capital market

AN OVERVIEW OF CAPITAL MARKET IN INDIA*

Transfer of resources from those with idle resources to others who have a productiveneed for them is perhaps most efficiently achieved through the securities markets. Statedformally, securities markets provide channels for allocation of savings to investmentsand thereby decouple these two activities. As a result, the savers and investors are notconstrained by their individual abilities, but by the economy’s abilities to invest and saverespectively, which inevitably enhances savings and investment in the economy.

MARKET SEGMENTS

The securities market has two interdependent and inseparable segments, the newissues (primary market) and the stock (secondary) market. The primary market providesthe channel for sale of new securities while the secondary market deals in securitiespreviously issued. The price signals, which subsume all information about the issuerand his business including associated risk, generated in the secondary market, help theprimary market in allocation of funds. The issuers of securities issue (create and sell)new securities in the primary market to raise funds for investment and/or to dischargesome obligation. They do so either through public issues or private placement. There aretwo major types of issuers who issue securities. The corporate entities issue mainlydebt and equity instruments (shares, debentures, etc.), while the governments (centraland state governments) issue debt securities (dated securities, treasury bills).

The secondary market enables participants who hold securities to adjust their holdingsin response to changes in their assessment of risk and return. They also sell securitiesfor cash to meet their liquidity needs.

A variant of secondary market is the forward market, where securities are traded forfuture delivery and payment. Pure forward is out side the formal market. The versions offorward in formal market are futures and options. In futures market, standardised securitiesare traded for future delivery and settlement. These futures can be on a basket of securitieslike an index or an individual security. In case of options, securities are traded forconditional future delivery. There are two types of options – a put option permits theowner to sell a security to the writer of options at a predetermined price while a calloption permits the owner to purchase a security from the writer of the option at apredetermined price. These options can also be on individual stocks or basket of stockslike index. Two exchanges, namely NSE and BSE provide trading of derivatives ofsecurities.

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* Adopted from the Article 'An Overview of the Securities Market in India', authored byShri M S Sahoo and published in April 2004 issue of Chartered Secretary.

PART A

2 SUPPLEMENT FOR SECURITIES LAWS & REGULATION OF FINANCIAL MARKETS

PRODUCTS AND PARTICIPANTS

Savings are linked to investments by a variety of intermediaries through a range ofcomplex financial products called “securities” which is defined in the Securities Contracts(Regulation) Act, 1956 to include shares, scrips, stocks, bonds, debentures, debenturestock, or other marketable securities of like nature in or of any incorporate company orbody corporate, government securities, derivatives of securities, units of collectiveinvestment scheme, security receipts, interest and rights in securities, or any otherinstruments so declared by the central government. There are a set of economic unitswho demand securities in lieu of funds and others who supply securities for funds.These demand for and supply of securities and funds determine, under competitivemarket conditions in goods and securities market, the prices of securities.

It is not that the suppliers of funds and suppliers of securities meet each other andexchange funds for securities. It is difficult to accomplish such double coincidence ofwants. The amount of funds supplied by the supplier of funds may not be the amountneeded by the supplier of securities. Similarly, the risk, liquidity and maturitycharacteristics of the securities may not match preference of the supplier of funds. Insuch cases, they incur substantial search costs to find each other. Search costs areminimised by the intermediaries who match and bring these suppliers together. Theymay act as agents to match the needs of the suppliers of funds / securities, help themin creation and sale of securities or buy the securities issued by supplier of securitiesand in turn, sell their own securities to suppliers of funds. It is, thus, a misnomer thatsecurities market disintermediates by establishing a direct relationship between thesuppliers of funds and suppliers of securities. The market does not work in a vacuum; itrequires services of a large variety of intermediaries like merchant bankers, brokers, etcto bring the suppliers of funds and suppliers of securities together for a variety oftransactions. The disintermediation in the securities market is in fact an intermediationwith a difference; it is a risk-less intermediation, where the ultimate risks are borne bythe suppliers of funds/securities (issuers of securities and investors in securities), andnot the intermediaries.

The securities market, thus, has essentially three categories of participants, namelythe issuers of securities, investors in securities and the intermediaries and two categoriesof products, namely the services of the intermediaries and the securities, includingderivatives. The issuers and investors are the consumers of services rendered by theintermediaries while the investors are consumers of securities issued by issuers. Thosewho receive funds in exchange for securities and those who receive securities in exchangefor funds often need the reassurance that it is safe to do so. This reassurance is providedby the law and custom, often enforced by the regulator. The regulator develops fairmarket practices and regulates the conduct of issuers of securities and the intermediariesso as to protect the interests of investors in securities. The regulator ensures a highstandard of service from intermediaries and supply of quality securities and non-manipulated demand for them in the market.

Securities Market and Economic Growth

A well functioning securities market is conducive to sustained economic growth.There have been a number of studies, starting from World Bank and IMF to variousscholars, which have established robust relationship not only one way, but also the both

SUPPLEMENT FOR SECURITIES LAWS & REGULATION OF FINANCIAL MARKETS 3

ways, between the development in the securities market and the economic growth. Thesecurities market fosters economic growth to the extent that it-(a) augments the quantitiesof real savings and capital formation from any given level of national income, (b) increasesnet capital inflow from abroad, (c) raises the productivity of investment by improvingallocation of investible funds, and (d) reduces the cost of capital.

It is reasonable to expect savings and capital accumulation and formation to respondfavourably to developments in securities market. The provision of even simple securitiesdecouples individual acts of saving from those of investment over both time and spaceand thus allows savings to occur without the need for a concomitant act of investment.If economic units rely entirely on self-finance, investment is constrained in two ways: bythe ability and willingness of any unit to save, and by its ability and willingness to invest.The unequal distribution of entrepreneurial talents and risk taking proclivities in anyeconomy means that at one extreme there are some whose investment plans may befrustrated for want of enough savings, while at the other end, there are those who do notneed to consume all their incomes but who are too inert to save or too cautious to investthe surplus productively. For the economy as a whole, productive investment may thusfall short of its potential level. In these circumstances, the securities market provides abridge between ultimate savers and ultimate investors and creates the opportunity toput the savings of the cautious at the disposal of the enterprising, thus promising toraise the total level of investment and hence of growth. The indivisibility or lumpiness ofmany potentially profitable but large investments reinforces this argument. These arecommonly beyond the financing capacity of any single economic unit but may besupported if the investor can gather and combine the savings of many. Moreover, theavailability of yield bearing securities makes present consumption more expensive relativeto future consumption and, therefore, people might be induced to consume less today.The composition of savings may also change with fewer saving being held in the form ofidle money or unproductive durable assets, simply because more divisible and liquidassets are available.

International Linkage

The securities market facilitates the internationalisation of an economy by linking itwith the rest of the world. This linkage assists through the inflow of capital in the form ofportfolio investment. Moreover, a strong domestic stock market performance forms thebasis for well performing domestic corporate to raise capital in the international market.This implies that the domestic economy is opened up to international competitivepressures, which help to raise efficiency. It is also very likely that existence of adomestic securities market will deter capital outflow by providing attractive investmentopportunities within domestic economy.

Any financial development produces allocational improvement over a system ofsegregated investment opportunities. The benefits of improved investment allocation issuch that Mc Kinnon defines economic development as reduction of the great dispersionin social rate of return to existing and new investments under domestic entrepreneurialcontrol. Instead of emphasising scarcity of capital, he focuses on the extra-ordinarydistortions commonly found in the domestic securities markets of the developing countries.The distortions in the real sectors such as monopoly power, tariff protection, importquotas, credit rationing add salt to injury. In the face of great discrepancies in rate ofreturn, the accumulation of capital does not contribute much to development. A developed


securities market successfully monitors the efficiency with which the existing capitalstock is deployed.

In as much as the securities market enlarges the financial sector, promoting additionaland more sophisticated financing, it increases opportunities for specialisation, divisionof labour and reductions in costs in financial activities. The securities market and itsinstitutions help the user in many ways to reduce the cost of capital. They provide aconvenient market place to which investors and issuers of securities go and therebyavoid the need to search a suitable counterpart. The market provides standardisedproducts and thereby cuts the information costs associated with individual instruments.The market institutions specialise and operate on large scale which cuts costs throughthe use of tested procedures and routines.

There are also other developmental benefits associated with the existence of asecurities market.

1. The securities market provides a fast-rate breeding ground for the skills andjudgement needed for entrepreneurship, risk bearing, portfolio selection andmanagement.

2. An active securities market serves as an ‘engine’ of general financialdevelopment and may, in particular, accelerate the integration of informal financialsystems with the institutional financial sector. Securities directly displacetraditional assets such as gold and stocks of produce or, indirectly, may provideportfolio assets for unit trusts, pension funds and similar FIs that raise savingsfrom the traditional sector.

3. The existence of securities market enhances the scope, and provides institutionalmechanisms, for the operation of monetary and financial policy.

A PROFILE OF THE SECURITIES MARKET

The past decade in many ways has been remarkable for securities market in India.It has grown exponentially as measured in terms of amount raised from the market,number of stock exchanges and other intermediaries, the number of listed stocks, marketcapitalisation, trading volumes and turnover on stock exchanges, and investor population.The market has witnessed fundamental institutional changes resulting in drasticreduction in transaction costs and significant improvements in efficiency, transparencyand safety.

Dependence on Securities Market

Three main sets of entities depend on securities market. While the corporates andgovernments raise resources from the securities market to meet their obligations, thehouseholds invest their savings in securities. While the corporate sector and governmentstogether raised a sum of Rs. 226,911 crore during 2001-02, the household sector invested4.3% of their financial savings through the securities market during 2000-01.

Corporate Sector : The 1990s witnessed emergence of the securities market as amajor source of finance for trade and industry. The share of capital market basedinstruments in resources raised externally increased to 53% in 1993-94, but declinedthereafter to 31% by 2000-01.


Governments : Along with increase in fiscal deficits of the governments, thedependence on market borrowings to finance fiscal deficits has increased over the years.The state governments and the central government financed about 14% and 18%respectively of their fiscal deficit by market borrowings during 1990-91. In percentageterms, dependence of the state governments on market borrowing did not increasemuch during the decade 1991-2002. In case of central government, it increased to 69.4%by 2001-02.

Households : Household sector accounted for 89% of gross domestic savings during2000-01; 53% of their savings were in financial assets. The share of financial savings ofthe household sector in securities (shares, debentures, public sector bonds and units ofUTI and other mutual funds and government securities) is estimated to have gone downfrom 22.9% in 1991-92 to 4.3% in 2000-01.

Though there was a major shift in the saving pattern of the household sector fromphysical assets to financial assets and within financial assets, from bank deposits tosecurities, the trend got reversed in the recent past due to high real interest rates,prolonged subdued conditions in the secondary market, lack of confidence by the issuersin the success of issue process as well as of investors in the credibility of the issuersand the systems and poor performance of mutual funds. The portfolio of householdsector remains heavily weighted in favour of physical assets and fixed income bearinginstruments.

Investor Population

The Society for Capital Market Research and Development carries out periodicalsurveys of household investors to estimate the number of investors. Their first surveycarried out in 1990 placed the total number of share owners at 90-100 lakh. Their secondsurvey estimated the number of share owners at around 140-150 lakh as of mid-1993.Their latest survey estimates the number of shareowners at around 2 crore at 1997 end,after which it remained stagnant upto the end of 1990s. The bulk of increase in numberof investors took place during 1991-94 and tapered off thereafter. 49% of the shareowners at the end of 2000 had, for the first time, entered the market before the end of1990, 44% entered during 1991-94, 6.3% during 1995-96 and 0.8% since 1997. Thesurvey attributes such tapering off to persistent depression in the share market andinvestors’ bad experience with many unscrupulous company promoters and managements.

According to the SEBI-NCAER survey of Indian investors conducted in early 1999,an estimated 12.8 million, or 7.6% of all Indian households representing 19 millionindividuals had directly invested in equity shares and/or debentures as at the end offinancial year 1998-99. The investor households increased at a compound growth rate of22% between 1985-86 and 1998-99. About 35% of investor households became investorsin equity shares prior to 1991, while 47% of the investors entered the market between1991 and 1995 and 17% after 1995. More than 156 million or 92% of all Indian householdswere non-investor households who did not have any investments in equity/debentures.Low per capita income, apprehension of loss of capital, and economic insecurity, whichare all inter-related factors, significantly influenced the investment attitude of thehouseholds. The lack of awareness about securities market and absence of a dependableinfrastructure and distribution network coupled with aversion to risk inhibited non-investorhouseholds from investing in the securities market.


An estimated 15 million (nearly 9%) of all households representing at least 23 millionunit holders had invested in units of mutual funds. Total investible resources of mutualfunds account for about 23% of market capitalisation compared to more than 50% indeveloped countries. The mutual funds have not yet become an attractive investmentavenue for the low and middle-income groups.

Primary Market

Corporate Securities : Average annual capital mobilisation from the primary market,which used to be about Rs.70 crore in the 1960s and about Rs.90 crore in the 1970s,increased manifold during the 1980s, with the amount raised in 1990-91 being Rs. 4,312crore. It received a further boost during the 1990s with the capital raised by non-governmentpublic companies rising sharply to Rs. 26,417 crore in 1994-95. The market, however,appears to have dried up since 1995-96 due to interplay of demand and supply sideforces. In real terms, the amount raised by non-government public companies during2001-02 is about 60% of the amount raised a decade back in 1990-91.

Many investors who were lured into the market during 1992-94 seem to be adoptinga very cautious approach because of their frustration with some of the issuers andintermediaries associated with the securities market. They have not completely withdrawnfrom the market, but are looking for quality issues the availability of which has declineddue to stricter eligibility criteria for public issues imposed by SEBI and the generalslowdown in the economic activity. Simultaneously, issuers have shifted focus to otheravenues for raising resources like private placement where compliance is much less.Available data, although scanty, indicate that private placement has become a preferredmeans of raising resources by the corporate sector. It accounted for about 89% of totalresources mobilised through domestic issues by the corporate sector during 2001-02.Rapid dismantling of shackles on institutional investments and deregulation of theeconomy are driving growth of this segment. There are several inherent advantages ofrelying on private placement route for raising resources. While it is cost and time effectivemethod of raising funds and can be structured to meet the needs of the entrepreneurs, itdoes not require detailed compliance with formalities as required in public or rights issues.It is believed in some circles that private placement has crowded out public issues.

Indian market is getting integrated with the global market though in a limited waythrough euro issues. Since 1992, when they were permitted access, Indian companieshave raised about Rs. 40,000 crore through ADRs/GDRs. By the end of December,2003, 517 FIIs were registered with SEBI. They had net cumulative investments over ofUS $ 23 billion by the end of December 2003.

The market is getting institutionalised as people prefer mutual funds as theirinvestment vehicle, thanks to evolution of a regulatory framework for mutual funds, taxconcessions offered by government and preference of investors for passive investing.The net collections by mutual funds picked up during 1990s and increased to Rs. 19,953crore during 1999-2000. This, however, declined to Rs. 4,580 crore during 2002-03. Startingwith an asset base of Rs. 25 crore in 1964, the total assets under management at theend of March 2003 was Rs. 1,09,297 crore. The number of households owning units ofMFs exceeds the number of households owning equity and debentures.

Government Securities : The primary issues of the Central Government haveincreased many-fold during the decade of 1990s from Rs. 8,989 crore in 1990-91 to


Rs. 1,51,126 crore in 2002-03. The issues by state governments increased by abouttwelve times from Rs. 2,569 crore to Rs. 30,853 crore during the same period.

Secondary Market

Corporate Securities : The number of stock exchanges increased from 11 in 1990 to23 now. All the exchanges are fully computerised and offer 100% on-line trading. 9,143companies were available for trading on stock exchanges at the end of March 2003. Thetrading platform of the stock exchanges was accessible to 9,519 members from over400 cities on the same date.

The market capitalisation grew ten fold between 1990-91 and 1999-2000. All Indiamarket capitalisation is estimated at Rs. 631,921 crore at the end of March 2003. Themarket capitalisation ratio, which indicates the size of the market, increased sharply to85% by March 2000. It, however, declined to 29% by end March 2003. Traditionally,manufacturing companies and financial services sector accounted for a major share inmarket capitalisation. However, in the recent past, the importance of these traditionalsectors has declined and new sectors like, information technology, pharmaceuticalsand fast moving consumer goods have picked up.

The trading volumes on exchanges have been witnessing phenomenal growth duringthe 1990s. The average daily turnover grew from about Rs. 150 crore in 1990 toRs. 12,000 crore in 2000, peaking at over Rs. 20,000 crore. One-sided turnover on allstock exchanges exceeded Rs. 10,00,000 crore during 1998-99, Rs. 20,00,000 croreduring 1999-2000 and approached Rs. 30,00,000 crore during 2000-01. However, it declinedsubstantially to Rs. 986,954 crore in 2002-03. The turnover ratio, which reflects thevolume of trading in relation to the size of the market, has been increasing by leaps andbounds after the advent of screen based trading system by the NSE. The turnover ratiofor the year 2000-01 increased to 375 but fell substantially due to bad market conditionsto 156 during 2002-03.

The sectoral distribution of turnover has undergone significant change over last fewyears. The share of manufacturing companies in turnover of top ‘50’ companies, whichwas nearly 80% in 1995-96, declined sharply to about 2% in 2002-03. During the sameperiod the share of IT companies in turnover increased sharply from nil in 1995-96 to75% in 2002-03.

Government Securities : The aggregate turnover in central and state governmentdated securities, including treasury bills, through SGL transactions increased 31 timesbetween 1994-95 and 2001-02. During 2002-2003 it reached a level of Rs.19,55,731crore, higher than combined trading volumes in equity segments of all the exchanges inthe country, reflecting deepening of the market. The share of outright transactions ingovernment securities increased from 23.2% in 1995-96 to 71.2% in 2002-03. The shareof repo transactions declined correspondingly from 76.8% in 1995-96 to 28.8% in 2002-03. The share of dated securities in turnover of government securities increased from69% in 1996-97 to 92% in 2001-02. The T-bills accounted for remaining SGL turnover.

Derivatives Market : Derivatives trading commenced in India in June 2000. The totalexchange traded derivatives witnessed a volume of Rs. 442,343 crore during 2002-03 as against Rs. 4,018 crore during the preceding year. While NSE accounted forabout 99.5% of total turnover, BSE accounted for about 0.5% in 2002-03. The market


witnessed higher volumes from June 2001 with introduction of index options, and stillhigher volumes with the introduction of stock options in July 2001. There was a spurt involumes in November 2001 when stock futures were introduced. It is believed that Indiais the largest market in the world for stock futures.

Regulatory Framework

The four main legislations governing the securities market are: (a) the SEBI Act,1992 which establishes SEBI to protect investors and develop and regulate securitiesmarket; (b) the Companies Act, 1956, which sets out the code of conduct for the corporatesector in relation to issue, allotment and transfer of securities, and disclosures to bemade in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which providesfor regulation of transactions in securities through control over stock exchanges; and (d)the Depositories Act, 1996 which provides for electronic maintenance and transfer ofownership of demat securities.

Legislations

SEBI Act, 1992: The SEBI Act, 1992 establishes SEBI with statutory powers for (a)protecting the interests of investors in securities, (b) promoting the development of thesecurities market, and (c) regulating the securities market. Its regulatory jurisdictionextends over corporates in the issuance of capital and transfer of securities, in additionto all intermediaries and persons associated with securities market. It can conductenquiries, audits and inspection of all concerned and adjudicate offences under the Act.It has powers to register and regulate all market intermediaries and also to penalisethem in case of violations of the provisions of the Act, Rules and Regulations madethere under. SEBI has full autonomy and authority to regulate and develop an orderlysecurities market.

Securities Contracts (Regulation) Act, 1956 : It provides for direct and indirect controlof virtually all aspects of securities trading and the running of stock exchanges andaims to prevent undesirable transactions in securities. It gives central government/SEBIregulatory jurisdiction over (a) stock exchanges through a process of recognition andcontinued supervision, (b) contracts in securities, and (c) listing of securities on stockexchanges. As a condition of recognition, a stock exchange complies with prescribedconditions of Central Government. Organised trading activity in securities takes placeon a specified recognised stock exchange. The stock exchanges determine their ownlisting regulations which have to conform to the minimum listing criteria set out in theRules.

Depositories Act, 1996 : The Depositories Act, 1996 provides for the establishmentof depositories in securities with the objective of ensuring free transferability of securitieswith speed, accuracy and security by (a) making securities of public limited companiesfreely transferable subject to certain exceptions; (b) dematerialising the securities in thedepository mode; and (c) providing for maintenance of ownership records in a book entryform. In order to streamline the settlement process, the Act envisages transfer ofownership of securities electronically by book entry without making the securities movefrom person to person. The Act has made the securities of all public limited companiesfreely transferable, restricting the company’s right to use discretion in effecting thetransfer of securities, and the transfer deed and other procedural requirements under theCompanies Act have been dispensed with.


Companies Act, 1956 : It deals with issue, allotment and transfer of securities andvarious aspects relating to company management. It provides for standard of disclosurein public issues of capital, particularly in the fields of company management and projects,information about other listed companies under the same management, and managementperception of risk factors. It also regulates underwriting, the use of premium and discountson issues, rights and bonus issues, payment of interest and dividends, supply of annualreport and other information.

Rules and Regulations

The Government have framed rules under the SCRA, SEBI Act and the DepositoriesAct. SEBI has framed regulations under the SEBI Act and the Depositories Act forregistration and regulation of all market intermediaries, and for prevention of unfair tradepractices, insider trading, etc. Under these Acts, Government and SEBI issuenotifications, guidelines, and circulars which need to be complied with by marketparticipants. Regulators

Regulators

The responsibility for regulating the securities market is shared by Department ofEconomic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India(RBI) and SEBI. The activities of these agencies are coordinated by a High LevelCommittee on Capital Markets. The orders of SEBI under the securities laws are appellablebefore a Securities Appellate Tribunal.

Most of the powers under the SCRA are exercisable by DEA while a few others bySEBI. The powers of the DEA under the SCRA are also con-currently exercised bySEBI. The powers in respect of the contracts for sale and purchase of securities, goldrelated securities, money market securities and securities derived from these securitiesand ready forward contracts in debt securities are exercised concurrently by RBI. TheSEBI Act and the Depositories Act are mostly administered by SEBI. The rules underthe securities laws are framed by government and regulations by SEBI. All these areadministered by SEBI. The powers under the Companies Act relating to issue and transferof securities and non-payment of dividend are administered by SEBI in case of listedpublic companies and public companies proposing to get their securities listed.


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The two exclusive legislations that governed the securities market till early 1992were the Capital Issues (Control) Act, 1947 (CICA) and the Securities Contracts (Regulation)Act, 1956 (SCRA). The CICA had its origin during the war in 1943 when the objectivewas to channel resources to support the war effort. Control of capital issues wasintroduced through the Defence of India Rules in May 1943 under the Defence of IndiaAct, 1939. The control was retained after the war with some modifications as means ofcontrolling the raising of capital by companies and to ensure that national resourceswere channeled into proper lines, i.e., for desirable purposes to serve goals and prioritiesof the government, and to protect the interests of investors. The relevant provisions inthe Defence of India Rules were replaced by the Capital Issues (Continuance of Control)Act in April 1947. This Act was made permanent in 1956 and enacted as the Capital Issues(Control) Act, 1947. Under the Act, the Controller of Capital Issues was set up which grantedapproval for issue of securities and also determined the amount, type and price of the issue.This Act was, however, repealed in 1992 as a part of liberalization process to allow thecompanies to approach the market directly provided they issue securities in compliancewith prescribed guidelines relating to disclosure and investor protection.

Though the stock exchanges were in operation, there was no legislation for theirregulation till the Bombay Securities Contracts Control Act was enacted in 1925. Thiswas, however, deficient in many respects. Under the constitution which came into forceon January 26, 1950, stock exchanges and forward markets came under the exclusiveauthority of the Central Government. The Government appointed the A. D. GorwalaCommittee in 1951 to formulate a legislation for the regulation of the stock exchangesand of contracts in securities. Following the recommendations of the Committee, theSCRA was enacted in 1956 to provide for direct and indirect control of virtually allaspects of securities trading and the running of stock exchanges and to preventundesirable transactions in securities. It has undergone several modifications since itsenactment and even today an amendment is awaiting approval of the Parliament. Itgives Central Government regulatory jurisdiction over (a) stock exchanges through aprocess of recognition and continued supervision, (b) contracts in securities, and (c)listing of securities on stock exchanges. As a condition of recognition, a stock exchangecomplies with conditions prescribed by Central Government. Organised trading activityin securities is permitted on recognised stock exchanges.

The authorities have been quite sensitive to requirements of the development ofsecurities market, so much so that the last decade (1992-2003) witnessed nine speciallegislative interventions, including two new enactments, namely the Securities andExchange Board of India (SEBI) Act, 1992 and the Depositories Act, 1996. The SCRA,the SEBI Act and the Depositories Act were amended six, five and three times respectivelyduring the same period. The developmental need was so urgent at times, that the lastdecade witnessed five ordinances relating to securities laws. Besides, a number of

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* Adopted from the pilot paper titled Historical Perspective of Securities Laws authored byShri M S Sahoo and published for 31st National Convention of the Institute of CompanySecretaries of India held on September 11-13, 2003 at Agra.

AN OVERVIEW OF SECURITIES LAWS IN INDIA*


other legislations (the Income Tax Act, the Companies Act, the Indian Stamps Act, theBankers’ Book Evidence Act, the Benami Transactions (Prohibition) Act etc.) havingbearing on securities markets have been amended in the recent past to complementamendments in securities laws.

The legal reforms began with the enactment of the SEBI Act, 1992, which establishedSEBI with statutory responsibilities to (i) protect the interest of investors in securities,(ii) promote the development of the securities market, and (iii) regulate the securitiesmarket. This was followed by repeal of the Capital Issues (Control) Act, 1947 in 1992which paved way for market determined allocation of resources. Then followed theSecurities Laws (Amendment) Act in 1995, which extended SEBI’s jurisdiction overcorporates in the issuance of capital and transfer of securities, in addition to allintermediaries and persons associated with securities market. It empowered SEBI toappoint adjudicating officers to adjudicate wide range of violations and impose monetarypenalties and provided for establishment of Securities Appellate Tribunals (SATs) tohear appeals against the orders of the adjudicating officers. Then followed the DepositoriesAct in 1996 to provide for the establishment of depositories in securities with the objectiveof ensuring free transferability of securities with speed, accuracy and security. It madesecurities of public limited companies freely transferable subject to certain exceptions;dematerialised the securities in the depository mode; and provided for maintenance ofownership records in a book entry form. The Depositories Related Laws (Amendment)Act, 1997 amended various legislations to facilitate dematerialization of securities. TheSecurities Laws (Amendment) Act, 1999 was enacted to provide a legal framework fortrading of derivatives of securities and units of CIS. The Securities Laws (SecondAmendment) Act, 1999 was enacted to empower SAT to deal with appeals againstorders of SEBI under the Depositories Act and the SEBI Act, and against refusal ofstock exchanges to list securities under the SCRA. The next intervention is the SEBI(Amendment) Act, 2002 which enhanced powers of SEBI substantially in respect ofinspection, investigation and enforcement. The latest and the ninth legislative interventionnamely the Securities Laws (Amendment) Bill, 2003 was introduced in the Parliament toamend the SCRA to provide for demutualisation of stock exchange.

A. Repeal of Capital Issues (Control) Act, 1947

It is believed that a liberalised securities market helps promote economic growth.The more liberalised a securities market is, the better is its impact on economic growth.Interventions in the securities market were originally designed to help governmentsexpropriate much of the seigniorage and control and direct the flow of funds for favoureduses. These helped governments to tap savings on a low or even no-cost basis. Besidesgovernment used to allocate funds from the securities market to competing enterprisesand decide the terms of allocation. The result was channelisation of resources to favoureduses rather than sound projects. In such circumstances accumulation of capital per semeant little, where rate of return on some investments were negative while extremelyremunerative investment opportunities were foregone. This kept the average rate ofreturn from investment lower than it would otherwise have been and, given the cost ofsavings, the resulting investment was less than optimum.

As a part of the liberalisation process, the CICA was repealed by an Ordinance onMay 29, 1992 paving way for market determined allocation of resources. With this theoffice of Controller of Capital Issues was abolished and the cost of rationing the resources


was saved. The Act earlier required a firm wishing to issue securities to obtain priorapproval from the government, which also determined the amount, type and price of theissue. Now the eligible firms comply with the specified requirements and access themarket to raise as much resources and at such terms as the market can bear. In theissues made through book building, the investors have freedom to subscribe for thesecurities at the prices they consider appropriate.

B. Enactment of the SEBI Act, 1992

Liberalisation does not mean scrapping of all codes and statutes. It rather meansreplacement of one set by another set of more liberal code / statute, which influence orprescribe the way the private sector agents should carry out their activities. In the contextof securities market, the regulations are necessary for the following reasons:

(i) The correction of identified market imperfections and failures. There are manypotential market imperfections in securities market such as inadequateinformation, asymmetric information, difficulty in ascertaining the quality ofcontracts at the point of purchase, imprecise definitions of products andcontracts, under-investment in information, agency costs and principal agentproblems. In a regulation free environment, these imperfections impose costson investors in securities. A high degree of information disclosure is required tomake investors effective in the market place. If the regulation requires the issueror intermediaries to provide necessary information, this adds cost to them butreduces cost on consumers.

(ii) Substantial economies of scale to be derived from collective regulation andsupervision of issuers and intermediaries. As investment contracts are long-term in nature and often involve a fiduciary role in a principal-agent relationship,there is need for continuous monitoring. In the absence of regulation andsupervision by a specialist agency, which offers certain minimum standards,investors are required to spend time, effort and resources in investigating andmonitoring issuers and intermediaries. This entails two types of costs: (a)substantial duplication and hence excessive social costs as all investors areduplicating the same process, (b) the loss of economies of scale that are derivedthrough a specialist regulator/supervisor acquiring expertise and establishingeffective authorization and monitoring system. In the absence of such an agency,an occasional investor would find investigation and monitoring excessive andfree-rider problem are likely to arise.

(iii) Signaling minimum standards of quality enhances confidence in markets. Witha known asymmetric information problem, risk averse investors may exit themarket altogether. In its extreme form the market breaks down completely aspotential investors know there are high and low quality products but they cannotdistinguish them ex ante, while the issuers can make the distinction but areunable or unwilling to communicate the distinction with credibility. When investorsknow there are low quality products in the market, good issuers and their productsmay become tarnished by the generalized reputation of poor products andsuppliers. In such a case, the regulator is to set minimum standards and therebyremove the bad products from the market.


With these objectives, it was considered necessary to create a statutory agency,which would ensure fair play in the market, develop fair market practices, prescribe andmonitor conduct of issuers and intermediaries so that the securities market enablesefficient allocation of resources. The enactment of the SEBI Act, 1992 was an attemptin this direction.

Constitution : The Act established a Board, called Securities and Exchange Boardof India (SEBI), to protect the interests of investors in securities and to promote thedevelopment of and to regulate the securities market. It prescribed that the Board wouldconsist of a Chairman, one member each from amongst the officials of the financeministry, the law ministry and the RBI and two other members. In order to avoid conflictof interest, it was provided that a member shall be removed from office if he is appointedas a director of a company.

Functions : In addition to its general responsibility, it was assigned the followingspecific responsibilities:

(a) regulating the business in stock exchanges and any other securities markets,

(b) registering and regulating the working of stock brokers, sub-brokers, share transferagents, bankers to an issue, trustee of trust deeds, registrars to an issue,merchant bankers, underwriters, portfolio mangers, investment advisors andsuch other intermediaries,

(c) registering and regulating working of CIS, including mutual funds,

(d) promoting and regulating self regulatory organizations (SROs),

(e) prohibiting fraudulent and unfair trade practices relating to securities market,

(f) promoting investor education and training of intermediaries,

(g) prohibiting insider trading in securities,

(h) regulating substantial acquisition of shares and takeover of companies,

(i) calling for information from, undertaking inspection, conducting inquiries andaudits of the stock exchanges, intermediaries and SROs,

(j) performing such functions and exercising such powers under the SCRA as maybe delegated by the Central Government, (This was done in the interest ofintegrated regulation. Then all the powers under the SCRA were exercisable byCentral Government. Until SEBI stabilizes, it was considered desirable thatimportant powers are not transferred from Central Government, but delegated toSEBI.)

(k) levying fees or other charges for carrying the above purposes,

(l) conducting research for the above purposes and

(m) performing such other functions as may be prescribed.

The Board was empowered to delegate any of its powers and functions under theAct (except powers to make regulations) to any member, officer of the Board or anyother person.

Autonomy and Accountability : The Central Government being accountable toParliament, the SEBI Act granted powers of last resort to Central Government. It obligatedSEBI, in exercise of its powers and performance of its functions, to be bound by the


directions of the Central Government on questions of policy. Whether a question is oneof policy or not shall be decided by the Central Government. Further, the CentralGovernment was empowered to supersede the Board for a period not exceeding sixmonths if it is of the opinion that the Board is unable to discharge the functions and theduties under the Act on account of grave emergency, or the Board has persistentlydefaulted in complying with any directions issued by the Central Government under theAct and as a result of such default the financial position or the administration of theBoard has deteriorated, or the circumstances exist which render it necessary in thepublic interest to do so. The Board was obligated to furnish to the Central Governmentsuch returns and statements and such particulars in regard to any proposed or existingprogramme for the promotion and development of the securities market, as the CentralGovernment may, from time to time, require. The Board was also obligated to submit toCentral Government a report in the prescribed form giving a true and full account of itsactivities, policy and programmes during the previous year within 60 days (increased to90 days by 1995 amendment) of the end of each financial year. A copy of this reportshall be laid before each house of parliament. While the Act empowered CentralGovernment to make rules for carrying out the purposes of the Act, it empowered SEBIto make regulations, with the previous approval of Central Government, consistent withthe Act and the rules, to carry out the purposes of the Act. In order to ensure accountability,it was provided that all the rules and regulations made under the Act shall be laid beforeeach house of parliament. It was also provided that any person aggrieved by an order ofthe Board under the Act may prefer an appeal to the Central Government. The Actempowered Central Government to exempt, in public interest, any person or class ofpersons dealing in securities from the requirements of registration.

In the interest of autonomy of SEBI, it was empowered to levy fees or other chargesfor carrying on the purposes of the Act. This power to levy fees has been upheld by theSupreme Court in the matter of BSE Brokers’ Forum and others v. SEBI and Others.

It was provided that no court shall take cognisance of any offence punishable underthe Act or any rules or regulations made thereunder except on a complaint made by theBoard with the approval of Central Government. It was further provided that no suit,prosecution or other legal proceedings shall lie against central government or any officerof the Central Government or any member, officer or other employee of the Board foranything which is in good faith done or intended to be done under this Act or the rules orregulations made thereunder.

Amendments in SCRA : All the powers under the SCRA were exercised by CentralGovernment. The SEBI Act, however, created a Board to regulate the securities market.In the interest of integrated regulation of securities market, it was felt that only oneagency (SEBI) as far as possible, should regulate the securities market. In order to doso, the SEBI Act transferred some of the powers of the Central Government under theSCRA to SEBI and empowered Central Government to delegate other powers, exceptpower to make rules, under the SCRA to SEBI. In exercise of this power, CentralGovernment has delegated almost all the powers under the SCRA by notifications issuedin 1992 and 1994. All the powers under the Securities Contracts (Regulation) Rules,1957 have also been transferred to SEBI in 1996.

Trading of government securities was not subject to any regulatory framework asthese were not ‘securities’ under the SCRA. In order to develop the market for government


securities, the definition of ‘securities’ was amended to include government securitieswithin its ambit so that the whole regulatory framework applicable to trading of securitiescould apply to trading government securities also. Further, in order to avoid frequentamendments, which is time consuming, the SCRA was amended to empower CentralGovernment to declare any other similar instrument to be securities.

C. Securities Laws (Amendment) Act, 1995

In the light of experience gained with the working of the SEBI Act, 1992, it wasconsidered desirable to expand the jurisdiction of SEBI, enhance its autonomy andempower it to take a variety of punitive actions in case of violations of the Act.

Composition of Board : As mentioned earlier, the SEBI Act made it obligatory forthe central government to remove a member from the Board if he was appointed as adirector of any company. This was presumably to ensure that a person would not beable to do justice to his roles as member of Board and as a member of board of directorsof a company simultaneously. His interests as member of Board might clash with thatof a director of a company. SEBI, being a quasi-judicial body, the members of the Boardwere not just expected to be impartial, they should also appear impartial. This wasprecluding the appointment of people with adequate knowledge and experience in thearea of securities market to Board as many of them were also involved with corporatemanagement in various capacities. The amendment Act deleted the provision relatingto disqualification of a member of Board on his being appointed as a director of a companyfrom the statute. It inserted a new provision to make it obligatory for a member ofBoard, who is director of any company and who has any direct or indirect pecuniaryinterest in any matter coming up for consideration at a meeting of the Board, to disclosethe nature of interest and refrain from participating in the deliberations or decisions ofthe Board with respect to that matter. Now the government can appoint people of eminencewith experience in matters relating to securities market to Board. This was expected toimprove the decision making potential of SEBI and enable Board to lead and guide moreeffectively the team of professionals working for SEBI.

Jurisdiction of SEBI : The jurisdiction of SEBI was enlarged to register and regulatea few more intermediaries and other persons associated with the securities market. Theamendment Act empowered SEBI to register and regulate the working of the intermediarieslike depositories, custodians for securities and also certain other persons associatedwith the securities market like foreign institutional investors, credit rating agencies,venture capital funds etc. SEBI was also given authority to regulate other intermediariesor persons, not named specifically in the statute, by specifying them through a notification.This obviated the need for amending SEBI Act every now and then to deal with a particulartype of intermediary or a person associated with the securities market that may emergein future.

Monetary Penalties : The SEBI Act originally provided for penalty of suspensionand cancellation of a certificate of registration of an intermediary. Such suspension/cancellation led to cessation of business and affected innocent third parties, oftenadversely, who were dealing with the intermediary. Besides there were many personsother than intermediaries associated with the securities market on whom the penalty ofsuspension/cancellation had no bearing. In order to tackle this, the amendment Actprovided for monetary penalties as an alternative mechanism to deal with capital marketviolations.


SEBI was empowered to adjudicate a wide range of violations and impose monetarypenalties on any intermediary or other participants in the securities market. Theamendment Act listed out a wide range of violations along with maximum penaltiesleviable. It provided for a highest penalty of Rs.10 lakh and the violations listed werefailure to submit any document, information or furnish any return, failure to maintainrequired books of accounts or records, carrying on any CIS (Collective InvestmentScheme) without registration, failure to enter into agreement with clients, insider trading,failure to redress the grievances of investors, failure to issue contract notes, chargingexcessive brokerage by brokers, failure to disclose substantial acquisition of sharesand take-overs, etc. The amendment Act provided for three types of monetary penaltiesviz., - (a) a lump sum penalty for a specific violation of the Act, (b) a penalty for everyday during which the violation continued, and (c) a multiple of the amount involved in theviolation. The amount of penalty was determined, subject to the ceiling, by the adjudicatingofficer who would be guided by the factors including amount of disproportionate gain orunfair advantage wherever quantifiable made as a result of the default, the amount ofloss caused to an investor or any group of investors as a result of default, and therepetitive nature of the default. It amended section 24 to provide that non-payment ofpenalty would be an offence punishable with fine or imprisonment under the Act.

The adjudicating officer is required to be appointed by SEBI. He shall not be anofficer below the rank of a division chief of SEBI. He will hold an enquiry after giving aperson reasonable opportunity of being heard for the purpose of determining if any violationhas taken place and imposing penalty. To ensure fair enquiry and penalty, it was providedthat appeal against the orders of adjudicating officers would lie to the SAT, which wasalso constituted by the amendment Act.

While the suspension or cancellation of registration continued to be regulated byregulations framed by SEBI and the appeal from the orders of the Board suspending orcanceling a registration would lie to Central Government, the amendment Act providedthat the monetary penalties would be imposed only in cases of violations listed in theAct by an adjudicating officer as per the Rules prescribed by the Central Government.Appeals from the orders of an adjudicating officer can be preferred to the SAT. Theappeals against the orders of SAT can be preferred to the High Court.

Empowerment : The amendment Act inserted section 11B to empower SEBI toissue directions to all intermediaries and other persons associated with the securitiesmarket (i) in the interest of investors, (ii) in the interest of orderly development of thesecurities market, (iii) to prevent the affairs of any intermediary including a mutual fundfrom being conducted in a manner detrimental to the interest of investors or of thesecurities market, or (iv) to secure the proper management of any such entity. The Actalso empowered SEBI to call for and furnish to any agency such information as necessaryfor efficient discharge of its functions. It vested SEBI with powers of a civil court underthe Code of Civil Procedure, 1908 in respect of the following: (i) summon and enforceattendance of person and examine them on oath, (ii) inspect any books, register andother documents, (iii) discover and enforce production of books of accounts and otherdocuments. These helped SEBI considerably to carry out investigations, conduct inquiresand inspections and levy fines against the erring intermediaries, issuers of securitiesand other persons associated with the securities market. SEBI was also empowered tocall for information and conduct enquiries, audits and inspection of mutual funds, and


other persons associated with the securities market, in addition to stock exchanges,self regulatory organizations and intermediaries provided earlier.

Autonomy of SEBI : The autonomy of SEBI was reinforced by the followingprovisions: (i) SEBI was vested with the powers of a civil court; (ii) Section 20A barredthe jurisdiction of civil court in respect of actions or orders passed by SEBI. One can,however, prefer an appeal to the Central Government against the orders of SEBI and thejurisdiction of the High Court was not barred. This made SEBI’s functioning independentof the lower civil courts and allowed quick disposal of cases by SEBI without beinghamstrung by stay orders from civil courts; (iii) Section 23 was amended to extendthe immunity from suit, prosecution or other legal proceedings to SEBI or any of itsmembers, officers or employees in respect of action taken in good faith; (iv) Section 26was amended to permit SEBI to file complaints in Courts under section 24 in respect ofoffences under the SEBI Act without previous sanction of the Central Government whichwas mandatory then even for filing routine prosecutions; (v) By amendment to section28, the power of last resort of the Central Government to exempt any person or class ofpersons dealing with securities market from the requirement of registration with SEBIwas withdrawn; (vi) Sections 29 and 30 were amended to amended to provide that theconditions for grant of registration would be determined by Regulations and not by Rules;(vii) Section 30 was amended to provide that the SEBI can notify regulations withoutapproval of the Central Government. These enabled SEBI to respond speedily to changingmarket conditions and enhance its autonomy.

SEBI was armed with better weapons to regulate various participants in the securitiesmarket. The amendment Act provided that henceforth the conditions of registrationshall be determined by Regulations and not under Rules as used to be before theamendment. The enactment of Rules under the Act is the prerogative of the CentralGovernment and is a very time consuming process in contrast to Regulations whichrequired only prior approval of Central Government. By this amendment, the requirementof prior approval was dispensed and the regulation making was brought within theexclusive domain of SEBI. This enabled SEBI to expeditiously notify and modifyregulations to keep pace with rapidly changing market conditions, facilitate maintenanceof market discipline, prudence and transparency and thereby strike on time.

Securities Appellate Tribunal : An efficient and effective system of regulationcalls not only for firmness, but also for fairness. The amendment Act provided forestablishment of one or more SATs to hear the appeals from the orders of the adjudicatingofficers. Anybody not satisfied with the orders of the SAT can prefer an appeal to theHigh Court. This ensured fairness in the process of adjudication.

Amendments in SCRA : The amendment Act also amended SCRA. In the last fewyears there has been substantial improvements in the functioning of the securities market.However there were inadequate advanced risk management tools. In order to providesuch tools and to deepen and strengthen the cash market, a need was felt for trading ofderivatives like futures and options. But it was not possible in view of prohibitions in theSCRA. Its preamble stated that the Act was to prevent undesirable transactions insecurities by regulating business of dealing therein, by prohibiting options, etc.Section 20 of the Act explicitly prohibited all options in securities. Section 16 of the Actempowered Central Government to prohibit by notification any type of transaction in anysecurity. In exercise of this power, government by its notification in 1969 prohibited all


forward trading in securities. Introduction of trading in derivatives required withdrawal ofthese prohibitions. The amendment Act withdrew the prohibitions by repealingsection 20 of the SCRA and amending its preamble.

Traditionally the operations of the stock exchanges were limited to the area earmarkedat the time of its recognition. This prevented an exchange from expanding its operationsbeyond the area, though it was considered desirable to introduce competition among theexchanges and technology permitted such expansion. The SCRA was amended to allowan exchange to establish additional trading floor outside its area of operation with approvalof SEBI.

The SCRA, before the amendment, provided that SEBI could compel a company tolist its securities on any stock exchange. Such coercion from authorities was notconsidered desirable in the liberalised market environment. This provision was removedfrom the SCRA.

The exchanges enter into listing agreements with the listed companies. The agreementcasts a lot of obligations on the listed companies in the interest of investors. However,this agreement was not having any statutory backing. As a result, in cases of non-compliance with listing agreement, the exchanges used to suspend / withdraw trading ofthe security, which was not in the interest of investors. In order to provide statutorybacking to listing agreement, which is being increasingly used to improve corporategovernance, it was prescribed that where securities were listed on the application of anyperson, such person shall comply with the conditions of listing with the stock exchange.

The rules made under the SCRA used to be published before formal notification.Though this practice helped to consult the regulated and the public on the proposedrules, it was time consuming and the regulated could derive regulatory arbitrage beforethe new rule came to effect. The Amendment Act did away with the requirement ofprevious publication.

D. The Depositories Act, 1996

The system of transfer of ownership of securities prevailing till mid 1990s wasgrossly inefficient as every transfer was required to be accomplished by the physicalmovement of paper securities to the issuer for registration and the ownership wasevidenced by the endorsement on the security certificate. The process of transfer inmany cases took much longer time than two months stipulated in the Companies Act,1956 or the SCRA. A significant proportion of transactions ended up as ‘ bad delivery’due to faulty compliance of paper work, mismatch of signatures on transfer deeds withthe specimen records of the issuer or for other procedural reasons. Theft, forgery,mutilation of certificates and other irregularities were rampant. The inherent right of theissuer to refuse the transfer of a security added to the misery of the investors. Thecumbersome paraphernelia associated with the transfer of securities under section 108of the Companies Act, 1956, along with huge paper work, printing of stationary, safecustody of securities, transportation and dispatch added to the cost of servicing papersecurities, delay in settlement and restricted liquidity in securities and made investorgrievance redressal time consuming and at times intractable. All these problems hadnot surfaced overnight but these were compounded by burgeoning trade volumes insecondary market and increasing dependence on securities market for financing trade


and industry. This underscored the need for streamlining the transfer of ownership ofsecurities which was sought to be accomplished by the Depositories Act, 1996. The Actprovides a legal basis for establishment of depositories in securities with the objectiveof ensuring free transferability of securities with speed, accuracy and security by (a)making the securities of public limited companies freely transferable; (b) dematerializingthe securities in the depository mode; and (c) providing for maintenance of ownershiprecords in a book entry form.

Legal Basis : The Depositories Act, 1996, read with section 12 of the SEBI Act,1992, provides a legal basis for establishment of multiple depositories and entruststhem with responsibility of maintaining ownership records of securities and effectingtransfer of securities through book entry only. The depositories render, throughparticipants, any service connected with recording of:

(a) allotment of securities; and

(b) transfer of ownership of securities.

By fiction of law under section 10 of the Depositories Act, the depository is deemedto be registered owner of securities with the limited purpose of effecting transfer ofownership of security. In respect of securities held in a depository, the name of thedepository appears in the records of the issuer as registered owner of securities. Thedepository has right to effect the transfer of securities and shall not have any other rightassociated with them. The owners of the securities become beneficial owners on therecords of the depository in respect of the securities held in a depository. The beneficialowner has all the rights and liabilities associated with the securities. The depositoriesholding the securities maintain ownership records in the name of the each participant.Each such participant, as an agent of the depository, in turn, maintains ownership recordsof every beneficial owner in book entry form. The depository and participants have aprincipal and agent relationship and their relations are governed by the bye-laws of thedepository and the agreement between them.

Both the depository and participant need to be registered with SEBI under section12 of the SEBI Act, 1992, and are regulated by SEBI. Only a company formed andregistered under the Companies Act, 1956 can be registered as a depository. However,before commencing business, the depository registered with SEBI has to obtain acertificate of commencement of business from SEBI. Such certificate is issued bySEBI on being fully satisfied that the depository has adequate systems and safeguardsto ensure against manipulation of records and transactions. SEBI is empowered tosuspend or cancel the certificate of registration of a depository as well as of theparticipants after giving a reasonable opportunity of hearing.

The ownership records of securities maintained by depositories/participants, whethermaintained in the form of books or machine readable form, shall be accepted as primafacie evidence in legal proceedings. The depository is treated as if it were a bank underthe Bankers’ Books of Evidence Act, 1891.

The depository services shall be available in respect of the securities as may bespecified by SEBI. The type of securities and the eligibility criteria for admission to thedepository mode shall be determined by SEBI regulations. This provides the flexibilityto SEBI, for example, to admit certain instruments like units of mutual funds and prohibit


admission of certain securities like shares of private limited companies from depositorymode.

Free Transferability of Securities : The securities of all public companies havebeen made freely transferable. The Act took away the companies’ right to use discretionin effecting transfer of securities by deleting section 22A from the SCRA and byinserting section 111A in the Companies Act, 1956. These provisions, read withsection 7 of the Depositories Act make the transfer of securities in any company, whetherlisted or not, other than a private company and a deemed public company, free andautomatic. That is, once the agreed consideration is paid and the purchase transactionis settled, the buyer is automatically entitled to all the rights associated with the security.As soon as the intimation regarding delivery of security against the payment of cash(delivery v. payment) is received, the transfer will be effected by the depository orcompany and the transferee will enjoy all the rights and obligations associated with thesecurity immediately. If the securities are in the depository mode, depository wouldeffect the transfer on the basis of intimation (contract notes or some other suitableevidence) from the participants. If the securities are outside the depository mode, thecompany would effect the transfer on receipt of the transfer deed. For the securities inthe depository mode, no transfer deed is required and other procedural requirementsunder section 108 of the Companies Act were dispensed with. The transferee in both themodes would be entitled to all the rights including voting rights and obligations associatedwith security.

However, if it is felt that the transfer of a security is in contravention of any of theprovisions of the SEBI Act, 1992 or Regulations made thereunder or Sick IndustrialCompanies (Special Provisions) Act (SICA), 1985, the company, depository, participant,investor or SEBI can make an application to the Company Law Board (CLB) to determineif the alleged contravention has taken place. After enquiry, if the CLB is satisfied of thecontravention, it can direct the company/ depository to make rectification in ownershiprecords. In other words, transfer has to be effected immediately even if the transfer iscontravention of SEBI Act, 1992 or SICA, 1985, subject to subsequent rectification bythe direction of CLB. Pending the completion of enquiry, CLB can suspend voting rightsin respect of securities so transferred. The transferee will continue to enjoy economicrights (bonus, dividend, rights etc) which cannot be suspended under any circumstances.During the pendency of the application with CLB, the transferee can transfer the securitiesand such further transfer will entitle the transferee to the voting rights also unless thevoting rights in respect of transferee has also been suspended.

Dematerialisation of Securities : Section 9 of the Depositories Act provides thatthe securities held by a depository shall be dematerialized and be fungible. The Actenvisages dematerialization of securities in the depository mode as against immobilizationof securities. The later refers to a situation when the depositories hold securities inphysical form side by side with ownership records. In such a case physical movementof securities does not accompany the transfers but securities are in existence in thecustody of the depository. What the Act envisages is that ownership of securities shallbe reflected through book entry system and this will not require existence of securitiescertificates. However, the securities outside the depository would be represented byphysical security certificate.

Supremacy of Investor : The investor has been given the option between holding


physical securities as at present or opting for a depository based ownership records. Atthe time of fresh issue, the issuer is under obligation to give the option to the investorseither to seek physical securities under the existing paper based system (non-depositorymode) or opt for book entry system of recording ownership (depository mode). Thedecision on whether or not to hold securities within the depository mode, if in depositorymode, which depository or participant, would be entirely with the investor. Such freedomcan be exercised either at the time of the initial offer of the security by indicating hischoice in the application form or at any subsequent time. He will also have the freedomto switch from depository mode to non-depository mode and vice versa.

At the time of initial offer, if the investor opts to hold a security in the depositorymode, the issuer shall be intimate concerned depository the details of allotment ofsecurities and record the depository as registered owner of the securities. On receipt ofsuch information, the depository shall enter in its records the names of allottees as thebeneficial owners.

An investor who holds physical securities and seeks to avail the services of adepository will surrender the certificates to the issuer. The issuer on receipt of certificatesshall cancel them and substitute in its records the name of the depository as a registeredowner in respect of that security and inform the depository accordingly. The depositoryshall thereafter enter the name of the investor in its records as beneficial owner.

If a beneficial owner or a transferee of securities seeks to opt out of a depository inrespect of any security, he shall inform the depository of his intention. The depository inturn shall make appropriate entries in its records and shall inform the issuer. The issuershall make arrangements for the issue of certificate of securities to the investor.

The depository shall record all transfers made within the depository mode on receiptof intimation from a participant. The type of intimation would be specified by SEBIregulations.

An investor, before availing the services of a depository, shall enter into an agreementwith a depository through a participant. The participant is also required to enter into anagreement with the depository to act as the latter’s agent. There will also be an agreementbetween the depository and the issuer of securities. The rights and obligations ofdepositories, participants, issuers and investors would be governed by the agreementamong them, the bye-laws of the depository and the regulations of SEBI.

Amendments in Other Acts : To provide for the smooth operation of the depositories,the Depositories Act amended a few other Acts such as the Indian Stamps Act, 1989, theCompanies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the Income-tax Act,1961, the Benami Transactions (Prohibition) Act, 1988 and the Securities and ExchangeBoard of India Act, 1992. The major amendments in these Acts are discussed below:

Amendment to the Indian Stamps Act : Section 8A was inserted in the IndianStamps Act to provide for the following :

(i) At the time of issue of securities, shares or otherwise, the issuer shall pay theStamp duty on the total amount of the security issued by it, whether through adepository or direct to investors, even though there will be no physical securities(instrument) which can be stamped (executed).


(ii) Entry into depository involves change of registered ownership as the investorbecomes the beneficial owner and the depository becomes the registered ownerin respect of the security. As it involves change in registered ownership, itattracts stamp duty under the existing provisions. The new section 8A, however,exempted such change of registered ownership of shares from an investor to adepository from the stamp duty.

(iii) All transactions of securities involving change in registered ownership and/orbeneficial ownership of shares within the depository mode shall not attract anystamp duty.

(iv) If an investor opts to exit from the depository and seeks the issue of physicalcertificate of securities from the issuer, the issue of such certificates shallattract stamp duty as is payable on the issue of duplicate certificates.

(v) All transactions outside the depository mode shall attract stamp duty as atpresent.

Amendments to the Income Tax Act : Sub-section 2A was inserted in section 45to provide that the depositories as well as the participants would not be liable to pay anycapital gains tax in respect of profits or gains arising from transfer securities held indepositories and transacted from time to time since these securities are held on behalfof the beneficial owners. In other words, inter-se transfer of securities between theparticipants in the books of a depository as well as between the depositories in therecords of an issuer shall not be treated as transfer unless it involves change in beneficialownership. If it involves any change in the beneficial ownership, only the beneficialowner shall be chargeable to capital gains tax, not the registered owner.

Due to fungible characteristic of the securities, while calculating capital gains tax,the cost of acquisition of securities shall not be determined with reference to cost ofacquisition of specific identifiable securities, but be ascertained on the principle of firstin first out. That is, the securities acquired first by the beneficial owner would be deemedto have been transferred first irrespective of the intention of the investor. This principlewould be applicable only in respect of securities held in a depository.

Amendment to the Companies Act : Section 83 of the Companies Act was deleted.This did away with the mandatory requirement of each company limited by shares todistinguish the shares by distinguishing numbers, in order to introduce the concept offungibility. The abolition of section 83, however, did not prohibit a company from havingdistinct numbers, although there was no mandatory requirement to that effect. HoweverSection 83 was restored vide the Depository Related Law (Amendment) Act, 1997, thedetails of which is covered in Point 'E'.

Section 108 was amended to provide that the provisions of section 108 shall applyto transfer of securities effected outside the depository mode. The provisions of section108 shall not apply to transfers of securities effected within the depository mode.

Section 111 was amended to provide that the provisions of section 111 shall applyto a private company and a deemed public company. The new section 111A was insertedto govern the transfer of securities of a public limited company. The shares or debenturesand any interest therein of a company were made freely transferable and all the rightsand obligations associated with them immediately accrue to the transferee. However, if


the transfer violates any of the provisions of the SEBI Act, 1992 or SICA, 1985, thedepository, company, participant, investor or SEBI can make an application to the CLB.The CLB, pending completion of enquiry may make an interim order to suspend thevoting rights in respect of those securities, and on completion of the enquiry, may directthe company or depository to rectify the register or records if transfer is in violation ofthe aforesaid provisions. During the pendency of the application with CLB, the economicrights accrue to the transferee and the transferee has a right to transfer the securitiesfurther and such further transferee shall be entitled to voting rights also.

E. The Depository Related Laws (Amendment) Act, 1997

While amending the Depositories Act, 1996, this amendment Act amended theCompanies Act, 1956, the Indian Stamp Act, 1899, the State Bank of India Act, 1955,the State Bank of India (Subsidiary Banks) Act, 1959, the Industrial Development Bankof India Act, 1964, the Banking Companies (Acquisition and Transfer of Undertakings)Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act,1980 to facilitate dematerialization of securities. The Act amended the Depositories Actto provide that the provision of the Companies Act relating to securities held in trustshall not apply to a depository in respect of such securities, even though the depositoryis the registered owner of the securities. It restored section 83 in the Companies Actrelating to distinct numbers for securities. However, the securities held in a depositorymay not have distinct numbers. It amended section 111A to restrict free transferabilityof securities provided originally in the Depositories Act, 1996. It provided that if a companyrefuses to register securities within 2 months, the transferee can appeal before the CLBfor registration of securities in his favour. It also provided that if the transfer is in violationof any law for the time being in force, the depository, depository participant, company,SEBI or investor may apply to CLB within 2 months for rectification of register or records.It amended the Indian Stamp Act to exempt stamp duty on transfer of beneficial ownershipof units of mutual funds dealt with by a depository. (Subsequently the stamp duty wasexempted on transfer of beneficial ownership of debt securities.)

F. Securities Laws (Amendment) Act, 1999

This Act has inserted provisions relating to derivatives, units of CIS and delegationof powers under the SCRA to RBI.

Derivatives : Despite withdrawal of prohibitions on derivatives by the SecuritiesLaws (Amendment) Act, 1995, the market for derivatives, however, did not take off, asthere was no regulatory framework to govern trading of derivatives. SEBI set up a 24member Committee under the Chairmanship of Dr. L. C. Gupta on 18th November 1996to develop appropriate regulatory framework for derivatives trading in India. TheCommittee submitted its report on March 17, 1998 recommending among others, thatthe derivatives may be declared as securities under section 2(h) (ii)(a) of the SCRA, sothat the regulatory framework applicable to trading of securities could govern trading ofderivatives also. Section 2 (h) of the SCRA, which provides an inclusive definition of‘securities’, empowers Central Government to declare “such other” instruments as“securities”. Government, however, did not declare derivatives to be securities, ratheramended the SCRA, to explicitly define securities to include derivatives, probably becauseits power to declare any instruments as “securities” was limited by the words “suchother”.


The Securities Contracts (Regulation) Amendment Bill, 1998 was introduced in theLok Sabha on 4th July 1998 proposing to expand the definition of “securities” to includederivatives within its ambit so that trading in derivatives could be introduced and regulatedunder the SCRA. The Bill was referred to the Standing Committee on Finance (SCF) on10th July 1998 for examination and report thereon. The Committee submitted its reporton 17th March 1999. The committee was of the opinion that the introduction of derivatives,if implemented with proper safeguards and risk containment measures, will certainlygive a fillip to the sagging market, result in enhanced investment activity and instillgreater confidence among the investors/participants. The Committee after havingexamined the Bill and being convinced of the needs and objectives of the Bill approvedthe same for enactment by Parliament with certain modifications. The Bill, however,lapsed following the dissolution of 12th Lok Sabha. A fresh bill, the Securities Laws(Amendment) Bill 1999 was introduced in the Lok Sabha on 28th October 1999incorporating the amendments proposed in the Securities Contracts Regulation(Amendment) Bill, 1998 as well as the modifications suggested by the SCF. This Billwas converted into an Act on 16th December 1999.

The Act inserted clause (aa) in section 2 to define derivatives to include: (a) asecurity derived from a debt instrument, share, loan whether secured or unsecured, riskinstrument or contract for differences or any other form of security, and (b) a contractwhich derives its value from the prices, or index of prices, of underlying securities. Italso inserted sub-clause (ia) in section 2 (h) to include derivatives within the ambit ofsecurities. Since derivative contracts are generally cash settled, these may be classifiedas wagers. The trading in wagers being null and void under section 30 of the IndianContracts Act 1872, it may be difficult to enforce derivatives contracts. In order to avoidsuch legal uncertainties, a new section 18A was inserted to provide that notwithstandinganything contained in any other law for the time being in force, contracts in derivativesshall be legal and valid if such contracts are traded on a recognised stock exchange andsettled on its clearing house in accordance with rules and bye-laws of such stockexchange. Section 23 was amended to provide that any body who enters into contractin contravention of section 18A shall be punishable.

By a notification issued on 1st March 2000, Government lifted the three-decade-oldprohibition on forward trading in securities by rescinding 1969 notification. This prohibitionwas imposed by government in exercise of its powers under section 16 of the SCRA bya notification issued on 27th June 1969 in order to curb certain unhealthy trends that haddeveloped in the securities market at that time and to prevent undesirable speculation.In the changed financial environment, the relevance of this prohibition had vastly reduced.Through appropriate amendments in the byelaws of the stock exchanges, carry forwardtransactions in securities were permitted. Similarly, periodic amendments to the aforesaidnotification were made to permit 'repo' transactions in government securities by authorisedintermediaries. Even though the notification of 1969 was in force, exceptions had beencarved out in course of time as market needs changed and some form of forward trading(carry forward/ready forward) was prevalent.

The provisions in the SCRA and the regulatory framework developed thereundergovern the trading in securities. The amendments of the SCRA to include derivativeswithin the ambit of “securities” in the SCRA made trading in derivatives possible withinthe framework of that Act.


Collective Investment Scheme (CIS) : During mid 1990s, many companies especiallyplantation companies had been raising capital from investors through schemes, whichwere in the form of CIS. Though SEBI is authorised under the SEBI Act, 1992 to registerand regulate CIS, there was no suitable regulatory framework to allow an orderlydevelopment of market for CIS units/instruments by them. Since SEBI’s jurisdiction islimited to protect the interests of investors in securities, it could not take steps toprotect the interests of investors in CIS units which were not securities. In order to allowfor this and to strengthen the hands of SEBI to protect interests of investors in plantationcompanies, the Act amended the definition of “securities” to include within its ambit theunits or any other instruments issued by any CIS to the investors in such schemes. TheAct empowered the Central Government to make rules to provide for the requirements,which shall be complied with by CIS for the purpose of getting their units listed on anystock exchange. Such rules have been incorporated in the Securities Contracts(Regulation) Rules. This is aimed at an orderly development of market for these unitswhile protecting the interest of investors therein. The Act also inserted a definition of theCIS in the SEBI Act, 1992. The CIS was defined to mean any scheme or arrangementmade or offered by any company under which (a) the contributions, or payments madeby the investors, by whatever name called, are pooled and utilised solely for the purposesof the scheme or arrangement; (b) the contributions or payments are made to suchscheme or arrangement by the investors with a view to receive profits, income, produceor property whether movable or immovable from such scheme or arrangement; (c) theproperty, contribution or investment forming part of scheme or arrangement, whetheridentifiable or not, is managed on behalf of the investors; and (d) the investors do nothave day to day control over the management and operation of the scheme or arrangement.The CIS, however, does not include any scheme or arrangement (a) made or offered bya cooperative society, (b) under which deposits are accepted by non banking financialcompanies, (c) being a contract of insurance, (d) providing for any Scheme, PensionScheme or the Insurance Scheme framed under the Employees Provident Fund andMiscellaneous Provision Act, 1952, (e) under which deposits are accepted undersection 58A of the Companies Act, 1956, (f) under which deposits are accepted by acompany declared as Nidhi or mutual benefit society under section 620A of the CompaniesAct, 1956, (g) falling within the meaning of Chit business as defined in clause (d) ofsection 2 of the Chit Fund Act, 1982 and (h) under which contributions made are in thenature of subscriptions to a mutual fund.

Delegation of Powers to RBI : The Government had power to delegate regulatoryauthority to SEBI. To provide additional flexibility, the Act amended section 29A of theSCRA so as to empower the Central Government to delegate powers to RBI also alongwith SEBI, to enable the former to regulate transactions under the SCRA as may benecessary. Now the Central Government, SEBI, and the RBI depending on theirjurisdiction as may be mutually agreed upon can exercise the powers under the Act.

With the repeal of the 1969 notification in 2000, the then prevailing regulatoryframework, which governed repo transactions, disappeared. It was, therefore, necessaryto work out an arrangement whereby the regulators could regulate such transactions. Inpursuance to this and in exercise of its newly acquired power, Central Governmentissued a notification on 2nd March 2000 delineating the areas of responsibility betweenRBI and SEBI. In terms of this notification, the powers exercisable by Central Governmentunder section 16 of the SCRA in relation to the contracts in government securities, gold


related securities, money market securities and in securities derived from these securitiesand in relation to ready forward contracts in bonds, debentures, debenture stock,securitised debt and other debt securities shall also be exercised by RBI. Such contracts,if executed on stock exchanges, shall, however, be regulated by (i) the rules andregulations or the byelaws made under the SCRA, or the SEBI Act or the directionsissued by SEBI under these Acts, (ii) the provisions contained in the notifications issuedby RBI under the SCRA, and (iii) the rules or regulations or directions issued by RBIunder the RBI Act, 1934, the Banking Regulations Act, 1949 or the Foreign ExchangeRegulation Act, 1973.

RBI and SEBI have also issued consequential notifications on 2nd March 2000specifying the regulatory framework in their respective areas. In terms of RBI notification,no person can enter into any (a) contract for the sale or purchase of government securities,gold related securities and money market securities other than spot delivery contract orsuch other contracts traded on a recognised stock exchange as is permissible under theSCRA, rules and byelaws of such stock exchange, and (b) ready forward contracts inbonds, debentures, debentures stock, securities debt, and other debt securities. Readyforward contracts may, however, be entered into by permitted persons in all governmentsecurities put through the Subsidiary General Ledger Account held with RBI in accordancewith terms and conditions as may be specified by RBI. SEBI by its notification hasprohibited all contracts in securities other than such spot delivery contract or contractfor cash or hand delivery or special delivery or contract in derivatives as is permissibleunder the SCRA or the SEBI Act and rules and regulations made thereunder and rules,regulations and byelaws of a recognised stock exchange.

G. The Securities Laws (Second Amendment) Act, 1999

The SCRA provided the right of appeal before the Central Government against refusal,omission or failure by a stock exchange to list the securities of any public company.The SEBI Act, 1992 provided for two kinds of appeals. Under section 20 of the Act, anyperson aggrieved by any order of the SEBI under the Act or rules or regulations madethereunder, may prefer an appeal to the Central Government. Accordingly, the CentralGovernment had notified the SEBI (Appeal to the Central Government) Rules, 1993 andconstituted an Appellate Authority for disposal of appeals. Section 15K of the Act providedfor establishment of one or more Securities Appellate Tribunal (SAT) to hear appealsfrom orders of adjudicating officer of SEBI imposing monetary penalty as per Rulesframed by the Central Government. Government has accordingly established a SAT atMumbai to hear appeals from the orders of adjudicating officers. Under section 23 of theDepositories Act, 1996, any person aggrieved by an order of SEBI under the DepositoriesAct 1996 or Rules and Regulations made thereunder may prefer an appeal to the CentralGovernment. Accordingly, the Central Government had notified the Depositories (Appealto the Central Government) Rules, 1998 and constituted an Appellate Authority fordisposal of appeals. Thus the Central Government was conferred with powers to disposeof appeals in respect of all matters (except disposal of appeals against the orders ofadjudicating officer under the SEBI Act, 1992) under all the three Acts.

In addition, the Central Government was empowered to issue directions to SEBIand make rules under these Acts. It was empowered to approve / amend / make rules/byelaws / regulations of the stock exchanges. Further, Central Government wasrepresented on the management of SEBI as well as of the stock exchanges. The


powers of the Central Government to issue directions and to make rules and appointmembers of the SEBI as well as all governing bodies of the stock exchanges wereperceived as compromising on its appellate powers. The Appellate Authorities appointedby the government under the SEBI Act and the Depositories Act had been receiving anddisposing of appeals in accordance with the Rules. However, since governmentconstituted these, their orders were perceived at times as orders of the government.When an order of SEBI was struck down, even on merits, there was a feeling thatSEBI’s autonomy as the regulator has been compromised. In order to remove suchmisgivings and impart transparency and impartiality to the process of disposal of appealsand to make the administration of penal provisions in the securities laws by the regulatorsmore accountable and impartial, the Securities Laws (Second Amendment) Act 1999amended all the three Acts to transfer appellate functions from the Central Governmentto an independent body, SAT.

The Amendment Act freezed section 22 of the SCRA and inserted a newsection 22A to provide for right of appeal before SAT against refusal, omission or failureby a stock exchange to list the securities of any public company within 15 days of suchrefusal, omission or failure. An obligation was cast on SAT to dispose off appeals asexpeditiously as possible, and to endeavour to dispose of finally within six months.Section 23 was amended to provide penalty for failure to comply with orders of SAT.Similar amendments were effected in the SEBI Act, 1992 and the Depositories Act1996. Section 15K of the SEBI Act was amended to expand jurisdiction of SAT to dealwith appeals also under any other law. Section 15T was amended to empower SAT todeal with appeals from any person aggrieved by an order of SEBI as well as of anadjudicating officer under the SEBI Act. Section 20 of the SEBI Act, which provided forappeals to Central Government, was freezed. Section 23 of the Depositories Act, 1996,which provided for appeals to the Central Government, was also freezed. A newsection 23A was inserted to provide for appeals to SAT under the Act. Hence, all appeals,namely the appeals against the orders of SEBI under the SEBI Act and the DepositoriesAct, appeals against the orders of the adjudicating officers under the SEBI Act, and appealsagainst refusal of stock exchanges to list securities were allowed to be preferred to SAT. Itwas further provided that any person aggrieved by the order of SAT may prefer appeal toHigh Court within 60 days.

Provisions were made in all three Acts to provide for appearance of the appellant inperson or through one or more chartered accountants or company secretaries or costaccountants or legal practitioners or any of its officers before a SAT.

Central government was empowered to make rules to provide for the form in whichan appeal may be filed before the SAT and the fees payable in respect of such appeals.Consequently, the SEBI (Appeal to the Central Government) Rules, 1993 and theDepositories (Appeal to the Central Government) Rules, 1998 were repealed. Governmentnotified on 18th February 2000 three Appeal Rules, Viz. (a) Securities Appellate Tribunal(Procedure) Rules, 2000 under the SEBI Act, 1992, (b) The Depositories (Appeal toSecurities Appellate Tribunal) Rules, 2000 under the Depositories Act, 1996, and (c) TheSecurities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000under the SCRA. These rules provide for fees, form and procedure for filing appeal andthe process of their disposal by the SAT. The appeals (except appeals against adjudicationorders under the SEBI Act) under all three Acts need to be accompanied by a fee ofRs. 5,000/- only. The appeals against the adjudication orders need to be accompanied


by a fee of Rs. 500/- if the penalty imposed is less than Rs.10,000/-, Rs.1,200/- if thepenalty imposed is Rs. 10,000/- or more but less than Rs. 1,00,000/- and an additionalRs. 1,000/- for every additional one lakh of penalty or fraction thereof.

H. SEBI (Amendment) Act, 2002

While responding to a calling attention motion in early March, 2001 by the leader ofthe opposition on extreme volatility in the stock markets, Finance Minister had proposedlegislative changes to further strengthen the provisions in the SEBI Act, 1992 to ensureinvestor protection. In pursuance to this, the SEBI (Amendment) Act, 2002 was enactedto make provisions to (i) strengthen the Securities Appellate Tribunal (SAT) and theSEBI in terms of organisational structure and institutional capacity, (ii) enhance powersof SEBI substantially, particularly in respect of inspection, investigation and enforcement,and (iii) strengthen penal framework by prescribing a few more offences in the SEBI Actand enhancing the monetary penalties for various offences.

Strengthening Organisations : Before the Amendment Act, 2002, SEBI consistedof a Chairman and five other members to be appointed by the Central Government. Ofthe five members, three represented Ministry of Finance, Ministry of Law and the RBI.In view of the growing importance of the securities markets in the economy and theresponsibilities of the SEBI under the SEBI Act, it was necessary to strengthen it further.The Amendment Act strengthened it by increasing the number of members from five toeight, providing for at least three whole time members and substituting the representationof the Ministry of Law by the Ministry dealing with administration of the Companies Act,1956. SEBI would now benefit from the expertise of three additional members, full timeattention of at least three additional members, and the representative of the Departmentof Company Affairs whose operations have bearing on the working of the securitiesmarket.

The SEBI Act provides for establishment of one or more SATs to hear appealsagainst the orders of SEBI. Prior to this amendment, the SAT consisted of one personcalled the Presiding Officer. Since it hears appeals against the orders of SEBI which isa very high powered statutory body and which is strengthened further by this amendment,and in the interests of objectivity and potential work load, it was necessary to strengthenthe SAT. The Amendment Act converted the SAT to a three member body consisting ofa presiding officer and two other members to be appointed by the Central Government. Itenhanced the level of the SAT by prescribing higher eligibility criteria for appointment ofthe presiding officer and the members. It provided that only a sitting or retired judge ofthe Supreme Court or a sitting or retired Chief Justice of a High Court would be eligibleto be appointed as presiding officer of the SAT and such appointment shall be made inconsultation with the Chief Justice of India or his nominee. The presiding officer will holdthe office for a term of five years or until he attains the age of sixty eight years, whicheveris earlier. It further provided that a person shall be qualified for appointment as memberof the SAT if he is a person of ability, integrity and standing, who has shown capacity indealing with problems relating to securities market and has qualification and experienceof corporate law, securities laws, finance, economics or accountancy. A member of SATcan hold office for a term of five years or until he attains the age of sixty two years,whichever is earlier. A member of SEBI or a senior officer of SEBI at the level ExecutiveDirector shall not be eligible to be appointed as a member or Presiding Officer of the SATduring the tenure of his office with the SEBI or within two years from the date on which


he ceases to hold such office. This will avoid conflict of interest in the sense that anofficial of SEBI responsible for a particular order should not uphold the order as a memberof the SAT. Any person aggrieved by any decision or order of the SAT can prefer anappeal before the Supreme Court (it was High Court earlier) only on a question of law.

Empowering SEBI : The Amendment Act conferred on SEBI a lot of additionalpowers to deal with any kind of market misconduct and protect the investors in securities.For example, it can now prevent issue of any offer document if it has any misgivingsabout the antecedents of promoters / companies concerned. Under the amendedprovisions, SEBI can now:

(i) call for information and record from any bank or any other authority or board orcorporation established or constituted by or under any Central, State or ProvincialAct in respect of transactions in securities which are under investigation orenquiry by SEBI;

(ii) conduct inspection of any book or register or other document or record of anylisted public company; If, however, the said company is not a registeredintermediary, SEBI can inspect only if it has reasonable grounds to believe thatsuch company has been indulging in insider trading or fraudulent and unfairtrade practices relating to securities market.

(iii) issue commissions for examination of witnesses or documents while exercisingpowers to call for information or conduct inspection;

(iv) take any of the following measures in the interest of investors or securitiesmarket, either pending investigation or inquiry or on completion of suchinvestigation or inquiry, but after giving an opportunity of hearing -

(a) suspend trading of a security in a recognised stock exchange;

(b) restrain persons from accessing the securities market and prohibit any personassociated with securities market from buying, selling or dealing in securities;

(c) suspend any office bearer of a stock exchange or self-regulatory organisationfrom holding such position;

(d) impound and retain the proceeds or securities in respect of any transactionwhich is under investigation;

(e) attach for a period not exceeding one month, with the prior approval of amagistrate, one or more bank accounts of any intermediary or any personassociated with the securities market in any manner involved in violation ofany of the provisions of the Act or rules or regulations made thereunder; and

(f) direct any intermediary or any person associated with the securities marketin any manner not to dispose of or alienate an asset forming part of anytransaction which is under investigation.

In case of a listed public company, which is not a registered intermediary, theSEBI can exercise its powers of impounding and retaining proceeds or securities,attaching bank accounts or directing non-alienation of assets only if it hasreasonable grounds to believe that the company has been indulging in insidertrading or fraudulent and unfair trade practices relating to securities market.

(v) prohibit, for the protection of investors, any company from issuing any offer


document including a prospectus or advertisement soliciting money from thepublic for the issue of securities, and specify the conditions subject to whichsuch offer documents can be issued;

(vi) specify the requirements for listing and transfer of securities; and

(vii) pass an order requiring a person to cease and desist from committing or causinga particular violation of any of the provisions of the SEBI Act, or any rules orregulations made thereunder, if it finds, after an enquiry, that such person hasviolated or likely to violate the said provisions. In case of a listed public company,which is not a registered intermediary, the SEBI can exercise this powers onlyif it has reasonable grounds to believe that the company has been indulging ininsider trading or market manipulation.

In addition, SEBI was armed with powers of investigation. If SEBI has reasonablegrounds to believe that the transactions in securities are being dealt in a manner detrimentalto the investors or the securities market or any intermediary or any person associatedwith the securities market has violated any of the provisions of the SEBI Act or the rulesor the regulations made or directions issued by SEBI thereunder, it can appoint a personas investigating authority to investigate the affairs of such intermediary or personsassociated with the securities market. In order to provide required teeth to the investigatingauthority, it has been provided that any person failing to produce any document orinformation to the investigating authority or appear before the investigating authority orsign the notes of examination shall be punishable with imprisonment or with fine or withboth. Further, if the investigating authority has reasonable grounds to believe that thebooks, registers or documents or records of or relating to any intermediary or any personassociated with securities market in any manner, may be destroyed, mutilated, alteredor falsified or secreted, he can obtain an authorisation from a Magistrate to (a) enter theplace or places where such books or records are kept, (b) search the place or placesand (c) seize the books or records, as considered necessary for investigation. Suchauthorisation would not be available to investigating authority in case of books or documentsof any listed public company, which is not a registered intermediary, unless such companyindulges in insider trading or market manipulation. Such search and seizure shall becarried out in accordance with the provisions of the Code of Criminal Procedure, 1973.The investigating authority can keep such record and documents in his custody till theconclusion of the investigation.

Strengthening Penal Framework : Section 11 of the SEBI Act, 1992 enjoins uponSEBI to take measures to provide for prohibiting insider trading in securities and fraudulentand unfair trade practices relating to securities markets, regulating substantial acquisitionof shares and takeover of companies etc. However, these terms were not explained andthese activities were not expressly forbidden in the Act. In order to clarify the matter, theAmendment Act added a new chapter, Chapter VA, relating to prohibition of manipulativeand deceptive devices, insider trading and substantial acquisition of securities or controland empowered SEBI to regulate these practices by regulations. It now provides that itshall be unlawful for any person, directly or indirectly –

(a) to use or employ any manipulative or deceptive device or contrivance incontravention of regulations in connection with the issue, purchase or sale ofany securities listed or proposed to be listed;


(b) to employ any device, scheme or artifice to defraud in connection with issue ordealing in securities which are listed or proposed to be listed;

(c) to engage in any act, practice, course of business which operates or wouldoperate as a fraud or deceit upon any person, in connection with the issue,dealing in securities which are listed or proposed to be listed, in contravention ofthe provisions of the Act, or the rules or the regulations made thereunder;

(d) to engage in insider trading;

(e) to deal in securities while in possession of material or non-public information orcommunicate such material or non-public information to any other person, in amanner which is in contravention of the provisions of the Act, or the rules or theregulations made thereunder; and

(f) to acquire control or securities beyond threshold limit of a company, whosesecurities are listed or proposed to be listed, in contravention of the regulationsmade under the SEBI Act.

In order to equip SEBI with wherewithal to bring all types of culprits to book toensure orderly development of market, the Amendment Act prescribed a few moreoffences along with associated penalties and enhanced penalties for the offencescommitted under the Act from a maximum of Rs. 5 lakh to a maximum of Rs. 25 crore orthree times the amount of profit made out of violation, whichever is higher, and fromimprisonment of one year to 10 years. Such enhanced punishment should serve asenough deterrent for the potential violators of law.

All the violations under section 15 shall be adjudicated by an adjudicating officerappointed by SEBI. The Amendment Act, however, provides that all sums realised byway of penalties would be credited to Consolidated Fund of India instead of SEBI. Thisis probably to avoid conflict of interest that SEBI may impose higher penalty when itneeds more funds.

The Amendment Act empowered the SAT and the Courts to compound offences.They can compound any offence under the SEBI Act, not being an offence punishablewith imprisonment only, or with imprisonment and also with fine, either before or afterthe institution of the proceeding.

In order to reduce delays, avoid unnecessary litigation and get cooperation of theaccused, Central Government has been empowered to grant immunity, before institutionof prosecution, to any person from prosecution for any offence under the SEBI Act orrules or regulations made thereunder or from the imposition of any penalty under the Actwith respect to alleged violation. Such immunity can be granted only if SEBI recommendsit and the person makes a full and true disclosure in respect of the alleged violation. Ifany person to whom immunity has been granted does not comply with the conditions onwhich immunity was granted or had given false evidence, the immunity can be withdrawnand on such withdrawal, the accused would face normal prosecution / penalty.

Any offence punishable under the Act or any rules or regulations made thereundershall be tried by a ‘court of session’ instead of ‘a metropolitan magistrate or a judicialmagistrate of the first class’ as provided earlier.


Scheme of Penalties under the SEBI (Amendment) Act, 2002

Section Violations PenaltyBefore Amendment After Amendment

11C(6) Failure to produce books, records, New provision Imprisonment for a term whichetc. or furnish information or may extend to one year or fineappear before the investigating which may extend to Rs. 1authority or to sign the note of any crore or both and a further fineexamination by investigating which may extend to Rs.5 lakhauthority for every day after the first

during which the failure orrefusal continues

15A(a) Failure by any person to furnish any Not exceeding Rs. 1 lakh for each day duringdocument, return or report to Rs.1.5 lakh / which such failure continuesSEBI required under the Act or any Failure or Rs. 1 crore, whichever isrules or regulations made there lessunder

15A(b) Failure by any person to file any Not exceedingreturn or furnish any information, Rs. 5,000 for each daybooks or other documents within during which suchthe time specified in the regulations failure continues

15A(c) Failure by any person to maintain Not exceedingbooks of accounts or records Rs. 10,000 for eachrequired under the Act or any rules day during which suchor regulations made thereunder. failure continues

15B Failure by an intermediary to enter Not exceedinginto agreement with clients required Rs. 5 lakh / Failureunder the Act

15C Failure by an intermediary to redress Not exceedingthe grievances of investors after Rs. 10,000 / Failurehaving been called upon by SEBI todo so

15C Failure by a listed company to New provisionredress the grievances of investorsafter having been called upon bySEBI to do so

15D(a) Sponsoring or carrying on any CIS, Not exceeding Rs. 1 l akh for each dayincluding mutual funds, by any Rs. 10,000 for each during which he sponsorsperson, without obtaining a certi- day during which he or carries on any such CISficate of registration from SEBI carries on any such or Rs. 1 crore, whichever

CIS or Rs. 10 lakh, is lesswhichever is higher

15D(b) Failure by a registered CIS to comply Not exceedingwith terms and conditions of Rs. 10,000 for eachregistration day during which

such failure continuesor Rs. 10 lakh,whichever is higher

15D(c) Failure by a registered CIS to apply Not exceedingfor listing of its schemes as provided Rs. 5,000 for eachin the regulations day during which

such failure continuesor Rs. 5 lakh, which-


ever is higher

15D(d) Failure by a registered CIS to Not exceedingdespatch unit certificates in the Rs. 1,000 for eachmanner provided in the regulations day during which

such failure continues

15D(e) Failure by a registered CIS to Not exceedingrefund application monies within the Rs. 1,000 for eachperiod specified in the regulations day during which

such failure continues

15D(f) Failure by a registered CIS to invest Not exceedingmoney in the manner or within the Rs. 5 lakh / Failureperiod specified in the regulations

15E Failure by any asset management Not exceedingcompany of a registered mutual Rs. 5 lakh / Failurefund to observe rules and regula-tions

15F(a) Failure by a registered stock broker Not exceeding five No changeto issue contract notes in the times the amount formanner specified by the exchange which the contract

note was required tobe issued

15F(b) Failure by a registered stock broker Not exceeding Rs. 1 lakh for each dayto deliver any security or make Rs. 5,000 for each during which such failurepayment of the amount due to day during which continues or Rs. 1 crore,investor in th e manner specified in such failure continues whichever is lessthe regulations

15F(c) Charging brokerage in excess of Not exceeding Rs. 1 lakh or five timesthe amount specified in the regu- Rs. 5,000 or five the amount of brokeragelations by a registered stock broker times the amount of charged in excess of the

brokerage charged specified brokerage,in excess of the whichever is higherspecified brokerage,whichever is higher

15G Insider trading Not exceeding Rs. 5 Rs. 25 crore or threelakh times the amount of

profits made out ofinsider trading, which-ever is higher

15H Failure by any person to disclose Not exceeding Rs. 5 Rs. 25 crore or threethe aggregate shareholding in the lakh times the amount ofbody corporate or make public profits made out of suchannouncement as required under failure, whichever isthe Act or rules or regulations higher

15H Failure by any person to make a New provisionpublic offer or make payment ofconsideration to shareholders whosold their shares pursuant to theletter of offer, as required under theAct or rules or regulations

15HA Indulging in fraudulent and unfair New provision Penalty which may up totrade practices relating to securities Rs. 1 crore



15HB Failure to comply with any provision New provisionof the Act, the rules or regulationsmade or directions issued by SEBIthereunder for which no separatepenalty has been provided

24(1) Contravenes or attempts to Imprisonment for a Imprisonment for a termcontravene or abets the contra- term which may which may extend to tenvention of the provisions of the Act extend to one year, years, or fine whichor of any rules or regulations made or fine, or both may extend to Rs. 25thereunder crore, or both

24(2) Failure to pay the penalty imposed Imprisonment for a Imprisonment for a termby adjudicating officer or to comply term which shall not which shall not be lesswith any of his directions or order. be less than one than one month but

month but which which may extendmay extend to 3 to 10 years, or fineyears, or fine which which shall not be lessshall not be less than than Rs. 25 crore or bothRs. 2,000 but whichmay extend toRs. 10,000, or both


CAPITAL MARKET —FREQUENTLY ASKED QUESTIONS

35

* Selected FAQs reproduced from the website of SEBI (www.sebi.gov.in). These FAQs are notthe interpretation of the law and provide only a simplisitic explanation of terms/conceptsrelated to Secondary markets. Users are advised to obtain expert/legal opinion as SEBIdoes not own any responsibility in this regard.

What are the various types of financial markets?

The financial markets can broadly be divided into money and capital market.

Money Market : Money market is a market for debt securities that pay off in theshort term usually less than one year, for example the market for 90-days treasury bills.This market encompasses the trading and issuance of short term non equity debtinstruments including treasury bills, commercial papers, bankers acceptance, certificatesof deposits, etc.

Capital Market : Capital market is a market for long-term debt and equity shares. Inthis market, the capital funds comprising of both equity and debt are issued and traded.This also includes private placement sources of debt and equity as well as organizedmarkets like stock exchanges. Capital market can be further divided into primary andsecondary markets.

What is meant by the secondary market ?

Secondary market refers to a market where securities are traded after being initiallyoffered to the public in the primary market and/or listed on the Stock Exchange. Majorityof the trading is done in the secondary market. Secondary market comprises of equitymarkets and the debt markets.

For the general investor, the secondary market provides an efficient platform fortrading of his securities. For the management of the company, Secondary equity marketsserve as a monitoring and control conduit—by facilitating value-enhancing controlactivities, enabling implementation of incentive-based management contracts, andaggregating information (via price discovery) that guides management decisions.

What is the difference between the primary market and the secondary market ?

In the primary market, securities are offered to public for subscription for the purposeof raising capital or fund. Secondary market is an equity trading venue in which alreadyexisting/pre- issued securities are traded among investors. Secondary market could beeither auction or dealer market. While stock exchange is the part of an auction market,Over-the-Counter (OTC) is a part of the dealer market.


What is the SEBI and what is its role ?

The SEBI is the regulatory authority in India established under Section 3 of SEBIAct to protect the interests of the investors in securities and to promote the developmentof, and to regulate, the securities market and for matters connected therewith and incidentalthereto.

What are the products dealt in the secondary markets ?

Following are the main financial products/instruments dealt in the Secondary market:

Equity : The ownership interest in a company of holders of its common and preferredstock. The various kinds of equity shares are as follows –

— Equity Shares : An equity share, commonly referred to as ordinary share alsorepresents the form of fractional ownership in which a shareholder, as a fractionalowner, undertakes the maximum entrepreneurial risk associated with a businessventure. The holder of such shares are member of the company and have votingrights. A company may issue such shares with differential rights as to voting,payment of dividend etc.

— Rights Issue/ Rights Shares : The issue of new securities to existing shareholdersat a ratio to those already held.

— Bonus Shares: Shares issued by the companies to their shareholders free ofcost by capitalization of accumulated reserves from the profits earned in theearlier years.

— Preferred Stock/ Preference shares : Owners of this kind of shares are entitledto a fixed dividend or dividend calculated at a fixed rate to be paid regularlybefore dividend can be paid in respect of equity share. They also enjoy priorityover the equity shareholders in payment of surplus. But in the event of liquidation,their claims rank below the claims of the company’s creditors, bondholders /debenture holders.

— Cumulative Preference Shares : A type of preference shares on which dividendaccumulates if remains unpaid. All arrears of preference dividend have to bepaid out before paying dividend on equity shares.

— Cumulative Convertible Preference Shares : A type of preference shares wherethe dividend payable on the same accumulates, if not paid. After a specifieddate, these shares will be converted into equity capital of the company.

— Participating Preference Share : The right of certain preference shareholders toparticipate in profits after a specified fixed dividend contracted for is paid.Participation right is linked with the quantum of dividend paid on the equityshares over and above a particular specified level.

— Bond : A negotiable certificate evidencing indebtedness. It is normally unsecured.A debt security is generally issued by a company, municipality or governmentagency. A bond investor lends money to the issuer and in exchange, the issuerpromises to repay the loan amount on a specified maturity date. The issuerusually pays the bond holder periodic interest payments over the life of the loan.


The various types of Bonds are as follows –

— Zero Coupon Bond : Bond issued at a discount and repaid at a face value. Noperiodic interest is paid. The difference between the issue price and redemptionprice represents the return to the holder. The buyer of these bonds receives onlyone payment, at the maturity of the bond.

— Convertible Bond : A bond giving the investor the option to convert the bond intoequity at a fixed conversion price.

— Debentures : Bonds issued by a company bearing a fixed rate of interest usuallypayable half yearly on specific dates and principal amount repayable on particulardate on redemption of the debentures. Debentures are normally secured/chargedagainst the asset of the company in favor of debenture holder.

— Commercial Paper : A short term promise to repay a fixed amount that is placedon the market either directly or through a specialized intermediary. It is usuallyissued by companies with a high credit standing in form of a promissory noteredeemable at par to the holder on maturity and therefore doesn’t require anyguarantee. Commercial paper is a money market instrument issued for the tenureof 90 days.

— Coupons : Tokens for payment of interest attached to bearer securities.

— Treasury Bills : Short-term (up to one year) bearer discount security issued bygovernment as a means of financing their cash requirements.

Whom should I contact for my Stock Market related transactions ?

You can contact a broker or a sub broker registered with SEBI for carrying out yourtransactions pertaining to the capital market.

Who is a broker ?

A broker is a member of a recognized stock exchange, who is permitted to do tradeson the floor of the exchange. He is enrolled as a member with the concerned exchangeand is registered with SEBI.

Who is a sub broker ?

A sub broker is a person who is registered with SEBI as such and is affiliated to amember of a recognized stock exchange.

How do I know if the broker or sub broker is registered ?

You can confirm it by verifying the registration certificate issued by SEBI. A broker’sregistration number begins with the letters “INB” and that of a sub broker with the letters“INS”.

Am I required to sign any agreement with the broker or sub-broker?

Yes. You have to sign the “Member - Client agreement”/ “Sub broker - Client Agreement”for the purpose of engaging a broker to execute trades on your behalf from time to timeand furnish details relating to yourself for enabling the member to maintain client registrationform. The Model Agreement between broker-client /Sub Broker client and Know yourClient Form can be viewed from SEBI Website at www.sebi.gov.in. The Model Agreement


has to be executed on the non-judicial stamp paper. The Agreement contains clausesdefining the rights and responsibility of Client vis a vis broker/ sub broker. The Broker/Sub broker can also add further clauses in the Model Agreement as per theirrequirement.

What is Member –Client agreement form ?

This form is an agreement entered between client and broker in presence of witnesswhere the client agrees (is desirous) to trade/invest in the securities listed on the concernedExchange through the broker after being satisfied of brokers capabilities to deal insecurities. The member, on the other hand agrees to be satisfied by the genuinenessand financial soundness of the client and making client aware of his(broker’s) liability forthe business to be conducted.

What kind of details do I have to provide in Client Registration form?

The brokers have to maintain a database of their clients, for which you have to fillclient registration form.

In case of individual client registration, you have to broadly provide followinginformation:

— Your name, address, educational qualifications, occupation, residentialstatus(Resident Indian/ NRI/others)

— Particulars of bank account

— Income tax no (PAN/GIR) which also serves as unique client code.

— If you are registered with any other broker, then the name of broker and concernedStock exchange and Client Code Number.

— Proof of identity submitted either as Passport number/Driving license/Rationcard/Voters identity card. Each client has to use one registration form. In caseof joint names /family members, a separate form has to be submitted form eachperson.

In case of Corporate Client, following information has to be provided:

— Name , address of the Company/Firm

— Date of incorporation and date of commencement of business.

— Copy of Memorandum and articles of Association/Partnership deed.

— Details of Promoters/Partners/Key managerial Personnel the Company/Firm inspecified format.

— Copies of annual report of last three years.

— Net worth of the Company

— Particulars of the Bank Account.

— Income tax number of the company.

— Annual income in last three years and market value of portfolio

— If you are registered with any other broker, then the name of broker and concernedStock exchange and Client Code Number.


What is meant by Unique Client Code?

In order to facilitate maintaining database of their clients, it is mandatory for allbrokers to use unique client code which will act as an exclusive identification for theclient. For this purpose, PAN number/passport number/driving License/voters ID number/ration card number coupled with the frequently used bank account number and thedepository beneficiary account can be used for identification, in the given order, basedon availability.

How do I place my orders with the broker or sub broker ?

You can either go to the brokers /sub brokers office or place an order on the phone/internet or as defined in the Model Agreement given above.

How do I know whether my order is placed ?

The Stock Exchanges assign a Unique Order Code Number to each transaction,which is intimated by broker to his client and once the order is executed, this order codenumber is printed on the contract note. The broker member has to also maintain therecord of time when the client has placed order and reflect the same in the contract notealong with the time of execution of the order.

What documents should be obtained from broker on execution of trade ?

You have to ensure receipt of the following documents for any trade executed on theExchange:

(a) Contract note in Form A to be given within stipulated time.

(b) Purchase /sale note or confirmation memo in the case of a sub broker.It is the contract note/purchase or sale note (confirmation memo) that gives riseto contractual rights and obligations of parties of the trade. Hence you shouldinsist on contract note from stock broker and purchase/sale note (confirmationmemo) from sub broker. The contract note displays the order number, order timeand unique trade number. The quantity and the price of the trade executed at theexchange can be verified by the Exchange. The contract note also containsarbitration clause for raising dispute with the Arbitrators as per the byelaws ofthe Exchange.

What details are required to be mentioned on the Contract note issued by theStock Broker ?

A broker has to issue a contract note to clients for all transactions in the formspecified by the stock exchange. The contract note inter-alia should have following :

— Name, address and SEBI Registration number of the Member broker.

— Name of partner /proprietor /Authorised Signatory.

— Dealing Office Address/Tel No/Fax no, Code number of the member given bythe Exchange.

— Contract number, date of issue of contract note, settlement number and timeperiod for settlement.

— Constituent (Client) name/Code Number.


— Order number and order time corresponding to the trades.

— Trade number and Trade time.

— Quantity and Kind of Security brought/sold by the client.

— Brokerage and Purchase /Sale rate are given separately .

— Service tax rates and any other charges levied by the broker.

— Appropriate stamps have to be affixed on the original contract note or it ismentioned that the consolidated stamp duty is paid.

— Signature of the Stock broker/Authorized Signatory.

Incase of purchase and sale note provided by the sub broker, following additionalinformation is provided:

— Name and SEBI Registration no of Sub broker.

— Name of affiliating trading member.

— Purchase/sale note number .

— Corresponding contract note issued by the broker for relevant trade numberalong with the date of contract.

Both contract note and purchase / sale note provide for the recourse to the systemof arbitrators for settlement of disputes arising out of transactions.

What is the pay-in day and payout day ?

Pay in day is the day when the brokers shall make payment or delivery of securitiesto the exchange. Pay out day is the day when the exchange makes payment or deliveryof securities to the broker. Since settlement cycle has been reduced from T+3 rollingsettlement to T+2 w.e.f. April 01, 2003, the exchanges have to ensure that the pay out offunds and securities to the clients is done by the broker within 24 hours of the payout.The Exchanges will have to issue press release immediately after pay out.

How long it takes to receive my money for a sale transaction and my shares for abuy transaction ?

Brokers were required to make payment or give delivery within two working days ofthe pay - out day. However, as settlement cycle has been reduced from T+3 rollingsettlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to the clientsby the broker will be within 24 hours of the payout.

Is there any provision where I can get faster delivery of shares in my account ?

The investors/clients can get direct delivery of shares in their beneficiary accounts.To avail this facility, you have to give details of your beneficiary account and the DP-IDof your DP to your broker along with the Standing Instructions for ‘Delivery-In’ to yourDepository participant for accepting shares in your beneficiary account. Given thesedetails, the Clearing Corporation/Clearing House shall send pay out instructions to thedepositories so that you receive pay out of securities directly into the beneficiary account.

In case of purchase of shares, when do I make payment to the broker ?

The payment for the shares purchased is required to be done prior to the pay in date


for the relevant settlement or as otherwise provided in the Rules and Regulations of theExchange.

In case of sale of shares, when should the shares be given to the broker ?

The delivery of shares has to be done prior to the pay in date for the relevantsettlement or as otherwise provided in the Rules and Regulations of the Exchange andagreed with the broker/sub broker in writing.

What is the maximum brokerage that a broker/sub broker can charge ?

The maximum brokerage that can be charged by a broker is decided by the StockExchanges as per the Exchange Regulations. The SEBI (Stock brokers and Sub brokers),1992 stipulates that sub broker cannot charge from his clients a commission which ismore than 1.5% of the value mentioned in the respective purchase or sale note .

What are the charges that can be levied on the investor by a stock broker/subBroker ?

The trading member can charge:

1. Brokerage charged by member broker.

2. Penalties arising on specific default on behalf of client (investor)

3. Service tax as stipulated

The brokerage and service tax is indicated separately in the contract note.

What happens if I could not make the payment of money or deliver shares on thepay-in day ?

In case of purchase on your behalf, the member broker has the liberty to close outtransactions by selling securities in case you fail to make full payment to the broker forthe execution of contract before pay in day as fixed by Stock Exchange for the concernedsettlement period unless you already have an equivalent credit with the Broker.Similarly, in case of sale of shares on your behalf, the member broker has the liberty toclose out the contract by effecting purchases if you fail to deliver the securities sold withvalid transfer documents, if any before delivery day as fixed by Stock Exchange for theconcerned settlement period.

In both the cases, any loss in transactions will be deductible from the margin moneypaid by you.

The shortages are met through auction process and the difference in price indicatedin contract note and price received through auction is paid by member to the Exchange,which is then liable to be recovered from the client.

What happens if the shares are not bought in the auction ?

If the shares could not be bought in the auction i.e. if shares are not offered for salein the auction, the transactions are closed out as per SEBI guidelines. The guidelinesstipulate that “the close out Price will be the highest price recorded in that scrip on theexchange in the settlement in which the concerned contract was entered into and uptothe date of auction/close out OR 20% above the official closing price on the exchangeon the day on which auction offers are called for (and in the event of there being no such


closing price on that day, then the official closing price on the immediately precedingtrading day on which there was an official closing price), whichever is higher.”

Since in the rolling settlement the auction and the close out takes place duringtrading hours, hence the reference price in the rolling settlement for close out procedureswould be taken as the previous day’s closing price.

What happens if I do not get my money or share on the due date ?

In case a broker fails to deliver to you in timely and proper payment of money/shares or you have complaint against conduct of the stock broker, you can file a complaintwith the respective stock exchange. The exchange is required to resolve all the complaints.To resolve the dispute, the complainant can also resort arbitration as provided on thereverse of contract note /purchase or sale note.

However, if the complaint is not addressed by the Stock Exchanges or is undulydelayed, then the complaints along with supporting documents may be forwarded toSecondary Market Department of SEBI. Your complaint would be followed up with theexchanges for expeditious redressal.

In case of complaint against a sub broker, the complaint may be forwarded to theconcerned broker with whom the sub broker is affiliated for redressal.

What recourses are available to me for redressing my grievances ?

You have following recourses available.

Investor Grievance Redressal Cell (IGG) : You can lodge complaint with IGG Cell ofSEBI against companies for delay, non-receipt of shares, refund orders etc and withStock Exchanges against brokers on certain trade disputes or non receipt of payment/securities.

Arbitration : If no amicable settlement could be reached, then you can makeapplication for reference to Arbitration under the Bye Laws of concerned Stockexchange. Court of Law

What is Arbitration ?

Arbitration is an alternative dispute resolution mechanism provided by a stockexchange for resolving disputes between the trading members and their clients in respectof trades done on the exchange.

What is the process for preferring arbitration ?

The byelaws of the exchange provide procedure for Arbitration .You can procure aform for filing arbitration from the concerned stock exchange. The arbitral tribunal has tomake the arbitral award within 3 months from the date of entering upon the reference.The time taken to make an award cannot be extended beyond three times up to maximumperiod of three months.

Who appoints the arbitrators ?

Every exchange maintains a panel of arbitrators. Investors may choose the arbitratorof their choice from the panel. The broker also has an option to choose an arbitrator. Thename(s) would be forwarded to the member for acceptance. In case of disagreement,the exchange shall decide upon the name of arbitrators.


What happens if I am aggrieved by the award of the arbitrator ?

In case you are aggrieved by the arbitration award, you can take recourse to theappeal provisions as given in the bye-laws of the Exchange.

OTHER GENERAL QUESTIONS

What is the traditional structure of the stock exchanges in India ?

In terms of legal structure, the stock exchanges in India could be segregated intotwo broad groups – 20 stock exchanges which were set up as companies, either limitedby guarantees or by shares, and the 3 stock exchanges which are functioning asassociations of persons (AOP) viz. BSE, ASE and Madhya Pradesh Stock Exchange.The 20 stock exchanges which are companies are: the stock exchanges of Bangalore,Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati, Hyderabad, InterconnectedSE, Jaipur, Ludhiana, Madras, Magadh, Managalore, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Apart from NSE, all stock exchanges whetherestablished as corporate bodies or Association of Persons (AOPs), are non-profit makingorganizations.

What is meant by corporatisation of stock exchanges ?

Corporatisation is the process of converting the organizational structure of the stockexchange from a non-corporate structure to a corporate structure. Traditionally, some ofthe stock exchanges in India were established as “Association of persons”, e.g. BSE,ASE and MPSE. Corporatisation of such exchanges is the process of converting theminto incorporated Companies.

What is demutualisation of stock exchanges ?

Demutualisation refers to the transition process of an exchange from a “mutually-owned” association to a company “owned by shareholders”. In other words, transformingthe legal structure of an exchange from a mutual form to a business corporation form isreferred to as demutualisation. The above, in effect means that after demutualisation,the ownership, the management and the trading rights at the exchange are segregatedfrom one another.

How is a demutualised exchange different from a mutual exchange ?

In a mutual exchange, the three functions of ownership, management and tradingare intervened into a single Group. Here, the broker members of the exchange are boththe owners and the traders on the exchange and they further manage the exchange aswell. A demutualised exchange, on the other hand, has all these three functions clearlysegregated, i.e. the ownership, management and trading are in separate hands.

What is meant by delisting of securities ?

The term “delisting” of securities means permanent removal of securities of a listedcompany from a stock exchange. As a consequence of delisting, the securities of thatcompany would no longer be traded at that stock exchange.

What is the difference between Voluntary delisting and Compulsory delisting?

Compulsory delisting refers to permanent removal of securities of a listed companyfrom a stock exchange as a penalizing measure at the behest of the Stock exchange for


not making submissions/comply with various requirements set out in the Listing agreementwithin the time frames prescribed. In voluntary delisting, a listed company decides on itsown to permanently remove its securities from a stock exchange.

What is the exit opportunity available for investors in case a company getsdelisted?

SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism, wherebythe exit price for voluntary delisting of securities is determined by the promoter of theconcerned company which desires to get delisted, in accordance to book building process.The offer price has a floor price ,which is average of 26 weeks average of traded pricequoted on the stock exchange where the shares of the company are most frequentlytraded preceding 26 weeks from the date public announcement is made. There is noceiling on the maximum price.

In case of infrequently traded securities, the offer price is as per Regulation20 (5) ofSEBI (Substantial Acquisition and Takeover) Regulations. For this purpose, infrequentlytraded securities is determined in the manner as provided in Regulation20 (5) of SEBI(Substantial Acquisition and Takeover) Regulations.

Does a company listed at BSE/NSE have to provide exit offer to shareholders incase it delists from stock exchanges other than BSE and NSE ?

No, the company does not have to provide exit offer to shareholders because itcontinues to be listed on the BSE /NSE which have nationwide reach and shareholderscan exit any time they decide to so by way of selling shares in NSE/BSE.

What is a Central Listing Authority?

The Central Listing Authority (CLA) is set up to address the issue of multiple listingof the same security and to bring about uniformity in the due diligence exercise inscrutinizing all listing applications on any stock exchanges. The functions of CLA asenumerated in SEBI (Central Listing Authority) Regulations, 2003 include:

— processing the application made by any body corporate, mutual fund or collectiveinvestment scheme for the letter of recommendation to get listed at the stockexchange,

— making recommendations as to listing conditions, and

— any other functions that may be specified by the SEBI Board from time totime.

What are the established codes of corporate governance ?

The Codes may be divided into supranational, national or institutional codes,depending on author. Some of the selected examples of supranational Codes are: OECD,ICGN (International Corporate Governance Network), CACG (Commonwealth Associationfor Corporate Governance); selected examples of national Codes are: Viénot Reportfrom France, the Cadbury, Greenbury and Hampel Reports and the Combined Code fromthe UK, the Malaysian code; and selected institutional Codes are: Calpers, HermesInvestment Management, the CII code on desirable corporate governance.

SEBI has also laid down certain codes like Kumar Mangalam Birla Committee Report,Clause 49 of Listing Agreement for good governance of listed companies with the purposeof enhancing wealth creation, wealth management and distribution.


What is meant by Corporate Governance ?

As Kumar Managalam Committee Report on Corporate Governance enumerates,the fundamental objective of corporate governance is the “enhancement of shareholdervalue, keeping in view the interests of other stakeholder”. This definition harmonizes theneed for a company to strike a balance at all times between the need to enhanceshareholders’ wealth whilst not in any way being detrimental to the interests of the otherstakeholders in the company.

What is meant by independent directors ?

As per Clause 49 of the listing agreement, ‘Independent directors’ means directorswho apart from receiving director’s remuneration, do not have any other material pecuniaryrelationship or transactions with the company, its promoters, its management or itssubsidiaries, which in judgment of the Board may affect independence of judgment ofthe director

What is EDIFAR ?

“Electronic Data Information Filing and Retrieval System” (EDIFAR) is a websitelaunched by SEBI in association with National Informatics Center (NIC) in July 2002 tofacilitate filing of certain material information/ documents/statements by the listedcompanies on line in the EDIFAR web site - www.sebiedifar.nic.in .EDIFAR would enableelectronic filing of information in a standard format by the companies and expeditedissemination of information to various classes of market participants like investors,regulatory organization, research institutions, etc.

MUTUAL FUNDS — FREQUENTLY ASKED QUESTIONS*

46

* Reproduced from the website of SEBI (www.sebi.gov.in)

What is a Mutual Fund ?

Mutual fund is a mechanism for pooling the resources by issuing units to the investorsand investing funds in securities in accordance with objectives as disclosed in offerdocument.

Investments in securities are spread across a wide cross-section of industries andsectors and thus the risk is reduced. Diversification reduces the risk because all stocksmay not move in the same direction in the same proportion at the same time. Mutualfund issues units to the investors in accordance with quantum of money invested bythem. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments.The mutual funds normally come out with a number of schemes with different investmentobjectives which are launched from time to time. A mutual fund is required to be registeredwith Securities and Exchange Board of India (SEBI) which regulates securities marketsbefore it can collect funds from the public.

What is the history of Mutual Funds in India and role of SEBI in mutual fundsindustry ?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early1990s, Government allowed public sector banks and institutions to set up mutualfunds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.The objectives of SEBI are – to protect the interest of investors in securities and topromote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates themutual funds to protect the interest of the investors. SEBI notified regulations for themutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities wereallowed to enter the capital market. The regulations were fully revised in 1996 and havebeen amended thereafter from time to time. SEBI has also issued guidelines to themutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities includingthose promoted by foreign entities are governed by the same set of Regulations. Thereis no distinction in regulatory requirements for these mutual funds and all are subject tomonitoring and inspections by SEBI. The risks associated with the schemes launchedby the mutual funds sponsored by these entities are of similar type.


How is a mutual fund set up ?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, assetmanagement company (AMC) and custodian. The trust is established by a sponsor ormore than one sponsor who is like promoter of a company. The trustees of the mutualfund hold its property for the benefit of the unitholders. Asset Management Company(AMC) approved by SEBI manages the funds by making investments in various types ofsecurities. Custodian, who is registered with SEBI, holds the securities of variousschemes of the fund in its custody. The trustees are vested with the general power ofsuperintendence and direction over AMC. They monitor the performance and complianceof SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee companyor board of trustees must be independent i.e. they should not be associated with thesponsors. Also, 50% of the directors of AMC must be independent. All mutual funds arerequired to be registered with SEBI before they launch any scheme.

What is Net Asset Value (NAV) of a scheme ?

The performance of a particular scheme of a mutual fund is denoted by Net AssetValue (NAV).

Mutual funds invest the money collected from the investors in securities markets. Insimple words, Net Asset Value is the market value of the securities held by the scheme.Since market value of securities changes every day, NAV of a scheme also varies onday to day basis. The NAV per unit is the market value of securities of a scheme dividedby the total number of units of the scheme on any particular date. For example, if themarket value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fundhas issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of thefund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis -daily or weekly - depending on the type of scheme.

What are the different types of mutual fund schemes ?

Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-endedscheme depending on its maturity period.

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchaseon a continuous basis. These schemes do not have a fixed maturity period. Investorscan conveniently buy and sell units at Net Asset Value (NAV) related prices which aredeclared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. Thefund is open for subscription only during a specified period at the time of launch of thescheme. Investors can invest in the scheme at the time of the initial public issue andthereafter they can buy or sell the units of the scheme on the stock exchanges wherethe units are listed. In order to provide an exit route to the investors, some close-ended


funds give an option of selling back the units to the mutual fund through periodicrepurchase at NAV related prices. SEBI Regulations stipulate that at least one of thetwo exit routes is provided to the investor i.e. either repurchase facility or through listingon stock exchanges. These mutual funds schemes disclose NAV generally on weeklybasis.

Schemes according to Investment Objective

A scheme can also be classified as growth scheme, income scheme, or balancedscheme considering its investment objective. Such schemes may be open-ended orclose-ended schemes as described earlier. Such schemes may be classified mainly asfollows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such fundshave comparatively high risks. These schemes provide different options to the investorslike dividend option, capital appreciation, etc. and the investors may choose an optiondepending on their preferences. The investors must indicate the option in the applicationform. The mutual funds also allow the investors to change the options at a later date.Growth schemes are good for investors having a long-term outlook seeking appreciationover a period of time.

Income/Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Suchschemes generally invest in fixed income securities such as bonds, corporate debentures,Government securities and money market instruments. Such funds are less riskycompared to equity schemes. These funds are not affected because of fluctuations inequity markets. However, opportunities of capital appreciation are also limited in suchfunds. The NAVs of such funds are affected because of change in interest rates in thecountry. If the interest rates fall, NAVs of such funds are likely to increase in the shortrun and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemesinvest both in equities and fixed income securities in the proportion indicated in theiroffer documents. These are appropriate for investors looking for moderate growth. Theygenerally invest 40-60% in equity and debt instruments. These funds are also affectedbecause of fluctuations in share prices in the stock markets. However, NAVs of suchfunds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,preservation of capital and moderate income. These schemes invest exclusively in safershort-term instruments such as treasury bills, certificates of deposit, commercial paperand inter-bank call money, government securities, etc. Returns on these schemesfluctuate much less compared to other funds. These funds are appropriate for corporateand individual investors as a means to park their surplus funds for short periods.


Gilt Fund

These funds invest exclusively in government securities. Government securitieshave no default risk. NAVs of these schemes also fluctuate due to change in interestrates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitiveindex, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in thesame weightage comprising of an index. NAVs of such schemes would rise or fall inaccordance with the rise or fall in the index, though not exactly by the same percentagedue to some factors known as “tracking error” in technical terms. Necessary disclosuresin this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which aretraded on the stock exchanges.

What are sector specific funds/schemes ?

These are the funds/schemes which invest in the securities of only those sectors orindustries as specified in the offer documents. e.g. Pharmaceuticals, Software, FastMoving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these fundsare dependent on the performance of the respective sectors/industries. While thesefunds may give higher returns, they are more risky compared to diversified funds. Investorsneed to keep a watch on the performance of those sectors/industries and must exit atan appropriate time. They may also seek advice of an expert.

What are Tax Saving Schemes ?

These schemes offer tax rebates to the investors under specific provisions of theIncome Tax Act, 1961 as the Government offers tax incentives for investment in specifiedavenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched bythe mutual funds also offer tax benefits. These schemes are growth oriented and investpre-dominantly in equities. Their growth opportunities and risks associated are like anyequity-oriented scheme.

What is a Load or no-load Fund ?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, eachtime one buys or sells units in the fund, a charge will be payable. This charge is used bythe mutual fund for marketing and distribution expenses. Suppose the NAV per unit isRs.10. If the entry as well as exit load charged is 1%, then the investors who buy wouldbe required to pay Rs.10.10 and those who offer their units for repurchase to the mutualfund will get only Rs. 9.90 per unit. The investors should take the loads into considerationwhile making investment as these affect their yields/returns. However, the investorsshould also consider the performance track record and service standards of the mutualfund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investorscan enter the fund/scheme at NAV and no additional charges are payable on purchase orsale of units.


Can a mutual fund impose fresh load or increase the load beyond the level mentioned inthe offer documents ?

Mutual funds cannot increase the load beyond the level mentioned in the offerdocument. Any change in the load will be applicable only to prospective investmentsand not to the original investments. In case of imposition of fresh loads or increase inexisting loads, the mutual funds are required to amend their offer documents so that thenew investors are aware of loads at the time of investments.

What is a sales or repurchase/redemption price ?

The price or NAV a unitholder is charged while investing in an open-ended schemeis called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended schemepurchases or redeems its units from the unitholders. It may include exit load, if applicable.

What is an assured return scheme ?

Assured return schemes are those schemes that assure a specific return to theunitholders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by thesponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for theentire period of the scheme or only for a certain period. Some schemes assure returnsone year at a time and they review and change it at the beginning of the next year.

Can a mutual fund change the asset allocation while deploying funds ofinvestors ?

Considering the market trends, any prudent fund managers can change the assetallocation i.e. he can invest higher or lower percentage of the fund in equity or debtinstruments compared to what is disclosed in the offer document. It can be done on ashort term basis on defensive considerations i.e. to protect the NAV. Hence the fundmanagers are allowed certain flexibility in altering the asset allocation considering theinterest of the investors. In case the mutual fund wants to change the asset allocationon a permanent basis, they are required to inform the unitholders and giving them optionto exit the scheme at prevailing NAV without any load.

How to invest in a scheme of a mutual fund ?

Mutual funds normally come out with an advertisement in newspapers publishingthe date of launch of the new schemes. Investors can also contact the agents anddistributors of mutual funds who are spread all over the country for necessary informationand application forms. Forms can be deposited with mutual funds through the agentsand distributors who provide such services. Now a days, the post offices and banks alsodistribute the units of mutual funds. However, the investors may please note that themutual funds schemes being marketed by banks and post offices should not be takenas their own schemes and no assurance of returns is given by them. The only role ofbanks and post offices is to help in distribution of mutual funds schemes to theinvestors.


Investors should not be carried away by commission/gifts given by agents/distributorsfor investing in a particular scheme. On the other hand they must consider the trackrecord of the mutual fund and should take objective decisions.

Can non-resident Indians (NRIs) invest in mutual funds ?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in thisrespect are given in the offer documents of the schemes.

How much should one invest in debt or equity oriented schemes ?

An investor should take into account his risk taking capacity, age factor, financialposition, etc. As already mentioned, the schemes invest in different type of securitiesas disclosed in the offer documents and offer different returns and risks. Investors mayalso consult financial experts before taking decisions. Agents and distributors may alsohelp in this regard.

How to fill up the application form of a mutual fund scheme ?

An investor must mention clearly his name, address, number of units applied forand such other information as required in the application form. He must give his bankaccount number so as to avoid any fraudulent encashment of any cheque/draft issuedby the mutual fund at a later date for the purpose of dividend or repurchase. Any changesin the address, bank account number, etc at a later date should be informed to themutual fund immediately.

What should an investor look into an offer document ?

An abridged offer document, which contains very useful information, is required tobe given to the prospective investor by the mutual fund. The application form forsubscription to a scheme is an integral part of the offer document. SEBI has prescribedminimum disclosures in the offer document. An investor, before investing in a scheme,should carefully read the offer document. Due care must be given to portions relating tomain features of the scheme, risk factors, initial issue expenses and recurring expensesto be charged to the scheme, entry or exit loads, sponsor’s track record, educationalqualification and work experience of key personnel including fund managers, performanceof other schemes launched by the mutual fund in the past, pending litigations and penaltiesimposed, etc.

When will the investor get certificate or statement of account after investing in amutual fund ?

Mutual funds are required to despatch certificates or statements of accounts withinsix weeks from the date of closure of the initial subscription of the scheme. In case ofclose-ended schemes, the investors would get either a demat account statement or unitcertificates as these are traded in the stock exchanges. In case of open-ended schemes,a statement of account is issued by the mutual fund within 30 days from the date ofclosure of initial public offer of the scheme. The procedure of repurchase is mentioned inthe offer document.

How long will it take for transfer of units after purchase from stock markets in caseof close-ended schemes ?

According to SEBI Regulations, transfer of units is required to be done within thirtydays from the date of lodgment of certificates with the mutual fund.


As a unitholder, how much time will it take to receive dividends/repurchaseproceeds ?

A mutual fund is required to despatch to the unitholders the dividend warrants within30 days of the declaration of the dividend and the redemption or repurchase proceedswithin 10 working days from the date of redemption or repurchase request made by theunitholder.

In case of failures to despatch the redemption/repurchase proceeds within thestipulated time period, Asset Management Company is liable to pay interest as specifiedby SEBI from time to time (15% at present).

Can a mutual fund change the nature of the scheme from the one specified in theoffer document ?

Yes. However, no change in the nature or terms of the scheme, known as fundamentalattributes of the scheme e.g.structure, investment pattern, etc. can be carried out unlessa written communication is sent to each unitholder and an advertisement is given in oneEnglish daily having nationwide circulation and in a newspaper published in the languageof the region where the head office of the mutual fund is situated. The unitholders havethe right to exit the scheme at the prevailing NAV without any exit load if they do notwant to continue with the scheme. The mutual funds are also required to follow similarprocedure while converting the scheme from close-ended to open-ended scheme and incase of change in sponsor.

How will an investor come to know about the changes, if any, which may occur inthe mutual fund?

There may be changes from time to time in a mutual fund. The mutual funds arerequired to inform any material changes to their unitholders. Apart from it, many mutualfunds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once intwo years. In the meantime, new investors are informed about the material changes byway of addendum to the offer document till the time offer document is revised andreprinted.

How to know the performance of a mutual fund scheme ?

The performance of a scheme is reflected in its net asset value (NAV) which isdisclosed on daily basis in case of open-ended schemes and on weekly basis in case ofclose-ended schemes. The NAVs of mutual funds are required to be published innewspapers. The NAVs are also available on the web sites of mutual funds. All mutualfunds are also required to put their NAVs on the web site of Association of Mutual Fundsin India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutualfunds at one place

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last sixmonths, 1 year, 3 years, 5 years and since inception of schemes. Investors can alsolook into other details like percentage of expenses of total assets as these have anaffect on the yield and other useful information in the same half-yearly format.


The mutual funds are also required to send annual report or abridged annual reportto the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes arebeing published by the financial newspapers on a weekly basis. Apart from these, manyresearch agencies also publish research reports on performance of mutual funds includingthe ranking of various schemes in terms of their performance. Investors should studythese reports and keep themselves informed about the performance of various schemesof different mutual funds.

Investors can compare the performance of their schemes with those of other mutualfunds under the same category. They can also compare the performance of equity orientedschemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide whento enter or exit from a mutual fund scheme.

How to know where the mutual fund scheme has invested money mobilised fromthe investors ?

The mutual funds are required to disclose full portfolios of all of their schemes onhalf-yearly basis which are published in the newspapers. Some mutual funds send theportfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures,money market instruments, government securities, etc. and their quantity, market valueand % to NAV. These portfolio statements are also required to disclose illiquid securitiesin the portfolio, investment made in rated and unrated debt securities, non-performingassets (NPAs), etc.

Some of the mutual funds send newsletters to the unitholders on quarterly basiswhich also contain portfolios of the schemes.

Is there any difference between investing in a mutual fund and in an initial publicoffering (IPO) of a company ?

Yes, there is a difference. IPOs of companies may open at lower or higher price thanthe issue price depending on market sentiment and perception of investors. However, inthe case of mutual funds, the par value of the units may not rise or fall immediately afterallotment. A mutual fund scheme takes some time to make investment in securities.NAV of the scheme depends on the value of securities in which the funds have beendeployed.

If schemes in the same category of different mutual funds are available, shouldone choose a scheme with lower NAV ?

Some of the investors have the tendency to prefer a scheme that is available atlower NAV compared to the one available at higher NAV. Sometimes, they prefer a newscheme which is issuing units at Rs. 10 whereas the existing schemes in the samecategory are available at much higher NAVs. Investors may please note that in case ofmutual funds schemes, lower or higher NAVs of similar type schemes of different mutualfunds have no relevance. On the other hand, investors should choose a scheme based


on its merit considering performance track record of the mutual fund, service standards,professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90.Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 ineach of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units(9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both theschemes perform equally good and it is reflected in their NAVs. NAV of scheme A wouldgo up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investmentswould be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs.9900 in scheme B (100*99). The investor would get the same return of 10% on hisinvestment in each of the schemes. Thus, lower or higher NAV of the schemes andallotment of higher or lower number of units within the amount an investor is willing toinvest, should not be the factors for making investment decision. Likewise, if a newequity oriented scheme is being offered at Rs.10 and an existing scheme is available forRs. 90, should not be a factor for decision making by the investor. Similar is the casewith income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV maygive higher returns compared to a scheme which is available at lower NAV but is notmanaged efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme athigher NAV may not fall as much as inefficiently managed scheme with lower NAV.Therefore, the investor should give more weightage to the professional management ofa scheme instead of lower NAV of any scheme. He may get much higher number of unitsat lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

How to choose a scheme for investment from a number of schemes available ?

As already mentioned, the investors must read the offer document of the mutualfund scheme very carefully. They may also look into the past track record of performanceof the scheme or other schemes of the same mutual fund. They may also compare theperformance with other schemes having similar investment objectives. Though pastperformance of a scheme is not an indicator of its future performance and good performancein the past may or may not be sustained in the future, this is one of the important factorsfor making investment decision. In case of debt oriented schemes, apart from lookinginto past returns, the investors should also see the quality of debt instruments which isreflected in their rating. A scheme with lower rate of return but having investments inbetter rated instruments may be safer. Similarly, in equities schemes also, investorsmay look for quality of portfolio. They may also seek advice of experts.

Are the companies having names like mutual benefit the same as mutual fundsschemes ?

Investors should not assume some companies having the name “mutual benefit” asmutual funds. These companies do not come under the purview of SEBI. On the otherhand, mutual funds can mobilise funds from the investors by launching schemes onlyafter getting registered with SEBI as mutual funds.

Is the higher net worth of the sponsor a guarantee for better returns ?

In the offer document of any mutual fund scheme, financial performance includingthe net worth of the sponsor for a period of three years is required to be given. The only


purpose is that the investors should know the track record of the company which hassponsored the mutual fund. However, higher net worth of the sponsor does not meanthat the scheme would give better returns or the sponsor would compensate in case theNAV falls.

Where can an investor look out for information on mutual funds ?

Almost all the mutual funds have their own web sites. Investors can also access theNAVs, half-yearly results and portfolios of all mutual funds at the web site of Associationof mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published usefulliterature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to “MutualFunds” section for information on SEBI regulations and guidelines, data on mutual funds,draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in theannual reports of SEBI available on the web site, a lot of information on mutual funds isgiven.

There are a number of other web sites which give a lot of information of variousschemes of mutual funds including yields over a period of time. Many newspapers alsopublish useful information on mutual funds on daily and weekly basis. Investors mayapproach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested ?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailingNAV after adjustment of expenses. Unitholders are entitled to receive a report on windingup from the mutual funds which gives all necessary details.

How can the investors redress their complaints ?

Investors would find the name of contact person in the offer document of the mutualfund scheme whom they may approach in case of any query, complaints or grievances.Trustees of a mutual fund monitor the activities of the mutual fund. The names of thedirectors of asset management company and trustees are also given in the offerdocuments. Investors can also approach SEBI for redressal of their complaints. Onreceipt of complaints, SEBI takes up the matter with the concerned mutual fund andfollows up with them till the matter is resolved.

What is the procedure for registering a mutual fund with SEBI ?

An applicant proposing to sponsor a mutual fund in India must submit an applicationin Form A along with a fee of Rs. 25,000. The application is examined and once thesponsor satisfies certain conditions such as being in the financial services businessand possessing positive net worth for the last five years, having net profit in three out ofthe last five years and possessing the general reputation of fairness and integrity in allbusiness transactions, it is required to complete the remaining formalities for setting upa mutual fund. These include inter alia, executing the trust deed and investmentmanagement agreement, setting up a trustee company/board of trustees comprisingtwo- thirds independent trustees, incorporating the asset management company (AMC),contributing to at least 40% of the net worth of the AMC and appointing a custodian.Upon satisfying these conditions, the registration certificate is issued subject to thepayment of registration fees of Rs. 25.00 lacs.

DERIVATIVES — FREQUENTLY ASKED QUESTIONS*

56

* Reproduced from the website of SEBI (www.sebi.gov.in)

What are Derivatives ?

The term “Derivative” indicates that it has no independent value, i.e. its value isentirely “derived” from the value of the underlying asset. The underlying asset can besecurities, commodities, bullion, currency, live stock or anything else. In other words,Derivative means a forward, future, option or any other hybrid contract of pre determinedfixed duration, linked for the purpose of contract fulfillment to the value of a specifiedreal or financial asset or to an index of securities.

With Securities Laws (Second Amendment) Act,1999, Derivatives has been includedin the definition of Securities. The term Derivative has been defined in Securities Contracts(Regulations) Act, as:-

A Derivative includes

(a) a security derived from a debt instrument, share, loan, whether secured orunsecured, risk instrument or contract for differences or any other form ofsecurity;

(b) a contract which derives its value from the prices, or index of prices, of underlyingsecurities;

What is a Futures Contract ?

Futures Contract means a legally binding agreement to buy or sell the underlyingsecurity on a future date. Future contracts are the organized/standardized contracts interms of quantity, quality (in case of commodities), delivery time and place for settlementon any date in future. The contract expires on a pre-specified date which is called theexpiry date of the contract. On expiry, futures can be settled by delivery of the underlyingasset or cash. Cash settlement entails paying/receiving the difference between the priceat which the contract was entered and the price of the underlying asset at the time ofexpiry of the contract.

What is an Option Contract ?

Options Contract is a type of Derivatives Contract which gives the buyer/holder ofthe contract the right (but not the obligation) to buy/sell the underlying asset at apredetermined price within or at end of a specified period. The buyer / holder of the optionpurchases the right from the seller/writer for a consideration which is called the premium.The seller/writer of an option is obligated to settle the option as per the terms of thecontract when the buyer/holder exercises his right. The underlying asset could includesecurities, an index of prices of securities etc.


Under Securities Contracts (Regulations) Act,1956 ‘options in securities’ has beendefined as “option in securities” means a contract for the purchase or sale of a right tobuy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, ateji mandi, a galli, a put, a call or a put and call in securities;

An Option to buy is called Call option and option to sell is called Put option. Further,if an option that is exercisable on or before the expiry date is called American option andone that is exercisable only on expiry date, is called European option. The price at whichthe option is to be exercised is called Strike price or Exercise price.

Therefore, in the case of American options the buyer has the right to exercise theoption at anytime on or before the expiry date. This request for exercise is submitted tothe Exchange, which randomly assigns the exercise request to the sellers of the options,who are obligated to settle the terms of the contract within a specified time frame.

As in the case of futures contracts, option contracts can be also be settled bydelivery of the underlying asset or cash. However, unlike futures cash settlement inoption contract entails paying/receiving the difference between the strike price/exerciseprice and the price of the underlying asset either at the time of expiry of the contract orat the time of exercise / assignment of the option contract.

What are Index Futures and Index Option Contracts ?

Futures contract based on an index i.e. the underlying asset is the index, are knownas Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30Index. These contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known asIndex options contract. However, unlike Index Futures, the buyer of Index Option Contractshas only the right but not the obligation to buy / sell the underlying index on expiry. IndexOption Contracts are generally European Style options i.e. they can be exercised /assigned only on the expiry date.

An index, in turn derives its value from the prices of securities that constitute theindex and is created to represent the sentiments of the market as a whole or of aparticular sector of the economy (Sectoral Index).

By its very nature, index cannot be delivered on maturity of the Index futures orIndex option contracts therefore, these contracts are essentially cash settled on Expiry.

What is the structure of Derivative Markets in India ?

Derivative trading in India can take place either on a separate and independentDerivative Exchange or on a separate segment of an existing Stock Exchange. DerivativeExchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI actsas the oversight regulator. The clearing & settlement of all trades on the DerivativeExchange/Segment would have to be through a Clearing Corporation/House, which isindependent in governance and membership from the Derivative Exchange/Segment.

What is the regulatory framework of Derivatives markets in India ?

With the amendment in the definition of ‘securities’ under SC(R)A (to include derivativecontracts in the definition of securities), derivatives trading takes place under the


provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities andExchange Board of India Act, 1992.

Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory frameworkfor derivative trading in India. SEBI has also framed suggestive bye-law for DerivativeExchanges/Segments and their Clearing Corporation/House which lays down theprovisions for trading and settlement of derivative contracts. The Rules, Bye-laws &Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. SEBI has also laid theeligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House.The eligibility conditions have been framed to ensure that Derivative Exchange/Segment& Clearing Corporation/House provide a transparent trading environment, safety & integrityand provide facilities for redressal of investor grievances. Some of the important eligibilityconditions are :

— Derivative trading to take place through an on-line screen based Trading System.

— The Derivatives Exchange/Segment shall have on-line surveillance capabilityto monitor positions, prices, and volumes on a real time basis so as to determarket manipulation.

— The Derivatives Exchange/ Segment should have arrangements for disseminationof information about trades, quantities and quotes on a real time basis throughatleast two information vending networks, which are easily accessible to investorsacross the country.

— The Derivatives Exchange/Segment should have arbitration and investorgrievances redressal mechanism operative from all the four areas / regions ofthe country.

— The Derivatives Exchange/Segment should have satisfactory system ofmonitoring investor complaints and preventing irregularities in trading.

— The Derivative Segment of the Exchange would have a separate InvestorProtection Fund.

— The Clearing Corporation/House shall perform full novation, i.e., the ClearingCorporation/House shall interpose itself between both legs of every trade,becoming the legal counterparty to both or alternatively should provide anunconditional guarantee for settlement of all trades.

— The Clearing Corporation/House shall have the capacity to monitor the overallposition of Members across both derivatives market and the underlying securitiesmarket for those Members who are participating in both.

— The level of initial margin on Index Futures Contracts shall be related to the riskof loss on the position. The concept of value-at-risk shall be used in calculatingrequired level of initial margins. The initial margins should be large enough tocover the one-day loss that can be encountered on the position on 99% of thedays.

— The Clearing Corporation/House shall establish facilities for electronic fundstransfer (EFT) for swift movement of margin payments.

— In the event of a Member defaulting in meeting its liabilities, the ClearingCorporation/House shall transfer client positions and assets to another solventMember or close-out all open positions.


— The Clearing Corporation/House should have capabilities to segregate initialmargins deposited by Clearing Members for trades on their own account and onaccount of his client. The Clearing Corporation/House shall hold the clients’margin money in trust for the client purposes only and should not allow itsdiversion for any other purpose.

— The Clearing Corporation/House shall have a separate Trade Guarantee Fundfor the trades executed on Derivative Exchange / Segment.

Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSEand the F&O Segment of NSE.

What derivative contracts are permitted by SEBI ?

Derivative products have been introduced in a phased manner starting with IndexFutures Contracts in June 2000. Index Options and Stock Options were introduced inJune 2001 and July 2001 followed by Stock Futures in November 2001.

What is minimum contract size ?

The Standing Committee on Finance, a Parliamentary Committee, at the time ofrecommending amendment to Securities Contract (Regulation) Act, 1956 hadrecommended that the minimum contract size of derivative contracts traded in the IndianMarkets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBIhas specified that the value of a derivative contract should not be less than Rs. 2 Lakhat the time of introducing the contract in the market.

What is the lot size of a contract ?

Lot size refers to number of underlying securities in one contract. Additionally, forstock specific derivative contracts SEBI has specified that the lot size of the underlyingindividual security should be in multiples of 100 and fractions, if any, should be roundedof to the next higher multiple of 100. This requirement of SEBI coupled with the requirementof minimum contract size forms the basis of arriving at the lot size of a contract.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimumcontract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

What is the margining system in the derivative markets ?

Two type of margins have been specified :

— Initial Margin — Based on 99% VaR and worst case loss over a specified horizon,which depends on the time in which Mark to Market margin is collected.

— Mark to Market Margin (MTM) — collected in cash for all Futures contracts andadjusted against the available Liquid Networth for option positions. In the caseof Futures Contracts MTM may be considered as Mark to Market Settlement.

Dr. L.C Gupta Committee had recommended that the level of initial margin requiredon a position should be related to the risk of loss on the position. The concept of value-at-risk should be used in calculating required level of initial margins. The initial marginsshould be large enough to cover the one day loss that can be encountered on theposition on 99% of the days. The recommendations of the Dr. L.C Gupta Committee


have been a guiding principle for SEBI in prescribing the margin computation & collectionmethodology to the Exchanges. With the introduction of various derivative products inthe Indian securities Markets, the margin computation methodology, especially for initialmargin, has been modified to address the specific risk characteristics of the product.The margining methodology specified is consistent with the margining system used indeveloped financial & commodity derivative markets worldwide. The exchanges weregiven the freedom to either develop their own margin computation system or adapt thesystems available internationally to the requirements of SEBI.

A portfolio based margining approach which takes an integrated view of the riskinvolved in the portfolio of each individual client comprising of his positions in all DerivativeContracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures,has been prescribed. The initial margin requirements are required to be based on theworst case loss of a portfolio of an individual client to cover 99% VaR over a specifiedtime horizon.

The Initial Margin is Higher of(Worst Scenario Loss +Calendar Spread Charges)

OrShort Option Minimum Charge

The worst scenario loss are required to be computed for a portfolio of a client and iscalculated by valuing the portfolio under 16 scenarios of probable changes in the valueand the volatility of the Index/ Individual Stocks. The options and futures positions in aclient’s portfolio are required to be valued by predicting the price and the volatility of theunderlying over a specified horizon so that 99% of times the price and volatility sopredicted does not exceed the maximum and minimum price or volatility scenario. Inthis manner initial margin of 99% VaR is achieved. The specified horizon is dependenton the time of collection of mark to market margin by the exchange.

The probable change in the price of the underlying over the specified horizon i.e.‘price scan range’, in the case of Index futures and Index option contracts are based onthree standard deviation (3s ) where ‘s ’ is the volatility estimate of the Index. Thevolatility estimate ‘s ’, is computed as per the Exponentially Weighted Moving Averagemethodology. This methodology has been prescribed by SEBI. In case of option andfutures on individual stocks the price scan range is based on three and a half standarddeviation (3.5s ) where ‘s ’ is the daily volatility estimate of individual stock.

For Index Futures and Stock futures it is specified that a minimum margin of 5%and 7.5% would be charged. This means if for stock futures the 3.5s value falls below7.5% then a minimum of 7.5% should be charged. This could be achieved by adjustingthe price scan range.

The probable change in the volatility of the underlying i.e. ‘volatility scan range’ isfixed at 4% for Index options and is fixed at 10% for options on Individual stocks. Thevolatility scan range is applicable only for option products.

Calendar spreads are offsetting positions in two contracts in the same underlyingacross different expiry. In a portfolio based margining approach all calendar-spreadpositions automatically get a margin offset. However, risk arising due to difference incost of carry or the ‘basis risk’ needs to be addressed. It is therefore specified that a


calendar spread charge would be added to the worst scenario loss for arriving at theinitial margin. For computing calendar spread charge, the system first identifies spreadpositions and then the spread charge which is 0.5% per month on the far leg of thespread with a minimum of 1% and maximum of 3%. Further, in the last three days of theexpiry of the near leg of spread, both the legs of the calendar spread would be treated asseparate individual positions.

In a portfolio of futures and options, the non-linear nature of options make shortoption positions most risky. Especially, short deep out of the money options, which arehighly susceptible to, changes in prices of the underlying. Therefore a short optionminimum charge has been specified. The short option minimum charge is 5% and 7.5%of the notional value of all short Index option and stock option contracts respectively.The short option minimum charge is the initial margin if the sum of the worst –scenarioloss and calendar spread charge is lower than the short option minimum charge.

To calculate volatility estimates the exchange are required to use the methodologyspecified in the Prof J.R Varma Committee Report on Risk Containment Measures forIndex Futures. Further, to calculated the option value the exchanges can use standardoption pricing models - Black-Scholes, Binomial, Merton, Adesi-Whaley.

The initial margin is required to be computed on a real time basis and has twocomponents:-

— The first is creation of risk arrays taking prices at discreet times taking latestprices and volatility estimates at the discreet times, which have been specified.

— The second is the application of the risk arrays on the actual portfolio positionsto compute the portfolio values and the initial margin on a real time basis.

The initial margin so computed is deducted form the available Liquid Networth on areal time basis.

Mark to Market Margin

Options – The value of the option are calculated as the theoretical value of theoption times the number of option contracts (positive for long options and negetivefor short options). This Net Option Value is added to the Liquid Networth of theClearing member. Thus MTM gains and losses on options are adjusted against theavailable liquid networth. The net option value is computed using the closing price ofthe option and are applied the next day.

Futures – The system computes the closing price of each series, which is used forcomputing mark to market settlement for cumulative net position. This margin iscollected on T+1 in cash. Therefore, the exchange charges a higher initial margin bymultiplying the price scan range of 3s & 3.5s with square root of 2, so that the initialmargin is adequate to cover 99% VaR over a two days horizon.

MARGIN COLLECTION

Initial Margin - is adjusted from the available Liquid Networth of the Clearing Memberon an online real time basis.

Marked to Market Margins

Futures contracts : The open positions (gross against clients and net of proprietary/self trading) in the futures contracts for each member is marked to market to the


daily settlement price of the Futures contracts at the end of each trading day. Thedaily settlement price at the end of each day is the weighted average price of thelast half an hour of the futures contract. The profits / losses arising from the differencebetween the trading price and the settlement price are collected / given to all theclearing members.

Option Contracts : The marked to market for Option contracts is computed andcollected as part of the SPAN Margin in the form of Net Option Value. The SPANMargin is collected on an online real time basis based on the data feeds given to thesystem at discrete time intervals.

Client Margins

Clearing Members and Trading Members are required to collect initial margins fromall their clients. The collection of margins at client level in the derivative markets isessential as derivatives are leveraged products and non-collection of margins at theclient level would provided zero cost leverage. In the derivative markets all moneypaid by the client towards margins is kept in trust with the Clearing House/ Clearingcorporation and in the event of default of the Trading or Clearing Member the amountspaid by the client towards margins are segregated and not utilised towards thedefault of the member.

Therefore, Clearing members are required to report on a daily basis details in respectof such margin amounts due and collected from their Trading members / clientsclearing and settling through them. Trading members are also required to report on adaily basis details of the amount due and collected from their clients. The reportingof the collection of the margins by the clients is done electronically through thesystem at the end of each trading day. The reporting of collection of client levelmargins plays a crucial role not only in ensuring that members collect margin fromclients but it also provides the clearing corporation with a record of the quantum offunds it has to keep in trust for the clients.

What are the position limits in Derivative Products ?

The position limits specified are as under –

Client / Customer level position limits

For index based products there is a disclosure requirement for clients whose positionexceeds 15% of the open interest of the market in index products.

For stock specific products the gross open position across all derivative contractson a particular underlying of a customer/client should not exceed the higher of –

— 1% of the free float market capitalisation (in terms of number of shares).

or

— 5% of the open interest in the derivative contracts on a particular underlyingstock (in terms of number of contracts).

This position limits are applicable on the combine position in all derivative contractson an underlying stock at an exchange. The exchanges are required to achieveclient level position monitoring in stages.


Trading Member Level Position Limits

For Index products the Trading Member position limits are Rs. 100 crore or 15% ofthe open interest whichever is higher.

For stock specific products the trading member position limit are at 7.5% of theopen interest or Rs 50 crore whichever is higher for derivative contract in a particularunderlying at an exchange.

It is also specified that once a member reaches the position limit in a particularunderlying then the member shall be permitted to take only offsetting positions(which result in lowering the open position of the member) in derivative contracts onthat underlying. In the event that the position limit is breached due to the reductionin the overall open interest in the market, the member shall be permitted to take onlyoffsetting positions (which result in lowering the open position of the member) inderivative contract in that underlying and no fresh positions shall be permitted. Theposition limit at trading member level are required to be be computed on a grossbasis across all clients of the Trading member.

Market wide limits

There are no market wide limits for index products. However for stock specificproducts the market wide limit of open positions (in terms of the number of underlyingstock) on an option and futures contract on a particular underlying stock would belower of –

— 30 times the average number of shares traded daily, during the previous calendarmonth, in the cash segment of the Exchange,

or

— 10% of the number of shares held by non-promoters i.e. 10% of the free float, interms of number of shares of a company.

It is further specified that when the total open interest in a contract reaches 80% ofthe market wide limit in that contract, the exchanges would double the price scanrange and volatility scan range specified. The exchanges are required to continuouslyreview the impact of this measure and take further proactive risk containmentmeasures as may be appropriate, including, further increases in the scan rangesand levying additional margins.

What measures have been specified by SEBI to protect the rights of investor in theDerivative Market ?

The measures specified by SEBI include:

1. Investor’s money has to be kept separate at all levels and is permitted to beused only against the liability of the Investor and is not available to the tradingmember or clearing member or even any other investor.

2. The Trading Member is required to provide every investor with a risk disclosuredocument which will disclose the risks associated with the derivatives tradingso that investors can take a conscious decision to trade in derivatives.


3. Investor would get the contract note duly time stamped for receipt of the orderand execution of the order. The order will be executed with the identity of theclient and without client ID order will not be accepted by the system. The investorcould also demand the trade confirmation slip with his ID in support of thecontract note. This will protect him from the risk of price favour, if any, extendedby the Member.

4. In the derivative markets all money paid by the Investor towards margins on allopen positions is kept in trust with the Clearing House/ Clearing corporation andin the event of default of the Trading or Clearing Member the amounts paid bythe client towards margins are segregated and not utilised towards the default ofthe member. However, in the event of a default of a member, losses suffered bythe Investor, if any, on settled / closed out position are compensated from theInvestor Protection Fund, as per the rules, bye-laws and regulations of thederivative segment of the exchanges.

CENTRAL LISTING AND DELISTING OF SECURITIES

I. CENTRAL LISTING AUTHORITY

In exercise of the powers conferred by Clause (d) of Sub-section (2) of Section 11and Sub-section(2) of Section 11A read with Section 30 of the Securities and ExchangeBoard of India Act, 1992, the Board notified the Securities and Exchange Board of India(Central Listing Authority) Regulations, 2003 on February 13, 2003.

SEBI, through its SEBI (Central Listing Authority) Regulations, 2003 has providedfor establishment of a self-regulatory authority – Central Listing Authority (CLA). Thefunctions of CLA will include processing the application made by any body corporate,mutual fund or collective investment scheme for the letter of recommendation for listing;and making recommendations as to listing conditions. The CLA may also perform anyother function as may be specified by SEBI from time to time.

Constitution

The CLA shall consist of a President, Vice-President and not more than nine othermembers, who will be appointed by SEBI and will be drawn from the judiciary, lawyers,academicians, exchanges, persons having expertise in securities market regulation,financial experts and investor associations. At least four members shall be representativesof stock exchanges but shall not draw any remuneration from the CLA. The remunerationand the terms and conditions of appointment of the President and the Members shall bespecified by SEBI.

Term of office

The President and members shall have a term of 3 years and shall not qualify for re-appointment as President or members of CLA if the person has already been a memberfor two terms of 3 years each. No member / President shall hold office after he hasattained the age of 65 years.

Quorum

The quorum for proceedings of the CLA shall be minimum four members. Whileconsidering an application for letter of recommendation, at least more than 50% of themembers present shall be other than the representatives of stock exchanges.

Fund

CLA shall constitute a Central Listing Authority General Fund. Any processing feesreceived by the CLA and all sums received from other sources as decided by SEBI shallbe credited to the fund. The fund shall be utilised for paying the remuneration to President/members / employees of the CLA and also meeting the expenses of the CLA in dischargeof its functions.

Application for letter of recommendation

A company seeking listing of fresh securities would make an application accompaniedby the specified fees in a prescribed format first to the CLA for obtaining the letter of

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recommendation. The CLA may direct the applicant to furnish such further information /clarification as may be required for the purpose of processing the application. CLA shallgive its opinion within 30 days of making application / furnishing information. However,the Authority shall not refuse to grant the letter of recommendation unless an opportunityis given to the applicant for making representation. Once the order is signed, the CLAshall cause it to be communicated to the applicant and the exchange(s) where listingwas sought.

Power to direct listing

In case CLA refuses to grant the letter of recommendation, the applicant may within10 days of receipt of refusal make a written submission to the SEBI to direct CLA togrant the letter of recommendation. SEBI, within 15 days of receipt of such submissionshall take a decision. In case it directs the CLA to grant the letter of recommendation,the Central Listing Authority shall grant the letter within 7 days.

Refusal of listing by exchange & Appeal

The stock exchange would independently decide on whether to list the security ornot with reference to its listing criteria. A body corporate, mutual fund or collectiveinvestment scheme may prefer an appeal to the Securities Appellate Tribunal as providedin section 22A of the Securities Contracts (Regulation) Act, 1956 against the decision ofthe exchange refusing the listing.

Listing conditions

The Authority may from time to time, review the Listing Conditions or the provisionsof the Listing Agreement, for the purpose of making recommendations to SEBI for theiramendment.

Power to regulate its own procedure

Subject to the provisions of the Regulations and with the prior approval of SEBI,CLA shall have the power to regulate its own procedure and frame operational guidelinesfor the performance of its functions.

Power of SEBI to supersede CLA

If SEBI is of the opinion that CLA is unable to discharge its functions and duties orif the circumstances so require, SEBI may supersede CLA.

Reports

CLA shall furnish returns and statements to SEBI in the form and manner specifiedby it. CLA shall also, within 30 days after the end of each calendar quarter, submit areport to SEBI, giving a true account of its activities during the previous quarter.

II. SEBI (Delisting of Securities) Guidelines, 2003 — A Discussion

The Securities and Exchange Board of India (Delisting of Securities Guidelines),2003 were issued under Section 11(1) of SEBI Act, 1992, read with sub-section (2) of


Section 11A of SEBI Act, with the objective to protect the interest of investors in thesecurities market. The Guidelines deals with Voluntary and Compulsory delisting.

Applicability

As per Guideline 4 of the SEBI Delisting Guidelines 2003, the guidelines applies todelisting of securities of companies and specifically apply to: -

(a) Voluntary delisting being sought by the promoters of a company;

(b) Any acquisition of shares of the company (either by a promoter or by any otherperson) or scheme or arrangement, by whatever name referred to. consequentto which the public shareholding falls below the minimum limit specified in thelisting conditions or listing agreement that may result in delisting ofsecurities;

(c) Promoters of the companies who voluntarily seek to delist their securities fromall or some of the stock exchanges;

(d) Cases where a person in control of the management is seeking to consolidatehis holdings in a company, in a manner which would result in the publicshareholding in the company falling below the limit specified in the listingconditions or in the listing agreement that may have the effect of companybeing delisted;

(e) Companies which may be compulsorily delisted by the stock exchanges.

As can be seen from above that four modes of voluntary delisting are prescribedunder (a) to (d) of Guideline 4 of Delisting Guidelines, 2003. Further an additional note ofdelisting is covered under Guideline 17 of Delisting Guidelines, 2003 which specifiesthat:

In case of rights issue, allotment to the promoters or the persons in control of themanagement shall be allowed even if they subscribe to unsubscribed portion which mayresult in public shareholding falling below the permissible minimum level. It is providedthat the adequate disclosures have been made in the offer document to that effect. It isfurther provided that they agree to buy out the remaining holders at the price of rightsissue or make an offer for sale to bring the public shareholding at the level specified inthe listing conditions or listing agreement to remain listed.

In case the rights issue is not fully subscribed, which may result in the publicshareholding falling below the permissible minimum level as specified in the listingcondition or listing agreement, the promoter(s) of the company shall be required to delistby providing an exit opportunity in the manner specified in Guideline 17.1 of DelisitngGuidelines, 2003 or may be required to make offer for sale of their holdings so that thepublic shareholding is raised to the minimum, level specified in the listing agreement orin the listing conditions within a period of 3 months.

The term “Rights issue” is defined in clause 1.2.1 (xxv) of SEBI (Disclosure andInvestor Protection) Guidelines 2000. It means an issue of capital under sub-section (1)of Section 81 of the Companies Act, 1956, to be offered to the existing shareholders ofthe company through a Letter of Offer.


Thus, Delisting Guidelines 2003 applies to any event/action on the part of Corporateswhich necessitates/results into delisting of securities from stock exchange(s). DelistingGuidelines, 2003 specifically applies to the modes specified in (a) to (e) above.

Para (a) and (c) above seems to convey one and the same meaning, i.e. When thepromoters of a company are seeking voluntary delisting. It may be noted here that theseguidelines envisages that public shareholding is not reduced below minimum level.

Para (b) provides for two situations:

(i) when as a result of acquisition of shares of the company (either by a promoteror by any other person), as a result of which the public shareholding falls belowthe minimum limit specified in the listing conditions or listing agreement whichmay result into delisting of securities;

(ii) when as a result of, acquisition of shares of the company pursuant to anyScheme or arrangement, by whatever name called, the public shareholding fallsbelow the minimum limit specified in the listing conditions or listing agreementwhich may result into delisting of securities;

Both situation of Para (b) above are analyzed here under:

Delisting Guidelines, 2003 do not specifically provide procedure for this mode ofdelisting.

(i) In case of acquisition by promoter or any other person, SEBI (SubstantialAcquisition of Shares and Takeovers) Regulations, 1997 applies and accordinglywhile making Public Announcement under Takeover Regulations, acquirer maydeclare its intention to delist securities after acquisition. After acquisition underTakeover Regulations is complete, if securities of the company continue to belisted with BSE/NSE then no exit offer under Delisting Guidelines, 2003 needsto be made And in case, after acquisition under takeover regulations is completed,if securities of the company to be delisted from all stock exchanges, includingBSE & NSE, then exit offer under Delisting Guidelines, 2003 needs to be made.

(ii) In case of scheme of merger, amalgamation or arrangement of listed companywith unlisted company, it is not clear that what exit price, the shareholders ofTransferor Company will get? Whether exit price is to be determined as perDelisting Guidelines, 2003 or as per exchange ratio under the scheme orarrangement? However it can be stated that, in such scheme or arrangement,the exit price as per Delisting Guidelines, 2003 will apply, since it is specificallystated under Delising Guidelines, 2003 that it applies to delisting through anyscheme or arrangement. It may also be noted that in case of shares of the listedcompany which are frequently traded, the pricing norms (exit price) varies underthe Takeover regulations and under the Delisting Guidelines 2003.

Para (d) : If the person in control of the management is seeking to consolidate hisholdings in a company, in a manner which would result in the public shareholding in thecompany falling below the limit specified in the listing conditions or in the listing agreementwhich may have the effect of company being delisted;

It is clarified in Delisting Guidelines, 2003 itself that there shall not be any compulsionfor the existing company to remain listed on any stock exchange merely because it is a


regional stock exchange. In other words, it can get delisted even from regional stockexchange.

Eligibility Criteria for Voluntary Deiisting

1. The securities of the company have been listed for a minimum period of 3 yearson any stock exchange.

2. A company, which has a convertible instrument outstanding, shall not be permittedto delist its equity shares, till the exercise of the conversion options.

3. A company may delist one or all of its class of securities. However, if the equityshares of a company are delisted, the fixed income securities may continue toremain listed on the stock exchange.

4. Determine an exit price in accordance with the book building process describedin the Delisting Guidelines.

Important Conditions for Voluntary Delisting

1. Company is not permitted to use the buy-back provision to delist its securities.

2. The amount of consideration for the tendered and accepted securities shall besettled in cash. The payment of consideration for delisting of securities shall bepaid in cash by the promoter or acquirer.

3. Where securities are proposed to be delisted from all the stock exchanges, anexit opportunity has been given to the investors for the purpose of which anexit price shall be determined in accordance with the “book building process”described in clauses 7 to 10 and 13 and 14 of the Delisting Guidelines, 2003. Itmay be noted that Clause 7 deals with Public announcement, Clause 8 dealswith Exit price for voluntary delisting,Clause 9 deals with rights of promoters,Clause 10 deals with Public Announcement of final price, Clause 13 deals withpayment of consideration which shall be paid in cash by the promoter or acquirer,and Clause 14 deals with delisting of one or all class of securities.

4. In case of partly paid-up securities, the price determined by the book buildingprocess shall be applicable to the extent the call has been made and paid.

5. In the case of infrequently traded securities the offer price shall be as perregulation 20(5) of the SEBI (Substantial Acquisition of Shares and Takeover)Regulations, and the infrequently traded securities shall be determined in themanner explained under regulation 20(5) of the SEBI (Substantial Acquisitionand Takeover) Regulations.

6. The promoter may not accept the securities at the offer price determined by thebook building process. However, adequate disclosure may be made in publicannouncement & in the offer letter/form sent to the shareholders.

7. Where securities continue to be listed in a stock exchange having nation widetrading terminals, an exit opportunity need not be given. At present SEBI hasrecognized the Stock Exchange, Mumbai and the National Stock Exchange asthe stock exchanges having nation wide trading terminals. However SEBI hasreserved the right to specify other stock exchange(s) as having nation widetrading terminals.

8. When a company which is listed on any stock exchange or stock exchanges


other than BSE &/or NSE (i.e., the stock exchanges having nationwide tradingterminals), seeks delisting, an exit offer shall be made to the shareholders inaccordance with Delisting Guidelines, 2003. There shall not be any compulsionfor the existing company to remain listed on any stock exchange merely becauseit is a regional stock exchange.

9. Before making the public announcement, the promoter shall appoint a merchantbanker registered with the Board, who is not an associate of the promoter.

10. Before making application for delisting, the promoters or the acquirers of thecompany shall make a public announcement.

Procedure for Voluntary Delisting from all stock Exchanges

(1) Any promoter or acquirer desirous of delisting securities of the company underthe provisions of Delisting Guidelines, 2003 shall : -

(a) Obtain the prior approval of shareholders of the company by a specialresolution passed at its general meeting. However, Delisitng Guidelines,2003 is silent on validity period of special resolution within which companyshall complete delisting formalities. As a good corporate practice Delistingto be completed within a period of one year of passing special resolution.

(b) The promoter shall appoint a merchant banker registered with SEBI, who isnot an associate of the promoter.

(c) Any promoter of a company, which desires to delist from the stock exchange,shall determine an exit price for delisting of securities in accordance withthe book building process described in Schedule II of Delisting Guidelines,2003.

(d) The offer price shall have a floor price, which will be the average of 26weeks traded price quoted on the stock exchange where the shares of thecompany are most frequently traded during preceding 26 week from thedate of the public announcement and without any ceiling of maximum price.

(e) The promoters or the acquirers of the company shall make a publicannouncement, in news papers containing, inter alia, information specifiedin Schedule I to the Delisting Guidelines, 2003. However, Guidelines aresilent on the area of circulation & the language of newspapers.

(f ) If the quantity eligible for acquiring securities at the final price offered doesnot result in public shareholding falling below required level of public holdingfor continuous listing, the company shall remain listed.

(g) The paid up share capital shall not be extinguished as in the case of buybackof securities.

(h) On determination of the final price pursuant to the book building, the promoteror the acquirer shall within a period of two working days from suchdetermination: (a) make a public announcement in the newspapers of thefinal price as discovered by the book building process and whether or notthe promoter or the acquirer has accepted the price; and, (b) communicateto, exchange or exchanges from which delisting is sought to be made, thefinal price discovered and whether the promoter has arcepted the price.


(i) Where the promoter decides not to accept the offer price so determined:

(i) he shall not make an application to the exchange for delisting of thesecurities; and

(ii) the promoter shall ensure that the public shareholding is brought up tothe minimum limits specified under the listing conditions within a periodof 6 months from the date of such decision, by any of the modes specifiedbelow :

(iii) intensity price at which right issue made not to be taken into accountwhich determining floor price.(a) by issue of new shares by the company in compliance with the

provisions of the Companies Act, 1956 and the Securities andExchange Board of India (Disclosure and Investor Protection)Guidelines, 2000;

(b) by the promoter making an offer for sale of his holdings in compliancewith the provisions of the Companies Act, 1956 and the Securitiesand Exchange Board of India (Disclosure and Investor Protection)Guidelines, 2000;

(c) by the promoter making sale of his holdings through the secondarymarket in a transparent manner.

(iv) In the event of the promoter not being able to raise the public shareholdingin accordance with (ii) above, within six months, he shall offer for saleto the public such portion of his holdings as would bring up the publicshareholding to the minimum limits specified in the listing agreement orthe listing conditions at the price determined by the Central ListingAuthority.

(j) Make an application to the stock exchange (delisting exchange) from whereit is proposed to delist shares. Such an application shall be in the form to bespecified by the exchange, annexing therewith a copy of the specialresolution passed at general meeting.

(k) Comply with such other additional conditions as may be specified by theconcerned stock exchanges from where securities are to be delisted.

(l) In the event of securities being delisted, the acquirer shall allow a furtherperiod of 6 months for any of the remaining shareholders to tender securitiesat the same price.

Note :

1. Where the offer for delisting results in acceptance of a fewer number ofshares than the total shares outstanding and as a consequence the publicshareholding does not fall below the minimum limit specified by the listingconditions or the listing agreement, the offer shall be considered to havefailed and no securities shall be acquired pursuant to such offer.

2. Role of stock exchange : The stock exchange (s) shall provide theinfrastructure facility for display of the price at the terminals of the tradingmembers to enable the investors to access the price on the screen to bringtransparency to the delisting process. The stock exchanges shall monitor


the possibility of price manipulation and keep under special watch thesecurities for which announcement for delisting has been made.

3. To ascertain the genuineness of physical securities if tendered and to avoidthe bad delivery, Registrar and Transfer Agent shall co-operate with theClearing House / Clearing Corporation to determine the quality of the papersupfront.

4. Voluntary delisting by right issue, above procedure to be followed after rightissue is completed.

5. As a good corporate practice, entire procedure of voluntary delisiting to becompleted within 1 year of passing of special resolution. Interestingly, priceat which right issue made is not to be taken into account while determiningthe floor price.

(2) Schedule I to the Delisting Guidelines 2003 specifies contents of PublicAnnouncement as under.

1. The floor price and how it was reached.

2. The dates of opening and closing of the bidding. It may be noted thatunder Schedule II (4) the offer to buy shall remain open to the securityholders for a minimum period of three days. The security holders shallhave a right to revise their bids before the closing of the bidding.

3. The name of the exchange or exchanges from which the securities aresought to be delisted. Though Delisitng Guidelines, 2003 is silent, namesof all stock exchanges, where its securities are listed shall be statedalong with names of stock exchanges from where it is proposed todelist.

4. The names and addresses of the trading members as well as the biddingterminals and centres through which bids can be placed.

5. Description of the methodology to be adopted for determination ofacceptable price. The company intending to delist from all stockexchanges, shall pay exit price, which shall be ascertained as per BookBuilding process described under Schedule II to Delisitng Guidelines,2003.

6. Period for which the offer shall be valid.

7. The necessity and the object of the delisting. The necessity for delistingcould be (i) unlisted company taking over listed company, (ii) schemeof arrangement or amalgamation or restructuring may necessacitatedelisting (iii) promoters consolidating their shareholding and as a resultpublic shareholding falling below the minimum specified under the listingcondition/agreement (iv) unsubscribed portion of rights issue beingabsorbed by the promoters and consequently public shareholding fallingbelow the minimum specified under the listing condition/agreement.

8. A full and complete disclosure of all material facts.

9. The proposed timetable from opening of the offer till the settlement ofthe transfers.


10. Details of the escrow account and the amount deposited therein.

11. Listing details and stock market data:

(a) high, low and average market prices of the securities of the companyduring the preceding three years;

(b) monthly high and low prices for the six months preceding the dateof the public announcement; and,

(c) the volume of securities traded in each month during the six monthspreceding the date of public announcement.

(d) Details pertaining to stock exchange(s)from where the companyproposes to delist shall be stated here.

12. Present capital structure and shareholding pattern. Shareholding patternas required under clause 35 of the listing agreement may be published.

13. The likely post-delisting capital structure. Also mention about likely post-delisting shareholding pattern.

14. The aggregate shareholding of the promoter group and of the directorsof the promoters where the promoter is a company and of persons whoare in control of the company.

15. Name of compliance officer of the company.

16. It should be signed and dated by the promoter.

Public Announcement may state that :

(i) where the offer for delisting results in acceptance of a fewer number of sharesthan the total shares outstanding and as a consequence the public shareholdingdoes not fall below the minimum limit specified by the listing conditions or thelisting agreement, the offer shall be considered to have failed and no securitiesshall be acquired pursuant to such offer.

(ii) The promoter may not accept the securities at the offer price determined bythe book building process.

AN ANALYSIS OF REVISED CLAUSE 49OF THE LISTING AGREEMENT*

INTRODUCTION

Good Governance in capital market has always been high on the agenda of SEBI.Corporate Governance is looked upon as a distinctive brand and benchmark in theprofile of Corporate Excellence. This is evident from the continuous updation of guidelines,rules and regulations by SEBI for ensuring transparency and accountability. In theprocess, SEBI had constituted a Committee on Corporate Governance under theChairmanship of Shri Kumar Mangalam Birla. The Committee in its report observed that“the strong Corporate Governance is indispensable to resilient and vibrant capital marketsand is an important instrument of investor protection. It is the blood that fills the veinsof transparent corporate disclosure and high quality accounting practices. It is themuscle that moves a viable and accessible financial reporting structure.”

Based on the recommendations of the Committee, the SEBI had specified principlesof Corporate Governance and introduced a new clause 49 in the Listing agreement of theStock Exchanges in the year 2000. These principles of Corporate Governance weremade applicable in a phased manner and all the listed companies with the paid upcapital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in thehistory of the company, were covered as of March 31, 2003.

SEBI, as part of its endeavour to improve the standards of corporate governance inline with the needs of a dynamic market, constituted another Committee on CorporateGovernance under the Chairmanship of Shri N. R. Narayana Murthy to review theperformance of Corporate Governance and to determine the role of companies inresponding to rumour and other price sensitive information circulating in the market inorder to enhance the transparency and integrity of the market. The Committee in itsReport observed that “the effectiveness of a system of Corporate Governance cannotbe legislated by law, nor can any system of Corporate Governance be static. In adynamic environment, system of Corporate Governance need to be continuallyevolved.”

With a view to promote and raise the standards of Corporate Governance, SEBI onthe basis of recommendations of the Committee and public comments received on thereport and in exercise of powers conferred by Section 11(1) of the Securities and

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* Based on Circular SEBI/MRD/SE/31/2003/26/08 dated 26 August, 2003 issued by SEBI. Toreview the clause 49 revised vide circular dated 26 August 2003, a meeting of NaryanaMurthy Committee was convened and the committee submitted its report which was placedon SEBI website for public comments and the implementation of circular dated 26 August,2003 has been kept in abeyance. Thus the, revised clause issued vide circular dated 26Aug. 2003 is not applicable for June 2004 examination of CS course.


Exchange Board of India Act, 1992 read with section 10 of the Securities Contracts(Regulation) Act 1956, revised the existing clause 49 of the Listing agreement vide itscircular SEBI/MRD/SE/31/2003/26/08 dated August 26, 2003.

Schedule of Implementation

The circular specifies following schedule of implementation of the revisedclause 49 :

(i) All entities seeking listing for the first time, at the time of listing,

(ii) All listed entities having a paid up share capital of Rs 3 crores and above or networth of Rs 25 crores or more at any time in the history of the company.

The companies are required to comply with the requirements of the clause on orbefore March 31, 2004. The companies which are required to comply with the requirementsof the revised clause 49 have been put under an obligation to submit a quarterly compliancereport to the stock exchanges as per sub clause (IX) (ii), of the revised clause 49, within15 days from the quarter ending 31st March, 2004. The report is required to be submittedeither by the Compliance Officer or the Chief Executive Officer of the company afterobtaining due approvals.

Application of Revised Clause 49

The revised clause 49 is applicable to the listed companies, in accordance with theschedule of implementation given above. However, for other listed entities, which arenot companies, but body corporates (e.g. private and public sector banks, financialinstitutions, insurance companies etc.) incorporated under other statutes, the revisedclause will apply to the extent that it does not violate their respective statutes, andguidelines or directives issued by the relevant regulatory authorities. The revised clauseis not applicable to the Mutual Fund Schemes.

Obligations on Stock Exchanges

The Stock Exchanges are put under obligation to ensure that all the provisions ofCorporate Governance have been complied with by the company seeking listing for thefirst time, before granting any new listing. For this purpose, it would be satisfactorycompliance if these companies set up the Boards and constitute committees such asAudit Committee, shareholders/ investors grievances committee, etc. before seekinglisting. The stock exchanges have been empowered to grant a reasonable time to complywith these conditions if they are satisfied that genuine legal issues exists which willdelay such compliance. In such cases while granting listing, the stock exchanges arerequired to obtain a suitable undertaking from the company. In case of the companyfailing to comply with this requirement without any genuine reason, the application moneyshall be kept in an escrow account till the conditions are complied with. The StockExchanges have also been required to set up a separate monitoring cell with identifiedpersonnel to monitor the compliance with the provisions of the Corporate Governance,and to obtain the quarterly compliance report from the companies which are required tocomply with the requirements of Corporate Governance. The stock exchanges are requiredto submit a consolidated compliance report to SEBI within 30 days of the end of eachquarter.


HIGHLIGHTS OF THE AMENDMENTS

1. Widening the Definition of Independent Director

Under the revised clause 49, the definition of the expression ‘independent director’has been expanded. The expression ‘independent director’ mean non-executive directorof the company who —

(a) apart from receiving director’s remuneration, does not have any material pecuniaryrelationships or transactions with the company, its promoters, its seniormanagement or its holding company, its subsidiaries and associatedcompanies;

(b) is not related to promoters or management at the board level or at one levelbelow the board;

(c) has not been an executive of the company in the immediately preceding threefinancial years;

(d) is not a partner or an executive of the statutory audit firm or the internal auditfirm that is associated with the company, and has not been a partner or anexecutive of any such firm for the last three years. This will also apply to legalfirm(s) and consulting firm(s) that have a material association with the entity.

(e) is not a supplier, service provider or customer of the company. This shouldinclude lessor-lessee type relationships also; and

(f) is not a substantial shareholder of the company, i.e. owning two percent or moreof the block of voting shares.

It has been clarified that the Institutional Directors on the boards of companies areindependent directors whether the institution is an investing institution or a lendinginstitution.

2. Compensation to Non Executive Directors and Disclosure thereof

As per earlier clause 49, the compensation to be paid to non-executive directorswas fixed by the Board of Directors, whereas the revised clause requires allcompensation paid to non-executive directors to be fixed by the Board of Directorsand to be approved by shareholders in general meeting. There is also provision forsetting up of limits for the maximum number of stock options that can be granted tonon-executive directors in any financial year and in aggregate. The stock optionsgranted to the non-executive directors to be vested after a period of at least oneyear from the date of retirement of such non-executive directors.

Placing the independent directors and non-executive directors on equal footing, therevised clause provides that the considerations as regards compensation paid to anindependent director shall be the same as those applied to a non-executive director.The companies have been put under an obligation to publish their compensationphilosophy and statement of entitled compensation in respect of non-executivedirectors in its annual report. Alternatively, this may be put up on the company’swebsite and a reference thereto in the annual report. The company is also requiredto disclose on an annual basis, details of shares held by non-executive directors,including on an “if-converted” basis.


The revised clause also requires non-executive directors to disclose prior to theirappointment their stock holding (both own or held by / for other persons on a beneficialbasis) in the listed company in which they are proposed to be appointed as directors.These details are required to be accompanied with their notice of appointment.

3. Periodical Review by Independent Director

The revised clause 49 requires the Independent Director to periodically review legalcompliance reports prepared by the company and any steps taken by the companyto cure any taint. The revised clause specifies that no defence shall be permittedthat the independent director was unaware of this responsibility in case of anyproceedings against him in connection with the affairs of the company.

4. Code of Conduct

The revised clause 49 requires the Board of a company to lay down the code ofconduct for all Board members and senior management of a company and the sameto be posted on the website of the company. Accordingly, all Board members andsenior management personnel have been put under an obligation to affirm compliancewith the code on an annual basis and a declaration to this effect signed by the CEOand COO is to be given in the Annual Report of the Company.

It has been clarified that the term senior management will include personnel of thecompany who are members of its management / operating council (i.e. coremanagement team excluding Board of Directors). Normally, this would comprise allmembers of management one level below the executive directors.

5. Non–Executive Directors – Not to hold office for more than Nine Years

Revised clause 49 limits the term of the office of the non-executive director andprovides that a person shall be eligible for the office of non-executive director solong as the term of office does not exceed nine years in three terms of three yearseach, running continuously.

6. Audit Committee

Two explanations have been added in the revised clause 49. The first explanationdefines the term “financially literate” to mean the ability to read and understandbasic financial statements i.e. balance sheet, profit and loss account, and statementof cash flows. It has also been clarified that a member is considered to haveaccounting or related financial management expertise if he or she possessesexperience in finance or accounting, or requisite professional certification inaccounting, or any other comparable experience or background which results in theindividual’s financial sophistication, including being or having been a Chief ExecutiveOfficer(CEO), Chief Financial Officer(CFO), or other senior officer with financialoversight responsibilities.

7. Review of information by Audit Committee

The Audit Committee is required to mandatorily review financial statements anddraft audit report, including quarterly / half-yearly financial information, managementdiscussion and analysis of financial condition and results of operations, reports


relating to compliance with laws and to risk management, management letters/letters of internal control weaknesses issued by statutory / internal auditors, andrecords of related party transactions.

The appointment, removal and terms of remuneration of the Chief Internal Auditorshall be subject to review by the Audit Committee.

8. Disclosure of Accounting Treatment

The revised clause 49 requires that in case a company has followed a treatmentdifferent from that prescribed in an Accounting Standards, the management of suchcompany shall justify why they believe such alternative treatment is morerepresentative of the underlined business transactions. Management is also requiredto clearly explain the alternative accounting treatment in the footnote of financialstatements.

9. Whistle Blower Policy

Companies have been required to formulate an Internal Policy on access to AuditCommittees. Personnel who observe any unethical or improper practice beingperpetrated by the people in the organisation (not necessarily a violation of law) canapproach the Audit Committee without necessarily informing their supervisors.

Companies are also required to take measures to ensure that this right of access iscommunicated to all employees through means of internal circulars, etc. Theemployment and other personnel policies of the company should also containprovisions protecting “whistle blowers” from unfair termination and other unfair orprejudicial employment practices. Companies have also been required to affirm thatit has not denied any personnel access to the Audit Committee of the company (inrespect of matters involving alleged misconduct) and that it has provided protectionto “whistle blowers” from unfair termination and other unfair or prejudicial employmentpractices. Such affirmation should form part of the Board’s report on CorporateGovernance that is required to be prepared and submitted together with the annualreport.

10. Subsidiary Companies

The revised clause 49 provides that the provisions relating to the composition of theBoard of Directors of the holding company are also applicable to the composition ofthe Board of Directors of subsidiary companies. The clause further requires that atleast one independent director on the Board of Directors of the holding companyshould be a director on the Board of Directors of the subsidiary company.

The Audit Committee of the holding company has been empowered to review thefinancial statements, in particular the investments made by the subsidiary companyand the minutes of the Board meetings of the subsidiary company to be placed forreview at the Board meeting of the holding company. It is further required that theBoard’s report of the holding company should state that they have reviewed theaffairs of the subsidiary company also.

11. Disclosure of contingent liabilities

The revised clause 49 requires the management to provide a clear description inplain English of each material contingent liability and its risks, which shall be


accompanied by the auditor’s clearly worded comments on the management’s view.This section is required to be highlighted in the significant accounting policies andnotes on accounts, as well as, in the auditor’s report, where necessary.

12. Additional Disclosures

The revised Clause 49 of the Listing Agreement requires the following additionaldisclosures:

(A) Basis of related party transactions

A statement of all transactions with related parties shall be placed before theAudit Committee for formal approval/ratification. If any transaction is not on anarm’s length basis, management is required to justify the same to the AuditCommittee.

(B) Board Disclosures –Risk management

The Board members should be informed about the risk assessment andminimization procedures. These procedures shall be periodically reviewed toensure that executive management controls risk through means of a properlydefined framework.

Management shall place a quarterly report certified by the compliance officer ofthe company, before the entire Board of Directors documenting the businessrisks faced by the company, measures to address and minimize such risks,and any limitations to the risk taking capacity of the corporation. This documentshall be formally approved by the Board.

(C) Proceeds from Initial Public Offerings (IPOs)

When money is raised through an Initial Public Offering (IPO), it shall discloseto the Audit Committee, the uses / applications of funds by major category(capital expenditure, sales and marketing, working capital, etc), on a quarterlybasis as a part of their quarterly declaration of financial results. Further, on anannual basis, the company shall prepare a statement of funds utilized for purposesother than those stated in the offer document/prospectus. This statement shallbe certified by the independent auditors of the company. The Audit Committeeshall make appropriate recommendations to the Board to take up steps in thismatter.

13. Certification by CEO/CFO

CEO (either the Executive Chairman or the Managing Director) and the CFO (Whole-Time Finance Director or other person discharging this function) of the company hasbeen put under an obligation to certify that, to the best of their knowledge and belief,they have reviewed the balance sheet and profit and loss account and all its schedulesand notes on accounts, the cash flow statements as well as the Directors’ Reportand these statements do not contain any materially untrue statement, omits anymaterial fact or do they contain statements that might be misleading. Further theyare required to certify that these statements together present a true and fair view ofthe company, and are in compliance with the existing accounting standards and/orapplicable laws/regulations.

The revised clause requires them to be responsible for establishing and maintaining


internal controls, to evaluate the effectiveness of internal control systems of thecompany, and to disclose to the auditors and the Audit Committee, deficiencies inthe design or operation of internal controls, if any. They are also required to discloseto the auditors as well as the Audit Committee, instances of significant fraud, if any,that involves management or employees having a significant role in the company’sinternal control systems, whether or not there were significant changes in internalcontrol and / or of accounting policies during the year.

14. Report on Corporate Governance

The companies have been required to submit a quarterly compliance report in theprescribed format to the stock exchanges within 15 days from the close of thequarter. The report has to be submitted either by the Compliance Officer or the ChiefExecutive Officer of the company after obtaining due approvals.

15. Company Secretary in Practice to Issue Certificate of Compliance

This is a landmark amendment authorizing Company Secretaries in Practice amongother professionals to issue certificate of compliance of clause 49. The revisedclause requires the company to obtain a certificate from either the auditors orpracticing company secretaries regarding compliance of conditions of corporategovernance and annex the certificate with the directors’ report, which is sent annuallyto all the shareholders of the company. The same certificate is also required to besent to the Stock Exchanges along with the annual returns filed by the company.

16. Additional disclosure in the Report on Corporate Governance

The following additional items are required to be disclosed in the suggested list ofItems to be included In the Report on Corporate Governance in the Annual Report ofCompanies.

(i) Disclosure of accounting treatment, if different, from that prescribed in AccountingStandards with explanation.

(ii) Whistle Blower policy and affirmation that no personnel has been deniedaccess to the audit committee.

17. Additional Disclosures under Non-Mandatory Requirements

The following additional disclosures are required to be made under the non-mandatoryrequirements :

(i) Audit qualificationsCompany may move towards a regime of unqualified financial statements.

(ii) Training of Board MembersCompany shall train its Board members in the business model of the companyas well as the risk profile of the business parameters of the company, theirresponsibilities as directors, and the best ways to discharge them.

(iii) Mechanism for evaluating Non-Executive Board MembersThe performance evaluation of non-executive directors should be done by apeer group comprising the entire Board of Directors, excluding the director beingevaluated; and Peer Group evaluation should be the mechanism to determinewhether to extend / continue the terms of appointment of non-executive directors.

SEBI (ISSUE OF SWEAT EQUITY) REGULATIONS, 2002*

81

In exercise of the powers conferred by section 30 of the Securities and Exchange Boardof India Act, 1992 (15 of 1992) read with clause (d) of sub-section (1) of Section 79A of theCompanies Act, 1956 (1 of 1956) as inserted by Companies (Amendment) Act, 1999 (1 of1999), the Board, hereby, makes the following regulations, namely :-

CHAPTER I

PRELIMINARY

1. Short title and commencement

(a) These regulations shall be called the Securities and Exchange Board of India(Issue of Sweat Equity) Regulations, 2002.

(b) These regulations shall come into force on the date of their publication in theOfficial Gazette.

2. Definitions

(1) In these regulations, unless the context otherwise requires :

(a) ‘Act’ means the Securities and Exchange Board of India Act, 1992;

(b) ‘associate’ includes a person, who directly or indirectly by himself or incombination with relatives, exercises control over the company; or,

(c) whose employee, officer or director is also a director, officer or employee ofanother company;

(d) ‘Board’ means the Board as defined in clause (a) of sub-section (1) ofsection 2 of the Act;

(e) ‘control’ shall include the right to appoint majority of the directors or tocontrol the management or policy decisions exercisable by a person orpersons acting individually or in concert, directly or indirectly, including by

* Issued by SEBI vide Notification No. SO 1031(E), dated 24-9-2002.

PART B

COMPILATION OF OTHER RECENT CHANGES ANDAMENDMENTS

In the present volatile capital market scenario, multifarious developments and changesare taking place in the legal framework. In order to acquaint the students with the importantchanges therein, and to enable them to update their study materials accordingly, a compilationof the relevant changes/amendments in the past two-three years are given hereunder :


virtue of their shareholding or management rights or shareholders or votingagreements or in any other manner;

(f) ‘company’ means a company as defined in the Companies Act, 1956;

(g) ‘director’ means, a director as defined in Sub-section (13) of Section 2 of theCompanies Act, 1956 ;

(h) ‘employee’ means;

(i) a permanent employee of the company working in India or abroad or

(ii) a director of the company, whether a whole time director or not.

(i) ‘ESOS’ means an Employees Stock Option Scheme as defined in Securitiesand Exchange Board of India (Employees Stock Option Scheme andEmployees Stock Purchase Scheme) Guidelines, 1999;

(j) ‘insider’ means an insider as defined in clause (e) of regulation 2 of Securitiesand Exchange Board of India (Prohibition of Insider Trading) Regulations,1992;

(k) ‘merchant banker’ means a merchant banker registered under section 12 ofthe Act;

(l) ‘promoter’ means promoter as defined in clause (h) of sub-regulation (1) ofregulation 2 of the Securities and Exchange Board of India (SubstantialAcquisition of shares and Takeovers) Regulations, 1997;

(m) ‘registrar’ means a registrar to an issue and includes a share transfer agentregistered under section 12 of the Act;

(n) ‘securities’ means securities as defined in clause (h) of section 2 of theSecurities Contracts (Regulation) Act, 1956 (42 of 1956);

(o) ‘statutory auditor’ means an auditor appointed by a company undersection 224 of the Companies Act 1956 (1 of 1956) ;

(p) ‘Recognised Stock Exchange’ means a stock exchange which has beengranted recognition under section 4 of the Securities Contracts (Regulation)Act, 1956 (42 of 1956);

(q) ‘sweat equity shares’ means sweat equity shares as defined inExplanation II of Sub-section (1) of Section 79A of the Companies Act, 1956;

(r) “Schedule” means a schedule to these Regulations;

(s) ‘valuer’ means a Chartered Accountant or a merchant banker appointed todetermine the value of the intellectual property rights or other value addition;

(2) Words and expressions not defined in these regulations shall have the samemeaning as have been assigned to them under the Act or the Securities Contracts(Regulation) Act, 1956 or the Companies Act, 1956, or any statutory modificationor re-enactment thereof, as the case may be.

3. Applicability

Nothing contained in these regulations shall apply to an unlisted company.

Provided the unlisted company coming out with initial public offering and seekinglisting of its securities on the stock exchange, pursuant to issue of sweat equity


shares, shall comply with the Securities and Exchange Board of India (Disclosureand Investor Protection) Guidelines, 2000.

CHAPTER II

ISSUE OF SWEAT EQUITY BY A LISTED COMPANY

4. Sweat equity shares may be issued to employee promoter

A company whose equity shares are listed on a recognised stock exchange mayissue sweat equity shares in accordance with Section 79A of Companies Act, 1956and these Regulations to its -

(a) Employees;

(b) Directors.

5. Special Resolution

(1) For the purposes of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 the explanatory statementto be annexed to the notice for the general meeting pursuant to section 173 ofthe Companies Act, 1956 shall contain disclosures as specified in the Schedule.

(2) The issue of sweat equity shares to promoters shall be subject to the requirementsspecified in Regulation 6 of these Regulations.

6. Issue of Sweat Equity

(1) In case of issue of sweat equity shares to Shares to Promotors. promoters, thesame shall also be approved by simple majority of the shareholders in GeneralMeeting :

Provided that for passing such resolution, voting through postal ballot as specifiedunder Companies (Passing of the resolution by Postal Ballot) Rules 2001 shallalso be adopted :

Provided further that the promoters to whom such Sweat Equity Shares areproposed to be issued shall not participate in such resolution.

(2) Each transaction of issue of Sweat Equity shall be voted by a separate resolution.

(3) The resolution for issue of Sweat Equity shall be valid for a period of not morethan twelve months from the date of passing of the resolution.

(4) For the purposes of passing the resolution, the explanatory statement shallcontain the disclosures as specified in the Schedule.

7. Pricing of Sweat Equity Shares

(1) The price of sweat equity shares shall not be less than the higher of thefollowing :-

(a) The average of the weekly high and low of the closing prices of the relatedequity shares during last six months preceding the relevant date; or

(b) The average of the weekly high and low of the closing prices of the relatedequity shares during the two weeks preceding the relevant date.

Explanation :-

“Relevant date” for this purpose means the date which is thirty days prior tothe date on which the meeting of the General Body of the shareholders is


convened, in terms of clause (a) of sub-section (1) of section 79A of theCompanies Act.

1. If the shares are listed on more than one stock exchange, but quotedonly on one stock exchange on the given date, then the price on thatstock exchange shall be considered.

2. If the share price is quoted on more than one stock exchange, then thestock exchange where there is highest trading volume during that dateshall be considered.

3. If shares are not quoted on the given date, then the share price on thenext trading day shall be considered.

8. Valuation of Intellectual Property

(1) The valuation of the intellectual property rights or of the know-how provided orother value addition mentioned in Explanation II of sub-section (1) ofSection 79A of the Companies Act, 1956 shall be carried out by a merchantbanker.

The merchant banker may consult such experts and valuers, as he may deem fithaving regard to the nature of the industry and the nature of the property or othervalue addition.

The merchant banker shall obtain a certificate from an independent CharteredAccountant that the valuation of the intellectual property or other value additionis in accordance with the relevant accounting standards.

9. Accounting Treatment

(1) Where the sweat equity shares are issued for a non – cash consideration, suchnon-cash consideration shall be treated in the following manner in the books ofaccount of the company :-

(a) where the non-cash consideration takes the form of a depreciable oramortizable asset, it shall be carried to the balance sheet of the company inaccordance with the relevant accounting standards; or

(b) where clause (a) is not applicable, it shall be expensed as provided in therelevant accounting standards.

10. Placing of Auditors Certificate before Annual General Meeting

In the general meeting subsequent to the issue of sweat equity, the Board of Directorsshall place before the shareholders/certificate from the auditors of the company thatthe issue of sweat equity shares has been made in accordance with the Regulationsand in accordance with the resolution passed by the company authorizing the issueof such Sweat Equity Shares.

11. Ceiling on Managerial Remuneration

The amount of Sweat Equity shares issued shall be treated as part of managerialremuneration for the purposes of sections 198, 309, 310, 311 and 387 of the CompaniesAct, 1956 if the following conditions are fulfilled :

(i) the Sweat Equity shares are issued to any director or manager; and,

(ii) they are issued for non-cash consideration, which does not take the form of an


asset which can be carried to the balance sheet of the company in accordancewith the relevant accounting standards.

12. Lock-in of sweat equity shares

(1) The Sweat Equity shares shall be locked in for a period of three years from thedate of allotment.

(2) The Securities and Exchange Board of India (Disclosure and Investor Protection)Guidelines, 2000, on public issue in terms of lock-in and computation ofpromoters’ contribution shall apply if a company makes a public issue after ithas issued sweat equity.

13. Listing

The Sweat Equity issued by a listed company shall be eligible for listing only if suchissue are in accordance with these regulations.

14. Applicability of Takeover

Any acquisition of Sweat Equity Shares shall be subject to the provision of Securitiesand Exchange Board of India (Substantial Acquisition of Shares and Takeovers)Regulations, 1997.

CHAPTER III

GENERAL OBLIGATIONS

15. Obligations of the Company

(1) The company shall ensure that -

(a) The Explanatory Statement to the notice for general meeting shall containcertain disclosures as are specified under clause (b) of Sub-section (1) ofSection 79A of the Companies Act, 1956 and sub-regulation (1) ofRegulation 5.

(b) Auditor’s certificate as required under Regulation 10 shall be placed in thegeneral meeting of shareholders.

(c) The company shall within seven days of the issue of sweat equity, issue orsend statement to the recognized stock exchange, disclosing :

(i) number of sweat equity shares;

(ii) price at which the sweat equity shares are issued;

(iii) total amount invested in sweat equity shares;

(iv) details of the persons to whom sweat equity shares are issued; and,

(v) the consequent changes in the capital structure and the shareholdingpattern after and before the issue of sweat equity.

16. Action against intermediaries

The Board may, on failure of the merchant banker to comply with the obligationsunder these regulations or failing to observe due diligence in respect of valuation ofintellectual property or value addition, initiate action against the merchant banker interms of Securities and Exchange Board of India (Merchant Bankers) Regulations,1992.


CHAPTER IV

PENALTIES AND PROCEDURE

17. Power of the Board to order Inspection or Investigation

(1) The Board may, suo-motu or upon information received by it, cause an inspectionto be made of the books of account or other books and papers of any companyor an investigation to be made in respect of the conduct and affairs of any personassociated with the process of Sweat Equity, by appointing an officer of theBoard *[not below the rank of Assistant General Manager for the purpose ofconducting inspection and not below the rank of Division Chief for the purpose ofconducting an investigation:]

Provided that no such inspection or investigation shall be made except for thepurposes specified in sub-regulation (2).

(2) The purposes referred to in sub-regulation (1) are the following, namely:-

(a) to ascertain whether there are any circumstances which would render anyperson guilty of having contravened any of these regulations or any directionsissued thereunder;

(b) to investigate into any complaint of any contravention of the regulation,received from any investor, or any other person;

(3) An order passed under the sub-regulation (1) shall be sufficient authority for theInspecting or Investigating Officer to undertake the inspection or investigation,as the case may be and on production of an authenticated copy of the order, theperson concerned shall be bound to carry out the duty imposed inRegulation 18.

18. Duty to produce records, etc.

(1) It shall be the duty of every person in respect of whom an inspection or investigationhas been ordered under regulation 17, to produce before the inspecting or theinvestigating Officer such book, accounts and other documents in his custodyor control and furnish him with such statements and information as the saidofficer may require from the purposes of the inspection or investigation.

(2) Without prejudice to the generality of the provisions of sub-regulation (1), suchperson shall –

(a) extend to the Inspecting or Investigating Officer reasonable facilities forexamining any books, accounts and other documents in his custody orcontrol (whether kept manually or in computer or in any other form) reasonablyrequired for the purposes of the inspection or investigation;

(b) provide such Inspecting or Investigating Officer copies of such books, accountsand records which, in opinion of the Officer, are relevant to the inspection orinvestigation or, as the case may be, allow him to take out computer printoutsthereof;

(c) provide such assistance and co-operation as may be required in connectionwith the inspection or investigation and furnish information relevant to suchinspection or investigation as may be sought by such officer.

* Inserted by the SEBI (Issue of Sweat Equity Shares) (Amendment) Regulation,2003, dated 27-8-2003.


(3) The Inspecting or Investigating Officer shall for the purpose of inspection orinvestigation, have the full powers;(a) of summoning and enforcing the attendance of persons;(b) to examine orally and to record on oath the statement of the persons

concerned, any director, partner, member or employee of such person.19. Submission of Report to the Board

(1) The Inspecting or Investigating Officer Board. shall, on completion of the inspectionor Investigation after taking into account all relevant facts and circumstances,submit a report to the Board.

(2) On the receipt of report under sub-regulation (1), the Board may initiate suchaction as it may be deemed fit to do in the interests of investors and the securitiesmarket.

20. Power of the Board to issue directionsThe Board may in the interests of the securities market and without prejudice to itsright to initiate action including criminal prosecution under section 24 of the Act orSection 621 of Companies Act, 1956 give such directions as it deems fit including :-(a) directing the person concerned not to further deal in securities in any particular

manner;(b) directing the person concerned to sell or divest the sweat equity shares acquired

in violation of the provisions of these Regulations or any other law or regulations;(c) prohibiting the persons concerned, from accessing the securities market;(d) directing the disgorgement of any ill-gotten gains or profit or avoidance of loss.(e) restraining the company from making a further offer for sweat equity.

SCHEDULE[Under Regulation 6(4)]

The explanatory statement to the notice and the resolution proposed to be passed inthe general meeting for approving the issuance of sweat equity shall, inter alia, containthe following information : -

(a) The total number of shares to be issued as sweat equity.(b) The current market price of the shares of the company.(c) The value of the intellectual property rights or technical know how or other value

addition to be received from the employee or director along with the valuationreport / basis of valuation.

(d) The names of the employees or directors or promoters to whom the sweat equityshares shall be issued and their relationship with the company.

(e) The consideration to be paid for the sweat equity.(f) The price at which the sweat equity shares shall be issued.(g) Ceiling on managerial remuneration, if any, which will be affected by issuance of

such sweat equity.(h) A statement to the effect that the company shall conform to the accounting

policies as specified by the Board.(i) Diluted Earning Per Share pursuant to the issue of securities to be calculated in

accordance with International Accounting Standards / standards specified bythe Institute of Chartered Accountants of India.

SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRYOFFICER AND IMPOSING PENALTY)

REGULATIONS, 2002*

88

In exercise of the powers conferred by section 30, read with sub-section (3) ofsection 12 and section 19, of the Securities and Exchange Board of India Act, 1992 (15of 1992), the Board hereby makes the following regulations, namely:-

CHAPTER I

PRELIMINARY


(1) These regulations may be called the Securities and Exchange Board of India(Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)Regulations, 2002.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. Definitions

(1) In these regulations, unless the context otherwise requires,-

(a) “Act” means the Securities and Exchange Board of India Act, 1992 (15 of1992);

(b) “Board” means the Securities and Exchange Board of India constituted undersection 3 of the Act;

(c) “certificate” means a certificate of registration granted to an intermediaryunder the relevant Regulations;

(d) “enquiry” means an enquiry held under these regulations;

(e) “enquiry officer” means an officer of the Board, not below the rank of a DivisionChief, appointed by the Chairman or a member designated in this behalf toconduct enquiry and pass an order under these regulations;

(f) “intermediary” means a person referred to in sub-section (1) or sub-section (1A) of section 12 of the Act and includes an asset managementcompany in relation to the Securities and Exchange Board of India (MutualFunds) Regulations, 1996 and a Collective Investment Management Companyin relation to the Securities and Exchange Board of India (Collective InvestmentSchemes) Regulations, 1999;

(g) “presenting officer” means a legal practitioner or an officer of the Board



appointed by the Chairman or a member designated in this behalf to presenta case on behalf of the Board before the enquiry officer;

(h) “relevant Regulations” means any of the regulations referred to inregulation 4 made by the Board under section 30 of the Act for regulating theactivities of intermediaries;

(i) “self-regulating organisation” means an organisation of intermediariesoperating in the securities market duly recognised by or registered with theBoard and includes a Stock Exchange;

(2) Words and expressions used and not defined in these regulations, but defined inthe Act or in the rules or regulations made thereunder, shall have the meaningsrespectively assigned to them in the Act or rules or regulations made thereunder,as the case may be.

CHAPTER II

ENQUIRY PROCEEDINGS

3. Procedure for holding enquiry

No order under these regulations shall be passed except after holding an enquiry bythe enquiry officer.

4. Enquiry for contraventions of the regulations

An enquiry for the purpose of passing an order under these regulations may be heldfor contravention of any of the provisions of –

(a) the Securities and Exchange Board of India (Stock-brokers and Sub-brokers)Regulations, 1992;

(b) the Securities and Exchange Board of India (Insider Trading) Regulations, 1992;

(c) the Securities and Exchange Board of India (Merchant Bankers) Regulations,1992;

(d) the Securities and Exchange Board of India (Portfolio Managers) Regulations,1993;

(e) the Securities and Exchange Board of India (Registrars to an Issue and ShareTransfer Agents) Regulations, 1993;

(f) the Securities and Exchange Board of India (Underwriters) Regulations, 1993;

(g) the Securities and Exchange Board of India (Debenture Trustees) Regulations,1993;

(h) the Securities and Exchange Board of India (Bankers to an Issue) Regulations,1994;

(i) the Securities and Exchange Board of India (Prohibition of Fraudulent and UnfairTrade Practices relating to Securities Market) Regulations, 1995;

(j) the Securities and Exchange Board of India (Foreign Institutional Investors)Regulations,1995;

(k) the Securities and Exchange Board of India (Custodian of Securities) Regulations,1996;

(l) the Securities and Exchange Board of India (Depositories and Participants)Regulations, 1996;


(m) the Securities and Exchange Board of India (Venture Capital Funds) Regulations,1996;

(n) the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996;

(o) the Securities and Exchange Board of India (Substantial Acquisition of Sharesand Takeovers) Regulations, 1997;

(p) the Securities and Exchange Board of India (Buy-Back of Securities) Regulations,1998;

(q) the Securities and Exchange Board of India (Credit Rating Agencies) Regulations,1999;

(r) the Securities and Exchange Board of India (Collective Investment Schemes)Regulations, 1999;

(s) the Securities and Exchange Board of India (Foreign Venture Capital Investors)Regulations, 2000.

5. Appointment of enquiry officer

(1) Where it appears to the Chairman or a member designated in this behalf that anintermediary has contravened any of the provisions of a Regulation referred to inregulation 4, the Chairman or the member, as the case may be, may appoint anenquiry officer for the purpose of holding an enquiry into the matter:

Provided that the Chairman or the member, as the case may be, may appointmore than one enquiry officers if the subject matter of enquiry contains technicalor complicated questions of fact or law who will function as a bench to be presidedby the senior amongst them.

(2) No officer who has dealt with the matter or who is directly or indirectly interested,or has an interest, in that intermediary or who has conducted an investigation orinspection in respect of the alleged violation shall be appointed as an enquiryofficer.

5A. Transfer of pending enquiry*

(1) Any enquiry in respect of violation of any provisions of the Securities and ExchangeBoard of India (Stock Brokers and Sub-Brokers) Regulations, 1992 pending beforeany enquiry officer immediately before the date of commencement of the Securitiesand Exchange Board of India (Stock Brokers and Sub-Brokers) (SecondAmendment) Regulations, 2003, being an enquriy in respect of a violation whichcan be adjudicated under Chapter VIA of the Act pursuant to the provisions ofthe Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)(Second Amendment) Regulations, 2003, being an enquiry in respect of a violationwhich can be adjudicated under Chapter VIA of the act pursuant to the provisionsof the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)(Second Amendment) Regulations, 2003 may be transferred by the Chairman orthe member by an order in writing to an adjudicating officer appointed undersection 15-I of the Act.

* Inserted by SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)(Second Amendment) Regulations, 2003, dated 30.12.2003.


(2) Where any matter has been transferred from an enquiry officer to an adjudicatingofficer under sub-regulation (1) —

(a) the enquiry officer shall, as soon as may be, after such transfer forward therecords of such enquiry proceedings to the adjudicating officer; and

(b) the adjudicating officer may, on receipt of such records, proceed to deal withthe matter, so far as may be, in the same manner as in the case of adjudicatingproceedigns under Chapter VIA read with the Securities and Exchange Boardof India (Procedure for Holding Inquiry and Imposing Penalties by AdjudicatingOfficer) Rules, 1995."

*6. Issuance of notice

(1) Where it is proposed to hold an enquiry against an intermediary under theseregulations, the enquiry officer shall issue, or cause to be issued, to theintermediary a notice which shall state the contravention of the relevantRegulations alleged to have been committed by the intermediary.

(2) There shall be annexed to the notice issued under sub-regulation (1) copies ofdocuments relied on by the Board and extracts of relevant portions of documentscontaining the findings arrived at in any investigation or inspection held by theBoard in respect of the alleged contravention.

(3) The notice under sub-regulation (1) shall require the intermediary -

(i) to submit within a period to be specified in the notice, ordinarily not exceedingtwenty-one days, a written statement, if any to the enquiry officer appointedunder sub-regulation (1) of regulation 5; and

(ii) to specify whether he desires to be heard in person before the enquiry officer.

7. Manner of service of notice

The notice referred to in regulation 6 shall be served in the manner specified inregulation 22.

8. Reply by intermediary

The intermediary to whom the notice under regulation 6 has been issued shall submit*[to the enquiry officer] his written statement within the period specified in the noticealong with documentary evidence, if any, in support thereof and shall also statewhether he desires to be heard in person:

Provided that the enquiry officer may, for sufficient reasons, extend the period tosubmit written statement.

9. Notice of hearing

The enquiry officer shall issue, or caused to be issued, notice in the manner specifiedunder regulation 22 stating the date and the place of hearing to the intermediary whomay appear before the enquiry officer for hearing on the date so notified.

10. Ex parte proceedings

If any intermediary fails or refuses to appear before the enquiry officer, as requiredunder regulation 9 or does not reply to the notice as required under regulation 8, the

* Inserted by the SEBI (Procedure for Holding Enquiry by Enquiry Officer and ImposingPenalty) (Amendment) Regulations 2003, dated 27-11-2003.


enquiry officer may proceed ex parte with the enquiry after recording the reasons andpass appropriate order on merits based on the material facts before him.

11. Representation before enquiry officer

The intermediary may appear before the enquiry officer in person or through anyperson duly authorised by him in this behalf:

Provided that no legal practitioner shall be permitted to represent the intermediary atthe enquiry except where a legal practitioner has been appointed by the Chairman ora member designated in this behalf as a presenting officer under regulation 12.

12. Presenting officer

(1) The Chairman or a member designated in this behalf may appoint a presentingofficer in an enquiry.

(2) The enquiry officer, if he considers it necessary, may advise the Board to appointa presenting officer for the purpose of the enquiry and the Chairman or a memberdesignated in this behalf on receipt of such advice shall appoint a presentingofficer.

13. Imposition of penalty

(1) The enquiry officer shall, after considering the written statement and the oralsubmissions, if any, of the intermediary and the provisions of the relevantRegulations, submit a report to the Chairman or a member designated in thisbehalf and recommend for the imposition of any of the following penalties by theChairman or the member, as the case may be, with the justification for theimposition thereof :-

(a) Minor penalties —

(i) warning or censure;

(ii) prohibiting the intermediary to take up any new assignment or mandateor launch a new scheme for a period upto six months;

(iii) debarring a partner or a whole time director of the intermediary fromcarrying out the activities as intermediary in the intermediary firm orcompany and other capital market related institutions for a period uptosix months ;

(iv) suspension of certificate of registration for a period upto three months;

(v) debarring a branch or an office of the intermediary from carrying out theactivities for a period upto six months.

(b) Major penalties —

(i) cancellation of certificate of registration;

(ii) suspension of certificate of registration for period exceeding three months;

(iii) taking of action under sub-clause (ii), (iii) or (v) of clause (a) for a periodexceeding six months.

(2) On receipt of the report from the enquiry officer, the Chairman or the member, asthe case may be, shall consider the same and issue a show-cause notice to theintermediary as to why the action as it considers appropriate should not betaken.


(3) The intermediary shall within fifteen days of the date of the receipt of the show-cause notice send a reply to the Chairman or the member, as the case maybe.

(4) The Chairman or the member, as the case may be, after considering the reply tothe show-cause notice, if received, shall as soon as possible pass such orderas it deems fit.

(5) If the enquiry officer under sub-regulation (1) has recommended or imposing of aminor penalty and the Chairman or the member, as the case may be, proposesimposing of a major penalty, he shall give a notice to the intermediary to makewritten submission against the proposed action within fifteen days after the receiptof the notice and the Chairman or the member after taking into consideration thewritten submissions, if any, shall pass such orders as deemed appropriate.

(6) The Board or the member shall impose major penalties only in the followingcircumstances, namely:-

(a) the intermediary or any of its whole-time directors or partners or its proprietorhas been found guilty of price or market manipulation of any scrip or index orassisting in such manipulation or of insider trading;

(b) the intermediary is guilty of violation of conditions of registration;

(c) the intermediary or any of its whole time directors or partners or its proprietoris found to be not a fit or proper person;

(d) failure to obey directions of the Board passed under section 11 orsection 11B of the Act or failure to obey order of an adjudicating officerimposing monetary penalty passed under section 15I of the Act by theintermediary; or

(e) repeated defaults by the intermediary for which action can be taken againsthim under clause (a) of sub-regulation (1).

(7) Every order passed under sub-regulation (4) shall be dated and signed by theChairman or the member, as the case may be.

14. Intimation of the order

(1) A copy of the order passed under sub-regulation (4) of regulation 13 shall besent to the intermediary.

(2) If the intermediary is a member of any self-regulating organisation, a copy of theorder shall also be sent to such organisation.

CHAPTER III

SUMMARY PROCEDURE

15. Situations when summary procedure to be followed

It shall not be necessary to hold an enquiry under Chapter II in relation to anintermediary where -

(a) such intermediary has been declared insolvent or is wound up;

(b) such intermediary fails to pay the registration, renewal or annual fees to theBoard as per the provisions of the relevant Regulations;


(c) such intermediary, being a Stock-broker, ceases to be a member of a recognisedstock exchange or has been declared a defaulter in relation to the transactionsat such exchange;

(d) such intermediary fails to obey an order of any adjudication officer imposing apenalty under section 15I of the Act;

(e) such intermediary fails to submit documents or records to the Board within thetime stipulated by the Board;

(f) such intermediary fails to issue contract notes or to enter into agreement asrequired under the provisions of the relevant Regulations;

(g) such intermediary does not satisfy the capital adequacy norms as specified inthe relevant Regulations;

(h) its proprietor or any of its partners or whole-time directors is convicted by a courtof competent jurisdiction of an offence involving moral turpitude;

(i) such intermediary surrenders its certificate of registration to the Board;

(j) such intermediary admits to have violated the provisions of the relevantRegulations;

(k) in any other situation where the facts leading to the violation of the provisions ofthe relevant Regulations are undisputed:

Provided that no action shall be taken against an intermediary without giving anopportunity of making representation to such intermediary.

16. Procedure to be followed under this chapter

(1) The Chairman or a member designated in this behalf shall appoint an officer ofthe Board, not below the rank of Division Chief, for passing appropriate orders inrespect of matters specified in regulation 15.

(2) The officer shall issue to the intermediary, against whom the proceedings arebeing held, a notice requiring the intermediary to make a written submission inreply to the notice within such time, ordinarily not exceeding fifteen days afterthe receipt of the notice, as may be specified in the notice.

(3) If the intermediary fails to make a written submission to the notice within theperiod specified in the notice, the officer shall pass such orders as he considersappropriate in the circumstances on the merits and in the light of the material onrecord and shall submit a report to the Chairman or the member, as the casemay be, and may recommend taking of any action under sub-regulation (1) ofregulation 13 as he considers appropriate in the circumstance of the case andshall give reasons for taking such action.

(4) If the intermediary makes submission within the said period, the officer shall,after considering the submission so made, submit a report to the Chairman orthe member, as the case may be, and may recommend taking of any actionunder sub-regulation (1) of regulation 13 as he considers appropriate in thecircumstances of the case and shall give reasons for taking such action.


(5) The Chairman or the member, as the case may be, after receipt ofrecommendations from the officer under sub-regulation *[(3) or] (4), shall passsuch orders as he may deem appropriate.

17. Publication of order

The Board shall issue a press release in respect of an order under these regulationsin at least two newspapers of which at least one shall have nationwide circulationand shall also put the order on the website of the Board.

CHAPTER IV

MISCELLANEOUS AND CONSEQUENTIAL PROVISIONS

18. Removal of doubts

For the removal of doubts, it is hereby declared that the provisions of these regulationsshall be without prejudice to any other action the Board may take under the Act orthe respective regulations.

19. Effect of debarment and cancellation order

(1) On and from the date of debarment or suspension and suspension of thecertificate, the intermediary shall not undertake any new assignment or contractor launch any new scheme and shall cease to carry on any activity as anintermediary during the period of such debarment or suspension and shall besubject to such other directions of the Board including directions relating to anyrecords, documents or securities or money of the investors that may be in thecustody or the control of such intermediary.

(2) On and from the date of cancellation of the certificate, the intermediary shall,with immediate effect, cease to carry on any activity as an intermediary andshall be subject to the directions of the Board with regard to the transfer of anyrecords, documents or securities or money of the investors that may be in thecustody or control of such intermediary.

20. Appeal to Securities Appellate Tribunal

An intermediary aggrieved by an order under these regulations may prefer an appealto the Securities Appellate Tribunal against such order in accordance withsection 15T of the Act.

21. Amendment of relevant Regulations

The Regulations specified in clauses (a) to (s) of regulation 4 shall stand amended inthe manner specified in the Schedule.

22. Service of notice

(1) A notice issued under these regulations may be served on the intermediary bysending it to such intermediary at his registered office address or at principaloffice address as available on the records of the Board by registered postacknowledgement due or by speed post or by such courier service as may beapproved by the Board.

* Inserted by the SEBI (Procedure for Holding Enquiry by Enquiry Officer and ImposingPenalty) (Amendment) Regulation dated 27.11.2003.


(2) If a notice cannot be served in the manner referred to in sub-regulation (1), thesame shall be served by affixing on the door or some other conspicuous part ofthe premises of the registered office or the principal office of the intermediary.

(3) In case of a stock broker, the notice shall be served through the concernedstock exchange.

23. Saving of actions

(1) Notwithstanding amendment of the regulations as specified in regulation 21,anything done or any action taken including any proceeding for inspections orinvestigation or enquiry commenced or any notice issued under the saidregulations before the commencement of these regulations shall be deemed tohave been done or taken under the corresponding provisions of these regulations.

(2) In particular and without prejudice to the generality of the provisions of sub-regulation (1), —

(i) an enquiry proceeding initiated by the Board under the relevant Regulationsand pending before the Board before the commencement of these regulationsshall be conducted and completed under the Relevant regulations as if thoseare not amended as specified in regulation 21;

(ii) any order appointing an enquiry officer under the relevant Regulations andpending before such enquiry officer immediately before the commencementof these regulations shall be deemed to have been ordered under thecorresponding provisions of these regulations.

THE SCHEDULE

[See regulation 21]

PART I

Amendment to the Securities and Exchange Board of India(Stock-Brokers and Sub-Brokers) Regulations, 1992

1. In regulation 2, clause (aaa) shall be omitted.

2. For regulation 23, the following regulation shall be substituted, namely :-

"23. Action on inspection or investigation report

The Board or the Chairman shall after consideration of inspection or investigationreport take such action as the Board or Chairman may deem fit and appropriateincluding action under the Securities and Exchange Board of India (Procedure forHolding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.”

3. For regulation 25, the following regulation shall be substituted, namely:-

"25. Liability for action in case of default

A stock-broker who –

(a) fails to comply with any conditions subject to which registration has been granted;

(b) contravenes any of the provisions of the Act, rules or regulations;

(c) contravenes the provisions of the Securities Contracts (Regulation) Act or therules made thereunder;


(d) contravenes the provisions of the Depositories Act, 1996 or the rules madethereunder;

(e) contravenes the rules, regulations or bye-laws of the stock exchange,

shall be dealt with in the manner provided under the Securities and Exchange Boardof India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)Regulations, 2002.”

4. Regulations 26 to 32 shall be omitted.

PART II

Amendment to the Securities and Exchange Board of India(Portfolio Managers) Regulation, 1992

1. In regulation 2, clause (a) shall be omitted.

2. For regulation 33, the following regulation shall be substituted, namely;-



3. For regulation 35, the following regulation shall substituted, namely:-


A merchant banker who —

(a) fails to comply with any conditions subject to which certificate has been granted;

(b) contravenes any of the provisions of the Act, rules or regulations,



PART III

Amendment to the Securities and Exchange Board of India(Portfolio Managers) Regulations, 1993








A portfolio manager who —

(a) fails to comply with any conditions subject to which certificate has beengranted;




PART IV

Amendment to the Securities and Exchange Board of India(Registrars to an Issue and Share Transfer Agents) Regulations, 1993

1. In regulation 2, clause (b) shall be omitted.






A registrar to an issue or share transfer agent who —

(a) fails to comply with any conditions subject to which registration has been granted;


(c) contravens the provisions of the Securities Contracts (Regulation) Act, 1956 (42of 1956) or the rules made thereunder;

(d) contravenes the provisions of the Depositories Act, 1996 or the rules madethereunder;

(e) contravenes the rules, regulations or bye-laws of the stock exchange,

shall be dealt with in the manner provided under the Securities and Exchange Boardof India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalties)Regulations, 2002.”


PART V

Amendment to the Securities and Exchange Board of India(Underwriters) Regulations, 1993





The Board or the Chairman shall after consideration of inspection or investigationreport take such action as the Board or Chairman may deem fit and appropriateincluding action under the Securities and Exchange Board of India (Procedure forHolding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002”.



An underwriter or a stock broker or a merchant banker entitled to carry on businessof underwriting who —





PART VI

Amendment to the Securities and Exchange Board of India(Debenture Trustees) Regulations, 1993

1. In regulation 2, clause (b) shall be omitted.






A debenture trustee who-



(c) contravenes the provisions of the Companies Act or the rules made thereunder,



PART VII

Amendment to the Securities and Exchange Board of India(Bankers to an Issue) Regulations, 1994








A banker to an issue who-





PART VIII

Amendment to the Securities and Exchange Board of India(Foreign Institutional Investors) Regulations, 1995

1. In regulation 2, clause (e) shall be omitted.



A Foreign Institutional Investor who –

(a) fails to comply with any condition subject to which certificate has been granted;

(b) contravenes any of the provisions of the Act, rules or regulations



PART IX

Amendment to the Securities and Exchange Board of India(Custodian of Securities) Regulations, 1996

1. In regulation 2, clause (g) shall be omitted.







A custodian of securities who —

(a) contravenes any of the provisions of the Act, the rules framed thereunder orthese regulations;

(b) fails to furnish any information relating to his activity as custodian of securitiesas required by the Board;

(c) furnishes to the Board information which is false and misleading in any materialparticular;

(d) does not submit periodic returns or reports as required by the Board;(e) does not co-operate in any enquiry or inspection conducted by the Board;(f) fails to update its systems and procedures as recommended by the Board;(g) fails to resolve the complaints of clients or fails to give a satisfactory reply to the

Board in this behalf;(h) is guilty of misconduct or makes a breach of the Code of Conduct specified in

the Third Schedule;(i) fails to pay annual fees,



PART X

Amendment to the Securities and Exchange Board of India(Depositories and Participants) Regulations, 1996

1. In regulation 2, clause (c) shall be omitted.






A depository or a participant who —

(a) contravenes any of the provisions of the Act, the Depositories Act, the bye-laws,agreements and these regulations;

(b) fails to furnish any information relating to its activity as a depository or participantas required under these regulations;

(c) does not furnish the information called for by the Board under clause (a) of sub-section (1) of section 18 of the Depositories Act or furnishes information whichis false or misleading in any material particular;


(d) does not co-operate in any inspection or investigation or enquiry conducted bythe Board;

(e) fails to comply with any direction of the Board issued under section 18 of theDepositories Act;

(f) fails to pay the annual fee referred to in regulation 8,



PART XI

Amendment to the Securities and Exchange Board of India(Venture Capital Funds) Regulations, 1996


2. Sub regulations (1) and (2) of regulation 29 shall be omitted and sub- regulation (3) ofthat regulation shall be re-numbered as regulation 29.



Without prejudice to the issue of directions or measure under regulation 29, a venturecapital fund which —

(a) contravenes any of the provisions of the Act or these regulations;

(b) fails to furnish any information relating to its activity as a venture capital fund asrequired by the Board;

(c) furnishes to the Board information which is false or misleading in any materialparticular;

(d) does not submit periodic returns or reports as required by the Board;

(e) does not co-operate in any enquiry, inspection or investigation conducted by theBoard;

(f) fails to resolve the complaints of investors or fails to give a satisfactory reply tothe Board in this behalf,

shall be dealt with in the manner provided in the Securities and Exchange Board ofIndia (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)Regulation, 2002.


PART XII

Amendment to the Securities and Exchange Board of India(Mutual Fund) Regulations, 1996

1. In regulation 2, clause (k) shall be omitted.







A mutual fund which —

(a) contravenes any of the provisions of the Act and these regulations;

(b) fails to furnish any information or furnishes wrong information relating to its activityas a mutual fund as required under these regulations;

(c) fails to submit periodical returns as required under these regulations;

(d) does not co-operate in any inquiry or inspection conducted by the Board;

(e) fails to comply with any directions of the Board issued under the provisions ofthe Act or the regulations;

(f) fails to resolve the complaints of the investors or fails to give a satisfactory replyto the Board in this behalf;

(g) indulges in unfair trade practices in securities:

Explanation — For the purposes of this clause “unfair trade practices” has the samemeaning as in the Securities and Exchange Board of India (Prohibition of Fraudulentand Unfair Trade Practices relating to Securities Market) Regulations, 1995;

(h) is guilty of misconduct or improper or unbusinesslike or unprofessional conductwhich is not in accordance with the Code of Conduct specified in the FifthSchedule;

(i) asset management company fails to maintain the net worth in accordance withthe provisions of regulation 21;

(j) fails to pay any fees;

(k) violates the conditions of registration;

(l) mutual fund, asset management company or trustees of that mutual fund doesnot carry out its obligations as specified in these regulations,



PART XIII

Amendment to the Securities and Exchange Board of India(Credit Rating Agencies) Regulations, 1999

1. In regulation 2, clause (j) shall be omitted.







A credit rating agency which —

(a) fails to comply with any condition subject to which a certificate has been granted;

(b) contravenes any of the provisions of the Act or these regulations or any otherregulations made under the Act,



PART XIV

Amendment to the Securities and Exchange Board of India(Collective Investment Schemes) Regulations, 1999




2. Regulation 58 shall be omitted.



In case a Collective Investment Management Company -

(a) contravenes any provision of the Act or these regulations;

(b) for the purposes of these regulations furnishes any information which is false ormisleading or suppresses any material information;

(c) does not co-operate in any inspection, investigation or inquiry conducted by theBoard under the Act or these regulations;

(d) fails to comply with any directions issued by the Board under the Act or theregulations;

(e) fails to resolve the complaints of the investors or fails to furnish to the Board asatisfactory reply in this behalf when called upon to do so by the Board;

(f) commits a breach of any provision of the Code of Conduct specified in the ThirdSchedule;

(g) fails to pay the fees specified in the Second Schedule;


(h) commits a breach of the conditions of registration; or

(i) fails to make an application for listing or fails to list units of a scheme in arecognized stock exchange,

shall be dealt with in the manner provided in the Securities and Exchange Board ofIndia (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)Regulations, 2002.”


PART XV

Amendment to the Securities and Exchange Board of India(Foreign Venture Capital Funds) Regulations, 2000


2. In Regulation 23, for the word “the regulation 24”, the words, “the Securities andExchange Board of India (Procedure for Holding Enquiry by Enquiry Officer andImposing Penalty) Regulations, 2002” shall be substituted.


SEBI (CENTRAL LISTING AUTHORITY)REGULATIONS, 2003*

106

In exercise of the powers conferred by sections 11 and 11A read with sections 19and 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Boardhereby makes the following regulations, namely:

CHAPTER I

PRELIMINARY

1. Short Title and Commencement

(1) These regulations shall be called Securities and Exchange Board of India (CentralListing Authority) Regulations, 2003.

(2) These regulations shall come into force on such date as may be specified by theBoard :

Provided that different dates may be specified for different provisions of theseregulations and in application to different kinds of securities or issues.

(3) These regulations shall apply to the issue of all classes of securities that areproposed to be listed.

2. Definitions

(1) In these regulations, unless the context otherwise requires:

(a) 'Act’ means the Securities and Exchange Board of India Act, 1992;

(b) ‘applicant’ means any company or other body corporate, mutual fund orcollective investment scheme, acting by itself or through a merchant banker,who proposes to make an application to the Authority for a letter precedentto listing;

(c) 'Authority’ means the Central Listing Authority established underregulation 3 of these regulations;

(d) ‘Board’ means the Securities and Exchange Board of India established undersection 3 of the Act;

(e) ‘Chief Executive Officer’ means a person, including a Member, appointed assuch by the/Authority with the previous approval of the Board;

(f) ‘exchange’ means a stock exchange which has been granted recognitionunder Section 4 of the Securities Contracts (Regulation) Act, 1956;

(g) ‘letter precedent to listing’ means a letter issued by the Authority under

* Issued by SEBI vide Notification No. SO 954(E) dated 21-8-2003.


regulation 12, permitting the applicant to make a listing application to anyexchange, including for relisting and listing of an already listed security atan exchange other than the exchange where it is presently listed;

(h) ‘listing agreement’ means the agreement that is entered into between anexchange and an applicant under which the securities are listed and dealtwith in the concerned exchange;

(i) ‘listing application’ means an application made by an applicant, underapplicable laws, to an exchange for permission for its securities to be listedand dealt with in the exchange;

Explanation : An application to any exchange for obtaining any prior‘inprinciple’ approval or for obtaining the comments or observations of theexchange on such application shall not be deemed to be a listing applicationfor the purposes of these regulations;

(j) ‘listing conditions’ means the conditions to be fulfilled by a company orother body corporate, mutual fund or collective investment scheme for thepurpose of getting its securities listed on an exchange; and

(k) ‘securities’ shall have the meaning assigned to it under Section 2(h) of theSecurities Contracts (Regulation) Act, 1956.

(2) (a) Words and expressions used and not defined in these regulations shallhave the meanings, if any, respectively assigned to them under the Act.

(b) Words and expressions used and not defined either in these regulations orthe Act, shall have the meanings, if any, respectively assigned to themunder the Securities Contracts (Regulation) Act, 1956 or any statutorymodification or re-enactment thereof.

(c) Words and expressions used and not defined either in these regulations, orin the Act or in the Securities Contracts (Regulation) Act, 1956 shall havethe meanings, if any, respectively assigned to them under the CompaniesAct, 1956, or any statutory modification or re-enactment thereof.

CHAPTER II

CENTRAL LISTING AUTHORITY

3. Establishment of the Central Listing Authority

(1) With effect from such date as may be specified by the Board in this regard, thereshall be established for the purposes of these regulations, an authority to becalled the “Central Listing Authority” and with effect from such date, the Boardshall be deemed to have delegated its functions and powers, as are specifiedherein, to the Authority.

(2) The head office of the Authority shall be located in Mumbai:

Provided that the Authority may, with prior approval of the Board, establish suchbranch or regional offices as may be necessary.

4. Composition of the Authority

(1) The Authority shall, at any time, be composed of not more than eleven Memberscomprising of :

(a) a President;


(b) a Vice President; and,

(c) not more than nine other Members.

(2) The President, Vice President and the Members shall be appointed by the Boardfrom amongst eminent persons of demonstrated integrity and outstandingtechnical and professional ability, and drawn from the judiciary, the legalprofession, the academia, investor associations, exchanges, and experts insecurities market or finance;*[Provided that at least three Members shall be representatives of exchanges,depositories, clearing corporation or other institutions relating with the securitiesmarket].

(3) The Chief Executive Officer of the Authority shall be the ex-officio Member-Secretary of the Authority.

(4) The President, Vice President and each Member shall be appointed for a term ofthree years.

(5) A Member shall be eligible for reappointment:

Provided that a Member shall not be eligible for re-appointment as a Member oras a President or as a Vice President, if he has already served for two terms.

(6) The remuneration and the terms and conditions of appointment of the Members,including the President, shall be such as may be specified by the Board:

Provided that the Members who are representatives of exchanges shall not drawany remuneration from the Authority.

(7) The President may, by notice in writing under his hand addressed to the Board,resign his office and the Vice President or a Member may, by notice in writingunder his hand addressed to the President, resign his office.

(8) The Board may, for reasonable cause, remove the President, Vice President ora Member:

*Provided that no Member, including the President, Vice President and the ChiefExecutive Officer, shall be removed from office unless the reasons for such removalare communicated to him and an opportunity of being heard by the Board hasbeen provided:

Provided further that no Member removed under this sub-regulation, shall beentitled to receive any compensation for loss of office.

5. Secretariat

(1) The Authority may have a secretariat to assist it in the discharge of its functions.

(2) The Board may, if requested by the Authority, make available or cause to bemade available to the Authority the premises, infrastructure and amenities,commensurate with its functions and responsibilities.

(3) The Authority shall, in consultation with the Board, appoint a Chief ExecutiveOfficer of the Authority who shall perform such functions as may be specified bythe Authority.

* Substituted by SEBI (Central Listing Authority) (Amendment) Regulations, 2003, dated14-10-2003.


(4) The Authority may appoint such officers and staff, on such remuneration andterms, as it considers necessary for the efficient discharge of its functions underthese regulations.

(5) Notwithstanding the above, the Authority may request the Board to depute, fromtime to time, adequate number of personnel to the secretariat.

(6) The Authority may engage, and pay for, external professional services to assistit in the efficient discharge of its functions under these regulations.

6. Meetings of the Authority

(1) The Authority may meet from time to time for the despatch of business, adjourn,re-schedule and otherwise regulate its meetings, as it thinks fit.

(2) The President may, either on his own volition or upon request by a Member,summon a meeting of the Authority.

(3) The President, and in his absence the Vice President shall chair all meetingsand in the absence of both of them in any meeting, the Members present shallappoint one of them to chair the meeting.

(4) The Chief Executive Officer being the ex officio Member-Secretary shall beresponsible for all administrative functions in relation to the meetings.

(5) The meetings of the Authority shall be held at its office, provided that the Authoritymay meet at any other place and conduct a meeting without the Members beingphysically present in one location, through audio or video conferencing.

(6) The quorum for any meeting of the Authority shall be four Members:

Provided however, that in a meeting for considering an application for a letterprecedent to listing, Members who are representatives of exchanges shall notbe considered for the purpose of quorum.

(7) The continuing Members may act notwithstanding any vacancies in theAuthority:

Provided that if the number of Members is reduced below the quorum fixed bythese regulations for a meeting of the Authority, the continuing Members orMember may act and they shall constitute the quorum.

(8) Questions arising at any meeting of the Authority shall be decided by a majorityvote of the Members present and voting in such meeting:

Provided that in case of an equality of votes, the President, or in his absence theperson presiding, shall have a second or casting vote.

(9) Decisions of the Authority may also be taken by circulation, provided the resolutionhas been circulated in draft, together with the necessary papers, if any, to all theMembers in advance.

(10) The Authority may delegate any of its functions and powers to any committeeconsisting of such Members as it may determine.

(11) Any committee so formed shall in the exercise of its powers or in the performanceof its functions so delegated, conform to such procedures or conditions thatmay be specified by the Authority.

(12) Questions arising at any meeting of a committee shall be determined by a


majority of the Members present and in case of an equality of votes, the mattershall be referred to the Authority for its consideration and decision thereon.

(13) No proceedings before, or order passed by the Authority, shall be questioned orshall be deemed to be invalid on the grounds merely of the existence of anyvacancy or defect in the constitution of the Authority.

7. Fund

(1) The Board shall constitute a Fund to be called the Central Listing AuthorityGeneral Fund and there shall be credited thereto:

(a) any application fees levied and received by the Board under sub-regulation (4) of regulation 10; and

(b) any other sum as may be decided upon by the Board.

(2) The above Fund shall be managed by the Authority and shall be applied formeeting:

(a) the remuneration, if any, of the President and other Members of the Authority;

(b) the expenses (whether capital or revenue in nature) of the Authority for thedischarge of its functions and exercise of powers under these regulationsincluding salary and allowances payable to the Chief Executive Officer, otherofficers and staff of the Authority; and,

(c) the professional fees of external professionals, agencies, consultants and/or advisers and/or advisory committees engaged by the Authority.

CHAPTER III

FUNCTIONS OF THE AUTHORITY AND LETTERS PRECEDENT TO LISTING

8. Functions of the Authority

(1) The Authority shall perform the following functions :

(a) to receive and process applications for letter precedent to listing fromapplicants and issue, if it deems fit, a letter precedent to listing to any suchapplicant;

(b) to make recommendations to the Board on issues pertaining to the protectionof the interest of the investors in securities and development and regulationof the securities market, including the listing agreements, listing conditionsand disclosures to be made in offer documents; and,

(c) to undertake any other functions as may be delegated to it by the Boardfrom time to time.

9. Letter Precedent to Listing

(1) No applicant, unless it has obtained a letter precedent to listing from the Authority,shall :

(a) make an issue of securities which is proposed to be listed on an exchange,and/or

(b) make a listing application for listing of its securities to any exchange.

(2) No applicant shall make an issue of any class of securities unless it has obtained


an in-principle approval from the exchange(s) where it proposes to list suchsecurities.

(3) No exchange shall consider a listing application made by an applicant, unless itis accompanied by a copy of the letter precedent to listing granted by theAuthority.

(4) The Board, in consultation with the Authority, may either by a general or aspecific order, exempt the application of sub-regulations (1), (2) and (3) to anysecurity or class of securities, for such period and subject to such conditions, ifany, as may be specified in the order.

10. Application for the Letter Precedent to Listing

(1) An applicant desirous of obtaining a letter precedent to listing from the Authorityshall make an application to the Authority in such form and in such manner andtogether with such information or documents, as may be specified by the Authority,from time to time.

(2) Notwithstanding anything contained in any regulations or guidelines issued bythe Board, an applicant seeking listing of securities shall file only with the Authoritythe draft offer documents including for public and rights issues by companiesand bodies corporate, or draft offer documents of schemes of mutual funds orcollective investment schemes and the Board may offer its observations, if any,to the Authority on such draft offer documents.

(3) An application for letter precedent to listing shall specify the exchange orexchanges where the applicant is desirous of listing its securities indicatingalso, wherever applicable, the designated stock exchange for the purposes offinalizing the basis of allotment and for depositing the security deposit.

(4) Any application for a letter precedent to listing shall be accompanied by suchapplication fees as may be specified by the Board, in consultation with theAuthority, from time to time.

11. Procedure on Receipt of Application

(1) Upon receipt of an application under regulation 10, the Authority may direct theapplicant to furnish such additional information, documents or clarifications asmay be required by the Authority, for the purpose of processing the said applicationand thereupon the applicant shall provide all such information within the timestipulated by the Authority.

(2) In the event the applicant supresses any material information or misrepresentsfacts to the Authority or does not provide the information or documents soughtby the Authority or does not inform the Authority of any relevant and materialdevelopments that take place subsequent to the filing and during the pendencyof the application, the Authority shall be entitled to reject the application forletter precedent to listing.

(3) The Authority shall be entitled to disclose to any person, exchange or authoritythe contents of the application and the information, documents or clarificationsreceived by the Authority from the applicant and to invite their comments andviews.

(4) Notwithstanding the primary obligation of the applicant to furnish information or


clarifications under subregulation (1), the Authority may call from the exchangestheir observations or comments on the application and call from any intermediariesregistered with the Board, such further information as it may deem necessary inconnection with the processing of an application for a letter precedent to listing.

(5) The Authority after examining the application and the information or clarificationscalled for, may either grant or refuse to grant the letter precedent to listing, andthis shall be done within thirty days of the making of the application or of furnishingof the information or clarification by the applicant, as the case may be:

Provided that the Authority shall not refuse to grant the letter precedent to listingunless the applicant is given an opportunity of making representation.

(6) The Authority shall, while processing the application, have regard to the followingfactors :

(a) compliance with the provisions of the Companies Act, 1956 pertaining toissue of securities;

(b) compliance with the Guidelines or Regulations of the Board relating toDisclosure and Investor Protection;

(c) compliance with the Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 or the Securities and Exchange Board of India (CollectiveInvestment Schemes) Regulations, 1999, or other relevant regulations orguidelines issued by the Board where applicable;

(d) compliance with the listing conditions specified under the Act, the SecuritiesContracts (Regulation) Act, 1956 and the rules made thereunder and thosespecified by exchanges, or otherwise; and,

(e) such other factors as the Authority may consider relevant in connection withprocessing the application, including, but not limited to, the following:

(i) whether listing of securities of the applicant may be detrimental to theinterests of investors or the securities market in view of the businesspractices, antecedents, credibility, financial morality, and marketreputation of the applicant and of its promoters or group companies andof its directors or persons in control or persons acting in concert withthe applicant;

(ii) whether the applicant has made any provision for monitoring or controlor supervision of the use of funds raised by the applicant through theissue of securities or based thereon; and,

(iii) whether the applicant has made a disclosure in the offer document ofthe availability and mechanism of safety net, if any.

12. Other Provisions as to Letter Precedent to Listing

(1) The Authority may, while granting the letter precedent to listing, impose suchconditions as it deems fit including conditions as to the manner, the requiredprominence and the wordings of the disclosures to be made in the offer documentsand advertisements.

(2) Failure by the applicant to comply with the conditions imposed under sub-regulation (1) shall, unless otherwise waived by the Authority in writing, renderthe letter precedent to listing invalid.


(3) Any letter precedent to listing granted by the Authority shall specify the namesof the exchange(s) where the applicant may make a listing application.

(4) Where the Authority issues a letter precedent to listing with any conditions, theapplicant shall comply with such conditions and confirm the same to theAuthority, within such time as may be specified by the Authority.

(5) The Authority shall be entitled to lay down any fresh conditions subsequent tothe grant of a letter precedent to listing as may be necessitated by new guidelinesor directions issued by the Board or due to some relevant developments in thesecurities market and the applicant shall comply with such conditions and confirmthe same to the Authority, within such time as may be specified by the Authority.

(6) The Authority shall communicate its decision made under sub-regulation (5) ofregulation 11 to the applicant and to the exchange or exchanges specified bythe applicant in its application for letter precedent to listing.

(7) The Authority may, subsequent to the issue of letter precedent to listing, directthe applicant, exchanges or other intermediaries registered with the Board tofurnish it such information as may be necessary to enable it to determine whetherthe applicant is in compliance with conditions imposed by applicable rules,regulations and guidelines or by the Authority in the letter precedent tolisting.

(8) Any letter precedent to listing granted by the Authority under these regulationsshall, unless specified otherwise by the Authority, have a validity period of 90days by which time the subscription list for public issues and rights issuesshould have opened and in the case of other kind of issue, the securities ‘ shouldhave been listed on the Exchange:

Provided that the Authority at its discretion may, upon an application made bythe applicant in this behalf, prior to the expiry of the validity period, extend thevalidity period of a letter precedent to listing subject to such conditions, if any,as it deems fit to impose.

(9) Where an applicant changes the terms and conditions of the issue in respect ofwhich a letter precedent to listing was granted to it or where any materialdevelopments take place which have a bearing on the issue or listing of thesecurities, the Authority may withdraw the letter precedent to listing:

Provided the Authority shall prior to withdrawing a letter precedent to listingunder this clause give an opportunity of making representation to the applicant.

(10) The Authority may withdraw the letter precedent to listing where it is satisfied,based upon information available to it, that

(i) the applicant had either suppressed material facts or misrepresented factsin its application for letter precedent to listing; or

(ii) the applicant has ceased to fulfill the qualifications specified in clause (e) ofsub-regulation(6) of regulation 11; or

(iii) withdrawal of a letter precedent to listing is desirable in the larger interestsof investors and the securities market:

Provided that the Authority shall, if it proposes to withdraw a letter precedent to


listing, communicate the grounds for such proposal to the applicant and affordhim an opportunity of making representation:

Provided further that the letter precedent to listing may be withdrawn by theAuthority only if the securities are not listed on the exchanges andif the securitieshave already been listed, the Authority shall inform the Board and the exchangesfor taking such action, including delisting of securities, as they may deem fit.

13. Appeal

An order passed by the Authority declining to grant or withdrawing a letter precedentto listing shall be deemed to be an order of the Board within the meaning of clause (a) ofsub-section (1) of Section 15T of the Act and shall be appealable to the SecuritiesAppellate Tribunal in accordance with the provisions of the Act.

14. Application to Exchanges for Listing

(1) On receipt of the letter precedent to listing from the Authority, the applicant maymake a listing application to the exchange(s) in respect of which the letterprecedent to listing has been granted, enclosing therewith a copy of the letterprecedent to listing.

(2) On receipt of the listing application, the exchange(s) shall proceed with thesame in the manner provided for under the Securities Contracts (Regulation)Act, 1956 and the rules and byelaws made thereunder.

(3) Unless otherwise permitted by the Authority, the applicant shall ensure that thesecurities for which it has obtained a letter precedent to listing are listed on thesame day at all the concerned exchanges.

15. Appeal against Refusal of Listing by Exchange

An applicant may prefer an appeal against the decision of an exchange refusinglisting to the Securities Appellate Tribunal as provided in Section 22A of the SecuritiesContracts (Regulation) Act, 1956.

16. Powers of the Authority to Regulate its Procedures and OperationalGuidelines

(1) Subject to the provisions of these regulations and with the previous approval ofthe Board, the Authority shall have power to set out and regulate its ownprocedures.

(2) Without prejudice to the generality of its power under subregulation (1), theAuthority may, with the previous approval of the Board, frame operational guidelinesfor the performance of its functions.

17. Company or Other Body Corporate, Mutual Fund or Collective InvestmentScheme to Continue to Comply with Listing Conditions and ListingAgreement

(1) These regulations are in addition to, and not in derogation of, the listing agreementand the listing conditions.

(2) An exchange in which any securities of a body corporate, mutual fund or collectiveinvestment scheme are listed shall comply with the listing agreement.


(3) If a company or other body corporate, mutual fund or collective investment schemefails to comply with these regulations, the listing conditions or the listingagreement or neglects to furnish any information or documents, which are requiredto be furnished to the Board, to the Authority or to an exchange as per theseregulations, the listing conditions or the listing agreement, it shall be liable topenalty as specified in Section 15A or Section 15HB of the Act, to be imposedin accordance with the procedure prescribed under Chapter VI A of the Act.

CHAPTER IV

MISCELLANEOUS

18. Power of the Board to Supersede the Authority

(1) If at any time the Board is of the opinion that circumstances exist which renderit necessary in the interests of investors or the securities market or in the publicinterest so to do, the Board may, by order, supersede the Authority for suchperiod as may be specified in the order.

(2) Upon the issuance of an order under sub-regulation (1) superseding the Authority:

(a) all Members shall, as from the date of supersession, be deemed to havevacated their offices; and

(b) all functions and powers which may, by or under the provisions of theseregulations, be exercised or discharged by or on behalf of the Authority,shall until the Authority is reconstituted under sub-regulation (3), be exercisedand discharged by the Board or such person or persons the Board maydirect.

(3) On the expiration of the period of supersession specified in the notification issuedunder subregulation (1), or earlier in the discretion of the Board, the Board mayreconstitute the Authority by fresh appointment and in such case any person orpersons who vacated their offices under clause (a) of subregulation (2), shall notbe deemed disqualified for appointment;

Provided that the Board may at any time, even before the expiration of the periodof supersession, take action under this sub-regulation.

19. Reporting and Exchange of Information

(1) The Authority shall furnish to the Board such returns and statements at suchtime and in such form and manner as the Board may require.

(2) It shall be competent for the Board and the Authority to exchange any informationrelevant for the discharge of their functions.

20. Records of the Authority

The Authority shall maintain such books, records and documents and for such periodas may be specified by the Board.

21. Repeal and Savings

(1) The Securities and Exchange Board of India (Central Listing Authority)Regulations, 2003 notified by the Board vide S.O. No. 171(E) dated 13th February,2003 are hereby repealed.


(2) Notwithstanding such repeal -

(a) the Authority constituted under regulation 3 of the regulations hereby repealedshall be deemed to be appointed under the corresponding provisions of theseregulations; and, anything done or any action taken or purported to havebeen done or taken, including any notice issued under the regulations herebyrepealed shall, in so far as it is not inconsistent with the provisions of theseregulations, be deemed to have been done or taken under the correspondingprovisions of these regulations.

SEBI (DELISTING OF SECURITIES)GUIDELINES - 2003*

117

1. These guidelines shall be called “Securities and Exchange Board of India (Delistingof Securities) Guidelines 2003”.

2. These guidelines are being issued under section 11(1) of SEBI Act, 1992, read withsub-section (2) of Section 11A of SEBI Act, with the objective to protect the interestof investors in the securities market.

3. DEFINITIONS

3.1 In these Guidelines, unless the context otherwise requires:-


(b) ‘Authority’ means the Central Listing Authority established under theSecurities and Exchange Board of India (Central Listing Authority)Regulations, 2003.

(c) ‘Board’ means the Securities and Exchange Board of India established undersection 3 of the Act;

(d) ‘compulsory delisting’ means delisting of the securities of a company by anexchange.

(e) ‘delisting exchange’ means the exchange from which the securities of thecompany are proposed to be delisted in accordance with these Guidelines;

(f) ‘exchange’ means any stock exchange which has been granted recognitionunder section 4 of the Securities Contracts (Regulation) Act, 1956;

(g) ‘promoter’ means a promoter as defined in clause (h) of sub-regulation (1) ofRegulation 2 of the Securities and Exchange Board of India (SubstantialAcquisition of shares and Takeovers) Regulation, 1997 and includes a personi.e. who is desirous of getting the securities of the company delisted underthese Guidelines;

(h) ‘public shareholding’ means the shareholding in a company held by personsother than the promoter, the acquirer or the persons acting in concert withhim as defined in regulation 2(1)(j) of the Securities and Exchange Board ofIndia (Substantial Acquisition of shares and Takeovers) Regulation, 1997and the term ‘public holders of securities’ shall be construed accordingly;

(i) ‘schedule’ means a schedule appended to these Guidelines.

(j) ‘voluntary delisting’ means delisting of securities of a body corporatevoluntarily by a promoter or an acquirer or any other person other than thestock exchange(s).

* Issued by SEBI vide Notification No. SMD/POLICY/CIR-7/2003 dated 17.2.2003.


3.2 Words and expressions not defined in these Guidelines shall have the samemeaning as have been assigned to them under the Act or the Securities Contracts(Regulation) Act, 1956 or the Companies Act, 1956, or any statutory modificationor re-enactment thereof, as the case may be.

4. APPLICABILITY

4.1 These guidelines shall be applicable to delisting of securities of companies andspecifically shall apply to:

(a) Voluntary delisting being sought by the promoters of a company

(b) any acquisition of shares of the company (either by a promoter or by anyother person) or scheme or arrangement, by whatever name referred to,consequent to which the public shareholding falls below the minimum limitspecified in the listing conditions or listing agreement that may result indelisting of securities;

(c) Promoters of the companies who voluntarily seek to delist their securitiesfrom all or some of the stock exchanges;

(d) cases where a person in control of the management is seeking to consolidatehis holdings in a company, in a manner which would result in the publicshareholding in the company falling below the limit specified in the listingconditions or in the listing agreement that may have the effect of companybeing delisted;

(e) companies which may be compulsorily delisted by the stock exchanges;

4.2 Provided that company shall not be permitted to use the buy-back provision todelist its securities.

5. DELISTING OF SECURITIES (VOLUNTARY) OF A LISTED COMPANY

5.1 A company may delist from stock exchange where its securities are listed.

Provided that the securities of the company have been listed for a minimumperiod of 3 years on any stock exchange.

Provided further that an exit opportunity has been given to the investors for thepurpose of which an exit price shall be determined in accordance with the “bookbuilding process” described in clauses 7-10 and 13 and 14 of these guidelines.

5.2 An exit opportunity need not be given in cases where securities continue to belisted in a stock exchange having nation wide trading terminals.

Explanation : For the purposes of these guidelines, stock exchange havingnationwide trading terminals means the Stock Exchange, Mumbai, the NationalStock Exchange and any other stock exchange, which may be specified by theBoard.

6. PROCEDURE FOR VOLUNTARY DELISTING

6.1 Any promoter or acquirer desirous of delisting securities of the company underthe provisions of these guidelines shall : -

(a) obtain the prior approval of shareholders of the company by a special resolutionpassed at its general meeting;


(b) make a public announcement in the manner provided in these Guidelines.

(c) make an application to the delisting exchange in the form specified by theexchange, annexing therewith a copy of the special resolution passed undersub-clause (a); and;

(d) comply with such other additional conditions as may be specified by theconcerned stock exchanges from where securities are to be delisted.

7. PUBLIC ANNOUNCEMENT FOR VOLUNTARY DELISTING

7.1 Before making application for delisting, the promoters or the acquirers of thecompany shall make a public announcement.

7.2 The public announcement shall contain inter-alia information specified inSchedule I.

7.3 Before making the public announcement, the promoter shall appoint a merchantbanker registered with the Board, who is not an associate of the promoter.

8. EXIT PRICE FOR VOLUNTARY DELISTING OF SECURITIES

8.1 Any promoter of a company which desires to delist from the stock exchangeshall determine an exit price for delisting of securities in accordance with thebook building process described in Schedule II of these guidelines.

8.2 The offer price shall have a floor price, which will be the average of 26 weekstraded price quoted on the stock exchange where the shares of the companyare most frequently traded preceding 26 week from the date of the publicannouncement and without any ceiling of maximum price.

8.3 In the case of infrequently traded securities the offer price shall be as perregulation 20(5) of the SEBI (Substantial Acquisition and Takeover) Regulations,and the infrequently traded securities shall be determined in the manner explainedunder regulation 20(5) of the SEBI (Substantial Acquisition and Takeover)Regulations.

8.4 The stock exchange(s) shall provide the infrastructure facility for display of theprice at the terminals of the trading members to enable the investors to accessthe price on the screen to bring transparency to the delisting process.

8.5 In the event of securities being delisted, the acquirer shall allow a further periodof 6 months for any of the remaining shareholders to tender securities at thesame price.

8.6 The stock exchanges shall monitor the possibility of price manipulation andkeep under special watch the securities for which announcement for delistinghas been made.

8.7 To ascertain the genuineness of physical securities if tendered and to avoid thebad delivery, Registrar and Transfer Agent shall co-operate with the ClearingHouse / Clearing Corporation to determine the quality of the papers upfront.

8.8 If the quantity eligible for acquiring securities at the final price offered does notresult in public shareholding falling below required level of public holding forcontinuous listing, the company shall remain listed.


8.9 The paid up share capital shall not be extinguished as in the case of buyback ofsecurities;

8.10 In case of partly paid-up securities, the price determined by the book buildingprocess shall be applicable to the extent the call has been made and paid.

8.11 The amount of consideration for the tendered and acceped securities shall besettled in cash;

9. RIGHT OF PROMOTER

9.1 The promoter may not accept the securities at the offer price determined by thebook building process.

9.2 Where the promoter decides not to accept the offer price so determined:

(a) he shall not make an application to the exchange for delisting of thesecurities; and

(b) the promoter shall ensure that the public shareholding is brought up to theminimum limits specified under the listing conditions within a period of 6months from the date of such decision, by any of the modes specified insub-clause 9.3.

9.3 For the purposes of sub-clause 9.2(b), the public shareholding may be increasedby any of the following means:

(a) by issue of new shares by the company in compliance with the provisions ofthe Companies Act, 1956 and the Securities and Exchange Board of India(Disclosure and Investor Protection) Guidelines, 2000;

(b) by the promoter making an offer for sale of his holdings in compliance withthe provisions of the Companies Act, 1956 and the Securities and ExchangeBoard of India (Disclosure and Investor Protection) Guidelines, 2000;

(c) by the promoter making sale of his holdings through the secondary marketin a transparent manner;

9.4 In the event of the promoter not being able to raise the public shareholding inaccordance with sub-clause 9.3 within six months, he shall offer for sale to thepublic such portion of his holdings as would bring up the public shareholding tothe minimum limits specified in the listing agreement or the listing conditions atthe price determined by the Central Listing Authority.

10. PUBLIC ANNOUNCEMENT OF FINAL PRICE

10.1 On determination of the final price pursuant to the book building, the promoteror the acquirer shall within a period of two working days from suchdetermination:

(a) make a public announcement in the newspapers of the final price asdiscovered by the book building process and whether or not the promoteror the acquirer has accepted the price; and,

(b) communicate to, exchange or exchanges from which delisting is soughtto be made, the final price discovered and whether the promoter hasaccepted the price.


11. DELISTING FROM ONE OR MORE STOCK EXCHANGES

11.1 When a company which is listed on any stock exchange or stock exchangesother than the stock exchanges having nationwide trading terminals, seeksdelisting, an exit offer shall be made to the shareholders in accordance withthese guidelines.

11.2 There shall not be any compulsion for the existing company to remain listedon any stock exchange merely because it is a regional stock exchange.

12. MINIMUM NUMBER OF SHARES TO BE ACQUIRED

12.1 Where the offer for delisting results in acceptance of a fewer number of sharesthan the total shares outstanding and as a consequence the public shareholdingdoes not fall below the minimum limit specified by the listing conditions or thelisting agreement, the offer shall be considered to have failed and no securitiesshall be acquired pursuant to such offer.

13. PAYMENT OF CONSIDERATION

13.1 The payment of consideration for delisting of securities shall be paid in cashby the promoter or acquirer.

14. DELISTING OF ONE OR ALL CLASS OF SECURITIES

14.1 A company may delist one or all of its class of securities subject to theprovisions of this clause.

14.2 If the equity shares of a company are delisted, the fixed income securitiesmay continue to remain listed on the stock exchange.

14.3 A company which has a convertible instrument outstanding, it shall not bepermitted to delist its equity shares till the exercise of the conversion options.

15. COMPULSORY DELISTING OF COMPANIES BY STOCK EXCHANGES

15.1 The Stock Exchanges may delist companies which have been suspended fora minimum period of six months for non-compliance with the Listing Agreement.

15.2 The Stock Exchanges may also delist companies as per the norms providedin Schedule III.

15.3 The Stock Exchange shall give adequate and wide public notice through newspapers (including one English national daily of wide circulation) and throughdisplay of the notice on the notice board/ website/ trading systems of theExchange.

15.4 The stock exchange shall give a show cause notice to a company or adoptprocedure provided under Part B of Schedule III for delisting under sub-clause 15.1 and 15.2.

15.5 The exchange shall provide a time period of 15 days within which representationmay be made to the exchange by any person who may be aggrieved by theproposed delisting

15.6 The stock exchange shall ensure that adequate and wide public notice is


given through newspapers and on the notice boards/trading systems of thestock exchanges after the period of show cause is over.

15.7 The stock exchange shall display the name of such company on itswebsite.

16. RIGHTS OF SECURITIES HOLDERS IN CASE OF COMPULSORY DELISTING

16.1 Where the securities of the company are delisted by an exchange, the promoterof the company shall be liable to compensate the security-holders of thecompany by paying them the fair value of the securities held by them andacquiring their securities, subject to their option to remain security-holderswith the company.

Explanation : For the purposes of this sub-clause fair value shall be determinedby the arbitrator having regard to the factors mentioned in Regulation 20 of theSecurities and Exchange Board of India (Substantial Acquisition of sharesand Takeovers) Regulations, 1997.

16.2 The security holders may enforce their claim to compensation/fair value underthis clause through the arbitration mechanism of the exchange in the mannerlaid down in its byelaws.

17. DELISTING PURSUANT TO RIGHTS ISSUE

17.1 In case of rights issue, allotment to the promoters or the persons in control ofthe management shall be allowed even if they subscribe to unsubscribed portionwhich may result in public shareholding falling below the permissible minimumlevel.

Provided that the adequate disclosures have been made in the offer documentto that effect.

Provided further that they agree to buy out the remaining holders at the price ofrights issue or make an offer for sale to bring the public shareholding at thelevel specified in the listing conditions or listing agreement to remain listed.

17.2 In case the rights issue is not fully subscribed, which may result in the publicshareholding falling below the permissible minimum level as specified in thelisting condition or listing agreement, the promoter(s) of the company shall berequired to delist by providing an exit opportunity in the manner specified inclause 17.1 of these guidelines or may be required to make offer for sale oftheir holdings so that the public shareholding is raised to the minimum levelspecified in the listing agreement or in the listing conditions within a period of3 months.

18. REINSTATEMENT OF DELISTED SECURITIES

Reinstatement of delisted securities should be permitted by the stock exchangeswith a cooling period of 2 years. In other words, relisting of securities should beallowed only after 2 years of delisting of the securities. It would be based on therespective norms/criteria for listing at the time of making the application for listingand the application will be initially scrutinized by the Central Listing Authority.


SCHEDULE I

(See Guideline 7.2)

Contents of the Public Announcement

1. The floor price and how it was reached

2. The dates of opening and closing of the bidding

3. The name of the exchange or exchanges from which the securities are sought tobe delisted.

4. The names and addresses of the trading members as well as the bidding terminalsand centres through which bids can be placed.

5. Description of the methodology to be adopted for determination of acceptableprice

6. Period for which the offer shall be valid

7. The necessity and the object of the delisting

8. A full and complete disclosure of all material facts.

9. The proposed time table from opening of the offer till the settlement of the transfers.

10. Details of the escrow account and the amount deposited therein.

11. Listing details and stock market data:

(a) high, low and average market prices of the securities of the company duringthe preceding three years;

(b) monthly high and low prices for the six months preceding the date of thepublic announcement; and,

(c) the volume of securities traded in each month during the six months precedingthe date of public announcement.

12. Present capital structure and shareholding pattern.

13. The likely post-delisting capital structure.

14. The aggregate shareholding of the promoter group and of the directors of thepromoters, where the promoter is a company and of persons who are in controlof the company.

15. Name of compliance officer of the company.

16. It should be signed and dated by the promoter.

SCHEDULE II

(See Guideline 8.1)

The Book Building Process

1. The book building process shall be made through an electronically linkedtransparent facility.

2. The number of bidding centres shall not be less than thirty, including all stockexchange centres and there shall be at least one electronically linked computerterminal at all bidding centres.

3. The promoter shall deposit in an escrow account, 100 per cent of the estimated


amount of consideration calculated on the basis of the floor price indicated andthe number of securities required to be acquired. The provisions of clause 10 ofthe Securities and Exchange Board of India (Buyback of Securities) Regulations,1998 shall be applicable mutatis mutandis to such escrow account.

4. The offer to buy shall remain open to the security holders for a minimum periodof three days. The security holders shall have a right to revise their bids beforethe closing of the bidding.

5. The promoter or acquirer shall appoint ‘trading members’ for placing bids on theon-line electronic system.

6. Investors may approach trading members for placing offers on the on-lineelectronic system. The format of the offer form and the details that it must containshall be specified.

7. The security holders desirous of availing the exit opportunity shall deposit theshares offered with the trading members prior to placement of orders. Alternatelythey may mark a pledge for the same to the trading member. The trading membersin turn may place these securities as margin with the exchanges/clearingcorporations.

8. The offers placed in the system shall have an audit trail in the form of confirmationswhich gives broker ID details with time stamp and unique order number.

9. The final offer price shall be determined as the price at which the maximumnumber of shares has been offered. The acquirer shall have the choice to acceptthe price. If the price is accepted then the acquirer shall be required to accept alloffers upto and including the final price but may not have to accept higher pricedoffers, subject to clause 15. An illustration is given below:

Offer Quantity Offer Price Remarks

50 120 Floor price

82 125

108 130 Final price (as quantity offered ismaximum).

27 135

5 140

10. If final price is accepted the acquirer shall have to accept offers up to and includingthe final price i.e. 240 shares at the final price of Rs. 130/-.

11. At the end of the book build period the merchant banker to the book buildingexercise shall announce in the press and to the concerned exchanges the finalprice and the acceptance (or not) of the price by the acquirer.

12. The acquirer shall make the requisite funds available with the exchange/clearingcorporation on the final settlement day (which shall be three days from the end


of the book build period). The trading members shall correspondingly make theshares available. On the settlement day the funds and securities shall be paidout in a process akin to secondary market settlements.

13. The entire exercise shall only be available for demat shares. For holders ofphysical certificates the acquirer shall keep the offer open for a period of 15 daysfrom the final settlement day for the shareholders to lodge the certificates withcustodian(s) specified by the merchant banker.

SCHEDULE III

(Guideline 17.1)

Norms and Procedure for Delisting of Securities by the Stock Exchanges

A. NORMS

1. The percentage of equity capital (floating stock) in the hands of public investors.

This may be seen with reference to —-

— Existing paid-up equity capital

— Market lot

— Share price – very high, medium, low

— Market Capitalisation

— SEBIs Takeover Regulations-Regulation 21(3)

— Clause 40A of the Listing Agreement

2. The minimum trading level of shares of a company on the exchanges. Thereshould be some liquidity in every trading cycle. There should be some volume oftrading for price discovery on the market. The Company should appoint marketmakers. Criteria of no-trading may be considered.

3. Financial aspect/Business aspects —

(a) The company should generate reasonable revenue/income/profits. It shouldbe operational/working. It must demonstrate earning power through itsfinancial results, profits, reserves, dividend payout for last 2/3 years.

(b) If there is hardly any public interest in the securities the company then it isfor consideration whether its “listed company” label needs to be retainedany more.

(c) The company should have some tangible asset. It is for consideration as towhat value of assets the company should own in order to be listed continuouslylisted.

4. Track records of compliance of the Listing Agreement requirements for the pastthree years.

l Submission of audited/unaudited results, annual report, other documentsrequired to be furnished to the Exchange

l Book closure Record date with due notice

l Payment of listing fee


l Service to investors especially with regard to timely return of shares dulytransferred, timely payment of dividend, communication of price sensitiveinformation, etc.

l Failure to observe good accounting practises in reporting earnings andfinancial position

l Publishing half yearly unaudited/audited results

l Frequent changes in –

Accounting year

Share transfer agent

Registered office

Name

5. Promoters’ Directors’ track record especially with regard to insider trading,manipulation of share prices, unfair market practises (e.g. returning of sharetransfer documents under objection on frivolous grounds with a view to creatingscarcity of floating stock, in the market causing unjust aberrations in the shareprices, auctions, close-out, etc. (Depending upon the trading position of directorsor the firms).

6. If whereabouts of the company, its promoters directors are not available andeven the letters sent by the Exchange return undelivered and the company failstop remain in touch with the Exchange.

7. The company has become sick and unable to meet current debt obligations orto adequately finance operations, or has not paid interest on debentures for thelast 2-3 years, or has become defunct,or there are no employees, or liquidatorappointed, etc.

8. On the basis of the above norms and other relevant information available aboutthe company, its promoters/directors, project, litigations, etc., a profile of thecompany should be prepared and then a decision on delisting should be takenby an Exchange.

B. PROCEDURE

1. The decision on delisting should be taken by a panel to be constituted by theExchange comprising the following :

(a) Two directors/officers of the Exchange (one director to be a publicrepresentative)

(b) One representative of the investors

(c) One representative from the Central Government (Department of CompanyAffairs)/ Regional Director / Registrar of Companies

(d) Executive Director / Secretary of the Exchange

2. Due notice of delisting and intimation to the company as well as other StockExchanges where the company’s securities are listed to be given.

3. Notice of termination of the Listing Agreement to be given.

4. An appeal against the order of compulsory delisting may be made to the SEBI.

SEBI (INFORMAL GUIDANCE) SCHEME, 2003*

127

1. This Scheme shall be called “Securities and Exchange Board of India (InformalGuidance) Scheme 2003”.

2.1 This Scheme is being issued under section 11(1) of SEBI Act, 1992 of the SEBI Act,in the interests of better regulation of and orderly development of the securitiesmarket.

2.2 The Scheme shall come into operation from 24.6.2003.

3.1 In this Scheme, unless the context otherwise requires:-


(b) ‘Board’ means the Securities and Exchange Board of India established undersection 3 of the Act;

(c) ‘Department’ means a Department of SEBI and includes a Division of SEBI;

(d) ‘Scheme’ means the SEBI (Informal Guidance Process) Scheme, 2003;

3.2 Words and expressions not defined in this Scheme shall have the same meaning ashave been assigned to them under the Act or the Securities Contracts (Regulation)Act, 1956 or the Companies Act, 1956, or any statutory modification or re-enactmentthereof, or any rules or regulations made thereunder, as the case may be.

**4. The following persons may make a request for informal guidance under this scheme:

(a) any intermediary registered with the Board under section 12 of the Act;

(b) any listed company;

(c) any company which intends to get any of its securities listed and which has filedeither a listing application with any stock exchange or a draft offer documentwith the Board or the Central Listing Authority;

(d) any mutual fund trustee company or asset management company;

(e) any acquirer or prospective acquirer under the Securities and Exchange Boardof India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

5. The informal guidance mentioned in para 4 may be sought for and given in two forms:

(i) No-action letters : in which a Department of SEBI indicates that the Departmentwould or would not recommend any action under any Act, Rules, Regulations,Guidelines, Circulars or other legal provisions administered by SEBI to the Boardif the proposed transaction described in a request made under para 6 isconsummated.

* Issued by SEBI on 24.6.2003

** Substituted by Notification issued by SEBI on 22.1.2004.


(ii) Interpretive letters : in which a Department of SEBI provides an interpretation ofa specific provision of any Act, Rules, Regulations, Guidelines, Circulars orother legal provision being administered by SEBI in the context of a proposedtransaction in securities or a specific factual situation.

6. A request seeking informal guidance shall comply with the following:

(i) It shall state that it is being made under this scheme and also state whether it isa request for a no-action letter or an interpretive letter;

(ii) It shall be accompanied with a fee of Rs. 25,000/-;

(iii) It shall be addressed to the concerned Department of SEBI; and,

(iv) It shall describe the request, disclose and analyse all material facts andcircumstances involved and mention all applicable legal provisions.

7. SEBI may dispose off the request as early as possible and in any case not later than60 days after the receipt of the request. The Department may give a hearing orconduct an interview if it feels necessary to do so. The requestor shall be entitledonly to the reply. The internal records or views of SEBI shall be confidential.

8. SEBI may not respond to the following types of requests:

(i) those which are general and those which do not completely and sufficientlydescribe the factual situation;

(ii) those which involve hypothetical situations;

(iii) those requests in which the requestor has no direct or proximate interest;

(iv) where the applicable legal provisions are not cited;

(v) where a no-action or interpretive letter has already been issued by that or anyother Department on a substantially similar question involving substantially similarfacts, as that to which the request relates;

(vi) those cases in which investigation, enquiry or other enforcement action hasalready been initiated;

(vii) those cases where connected issues are pending before any Tribunal or Courtand on issues which are subjudice; and,

(viii) those cases where policy concerns require that the Department does not respond.

9. Where a request is rejected for non-compliance with para 6 or under para 8, the feeif any paid by the requestor shall be refunded to him after deducting therefrom a sumof Rs. 5,000/- towards processing fee.

10. SEBI shall not be under any obligation to respond to a request for guidance madeunder this scheme, and shall not be liable to disclose the reasons for declining toanswer the request.

11. Confidentiality of request:

(a) Any person submitting a letter or written communication under this schememay request that it receive confidential treatment for a specified period of time


not exceeding 90 days from the date of the Department’s response. The requestshall include a statement of the basis for confidential treatment.

(b) If the Department determines to grant the request, the letter or writtencommunication will not be available to the public until the expiration of the specifiedperiod.

(c) If it appears to the Department that the request for confidential treatment shouldbe denied, the requestor will be so advised and such person may withdraw theletter or written communication within 30 days of receipt of the advise, in whichcase the fee, if any, paid by him would be refunded to him.

(d) In case where a request has been withdrawn under clause (c), no response willbe given and the letter or written communication will remain in the SEBI files butwill not be made available to the public.

(e) If the letter or written communication is not withdrawn, it shall be available to thepublic together with any written staff response.

12. A no-action letter or an interpretive letter issued by a Department constitutes theview of the Department but will not be binding on the Board, though the Board maygenerally act in accordance with such a letter.

13. The letter issued by a Department under this scheme should not be construed as aconclusive decision or determination of any question of law or fact by SEBI. Such aletter cannot be construed as an order of the Board under section 15T of the Act andshall not be appealable.

14. Where a no action letter is issued by a Department affirmatively, it means that theDepartment will not recommend enforcement action to the Board, subject to otherprovisions of this scheme.

15. The guidance offered through the letters issued by Departments is conditional uponthe requestor acting strictly in accordance with the facts and representations madein the letter.

16. SEBI shall not be liable for any loss or damage that the requestor or any otherperson may suffer on account of the request not being answered or being belatedlyanswered or the Board taking a different view from that taken in a letter alreadyissued under this scheme.

17. Where the Department finds that a letter issued by it under this scheme has beenobtained by the requestor by fraud or misrepresentation of facts, notwithstandingany legal action that the Department may take, it may declare such letter to be nonest and thereupon the case of the requestor will be dealt with as if such letter hadnever been issued.

Where SEBI issues a letter under this scheme, it may post the letter, together withthe incoming request, in the SEBI website, subject to the provisions of para 11.

SEBI (PROHIBITION OF FRAUDULENT AND UNFAIRTRADE PRACTICES RELATING TO SECURITIES MARKET)

REGULATIONS, 2003*

130

In exercise of the powers conferred by section 30 of the Securities and ExchangeBoard of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations,namely:-

CHAPTER I

PRELIMINARY


(1) These regulations may be called the Securities and Exchange Board of India(Prohibition of Fraudulent and Unfair Trade Practices relating to SecuritiesMarkets) Regulations, 2003.


2. Definitions



(b) “dealing in securities” includes an act of buying, selling or subscribing pursuantto any issue of any security or agreeing to buy, sell or subscribe to anyissue of any security or otherwise transacting in any way in any security byany person as principal, agent or intermediary referred to in section 12 of theAct.

(c) “fraud” includes any act, expression, omission or concealment committedwhether in a deceitful manner or not by a person or by any other person withhis connivance or by his agent while dealing in securities in order to induceanother person or his agent to deal in securities, whether or not there is anywrongful gain or avoidance of any loss, and shall also include-

(1) a knowing misrepresentation of the truth or concealment of material factin order that another person may act to his detriment;

(2) a suggestion as to a fact which is not true by one who does not believeit to be true;

(3) an active concealment of a fact by a person having knowledge or beliefof the fact;



(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless manner whether it betrue or false;

(6) any such act or omission as any other law specifically declares to befraudulent;

(7) deceptive behaviour by a person depriving another of informed consentor full participation;

(8) a false statement made without reasonable ground for believing it to betrue;

(9) The act of an issuer of securities giving out misinformation that affectsthe market price of the security, resulting in investors being effectivelymisled eventhough they did not rely on the statement itself or anythingderived from it other than the market price.

And “fraudulent” shall be construed accordingly;

Nothing contained in this clause shall apply to any general comments madein good faith in regard to –

(a) the economic policy of the government

(b) the economic situation of the country

(c) trends in the securities market or

(d) any other matter of a like nature

whether such comments are made in public or in private.

(d) “Investigating Authority” means any officer of the Board not below the rank ofDivision Chief, authorized by the Board to undertake investigation underSection 11C of the Act;

(e) “securities” means securities as defined in section 2 of the SecuritiesContracts (Regulation) Act, 1956 (42 of 1956).

(2) Words and expressions used and not defined in these regulations, but defined inthe Act or in the rules or regulations made thereunder, shall have the meaningsrespectively assigned to them in the Act or rules or regulations made thereunder,as the case may be.

CHAPTER II

PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICESRELATING TO THE SECURITIES MARKET

3. Prohibition of certain dealings in securities

No person shall directly or indirectly —

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listedor proposed to be listed in a recognized stock exchange, any manipulative ordeceptive device or contrivance in contravention of the provisions of the Act orthe rules or the regulations made there under;


(c) employ any device, scheme or artifice to defraud in connection with dealing in orissue of securities which are listed or proposed to be listed on a recognizedstock exchange;

(d) engage in any act, practice, course of business which operates or would operateas fraud or deceit upon any person in connection with any dealing in or issue ofsecurities which are listed or proposed to be listed on a recognized stockexchange in contravention of the provisions of the Act or the rules and theregulations made there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in afraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practiceif it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of tradingin the securities market;

(b) dealing in a security not intended to effect transfer of beneficial ownershipbut intended to operate only as a device to inflate, depress or causefluctuations in the price of such security for wrongful gain or avoidance ofloss;

(c) advancing or agreeing to advance any money to any person thereby inducingany other person to offer to buy any security in any issue only with theintention of securing the minimum subscription to such issue;

(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any personany money or money’s worth for inducing such person for dealing in anysecurity with the object of inflating, depressing, maintaining or causingfluctuation in the price of such security;

(e) any act or omission amounting to manipulation of the price of a security;

(f) publishing or causing to publish or reporting or causing to report by a persondealing in securities any information which is not true or which he does notbelieve to be true prior to or in the course of dealing in securities;

(g) entering into a transaction in securities without intention of performing it orwithout intention of change of ownership of such security;

(h) selling, dealing or pledging of stolen or counterfeit security whether in physicalor dematerialized form;

(i) an intermediary promising a certain price in respect of buying or selling of asecurity to a client and waiting till a discrepancy arises in the price of suchsecurity and retaining the difference in prices as profit for himself;

(j) an intermediary providing his clients with such information relating to asecurity as cannot be verified by the clients before their dealing in suchsecurity;

(k) an advertisement that is misleading or that contains information in a distortedmanner and which may influence the decision of the investors;

(l) an intermediary reporting trading transactions to his clients entered into on


their behalf in an inflated manner in order to increase his commission andbrokerage;

(m) an intermediary not disclosing to his client transactions entered into on hisbehalf including taking an option position;

(n) circular transactions in respect of a security entered into betweenintermediaries in order to increase commission to provide a false appearanceof trading in such security or to inflate, depress or cause fluctuations in theprice of such security;

(o) encouraging the clients by an intermediary to deal in securities solely withthe object of enhancing his brokerage or commission.

(p) an intermediary predating or otherwise falsifying records such as contractnotes.

(q) an intermediary buying or selling securities in advance of a substantial clientorder or whereby a futures or option position is taken about an impendingtransaction in the same or related futures or options contract.

(r) planting false or misleading news which may induce sale or purchase ofsecurities.

CHAPTER III

INVESTIGATION

5. Power of the Board to order investigation

Where the Board, the Chairman, the member or the Executive Director (hereinafterreferred to as “appointing authority”) has reasonable ground to believe that -

(a) the transactions in securities are being dealt with in a manner detrimental to theinvestors or the securities market in violation of these regulations;

(b) any intermediary or any person associated with the securities market has violatedany of the provisions of the Act or the rules or the regulations,

it may, at any time by order in writing, direct any officer not below the rank of DivisionChief (hereinafter referred to as the “Investigating Authority”) specified in the order toinvestigate the affairs of such intermediary or persons associated with the securitiesmarket or any other person and to report thereon to the Board in the manner providedin section 11C of the Act.

6. Powers of Investigating Authority

Without prejudice to the powers conferred under the Act, the Investigating Authorityshall have the following powers for the conduct of investigation, namely:-

(1) to call for information or records from any person specified in section 11(2)(i) ofthe Act;

(2) to undertake inspection of any book, or register, or other document or record ofany listed public company or a public company (not being intermediaries referredto in section 12 of the Act) which intends to get its securities listed on anyrecognized stock exchange where the Investigating Authority has reasonable


grounds to believe that such company has been conducting in violation of theseregulations;

(3) to require any intermediary or any person associated with securities market inany manner to furnish such information to, or produce such books, or registers,or other documents, or record before him or any person authorized by him in thisbehalf as he may consider necessary if the furnishing of such information or theproduction of such books, or registers, or other documents, or record is relevantor necessary for the purposes of the investigation;

(4) to keep in his custody any books, registers, other documents and record producedunder this regulation for a maximum period of one month which may be extendedupto a period of six months by the Board:

Provided that the Investigating Authority may call for any book, register, otherdocument or record if the same is needed again:

Provided further that if the person on whose behalf the books, registers, otherdocuments and record are produced requires certified copies of the books,registers, other documents and record produced before the Investigating Authority,he shall give certified copies of such books, registers, other documents andrecord to such person or on whose behalf the books, registers, other documentsand record were produced;

(5) to examine orally and to record the statement of the person concerned or anydirector, partner, member or employee of such person and to take notes of suchoral examination to be used as an evidence against such person:

Provided that the said notes shall be read over to, or by, and signed by, theperson so examined;

(6) to examine on oath any manager, managing director, officer or other employee ofany intermediary or any person associated with securities market in any mannerin relation to the affairs of his business and may administer an oath accordinglyand for that purpose may require any of those persons to appear before himpersonally.

7. Power of the Investigating Authority to be exercised with prior approval

The Investigating Authority may, after obtaining specific approval from the Chairmanor Member also exercise all or any of the following powers, namely :-

(a) to call for information and record from any bank or any other authority or board orcorporation established or constituted by or under any Central, State or ProvincialAct in respect of any transaction in securities which are under investigation;

(b) to make an application to the Judicial Magistrate of the first class havingjurisdiction for an order for the seizure of any books, registers, other documentsand record, if in the course of investigation, the Investigating Authority hasreasonable ground to believe that such books, registers, other documents andrecord of, or relating to, any intermediary or any person associated with securitiesmarket in any manner may be destroyed, mutilated, altered, falsified or secreted;

(c) to keep in his custody the books, registers, other documents and record seizedunder these regulations for such period not later than the conclusion of theinvestigation as he considers necessary and thereafter to return the same to the


person, the company or the other body corporate, or, as the case may be, to themanaging director or the manager or any other person from whose custody orpower they were seized:

Provided that the Investigating Authority may, before returning such books,registers, other documents and record as aforesaid, place identification markson them or any part thereof;

(d) Save as otherwise provided in this regulation, every search or seizure madeunder this regulation shall be carried out in accordance with the provisions of theCode of Criminal Procedure, 1973 (2 of 1974) relating to searches or seizuresmade under that Code.

8. Duty to co-operate, etc.

(1) It shall be the duty of every person in respect of whom an investigation has beenordered under regulation 7—

(a) to produce to the Investigating Authority or any person authorized by himsuch books, accounts and other documents and record in his custody orcontrol and to furnish such statements and information as the InvestigationAuthority or the person so authorized by him may reasonably require for thepurposes of the investigation;

(b) to appear before the Investigation Authority personally when required to doso by him under regulation 6 or regulation 7 to answer any question which isput to him by the Investigation Authority in pursuance of the powers underthe said regulations.

(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act,1956 (1 of 1956), it shall be the duty of every manager, managing director, officerand other employee of the company and every intermediary referred to insection 12 of the Act or every person associated with the securities market topreserve and to produce to the Investigating Authority or any person authorizedby him in this behalf, all the books, registers, other documents and record of, orrelating to, the company or, as the case may be, of or relating to, the intermediaryor such person, which are in their custody or power.

(3) Without prejudice to the generality of the provisions of sub-regulations (1) and(2), such person shall -

(a) allow the Investigating Authority to have access to the premises occupiedby such person at all reasonable times for the purpose of investigation;

(b) extend to the Investigating Authority reasonable facilities for examining anybooks, accounts and other documents in his custody or control (whetherkept manually or in computer or in any other form) reasonably required forthe purposes of the investigation;

(c) provide to such Investigating Authority any such books, accounts and recordswhich, in the opinion of the Investigating Authority, are relevant to theinvestigation or, as the case may be, allow him to take out computer out-prints thereof.


9. Submission of report to the Board

The Investigating Authority shall, on completion of investigation, after taking intoaccount all relevant facts, submit a report to the appointing authority:

Provided that the Investigating Authority may submit an interim report pendingcompletion of investigations if he considers necessary in the interest of investorsand the securities market or as directed by the appointing authority.

10. Enforcement by the Board

The Board may, after consideration of the report referred to in regulation 9, if satisfiedthat there is a violation of these regulations and after giving a reasonable opportunityof hearing to the persons concerned, issue such directions or take such action asmentioned in regulation 11and regulation 12:

Provided that the Board may, in the interest of investors and the securities market,pending the receipt of the report of the investigating authority referred to inregulation 9, issue directions under regulation 11:

Provided further that the Board may, in the interest of investors and securities market,dispense with the opportunity of pre-decisional hearing by recording reasons in writingand shall give an opportunity of post-decisional hearing to the persons concerned asexpeditiously as possible.

11. (1) The Board may, without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) of section 11 and section 11B of the Act, by anorder, for reasons to be recorded in writing, in the interests of investors andsecurities market, issue or take any of the following actions or directions, eitherpending investigation or enquiry or on completion of such investigation or enquiry,namely:-

(a) suspend the trading of the security found to be or prima-facie found to beinvolved in fraudulent and unfair trade practice in a recognized stock exchange;

(b) restrain persons from accessing the securities market and prohibit any personassociated with securities market to buy, sell or deal in securities;

(c) suspend any office-bearer of any stock exchange or self-regulatoryorganization from holding such position;

(d) impound and retain the proceeds or securities in respect of any transactionwhich is in violation or prima facie in violation of these regulations;

(e) direct any intermediary or any person associated with the securities marketin any manner not to dispose of or alienate an asset forming part of a fraudulentand unfair transaction;

(f) require the person concerned to call upon any of its officers, other employeesor representatives to refrain from dealing in securities in any particular manner;

(g) prohibit the person concerned from disposing of any of the securities acquiredin contravention of these regulations;

(h) direct the person concerned to dispose of any such securities acquired incontravention of these regulations, in such manner as the Board may deemfit, for restoring the status-quo ante;


(2) The Board shall issue a press release in respect of any final order passed undersub-regulation (1) in atleast two newspapers of which one shall have nationwidecirculation and shall also put the order on the website of the Board.

12. Suspension or cancellation of registration

(1) The Board may, without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) of section 11 and section 11B of the Act, by anorder, for reasons to be recorded in writing, in the interests of investors andsecurities market take the following action against an intermediary:

(a) Issue a warning or censure

(b) suspend the registration of the intermediary; or

(c) cancel of the registration of the intermediary

Provided that no final order of suspension or cancellation of an intermediary forviolation of these regulations shall be passed unless the procedure specified inthe regulations applicable to such intermediary under the Securities and ExchangeBoard of India (Procedure for Holding Enquiry by Enquiry Officer and ImposingPenalty) Regulations, 2002 is complied with.

13. Repeal and savings

(1) The Securities and Exchange Board of India (Prohibition of Fraudulent and UnfairTrade Practices relating to Securities Market) Regulations, 1995 is herebyrepealed.

(2) Notwithstanding repeal of the Securities and Exchange Board of India (Prohibitionof Fraudulent and Unfair Trade Practices relating to Securities Market)Regulations, 1995, any violation of regulations 3, 4, 5 and 6 of the SEBI (Prohibitionof Fraudulent and Unfair Trade Practices Relating to Securities Market)Regulations, 1995 shall be investigated and proceeded against in accordancewith the procedure laid down in these regulations.

(3) Notwithstanding repeal of the Securities and Exchange Board of India (Prohibitionof Fraudulent and Unfair Trade Practices relating to Securities Market)Regulations, 1995, any investigation pending, at the commencement of theseregulations shall be continued and disposed of in accordance with the procedurelaid down in these regulations.

SEBI (OMBUDSMAN) REGULATIONS, 2003*

138

In exercise of the powers conferred by section 30, read with sub-section (1) ofsection 11, of the Securities and Exchange Board of India Act, 1992 (15 of 1992), theBoard hereby makes the following regulations to provide for the establishment of the officeof Ombudsman to redress the grievance of the investors in securities and for mattersconnected therewith or incidental thereto, namely:-

CHAPTER I

PRELIMINARY

1. Short title and Commencement

(1) These regulations may be called the Securities and Exchange Board of India(Ombudsman) Regulations, 2003.


2. Definitions



(b) “award” means a finding in the form of direction or an order of an Ombudsmangiven in accordance with these regulations;

(c) “authorised representative” means a person duly appointed and authorisedby a complainant or any other party to the complaint to act on his behalf andrepresent him in the proceedings before the Ombudsman;

(d) “Board” means the Securities and Exchange Board of India established undersection 3 of the Act;

(e) “Chairman” means Chairman of the Board;

(f) “complaint” means a representation in writing containing a grievance asspecified in regulation 13 of these regulations;

(g) “complainant” means any investor who lodges complaint with the Ombudsmanand includes an investors association recognised by the Board;

(h) “intermediary” means and includes a person referred to in section 12 of theAct;

(i) “investor” means a person who invests or buys or sells or deals in securities;

(j) “listed company” means a company whose securities are listed on a

* Issued by SEBI vide Notification No. SO 953(E) dated 21-8-2003.


recognised stock exchange and includes a public company which intends toget its securities listed on a recognised stock exchange;

(k) “member” means a member of the Board and includes the Chairman;

(l) “Ombudsman” means any person appointed under regulation 3 of theseregulations and unless the context otherwise requires, includes StipendiaryOmbudsman;

(m) “securities” means Securities as defined in clause (h) of section 2 of theSecurities Contracts (Regulation) Act,1956 (42 of 1956);

(n) “Stipendiary Ombudsman” means a person appointed under regulation 9 forthe purpose of acting as ombudsman in respect of a specific matter or mattersin a specific territorial jurisdiction and for which he may be paid suchexpenses, honorarium or sitting fees as may be determined by the Boardfrom time to time.

(2) Words and expressions used and not defined in these regulations but defined inthe Act or in the rules or regulations made under the Act shall have the meaningsrespectively assigned to them in the Act or in the rules or regulations made underthe Act.

CHAPTER II

ESTABLISHMENT OF OFFICE OF OMBUDSMAN

3. Establishment and Appointment

(1) With effect from such date as the Board may, by an order fix, there shall beestablished an office of Ombudsman for the purposes of these regulations.

(2) The Board may, on recommendation of a Selection Committee, appoint one ormore Ombudsmen for such territorial jurisdiction as may be specified from timeto time by an order.

(3) The Selection Committee referred in sub-regulation (2) shall consist of the followingmembers, namely :-

*[(i) an expert in the areas relating to financial marekt operations to be nominatedby the Chairman;

(ii) a person having a special knowledge and experience of law, finance oreconomics, to be nominated by the Chairman].

(iii) a representative of the Board not below the rank of Executive Director whoshall be Secretary of the Selection Committee, to be nominated by theChairman.

(4) At the request of the Board, the Selection Committee may also prepare a panelof persons out of which a person may be appointed as Stipendiary Ombudsman.

(5) The panel under sub-regulation (4) shall remain in force for a maximum period oftwo years and shall be reconstituted from time to time.

Provided that any person in the existing panel shall be eligible to be included inthe reconstituted panel.

* Substituted by the SEBI (Ombudsman) (Amendment) Regulations,2003 vide 5-12-2003.


4. Location of Office

(1) Office of the Ombudsman shall be located at the Head Office of the Board and ifmore than one Ombudsman are appointed then the office of any such Ombudsmanmay be located at any other office of the Board or any other place as may bespecified by the Board from time to time.

Provided that the Stipendiary Ombudsman when appointed for any specificcomplaint or complaints shall be located at such place as may be specified.

(2) In order to expedite disposal of complaints, the Ombudsman or StipendiaryOmbudsman, as the case may be, may hold sittings at such places within hisarea of jurisdiction as may be considered necessary and proper by him.

(3) The Board may provide the premises and other infrastructures including staff orsecretarial assistance for the office of Ombudsman or Stipendiary Ombudsman,as the case may be.

5. Qualification

In order to be appointed as an Ombudsman a person shall be -

(i) a citizen of India;

(ii) of high moral integrity;

(iii) not below the age of forty five years of age; and

(iv) either

(a) a retired District Judge or qualified to be appointed a District Judge, or

(b) having at least ten years experience of service in any regulatory body, or

(c) having special knowledge and experience in law, finance, corporate matters,economics, management or administration for a period not less than tenyears, or

(d) an office bearer of investors’ association recognised by the Board havingexperience in dealing with matters relating to investor protection for a periodnot less than 10 years.

6. Disqualification

(1) A person shall not be qualified to hold the office of the Ombudsman if he -

(i) is an un-discharged insolvent ;

(ii) has been convicted of an offence involving moral turpitude;

(iii) has been found to be of unsound mind and stands so declared by a competentcourt;

(iv) has been charge sheeted for any offence including economic offences; or

(v) has been a whole-time director in the office of an intermediary or a listedcompany and a period of at least 3 years has not elapsed.

7. Tenure

*[(1) A person appointed as an Ombudsman shall hold office for a term of three yearsand shall be eligible for reappointment for another period of two years.

* Substituted by the SEBI (Ombudsman) (Amendment) Regulations, 2003, dated 5-12-2003.


Provided that no person shall hold the office of Ombudsman after attaining theage of sixty-five years.]

(2) The Board, at any time, before the expiry of the period specified under sub-regulation (1) may terminate the services of the Ombudsman by giving him noticeof not less than three months in writing or three months salary and allowances inlieu thereof, and the Ombudsman shall also have the right to relinquish his office,at any time, before the expiry of period specified under sub-regulation (1), bygiving to the Board notice of not less than three months in writing.

8. Remuneration

The salary, allowances, honorarium or fee payable to, and other terms and conditionsof service of, an Ombudsman shall be determined by the Board from time to time.

9. Stipendiary Ombudsman

(1) Notwithstanding the appointment of Ombudsman under sub-regulation (2) ofregulation 3, the Board may appoint a person as a Stipendiary Ombudsman outof the panel prepared under sub-regulation (4) of regulation 3, for the purpose ofacting as an Ombudsman in respect of a specific matter or matters in a specificterritorial jurisdiction, as may be specified in the order of appointment.

(2) A person shall be eligible to be appointed as Stipendiary Ombudsman who :-

(i) has held a judicial post or an executive office under the Central or StateGovernment for atleast ten years; or

(ii) is having experience of at least ten years in matters relating to consumer orinvestor protection; or

(iii) has been a legal practitioner in corporate matters for atleast 10 years; or

(iv) has served for a minimum period of ten years in any public financial institutionwithin the meaning of section 4A of the Companies Act, 1956 (1 of 1956) ora regulatory body.

(3) Save as otherwise specified by the Board, the Stipendiary Ombudsman shallexercise all powers and functions as are vested in a Ombudsman under theseregulations.

(4) The Stipendiary Ombudsman shall be paid such fees or honorarium and allowancesfor the services rendered by him, as may be determined by the Board from timeto time.

10. Territorial Jurisdiction

Every Ombudsman or Stipendiary Ombudsman shall exercise jurisdiction in relationto an area as may be specified by the Board by an order.

CHAPTER III

POWERS AND FUNCTIONS OF OMBUDSMAN

11. General

The Ombudsman shall have the following powers and functions :-

(a) to receive complaints specified in regulation 13 against any intermediary or alisted company or both;


(b) to consider such complaints and facilitate resolution thereof by amicablesettlement;

(c) to approve a friendly or amicable settlement of the dispute between the parties;

(d) to adjudicate such complaints in the event of failure of settlement thereof byfriendly or amicable settlement.

12. Other powers and functions

(1) The Ombudsman shall —

(a) draw up an annual budget for his office in consultation with the Board andshall incur expenditure within and in accordance with the provisions of theapproved budget;

(b) submit an annual report to the Board within three months of the close of eachfinancial year containing general review of activities of his office; and

(c) furnish from time to time such information to the Board as may be requiredby the Board.

(2) Every financial year of the Ombudsman shall end on 31st March of each year andthe annual report shall be given in such form and manner as may be specified bythe Board.

CHAPTER IV

PROCEDURE FOR REDRESSAL OF GRIEVANCE

13. Grounds of Complaint

A person may lodge a complaint on any one or more of the following grounds either tothe Board or to the Ombudsman concerned :-

(i) Non-receipt of refund orders, allotment letters in respect of a public issue ofsecurities of companies or units of mutual funds or collective investments schemes;

(ii) Non-receipt of share certificates, unit certificates, debenture certificates, bonusshares;

(iii) Non-receipt of dividend by shareholders or unit-holders;

(iv) Non-receipt of interest on debentures, redemption amount of debentures or intereston delayed payment of interest on debentures;

(v) Non-receipt of interest on delayed refund of application monies;

(vi) Non-receipt of annual reports or state ments pertaining to the portfolios;

(vii) Non-receipt of redemption amount from a mutual fund or returns from collectiveinvestment scheme;

(viii) Non-transfer of securities by an issuer company, mutual fund, Collective InvestmentManagement Company or depository within the stipulated time;

(ix) Non-receipt of letter of offer or consideration in takeover or buy-back offer ordelisting;

(x) Non-receipt of statement of holding corporate benefits or any grievances in respectof corporate benefits, etc;

(xi) Any grievance in respect of public, rights or bonus issue of a listed company;


(xii) Any of the matters covered under section 55A of the Companies Act, 1956;

(xiii) Any grievance in respect of issue or dealing in securities against an intermediaryor a listed company.

14. Procedure of filing complaint

(1) Any person who has a grievance against a listed company or an intermediaryrelating to any of the matters specified in regulation 13 may himself or through hisauthorised representative or any investors association recognised by the Board,make a complaint against a listed company or an intermediary to the Ombudsmanwithin whose jurisdiction the registered or corporate office of such listed companyor intermediary is located.

Provided that if the Board has not notified any Ombudsman for a particular localityor territorial jurisdiction, the complainant may request the Ombudsman locatedat the Head Office of the Board for forwarding his complaint to the Ombudsman ofcompetent jurisdiction.

(2) The complaint shall be in writing duly signed by the complainant or his authorisedrepresentative (not being a legal practitioner) in the Form specified in the Scheduleto these regulations and supported by documents, if any.

(3) No complaint to the Ombudsman shall lie -

(a) unless the complainant had, before making a complaint to the Board or theOmbudsman concerned, made a written representation to the listed companyor the intermediary named in the complaint and the listed company or theintermediary, as the case may be, had rejected the complaint or thecomplainant had not received any reply within a period of one month after thelisted company or intermediary concerned received his representation or thecomplainant is not satisfied with the reply given to him by the listed companyor an intermediary;

(b) unless the complaint is made within six months from the date of the receiptof communication of rejection of his complaint by the complainant or withinseven months after the receipt of complaint by the listed company orintermediary under clause (a) above.

(c) if the complaint is in respect of the same subject matter which was settledthrough the Office of the Board or Ombudsman concerned in any previousproceedings, whether or not received from the same complainant or alongwith any one or more or other complainants or any one or more of the partiesconcerned with the subject matter;

(d) if the complaint pertains to the same subject matter for which any proceedingsbefore the Board or any court, tribunal or arbitrator or any other forum ispending or a decree or award or a final order has already been passed by anysuch competent authority, court, tribunal, arbitrator or forum.

(e) if the complaint is in respect of or pertaining to a matter for which action hasbeen taken by the Board under Section 11(4) of the Act or Chapter VI A of theAct or under sub-section (3) of section 12 of the Act or under any otherregulations made under the Act.


(4) The Ombudsman may dismiss in limine a complaint on any of the grounds specifiedunder sub-regulation (3) or when such complaint is frivolous in his opinion.

15. Power to call for information

(1) For the purpose of carrying out his duties under these regulations, an Ombudsmanmay require the listed company or the intermediary named in the complaint orany other person, institution or authority to provide any information or furnishcertified copy of any document relating to the subject matter of the complaintwhich is or is alleged to be in its or his possession:

Provided that in the event of the failure of a listed company or the intermediary tocomply with the requisition made under sub-regulation (1) without any sufficientcause, the Ombudsman may, if he deems fit, draw the inference that theinformation, if provided or copies if furnished, would be unfavourable to the listedcompany or intermediary.

(2) The Ombudsman shall maintain confidentiality of any information or documentcoming to his knowledge or possession in the course of discharging his dutiesand shall not disclose such information or document to any person except andas otherwise required by law or with the consent of the person furnishing suchinformation or document:

Provided that nothing in sub-regulation (2) shall prevent the Ombudsman fromdisclosing information or document furnished by a party in a complaint to theother party or parties, to the extent considered by him to be reasonably requiredto comply with the principles of natural justice and fair play in the proceedings.

Provided further that provisions of sub-regulation (2) shall not apply in relation tothe disclosures made or information furnished by the Ombudsman to the Boardor to the publication of Ombudsman’s award in any journal or newspaper or filingthereof before any Court, Forum or authority.

16. Settlement by Mutual Agreement

(1) As soon as it may be practicable so to do, the Ombudsman shall cause a noticeof the receipt of any complaint along with a copy of the complaint sent to theregistered or corporate office of the listed company or office of the intermediarynamed in the complaint and endeavour to promote a settlement of the complaintby agreement or mediation between the complainant and the listed company orintermediary named in the complaint.

(2) If any amicable settlement or friendly agreement is arrived at between the parties,the Ombudsman shall pass an award in terms of such settlement or agreementwithin one month from the date thereof and direct the parties to perform theirobligations in accordance with the terms recorded in the award.

(3) For the purpose of promoting a settlement of the complaint, the Ombudsmanmay follow such procedure and take such actions as he may consider appropriate.

17. Award an adjudication

(1) In the event the matter is not resolved by mutually acceptable agreement within aperiod of one month of the receipt of the complaint or such extended period asmay be permitted by the Ombudsman, he shall, based upon the material placed


before him and after giving opportunity of being heard to the parties, give hisaward in writing or pass any other directions or orders as he may considerappropriate.

(2) The award on adjudication shall be made by Ombudsman within a period of threemonths from the date of the filing of the complaint.

Provided that no award shall be invalidated by reason alone of the fact that theaward was made beyond the said period of three months.

(3) The Ombudsman shall send his award to the parties to the adjudication to performtheir obligations under the award.

18. Correction of Award

(1) Within fifteen days from the receipt of the award a party, with notice to the otherparty, may request the Ombudsman to correct any computation errors, any clericalor typographical errors or any other errors of a similar nature occurring in theaward.

(2) If the Ombudsman considers the request made under sub-regulation (1) to bejustified, he shall make the correction within fifteen days from the receipt of therequest which shall form part of the award.

(3) The Ombudsman may also rectify any error of the type referred to in sub-regulation (1), on his own initiative, within fifteen days from the date of the award.

19. Evidence act not to apply in the proceedings before ombudsman

(1) In proceedings before the Ombudsman strict rules of evidence under the EvidenceAct shall not apply and the Ombudsman may determine his own procedureconsistent with the principles of natural justice.

(2) Ombudsman shall decide whether to hold oral hearings for the presentation ofevidence or for oral argument or whether the proceeding shall be conducted onthe basis of documents and other materials.

Provided that it shall not be necessary for an investor to be present at the oralhearing of proceedings under these regulations and the Ombudsman may proceedon the basis of the documentary evidence submitted before him.

(3) No legal practitioner shall be permitted to represent the defendants or respondentsat the proceedings before the Ombudsman except where a legal practitioner hasbeen permitted to represent the complainants by the Ombudsman.

20. Finality to award and circumstances of review

(1) Subject to the provisions of this regulation, an award shall be final and binding onthe parties and persons claiming under them respectively.

(2) Any party aggrieved by the award on adjudication may within one month from thereceipt of the award under Regulation 17 or corrected award under Regulation 18may file a petition before the Board setting out the grounds for review of theaward.

(3) An award may be reviewed by the Board only if –

(a) there is substantial mis-carriage of justice, or


(b) there is an error apparent on the face of the award.

(4) Where a petition for review of the award under sub-regulation (2) is filed by a partyfrom whom the amount mentioned in the award is to be paid to the other party interms of the award, such petition shall not be entertained by the Board unless theparty filing the petition has deposited with the Board seventy-five percent of theamount mentioned in the award.

Provided that the Board may, for reasons to be recorded in writing, waive orreduce the amount to be deposited under this sub-regulation.

(5) The Board may review the award and pass such order as it may deem appropriate.

(6) The Board shall endeavour to dispose of the matter within a period of forty fivedays of the filing of the petition for review.

(7) The award passed by the Ombudsman shall remain suspended till the expiry ofperiod of one month for filing review petition under sub-regulation (2) or till thereview petition is disposed off by the Board.

(8) The party so directed shall implement the award within 30 days of receipt of theorder of the Board on review or within such period as may be specified by theBoard in the order disposing off the review petition.

(9) The Board may determine its own procedure consistent with principles of naturaljustice in the matter of disposing of review petition and may dismiss the petitionin limine if it does not satisfy any of the grounds specified in sub-regulation (3).

21. Cost and interest

(1) The Ombudsman or the Board, as the case may be, shall be entitled to awardreasonable compensation along with interest including future interest till date ofsatisfaction of the award at a rate which may not exceed one percent per mensem.

(2) The Ombudsman in the case of an award, or the Board in the case of orderpassed in petition for review of the award, as the case may be, may determinethe cost of the proceedings in the award and include the same in the award or asthe case may be, in the order.

(3) The Ombudsman or the Board may impose cost on the complainant for filingcomplaint or any petition for review, which is frivolous.

CHAPTER V

IMPLEMENTATION OF THE AWARD

22. Consequences of non-implementation of the award

(1) The award shall be implemented by the party so directed within one month ofreceipt of the award from the Ombudsman or an order of the Board passed inreview petition or within such period as specified in the award or order of theBoard.

(2) If any person fails to implement the award or order of the Board passed in thereview petition, without reasonable cause —

(a) he shall be deemed to have failed to redress investors’ grievances and shallbe liable to a penalty under section 15C of the Act;


(b) he shall also be liable for —(i) an action under section 11 (4) of the Act ; or(ii) suspension or delisting of securities; or(iii) being debarred from accessing the securities market; or(iv) being debarred from dealing in securities; or dealing in securities; or

(v) an action for suspension or cancellation of certificate of registration; or(vi) such other action permissible which may be deemed appropriate in the

facts and circumstances of the case.

Provided that no such order shall be passed without following the procedure laiddown under the relevant rules or regulations.

CHAPTER VI

DISPLAY OF THE PARTICULARS OF THE OMBUDSMAN

23. Display of the particulars of the Ombudsman in office premises and documents

(1) Every listed company or intermediary shall display the name and address of theOmbudsman as specified by the Board to whom the complaints are to be madeby any aggrieved person in its office premises in such manner and at such place,so that it is put to notice of the shareholders or investors or unit holders visitingthe office premises of the listed company or intermediary.

(2) The listed company or intermediary in its offer document or clients agreementshall give full disclosure about the grievance redressal mechanism throughOmbudsman under these regulations.

(3) Any failure to disclose the grievance redressal mechanism through Ombudsmanunder sub-regulation (2) or any failure to display the particulars as per sub-regulation (1) shall attract the penal provisions contained in Section 15A of theAct.

24. Removal of Difficulties

If any difficulty arises in giving effect to the provisions of these regulations, the Boardmay issue such directions or clarifications as it may think necessary or expedient forremoving the difficulty.

SCHEDULE

FORM

[Under regulation 14 of the Securities and Exchange Board of India(Ombudsman) Regulations, 2003]

(FOR OFFICE USE ONLY)Complaint No. ………of year ..…Date ……………………..(TO BE FILLED UP BY THE COMPLAINANT)ToThe Securities and Exchange Board of India/ Ombudsman

(*give address of the office of the Board or the address of the Ombudsman havingjurisdiction ……)


Dear Sir,Sub : Complaint against …………………….

(Name of the listed company / intermediary)

1. Name of the Complaint __________________________________________________

2. Full Address of the Complaint _____________________________________________

____________________________________________________________________

____________________________________________________________________

Pin Code ________________________________

Phone No./Fax No. ________________________

3. Complaint against (Name and Full Address of the Listed Company/Intermediaries)

____________________________________________________________________

Pin Code ________________________________

Phone No./Fax No. ________________________

4. (a) Date of representation/complaint by the complainant to the listed company/intermediary ________________________________________________________

The Listed Company/Intermediary ______________________________________

(Please enclose three copies of the representation)

(b) Whether any reminder was sent by the complainant ? Yes/No

(If yes, please enclose three copies of the reminder)

5. Subject-matter/grounds of the complaint(Please refer to regulation 14 of the Regulations)____________________________________________________________________

6. Details of the complaint (If space is not sufficient, please enclose separate sheet)

____________________________________________________________________

7. (a) Whether any reply (Within a period of one month after the listedcompany / intermediary concerned received the representation) has been received?Yes/No(If yes, please enclose ‘three copies’ of the reply of the listed company / intermediary)

(b) Whether the representation has been rejected ? Yes/No(If yes, please enclose ‘three copies’ of the letter of rejection)

(c) Whether the complainant has received any other final decision of the listedcompany / intermediary ? Yes/No(If yes, please enclose ‘three copies’ of the letter of the listed company/intermediaryconveying its final decision)

8. Nature of relief sought from the Ombudsman

____________________________________________________________________

(Please enclose ‘three copies’ of documentary proof, if any, in support of your claim)

9. List of Documents Enclosed

(Please enclose ‘three copies’ of all the documents)


10. Declaration

1. I/We, the complainant/s herein declare that:

(a) the information furnished herein above is true and correct; and

(b) I/We have not concealed or misrepresented any fact stated in aforesaidcolumns and the documents submitted herewith.

2. The complaint is filed before expiry of period of one year reckoned in accordancewith the provisions of the Regulations.

3. (a) The subject matter of the present complaint has never been brought beforethe Office of the Securities and Exchange Board of India /Ombudsman byme/ or by any one of us or by any of the parties concerned with the subjectmatter to the best of my/ our knowledge.

The subject matter of the present complaint is not in respect of the samewhich was settled through the Office of the Securities and Exchange Boardof India /Ombudsman in any previous proceedings.

(b) The subject matter of the present complaint has not been decided by anyforum/court/arbitrator.

OR

The subject matter of the present complaint is pending since….. (pleasemention the date when the matter was filed) before .…… (*Please mentionthe name of the forum/court/arbitrator before whom pending ….) and theproceedings are likely to take longer time in its final adjudication ascontemplated in the Regulations.

1. I/We authorise the listed company/intermediary to disclose any such information/documents furnished by us to the Securities and Exchange Board of India /Ombudsman and disclosure whereof in the opinion of the Securities and ExchangeBoard of India/ Ombudsman is necessary and is required for redressal of any othercomplaint or our complaint.

2. I/We have carefully gone through the provisions of the Securities and Exchange Boardof India (Ombudsman) Regulations, 2003.

Yours faithfully

(Signature)

(Complainant)

NOMINATION / AUTHORISIATION – (If the complainant wants to nominate/authorisehis representative, not being a legal practitioner, to appear and make submissions on hisbehalf before the Securities and Exchange Board of India/ Ombudsman or to the Office ofthe Securities and Exchange Board of India/ Ombudsman, the following declaration shouldalso be submitted.)


1. I/We the above named complainant/s hereby nominate Shri/Smt…………………………………….. who is not a legal practitioner and whose addressis……………………………………………………………as my/our REPRESENTATIVEin all proceedings of this complaint and confirm that any statement, acceptance orrejection made by him/her shall be binding on me/us. He/She has signed below in mypresence.

ACCEPTED

(Signature of Representative)

(Signature of Complainant)

SEBI (CENTRAL DATABASE OF MARKET PARTICIPANTS)REGULATIONS, 2003*

151

In exercise of the powers conferred by section 30 read with sections 11, 11A, 12 and19 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Boardhereby makes the following Regulations, namely :-

CHAPTER I

PRELIMINARY


(1) These Regulations may be called Securities and Exchange Board of India (CentralDatabase of Market Participants) Regulations, 2003.

(2) These Regulations shall come into force on such date** as may be specified bythe Board:

Provided that different dates may be specified for different provisions of theseregulations and any reference in any such provision to the commencement ofthese regulations 2 shall be construed as a reference to the commencement ofthat provision.

2. Definitions

(1) In these Regulations, unless the context otherwise requires:-


(b) ‘associate’ in relation to an intermediary or a listed company means a person:

(i) who, directly or indirectly, by himself or in combination with his relativesexercises control over the intermediary or listed company or has aholding of not less than 15% in the paid up equity capital of theintermediary or the listed company;

(ii) in respect of whom the intermediary or listed company directly or indirectlyexercises control;

(iii) whose director or partner is also a director or partner of the intermediaryor listed company.

Explanation – For the purposes of this clause –

(i) ‘Control’ means control as defined in clause (c) of sub-regulation (1) ofregulation 2 of the Securities and Exchange Board of India (SubstantialAcquisition of Shares and Takeovers) Regulations, 1997;

* Issued by SEBI vide Notification F. No. SEBI/LE/26/2003 dated 20-11-2003.

** 1-12-2003, except Regulations 5 and 6.


(ii) ‘director’ does not include a nominee director;

(iii) ‘person’ means a natural person, a company registered under theCompanies Act, 1956, a body corporate, a partnership concern, a trustor society registered under the Societies Registration Act, 1860 or anyother legal entity.

(c) ‘Board’ means the Securities and Exchange Board of India established undersection 3 of the Act;

(d) ‘Central Database’ means the electronic representation and storage ofinformation that may be created and maintained by a Designated ServiceProvider in respect of the persons who have been allotted unique identificationnumbers under these regulations;

(e) ‘Central Listing Authority’ means the Central Listing Authority establishedunder regulation 3 of the Securities and Exchange Board of India (CentralListing Authority) Regulations, 2003;

(f) ‘Designated employee’ in relation to a listed company or a company whichintends to get its securities listed means a designated employee within themeaning of the Explanation to clause 1.2 of Part A of Schedule I to theSecurities and Exchange Board of India (Prohibition of Insider Trading)Regulations, 1992;

(g) ‘Designated Service Provider’ means a person so designated by the Boardto create and maintain the Central Database on such terms and conditionsas may be agreed to between him and the Board and to perform such otherfunctions under these regulations as may be delegated to him by the Board;

(h) ‘Intermediary’ means any person who is registered with the Board undersection 12 of the Act, but does not include Foreign Institutional Investorsand Foreign Venture Capital Investors;

(i) ‘Investor’ means an investor in securities and includes a Foreign InstitutionalInvestor and a Foreign Venture Capital Investor;

(j) ‘Listed company’ means a company whose securities are listed on arecognised stock exchange and includes a public company which intendsto get its securities listed on a recognized stock exchange;

(k) ‘Market participants’ means intermediaries, other entities, investors, listedcompanies and companies which intend to get their securities listed;

(l) ‘other entity’ means any recognised stock exchange, clearing corporation,approved intermediary under the Securities Lending Scheme, 1997, investorassociations and includes any other person granted recognition by the Board,any person required to obtain any license or approval from any self- regulatoryorganization and any other person associated with the securities market inany manner as may be notified by the Board in the official gazette;

(m) ‘promoter’ means -

(1) any person or persons who are directly or indirectly in control of thecompany; or

(2) any person or persons named as “promoters” in the offer document or in


the shareholding pattern disclosed by the Company under provisions ofthe Listing Agreement, whichever is later; and includes,

(A) where such person is an individual,

(i) his spouse, parents, brothers, sisters or children;

(ii) any company in which 26% or more of the equity share capital isheld by him or by the persons mentioned in sub-clause (i) or anyfirm or Hindu Undivided Family in which he or any of the personsmentioned in sub-clause (i) is a partner or member;

(iii) any company in which a company specified in sub-clause (ii) above,holds more than 50% of the equity share capital;

(iv) any firm in which the aggregate of his holding and the holdings ofthe persons mentioned in sub-clause (i) is more than 50%;

(B) where such person is a body corporate,

(i) a subsidiary or holding company of that body corporate;

(ii) any company in which the said body corporate holds 26% or moreof the equity share capital;

(iii) any company which holds 26% or more of the equity share capitalof the said body corporate;

(iv) any company in which a group of persons holds 26% or more of theequity share capital and that group of persons also holds 26% ormore of the equity share capital in such body corporate;

(v) any other body corporate under the same management as the saidbody corporate within the meaning of sub-section (1B) ofsection 370 of the Companies Act, 1956;

Explanation I : A Financial Institution, Scheduled Commercial Bank,Foreign Institutional Investor or Mutual fund shall not be deemed to be apromoter merely by virtue of its shareholding.

Explanation II : A Financial Institution, Scheduled Commercial Bank orForeign Institutional Investor shall be deemed to be a promoter of itssubsidiary and of the mutual funds sponsored by it.

(n) ‘recognised stock exchange’ means a stock exchange which has beengranted recognition under section 4 of the Securities Contracts (Regulation)Act, 1956;

(o) ‘relative’ in relation to a natural person means his spouse, dependant childrenand dependant parents;

(p) ‘related persons’ means the persons specified in clause (b) of sub-regulation (1) of regulation 4 in respect of an intermediary or other entity andpersons specified in clause (b) of regulation 5 in respect of a listed companyor a company intending to get its securities listed;

(q) ‘Schedule’ means a Schedule annexed to these regulations;

(r) ‘securities’ means securities as defined in clause (h) of the SecuritiesContracts (Regulation) Act, 1956;


(s) ‘self-regulatory organization’ means an organization of intermediaries whichis representing a particular segment of the securities market and formed asa company duly recognized with the Board and excludes a stock exchange;

(t) ‘specified intermediaries’ mean such intermediaries or other entities as maybe specified* by the Board in the notification published in the official gazettepursuant to sub-regulation (1) of regulation 4;

(u) ‘specified investors’ mean such investors as may be specified by the Boardin the notification published in the official gazette pursuant to sub-regulation (1) to regulation 6;

(v) ‘specified listed company’ means such companies as may be specified bythe Board in the notification published in the official gazette pursuant toregulation 5; and,

(w) ‘unique identification number’ means the identification number generated inthe Central Database for and allotted to each applicant under theseregulations.

(2) (a) Words and expressions used and not defined in these regulations shallhave the meanings, if any, respectively assigned to them under the Act.

(b) Words and expressions used and not defined either in these regulations orthe Act, shall have the meanings, if any, respectively assigned to them inthe Securities Contracts (Regulation) Act, 1956 or any statutory modificationor re-enactment thereof.

(c) Words and expressions used and not defined either in these regulations, orin the Act or in the Securities Contracts (Regulation) Act, 1956 shall havethe meanings, if any, respectively assigned to them under the CompaniesAct, 1956, or any statutory modification or re-enactment thereof.

CHAPTER II

REQUIREMENT OF OBTAINING UNIQUE IDENTIFICATION NUMBERS

3. Unique Identification Numbers for market participants

Every specified intermediary, other entity, specified listed company and specifiedinvestor shall make application for allotment of unique identification numbers foritself and for its related persons in accordance with these regulations.

4. Specified intermediary and other entity to obtain unique identificationnumbers

(1) On and from such date as may be notified by the Board in the official gazette, nospecified intermediary or other entity shall act as such, unless –

(a) it has obtained a unique identification number from the Designated ServiceProvider; and,

(b) the following related persons have been allotted unique identification numbersby the Designated Service Provider:

(i) its principal officer and personnel engaged in the operational activities of

* Refer Notification at Serial No. I and II given at the end of this Regulation.


the intermediary for which a certificate of registration is required or takenfrom the Board;

(ii) its promoters, other than the Central or State Government or any statutoryauthority;

(iii) its directors, in case it is a body corporate;

(iv) its partners, in case it is a partnership firm;

(v) its associates and their directors;

(vi) the sponsors, trustees, asset management companies and assetmanagers, where applicable;

(vii) its proprietor, where applicable; and,

(viii) relatives of the natural persons mentioned in sub-clauses (i) to (vii) above.

Provided that such person may continue to act as an intermediary or other entityif it has made applications for allotment of unique identification number underregulation 7 before the notified date and where such application has been rejectedby the Board, an appeal has been filed and such appeal is pending for disposal.

(2) Every certificate of registration issued to a specified intermediary by the Boardafter commencement of these regulations shall be subject to the condition thatprior to commencement of its activities, the intermediary shall obtain a uniqueidentification number for itself and for the persons mentioned in clause (b) ofsub-regulation (1) in accordance with these regulations.

(5) Specified listed company to obtain unique identification number

On and from such date as may be notified by the Board in the official gazette, nospecified listed company or a company which intends to get its securities listedshall issue any securities which are proposed to be listed on a recognized stockexchange, unless –

(a) it has obtained a unique identification number from the Designated ServiceProvider; and,

(b) the following related persons have been allotted unique identification numbersby the Designated Service Provider :

(i) its promoters, other than the Central or State Government or any statutoryauthority;

(ii) its directors and officers;(iii) its designated employees;(iv) its subsidiaries, its holding company and the holding company’s subsidiaries,

if any;(v) its associates and their directors; and,(vi) relatives of the natural persons mentioned in sub-clauses (i) to (iii) and (v)

above.

Provided that a specified listed company may, make an issue of securities whichare proposed to be listed in any recognized stock exchange if it has made anapplication for allotment of unique identification number before the notified date,till the disposal of the application and where an appeal has been filed, till suchappeal is disposed of.


6. Specified investors to obtain unique identification numbers

(1) On and from such date as may be notified by the Board in the Official Gazette,no specified investor, not being a body corporate, shall buy, sell or deal in anysecurities which are listed on any recognized stock exchange or in units of amutual fund or a collective investment scheme or subscribe to securities whichare proposed to be listed in any recognized stock exchange or units of a mutualfund or a collective investment scheme unless he has been allotted a uniqueidentification number.

(2) On and from such date as may be notified by the Board in the Official Gazette,no specified investor being a body corporate shall buy, sell or deal in any securitieswhich are listed on any recognized stock exchange or in units of a mutual fundor a collective investment scheme or subscribe to securities which are proposedto be listed in any recognized stock exchange or units of a mutual fund or acollective investment scheme unless such specified investor, its promoters anddirectors have been allotted unique identification numbers.

(3) On and from such date as may be notified by the Board in the Official Gazette,no specified investor, being a Foreign Institutional Investor, a sub-account or aForeign Venture Capital Investor shall buy, sell or deal in any securities whichare listed on any recognized stock exchange or in units of a mutual fund or acollective investment scheme or subscribe to securities which are proposed tobe listed in any recognized stock exchange or units of a mutual fund or acollective investment scheme unless it has been allotted a unique identificationnumber.

(4) No intermediary shall, after such specified date, deal in or allot such securitieson behalf of or to a specified investor unless the investor has been allotted aunique identification number.

(5) Nothing in this regulation shall apply to any specified investor who has appliedfor allotment of a unique identification number under regulation 9 before the notifieddate, till the disposal of his application or, where he has filed an appeal, till thedisposal of the appeal, as the case may be.

7. Application by specified intermediary or other entity

Every specified intermediary or other entity shall make an application in accordancewith sub-regulation (1) of regulation 12 to the Designated Service Provider for allotmentof unique identification numbers for itself and for its related persons.

8. Application by specified listed company

(1) Every specified listed company shall make an application to the DesignatedService Provider in accordance with sub-regulation (2) of regulation 12 for allotmentof unique identification numbers for itself and for its related persons.

(2) Every public company specified in the notification issued under regulation 5 andwhich intends to get its securities listed in a recognized stock exchange shallmake an application to the Designated Service Provider for allotment of uniqueidentification numbers for itself and for the related persons mentioned inclause (b) of regulation 4 simultaneously with the filing of the offer document withthe Central Listing Authority.


9. Application by specified investor

Every specified investor shall make an application to the Designated Service Providerin accordance with sub-regulation (3) of regulation 12 for allotment of a uniqueidentification number.

10. Person holding a unique identification number not required to obtain anotherunique identification number

Notwithstanding anything contained in these regulations, no person shall be obligedto apply for or be allotted another unique identification number, if he already holds aunique identification number allotted to him under these regulations in any othercapacity.

Provided that where any person holding a unique identification number subsequentlybecomes an intermediary or a listed company or a related person of any of them, heshall disclose such fact to the Designated Service Provider.

11. Maintenance of records

The Designated Service Provider shall maintain such books, records and documents,in such manner and for such period as may be specified by the Board.

CHAPTER III

GRANT AND REVOCATION OF UNIQUE IDENTIFICATION NUMBERS

12. Format of application

(1) Every application made by a specified investor or a related person of a specifiedintermediary or specified listed company being a natural person, underregulation 7, 8 or 9, as the case may be, shall be in Form A specified in theSchedule and shall be accompanied with a fee as specified in the notificationsissued under regulations 4, 5 or 6, as the case may be.

(2) Every application made by a specified listed company, specified intermediary, arelated person of any of the above or a specified investor, not being a naturalperson, under regulation 7, 8 or 9, as the case may be, shall be in Form Bspecified in the Schedule and shall be accompanied with a fee as specified inthe notifications issued under regulations 4, 5 or 6, as the case may be.

13. Procedure on receipt of application

(1) Upon receipt of an application for allotment of unique identification number underthese regulations, the Designated Service Provider shall, if the application is notfound defective, allot to the applicant a unique identification number within thirtydays of receipt of the application.

(2) Where it is found that any such application is defective, the Designated ServiceProvider may intimate the defect to the applicant and give it an opportunity torectify the defect within a period of fifteen days from the date of such intimationor within such further period which the Board may allow on a request made inthis behalf.

(3) Where any defect in the application is intimated under sub-regulation (2) and the


defect is not rectified by the applicant within the said period of fifteen days or, asthe case may be, further period allowed under sub-regulation (2), then,notwithstanding anything contained in any other provision of this Chapter,Designated Service Provider shall refer the application to the Board, which mayeither direct the Designated Service Provider to allot the unique identificationnumber or reject the application after giving an opportunity to the applicant tomake representations.

14. Criteria to determine specified intermediaries, specified listed companiesand specified investors

For the purposes of specifying the intermediaries, listed companies or investorsunder sub-regulation (1) of regulation 4 or regulation 5 or subregulation (1) ofregulation 6, the Board may take into consideration the following factors:

(a) with regard to intermediaries or other entities – their kind and the nature offunctions performed by them, their networth and other similar factors;

(b) with regard to listed companies or companies which intend to get their securitieslisted – their paid up capital, the number of their public shareholders, the volumeof trading in their securities, the proposed issue size and other similar factors;and,

(c) with regard to investors – the quantum of investment made by them in thesecurities of any listed company or their volume of trading in securities in aparticular financial year.

15. Duty not to make false statements and revocation of unique identificationnumber

(1) No person shall make a false statement or misrepresent any fact in any applicationmade to the Designated Service Provider under these regulations.

(2) Every application made to the Designated Service Provider under these regulationsand every intimation made under regulation 17 shall be certified to be true andcorrect :

(a) in case of an intermediary, by its whole time director, managing partner,managing trustee or sole proprietor, as the case may be, and by its complianceofficer;

(b) in case of a listed company, by its whole time director and its companysecretary or auditor; and,

(c) in case of an investor, by him.

16. Revocation of unique identification number

(1) Where it is found that the unique identification number was obtained by a personthrough fraud or misrepresentation or was allotted to him under a mistake, theBoard may, without prejudice to other action that it may take under any law forthe time being in force and after giving him an opportunity of makingrepresentations, revoke the unique identification number allotted to him or to therelated persons.

(2) Upon revocation of the unique identification number of a person, the provisions of


these regulations shall apply from the date of revocation, as if no uniqueidentification number was allotted to him.

(3) Every order passed by the Board under these regulations shall be in writing.

CHAPTER IV

CONTINUING OBLIGATIONS

17. Duty to intimate changes

(1) Every person who has been allotted a unique identification number under theseregulations shall intimate the changes if any, in the particulars submitted by himin the application, to the Designated Service Provider, in such electronic or othermanner as may be specified by the Board, within thirty days of occurrence of thechange.

(2) Every intermediary shall exercise due diligence to satisfy itself that its clients,being specified investors, have complied with sub-regulation (1).

18. Duty to seek unique identification numbers for newly added related persons

(1) Every specified intermediary and other entity shall within thirty days of any personbecoming a related person, ensure that such person has been allotted or hasapplied for a unique identification number.

(2) Every specified listed company shall within thirty days of any person becominga related person, ensure that such person has been allotted or has applied for aunique identification number.

CHAPTER V

ACTION IN CASE OF VIOLATION

19. Action for acting, dealing etc. without obtaining unique identification number

Any person who issues any security or buys, sells or deals in any securities incontravention of these regulations shall be liable for –

(a) action under sub-section (4) of section 11 of the Act;

(b) delisting of securities;

(c) being debarred from acting in any capacity in any security market relatedinstitution;

(d) such other action as may be deemed appropriate by the Board in the facts andcircumstances of the case.

Provided that no such action shall be taken without following the procedure laid downunder the relevant rules or regulations.

20. Action for giving false statement

Any person who makes any false statement or misrepresents any fact in anyapplication or other document submitted to the Designated Service Provider shall,without prejudice to any action which may be taken under section 24 of the Act bythe Board, be liable for action under section 15HB of the Act.


21. Action for failure to intimate changes

Any person who being required to do so, fails to intimate changes as required inregulation 15 shall be liable for action under clause (b) of section 15A of the Act.

22. Action for failure to make application for newly added related persons

Any intermediary or listed company who fails to ensure compliance withregulation 16 shall be liable for action under section 15HB of the Act.


THE SCHEDULE

[See regulation 12 of SEBI [Central Database of Market Participants]Regulations, 2003]

FORM A

Application Form / Form for intimating changes – Natural Persons

This application has three parts, Part A, B and C. Part B is to be filled in by employeeof an Intermediary registered with SEBI.

(For use by POS only) Application Fee : Rs. ______ (Demand drafts only)

TIN : Drawn on Bank

Data Uploaded on: __/ __/ ____ DD No. Payable at

Please fill in BLOCK LETTERS. Please tick relevant boxes wherever option is provided.

FIRST AMENDMENT UniqueAPPLI- identificationCATION number

(Please provide in case ofamendment only)

PART A

PERSONAL DETAILS

Gender : Male Female Date of Birth :Day Month Year

First Name Mr./ Mrs./ Ms.

Middle name

Last name

(Name as written above will appear on the identity card)

Father’s/ Husband’s Name Mr.

Mother’s Name* Mrs.

PAN No. Note : Please provide copy of PAN Card

* — Please write First name only. For example, if mother’s full name is ‘Girija RamlalMehra’, please write only ‘Girija’

Address:

House No./Apt Name/Block No.

Road/Street/Lane

Area

City/Post/Taluka PIN


Telephone :Office/Residence

STD Code Telephone Number

I hereby submit copies of the following documents as proof of my identity and address.(Original documents should be brought for verification to POS at the time of submittingapplication form)

Proof of Identity

Passport Driving PAN Card with Voter Id Photo Identity CardLicense Photograph issued by Employer

registered underMAPIN

Please provide Document No. Place of issue Date of Issuedetails of documentsubmitted

d d m m y y y y

Proof of Address

Passport Voter Id Driving Bank Rent RationLicense Passbook Agreement Card

Flat Telephone Electricity Certificate issued InsuranceMainte- Bill Bill by employer Policynance holding uniqueBill identification number

Please provide Document No. Place of issue Date of Issuedetails of documentsubmitted

d d m m y y y yDeclaration

I have not applied for unique identification number earlier and I am applying for thefirst time.

OR

I have applied for registration earlier and unique identification number has been allottedto me. This application is for intimation of changes in the information given earlier.

I declare that I am applying for unique identification number in my capacityas____________. I certify that the information given by me in this form is true and correct.

Signature :

Date : Signature of Applicant Information given above has been(To be signed in verified against original documents

Place : black ink in presence of presented before meRegistration Officer) [Signature of Registration Officer]


Acknowledgement

PART - I



(For use by POS only)

TIN :

We acknowledge receipt of the application form together with fee. The identity cardcan be collected on date mentioned below.

d d m m y y y y

Date: POS Seal and Signature

PART B

TO BE FILLED IN BY DIRECTORS / PARTNERS / PROPRIETORS /PERSONNEL OF SPECIFIED INTERMEDIARIES

Employer’s unique identification number

Employee JoiningDate Day Month Year

Qualifications

Qualifications Issuing Authority Valid upto (Date) (If Applicable)

Month YearTraining Information

Name of Training Conducted by From Date To DateProgram

d d m m y y y y d d m m y y y y


Whether this person is appointed Yes / No If Yes, please provideas Compliance Officer ? Intermediary Type(s)*

(1)

(2)

(3)

* Intermediary type means the type of registration obtained from SEBI. For e.g. ‘MerchantBanker - Category I’ or ‘Registrar & Transfer Agent- Category II’. Please mentioncomplete description if intermediary type is stockbroker/sub-broker. For e.g. ‘StockBroker – XYZ Stock Exchange’ or ‘Sub-broker – XYZ Stock Exchange’.

Declaration:

On behalf of __________________________________________, we hereby confirmthat we have verified the details given under Part A and Part B with relevant originaldocuments and are satisfied that the details furnished are in accordance with thedocuments verified.

Employer’s Authorised Signatory

Name Designation Signature

ComplianceOfficer

Whole timeDirector

PART C

Form for establishing Association / DissociationNote :

(1) This form is to notify association/ dissociation between individuals and corporatesin various roles as defined under SEBI (Central Database of Market Participants)Regulations, 2003. This form has to be submitted after the Unique ID No. hasbeen allotted to Company/Intermediary.

(2) Please submit separate forms for association and dissociation.

Request For Association Request For Dissociation

Name of the Applicant

Unique identification number

(not to be filled if submitted with Part A & Part B)


I notify the association/dissociation between me and the entities listed here below,as per the details given below.

Name of the Body Unique identification Relationship Type ofCorporate / other person number of the Body (Refer Note Intermediary

Corporate 1 & 2) (Refer Note 3)

Notes:

1. Relationships specific to specified Listed Company are – Associate, ComplianceOfficer, Director, Managing Director/Whole Time Director, Promoter, DesignatedEmployee, Subsidiary/Holding Company and Relatives of above.

2. Relationships specific to Intermediary are - Associate/Asset ManagementCompany, Director, Managing Director/Whole Time Director/Partner/Proprietor,Promoter/Sponsor, Personnel, Compliance Officer, Office Bearer of InvestorAssociation and Relatives of above.

3. Please mention ‘Type of Intermediary’ if the role selected is Compliance Officerof Intermediary.

4. Please attach additional sheets containing the details in the above stated formatif required. Additional sheet should be duly signed.

Declaration

I declare and state that the information given by me in this form is true and correct.I undertake to inform the designated service provider of any changes in the informationprovided by me.

Date :Place : Signature of Applicant

Acknowledgement

PART C

Form for Establishing Association / Dissociation


TIN :


(not to be filled if submitted with Part A & Part B)

We acknowledge the receipt of application form. The relationship as applied for willbe established by ___/___/______Date : Signature of Registration Officer and Seal


FORM B

Application Form / Form for intimating changes – BodiesCorporate, Intermediaries and other persons

[Note: All persons mentioned in regulation 12(2) shall fill up Part A & Part C. Ifapplicant is specified intermediary, it shall fill up Part A, B & C of this form]

(For use by POS only) Application Fee _____ Rs. _____ (Demand drafts only)

TIN ID : Drawn on Bank

Data Uploaded on : __/ __/ ____ DD No. Payable at

PART A



Organisation Name

(Name written here willappear on the identity card)

Short Name

Previous Names (if any) Effective Date

(1)

(2)

(3)

(4)

(5)

d d m m y y y y

Form of Organisation as on the date of this application (Please tick only one)

Public Limited Company Private Limited Company Company Limited byGuarantee

Scheduled Commercial Urban Bank Co-operative BankBank

Registered Trust Unregistered Trust Proprietorship

Registered Partnership Unregistered Partnership Non-Banking FinanceFirm Firm Company

Registered Society Unregistered Society


Note : Entities registered with the Registrar of Companies should tick any of thecompany options or the NBFC option.

Registration Registration/No. Formation Date

d d m m y y y y

State of Head OfficeRegistration City

Note :

(i) Copy of the registration document/partnership deed/trust deed may be submitted.

(ii) Original documents will be verified by Registration Officer at the time of submittingapplication form.

Sr. Stock Exchange on which the company is listed (if applicable)

1

2

3

4

Address for Communication : (Mailing address to be used by SEBI)

House No./Apt Name/Block No :

Road/Street/Lane :

Area :

City/Post/Taluka : Pin

Telephone :

STD Code Telephone Number

Proof of Address (Please Tick)

Copy of Income Bank Leave & License SaleTax Return Statement Agreement Agreement

ROC Registration Certificate

Please provide details Document No. Place of Issue Document Dateof document submitted

d d m m y y y y


Declaration

On behalf of ______________________________________________________, wehereby confirm the following:

• We have not applied for unique identification number under this application earlierand we are applying for the first time.

OR

• We have applied for registration earlier and unique identification number has beenallotted to us. This application is for intimation of changes in the information givenearlier.

We declare that this application is made in the capacity of the applicant asa____________. We certify that the information given in this form is true and correct.

Authorised Signatory


Company Secretary/ Auditor

Whole Time Director/ Managing

Trustee/ Managing Partner/Proprietor

Place :

Date :

Acknowledgement

Part – A



(For use by POS only)

TIN :

We acknowledge the receipt of application form together with fee. Please collect theidentity card on date mentioned below.

d d m m y y y y

Date : POS Seal and Signature


PART B

DETAILS TO BE PROVIDED IF THE APPLICANT IS ASPECIFIED INTERMEDIARY

Networth (Rs. in lakh roundedoff to the nearest lakh)

As on year ended __/ __/ ____

Intermediary Type # SEBI Registration No. SEBI Registration Date

d d m m y y y y

# Please write from the list below. In case space is not sufficient, please attach additionalsheets containing the details in the above stated format. Additional sheet may beprinted on letterhead of the organisation and duly signed. In case of multiple SEBIregistrations, please mention each separately.

Sr. Type of Intermediary Sr. Type of Intermediary

1. Banker to Issue 12. Portfolio Manager

2. Clearing Corporation 13. Registrar & Transfer Agent Category - I

3. Collective Investment Scheme 14. Registrar & Transfer Agent Category - II

4. Credit Rating Agency 15. SLS Approved Intermediary

5. Custodian 16. Stock Broker *

6. Debenture Trustee 17. Stock Exchange

7. Depository 18. Sub Broker **

8. Depository Participant 19. Underwriter

9. Investor Association (SEBI 20. Venture Capital FundRecognised)

10. Merchant Banker Category – I

11. Mutual Fund

* In case of Stock Brokers, please mention in the following format ‘StockBroker– XYZ Stock Exchange’

** In case of Sub- Brokers, please mention in the following format ‘Sub Broker–XYZ Stock Exchange’


Declaration

On behalf of ______________________________________________________, wehereby declare and state that the information given in this form is true and correct.



Compliance Officer

Whole Time Director

(for use by POS only)

It is hereby confirmed that the above information is verified with the originaldocuments submitted and found to be in accordance with such documents.

Signature of Registration Officer:

Seal :

PART C


[Note : (1) This form is to notify association/ dissociation between intermediary/listed company/investor with related persons and such other persons as is requiredunder these regulations. This form has to be submitted after the unique identificationnumber has been allotted to Company/Intermediary. (2) Please submit separate formsfor association and dissociation]


Name of the Applicant

Nature of the Applicant Intermediary / Listed Company / Other Corporate

Unique identificationnumber

We notify the association/dissociation between our organisation and the entitieslisted here below, as per the details given below.

NAME Unique ID No. Relationship Type of Intermediary(Refer Note 1 & 2) (Refer Note 3)


Notes :

1. Relationships specific to specified Listed Company are – Associate, ComplianceOfficer, Director, Managing Director/Whole Time Director, Promoter, DesignatedEmployee, Subsidiary/Holding Company and Relatives of above.

2. Relationships specific to specified Intermediary are - Associate/AssetManagement Company, Director, Managing Director/Whole Time Director/Partner/Proprietor, Promoter/Sponsor, Personnel, Compliance Officer, Office Bearer ofInvestor Association and Relatives of above.

3. Please mention ‘Type of Intermediary’ if the role selected is Compliance Officerof Intermediary. A complete list of intermediaries is given in Part B of theapplication form.

4. Please attach additional sheets containing the details in the above stated formatif required. Additional sheet may be printed on letterhead and duly signed.



Compliance Officer

Whole time Director

Acknowledgement

PART C




We acknowledge the receipt of application form. The relationship as applied for willbe established by ___/___/______

Date : Signature of Registration Officer and Seal

I. Notification under regulation 1(2) and 4(1) of the SEBI(Central Database of Market Participants Regulations, 2003*

In exercise of the powers conferred by sub-regulation (2) of regulation 1 and sub-regulation (1) of regulation 4 of the Securities and Exchange Board of India (CentralDatabase of Market Participants) Regulations, 2003 (hereinafter referred to as the saidregulations) and having taken into consideration the factors mentioned in regulation 14,the Board hereby specify :-

(a) the 1st day of December, 2003 as the date of commencement of all provisions ofthe said regulations except regulations 5 and 6 thereof;

* Issue by SEBI vide Notification F. No. SEBI/LE/03/22/75, dated 25-11-2003.


(b) intermediaries and other entities mentioned in the Annexure hereto as 'specifiedintermediaries' for the purposes of clause (u) of sub-regulation (1) of regulation2 of the said regulations;

(c) the 31st day of March, 2004 as the notified date for the purpose of sub-regulation (1) of regulation 4 for such specified intermediaries;

(d) that the fee payable by the specified intermediaries and their related personsunder sub-regulation (1) or (2) of regulation 12 shall be a sum of rupees threehundred for each application, payable by a demand draft drawn in favour of'Securities and Exchange Board of India'.

Annexure

(a) Approved intermediaries under the Securities Lending Scheme, 1997

(b) Bankers to an issue

(c) Collective investment schemes

(d) Credit rating agencies

(e) Custodians of securities

(f) Debenture Trustees

(g) Depositories

(h) Depository participants

(i) Investor association

(j) Merchant bankers

(k) Mutual funds

(l) Portfolio managers

(m) Registrars and share transfer agents

(n) Stock exchanges

(o) Underwriters

(p) Venture capital funds

II. Specified intermediary and other entity to obtain uniqueidentification numbers — Specified intermediaries*

In exercise of the powers conferred by sub-regulation (1) of regulation 4 of the Securitiesand Exchange Board of India (Central Data base of Market Participants) Regulations,2003 (hereinafter referred to as the said regulations) and having taken into considerationthe factors mentioned in regulation 14, the Board hereby specify :-

(a) stock brokers within the meaning of clause (e) of rule 2 of the Securities andExchange Board of India (Stock Brokers and Sub-brokers) Rules, 1992 as"specified intermediaries" for the purposes of clause (a) of sub-regulation (1) ofregulation 2 of the said regulations;

(b) the 31st day of March, 2004 as the notified date of the purpose of sub-regulation (1) of regulation 4 for such specified intermediaries.

* Issued by SEBI vide Notification F. No. SEBI/LE/03/23142, dated 9-12-2003.

UNLISTED PUBLIC COMPANIES(PREFERENTIAL ALLOTMENT) RULES, 2003*

173

In exercise of the powers conferred by sub-section (1A) of section 81 of the CompaniesAct, 1956 read with section 642 of the said Act, the Central Government hereby makesthe following rules, namely:-


(1) These rules may be called Unlisted Public Companies (Preferential Allotment)Rules, 2003.

(2) They shall come into force on the date of their publication in the official gazette.

2. Applicability

These rules shall be applicable to all unlisted public companies in respect ofpreferential issue of equity shares, fully convertible debentures, partly convertibledebentures or any other financial instruments, which would be convertible into or exchangedwith equity shares at a later date.

3. Definitions

(1) “Preferential Allotment” includes issue of shares on preferential basis and/orthrough private placement made by a company in pursuance of a resolutionpassed under sub-section (1A) of section 81 of the Companies Act, 1956 andissue of shares to the promoters and their relatives either in public issue orotherwise.

(2) “Promoter” means –

(a) the person or persons who are in over-all control of the company; and

(b) the person or persons who hold themselves as promoters.

Explanation : Where a promoter of a company is a body corporate, the promotersof that body corporate shall also be deemed to be promoters of the company.

(3) “control” shall include the right to appoint majority of the directors or to controlthe management or policy decisions exercisable by a person or persons actingindividually or in concert, directly or indirectly, including by virtue of theirshareholding or management rights or shareholders agreements or votingagreements or in any other manner.

4. Special Resolution

No issue of shares on a preferential basis can be made by a company unlessauthorized by its articles of association and unless a special resolution is passed by the

* Issued vide Notification No. GSR 922(E) dated 4.12.2003.


members in a General Meeting authorizing the Board of Directors to issue the same.The special resolution shall be acted upon within a period of 12 months.

5. Pricing

Where warrants are issued on a preferential basis with an option to apply for and getthe shares allotted, the issuing company shall determine before hand the price of theresultant shares.

6. Disclosures

The explanatory statement to the notice for the general meeting as required bysection 173 of the Companies Act, 1956 shall contain the following particulars:

(a) the price or price band at which the allotment is proposed;

(b) the relevant date on the basis of which price has been arrived at;

(c) the object/s of the issue through preferential offer;

(d) the class or classes of persons to whom the allotment is proposed to be made;

(e) intention of promoters/directors/key management persons to subscribe to theoffer;

(f) shareholding pattern of promoters and others classes of shares before and afterthe offer;

(g) proposed time within which the allotment shall be completed;

(h) whether a change in control is intended or expected.

7. Audit Certificate

In case of every issue of shares/warrants/fully convertible debentures/partly convertibledebentures or other financial instruments with conversion option, the statutory auditorsof the issuing company / company secretary in practice shall certify that the issue of thesaid instruments is being made in accordance with these Rules. Such certificate shallbe laid before the meeting of the shareholders convened to consider the proposed issue.

UNLISTED COMPANIES(ISSUE OF SWEAT EQUITY SHARES) RULES, 2003*

175

In exercise of the powers conferred by proviso to sub-section (1) of section 79A ofthe Companies Act, 1956 (1 of 1956) read with sub-section (1) of section 642 of the saidAct, the Central Government hereby makes the following rules, namely :-


(1) These Rules may be called the Unlisted Companies (Issue of Sweat EquityShares) Rules, 2003.


2. Definitions

In these rules, unless otherwise defined,-

(i) “Asset” means a resource controlled by the company and from which futureeconomic benefits are expected to flow to the company;

(ii) “employee” means :-

(a) a permanent employee of the company working in India or out of India; or

(b) a director of the company, employed as a whole time director or executivedirector of a company;

(iii) “intangible Asset” means an identifiable non-monetary asset, without physicalsubstance, held for use in the production or supply of goods or services, forrental to others, or for administrative purposes;

(iv) “share price” means price of a share on a given date arrived on the net worthbasis;

(v) “value addition” means anticipated economic benefits derived by the enterprisefrom expert and/or professional for providing know-how or making available rightsin the nature of intellectual property rights, by such person to whom sweatequity is issued for which the consideration is not paid or included in -

(a) the normal remuneration payable under the contract of employment, in thecase of an employee and/or

(b) monetary consideration payable under any other contract, in the case ofnon-employee.

* Issued vide Notification No. GSR 922(E) dated 4.12.2003.


3. Applicability

These Rules shall be applicable to issue of sweat equity shares by all unlistedcompanies.

4. Special resolution

(1) For the purpose of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 (1 of 1956), the explanatorystatement to be annexed to the notice for the general meeting pursuant tosection 173 of the said Act shall contain particulars as specified below.

(i) the date of the meeting at which the proposal for issue of sweat equityshares was approved by the Board of Directors of the company;

(ii) the reasons/justification for the issue;

(iii) the number of shares, consideration for such shares and the class or classesof persons to whom such equity shares are to be issued;

(iv) the value of the sweat equity shares alongwith valuation report/ basis ofvaluation and the price at which the sweat equity shares will be issued;

(v) the names of persons to whom the equity will be issued and the person’srelationship with the company;

(vi) ceiling on managerial remuneration, if any, which will be affected by issuanceof such equity;

(vii) a statement to the effect that the company shall conform to the accountingpolicies specified by the Central Government; and

(viii) diluted earning per share pursuant to the issue of securities to be calculatedin accordance with the Accounting Standards specified by the Institute ofChartered Accountants of India.

(2) Approval of shareholders by way of separate resolution in the general meetingshall be obtained by the company in case of grant of shares to identifiedemployees and promoters, during any one year, equal to or exceeding 1% of theissued capital (excluding outstanding warrants and conversion) of the companyat the time of grant of the sweat equity shares.

5. Register of shares

The company shall maintain a Register of Sweat Equity Shares issued undersection 79A in the Form specified in Schedule annexed to these rules.

6. Restriction on issue of sweat equity shares

The company shall not issue sweat equity shares for more than 15% of total paid upequity share capital in a year or shares of the value of 5 crores of rupees, whichever ishigher except with the prior approval of the Central Government.

7. Disclosure in the Directors’ Report

The Board of Directors, shall, inter alia, disclose either in the Directors’ Report or inthe annexure to the Director’s Report, the following details of issue of sweat equityshares :-

(a) number of shares to be issued to the employees or the directors;


(b) conditions for issue of sweat equity shares;

(c) the pricing formula;

(d) the total number of shares arising as a result of issue of sweat equity shares;

(e) money realised or benefit accrued to the company from the issue of sweatequity shares;

(f) diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

8. Pricing of Sweat Equity Shares

The price of sweat equity shares to be issued to employees and directors shall be ata fair price calculated by an independent valuer.

9. Issue of Sweat Equity Shares for consideration other than cash

Where a company proposes to issue sweat equity shares for consideration otherthan cash, it shall comply with following :

(a) the valuation of the intellectual property or of the know-how provided or othervalue addition to consideration at which sweat equity capital is issued, shall becarried out by a valuer;

(b) the valuer shall consult such experts, as he may deem fit, having regard to thenature of the industry and the nature of the property or the value addition;

(c) the valuer shall submit a valuation report to the company giving justification forthe valuation;

(d) a copy of the valuation report of the valuer shall be sent to the shareholders withthe notice of the general meeting;

(e) the company shall give justification for issue of sweat equity shares forconsideration other than cash, which shall form part of the notice sent for thegeneral meeting; and

(f) the amount of Sweat Equity shares issued shall be treated as part of managerialremuneration for the purposes of sections 198, 309, 310, 311 and 387 of theCompanies Act, 1956 if the following conditions are fulfilled:

(i) the Sweat Equity shares are issued to any director or manager; and,

(ii) they are issued for non-cash consideration, which does not take the form ofan asset which can be carried to the balance sheet of the company inaccordance with the relevant accounting standards.

10. Lock-in of sweat equity shares

Sweat equity shares issued to employees or directors shall be locked in for a periodof three years from the date of allotment.

11. Certificate from auditors

In the case of every company that has allotted shares under these Rules, the Boardof Directors shall at each annual general meeting place before the shareholders a certificate


from the auditors of the company/ practising company secretary that sweat equity shareshave been allotted in accordance with the resolution of the company in the generalmeeting and these Rules.

12. Accounting policies

(1) Where the sweat equity shares are issued for a non-cash consideration, suchnon-cash consideration shall be treated in the following manner in the books ofaccount of the company:

(a) where the non-cash consideration takes the form of a depreciable oramortizable asset, it shall be carried to the balance sheet of the company inaccordance with the relevant accounting standards; or

(b) where clause (a) is not applicable, it shall be expensed as provided in therelevant accounting standards.

(2) In respect of sweat equity shares issued during accounting period, the accountingvalue of sweat equity shares shall be treated as another form of compensation tothe employee or the director in the financial statement of the company.

SCHEDULE

REGISTER OF SWEAT EQUITY SHARES(Pursuant to Rule 5)

The register of sweat equity shares issued by the company to be kept in the followingformat:

S.No. Folio No. / Date of passing Date of issue ofCertificate No. of resolution sweat equity shares

1 2 3 4

Name of Status of the Reference to entry Number of sweatthe allottee allottee - whether in register of equity shares

director or employee members issued

5 6 7 8

Face value of Price at which Total consideration Lock in periodthe share shares issued paid by employee/director till which date

9 10 11 12


SECONDARY MARKET FORCORPORATE DEBT SECURITIES*

179

1. Companies have been issuing debt securities on private placement basis from timeto time. In order to provide greater transparency to such issuances and to protectthe interest of investors in such securities, it has been decided that any listed companymaking issue of debt securities on a private placement basis and listed on a stockexchange shall be required to comply with the following:-

1.1 The company shall make full disclosures (initial and continuing) in the mannerprescribed in Schedule II of the Companies Act, 1956, SEBI (Disclosure andInvestor Protection) Guidelines, 2000 and the Listing Agreement with theexchanges. However, if the privately placed debt securities are in standarddenomination of Rs.10 Lakhs, such disclosures may be made only throughweb sites of the stock exchange where the debt securities are sought to belisted.

1.2 The debt securities shall carry a credit rating of not less than investment gradefrom a Credit Rating Agency registered with the Board.

1.3 The company shall appoint a debenture trustee registered with SEBI in respectof the issue of the debt securities.

1.4 The debt securities shall be issued and traded in demat form.

1.5 The company shall sign a separate listing agreement with the exchange inrespect of debt securities and comply with the conditions of listing.

1.6 All trades with the exception of spot transactions, in a listed debt security,shall be executed only on the trading platform of a stock exchange.

1.7 The trading in privately placed debts shall only take place between QualifiedInstitutional Investors (QIBs) and High Networth Individuals (HNIs), in standarddenomination of Rs.10 lakhs.

1.8 The requirement of Rule 19(2)(b) of the Securities Contract (Regulation) Rules,1957 will not be applicable to listing of privately placed debt securities onexchanges, provided all the above requirements are complied with.

1.9 If the intermediaries registered with SEBI associate themselves with theissuance of private placement of unlisted debt securities, they will be heldaccountable for such issues. They will also be required to furnish periodicalreports to SEBI in such format as may be decided by SEBI.

2. The stock exchanges are directed to:

2.1 make necessary amendments to the listing agreement, bye-laws, rules and

* Issued by SEBI vide SEBI/MRD/SE/AT/36/2003/30/09 dated 30-09-2003.


regulations for the implementation of the above decision immediately, as maybe applicable.

2.2 bring the provisions of this circular to the notice of the listed companies/memberbrokers/clearing members of the Exchange and also to disseminate the sameon the website for easy access to the investors; and

2.3 communicate to SEBI, the status of the implementation of the provisions ofthis circular in Section II, item no. 13 of the Monthly Development Report forthe month of October 2003.

3. This circular is being issued in exercise of powers conferred by section 11 (1) of theSecurities and Exchange Board of India Act, 1992, read with section 10 of theSecurities Contracts (Regulation) Act 1956, to protect the interests of investors insecurities and to promote the development of, and to regulate the securities market.

CLARIFICATIONS*

1. SEBI had issued a circular No. SEBI/MRD/SE/AT/36/2003/30/09 datedSeptember 30, 2003 stipulating the conditions to be complied in respect of privateplacement of debt securities. These conditions governed three aspects, viz., issuance,listing and trading of privately placed debt securities.

2. The said circular was issued by SEBI after a consultative paper on the subject wasplaced on the web site of SEBI for public comments. Subsequent to the issuance ofthe circular, market participants have made representations and suggestions andsought clarifications on the various provisions of the circular from SEBI. A series ofmeetings were also held with them. Meanwhile, SEBI has vide press release datedNovember 25, 2003 granted a transition period up to March 31, 2004 to those issuercompanies who had issued privately placed debt securities but did not list thosesecurities prior to September 30, 2003 (the date of the circular) to enable them tocomply with the provisions of the circular.

3. The clarifications sought and representations covered the following aspects :

3.1 Applicability of the circular to

(i) Type of issuer companies;

(ii) Prospective and existing issues;

(iii) Tenor of the debt instruments.

3.2 Extent of disclosures and applicability of DIP Guidelines

3.3 Association of SEBI registered intermediaries, including merchant bankers

3.4 Vetting of Offer document

3.5 Whether the requirement of 1% deposit with the stock exchange/s is mandatory

3.6 Applicability of mi nimum subscription clause as per DIP guidelines

3.7 Credit rating

3.8 Listing through a separate listing agreement

3.9 Denomination for issuance and market lot for trading3.10 Trading of securities on the stock exchanges.

* Issued by SEBI vide SEBI/MRD/SE/AT/46/2003 dated 22-12-2003.


4. The clarifications to the above are as follows:

4.1 Applicability of the circular

(i) Type of Issuer companies

(a) The SEBI circular dated September 30, 2003 would be applicable toall listed companies which have any of their securities, either equityor debt, offered through an offer document, i.e., through a publicissue and listed on a recognized stock exchange and also includesPublic Sector Undertakings whose securities are listed on arecognized stock exchange.

(b) Further, unlisted companies/statutory corporations/other entities, ifthey so desire, may get their privately placed debt securities listedin the stock exchanges, by complying with the relevant provisionsof the said circular.

(ii) Prospective and existing issues

(a) The SEBI circular is applicable to all debt securities that have beenand would be issued on a private placement basis on or after thedate of the circular, i.e., September 30, 2003.

(b) The circular would also apply to those issuer companies whoseoutstanding debt securities were issued prior to September 30, 2003.However, such issuer companies are required to comply with theprovisions of the circular before March 31, 2004 for which transitiontime was provided vide press release dated November 25, 2003.

(c) If, however, the issuer companies do not comply with the aforesaidconditions for listing of such securities before March 31, 2004, thensuch securities would remain unlisted and, would, therefore, not bepermitted for trading in the Stock Exchange trading platform fromApril 01, 2004.

(iii) Tenor of the debt instruments

The SEBI circular would not be applicable for private placement of debtsecurities having a maturity of less than 365 days.

4.2 Extent of disclosures and applicability of DIP Guidelines

(a) As already stipulated in the circular dated September 30, 2003 the issuercompanies shall make full disclosures (initial and continuing) in the mannerprescribed in Schedule II of the Companies Act, 1956, Chapter VI of theSEBI (DIP) Guidelines, 2000 and the listing agreement with the stockexchanges.

(b) Such disclosures may be made through the web site of the stockexchanges where the debt securities are sought to be listed if the privatelyplaced debt securities are issued in the standard denomination of Rs. 10lakhs.

(c) The issuer companies which make frequent private placements of debt


securities would be permitted to file an umbrella offer document on thelines of a “Shelf prospectus” as applicable for a public issue.

(d) As regards financial disclosures, issuer companies which are not in aposition, for genuine reasons, to disclose audited accounts upto a datenot earlier than six months of the date of the offer document, in terms ofprovisions of Clause 6.18 of SEBI (DIP) Guidelines, 2000 may disclosethe audited accounts for the last financial year and unaudited accounts forthe subsequent quarters with a limited review by a practicing CharteredAccountant.

(e) It is also being clarified that the provisions other than Chapter VI of SEBI(DIP) Guidelines, 2000 will not be applicable for privately placed debtsecurities.

4.3 Association of SEBI registered intermediaries, including merchant bankers

(a) The appointment of intermediaries (other than debenture trustee) for privateplacement of debt securities is not mandatory.

(b) Since engaging the services of an intermediary (other than debenture trustee)is not mandatory, the appointment of such an intermediary would be left tothe discretion of the issuer company, as it deems fit.

(c) There is no prohibition on SEBI registered intermediaries to be associatedwith the privately placed unlisted debt securities.However, suchintermediaries would be accountable for their activities. Further, they wouldbe required to furnish periodical reports to SEBI in such format as specifiedby SEBI from time to time.

4.4 Vetting of offer document

There is no requirement of vetting of the offer document by SEBI.

4.5 Whether the requirement of 1% deposit with the stock exchange/s is mandatory

There is no requirement to deposit 1% of the issue size of the privately placeddebt securities with the stock exchanges.

4.6 Applicability of minimum subscription clause as per DIP guidelines

This clause will not be applicable for privately placed debt securities.

4.7 Credit rating

The debt securities shall carry a credit rating from a Credit Rating Agencyregistered with SEBI.

4.8 Listing through a separate listing agreement

The separate Listing Agreement for listing the privately placed debt securitiesis being finalised. Till such time, the issuance process would be allowed andthe securities may be listed on the basis of disclosures subject to the issuercompany furnishing an undertaking to the Stock Exchanges stating, inter-alia, that the issuer company shall sign the Listing Agreement as soon as thesame comes into force.

4.9 Denomination for issuance and market lot for trading

(a) The privately placed debt securities need not necessarily be issued indenomination of Rs. 10 lakhs.

(b) The securities shall be issued in demat form.


(c) However, if an investor is allotted securities of Rs.1 lakh or less, suchsecurities may be issued in physical form at the option of the investor. Itshall be disclosed by the issuer companies that such investors would notbe able to trade in such securities through the stock exchange mechanism.

4.10 Trading of securities on the stock exchanges

(a) The trading in the privately placed debt securities would be permitted instandard denomination of Rs. 10 lakhs in the anonymous, order drivensystem of the stock exchanges in a separate trading segment. Themarketable lot would be Rs. 10 lakhs.

(b) All class of investors would be permitted to trade subject to the said standarddenomination/marketable lot.

(c) The trades executed on spot basis shall be required to be reported to thestock exchange/s.

5. The stock exchanges are directed to:

— make necessary amendments to the listing agreement, byelaws, rules andregulations for the implementation of the above decision immediately, as maybe applicable and necessary.

— bring the provisions of this circular to the notice of the listed companies/memberbrokers/clearing members of the Exchange and also to disseminate the sameon the website for easy access to the investors; and

— communicate to SEBI, the status of the implementation of the provisions ofthis circular in Section II, item no. 13 of the Monthly Development Report forthe month of January, 2004.

6. This circular is being issued in exercise of powers conferred by section 11 (1) of theSecurities and Exchange Board of India Act, 1992, to protect the interests of investorsin securities and to promote the deve lopment of, and to regulate the securitiesmarket.

INTERNAL AUDIT OF PORTFOLIO MANAGERS*

184

1. As you are aware, all portfolio managers are required to disclose the performance oftheir portfolios to their clients, including disclosure of the performance indicatorscalculated on the basis of weighted average method taking each individual categoryof investments for the immediately preceding three years in case of discretionaryportfolio managers. In order to make the investors fully aware about how their fundshave been deployed and also to give them an objective analysis of the performanceof the portfolios being managed by the portfolio managers on discretionary basis incomparison with the rise or fall in the markets, it has been decided to disclose theperformance of benchmark indices in the periodical reports to be furnished to theclient in terms of Regulation 21 of SEBI (Portfolio Managers) Regulations, 1993.

The portfolio managers may select any of the indices available, e.g. BSE (Sensitive)index, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX 500, depending on theinvestment objective and portfolio of the client. These benchmark indices may bedecided by the portfolio managers and any change at a later date shall be recordedand justified with specific reasons thereof.

As the purpose of introducing benchmarks is to indicate the performance of theportfolios vis-a-vis. markets to the investors, the portfolio managers may giveperformance of more than one index if they so desire. Also, they have the option togive their management perception on the performance of their schemes.

The Boards of portfolio managers may review the performance of the funds managedby them for each client separately in their meetings and should take correctiveaction wherever necessary. They may also compare the performance of the portfolioswith benchmarks.

2. Boards of the portfolio managers should review the compliance of regulations in theirperiodical meetings. They should develop a system of getting quarterly reports ofcompliance of SEBI Regulations and Guidelines and also that due diligence hasbeen exercised by their officials in their operations and that the interests of investorsare protected. Such reports may be placed before the Boards by the complianceofficers. Boards of the portfolio managers should also review redressal of investors’grievances. Any deficiency letters or warning letters issued to the portfolio managersby SEBI should also be placed before the Boards of the portfolio managers.

3. There shall be internal audit by a practicing CA or CS so as to judge the quality ofinternal procedures being followed by the portfolio manager. The report of the internalaudit shall be submitted to the Board of the portfolio manager.

* Issued by SEBI vide IMD/PMS/CIR/1/21727/03 dated 18-11-2003.


4. The portfolio manager shall exercise due diligence in all their operational activities.

5. Compliance of the above guidelines may please be disclosed to SEBI while submittingthe half yearly report. The report is to be submitted twice a year, as on 31st of Marchand 30th of September. The report should reach SEBI within thirty days of the periodto which it relates.

These guidelines are being issued in accordance with the provisions ofRegulation 39 of SEBI (Portfolio Managers) Regulations, 1993.