting sent to members along with all the annexure
❖ Shorter Notice Consent Letters from the members in case the General
Meeting was convened at shorter notice.
❖ Copy of Attendance Sheet of General Meeting
❖ Any other attachment as may be applicable.

5.Open Separate Bank Account

Company shall open a separate Bank Account in a Scheduled
Bank for keeping the monies received on the application.

Preparation and Filing of Private Placement Offer Letter

❖ Company shall record the names of the persons to whom the debenture
through Private Placement shall be offered.
❖ Company shall make a Private Placement Offer Letter in Form PAS-4 and
shall send these offer letters either in writing or in electronic mode within 30
days of recording of names of such person with an application form serially
numbered to the person to whom it is made.
❖ Company shall maintain a complete record of persons to whom the private
placement offer letter is sent in Form PAS-5.

Receive the Amount of Subscription

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 ❖ Company shall receive the amount of subscription through cheque or
demand draft or other banking channels from the Bank Account of the
person subscribing to debentures except in case of issue of debentures for
consideration other than cash.
❖ Company shall keep the record of the Bank account from where such
payments for subscriptions have been received.

Allotment of securities by Private Placement

After closing the Private Placement Offer, Company
shall

❖ Employees Convene a Board Meeting, OR

❖ Pass a Board Resolution by Circulation [Refer the Procedure for Passing a
Resolution by Circulation] within 60 days from the date of receipt of the
application money.

Employee stock option scheme and employee stock purchase scheme :

The Securities and Exchange Board of India (SEBI), in the year
1999, had framed "Securities and Exchange Board of India (Employee Stock
Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999"
(hereinafter "existing guidelines") which provides for the stock based incentive
schemes to employees. On 28th October, 2014, SEBI has notified Securities and
Exchange Board of India (Share Based Employee Benefits) Regulations,
2014, 1 (hereinafter "Regulations") the provisions of which shall be applicable on
the following:

i. employee stock option schemes;

ii. employee stock purchase schemes;

71
iii. stock appreciation rights schemes;
iv. general employee benefits schemes; and
v. retirement benefit schemes consequent upon which the existing guidelines
have been repealed.

The Regulations has been framed by the market regulator SEBI in

order to bring into its wide ambit, all the shares related schemes issued by the
companies for the benefit of its employees.

Applicability
As per the Regulation 1 (4), of the Regulations shall be applicable to
those companies whose shares are listed on any recognised stock exchange in
India, and which fulfills the following:

i. has a scheme for direct or indirect benefit of employees;

ii. involves dealing in or subscribing to or purchasing securities of the
company, directly or indirectly; and
iii. which satisfies, directly or indirectly, any one of the following conditions:

a. the scheme is set up by the company or any other company in its group;

b. the scheme is funded or guaranteed by the company or any other company in its
group;

c. the scheme is controlled or managed by the company or any other company in

its group.

As far as applicability of these regulations are concerned, Regulation 1(5) provides

that these Regulations shall not be applicable to shares issued to employees in
compliance with the provisions pertaining to preferential allotment as specified in

72
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009.

Further, it has been clarified that the provisions pertaining to

preferential allotment as specified in the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009 shall not be
applicable in case of a company issuing new shares in pursuance and compliance
of these Regulations.

Employee stock option :

Employee stock options (ESO) is a label that refers to
compensation contracts between an employer and an employee that carries some
characteristics of financial options.
Employee stock options are commonly viewed as an internal agreement providing
the possibility to participate in the share capital of a company, granted by the
company to an employee as part of the employee's remuneration package.
Regulators and economists have since specified that ESOs are compensation
contracts.
These nonstandard contracts exist between employee and
employer, whereby the employer has the liability of delivering a certain number of
shares of the employer stock, when and if the employee stock options are exercised
by the employee. The contract length varies, and often carries terms that may
change depending on the employer and the current employment status of the
employee. In the United States, the terms are detailed within an employer's "Stock
Option Agreement for Incentive Equity Plan. Essentially, this is an agreement
which grants the employee eligibility to purchase a limited amount of stock at a

73
predetermined price. The resulting shares that are granted are typically restricted
stock. There is no obligation for the employee to exercise the option, in which case
the option will lapse.
AICPA's Financial Reporting Alert describes these contracts
as amounting to a "short" position in the employer's equity, unless the contract is
tied to some other attribute of the employer's balance sheet. To the extent the
employer's position can be modeled as a type of option, it is most often modeled as
a "short position in a call". From the employee's point of view, the compensation
contract provides a conditional right to buy the equity of the employer and when
modeled as an option, the employee's perspective is that of a "long position in a
call option".
Stock options are a benefit often associated with startup
companies, which may issue them in order to reward early employees when and if
the company goes public. They are awarded by some fast-growing companies as an
incentive for employees to work towards growing the value of the company's
shares. Stock options can also serve as an incentive for employees to stay with the
company. The options are canceled if the employee leaves the company before
they vest. ESOs do not include any dividend or voting rights.
Understanding ESOs
Corporate benefits for some or all employees may include
equity compensation plans. These plans are known for providing financial
compensation in the form of stock equity. ESOs are just one type of equity
compensation a company may offer. Other types of equity compensation may
include:

74
 1. Restricted Stock Grants: these give employees the right to acquire or
receive shares once certain criteria are attained, like working for a defined
number of years or meeting performance targets.
2. Stock Appreciation Rights (SARs): SARs provide the right to the increase
in the value of a designated number of shares; such increase in value is
payable in cash or company stock.
3. Phantom Stock: this pays a future cash bonus equal to the value of a
defined number of shares; no legal transfer of share ownership usually takes
place, although the phantom stock may be convertible to actual shares if
defined trigger events occur.
4. Employee Stock Purchase Plans: these plans give employees the right to
purchase company shares, usually at a discount.

In broad terms, the commonality between all these equity

compensation plans is that they give employees and stakeholders an equity
incentive to build the company and share in its growth and success.

For employees, the key benefits of any type of equity compensation plan are:

• An opportunity to share directly in the company’s success through stock

holdings
• Pride of ownership; employees may feel motivated to be fully productive
because they own a stake in the company
• Provides a tangible representation of how much their contribution is worth to
the employer
• Depending on the plan, it may offer the potential for tax savings upon sale or
disposal of the shares

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The benefits of an equity compensation plan to employers are:

• It is a key tool to recruit the best and the brightest in an increasingly

integrated global economy where there is worldwide competition for top
talent
• Boosts employee job satisfaction and financial wellbeing by providing
lucrative financial incentives
• Incentivizes employees to help the company grow and succeed because they
can share in its success
• May be used as a potential exit strategy for owners, in some instances

In terms of stock options, there are two main types:

1. Incentive stock options (ISOs), also known as statutory or qualified options,

are generally only offered to key employees and top management. They
receive preferential tax treatment in many cases, as the IRS treats gains on
such options as long-term capital gains.
2. Non-qualified stock options (NSOs) can be granted to employees at all
levels of a company, as well as to board members and consultants. Also
known as non-statutory stock options, profits on these are considered as
ordinary income and are taxed as such.

Procedure for Issue of Employee Stock Option Plan

The Employee Stock Option Plan (ESOP) is an

employee benefit plan. It is issued by the company for its employees to encourage
employee ownership in the company. The shares of the companies are given to the

76
employees at discounted rates. Any company can issue ESOP. All companies other
than listed companies should issue it in accordance with the provisions of the
Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014.
In the case of listed companies, they should issue in accordance with Securities and
Exchange Board of India Employee Stock Option Scheme Guidelines.

Section 2(37) of the Companies Act, 2013 defines employees

stock option as the option given to the directors, employees or officers of the
company or of its holding or subsidiary company, the right to purchase or benefit
or subscribe for the shares of the company at a predetermined price on a future
date. Thus, ESOP is a scheme where a company proposes to increase its subscribed
share capital by issuing further shares to its employees at a predetermined rate.

ESOP benefits the company as well as its employees. It

benefits the startups where employees can be rewarded after the company goes
public. Any employee of the company can be offered ESOP if they fit the criteria.

To Whom Can The E SOP Be Issued?

Rule 12(1) of Companies (Share Capital and Debentures)

Rules, 2014 states that ESOP can be issued to the following employees-

• A permanent employee of the company who is working in India or outside

India.
• A Director of the company, including a whole-time or part-time director but
not an independent director.
• A permanent employee or director of a subsidiary company in India or
outside India, or holding company, or an associate company.
• A company cannot issue ESOP to the following employees-

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 • An employee who is belonging to the promoter group or is a promoter of the
company.
• A director who either himself or through any body corporate or through his
relative holds more than ten per cent of the outstanding equity shares of the
company, whether directly or indirectly.

However, the above two conditions do not apply to Startup

Companies for a period of ten years from the date of its incorporation.

Process Of Issue Of ESOP

Section 62(1)(b) of the Companies Act, 2013 and Rule

12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) governs
the issuance of ESOP. The procedure for issuance of ESOP under the Rules is
similar to that of the procedure under the Securities and Exchange Board of India
Employee Stock Option Scheme Guidelines for listed companies. The process for
issuing ESOP by a company are:

• Prepare the draft of ESOP in accordance with the Companies Act, 2013 and
Rules.
• Prepare the notice for the board meeting along with the draft resolution to be
passed in the board meeting.
• Send the notice of the board meeting to all the directors at least seven days
before the meeting.
• Pass the resolution for the issuance of shares through ESOP, determine the
price of shares to be issued pursuant to ESOP and fix time and date and
approve for calling the general meeting to pass a special resolution for
issuing ESOP.

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 • Send the draft minutes of the board meeting to all the directors within fifteen
days of its conclusion and file the MGT-14 form with the Registrar of
Companies of passing the board resolution.
• Send notice of the general meeting to all the directors, auditors, shareholders
and secretarial auditors of the company at least before twenty-one days of
the date of the meeting.
• Pass the special resolution for the issuance of shares under the ESOP to the
employees, directors and officers of the company in the general meeting.
• File MGT-14 form with the Registrar of Companies within thirty days of
passing the special resolution in the general meeting along with the
documents.
• Send options to the employees, directors and officers of the company for
purchasing shares under ESOP.
• Maintain a ‘Register of Employee Stock Options’ in Form No.SH-6 and
enter the particulars of the ESOP granted to the employees, directors or
officers of the company.

If a private company wants to issue ESOP, then it should

ensure that the Articles of Association (AoA) authorises for issuance of shares
through ESOP. If the AoA does not authorise, then the company should first hold
an extraordinary general meeting to alter the AoA to include the provisions of
issuance of shares through ESOP and then proceed with holding the board meeting
for the passing of the resolution and getting the shareholder’s approval for ESOP
Scheme.

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Allotment of ESOP

There are three terms that are mainly focused on the time of
issuance of shares through ESOP to the employees. They are as follows-

Grant- Grant means the issue of stocks to the employees. It means informing the
employee that he is eligible for ESOP. The company will have the freedom to
determine the exercise price while providing the option of ESOP to the employees.

Vest-Vest means the right of the employees to apply for the shares granted to
them. There shall be a minimum of one year between the grant of option and
vesting of option for the ESOP scheme.

Exercise- The exercise period is where the employees can exercise the option of
buying the shares. The company will have the freedom to specify the lock-in
period for the shares issued (if any) after the exercise of the option. The employees
will not have the right to receive any dividend or to vote or enjoy the advantages of
a shareholder in respect of the ESOP granted to him until the shares are issued on
exercise of his option.

Disclosures To Be Made While Issuing ESOP

I. The company should make the following disclosures in the explanatory

statement annexed to the notice for passing the special resolution for the
issuance of ESOP-
II. The total number of stock options which is to be granted,
III. The identified class of employees who can participate in the ESOP,
IV. Requirements of vesting period of ESOP,
V. Maximum period within which the options can be vested,
VI. The exercise price and process of exercise,
VII. The lock-in period, if any,

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VIII. The grant of the maximum number of options for an employee,
IX. The methods used by the company to value its options,
X. The conditions of lapsing of the options vested in employees,
XI. A statement that the company will comply with the applicable accounting
standards.

Employee stock purchase scheme

In the United States, an employee stock
purchase plan (ESPP) is a means by which employees of a corporation can
purchase the corporation's stock, often at a discount. Employees contribute to the
plan through payroll deductions, which build up between the offering date and the
purchase date. At the purchase date, the company uses the accumulated funds to
purchase shares in the company on behalf of the participating employees. Th
amount of the discount depends on the specific plan but can be as much as 15%
lower than the market price. ESPPs can also be subject to a vesting schedule, or
length of time before the stock is available to the employees, typically one or two
years of service.

Depending on when the employee sells the shares, the

disposition will be classified as either qualified or not qualified. If the position is
sold two years after the offering date and at least one year after the purchase date,
the shares will fall under a qualified disposition. If the shares are sold within two
years of the offering date or within one year after the purchase date the disposition
will not be qualified. These positions will have different tax implications.

ESPPs differs from other types of employee stock ownership,

such as Employee Stock Ownership Plans (ESOPs), both in how the stocks are
bought, access to the stocks (either after vesting or upon retirement), taxation for
the employees, and how much these plans cost to implement for the company.

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An employee stock purchase plan (ESPP) is a company-run program in which
participating employ yes can purchase company stock at a discounted price.
Employees contribute to the plan through payroll deductions which build up
between the offering date and the purchase date. At the purchase date, the company
uses the employee's accumulated funds to purchase stock in the company on behalf
of the participating employees.
Understanding Employee Stock Purchase Plans (ESPP)
With employee stock purchase plans, the discount
rate on company shares depends on the specific plan but can be as much as 15%
lower than the market price. ESPPs may have a “look back” provision allowing the
plan to use a historical closing price of the stock. This price may be either the price
of the stock offering date or the purchase date – often whichever figure is lower.

Qualified Vs. Non-qualified Plans

ESPPs are categorized in two ways: qualified and
non-qualified. Qualified plans require the approval of shareholders before
implementation, and all plan participants have equal rights in the plan. The
offering period of a qualified ESPP cannot be greater than three years and there are
restrictions on the maximum price discount allowable. Non-qualified plans are not
subject to as many restrictions as a qualified plan. However, non-qualified plans do
not have the tax advantages of after-tax deductions that qualified plans do.

Eligibility
ESPPs typically do not allow individuals who own more than 5% of
company stock to participate. Restrictions are often in place to disallow employees
who have not been employed with the company for a specified duration – often
one year. All other employees typically have the option, but not the obligation, to
participate in the plan.

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Key Figures
During the application period, employees state the amount to be
deducted from their pay and contributed to the plan. This may be subject to a
percentage limitation. In addition, the Internal Revenue Service (IRS) restricts the
total dollar amount to be contributed to $25,000 per calendar year. Most ESPPs
grant employees a price discount of up to 15%.

Administration and implementation :

• Subject to the provisions of these regulations, the ESPS scheme shall

contain the details of the manner in which the scheme will be implemented
and operated.

Pricing and lock-in

(1) The company may determine the price of shares to be issued under an ESPS,
provided they conform to the provisions of accounting policies under regulation
15.

(2) Shares issued under an ESPS shall be locked-in for a minimum period of one
year from the date of allotment:

Provided that in case 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 undergone in respect of shares of
the transferor company shall be adjusted against the lock-in period required under
this sub-regulation.

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(3) 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.

The Emergence of ESOPs in India

India is the third-largest startup ecosystem in the
world and it attracts all kinds of global investors. This is evident with the huge
expansion India has seen in the recent past with regards to the list of ‘unicorn’
companies that have come into existence. A unicorn refers to a startup that gains
value of over $1 billion. This brings into the picture Employee Stock Option Plans
(ESOPs) to ensure that all the employees of the company have the same goal
which—to increase the performance of the company, which in turn makes it more
profitable.

Employee Stock Option Plan and Regulatory Framework

An Employee Stock Option Plan (ESOP) in India
is an incentive granted to employees of a company to buy or subscribe to shares of
the company at a predetermined price for the future. The software industry was the
first to bring about this plan because of the “brain drain” and poaching of high
performing employees. Employees want more than just a salary because they need
the incentive to stay on with the same company and not move jobs as easily.
Ownership of part of the company gives employees a sense of belonging as well as
an incentive to continue their employment long term.

Employee Stock Option was first introduced by way of

clause 15A in section 2 of the Companies Act, 1956. It defines what an employee
stock option is and enumerates the conditions that need to be fulfilled for the issue

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of such shares. The Securities and Exchange Board of India (SEBI) which is the
governing body for ESOPs and Employee Stock Option Schemes (ESOS) set
guidelines in 1999. Section 62 of the Companies Act, 2013, further incorporates
enabling provisions for the issue of ESOPs subject to the sanction of a special
resolution and compliance rules (in case of unlisted companies) and SEBI rules (in
case of listed companies).

Employee ownership plans in India are simply stock

option plans. Approximately 68% of listed companies, and 29% of unlisted
companies, give ESOP benefits to their employee amounting to one time the cost
to the company. Unlisted companies issue ESOPs to retain employees and give
them an incentive for when stocks are listed which will unlock the value and give a
high potential for great earnings. Listed Companies use it mostly as a rewarding
tool. Indian employees exercise the vested option early with 90% of them doing it
within 2 years. This may be because of the taxation laws which state that if an
employee holds shares of a listed company for more than a year, the capital gains
are tax-free.

Indian ESOP Statistics

As per a survey, 43% of IT companies in India have given
ESOPs to more than 90% of its employees but only 17% of Non-IT companies
have done the same. More than 75% of non-IT companies offer ESOPs only to
senior and middle management employees. A study in 2001 shows that within IT
companies only 23% of the large companies offer ESOPs to more than 90% of
their employees and only 60% in the case of small companies. A significant 54%
of large IT companies offer ESOPs to less than 25% of their employees.

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How Indian ESOPs Works
The above shows the general outline of a stock option
plan. An employee gets the grant and has to wait a minimum of one year until the
shares vest. After which they can exercise and sell the option at any time
depending on the market rates. There is no minimum or maximum limit for
exercise and sale of shares. These ESOPs are not transferable and only the
employee shall be entitled to exercise the options. The guidelines state, upon the
death of the option holder, while he was an employee, all options granted to him
including unvested options, shall vest in his legal heirs on the date of his death, and
they shall be able to exercise it. This also holds if he was not an employee at the
time of his death but had options. Buy-back of shares does not have clear
regulations. The guidelines prohibit the transfer of stock options, buyback through
negotiated deals, or private arrangements.

COMPANIES OFFERING THESE SCHEMES IN INDIA :

• Aavin
• Adarsh Co-operative Bank
• Amul
• Banas Dairy
• Co-optex
• Dabbawala
• Horticultural Producers' Cooperative Marketing and Processing Society
• Indian Coffee House
• Indian Farmers Fertiliser Cooperative
• Indian Potash Limited
• J Thomas & Co. Pvt. Ltd.

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 • Kaira District Co-operative Milk Producers' Union
• Karnataka Milk Federation
• Kerala Co-operative Milk Marketing Federation
• Krishak Bharati Cooperative
• Larsen & Toubro
• Mother Dairy
• National Agricultural Cooperative Marketing Federation of India
• Orissa State Cooperative Milk Producers' Federation
• Pratibha Mahila Sahakari Bank
• Rehwa Society
• Sant Muktabai Sahakari Sakhar Karkhana
• Space Development Network
• The Totgars' Cooperative Sale Society Limited
• Working Women's Forum

QUESTION BANK

UNIT-III

PART-A

1 What are Derivatives?

2 Recall any two demerits of listing

3 Why Listing of Shares is Important?

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4 Give the meaning of convertible debentures

5 Define the term Employee stock Option Scheme.

6 Assess the provisions of Employee stock Option Scheme

7 What do you mean by Public Issue?

8 When can shares be Forfeited?

9 Recall the term employee stock purchase scheme

10 Give the meaning of Minimum Public Offer.

PART-B

1 Explain the conditions to be fulfilled by a company in order to list its securities.

2 Interpret the benefits of employee stock purchase plan

3 Classify the kinds of Shares.

4 Summarize the procedure for issuing of Shares.

5 Assess the procedure for issue of Employee Stock Option Plan(ESOP)

6 Determine the regulatory framework for ESOP.

7 Explain the different types of debentures.

8 Describe the Process of issue the Employee stock option plan

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9 Examine the documents to be submitted by a company in order to list its
securities.

10 Summarize the benefits of listing of securities.

REFERENCE

❖ KONDAIAH JONNALAGADD, SECURITIES LAW, LEXIS NEXIS,2015

❖ MS ZAD,SECURITIES LAW AND CAPITAL MARKET,TAXMAN,2019
❖ RAJNISH KUMAR,CAPITAL MARKET AND SECURITIES
LAW,COMMERCIAL LAWPUBLISHERS,9 TH EDITION,2018

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 UNIT 4 SEBI ACT 1992

Securities and Exchange Board of India Act, 1992: Objective: Powers and
functions of SEBI; Securities Appellate Tribunal Penalties and appeals -
Appearance before SAT, SEBI (Buyback of Securities) Regulations, 1998,
SEBI (Delisting of Equity Shares) Regulations, 2009.

The Securities and Exchange Board of India Act, 1992 setup SEBI to promote &
regulate the securities market and to protect the interests of investors.

The Securities and Exchange Board of India Act, 1992 was

introduced with the aim of establishing a Board:
1. to protect the interests of investors in securities
2. to promote the development of the securities market
3. to regulate the securities market
4. for all connected and related matters.
Brief History of the Act :
The Securities and Exchange Board of India Act,
1992 was first introduced before the Lok Sabha as the Securities and Exchange
Board of India Bill, 1992 on 03/03/1992 and was passed by the Lok Sabha on
30/03/1992. The Rajya Sabha passed this Bill on 01/04/1992 and it received
Presidential assent on 04/04/1992.

The Securities and Exchange Board of India Act, 1992 is an Act of

the Parliament of India enacted for regulation and development
of securities market in India. It was amended in the years 1995, 1999 and 2002 to

90
meet the requirements of changing needs of the securities market. It is the 15th Act
of 1992. The Act provides for the establishment of Securities and Exchange Board
of India following the Harshad Mehta scam.

The Act contains 10 Chapters and 91 Sections.

Preamble

The Securities an Exchange Board of India is the sole regular of the

Indian Securities Market. Its Preamble describes its basic function as "...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 incid thereto"

Management of the Board (1) The Board shall consist of the following members,
namely:—

(a) a Chairman

(b) two members from amongst the officials of the 9[Ministry] of the Central
Government dealing with Finance

(c) one member from amongst the officials of 11[the Reserve Bank];

[(d)five other members of whom at least three shall be the whole-time members,]
to be appointed by the Central Government.

(2) 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.

91
(3) Save as otherwise determined by regulations, 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.
(4) The Chairman and members referred to in clauses (a) and (d) of sub-section (1)
shall be appointed by the Central Government and the members referred to in
clauses (b) and (c) of that sub-section shall be nominated by the Central
Government and the 13[Reserve Bank] respectively.
(5) The Chairman and the other members referred to in clauses (a) and (d) of sub-
section (1) 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.

Purpose of SEBI Act

The confidence of investors is eroded and the economic

growth is impaired as a result of market abuse. Investors are lured into making
investment decisions based on the incorrect or misleading information provided
leading to the creation of artificial market and inflated results. Huge amounts of
money were manipulated with the help of various financial scandals and security
scams. Manipulators have a very vast knowledge about the working of the system
and henceforth, they take advantage of this opportunity to manipulate the
system as well as the investors.

Thus, the primary objective, which has to be achieved with

the establishment of SEBI, is the creation of such an environment that helps in

92
effective mobilization as well as the allocation of resources with the help of
securities market of India. Such an environment is bundled with policy
frameworks, rules and regulations, infrastructures and practices in order to meet
the requirements of various class of people which are the main players of the
market. Some of them are the investors, the market intermediaries and the
companies, which are the issuers of securities.

1. For the purpose of investors

The credit for making market active goes to

the investors. SEBI has the motive of providing accurate, authentic and adequate
information on a regular basis in order to safeguard the interests and rights of the
investors. This is done in order to restore the confidence of the investors or the
general public, who is willing to invest their money in the market.

• For the purpose of issuers of securities

The demand of the various corporate fields,

who are responsible for issuing securities, is a transparent and safe market place
where they can look forward to raising the number of funds confidently in an
efficient and easy manner. SEBI works with the aim of making such a safe as well
as a healthy market place available to the issuers.

For the purpose of intermediaries

Intermediaries are those people who are entitled

to act as middlemen for any transaction or agreement between the investors and the
issuers. They are entrusted with the object of providing better services to the
issuers and investors. For this purpose, SEBI is empowered to make an ever-

93
expanding, professionalized and competitive market with an efficient and adequate
infrastructure available to the intermediaries. Financial transactions become safer
and smoother because of the role of

Securities and Exchange Board of India :

The Securities and Exchange Board of

India (SEBI) is the regulatory body for securities and commodity
market in India under the jurisdiction of Ministry of Finance , Government of
India. It was established on 12 April 1988 and given Statutory Powers on 30
January 1992 through the SEBI Act, 1992. Securities and Exchange Board of India
(SEBI) was first established in 1988 as a non-statutory body for regulating the
securities market. It became an autonomous body on 30 January 1992 and was
accorded statutory powers with the passing of the SEBI Act 1992 by the Indian
Parliament. SEBI has its headquarters at the business district of Bandra Kurla
Complex in Mumbai and has Northern, Eastern, Southern and Western Regional
Offices in New Delhi, Kolkata, Chennai, and Ahmedabad respectively. It has
opened local offices at Jaipur and Bangalore and has also opened offices
at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year
2013–2014.

Controller of Capital Issues was the regulatory authority before SEBI came into
existence; it derived authority from the Capital Issues (Control) Act, 1947.

The SEBI is managed by its members, which consists of the following:

• The chairman is nominated by the Union Government of India.

• Two members, i.e., Officers from the Union Finance Ministry.

94
 • One member from the Reserve Bank of India.
• The remaining five members are nominated by the Union Government of
India, out of them at least three shall be whole-time members.

After the amendment of 1999, collective investment schemes

were brought under SEBI except nidhis, chit funds and cooperatives.
The Government’s avowed interest in regulating the capital market and
safeguarding the retail investors lead to the creation of Securities and Exchange
Board of India and subsequent reforms in the market. These significant events in
the past decade have changed the course of the Indian capital market.

The IPOs in the primary market and several secondary market

practices got changed affecting the prime constituent of the capital market, the
individual investor. There cannot be two opinions on the fact that SEBI has, by its
guidelines, regulations and directions, statutorily promoted disclosure of all
relevant information and has strengthened the protection to investors in the
securities market.

Formation of SEBI:
The Securities and Exchange Board of India (SEBI) was
established by the Government of India through an executive resolution in 1988,
and was subsequently upgraded as a fully autonomous body (a statutory Board) in
the year 1992 with the passing of the Securities and Exchange Board of India Act
(SEBI Act) on 30th January 1992.

Relatively a brief act containing 35 sections, the SEBI Act

governs all the Stock Exchanges and the Securities Transactions in India. It has
been set up as a statutory and autonomous regulatory board with independent

95
powers and defined responsibilities, to cover both development & regulation of the
Capital market. It may be said that this is a positive outcome of the Securities
Scam of 1990-91.

SEBI Act and SEBI Guidelines

SEBI was established as a non-statutory body in 1988,

entrusted with observing the stock market activities. The SEBI Act of 1922
converted SEBI into a statutory authority with autonomous powers. The Act
provided SEBI with the authority to regulate capital markets, not just observe but
enforce guidelines.

The SEBI Act 1992 covers the following areas:

1. Composition and actions of the SEBI Board members

2. Powers and Functions of the Board
3. Fund sources of SEBI, as in grants made available by the Union Government
4. Rules on Penalties and legal pathways
5. Defines the judicial authority of SEBI
6. The extent of powers of the Union Government to supersede SEBI

SEBI also has to adhere to a list of SEBI guidelines, pertaining to areas such as:

• Employee Stock Option schemes

• Disclosure and Investor Protection norms
• Legal Proceedings
• Anti-money laundering norms
• Listing and delisting of securities
• Opening of trading terminals overseas

96
Objectives of SEBI:

SEBI was set up to assist and facilitate the mobilization of

adequate resources through the securities market and its efficient allocation,
keeping in mind the interest of issuers, investors and intermediaries.

The primary-objectives of SEBI are:

I. To protect the interests of investors in securities;

II. To promote the development of Securities Market;

III. To regulate the securities market; and

IV. For matters connected therewith or incidental thereto

Protect the Interests of Investors:

SEBI endeavours to restore and safeguard the trust of
investors, especially the interest of small investors. This is achieved by meeting the
needs of the players connected with securities market such as the investors, the
corporate sector and the intermediaries. It works for creating proper investment
climate to enable corporate sector to float industrial securities easily, efficiently
and at affordable minimum cost.

It aims at educating investors so as to make them aware of

their rights in clear and specific terms by providing them with information. A high
degree of protection of investor rights and interests is made possible by providing
adequate, accurate and authentic information on a continuous basis.

97
Promote the Development of Securities Market:
Since its inception SEBI has been working
targeting the securities and is attending to the fulfillment of its objectives with
commendable zeal and dexterity. The improvements in the securities markets like
capitalization requirements, margining, establishment of clearing corporations etc.
reduced the risk of credit.

SEBI adopts two broad approaches to develop the securities

market – to integrate the securities market at the national level and to diversify the
trading products – so that there is an increase in number of traders including banks,
financial institutions, insurance companies, mutual funds, and primary dealers etc.
to transact through the exchanges.

In this context the introduction of derivatives trading through

Indian Stock Exchanges permitted by SEBI in the year 2000 provided the much
needed depth to the securities market.

Regulation of the Securities Market:

SEBI has introduced comprehensive regulatory
measures, prescribed registration norms, eligibility criteria, code of obligations and
the code of conduct for different intermediaries like, bankers to issue, merchant
bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating
agencies, underwriters and others.

It has framed by-laws, risk identification and risk management

systems for Clearing houses of stock exchanges, surveillance system etc. which has
made dealing in securities both safe and transparent to the end investor.

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Organization of SEBI:

The SEBI is a body corporate. Under Section 4 of the SEBI

Act, the management of SEBI is entrusted with the Board of Directors.

The Board consists of:

(i) A Chairman appointed by the Government,

(ii) Two members from amongst officials of the Ministry of Government of India
dealing with Finance and administration of the Companies appointed by the
Government,

(iii) One member from amongst the officials of, and nominated by RBI,

(iv) Five members of whom at least two should be whole time members nominated
by the Government. Its general superintendence, direction and management are
vested in a Board of Members which may exercise all powers and do all acts/things
which may be exercised/done by the SEBI.

The Chairman also has powers to general superintendence and

direction of its affairs and may also exercise all powers and do all acts/things
exercisable/done by it. The Chairman and other members of the SEBI should be
persons of ability, integrity and standing who have shown capacity in dealing with
problems relating to the securities market or have special knowledge/experience of
law, finance, economics, accountancy, administration or in any other discipline
which, in the opinion of the Government, would be useful to the SEBI.

99
 The Central Government reserves the right to terminate the services
of the Chairman or any member of the Board. SEBI has its head office in Mumbai
and regional offices at Delhi, Calcutta and Chennai.

Powers of SEBI:

Section 11 of the SEBI Act provides that, it is the duty of the

Board to protect the interest of investors in securities and to promote the
development of and to regulate the securities market by such measures as required.

The Act has given power to the Board to regulate the business in
Stock Exchanges, 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 advisers,
etc., also to register and regulate the working of collective investment schemes
including mutual funds, to prohibit fraudulent and unfair trade practices and insider
trading, to regulate take-over, to conduct enquiries and audits of the stock
exchanges, etc.

All the stock brokers, sub-brokers, share transfer agents, bankers

to an issue, trustees of trust deed, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediary
who may be associated with the Securities Markets are to register with the Board
under the provisions of the Act, under Section 12 of the SEBI Act. The Board has
the power to suspend or cancel such registration. The Board decides issues in its
meetings by majority vote with the Chairman having a second or casting vote.

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 Authority and Power of SEBI

SEBI possesses high authority and power as its primary purpose was to control the
market systematically by preventing any fraudulent activity. It has three significant
powers:

1. Quasi-Judicial- This includes drafting legislation with respect to the capital

markets. With the help of this authority, it has the right to conduct hearing and pass
judgments in case any fraudulent activity happens. The benefit of this authority is
that it assures that there is fairness, reliability and accountability in the capital
market.

2. Quasi-Executive Functions- Implementing legislation also comes under SEBI.

This means that SEBI has the absolute authority to build rules and regulations to
shield the interest of investors.

For example, there is legislation called SEBI Listing obligation and Disclosure
requirements; this was made to consolidate and simplify provisions of the current
listing agreements for various segments to financial markets such as equity shares.
Such regulations are made to keep any sort of illegal practice at bay.

3. Quasi-Legislative- Under this segment, the role of SEBI is to create guidelines

for the security of interest of investors. Few rules and regulations made by SEBI
are disclosure requirements, trading regulation and listing obligation.

The primary goal is to methodize and fortify the provision of current listing
agreements for various segments of the financial market. Although SEBI has a lot

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of powers, still, it has to go through the Securities Appellate Tribunal and the
Supreme Court of India.

Functions of SEBI:

SEBI has three functions rolled into one body-legislative,

judicial and executive. It drafts rules in its legislative capacity, it conducts
enquiries and enforcement action in its executive function and it passes rulings and
orders in its judicial capacity. Though this makes it exceedingly powerful, there is
an appeal process to create accountability.

Its main functions are:

I. Helping the business in stock exchanges and any other securities markets,

II. Registering and regulating 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 advisers and such
other intermediaries who may be associated with securities markets in any manner.

III. Registering and regulating the working of the depositories, participants,

custodians of securities, foreign institutional investors, credit rating agencies and
such other intermediaries as the Board may, by notification, specify in this behalf.

IV. Registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds;

V. Promoting and regulating self-regulatory organisations;

VI. Prohibiting fraudulent and unfair trade practices relating to securities markets;

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VII. Promoting investors’ education and training of intermediaries of securities
markets;

VIII. Prohibiting insider trading in securities;

IX. Regulating substantial acquisition of shares and takeover of companies;

X. Calling for information from undertaking inspection, conducting inquiries and

audits of the stock exchanges, mutual funds and other persons associated with the
securities market and intermediaries and self-regulatory organisations in the
securities market;

XI. Calling for information and record from any bank or any other authority or
board 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 Board;

XII. 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;

XIII. Levying fees or other charges for carrying out the purpose of this section;

XIV. Conducting research for the above purposes;

XV. Calling from or furnishing to any such agencies, as may be specified by the
Board, such information as may be considered necessary by it for the efficient
discharge of its functions;

XVI. Performing such other functions as may be prescribed.

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 In addition, it may also take measures to undertake inspection of
any book, register, or other document or record of any listed public company or
public company which intends to get its securities listed on any recognised stock
exchange where the SEBI has reasonable grounds to believe that such company
has been indulging in insider trading and unfair trade practices relating to the
securities market.

SEBI has had a mixed history in terms of its success as a regulator.

Though it has pushed systemic reforms aggressively and successively (e.g., the
quick movement towards making the markets electronic and paperless), it seems to
lack the legal expertise needed to sustain prosecutions/enforcement actions. It has
often received flak from the appellate body known as the Securities Appellate
Tribunal (SAT). From the SAT, an appeal moves straight to the Supreme Court of
India.

Securities appellate tribunal :

Securities Appellate Tribunal is a statutory body

developed under the provisions of Section 15K of the Securities and Exchange
Board of India Act. Securities Appellate Tribunal was mainly established to hear
an appeal against the order passed by the SEBI (Securities and Exchange Board
of India) or by an adjudicating officer under the SEBI Act. In this article, we look
at the Securities Appellate Tribunal (SAT) in detail. Securities Appellate Tribunal
is a statutory body established under the provisions of Section 15K of the
Securities and Exchange Board of India Act, 1992 to hear and dispose of appeals
against orders passed by the Securities and Exchange Board of India or by an
adjudicating officer under the Act; and to exercise jurisdiction, powers and
authority conferred on the Tribunal by or under this Act or any other law for the

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time being in force. Consequent to Government Notification No.DL-33004/99
dated 27th May, 2014, SAT hears and disposes of appeals against orders passed by
the Pension Fund Regulatory and Development Authority (PFRDA) under the
PFRDA Act, 2013. Further, in terms of Government Notification No.DL-
(N)/04/0007/2003-15 dated 23rd March, 2015, SAT hears and disposes of appeals
against orders passed by the Insurance Regulatory Development Authority of India
(IRDAI) under the Insurance Act, 1938, the General Insurance Business
(Nationalization) Act, 1972 and the Insurance Regulatory and Development
Authority Act, 1999 and the Rules and Regulations framed thereunder

Establishment of Securities Appellate Tribunals.

(1) The Central Government shall, by notification, establish a Tribunal to be
known as the Securities Appellate Tribunal to exercise the jurisdiction, powers and
authority conferred on it by or under this Act or any other law for the time being in
force.

(2) The Central Government shall also specify in the notification referred to in sub-
section (1), the matters and places in relation to which the Securities Appellate
Tribunal may exercise jurisdiction.]

Composition of Securities Appellate Tribunal (SAT)(1) 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

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(2)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:Provided that 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.

(3) Notwithstanding anything contained in sub-section (2), the Presiding Officer

may transfer a Judicial Member or a Technical Member of the Securities Appellate
Tribunal from one Bench to another Bench Presiding Officer :

The Central Government will appoint the presiding Officer of Securities Appellate
Tribunal in discussion with the chief justice of India or nominee. The person so
appointed as the presiding Officer Officer should meet with the following
requirements:

• The retired or sitting judge of the supreme court

• The retired or sitting judge of the high court
• The retired or sitting judge of the high court, who has completed at least
seven years of service as a judge in a high court.

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Members :

The Central Government will appoint the two members of the Securities Appellate
Tribunal. The member so appointed should possess the following qualities:

• The member should be capable of dealing with problems related to

the securities market.
• The member should possess qualification and experience related to corporate
law, securities laws, economics, finance or accountancy.

Tenure :

Presiding Officer: The tenure for Presiding Officer will be five years from the
date of appointment or re-appointment.

Members: The tenure for the member will be five years from the date of
appointment or re-appointment.

Procedure and powers of the Securities Appellate Tribunal.

(1) The Securities Appellate Tribunal shall not be bound by the procedure laid
down by the Code of Civil Procedure, 1908 (5 of 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

(2) The Securities Appellate Tribunal shall have, for the purposes of discharging
their functions under this Act, the same powers as are vested in a civil court under

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the Code of Civil Procedure, 1908 (5 of 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 exparte.

(h) any other matter which may be prescribed.

(3) 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 (45 of 1860), 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 (2 of
1974).

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(4) Where Benches are constituted, the Presiding Officer of the Securities
Appellate Tribunal may, from 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.

(5) 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.

(6) 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.

Powers of SAT :

For the following matters, Securities Appellate Tribunal will

have the same powers that the Civil Court is vested with, under the Code of Civil
Procedures, 1908.

• to summon and to enforce the attendance of any person; or

• to examine him on oath; or

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 • to order the discovery and production of documents; or
• to procure evidence on affidavits; or
• to issue commissions for the examination of witnesses or documents; or
• to review decisions passed by the Tribunal itself; or
• to dismiss an application for default; or
• to decide an application as ex-parte; or
• set any order aside or dismiss any application for default or any order passed
by it ex-parte, or
• any other matter which may be prescribed.
• Enforce and summon the attendance of any person
• Require the discovery and production of documents
• Receive evidence on affidavits
• Issue commissions for the examination of the documents or witnesses
• Dismiss an application for default or deciding it ex-parte
• Set aside any order or dismissal of any application for default or any other
order passed by it ex-parte
• Any other matter as and when prescribed.
•

Appeal to SAT :
Section 15T of the Securities and Exchange Board of India Act, 1992

Under this Section, an appeal can be preferred to a Securities

Appellate Tribunal having jurisdiction in the matter,

• by an order or rules and regulations of the Board made under this Act which
was made on and after the commencement of the Securities Laws (Second
Amendment) Act, 1999;or

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 1. by an order made under this Act, by an adjudicating officer; or
2. by an order of the Insurance Regulatory and Development Authority or the
Pension Fund Regulatory and Development Authority.

Now we will be dealing with the Securities Appellate Tribunal (Procedures) Rules,
2000.

Who can make an appeal?

Every person aggrieved by order of the Securities and

Exchange Board of India or adjudicating officer is liable to make an appeal to the
Securities Appellate Tribunal (SAT).

Note: No appeal can be made to the Securities Appellate Tribunal (SAT) against
any order made with the consent of the parties.

Time Limit :

• Every appeal to the Securities Appellate Tribunal should be filed within 45

days from the day on which a copy of the order passed by the Securities and
Exchange Board of India or adjudicating office is received.
• The Securities Appellate Tribunal may allow an appeal after the expiry of
the specified period of 45 days if the reason for not filing the appeal with the
said period is satisfied.
• The appeal should be made in three copies along with the additional copies
for each additional appeal, and that should be signed by the authorised
person.

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 • On receipt of the appeal, the Securities Appellate Tribunal may confirm,
modify or set aside the order appealed against and such appeal should be
disposed of within 6 months from the date of receipt of such appeal.

Appear before SAT :

As per the SEBI Act, any authorised person is a Company

Secretary, Chartered Accountant (CA), Cost Accountant or Legal Practitioner can
appear before Securities Appellate Tribunal (SAT).

Appeal against the orders of SAT

• Every person aggrieved by any order or decision of Securities Appellate

Tribunal can file an appeal to the supreme court. Also, the appeal only can
be made on any question of law.
• The appeal should be made within 60 days from the date of receiving a copy
of the order or decision of Securities Appellate Tribunal. However, the
supreme court may further allow a period of 60 days for making an appeal, if
it satisfied that the applicant was prevented from filing the appeal within the
first 60 days due to sufficient cause.

Securities Appellate Tribunal (Procedure) Rules, 2000 :

The Central
Government issued the following guidelines, by exercising the powers conferred to
it by Section 29 read with Sections 15T and 15U of the Securities and Exchange
Board of India, 1992.

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 Let us discuss all the Sections contained in Securities Appellate
Tribunal (Procedure) Rules, 2000 and the procedures to file an appeal in the
Securities Appellate Tribunal.

Limitation for filing the appeal :

• The appeal should be filed before the Tribunal within a period of 45 days.
• The 45 days will start from the day when the appellant receives a copy of the
order against which the appeal is filed.
• It is further provided that if the appeal is not filed within 45 days then the
Appellate Tribunal may if it thinks that there exists a justified reason for not
filing the appeal within 45 days, allow that appeal.

Form and procedure of appeal :

• Any aggrieved person in the registry of the Appellate Tribunal can present a
memorandum of appeal which shall be presented in the Form.
• This memorandum of appeal has to be presented in the Appellate Tribunal
within whose jurisdiction the concerned case falls or shall be sent by
registered post addressed to the Registrar.
• In case, the memorandum of appeal is sent through the post by the
aggrieved, then it shall be deemed to have been presented in the registry on
the day it was received in the registry.

Sittings of Appellate Tribunal :

• The Appellate Tribunal will sit either at a place where its office is situated or
at any other place where the jurisdiction of the Appellate Tribunal
falls(whichever place the Appellate Tribunal finds suitable).

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 • When the Presiding Officer is temporarily absent, Government of India can
authorize either of the two other members to preside over the sitting of the
Tribunal either at a place where its office is situated or at such other place
where the jurisdiction of the Appellate Tribunal falls.

Language of Appellate Tribunal :

• All the proceedings in the Appellate Tribunal are to be conducted in either

English or Hindi.
• Any appeal, application, representation, document or other matters contained
in any language other than English or Hindi, will not be accepted by the
Appellate Tribunal unless the same is accompanied by a true copy of the
translation of the following matter, which will be in English or Hindi.

Appeal to be in writing :

• Every appeal, application, reply, representation or any document filed before

the Appellate Tribunal should be typewritten, cyclostyled or printed neatly
and legibly.
• It should be typewritten on the side of a good quality paper of foolscap size
in double space and separate sheets should be stitched together. Also, every
page should be consecutively numbered and filed in the manner provided in
sub-rule (2).
• The appeal under sub-rule (1) shall be presented in 5 sets in a paper book
along with an empty file size envelope. This envelope should bear the full
address of the particular respondent whereas the full address of each
respondent, in case the respondents are more than one. It should be provided

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 along with a sufficient number of extra paper books together with an empty
file size envelope.

Presentation and scrutiny of the memorandum of appeal :

1. The Registrar will endorse the date on every appeal and will sign the
endorsement. The date mentioned will be the one on which the appeal was
presented under rule 4 or deemed to have been presented under that rule.
2. The appeal will be duly registered and a serial number will be given
provided that on scrutiny, the appeal is found to be in order.
3. The Registrar may allow the appellant to rectify the defect in his presence if
on scrutiny, the appeal is found to be defective and the concerned defect is
formal in nature, but if the said defect is not formal in nature, the Registrar
may give the appellant some time to rectify the defect as he may deem fit.
4. If the appeal has been sent by post and found to be defective, the Registrar
may communicate the defects to the appellant and give the appellant some
time to rectify the defect as he may deem suitable.
5. If the appellant fails to rectify the defect within the time allotted by the
Registrar (in sub-rule (3)), the Registrar will pass an order which will
provide for reasons to be recorded in writing and may decline to register
such memorandum of appeal and communicate the order to the appellant
within seven days from declining.
6. An appeal against the order of the Registrar under sub-rule (4) can be made
within 15 days of receiving such order which declined the appeal. The
appeal will be made to the Presiding Officer or in his temporary absence, to
the Member authorized under sub-rule (2) of rule 5, whose decision will be
considered as final.

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Scheduled Fee :

Every appeal should be made along with an application fee

remitted in the form of Demand Draft drawn on any nationalised bank and such fee
is payable at the place where the registry is located. The amount of fee payable for
appeal against adjudication orders made are as follows:

S.No Amount of Amount of

Penalty Fees
Imposed Payable

1. Less than Rs.500

Rs.10,000

2. Rs.10,000 Rs.1,200
or more

3. Rs.1 lakh Rs.1,200

or more inclusive of
Rs.500 for
every one
lakh of
penalty.

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Note: The fee payable for any other appeal against an order of the Board under the
Securities and Exchange Board of India Act should be of Rs.5000.

Buy Back :

Buy-Back is a corporate action in which a company buys back its

shares from the existing shareholders usually at a price higher than market
price. When it buys back, the number of shares outstanding in the market reduces.

BREAKING DOWN 'Buyback'

A buyback allows companies to invest in

themselves. By reducing the number of shares outstanding on the market, buybacks
increase the proportion of shares a company owns. Buybacks can be carried out in
two ways:

• Shareholders may be presented with a tender offer whereby they have the
option to submit (or tender) a portion or all of their shares within a certain
time frame and at a premium to the current market price. Thi s premium
compensates investors for tendering their shares rather than holding on to
them.
• Companies buy back shares on the open market over an extended period of
time.
Conditions & Requirements for Buyback of Shares and Other Securities
According
to new SEBI (Buy-back of Securities) Regulations, 2018, the applicant requires

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fulfilling the following conditions for buyback of shares and other specified
securities:

1. The maximum limit of buy-back of shares/securities shall be 25% or less of the

total paid-up capital and free reserves of the company
Note:The reference to 25% in this regulation, in respect of the buyback of
shares/securities in any of the financial year, implies its total paid-up equity capital
in that FY.

The ratio of the total secures and unsecured debts that the company
owes after buyback shouldn’t be more than twice the paid-up capital and free
reserves
Condition: 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.

2.All shares and other securities for buy-back should be wholly paid-up
ompanies may buy back their shares or other securities by any of the following
means:
The existing shares other specified security-holders on the basis of
proportion through the tender offer;
Open market through-
• Book-building process
• Stock Exchange
• Odd-lot holder
A company could undertake a buy-back of its own shares or securities out of the
following:

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Its free reserves,
The securities premium account, or
The proceeds of the issue of any shares or securities as specified:
Condition: Any such buy-back shall not be made out of the proceeds of an earlier
issue of the similar shares or other specified securities.
Note: For this regulation, “free reserves” comprises a securities premium account.
Restrictions on Buyback
Along with the above-described conditions, there are some
restrictions on the companies opting for buy-back of shares. These are also a kind
of condition that the applicant company must follow. They are as follows:

 A company can’t buy-back its shares or other specified securities from any
individual via negotiated deals, whether on or off the stock exchange or
through any private arrangement or through spot transactions
 Companies cannot buy-back their shares or other specified securities from
the stock exchange for the purpose of delisting their shares or other specified
securities
 Companies can’t offer any buy-back within a period of one year reckoned
from the expiry date of the buyback period of the preceding offer of the
buyback if any
1. The company can’t let buyback of its shares unless the consequent reduction
of its share capital is affected
2. A company can’t purchase its own shares or other specified securities either
directly or indirectly
3. Through any subsidiary company consisting of its own subsidiary
companies;Via any investment company or group of investment companies;
or In case the company has made a default in the repayment of the deposits

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 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
Condition: The buyba ck isn’t restricted, in case the company has resolved its
default and it has lapsed a period of three years after such default.

The reasons for buy-back:

1. To improve earnings per share;

2. To improve return on capital, return on net worth and to enhance the long-
term shareholder value;
3. To provide an additional exit route to shareholders when shares are under
valued or are thinly traded;
4. To enhance consolidation of stake in the company;
5. To prevent unwelcome takeover bids;
6. To return surplus cash to shareholders;
7. To achieve optimum capital structure;
8. To support share price during periods of sluggish market conditions;
9. To service the equity more efficiently.

Advantages of Buy Back:

• It is an alternative mode of reduction in capital without requiring approval of

the Court/CLB(NCLT),
• To improve the earnings per share;

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 • To improve return on capital, return on net worth and to enhance the long-
term shareholders value;
• To provide an additional exit route to shareholders when shares are
undervalued or 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 condition;
• To serve the equity more efficiently.

Statutory Provisions of Buy-Back of Shares as Per Companies Act 2013 and

SEBI Act :

Procedure for Buyback of Shares

Now that you are aware of the conditions and if you meet the requirements, then
you can go for the process for buyback of shares in India:

Step 1: Convene the Board Meeting Firstly, the applicant needs to call a board
meeting. For the same, a notice must be sent to the directors of the company at
least 7 days prior to the date of the meeting
Step 2: Approval for EGM
In the board meeting, the applicant company needs to approve the buy-back, fix the
date of the EGM (Extra-Ordinary Meeting), and approve the EGM’s notice along
with the explanatory statement under Section 102

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Step 3: Send the notice for EGM Once the notice for EGM is approved, the
applicant must send it at least 21 days before the date of the meeting
Step 4: Passing of Special Resolution for Buy-Back of Shares
In the EGM, a special resolution must be passed for the approval of the Buy-back
of shares
Step 5: File SH-8 After the resolution has been passed, one must file the Letter of
Offer in Form SH-8 with the Registrar. Furthermore, the form must contain the
signature of two directors of the company
Step 6: Declaration of Solvency Along with the form SH-8, you need to annex
form SH-9 which is the declaration of solvency. Again, the form must be signed by
the two directors of the directors.
Step 7: Letter of Offer to the Shareholders Within 20 days of the filing of SH-8
with the Registrar, the applicant needs to dispatch the ‘Letter of Offer’ to the
shareholders of the company. Moreover, the Letter of Offer needs to be kept open
for at least 15 days and a maximum of 30 days.
Step 8: Acceptance of Offer The Offer will be considered as accepted if there’s no
communication of rejection within 21 days of offer closure
Step 9: Opening of a Bank Account So, if the shareholders have accepted the
offer, the applicant company has to open a separate bank account. Besides, the
total consideration amount for the shares offered to be paid in Buy-back should be
deposited in a separate bank account.
Furthermore, the consideration must be paid within seven days of verification.
Moreover, shares that are to be bought back should be destroyed within seven days
of the completion of buyback.
Step 10: Filing of SH-11 Lastly, the applicant needs to file form SH-11 within
thirty days of the completion of the buyback return.

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DELISTING OF EQUITY SHARES :

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.
On June 10, 2021, the Securities and Exchange Board of India
(SEBI) has issued the Securities and Exchange Board of India (Delisting of Equity
Shares) Regulations, 2021.

Applicability: The Regulations apply to delisting of equity shares of a company

including equity shares having superior voting rights from all or any of the
recognised stock exchanges where such shares are listed.

(1) These regulations shall apply to delisting of equity shares of a company

including equity shares having superior voting rights from all or any of the
recognised stock exchanges where such shares are listed.

(2) Nothing contained in these regulations shall apply to the delisting of equity
shares of a listed company—

(a) that have been listed and traded on the innovators growth platform of a
recognised stock exchange without making a public issue;

(b) made pursuant to a resolution plan approved under section 31 of the Insolvency
Code, if such plan provides for:

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(i) delisting of such shares; or

(ii) an exit opportunity to the existing public shareholders at a specified price:

Provided that the existing public shareholders shall be provided

the 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 further that the details of delisting of such shares along

with the justification for the exit price in respect of the proposed delisting shall be
disclosed to the recognized stock exchange(s) where the shares are listed within
one day of approval of the resolution plan under section 31 of the Insolvency Code.

Conditions for delisting :

(1) Neither any company shall apply for nor any recognised stock exchange shall
permit delisting of equity shares of a company:-

(a) unless a period of three years has elapsed since the listing of that class of equity
shares on any recognised stock exchange;

(b) if any instrument issued by the company, which is convertible into the same
class of equity share(s) that is sought to be delisted, is outstanding;

(c) pursuant to a buyback of equity shares by the company, including a buyback

pursuant to consolidation or division of all or part of the equity share capital of the
company, unless a period of six months has elapsed from the date of completion of
such buyback;

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(d) pursuant to a preferential allotment made by the company unless a period of six
months has elapsed from the date of such allotment:

Provided that nothing contained under clause (d) of sub-

regulation (1) shall be applicable to the delisting of equity shares made by a new
acquirer(s) who has made an offer under regulation 5A of the Takeover
Regulations or a new promoter(s) pursuant to re-classification in terms of the
provisions of the Securities and Exchange Board of India (Listing Obligations and
Disclosures Requirements) Regulations, 2015.

(2) No acquirer shall propose delisting of equity shares of a company, if the

acquirer had sold the equity shares of the company during the period of six months
prior to the date of the initial public announcement made in terms of sub-regulation
(1) of regulation 8 of these regulations.

(3) Nothing contained in clauses (a) and (b) of sub-regulation (1) shall apply to a
delisting of equity shares falling under regulation 5 of these regulations.

(4) No acquirer shall, directly or indirectly, employ the funds of the company to
finance an exit opportunity provided under Chapter IV of these regulations or an
acquisition of sh ares made pursuant to sub-regulation (4) of regulation 33 of these
regulations.

(5) No acquirer shall, directly or indirectly,–

(a) employ any device, scheme or artifice to defraud any shareholder or other
person; or

(b) engage in any transaction or practice that operates as a fraud or deceit upon any
shareholder or other person; or

125
(c) engage in any act or practice that is fraudulent, deceptive or manipulative – in
connection with any delisting of equity shares sought or permitted or exit
opportunity given or other acquisition of equity shares made under these
regulations.

Neither any company shall apply for nor any recognised stock
exchange shall permit delisting of equity shares of a company:-
(a) unless a period of three years has elapsed since the listing of that class of equity
shares on any recognised stock exchange;

(b) if any instrument issued by the company, which is convertible into the same
class of equity share(s) that is sought to be delisted, is outstanding;

(c) pursuant to a buyback of equity shares by the company, including a buyback

pursuant to consolidation or division of all or part of the equity share capital of the
company, unless a period of six months has elapsed from the date of completion of
such buyback;

(d) pursuant to a preferential allotment made by the company unless a period of six
months has elapsed from the date of such allotment.

2. No acquirer shall propose delisting of equity shares of a company, if the acquirer

had sold the equity shares of the company during the period of six months prior to
the date of the initial public announcement.

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Delisting from some of the recognised stock exchanges :
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.

Delisting from all the recognised stock exchanges :

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.
Initial public announcement

(1) On the date when the acquirer(s) 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.

(2) 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.

(3) The initial public announcement shall contain such information as may be
specified, including:—

(a) the reasons for delisting;

127
(b) an undertaking with respect to compliance with sub-regulations (2) and (5) of
regulation 4 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

(1) Prior to making an initial public announcement, the acquirer shall appoint a
merchant banker registered with the Board as the Manager to the offer.

(2) The Manager to the offer appointed under sub-regulation (1) shall not be an
associate of the acquirer.

(3) 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.

Approval by the Board of Directors

. (1) The company shall obtain the approval of its Board of Directors in respect of
the proposal of the acquirer to delist the equity shares of the company, not later
than twenty one days from the date of the initial public announcement.

(2) The Board of Directors of the company, before considering the proposal of
delisting, shall appoint a Peer Review Company Secretary and provide the
following information to such Company Secretary for carrying out duediligence:-

(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

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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, including the information mentioned in clauses (a)
and (b) for a longer period of time, sought by the Company Secretary if the
Company Secretary is of the opinion that the information provided under clauses
(a) and (b) is not sufficient for providing the certification in terms of sub-regulation
(3).

(3) After obtaining the information from the Board of Directors of the company
under sub-regulation 2, 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 compliance with sub-
regulation (5) of regulation 4 of these regulations.

(4) 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 report of the Company Secretary
including compliance with sub-regulation (5) of regulation 4 of these regulations;

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(c) the delisting, in their opinion, is in the interest of the shareholders of the
company(5) 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 in terms of sub-regulation (3)
and the audit report in terms of sub-regulation (2) of regulation 12 of these
regulations.

(6) Upon receipt of the communication from the company under sub-regulation
(5), the stock exchanges shall forthwith disseminate the same to the public.

Approval by shareholders

(1) 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 approval of
Board of Directors.

(2) The special resolution shall be passed through postal ballot and / or e-voting as
per the applicable provisions of the Companies Act, 2013 (18 of 2013) and the
rules made thereunder.

(3) The company shall disclose all material facts in the explanatory statement sent
to the shareholders in relation to such a resolution.

(4) The special resolution shall be acted upon only if the votes cast by the public
shareholders in favour of the proposal are at least two times the number of votes
cast by the public shareholders against it.

In-principle approval of the stock exchange

130
(1) 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 by the recognised stock exchange from time to time, 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.

(2) 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
Securities and Exchange Board of India (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.

(3) 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.

(4) The recognised stock exchange shall not unfairly withhold such an application,
but may require the company to satisfy or inform it as regards –

(a) compliance with regulations 10 and 11 of these regulations;

(b) resolution of investor grievances by the company;

(c) payment of listing fees due to the recognised stock exchange;

(d) compliance with any provision of the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended
from time to time, that has a material bearing on the interests of its equity
shareholders;

131
(e) any litigation or action pending against the company pertaining to its activities
in the securities market or any other matter having a material bearing on the
interests of its equity shareholders;

(f) any other relevant matter as it may deem fit.

QUESTION BANK

UNIT IV

PART-A

1 List out the primary objectives of SEBI.

2 How is the board of Management of SEBI constituted?

3 What is Securities appellate tribunal?

4 What do you mean by “Buy Back of Shares”?

5 Mention the qualifications of members of SAT

6 Who is a presiding officer in SAT?

7 List out the reasons for buy back of shares.

8 State any two benefits of Buy back of shares.

9 When did SEBI Act come to force?

10 State the tenure of various offices under SAT

132
 PART-B

1 Discuss the powers and functions of SEBI Act.

2 Elaborate the Statutory provisions for buy back of Shares

3 Examine the conditions for Delisting of Shares.

4 Describe the objectives and guidelines of SEBI.

5 Explain the procedure and powers of Securities Appellate Tribunal

6 Explain the process of buying back through stock exchange

7 Outline the process for Delisting of shares of a Company

8 Summarize the functions of Securities Appellate Tribunal

9 Determine the powers of SAT in detail

10 Examine the statutory Provisions of Buy-Back of Shares as Per Companies Act

2013 and SEBI Act

REFERENCE

❖ KONDAIAH JONNALAGADD, SECURITIES LAW, LEXIS NEXIS,2015

❖ MS ZAD,SECURITIES LAW AND CAPITAL MARKET,TAXMAN,2019
❖ RAJNISH KUMAR,CAPITAL MARKET AND SECURITIES
❖ LAW,COMMERCIAL LAWPUBLISHERS,9 TH EDITION,2018

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 UNIT 5

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.

INTRODUCTION

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. To utilize the services
offered by a Depository, the investor has to open an account with the Depository
through a Depository Participant.

According to Section 2(e) of the Depositories Act, 1996,

Depository means a company formed and registered under the Companies Act,
2013 and which has been granted a certificate of registration under Section 12(1A)
of the SEBI Act, 1992.

A depository cannot act as a depository unless it obtains a certificate

of commencement of business from the SEBI. There are two Depositories
functioning in India, namely the National Securities Depository Limited (NSDL)
and the Central Depository Services (India) Limited (CDSL).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
1
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.

All the securities held by a depository shall be dematerialized and

shall be in a fungible form. To utilize the services offered by 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.

Definition
The Depository Act was enacted by the Indian Parliament to provide a
legal framework for the establishment of depositories. The term “Depository” is a
registered organization which helps an investor to buy or sell securities such
as shares, debentures and bonds in an electronic form.

Certificate of commencement of business by depositories.

(1) No depository shall act as a depository unless it obtains a certificate of
commencement of business from the Board.
(2) A certificate granted under sub-section (1) shall be in such form as may be
specified by the regulations

(3) The Board shall not grant it certificate under sub-section (1) unless it is
satisfied that the depository has adequate systems and safeguards to prevent
manipulation of records and transactions: Provided that no certificate shall be
2
refused under this section unless the depository concerned has been given a
reasonable opportunity of being heard.

Agreement between depository and participant.

(1) A depository shall enter into an agreement with one or more participants as its
agent.
(2) Every agreement under sub-section (1) shall be 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.

Rights of depositories and beneficial owner.

(1) Notwithstanding anything contained in any other law for the time being in
force, a depository shall be deemed to be the registered owner for the purposes of
effecting transfer of ownership of security on behalf of a beneficial owner.
(2) Save as otherwise provided in sub-section (1), the depository as a
registered owner shall not have any voting rights or any other rights in respect of
securities held by it.
(3) The beneficial owner shall be entitled to all the rights and benefits and be
subjected to all the liabilities in respect of his securities held by a depository

DEPOSITORY FUNCTION

– Account opening

– Dematerialisation

– Rematerialisation

3
– Settlement

– Initial Public Offers (IPO’s), corporate benefits

– Creation of encumbrance

ROLE AND FUNCTIONS OF DEPOSITORIES

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”. Inthe 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.

Immediate transfer and registration of securities

4
 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.

5
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.

Other roles of Depositories

The role of depositories can vary from country to country and the
range of services offered in each country may differ. Nowadays depositories
continue to expan d and offer new services on a continual basis. Some of the other
roles of depositories are;

● Removing or minimising problems associated with a change of address of an

investor

● Removal of problems associated with the transfer or selling of shares of a

minor

● Ease in portfolio monitoring

● The role of depositories in other countries includes underwriting new

securities

● Processing dividend and interest payments

6
 ● Announcing, reporting and facilitating tender offers and reorganisations in
addition to the deposit and withdrawal of securities

Depositories offer their services through depository

participants. All of the functions including the various roles of depositories are
performed by depository participants. Depository participants are a bridge between
depositories and investors. This means that any investor who wishes to make use
of the services provided by depositories does so through the depository
participants. Depository participants can be banks or other financial institutions,
brokers, custodian participants, registrars, share transfer agents or non-banking
financial companies. There can be one or various organisations offering depository
services in a country. Depositories are regulated by the securities exchange board.

Following services are provided by a depository to the beneficial owners but

of course, through a depository participant:

● Opening a demat account;

● Dematerialization, i.e. converting physical securities into electronic

form,

● Rematerialization, i.e. converting electronic securities balances held

in a BO account into physical form;

● Maintaining record of securities held by the beneficial owners in the

electronic form;

● Settlement of trades by delivery or receipt of securities from / in BO

accounts;

7
● Settlement of off-market transactions between BOs;

● Receiving electronic credit in respect of securities allotted by issuers

under IPO or otherwise on behalf of demat account holders;

● Receiving non cash corporate benefits such as allotment of bonus

and rights shares or any other non-cash corporate benefits given by

the issuers in electronic form on behalf of its demat account holders,

● Pledging of dematerialized securities & facilitating loans against

shares,

● Freezing of the demat account for debits, credits, or both

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 legal maintains securities’ account balances and intimates the
status of holding to the account holder from time to time. According to the SEBI
guidelines, Financial Institutions like banks, custodians, stock-brokers etc. can
become participants in the depository.

Characteristics of a DP:

– Transmission requests/nomination

– Acts as an Agent of Depository

– Customer interface of Depository

8
– Functions like Securities Bank

– Account opening

– 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.

The SEBI (Depositories and Participants) Regulations, 1996

SEBI had circulated a consultative paper on the framework

of the draft regulations for depositories and participants in October 1995.
Extensive discussion were then held with the stock exchanges, market participants
and investors on this issue. In addition to the views expressed at these meetings,
SEBI also had the benefit of written comments on the Consultative Paper
submitted by chambers of commerce and industry, market participants and
investors. Based on the above, the SEBI (Depositories and Participants)
Regulations, 1996 were notified in May 1996.

These regulations provide for the following:

• registration of depositories and participants under the SEBI Act

9
 • grant of certificate of commencement of business upon satisfaction that
adequate safeguards and systems to prevent manipulation of records and
transactions have been put in place, as required by the Depositories Act
• the eligibility criteria for admission of securities to a depository
• the specific rights and obligations of depositories, participants and issuers in
addition to those specified in the Depositories Act
• periodic reports to and inspections and enquiries by SEBI
• penal action and procedure in case of default

In addition, the regulations contain the following provisions:

• the minimum capital of the company that is to be registered as depository,

has been set at Rs. 100 crore
• the eligibility criteria for the sponsors of a depository, who have been
restricted to financial institutions, custodians, non-banking finance
companies and stock brokers with a minimum net worth of Rs. 50 lakh and
subject to a ceiling of 25 times their net worth on the value of the portfolios
for which they act as participant
• provisions for the indemnification of beneficial owners including insurance
cover for the depository and participants
• the adequacy of safeguards and procedures that are to be put in place before
commencement of business is allowed to the depository
• the internal and external controls and audit mechanisms that are to be
instituted by the depository in order to ensure the integrity of data processing
systems and the adequacy of systems and procedures to prevent systemic
failure, manipulation or loss of records

10
The SEBI(Depositories and Participants)(Amendment) Regulations, 1997

In February 1997, the SEBI (Depositories and Participants)

Regulations, 1997 were amended to restrict foreign ownership of a depository,
whether as sponsors or participants to 20% of its equity. The regulations were also
amended to permit non-banking finance companies with a minimum net worth of
Rs. 50 crore in addition to the net worth specified by any other authority to act as
participants in a depository on behalf of other beneficial owners.

The National Securities Depository Limited Following the notification of the

SEBI (Depositories and Participants) Regulations, 1996,

NSDL, a company sponsored by the IDBI, the UTI and the

NSE was granted a certificate of registration as a depository on June 7, 1996.
NSDL was granted a certificate of commencement of business on October 31,
1996. NSDL began the process of dematerialisation of securities with three
participants and three securities eligible for dematerialisation.

As of March 31, 1997, 28 participants had been registered by

SEBI as participants in NSDL. Of these 10 were banks, 2 were financial
institutions, 3 non bank custodians, 11 were stock brokers and 2 other non bank
finance companies. All the major custodians of securities who act on behalf of
FIIs, mutual funds and financial institutions had become participants in NSDL. For
a security to be declared eligible for dematerialisation in NSDL, the issuer (and his
registrar and transfer agent in case there is one) has to sign an agreement with
NSDL. This agreement lays down the obligations and responsibilities of the issuer
and NSDL with respect to each other, in addition to those prescribed in the
Depositories Act and the SEBI regulations. As the Depositories Act permits
11
investors to hold securities which are eligible for dematerialisation in a depository
in physical form outside the depository, it is important that the issuer or the issuer's
registrar and transfer agent have been required to reconcile the holdings of a
security in physical form with those held in dematerialised form on a daily basis.

As of March 31, 1997, issuers had signed agreements with

NSDL in respect of 43 securities. The market capitalisation of securities for which
issuers had established electronic connectivity with NSDL at the end of 1996-97
stood at Rs. 44,973 crore. As of March 31, 1997, the market value of
dematerialised securities stood at Rs. 502 crore. These were held on behalf of
1,957 beneficial owners.

At present, only the capital market segment of the NSE and

the National Securities Clearing Corporation Limited (NSCCL), which acts as the
clearing corporation for securities traded on the capital market segment of the NSE
are integrated with the depository. Only trades which are executed on the
dematerialised securities trading segment on the NSE can be cleared by NSCCL
for settlement by electronic book entry within NSDL. The Depositories Act, 1996
amended the Indian Stamp Act, 1899, to exempt transfers of equity shares through
electronic book entry from payment of stamp duty.

Admission of securities

The registration of securities ensures the enforceability of

shareholders’ ownership rights, a higher degree of circulation safety and greater
trust by investors, partners and financial institutions.

12
 ● Law under which the securities are constituted allows securities to be
represented in book-entry form subsequent to a direct issuance in
dematerialized form;

● Law under which the securities are constituted does not prohibit securities to
be validly issued and transferred in the Settlement System to which
admission is requested;

● All securities of the same issue are fungible,

● Admission of securities complies with the requirements of the law

applicable to the Settlement System to which the admission is requested.

● Shares of companies registered in the Estonia and other securities

constituted under Estonian law are admitted to Estonian Settlement System;

● Shares of companies registered in the Iceland and other securities constituted

under Icelandic law are admitted to Icelandic Settlement System;

● Shares of companies registered in the Latvia and other securities constituted

under Latvian law are admitted to Latvian Settlement System;

● Shares of companies registered in the Lithuania and other securities

constituted under Lithuanian law are admitted to Lithuanian Settlement
System.

DEMATERIALIZATION

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

13
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 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.

14
 In order to dematerialise physical securities one has to fill in a
DRF (Demat Request Form) which is available with the DP and submit the same
along with physical certificates that are to be dematerialised. Separate DRF has to
be filled for each ISIN. The complete process of dematerialisation is outlined
below:

1.Surrender certificates for dematerialisation to your DP.

2.DP intimates to the Depository regarding the request through the system.

3.DP submits the certificates to the registrar of the Issuer Company.

15
4,Registrar confirms the dematerialisation request from depository.

5.After dematerialising the certificates, Registrar updates accounts and informs

depository regarding completion of dematerialisation.

6.Depository updates its accounts and informs the DP.

7.DP updates the demat account of the investor.

Procedure for selling dematerialised securities

The procedure for buying and selling dematerialised

securities is similar to the procedure for buying and selling physical securities. The
difference lies in the process of delivery (in case of sale) and receipt (in case of
purchase) of securities.

In case of purchase:-

• The broker will receive the securities in his account on the payout day.
• The broker will give instruction to its DP to debit his account and credit
BO's account.
• BO will give ‘Receipt Instruction’ to DP for receiving credit by filling
appropriate form. However BO can give standing instruction for credit to his
account that will obviate the need of giving Receipt Instruction every time.

In case of sale

BO will give delivery instruction through Delivery Instruction Slip

(DIS) to DP to debit his account and credit the broker’s account. Such instruction
should reach the DP’s office at least 24 hours before the pay-in, failing which, DP
will accept the instruction only at the BO’s risk.

16
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.

Features

● A client can rematerialise his dematerialised holdings at any point of time.

● The rematerialisation process is completed within 30 days.

● The securities sent for rematerialisation cannot be traded.

Process

The process is called rematerialisation. If one wishes to get back his

securities in the physical form he has to fill in the RRF (Remat Request Form) and
request his DP for rematerialisation of the balances in his securities account. The
process of rematerialisation is outlined below:

● Make a request for rematerialisation.

● Depository participant intimates depository regarding the request through the

system.

● Depository confirms rematerialisation request to the registrar.

17
● Registrar updates accounts and prints certificates.

● Depository updates accounts and downloads details to depository participant.

● Registrar dispatches certificates to investor.

18
19
Depository process

When the shares are handed over to the depository system, the
shares get immobilized as they are no more with the shareholder in physical form.

Notification by Stock Exchange

20
 The stock exchange concerned where the shares are listed will
come out with a notification for the dematerialization of shares.

Dematerialization Form

The shareholder will obtain the Dematerialisation request form

from the Depository Participant. This form will contain details about the name of
the company, folio number and the distinctive number of the shares which are
given for dematerialization. The form will be signed by either the single owner if it
is held so or by joint owners, when they are held jointly.

Registering of shares

When the D.P hands over the securities to the depository, the
securities will be sent to Share Registrar who will register the depository name and
the particulars of shares. But, before doing this, the ownership of the securities
should be verified with the company and hence, this procedure will take some
time.

In case the signature in the requisition form does not tally with
the specimen signature held by the company, then the request for dematerialization
will be rejected as it amounts to bad delivery.

Crediting the investor account

In the last stage, the Depository will inform the D.P the
details of shares registered in the name of the shareholder concerned. On this basis,
the D.P will send the Statement of Account, to the customer shareholder.

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Objectives of Depository

The introduction of depository system will result in the elimination of

all the problems connected with ownership, trading and transfer of securities. It
plays a crucial role in Indian capital market. Depository system enables the capital
market to achieve the following objectives:

1. It eliminates the occurrence of bad deliveries, forgery and duplicate share

certificates.

2. It avoids delay in transfer of securities.

3. It enhances liquidity of securities by facilitating their easy transfer.

4. It substantially reduces the cost of transactions for the investor.

5.It enables surrender and withdrawal of securities from it with ease.

6. It maintains an accurate record of investors’ holdings by keeping the details in

electronic form.
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7. It attracts foreign investors by complying with global standards.

8. It provides service infrastructure in a capital market.

POWER OF THE SEBI:

Section 18 of the Act provides that the SEBI in the public

interest or in the interest of investors may by order in writing to 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.

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
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(b) to any issuer, as may be appropriate in the interest of investors or the securities
market.

INSPECTION AND PENALTIES

PENALTIES AND ADJUDICATION

S.No Section Section Particulars

1. Section 19A Failure to furnish information, return, etc.

2. Section 19B Failure to enter into an agreement

3. Section 19C Failure to redress investors’ grievances

4. Section 19D Delay in dematerialisation or issue of certificate

of securities

5. Section 19E Failure to reconcile records

6. Section 19F Failure to comply with directions issued by the

SEBI under section 19 of the Act

7. Section 19G Contravention where no separate penalty has

been provided

8. Section 19H Power to adjudicate

9. Section 19I Factors to be taken into account by adjudicating

officer

10. Section 19-IA Settlement of Administrative Civil Proceedings

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11. Section 19-IB Recovery of amounts

12. Section 19J Crediting sums realised by way of penalties to

Consolidated Fund of India

Adjudication

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 The adjudication procedure as mentioned under Section 19H to 19J of
the Depositories Act, 1996 is same as the adjudication procedure prescribed under
the SEBI Act, 1992. Hence, student may refer the same.

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:
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 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 has vide its circular No. NSDL/SG/II/010/99 dated 26th

March 1999 notified amendment of its Bye Law “Every Participant shall ensure
that an internal audit in respect of the operations of the Depository is conducted at
intervals of not more than three months by a qualified Chartered Accountant or a
Company Secretary 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 “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 practice in accordance with
the provisions of the Company Secretaries Act, 1980, 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
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– Off Market Trades

– Transmission

– Returns to Depository

– Grievance Redressal Mechanism

– 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,

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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.

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(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-market 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.

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

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– 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.

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

– Bye-laws of Depository

– Business Rules of Depository.

Apart from the above, Depositories are also governed by certain provisions of:

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– 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.

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 QUESTION BANK

UNIT-V

PART-A

1.Define a Depository

2.State the functions of Depository.

3.List out the characteristics of a Depository.

4.What is meant by Dematerialization?

5.Mention the objectives of Depository system

6.Expand the term DIS.

7.Differentiate Depository from a Custodian.

8.State the meaning of Re-materialization.

9.Write down any four differences between Dematerialization and Re-

materialization.

10.What is meant by Adjudication?

PART-B

1.Summarize the roles and functions of Depository.

2.Explain the process of Dematerialization of securities with the help of an

illustration.

3.Explain the procedure for Re-materialization of securities Illustrate with the help
of a flow chart.
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4.Differentiate Dematerialization from Re-materialization.

5.Examine the Penalties and Adjudication of Depository under SEBI Act 1992.

6.Explain the Internal Audit process for Depositories under SEBI Act.

7.Describe Depository participants in detail.

8.Explain the Concurrent Audit process for Depositories under SEBI Act.

9.Summarize in detail about Depository system in India.

10.Analyze the process for Admission of Securities.

REFERENCE

❖ KONDAIAH JONNALAGADD, SECURITIES LAW, LEXIS NEXIS,2015

❖ MS ZAD,SECURITIES LAW AND CAPITAL MARKET,TAXMAN,2019
❖ RAJNISH KUMAR,CAPITAL MARKET AND SECURITIES
LAW,COMMERCIAL LAWPUBLISHERS,9 TH EDITION,2018

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