Role of Sebi in Securities Market- Achal Jain

8/13/2019 Role of Sebi in Securities Market- Achal Jain

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*/01ARATION

("ont# $i%es New &o%an, 1', Bold, ))er *ase, No +nderline !

here . declare that the %inor )ro/ect re)ort, entitled Moti'ation2 , is ased on %.

ori inal st+d. and has not een s+ %itted earlier or award o an. de ree or di)lo%a to

an. instit+te or +ni3ersit.4

$he wor o other a+thor(s!, where3er +sed, has een ac nowled ed at a))ro)riate

)lace(s!4

6lace# New Delhi 0andidate3s si nature

Date# Na%e#

Enroll4 No4#

*o+ntersi ned

Na%e # Na%e #

7+)er3isor Director


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A0-NO41/*%/M/NT

("ont# $i%es New &o%an, 1', Bold, ))er *ase, No +nderline!

8n inde)endent )ro/ect is a contradiction in ter%s4 E3er. )ro/ect in3ol3es contri +tion o

%an. )eo)le4 $his )ro/ect also ears the i%)rints o %an. )eo)le and it is a )leas+re or

%e to ac nowled e and than all o the%4

a% dee)l. inde ted to Ms + Sunita Sharma "Name of the %uide$ who acted as a

%entor and +ide, )ro3idin nowled e and i3in %e his her 3al+a le ti%e o+t o

his her +s. sched+le, at e3er. ste) thro+ ho+t the )ro/ect4 t is onl. eca+se o his her

this )ro/ect ca%e into ein 4

also than Prof+ "*r+$ 5+P+ Varshne() Director o Delhi *olle e o 8d3anced 7t+dies,

or )ro3idin an o))ort+nit. o doin this )ro/ect +nder his leadershi)4

also ta e the o))ort+nit. to ex)ress %. sincere ratit+de to each and e3er. )erson, who

directl. or indirectl. hel)ed %e thro+ ho+t the )ro/ect and witho+t an.one o the% this

)ro/ect wo+ld not ha3e een )ossi le4

$he i%%ense learnin ro% this )ro/ect wo+ld e indeli le ore3er4

(7t+dent Na%e!


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TA!1/ O6 0ONT/NTS

S+No+ Topic Pa e No

1 Declaration i

2 8c nowled e%ent ii

: ;ist o $a les iii

;ist o "i +res i3

5 ;ist o 7.% ols 3

' ;ist o 8 re3iations 3i

< 0hapter7I, Introduction

ntrod+ction to ( the topic$

= /ecti3es o the st+d.

7co)e o the st+d.

Methodolo .

1-15

1

:

5

15

> 0hapter7II, 0onceptual 6ramewor8

1'-25

1'

9 0hapter7III, Summar(

7+%%ar. o the 6ro/ect

;i%itations o the st+d.

7+ estions

2'-:1

2'

29

:1

10 Bi lio ra)h. :2- 0

0.APT/R I


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INTRO*&0TION

4748 ? K had lon ac created se)arate oards co%%issions or the re +lation o

sec+rities %ar et4 $he ndian Go3ern%ent@s intention to set +) a se)arate oard or the

re +lation and orderl. +nctionin o the ca)ital %ar et was irst declared in the +d et

s)eech . &a/ee3 Gandhi while )resentin +d et or the .ear 19>>4 Ae stated $he

ca)ital %ar ets in ndia ha3e shown tre%endo+s rowth in the last i3e .ears4 8))ro3al

or ca)ital iss+e has exceeded &s4 5000 crore in 19>'->< ro% &s4 500 crore in 19>0->14

"or a health. rowth o ca)ital %ar ets, in3estors %+st e )rotected4 $radin

%al)ractices %+st e )re3ented4 Go3ern%ent has decided to set +) a se)arate oard or

the re +lation o stoc exchan es and sec+rities ind+str. 4

Profile of S/!I

$he 7ec+rities and Exchan e Board o ndia (7EB ! is the re +lator or

the sec+rities %ar et in ndia4 n 19>> the 7ec+rities and Exchan e Board o ndia (7EB !

was esta lished . the Go3ern%ent o ndia thro+ h an exec+ti3e resol+tion, and was

s+ seC+entl. +) raded as a +ll. a+tono%o+s od. (a stat+tor. Board! in the .ear 1992

with she )assin o the 7ec+rities and Exchan e Board o ndia 8ct, 1992 (7EB 8ct! on

:0th an+ar. 19924 n )lace o Go3ern%ent *ontrol, a stat+tor. and a+tono%o+s

re +lator. oard with de ined res)onsi ilities, to co3er oth de3elo)%ent ? re +lation o

the %ar et, and inde)endent )owers has een set +)4 6aradoxicall. this is a )ositi3e

o+tco%e o the 7ec+rities 7ca% o 1990-914


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6resentl. *haired . * B Bha3e, 7EB is headC+artered in the )o)+lar +siness district

o Bandra-K+rla co%)lex in M+% ai, and has Northern, Eastern, 7o+thern and estern

re ional o ices in New Delhi, Kol ata, *hennai and 8h%ada ad4

7ince its ince)tion 7EB has een wor in tar etin the sec+rities and is attendin to the

+l ill%ent o its o /ecti3es with co%%enda le Feal and dexterit.4 $he i%)ro3e%ents in

the sec+rities %ar ets li e ca)italiFation reC+ire%ents, %ar inin , esta lish%ent o

clearin cor)orations etc4 red+ced the ris o credit %ar et4

7EB has introd+ced the co%)rehensi3e re +lator. %eas+res, )rescri ed re istration

nor%s, the eli i ilit. criteria, the code o o li ations and the code o cond+ct or

di erent inter%ediaries li e, an ers to iss+e, %erchant an ers, ro ers and s+ -

ro ers, re istrars, )ort olio %ana ers, credit ratin a encies, +nderwriters and others4 t

has ra%ed .e-laws, ris identi ication and ris %ana e%ent s.ste%s or *learin

ho+ses o stoc exchan es, s+r3eillance s.ste% etc4 which has %ade dealin in sec+rities

oth sa e and trans)arent to the end in3estor4

8nother si ni icant e3ent is the a))ro3al o tradin in stoc indices (li e 7?6 *N Ni t.

? 7ensex! in 20004 8 %ar et ndex is a con3enient and e ecti3e )rod+ct eca+se o the

ollowin reasons#

t acts as a aro%eter or %ar et eha3ior4

t is +sed to ench%ar )ort olio )er or%ance4

t is +sed in deri3ati3e instr+%ents li e index +t+res and index o)tions4

t can e +sed or )assi3e +nd %ana e%ent as in case o ndex "+nds4


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6unctions # Responsibilities

7EB is the nodal a enc. which )rotects the interests o an in3estor in the ndian

sec+rities %ar et4 =therwise re +lation o the ca)ital %ar ets is )ri%aril. the

res)onsi ilit. o the 7EB 4 7o%e o the %a/or +nctions o 7EB are#

7EB is ex)ected to re +late the +siness in stoc exchan es and an. other

sec+rities %ar et4

&e isterin and re +latin the wor in o collecti3e in3est%ent sche%es,

incl+din %+t+al +nds is a res)onsi ilit. o 7EB 4

7EB is res)onsi le or )rohi itin ra+d+lent and +n air trade )ractices relatin

to sec+rities %ar ets4

6rohi itin insider tradin in sec+rities, with the i%)osition o %onetar.

)enalties, on errin %ar et inter%ediaries4

&e +latin s+ stantial acC+isition o shares and ta eo3er o co%)anies4

*allin or in or%ation ro%, carr.in o+t ins)ection, cond+ctin inC+iries and

a+dits o the stoc exchan es4

*ond+ctin research or the a o3e )+r)oses4

S/!I has to be responsi'e to the needs of three roups) which constitute

the mar8et,

$he iss+ers o sec+rities

$he in3estors

$he %ar et inter%ediaries4


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7EB has three +nctions rolled into one od. C+asi-le islati3e, C+asi-/+dicial and C+asi-

exec+ti3e4 t dra ts re +lations in its le islati3e ca)acit., it cond+cts in3esti ation and

en orce%ent action in its exec+ti3e +nction and it )asses r+lin s and orders in its /+dicial

ca)acit.4 $ho+ h this %a es it 3er. )ower +l, there is an a))eals )rocess to create

acco+nta ilit.4 $here is a 7ec+rities 8))ellate $ri +nal which is a three-%e% er tri +nal

and is )resentl. headed . a or%er *hie +stice o a Ai h co+rt - +stice N4K4 7odhi4 8

second a))eal lies directl. to the 7+)re%e *o+rt4

7EB has en/o.ed s+ccess as a re +lator . )+shin s.ste%ic re or%s a ressi3el. and

s+ccessi3el. (e4 4 the C+ic %o3e%ent towards %a in the %ar ets electronic and

)a)erless rollin settle%ent on $H2 asis!4 7EB has een acti3e in settin +) the

re +lations as reC+ired +nder law4 7EB has also een instr+%ental in ta in C+ic and

e ecti3e ste)s in li ht o the lo al %eltdown and the 7at.a% iasco4 t had increased the

extent and C+antit. o disclos+res to e %ade . ndian cor)orate )ro%oters4 More

recentl., in li ht o the lo al %eltdown, it li eraliFed the ta eo3er code to acilitate

in3est%ents . re%o3in re +lator. strict+res4 n one s+ch %o3e, 7EB has increased the

a))lication li%it or retail in3estors to &s 2 la h, ro% &s 1 la h at )resent4


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Objecti'e of the Stud(,

4 8nal.Fin the )er or%ance o 7EB with re erence to the order )assed . 7EB

a ainst %ar et )la.ers li e stoc ro ers, %+t+al +nds etc or the 3iolation o 7EB

8ct and re +lations ra%ed there+nder4

4 *hallen es aced . 7EB as a re +lator4 $his incl+des sca%s, instances o

%ar et %ani)+lation, retainin trained %an )ower etc4

4 "+t+re rowth )ros)ects4 $his wo+ld incl+de new areas s+ch as new deri3ati3e

)rod+cts, re +latin new %ar ets etc4

Scope of the Stud(,

$he st+d. is done to anal.Fe the role o sec+rities %ar et re +lator -7EB 4 $he st+d. can

e +se +l to oth the or aniFation and to the researcher4 t hel)s the or aniFation to

identi . its wea areas and it can concentrate %ore on these areas or +t+re

i%)ro3e%ent4 t i3es the researcher a )ractical ex)erience, which is the %ost i%)ortant

as)ect4 $he researcher nows %ore a o+t the re +lator and it hel)s in the +t+re

de3elo)%ent o the 7EB 4


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Methodolo (,

Research *esi n,

$he &ole o 7EB has een anal.Fed . +sin secondar. data4 7econdar. data is

collected ro% the ann+al re)orts, 7EB @s we site, N7E, B7E we sites etc4

*ata Presentation,

Data collected ro% secondar. data has een shown with the hel) o cases in which 7EB

)la.ed a 3er. cr+cial role which will hel) in eas. +nderstandin o the i%)ortance o

7EB 4

6ramewor8 of the Report,

$he )ro/ect re)ort is ra%ed in s+ch a wa. that an. od. can ha3e a C+ic idea a o+t the

research )ro/ect ro% )+r)ose to res+lts reco%%endations4 nitial )art rie l. ex)lores

the or%ation o 7EB ollowed . rie idea a o+t 7EB 4 Next the re)ort )er or%s the

detailed and anal.tical st+d. on role o 7EB 4 $he re)ort ai%ed to ser3e as an e.e-o)ener

o those who are interested in nowin the sec+rities %ar et4

Need of the Project,

ndian sec+rities %ar et has rown %ani old o3er the .ears and has eco%e one

o thenleadin %ar ets lo all.4


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7EB has )la.ed a )i3otal role in de3elo)in the ndian sec+rities %ar et and

ens+rin its ra)id rowth4

t has ra%ed 3ario+s )olicies and re +lations or the rowth and re +lation o the

sec+rities %ar et4

0.APT/R II

0ON0/PT&A1 6RAM/4OR-

Anal(sis of the performance of S/!I in re ulatin the securities

Mar8et,7

8s we now that to re +late the sec+rities %ar et is within )re3iew o 7EB or which it

has ra%ed 3ario+s re +lations and +idelines e4 4 7EB (7toc Bro er and 7+ - Bro ers!

&e +lations, 1992, 7EB (6rohi ition o "ra+d+lent and n air $rade 6ractices &elatin

to 7ec+rities Mar et! &e +lation, 200:, 7EB (7+ stantial 8cC+isition o 7hares and

$a eo3ers! &e +lations, 199


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Introduction:

8 M+t+al "+nd is a %echanis% or )oolin reso+rces . iss+in +nits to the in3estors and

in3estin +nds in sec+rities in accordance with o /ecti3es as disclosed in the o er

doc+%ent4 n3est%ents in sec+rities are s)read across a wide cross-section o ind+stries

and sectors and 7th+s the ris is red+ced4 Di3ersi ication red+ces the ris eca+se all

stoc s %a. not %o3e in the sa%e direction in the sa%e )ro)ortion at the sa%e ti%e4

M+t+al "+nd iss+es +nits to the in3estors in accordance with C+ant+% o %one. in3ested

. the%4 n3estors o M+t+al "+nds are nown as +nitholders4

$he )ro its or losses are shared . the in3estors in )ro)ortion to their in3est%ents4 $he

M+t+al "+nds nor%all. co%e o+t with a n+% er o sche%es with di erent in3est%ent

o /ecti3es which are la+nched ro% ti%e to ti%e4 8 M+t+al "+nd is reC+ired to e

re istered with 7ec+rities and Exchan e Board o ndia (7EB ! which re +lates sec+rities

%ar ets e ore it can collect +nds ro% the )+ lic4


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hen an in3estor s+ scri es or the +nits o a %+t+al +nd, he eco%es )art owner o the

assets o the +nd in the sa%e )ro)ortion as his contri +tion a%o+nt )+t +) with the


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cor)+s (the total a%o+nt o the +nd!4 M+t+al "+nd in3estor is also nown as a %+t+al

+nd shareholder or a +nit holder4 8n. chan e in the 3al+e o the in3est%ents %ade into

ca)ital %ar et instr+%ents (s+ch as shares, de ent+res etc! is re lected in the Net 8sset

Ial+e (N8I! o the sche%e4 N8I is de ined as the %ar et 3al+e o the M+t+al "+nd

sche%eJs assets net o its lia ilities4 N8I o a sche%e is calc+lated . di3idin the

%ar et 3al+e o sche%eJs assets . the total n+% er o +nits iss+ed to the in3estors4

6or e9ample ,

the %ar et 3al+e o the assets o a +nd is &s4 100,000

$he total n+% er o +nits iss+ed to the in3estors is eC+al to 10,0004

$hen the N8I o this sche%e (8! (B!, i4e4 100,000 10,000 or 10400

Now i an in3estor J J owns 5 +nits o this sche%e

$hen his total contri +tion to the +nd is &s4 504

Role of S/!I in re ulatin Mutual 6unds in India :

nit $r+st o ndia was the irst %+t+al +nd set +) in ndia in the .ear 19':4 n earl.

1990s, Go3ern%ent allowed )+ lic sector an s and instit+tions to set +) %+t+al +nds4

n the .ear 1992, 7ec+rities and exchan e Board o ndia (7EB ! 8ct was )assed4 $he

o /ecti3es o 7EB are to )rotect the interest o in3estors in sec+rities and to )ro%ote

the de3elo)%ent o and to re +late the sec+rities %ar et4

8s ar as %+t+al +nds are concerned, 7EB or%+lates )olicies and re +lates the %+t+al

+nds to )rotect the interest o the in3estors4 7EB noti ied re +lations or the %+t+al

+nds in 199:4 $herea ter, %+t+al +nds s)onsored . )ri3ate sector entities were allowed
http://allmutualfund.blog.co.in/2008/03/31/history-and-role-of-sebi-in-mutual-funds-in-india/http://allmutualfund.blog.co.in/2008/03/31/history-and-role-of-sebi-in-mutual-funds-in-india/


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to enter the ca)ital %ar et4 $he re +lations were +ll. re3ised in 199' and ha3e een

a%ended therea ter ro% ti%e to ti%e4 7EB has also iss+ed +idelines to the %+t+al

+nds ro% ti%e to ti%e to )rotect the interests o in3estors4

8ll %+t+al +nds whether )ro%oted . )+ lic sector or )ri3ate sector entities incl+din

those )ro%oted . orei n entities are o3erned . the sa%e set o &e +lations4 $here is

no distinction in re +lator. reC+ire%ents or these %+t+al +nds and all are s+ /ect to

%onitorin and ins)ections . 7EB 4 $he ris s associated with the sche%es la+nched .

the %+t+al +nds s)onsored . these entities are o si%ilar t.)e4 t %a. e %entioned here

that nit $r+st o ndia ( $ ! is not re istered with 7EB as a %+t+al +nd (as on an+ar.

15, 2002!4 7EB has ra%ed the 7EB (M+t+al "+nds! &e +lations, 199' to re +late the

%+t+al +nds4 Gi3en elow are the orders )assed . the 7EB or the 3iolation o the said

re +lation48s on March :1, 2010, < %+t+al +nds were re istered with 7EB , o which

: were in the )ri3ate sector and o+r (incl+din $ ! were in the )+ lic sector4

Mutual 6und Re istered with S/!I,

S/!I Vs+ Shriram Mutual 6und # Others

Sector :;7march7 :;7march7


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8 )enalt. o &s42 la h was i%)osed . 7EB on 7hrira% M+t+al "+nd (7M"! as it had

re)eatedl. exceeded the )er%issi le li%its o transactions thro+ h its associate ro er, in

ter%s o &e +lation 25(

7EB (M+t+al "+nds! &e +lations4

=n an a))eal . 7M", 7ec+rities 8))ellate $ri +nal 3ide its inal /+d %ent and

order dated 8+ +st 21, 200:, set aside 7EB order inter-alia on the ro+nd that

the li%it was not exceeded intentionall.4

7EB iled an a))eal e ore the Aon@ le 7+)re%e *o+rt o ndia

$he Aon@ le 7+)re%e *o+rt )rono+nced its inal /+d %ent and order on Ma.

2:, 200'4 Aon@ le 7+)re%e *o+rt set aside the /+d %ent o 78$ and settled the

iss+es, as +nder#

Mens rea (*ri%inal intention! is not an essential in redient or contra3ention o the

)ro3isions o a *i3il 8ct4 6enalt. is attracted as soon as contra3ention o the stat+tor.

o li ation as conte%)lated . the 8ct is esta lished, and there ore the intention o the

)arties co%%ittin s+ch 3iolation eco%es i%%aterial4 =nce the contra3ention is

esta lished, the )enalt. has to ollow and onl. the C+ant+% o )enalt. is discretionar.4

Recommendations,

n cases o the %+t+al +nds while i%)osin the )enalt. the )ro%oters o the sche%e

sho+ld e directed to )a. s+ch )enalt. ro% their )ersonal +nds and not ro% the +nds

or sche%e4 =therwise this will lead to the loss to the in3estors .


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0hallen es faced b( S/!I as a re ulator,7

Securit( mar8et,

*isposals of Appeals orders b( Securities Appellate Tribunal

Orders


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o ered to the in3estin )+ lic or the irst ti%e4 $he %ar et, there ore, deri3es its na%e

ro% the act that it %a es a3aila le a new loc o sec+rities or )+ lic s+ scri)tion4

New ss+es Mar et co%)rises all )eo)le, instit+tions, %echanis%, ser3ices, %ethods and

)ractices in3ol3in in raisin resh ca)ital or oth new and existin co%)anies4 $h+s,

)ri%ar. %ar et acilities direct con3ersion o sa3in s into cor)orate in3est%ent4

$he )ri%ar. %ar et )ro3ides the iss+in co%)an. with additional +nds or startin a

new enter)rise or or their ex)ansion or di3ersi ication o an existin +nit4 $he new

%ar et neither en/o.s an. tan i le or% or an. ad%inistrati3e set+) nor is s+ /ect to an.

centraliFed control or the exec+tion o its +siness- it is reco niFed . the ser3ices that itrenders to the lenders and orrowers o ca)ital +nds at the ti%e o an. )artic+lar

o)eration4 New iss+es %ar et )ro3ides a co%%on ro+nd or acilitatin the trans er

)rocess o +nds ro% the s+))liers (in3estors! to the co%)anies raisin resh ca)ital4

$hose co%)anies which ha3e to raise the ca)ital ro% the %ar et ha3e to ile Dra t &ed

Aerrin 6ros)ect+s with 7EB 4 $hen, 7EB has to i3e its o ser3ations on it within a

s)eci ied ti%e4

D+rin 2009-10,

crore in 200>-09 thro+ h )+ lic (22! and ri hts iss+es (25!4 D+e to etter inancial

en3iron%ent, there were :9 6=s d+rin 2009-10 as a ainst 21 d+rin 200>-094


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Particulars 7;=

;+ Public Issues "i$G"ii$

(i! 6+ lic ss+es o which

6=s

"6=s

(ii! 6+ lic ss+es (Bonds!

22


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a))licants and certain D6s4 $he ains %ade . these inanciers were treated as +nlaw +l

ains as their actions were o+nd to e in 3iolations o 7EB (6rohi ition o "ra+d+lent

and n air $rade 6ractices &elatin to 7ec+rities Mar ets! &e +lations, 200:, 7EB had

)assed two ad interi% ex )arte order c+% show ca+se notices on an+ar. 12, 200' and

8)ril 2


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Recommendations, 7

$ho+ h, 7EB has dis or ed the ille al a%o+nt ro% the ene iciaries who %ade the

ille al ains the a%o+nt was then redistri +ted a%on those in3estors who ha3e s+ ered

loss as the shares co+ld not e allotted to the% eca+se ra+d+lent %+lti)le a))lications

. so%e o the a))licants4

$o a3oid s+ch t.)e o sca%s re)eated in +t+re +se o the io%etrics is the est o)tion

wherein the th+% i%)ression o the )erson wo+ld e recorded and then he co+ld e

identi ied accordin to it4 $his will i3e the correct identi ication o the in3estor

%ini%iFin s+ch t.)es o ra+d4 n act, it is hi h ti%e that 7EB , N7D;, *D7; sho+ld

/oin hands with in niC+e denti ication N+% er 6ro ra%%e which has recentl. initiated

in se3eral )arts o the co+ntr.4

0ollecti'e In'estment Scheme

Introduction,

8 *ollecti3e in3est%ent sche%e is an. sche%e or arran e%ent, which satis ies the

conditions, re erred to in s+ -section (2! o section 1188 o the 7EB 8ct4 8n. sche%e

or arran e%ent %ade or o ered . an. co%)an. +nder which the contri +tions, or

)a.%ents %ade . the in3estors, are )ooled and +tilised with a 3iew to recei3e )ro its,

inco%e, )rod+ce or )ro)ert., and is %ana ed on ehal o the in3estors is a * 74

n3estors do not ha3e da. to da. control o3er the %ana e%ent and o)eration o s+ch

sche%e or arran e%ent4


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$he ollowin do not constit+te a collecti3e in3est%ent sche%e# an. sche%e or

arran e%ent %ade or o ered . a co-o)erati3e societ. or a societ. ein a societ.

re istered

or dee%ed to e re istered +nder an. law relatin to co-o)erati3e societies or the

ti%e ein in orce in an. 7tate

an. sche%e or arran e%ent +nder which de)osits are acce)ted . non- an in

inancial co%)anies

an. sche%e or arran e%ent ein a contract o ins+rance to which the ns+rance8ct, a))lies

an. sche%e or arran e%ent )ro3idin or an. 7che%e, 6ension 7che%e or the

ns+rance 7che%e ra%ed +nder the E%)lo.ees 6ro3ident "+nd and

Miscellaneo+s 6ro3isions 8ct, 1952

an. sche%e or arran e%ent +nder which de)osits are acce)ted +nder section 5>8

o the *o%)anies 8ct, 195' (1 o 195'!

an. sche%e or arran e%ent +nder which de)osits are acce)ted . a co%)an.

declared as a Nidhi or a %+t+al ene it societ. +nder section '208 o the

*o%)anies 8ct, 195' (1 o 195'!

an. sche%e or arran e%ent allin within the %eanin o *hit +siness as de ined

in cla+se (d! o section 2o the *hit "+nd 8ct, 19>2 ( 0 o 19>2!


24/76

an. sche%e or arran e%ent +nder which contri +tions %ade are in the nat+re o

s+ scri)tion to a %+t+al +nd4

8s we now that )lantation co%)anies ha3e or lon o)erated in a re +lator. 3ac++%4

6lantation co%)anies are re istered +nder the *o%)anies 8ct 195'4 $he. raised %one.

ro% )oor retail in3estors )ro%isin the% l+crati3e ret+rns on their in3est%ent a ter a

)eriod o 12-15 .ears4 nli e shares, in s+ch cases the co%)anies iss+ed +nits to the

in3estors4 n all s+ch cases, the %one. was said to in3est in a ric+lt+re land, )lantation

on the na%e o de3elo)%ent o land and in other related acti3ities4 7ince the. are not

non- an in inance co%)anies, the. are not +nder the a% it o the &eser3e Ban o

ndia (&B ! since the. raise %one. that is not de ined as de)osits, the. are not re +lated

. the De)art%ent o *o%)an. 8 airs (D*8! and since the %one. raised is not

in3ested in sec+rities, the. do not co%e +nder 7EB Js )+r3iew4 7o, there was no

o3ern%ent re +lator. a enc. a rie3ed in3estors co+ld t+rn to in case the co%)anies

de a+lted4 "inance %inistr. then con erred the )ower to +)on 7EB to re +late the

sec+rities %ar et )+rs+ant4

n +rtherance to the a o3e decision o the *entral Go3ern%ent, the 7EB 8ct was

a%ended to de ine the ter% *ollecti3e n3est%ent 7che%e to %ean a sche%e carried on

. a co%)an. where +nder %one. is collected ro% in3estors, )ooled and +tiliFed or the

)+r)oses o the sche%e, in3est%ent %ade with a 3iew to recei3e ret+rn on the in3est%entand the a airs o the co%)an. is %ana ed on ehal o the in3estors4 "+rther, the

de inition o ter% Lsec+rities@ i3e +nder 7*&8 was also a%ended to incl+de the +nits

iss+ed . s+ch collecti3e in3est%ent sche%es4


25/76

6+rs+ant to a o3e a%end%ents in 7EB and 7*&8, 7EB ca%e o+t with 7EB

(*ollecti3e n3est%ent 7che%e! &e +lations, 1999 )ro3idin in detail the reC+ire%ent

or s+ch co%)anies to o tain certi icate o re istration ro% the Board or to wind +) their

sche%es and %a e re)a.%ent to the in3estors in accordance with the )ro%ise %ade

+nder res)ecti3e sche%es4

Noticin non co%)liance with the reC+ire%ent o the )ro3isions o 7EB 8ct and the

re +lations ra%ed . 7EB , 3ario+s actions s+ch as directin to the co%)an. or

re +ndin the a%o+nt collected ro% in3estors, de arrin he co%)an. and their directors

ro% o)eratin in the ca)ital %ar et, la+nchin o )rosec+tion )roceedin s a ainst the

)ersons res)onsi le or de a+lt were ta en . the Board4 *ase laws are %entioned elow#

S/!I Vs+ 1ibra Plantation 1imited

8 )+ lic interest )etition (6 ;! was iled e ore Bo% a. Ai h *o+rt . 7EB a ainst the

)lantation co%)anies4 $he *o+rt held that where the cor)orate character is e%)lo.ed or

the )+r)ose o co%%ittin ille alit. or or de ra+din others, the *o+rt wo+ld i nore the

cor)orate character and will loo at the realit. ehind the cor)orate 3eil so as to ena le it

to )ass a))ro)riate orders to do /+stice etween the )arties concerned4 $he *o+rt also

held that the a sence o a stat+tor. )ro3ision will not inhi it the *o+rt while actin +nder

8rticle 1 2 ro% %a in a))ro)riate orders or doin co%)lete /+stice etween the

)arties4 $he *o+rt +rther o ser3ed that in ndia the *o+rts are not onl. *o+rts o law +t

also the *o+rts o eC+it. and therea ter )assed an a))ro)riate order attachin certain

)ro)erties o the directors o the co%)an. in the instant case4 $he co+rt ordered


26/76

*o%%issioner o 6olice to a))oint D*6 to enC+ire into the 3ario+s as)ects o the

&es)ondent co%)an. and to ind o+t the assets o the directors o the co%)an. and

whether an. a%o+nt o the co%)an. is si)honed o to an. sister concerns or in the na%e

o relati3es o the directors4

Recommendations,

8l%ost all the co%)anies o)eratin the * 7 sche%e ha3e een directed . 7EB to wind

+) the sche%e and to ret+rn the %one. o the in3estors within a i3en ti%e ra%e4 $hese

co%)anies o)eratin ro% the di erent )arts o the co+ntr. ha3e also iled their

a))eals )etition with di erent co+rts in the co+ntr. dela.in the )a.%ent o the %atter4

t is reco%%ended that 7EB sho+ld ile an a))lication with the 7+)re%e *o+rt o ndia

with a )ra.er to consolidate all these cases as the iss+e is al%ost sa%e in all the a))eals

and trans erred these %atters in onl. one co+rt o the co+ntr. )re era l. in M+% ai4

$his wo+ld ex)edite the dis)osal o the %atters, red+ces the re +lator. costs and the

in3estors %a. et their hard earned %one. witho+t %+ch dela.4

&N6AIR TRA*/ PRA0TI0/S,

Introduction,


27/76

6ractices that constit+te +n air %ethods o co%)etition or +n air or dece)ti3e acts or

)ractices4 $he. incl+de %isre)resentation, twistin , re atin , dece)ti3e or alse

ad3ertisin , ineC+ita le clai% settle%ent, and +n air discri%ination4

$o c+r the +n air trade )ractices in the %ar et 7EB dra ted 7EB (6rohi ition o

"ra+d+lent and +n air $rade 6ractices &elatin to 7ec+rities Mar et! &e +lation, 1995

which was re)ealed in the .ear 200: and is nown as 7EB (6rohi ition o "ra+d+lent

and +n air $rade 6ractices &elatin to 7ec+rities Mar et! &e +lation, 200:4 $hose

entities which traded in the %ar et +n airl. li e s.nchroniFed trades or circ+lar trades

then 7EB initiate actions on those entities4 7o%e o the land%ar case laws in these

re ards are listed elow#

$o c+r the +n air trade )ractices in the %ar et 7EB dra ted 7EB (6rohi ition o

"ra+d+lent and +n air $rade 6ractices &elatin to 7ec+rities Mar et! &e +lation, 1995

which was re)ealed in the .ear 200: and is nown as 7EB (6rohi ition o "ra+d+lent

and +n air $rade 6ractices &elatin to 7ec+rities Mar et! &e +lation, 200:4 $hose

entities which traded in the %ar et +n airl. li e s.nchroniFed trades or circ+lar trades

then 7EB initiate actions on those entities4 7o%e o the land%ar case laws in these

re ards are listed elow#

-etan Pare8h Vs+ S/!I

7EB 3ide its order dated Dece% er 12, 200:, in exercise o )owers con erred +)on it

+nder sections 11B and 11( !( ! o 7EB 8ct read with &e +lations 11 and 1: o 7EB

(6rohi ition o "ra+d+lent and n air $rade 6ractices relatin to 7ec+rities Mar ets!

&e +lations, 1995 had de arred Ketan I 6are h and its related entities ro% +.in ,


28/76

sellin or dealin in sec+rities in an. %anner, directl. or indirectl.4 7EB had also

de arred the% ro% associatin with the sec+rities %ar et or a )eriod o 1 .ears or

7.nchroniFed $rades and *irc+lar $radin and creation o arti icial 3ol+%e in the

%ar et4 t was o ser3ed ro% the anal.sis o )rice 3ol+%e data that )rice o the scri) o

;+)in ;a oratories ;td4 had %o3ed ro% &s4 1


29/76

7EB @s %o3e in de arrin the Ketan 6ari h act as a deterrent or other %ar et

%ani)+lators4 D+e to s+ch t.)e o %o3es . the re +lator there is a con idence in the

in3estors and the. eel sa e in in3estin in the %ar et4

STO0- / 0.AN%/S

Introduction,

8 stoc exchan e is an entit. which )ro3ides tradin acilities or %ar et )artici)ants,

to trade in shares and other sec+rities 4 7toc exchan es also )ro3ide acilities or the

iss+e and rede%)tion o sec+rities as well as other inancial instr+%ents4 $he sec+rities

traded on a stoc exchan e incl+de# shares iss+ed . co%)anies, +nits o %+t+al +nds,

deri3ati3es 4

$o e a le to trade a sec+rit. on a certain stoc exchan e, it has to e listed there4

s+all. there is a central location at least or record ee)in , +t trade is less and less

lin ed to s+ch a )h.sical )lace, as %odern %ar ets are electronic networ s , which i3es

the% ad3anta es o s)eed and cost o transactions4 $rade on an exchan e is . %e% ers

onl.4

$he initial o erin o sec+rities to in3estors is . de inition done in the )ri%ar.

%ar et and s+ seC+ent tradin is done in the secondar. %ar et 4 8 stoc exchan e is

o ten the %ost i%)ortant co%)onent o a stoc %ar et 4 7+))l. and de%and in stoc

%ar ets is dri3en . 3ario+s actors which, as in all ree %ar ets , a ect the )rice o

stoc s4
http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_market


30/76

$here is +s+all. no co%)+lsion to iss+e stoc 3ia the stoc exchan e itsel , nor %+st

stoc e s+ seC+entl. traded on the exchan e4 7+ch tradin is said to e o

exchan e or o3er-the-co+nter 4 $his is the +s+al wa. that deri3ati3es and onds are traded4

ncreasin l., stoc exchan es are )art o a lo al %ar et or sec+rities4

6unctions of Stoc8 /9chan e

Mar8etabilit( to Securities,

7toc exchan e )ro3ides a or+% to )+rchase and sell sec+rities listed therein at a %ar et

orce deter%ined )rice th+s )ro3idin a C+ic %ar et to a sec+rit. to deal in4

Transferrin Ownership,

$ransaction in sec+rities at a stoc exchan e re)resents shi t in ownershi) ro% one to

other o a lon -ter% sec+rit.4 $h+s, widenin ownershi) ase4

Pro'idin 1iquidit(,

8n in3est%ent in eC+it. share ca)ital is a )er)et+al or )er%anent co%%it%ent in

contri +tin ixed ca)ital o a co%)an., th+s loc in liC+idit.4 t is the stoc exchan e

which )ro3ides liC+idit. when needed4

Reducin Personal Ris8,

$hro+ h %ar eta ilit., )ersonal ris o in3estor is red+ced . roadenin the s+))l. o

eC+it. and lon -ter% de ts ca)ital or inancin +siness enter)rise4
http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Bond_(finance)


31/76

Rotatin 0ontribution,

n3est%ent in eC+it. share is ixed or the li e o the co%)an., the a ilit. to shi t the

ownershi) to others d+rin this co+rse o )eriod )er%its %ore indi3id+als to )artici)ate in

the lon -ter% inancin o the co%)an.4

Allocator of 0apital,

7toc exchan e allocates reso+rces to alternati3e +ses4 $h+s, in e icient stoc %ar et the

s+))l. o reso+rces is trans or%ed into lon -ter% in3est%ent +nd, th+s allocatin +nds

to est rewardin ir%4

Safet( to In'estors,

$he %a/or +nction o stoc exchan e is to )ro3ide adeC+ate sa et. to the en+ine

in3estors ro% ra+ds and %ani)+lations ca+sed d+e to s)ec+lators, %e% ers, ro ers etc4

or this )+r)ose 7EB , 7ec+rities *ontract (&e +lations! 8ct, 195' (7&*8! and *entral

Go3t4, ha3e wide )owers to re +late o)erations o stoc exchan es4

/'aluation of Securities,

7toc Exchan es )ro3ide an o))ort+nit. to deter%ine a reasona le and air )rice o the

sec+rit.4 t wor s as a %echanis% to ix a )rice thro+ h the %ar et orce o de%and and

s+))l.4 $hese )rices are C+oted and )+ lished or )+ lic on dail. asis4 $he l+ct+ation

in )rice re)resents the collecti3e /+d %ent o all the in3estors and s)ec+lators4 $his

contin+o+s )rocess o e3al+ation at the 3ario+s stoc exchan es is re lected thro+ h stoc

%ar et indices4

MobiliJation of Sa'in s,


32/76

t )ro3ides an o))ort+nit. to all the in3estors to in3est their s+r)l+s +nds into 3ario+s

inancial instr+%ents, and th+s directs its low towards de icit +nits4 7toc %ar et

%oti3ates in3estors to sa3e %ore and in3est in hi h .ieldin sec+rities and th+s )ro%otes

s+ch ind+stries +nits which show est )rod+cti3e and inancial )er or%ance4

Promotin Industrial *emocrac(,

;i e )olitical de%ocrac., stoc exchan es )ro%ote shareholders@ de%ocrac. in

%ana e%ent set+) o listed co%)an. hitherto, closel. held a%il. %ana ed co%)anies

ha3e to chan e their nat+re and st.le . listin on a stoc exchan e and thin a o+t

shareholders de%ocrac. . honorin their ri hts, enhance shares in %ana e%ent,

introd+cin rotator chan e in Board o Directors, e%)lo.ees@ elon in ness +nder stoc

o)tion )lans, %ore trans)arent disclos+re and ood cor)orate o3ernance4

$o re +late the +siness o 7toc Exchan es in ndia is also the +nction o 7EB 4 8t

)resent there are 25 stoc exchan es )resent in ndia4 7o%e o the% are Bo% a. 7toc

Exchan e ;i%ited, National 7toc Exchan e ;i%ited *alc+tta 7toc Exchan e ;td4

Delhi 7toc Exchan e ;td, Madras 7toc Exchan e ;td4 etc4 7o%e o the% are new

stoc exchan es and dealt )+rel. in deri3ates li e nited 7toc Exchan e and

M+ltico%%odit. 7toc Exchan e4 $o start the tradin in sec+rities the. ha3e to ta e

)rior a))ro3al o 7EB which a ter ins)ectin the exchan e and on satis action o

co%)liance o the re +lations i3e the% the certi icate o re istration4 7EB is satis ied

that there is a 3iolation o certain re +lations then their certi icate %a. e cancelled or

%a. not e i3en the )er%ission to trade in sec+rities4 =ne s+ch case is %entioned elow4

M0 7S Vs+ S/!I


33/76

M* 7toc Exchan e ;i%ited iled a letter with 7ec+rities and Exchan e Board o ndia

(hereina ter re erred to as 7EB ! on 8)ril


34/76

7EB is ri ht in not allowin the M* -7 to start eC+it. tradin eca+se M* - 7 has

not +ll. co%)lied with the M6 M7 &e +lations which %eans )ro%oters o the M* -

7 has not red+ced their shareholdin as )er the )ro3isions4 $his %a. +rther lead to the

3iolations o se3eral re +lations4

"or +rther de3elo)%ent o the %ar et 7EB sho+ld con3ince the stoc exchan es to

o)en their ranches in r+ral areas also4 $his will i3e the oost to the %ar et as %ore and

%ore in3estors will co%e +) and in3est in the %ar et4 B. doin this the. will also %a e

%one.4 8t the sa%e ti%e the. sho+ld e ad3ised to in3est a little4


35/76

INSI*/R TRA*IN%

Introduction:

nsider tradin is the tradin o a cor)orationJs stoc orother sec+rities (e4 4 onds or stoc o)tions! . indi3id+als with )otential access to non-

)+ lic in or%ation a o+t the co%)an.4 n %ost co+ntries, tradin . cor)orate insiders

s+ch as o icers, e. e%)lo.ees, directors, and lar e shareholders %a. e le al, i this

tradin is done in a wa. that does not ta e ad3anta e o non-)+ lic in or%ation4

Aowe3er, the ter% is reC+entl. +sed to re er to a )ractice in which an insider or a related

)art. trades ased on %aterial non-)+ lic in or%ation o tained d+rin the )er or%ance o

the insiderJs d+ties at the cor)oration, or otherwise in reach o a id+ciar. or other

relationshi) o tr+st and con idence or where the non-)+ lic in or%ation was

%isa))ro)riated ro% the co%)an.4

n the nited 7tates and se3eral other /+risdictions, tradin cond+cted . cor)orate

o icers, e. e%)lo.ees, directors, or si ni icant shareholders (in the 474, de ined as

ene icial owners o ten )ercent or %ore o the ir%Js eC+it. sec+rities! %+st e re)orted

to the re +lator or )+ licl. disclosed, +s+all. within a ew +siness da.s o the trade4

Man. in3estors ollow the s+%%aries o these insider trades in the ho)e that %i%ic in

these trades will e )ro ita le4 hile le al insider tradin cannot e ased on %aterial

non-)+ lic in or%ation, so%e in3estors elie3e cor)orate insiders nonetheless %a. ha3e

etter insi hts into the health o a cor)oration ( roadl. s)ea in ! and that their trades

otherwise con3e. i%)ortant in or%ation (e4 4, a o+t the )endin retire%ent o an

i%)ortant o icer sellin shares reater co%%it%ent to the cor)oration . o icers

)+rchasin shares, etc4!


36/76

lle al insider tradin is elie3ed to raise the cost o ca)ital or sec+rities iss+ers, th+s

decreasin o3erall econo%ic rowth4

$he nsider $radin &e +lations, sa., an Linsider@' is an. )erson who, is or was

connected with the co%)an., and who is reasona l. ex)ected to ha3e access to

+n)+ lished L)rice-sensiti3e in or%ation@ a o+t the stoc o that )artic+lar co%)an., or

who has access to s+ch +n)+ lished )rice sensiti3e in or%ation4

L6rice sensiti3e in or%ation@ %eans an. in or%ation which relates directl. or indirectl.

to a co%)an. and which i )+ lished is li el. to %ateriall. a ect the )rice o sec+rities

o co%)an.4 $he ollowin in or%ation wo+ld e considered as the )rice sensiti3e

in or%ation within the )+r3iew o the nsider $radin &e +lations #

6eriodical inancial res+lts o the co%)an.

ntended declaration o di3idends ( oth interi% and inal!

ss+e o sec+rities or +.- ac o sec+rities

8n. %a/or ex)ansion )lans or exec+tion o new )ro/ects

8%al a%ation, %er ers or ta eo3ers

Dis)osal o the whole or s+ stantial )art o the +nderta in

7i ni icant chan es in )olicies, )lans or o)erations o the co%)an.4

$o )rohi it the insider tradin 7EB dra ted the re +lation 7EB (6rohi ition o nsider

$radin ! &e +lation, 19924


37/76

Ra8esh A arwal '+ S/!I

&a esh 8 arwal, the %ana in director o 8B7 nd+stries ;td4 (8B7!, was in3ol3ed in

ne otiations with Ba.er 84G4 (a co%)an. re istered in Ger%an.!, re ardin their

intentions to ta eo3er 8B74 Bein the %ana in director with s+ch hi h )ort olio it oes

witho+t sa.in that he had access to the )rice sensiti3e in or%ation4 &a esh 8 arwal in

order to esca)e ro% the 3i ilant e.es o the 7EB )la.ed a tric 4 Ae wanted to

circ+%3ent the )ro3isions o law thro+ h a tact +l %anner4 Be ore the anno+nce%ent o

the %er er ein %ade )+ lic thro+ h anno+nce%ent, he %ade a coll+si3e a ree%ent

with his rother to ta e o3er the shares o 8B7 ro% the %ar et4 $herea ter, he tendered

the sa%e shares thro+ h the o)en o er %a in a h+ e )ro it4 $hese clandestine

a ree%ents co+ld e traced . the 7EB thro+ h their thread are in3esti ation4 Ba.er

8G s+ seC+entl. acC+ired 8B74 "+rther, he was also an insider as ar as 8B7 was

concerned4$he secreti3e a ree%ent entered etween &a esh 8 arwal and his rother-

in-law to acC+ire the shares e ore the %er er was carried o+t was a 3iolation o sections

: and o the nsider $radin &e +lations4 &a esh 8 arwal 3ehe%entl. denied the

alle ations le3elled a ainst hi% . the 7EB statin that he had acted in s+ch a %anner

or the ene its o the co%)an. and he had no intention to ha3e )ersonal ains4 Ae said

that he wanted to acC+ire 51 )er cent shares o the co%)an. o 8B7 thro+ h Ba.er and

he wanted the )lan to e exec+ted in clinical )recision4 $he 7EB directed &a esh

8 arwal to de)osit &s4 : ,00,000 with n3estor Ed+cation ? 6rotection "+nds o 7toc 4

Exchan e, M+% ai and N7E (in eC+al )ro)ortion, i4e4, &s4 1


38/76

to co%)ensate an. in3estor which %i ht %a e an. clai% s+ seC+entl.4 8 case a ainst

&a esh 8 arwal was %ade o+t +nder section 2 o the 7EB 8ct4 8d/+dication

)roceedin s were also initiated a ainst hi%4 &a esh 8 arwal %ade an a))eal to the

7ec+rities 8))ellate $ri +nal, M+% ai4 $he $ri +nal held that the )art o the order o the

7EB directin &a esh 8 arwal to )a. &s4 : ,00,000 co+ld not e s+stained, on the

ro+nd that &a esh 8 arwal did that in the interests o the co%)an. (8B7!, as

%entioned in the acts a o3e4

TA-/OV/R

Introduction,

Generall. s)ea in ta eo3er %eans acC+isition o a co%)an.4 8 ta eo3er occ+rs when

the acC+irin ir% ta es o3er the control o the tar et ir%4 8n acC+isition or ta eo3er

does not necessaril. entail +ll, le al control4 8 co%)an. can ha3e e ecti3e control o3er

another co%)an. . holdin %inorit. ownershi)4 nder the %ono)olies and restricti3e

trade )ractices act, ta eo3er %eans acC+isition o not less than 25O o the 3otin )ower

in a co%)an.4 7ection :


39/76

acC+isition, it is called a ta eo3er4 n an +nwillin acC+isition, the %ana e%ent o

tar et co%)an. wo+ld o))ose a %o3e o ein ta en o3er4 hen %ana e%ents o

acC+irin and tar et co%)anies %+t+all. and willin l. a ree or the ta eo3er, it is called

acC+isition or riendl. ta eo3er4

8 ta eo3er is the )+rchase o one co%)an. . another (the acC+irer, or idder!4 7EB has

ra%ed 7EB (7+ stantial 8cC+isition o 7hares and $a eo3ers! &e +lations, 199


40/76

the 7EB to loo into the en+iness o the non-co%)ete ees e3en where it is within the

li%its (25O! allowed . the re +lations4

Recommendations,

7ince the non-co%)ete ees has direct e ect on the s%all shareholders in the listed

co%)anies it is ood that 7EB is ta in this iss+e 3er. serio+sl.4 7+ch a )ower to o into

the en+iness o the non-co%)ete sho+ld e with the re +lator4 $he new $a eo3er

&e +lations as )ro)osed . $a eo3er &e +lator. 8d3isor. *o%%ittee ($&8*!, a

co%%ittee constit+ted . the 7EB to o3erha+l the $a eo3er ;aw has done awa. with

this conce)t o the non-co%)ete ees4

6uture routh prospects,7

6uture Prospects

7EB has one a lon wa. since its ince)tion4 7EB has een airl. s+ccess +l in

%ana in the ndian sec+rities %ar et in an e icient %anner4 $here can e o))ort+nities

in +t+re or 7EB to re +late other %ar ets s+ch as co%%odities etc4 $here are enor%o+s

)ossi ilities to ex)and the %ar et . introd+cin new )rod+cts4

SEBI continues its effort to bring transparency in Capital Markets :

7EB has een instr+%ental in its e orts to rin trans)arenc. into the ca)ital %ar ets

and %a e the %ar ets %ore n3estor ha)).4 ith a slew o re or%s oth or the )ri%ar.


41/76

and secondar. %ar ets, 7EB has now t+rned its oc+s on settin thin s ri ht or the

M+t+al "+nd sector4

8 ter )+llin o+t the &eliance M" ad a while ac on acco+nt o not ollowin the

sti)+lated +idelines, 7EB has %ade it %andator. or all M" ad3ertise%ents to carr. a

co%)lete 5 second a+dio-3is+al disclai%er which states M+t+al +nd in3est%ents are

s+ /ect to %ar et ris s, read all sche%e-related doc+%ents care +ll.

e all are s+ /ected to those tall clai%s %ade . 8M*@s and telesales %a in alse

clai%s or their )rod+ct4 $he +se o catch )hrases li e Do+ le Po+ n3est%ent in 5

.ears and 200O ret+rns consistentl. ha3e eco%e co%%on )ractice 4No a ent or

)rod+ct )ro%oter cares to ex)lain the iner details o the in3est%ent )rod+ct and the.

%a e %err. o +naware in3estors4

reall. ho)e that 7EB also acti3el. %a e a%ends in the wa. certain n3est%ent

)rod+cts are %ar eted4 t will do a hea) o hel) and the in3estors will e a le to %a e

in or%ed decisions rather then ein d+)ed . h+ el. o3er h.)ed )rod+ct descri)tions

ro% the %ar eters4

n concl+sion, so ar 7EB has done a ood /o in re +latin the sec+rities %ar et and .

)+nishin those who are 3iolatin the &+les and &e +lations4 $he ste)s ta en . the

re +lator the con idence o the in3estors ha3e increased tre%endo+sl.4 t is doin well or

the s%all in3estors li e distri +tin the dis or e%ent a%o+nt to those in3estors who

%issed it eca+se o the %+lti)le a))lications . so%e )ersons, increased the li%it or the

s%all in3estors in 6=@s,8))lication s+))ort . Bloc ed 8%o+nt (87B8!47EB is a

world class re +lator and e%er in %ar et li e ndia needs it4


42/76


43/76

)er or%ance o *or)orate Go3ernance and to deter%ine the role o co%)anies in

res)ondin to r+%o+r and other )rice sensiti3e in or%ation circ+latin in the %ar et in

order to enhance the trans)arenc. and inte rit. o the %ar et4 $he *o%%ittee in its

&e)ort o ser3ed that the e ecti3eness o a s.ste% o *or)orate Go3ernance cannot e

le islated . law, nor can an. s.ste% o *or)orate Go3ernance e static4 n a d.na%ic

en3iron%ent, s.ste% o *or)orate Go3ernance need to e contin+all. e3ol3ed4

ith a 3iew to )ro%ote and raise the standards o *or)orate Go3ernance, 7EB on the

asis o reco%%endations o the *o%%ittee and )+ lic co%%ents recei3ed on the

re)ort and in exercise o )owers con erred . 7ection 11(1! o the 7ec+rities and

Exchan e Board o ndia 8ct, 1992 read with section 10 o the 7ec+rities *ontracts

(&e +lation! 8ct 195', re3ised the existin cla+se 9 o the ;istin a ree%ent 3ide its

circ+lar 7EB M&D 7E :1 200: 2' 0> dated 8+ +st 2', 200:4 t clari ied that so%e o

the s+ -cla+ses o the re3ised cla+se 9 shall e s+ita l. %odi ied or new cla+ses shall e

added ollowin the a%end%ents to the *o%)anies 8ct 195' . the *o%)anies

(8%end%ent! Bill 8ct 200:, so that the rele3ant )ro3isions o the cla+ses on *or)orate

Go3ernance in the ;istin 8 ree%ent and the *o%)anies 8ct re%ain har%onio+s with

one another4

Schedule of Implementation,

$he circ+lar s)eci ies ollowin sched+le o i%)le%entation o the re3ised cla+se 9 #

8ll entities see in listin or the irst ti%e, at the ti%e o listin ,

8ll listed entities ha3in a )aid +) share ca)ital o &s : crores and a o3e or net

worth o &s 25 crores or %ore at an. ti%e in the histor. o the co%)an.4


44/76

$he co%)anies are reC+ired to co%)l. with the reC+ire%ents o the cla+se on or e ore

March :1, 200 4 $he co%)anies which are reC+ired to co%)l. with the reC+ire%ents o

the re3ised cla+se 9 ha3e een )+t +nder an o li ation to s+ %it a C+arterl. co%)liance

re)ort to the stoc exchan es as )er s+ cla+se ( ! (ii!, o the re3ised cla+se 9, within

15 da.s ro% the C+arter endin :1st March, 200 4 $he re)ort is reC+ired to e s+ %itted

either . the *o%)liance = icer or the *hie Exec+ti3e = icer o the co%)an. a ter

o tainin d+e a))ro3als4

Application of Re'ised 0lause ?>,

$he re3ised cla+se 9 is a))lica le to the listed co%)anies, in accordance with the

sched+le o i%)le%entation i3en a o3e4 Aowe3er, or other listed entities, which are not

co%)anies, +t od. cor)orates (e4 4 )ri3ate and )+ lic sector an s, inancial

instit+tions, ins+rance co%)anies etc4! incor)orated +nder other stat+tes, the re3ised

cla+se will a))l. to the extent that it does not 3iolate their res)ecti3e stat+tes, and

+idelines or directi3es iss+ed . the rele3ant re +lator. a+thorities4 $he re3ised cla+se is

not a))lica le to the M+t+al "+nd 7che%es4

Obli ations on Stoc8 /9chan es,

$he 7toc Exchan es are )+t +nder o li ation to ens+re that all the )ro3isions o

*or)orate Go3ernance ha3e een co%)lied with . the co%)an. see in listin or the

irst ti%e, e ore rantin an. new listin 4 "or this )+r)ose, it wo+ld e satis actor.

co%)liance i these co%)anies set +) the Boards and constit+te co%%ittees s+ch as 8+dit

*o%%ittee, shareholders in3estors rie3ances co%%ittee, etc4 e ore see in listin 4

$he stoc exchan es ha3e een e%)owered to rant a reasona le ti%e to co%)l. with


45/76

these conditions i the. are satis ied that en+ine le al iss+es exists which will dela. s+ch

co%)liance4 n s+ch cases while rantin listin , the stoc exchan es are reC+ired to

o tain a s+ita le +nderta in ro% the co%)an.4 n case o the co%)an. ailin to

co%)l. with this reC+ire%ent witho+t an. en+ine reason, the a))lication %one. shall e

e)t in an escrow acco+nt till the conditions are co%)lied with4 $he 7toc Exchan es

ha3e also een reC+ired to set +) a se)arate %onitorin cell with identi ied )ersonnel to

%onitor the co%)liance with the )ro3isions o the *or)orate Go3ernance, and to o tain

the C+arterl. co%)liance re)ort ro% the co%)anies which are reC+ired to co%)l. with

the reC+ire%ents o *or)orate Go3ernance4 $he stoc exchan es are reC+ired to s+ %it aconsolidated co%)liance re)ort to 7EB within :0 da.s o the end o each C+arter4

.i hli hts of the new amendments,

idenin the De inition o nde)endent Director

nder the re3ised cla+se 9, the de inition o the ex)ression Linde)endent director@

has een ex)anded4 $he ex)ression Linde)endent director@ %ean non-exec+ti3e

director o the co%)an. who Q

a)art ro% recei3in director@s re%+neration, does not ha3e an. %aterial )ec+niar.

relationshi)s or transactions with the co%)an., its )ro%oters, its senior

%ana e%ent or its holdin co%)an., its s+ sidiaries and associated co%)anies

is not related to )ro%oters or %ana e%ent at the oard le3el or at one le3el elow

the oard


46/76

has not een an exec+ti3e o the co%)an. in the i%%ediatel. )recedin three

inancial .ears

is not a )artner or an exec+ti3e o the stat+tor. a+dit ir% or the internal a+dit ir%

that is associated with the co%)an., and has not een a )artner or an exec+ti3e o

an. s+ch ir% or the last three .ears4 $his will also a))l. to le al ir%(s! and

cons+ltin ir%(s! that ha3e a %aterial association with the entit.4

is not a s+))lier, ser3ice )ro3ider or c+sto%er o the co%)an.4 $his sho+ld incl+de

lessor-lessee t.)e relationshi)s also and

is not a s+ stantial shareholder o the co%)an., i4e4 ownin two )ercent or %ore o

the loc o 3otin shares4

t has een clari ied that the nstit+tional Directors on the oards o co%)anies are

inde)endent directors whether the instit+tion is an in3estin instit+tion or a lendin

instit+tion4

0ompensation to Non /9ecuti'e *irectors and *isclosure thereof,

8s )er earlier cla+se 9, the co%)ensation to e )aid to non-exec+ti3e directors was ixed

. the Board o Directors, whereas the re3ised cla+se reC+ires all co%)ensation )aid to

non-exec+ti3e directors to e ixed . the Board o Directors and to e a))ro3ed .

shareholders in eneral %eetin 4 $here is also )ro3ision or settin +) o li%its or the

%axi%+% n+% er o stoc o)tions that can e ranted to non-exec+ti3e directors in an.

inancial .ear and in a re ate4 $he stoc o)tions ranted to the non-exec+ti3e directors


47/76

to e 3ested a ter a )eriod o at least one .ear ro% the date o retire%ent o s+ch non-

exec+ti3e directors4

6lacin the inde)endent directors and non-exec+ti3e directors on eC+al ootin , the

re3ised cla+se )ro3ides that the considerations as re ards co%)ensation )aid to an

inde)endent director shall e the sa%e as those a))lied to a non-exec+ti3e director4 $he

co%)anies ha3e een )+t +nder an o li ation to )+ lish their co%)ensation )hiloso)h.

and state%ent o entitled co%)ensation in res)ect o non-exec+ti3e directors in its ann+al

re)ort4 8lternati3el., this %a. e )+t +) on the co%)an.@s we site and a re erence

thereto in the ann+al re)ort4 $he co%)an. is also reC+ired to disclose on an ann+al asis,

details o shares held . non-exec+ti3e directors, incl+din on an i -con3erted asis4

$he re3ised cla+se also reC+ires non-exec+ti3e directors to disclose )rior to their

a))oint%ent their stoc holdin ( oth own or held . or other )ersons on a ene icial

asis! in the listed co%)an. in which the. are )ro)osed to e a))ointed as directors,4

$hese details are reC+ired to e acco%)anied with their notice o a))oint%ent4

Periodical Re'iew b( Independent *irector,

$he re3ised cla+se 9 reC+ires the nde)endent Director to )eriodicall. re3iew le al

co%)liance re)orts )re)ared . the co%)an. and an. ste)s ta en . the co%)an. to c+re

an. taint4 $he re3ised cla+se s)eci ies that no de ence shall e )er%itted that the

inde)endent director was +naware o this res)onsi ilit. in case o an. )roceedin s

a ainst hi% in connection with the a airs o the co%)an.4

0ode of 0onduct,


48/76

$he re3ised cla+se 9 reC+ires the Board o a co%)an. to la. down the code o cond+ct

or all Board %e% ers and senior %ana e%ent o a co%)an. and the sa%e to e )osted

on the we site o the co%)an.4 8ccordin l., all Board %e% ers and senior %ana e%ent

)ersonnel ha3e een )+t +nder an o li ation to a ir% co%)liance with the code on an

ann+al asis and a declaration to this e ect si ned . the *E= and *== is to e i3en in

the 8nn+al &e)ort o the *o%)an.4

t has een clari ied that the ter% senior %ana e%ent will incl+de )ersonnel o the

co%)an. who are %e% ers o its %ana e%ent o)eratin co+ncil (i4e4 core %ana e%ent

tea% excl+din Board o Directors!4 Nor%all., this wo+ld co%)rise all %e% ers o

%ana e%ent one le3el elow the exec+ti3e directors4

NonK/9ecuti'e *irectors K Not to hold office for more than Nine Hears

&e3ised cla+se 9 li%its the ter% o the o ice o the non-exec+ti3e director and )ro3ides

that a )erson shall e eli i le or the o ice o non-exec+ti3e director so lon as the ter%

o o ice does not exceed nine .ears in three ter%s o three .ears each, r+nnin

contin+o+sl.4

Audit 0ommittee,

$wo ex)lanations ha3e een added in the re3ised cla+se 94 $he irst ex)lanation de ines

the ter% inanciall. literate to %ean the a ilit. to read and +nderstand asic inancial

state%ents i4e4 alance sheet, )ro it and loss acco+nt, and state%ent o cash lows4 t has

also een clari ied that a %e% er is considered to ha3e acco+ntin or related inancial

%ana e%ent ex)ertise i he or she )ossesses ex)erience in inance or acco+ntin , or


49/76

reC+isite )ro essional certi ication in acco+ntin , or an. other co%)ara le ex)erience or

ac ro+nd which res+lts in the indi3id+al@s inancial so)histication, incl+din ein or

ha3in een a *hie Exec+ti3e = icer(*E=!, *hie "inancial = icer(*"=!, or other

senior o icer with inancial o3ersi ht res)onsi ilities4

Re'iew of information b( Audit 0ommittee

$he 8+dit *o%%ittee is reC+ired to %andatoril. re3iew inancial state%ents and dra t

a+dit re)ort, incl+din C+arterl. hal -.earl. inancial in or%ation, %ana e%ent

disc+ssion and anal.sis o inancial condition and res+lts o o)erations, re)orts relatin to

co%)liance with laws and to ris %ana e%ent, %ana e%ent letters letters o internal

control wea nesses iss+ed . stat+tor. internal a+ditors, and records o related )art.

transactions4

$he a))oint%ent, re%o3al and ter%s o re%+neration o the *hie nternal 8+ditor shall

e s+ /ect to re3iew . the 8+dit *o%%ittee4

*isclosure of Accountin Treatment

$he re3ised cla+se 9 reC+ires that in case a co%)an. has ollowed a treat%ent di erent

ro% that )rescri ed in an 8cco+ntin 7tandards, the %ana e%ent o s+ch co%)an. shall

/+sti . wh. the. elie3e s+ch alternati3e treat%ent is %ore re)resentati3e o the

+nderlined +siness transactions4 Mana e%ent is also reC+ired to clearl. ex)lain the

alternati3e acco+ntin treat%ent in the ootnote o inancial state%ents4

4histle !lower Polic(


50/76

*o%)anies ha3e een reC+ired to or%+late an nternal 6olic. on access to 8+dit

*o%%ittees4 6ersonnel who o ser3e an. +nethical or i%)ro)er )ractice (not necessaril. a

3iolation o law! can a))roach the 8+dit *o%%ittee witho+t necessaril. in or%in their

s+)er3isors4

*o%)anies are also reC+ired to ta e %eas+res to ens+re that this ri ht o access is

co%%+nicated to all e%)lo.ees thro+ h %eans o internal circ+lars, etc4 $he e%)lo.%ent

and other )ersonnel )olicies o the co%)an. sho+ld also contain )ro3isions )rotectin

whistle lowers ro% +n air ter%ination and other +n air or )re/+dicial e%)lo.%ent

)ractices4 *o%)anies ha3e also een reC+ired to a ir% that it has not denied an.

)ersonnel access to the 8+dit *o%%ittee o the co%)an. (in res)ect o %atters in3ol3in

alle ed %iscond+ct! and that it has )ro3ided )rotection to whistle lowers ro% +n air

ter%ination and other +n air or )re/+dicial e%)lo.%ent )ractices4 7+ch a ir%ation

sho+ld or% )art o the Board@s re)ort on *or)orate Go3ernance that is reC+ired to e

)re)ared and s+ %itted to ether with the ann+al re)ort4

Subsidiar( 0ompanies

$he re3ised cla+se 9 )ro3ides that the )ro3isions relatin to the co%)osition o the

Board o Directors o the holdin co%)an. are also a))lica le to the co%)osition o the

Board o Directors o s+ sidiar. co%)anies4 $he cla+se +rther reC+ires that at least one

inde)endent director on the Board o Directors o the holdin co%)an. sho+ld e a

director on the Board o Directors o the s+ sidiar. co%)an.4

$he 8+dit *o%%ittee o the holdin co%)an. has een e%)owered to re3iew the

inancial state%ents, in )artic+lar the in3est%ents %ade . the s+ sidiar. co%)an. and


51/76

the %in+tes o the Board %eetin s o the s+ sidiar. co%)an. to e )laced or re3iew at

the Board %eetin o the holdin co%)an.4 t is +rther reC+ired that the Board@s re)ort

o the holdin co%)an. sho+ld state that the. ha3e re3iewed the a airs o the s+ sidiar.

co%)an. also4

*isclosure of contin ent liabilities

$he re3ised cla+se 9 reC+ires the %ana e%ent to )ro3ide a clear descri)tion in )lain

En lish o each %aterial contin ent lia ilit. and its ris s, which shall e acco%)anied .

the a+ditor@s clearl. worded co%%ents on the %ana e%ent@s 3iew4 $his section is

reC+ired to e hi hli hted in the si ni icant acco+ntin )olicies and notes on acco+nts, as

well as, in the a+ditor@s re)ort, where necessar.4

Additional *isclosures

$he re3ised *la+se 9 o the ;istin 8 ree%ent reC+ires the ollowin additional

disclos+res#

!asis of related part( transactions

8 state%ent o all transactions with related )arties shall e )laced e ore the 8+dit

*o%%ittee or or%al a))ro3al rati ication4 an. transaction is not on an ar%@s len th

asis, %ana e%ent is reC+ired to /+sti . the sa%e to the 8+dit *o%%ittee4

!oard *isclosures KRis8 mana ement


52/76

$he Board %e% ers sho+ld e in or%ed a o+t the ris assess%ent and %ini%iFation

)roced+res4 $hese )roced+res shall e )eriodicall. re3iewed to ens+re that exec+ti3e

%ana e%ent controls ris thro+ h %eans o a )ro)erl. de ined ra%ewor 4Mana e%ent

shall )lace a C+arterl. re)ort certi ied . the co%)liance o icer o the co%)an., e ore

the entire Board o Directors doc+%entin the +siness ris s aced . the co%)an.,

%eas+res to address and %ini%iFe s+ch ris s, and an. li%itations to the ris ta in

ca)acit. o the cor)oration4 $his doc+%ent shall e or%all. a))ro3ed . the Board4

Proceeds from Initial Public Offerin s "IPOs$

hen %one. is raised thro+ h an nitial 6+ lic = erin ( 6=!, it shall disclose to the

8+dit *o%%ittee, the +ses a))lications o +nds . %a/or cate or. (ca)ital ex)endit+re,

sales and %ar etin , wor in ca)ital, etc!, on a C+arterl. asis as a )art o their C+arterl.

declaration o inancial res+lts4 "+rther, on an ann+al asis, the co%)an. shall )re)are a

state%ent o +nds +tiliFed or )+r)oses other than those stated in the o er

doc+%ent )ros)ect+s4 $his state%ent shall e certi ied . the inde)endent a+ditors o the

co%)an.4 $he 8+dit *o%%ittee shall %a e a))ro)riate reco%%endations to the Board to

ta e +) ste)s in this %atter4

0ertification b( 0/O 06O

*E= (either the Exec+ti3e *hair%an or the Mana in Director! and the *"= ( hole-

$i%e "inance Director or other )erson dischar in this +nction! o the co%)an. has

een )+t +nder an o li ation to certi . that, to the est o their nowled e and elie , the.

ha3e re3iewed the alance sheet and )ro it and loss acco+nt and all its sched+les and


53/76

notes on acco+nts, the cash low state%ents as well as the Directors@ &e)ort and these

state%ents do not contain an. %ateriall. +ntr+e state%ent, o%its an. %aterial act or do

the. contain state%ents that %i ht e %isleadin 4 "+rther the. are reC+ired to certi . that

these state%ents to ether )resent a tr+e and air 3iew o the co%)an., and are in

co%)liance with the existin acco+ntin standards and or a))lica le laws re +lations4

$he re3ised cla+se reC+ires the% to e res)onsi le or esta lishin and %aintainin

internal controls, to e3al+ate the e ecti3eness o internal control s.ste%s o the co%)an.,

and to disclose to the a+ditors and the 8+dit *o%%ittee, de iciencies in the desi n or

o)eration o internal controls, i an.4 $he. are also reC+ired to disclose to the a+ditors as

well as the 8+dit *o%%ittee, instances o si ni icant ra+d, i an., that in3ol3es

%ana e%ent or e%)lo.ees ha3in a si ni icant role in the co%)an.@s internal control

s.ste%s, whether or not there were si ni icant chan es in internal control and or o

acco+ntin )olicies d+rin the .ear4

Report on 0orporate %o'ernance

$he co%)anies ha3e een reC+ired to s+ %it a C+arterl. co%)liance re)ort in the

)rescri ed or%at to the stoc exchan es within 15 da.s ro% the close o the C+arter4

$he re)ort has to e s+ %itted either . the *o%)liance = icer or the *hie Exec+ti3e

= icer o the co%)an. a ter o tainin d+e a))ro3als4

0ompan( Secretar( in Practice to Issue 0ertificate of 0ompliance

$his is a land%ar a%end%ent a+thoriFin *o%)an. 7ecretaries in 6ractice a%on other

)ro essionals to iss+e certi icate o co%)liance o cla+se 94 $he re3ised cla+se reC+ires


54/76

the co%)an. to o tain a certi icate ro% either the a+ditors or )racticin co%)an.

secretaries re ardin co%)liance o conditions o cor)orate o3ernance and annex the

certi icate with the directors@ re)ort, which is sent ann+all. to all the shareholders o the

co%)an.4 $he sa%e certi icate is also reC+ired to e sent to the 7toc Exchan es alon

with the ann+al ret+rns iled . the co%)an.4

Additional disclosure in the Report on 0orporate %o'ernance

$he ollowin additional ite%s are reC+ired to e disclosed in the s+ ested list o te%s

to e incl+ded n the &e)ort on *or)orate Go3ernance in the 8nn+al &e)ort o

*o%)anies4

Disclos+re o acco+ntin treat%ent, i di erent, ro% that )rescri ed in

8cco+ntin 7tandards with ex)lanation4

histle Blower )olic. and a ir%ation that no )ersonnel has een denied

access to the a+dit co%%ittee4

Additional *isclosures under Non7Mandator( Requirements

$he ollowin additional disclos+res are reC+ired to e %ade +nder the non-%andator.

reC+ire%ents #

Audit qualifications

*o%)an. %a. %o3e towards a re i%e o +nC+ali ied inancial state%ents4


55/76

Trainin of !oard Members

*o%)an. shall train its Board %e% ers in the +siness %odel o the co%)an. as

well as the ris )ro ile o the +siness )ara%eters o the co%)an., their

res)onsi ilities as directors, and the est wa.s to dischar e the%4

Mechanism for e'aluatin Non7/9ecuti'e !oard Members

$he )er or%ance e3al+ation o non-exec+ti3e directors sho+ld e done . a )eer

ro+) co%)risin the entire Board o Directors, excl+din the director ein

e3al+ated and 6eer Gro+) e3al+ation sho+ld e the %echanis% to deter%ine

whether to extend contin+e the ter%s o a))oint%ent o non-exec+ti3e directors4

0onclusion,

$he recent e3ents worldwide, )artic+larl. in the nited 7tates ha3e renewed the

e%)hasis on *or)orate Go3ernance the worldo3er4 $hese e3ents ha3e hi hli hted the

need or ethical o3ernance and reC+ire %ana e%ent to loo e.ond their s.ste%s and

)roced+res4 &eactin swi tl. and s)ontaneo+sl., the nited 7tates enacted 7ar ans

=xle. 8ct, 2002 rin in o+t +nda%ental chan es in e3er. di%ension o *or)orate

Go3ernance4 Bac ho%e in ndia, the need or stren thened nor%s or *or)orate

Go3ernance is also elt4 $he re3ised cla+se 9 o the ;istin 8 ree%ent is, there ore,

%ost ti%el. and )ro3ides %+ch needed disclos+re reC+ire%ents, widened de inition o

inde)endent director, )eriodical re3iew . inde)endent director, whistle lower )olic.,

C+arterl. co%)liance re)ort in the )rescri ed or%at and iss+e o certi icate o


56/76

co%)liance4 t is ho)ed that the re3ised cla+se 9 wo+ld o a lon wa. in )ro3idin

cor)orates ood o3ernance ra%ewor 4

SATHAM 0AS/,

n case o 7at.a% *o%)+ter 7er3ices ;td4 7EB recei3ed an e-%ail ro% its chair%an on

an+ar. 0


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8ndhra 6radesh, 7EB iled a )etition e ore the %a istrate to exa%ine and record their

state%ents4 8s the )etition was re/ected, 7EB iled a))eal e ore the Aon@ le Ai h

*o+rt on an+ar. 2>, 20094 7ince the %atter was to e heard a ter i3in notice to &a/+

rothers, 7EB iled a))eal e ore Aon@ le 7+)re%e *o+rt eca+se o +r enc. o the

%atter4 $he Aon@ le 7+)re%e *o+rt allowed 7EB on "e r+ar. 0:, 2009 to exa%ine and

record state%ents o oth &a/+ rothers4 7+ seC+entl., 7EB co%)leted this exercise on

"e r+ar. 0 -0', 20094 $herea ter, 7EB o tained )er%ission ro% the %a istrate or

recordin the state%ents o 7hri 7rini3as Iadla%ani, ex-chie inancial o icer o 7at.a%,

7hri 7 Go)ala rishnan and 7hri 7rini3as $all+ri, oth ex-)artners o 6rice aterho+se(all o the% were in )rison! and this was carried o+t on "e r+ar. 19-20, 20094

hile +rther in3esti ation is in )ro ress 7EB had iss+ed show ca+se notices to

6ricewaterho+se *oo)ers and its two a oresaid )artners on "e r+ar. 1 , 2009 and also to

7hri &a%alin a &a/+, ex-*hair%an, 7hri &a%a &a/+, ex-Mana in Director and 7hri

Iadla%ani 7rini3as, ex-*"= o 7at.a% *o%)+ter 7er3ices ;td4 on March 09, 2009 onthe asis o indin s o in3esti ation carried o+t so ar4 7EB has also shared the indin s

o in3esti ation with other re +lator. a encies4 *ertain )olic. decisions arisin o+t o

this in3esti ation li e )eer re3iew o the wor in )a)ers (relatin to inancial state%ents

o listed entities! o a+ditors and disclos+re o )led ed shares . the )ro%oters ha3e een

ta en . 7EB 4 $he cases are )endin e ore the co+rts4

Recommendations,

$here sho+ld e a+dit . the *8G on a C+arterl. asis instead o ann+al a+dit to

%ini%iFe the chances o s+ch t.)es o ra+d4


58/76

%old /T63s "/9chan e Traded 6unds$

8nother )rod+ct which alls within the a% it o two re +lators 3iF "orward Mar et

*o%%ission ("M*! and 7EB is Gold E$"s4 Gold E$"@s are the +nits re)resentin

)h.sical old which %a. e in )a)er or de%aterialiFed or%4 $hese +nits are traded on

exchan e li e a sin le stoc o an. co%)an.4 Gold E$"s are intended to o er in3estors a

%eans o )artici)atin in the old +llion %ar et witho+t the necessit. o ta in )h.sical

deli3er. o old, and to +. and sell that )artici)ation thro+ h the tradin o a sec+rit. on

stoc exchan e4 7o%e o the exa%)les o the E$"s listed and traded on National 7toc

Exchan e Goldshare, Kota Gold, &el old . $ , Kota and &eliance M+t+al "+nd

res)ecti3el.4

$he +nda%ental iss+e is whether s+ch a +nd sho+ld all +nder the )+r3iew o Jsec+ritiesJ

or Jco%%oditiesJ4 $his is i%)ortant eca+se the +nd is ased on an +nderl.in which is a

co%%odit. and wo+ld entail )h.sical )roc+re%ent o the +nderl.in , either to the extent

o the siFe o the +nd, or on a ractional asis de)endin on the str+ct+rin o the +nds4

E$"@s allow in3estors to in3est in a +nd which in t+rn de)lo.s the %one. in the

+nderl.in asset which is traded on an exchan e4 Gold E$"s as the. a))ear to e de ined

toda. in the ndian context wo+ld e a )art o the stoc %ar et stor.4

Gold E$"s ha3e a co%%odit. as the +nderl.in and lo icall. sho+ld e within the

do%ain o co%%odities4 $he %+t+al +nds that ha3e la+nched s+ch +nds are listed on the

stoc exchan es, which raises the C+estion as to whether s+ch a decision is ased on the

class o %ar et )artici)ants or the )h.sical +nderl.in 4 *+rrentl., %+t+al +nds are )art


59/76


60/76

7+ch a lar e n+% er o )artici)ants )ersons associated with sec+rities

%ar et inter%ediaries %a. not e e ecti3el. re +lated . the re +lators li e 7EB

ha3in re ard to its li%ited reso+rces4 Aowe3er, li%ited reso+rces can not e a ro+nd or

shrin in ro% the re +lator. o li ations i%)osed +)on it4 $here ore, in order to ha3e

e ecti3e re +lation o s+ch )ersons it is s+ ested that the 7EB )ro%otes 7el

&e +lator. =r anisations (7&=s! in the sec+rities %ar et4 7+ch )ersons sho+ld e

)ri%aril. re istered and re +lated . these 7&=s +nder the o3erall re +lator. control o

the 7EB 4

Problem of identif(in the ultimate beneficiar( source of mone( in certain

in'estments in the Indian Securities Mar8et #

ith the o)enin o the ndian econo%., ndian cor)orate has een allowed to raise

%one. a road also the orei n in3estors were also allowed to in3est%ent in the %ar et in

ndia e4 4# " 4 Aowe3er, identi ication o +lti%ate ene iciar. o s+ch in3est%ents and

so+rce o %one. o s+ch in3est%ents alwa.s re%ains a concern or the re +lator4

0onclusion #

$he %ost co%%on di ic+lt. in )roc+rin s+ch in or%ation is the secrec. laws o the

di erent co+ntries4 7+ch secrec. laws sho+ld e chan ed to in order to ha3e the exact

in or%ation o the real in or%ation a o+t the +lti%ate ene iciaries4 $his is %+ch %ore

desira le in 3iew o the terrorist acti3ities4 $here ore, "8$" sho+ld ta e serio+s note o

s+ch laws while assessin the di erent %e% er co+ntries on the )ara%eters o its 0 H >

reco%%endations on 8nti Mone. ;a+nderin and $errorist "inancin )rinci)les4


61/76

0ONS/NT OR*/RS

n 8)ril 200< 7EB has co%e o+t with +idelines or the )assin o the consent orders4

n 7 7ec+rities and Exchan e *o%%ission o3er 90 O o cases are settled thro+ h

consent4 $he settle%ent case thro+ h the consent orders is settle%ent o+t o co+rt4

7EB has settled a n+% er o cases thro+ h consent orders4

Receipt and *isposal of applications under 0onsent and 0ompoundin Process durin

7

Pear No+ of

Applications

recei'ed

No+ of

applications

settled b(

passin of

consent orders

Settlement

0ompoundin

amount "Total

in Rs$

200 '9> 101 :,09,0>,>00

200>-09 '92 0 ',12,05,'92

7;= @=< :C: CD)C;)?


62/76

&elated to 7ec+rities Mar et! &e +lations, 200:4 $he %atters were settled . the

co%)an. on )a.%ent o &s4 50 *rores alon with de ar%ent4

7EB has done a ood /o . introd+cin this sche%e4 =n the one hand it red+ces the

re +lator. costs on liti ations4 t is red+cin the )endenc. o the cases at 3er. ast rate +

ROA*!1O0-S A./A* 6OR S/!I

Products fallin within the jurisdiction of different re ulators in India,

"inancial en ineerin has i3en rise to the inno3ation o di erent inancial )rod+cts

which %a. all within the do%ain o the di erent re +lators in the "inancial 7ector4 $he

ew exa%)les to e en+%erated are ; 6s, Gold E$"s, and *+rrenc. "+t+res4 ; 6

ein a )rod+ct la+nched . the ins+rance co%)anies and ha3in a co%)onent o

ins+rance +sed to all in the /+risdiction o &D8, howe3er, it also ha3e the co%)onent o

Lin3est%ent@ in the sec+rities %ar et which rin s it in the real% o 7EB also4 7i%ilarl.,

la+nchin o c+rrenc. +t+res too a lot o ti%e in ndia, d+e to in3ol3e%ent o re +lator.

/+risdiction o two re +lators 3iF# 7EB and &B 4 Gold E$" is also a si%ilar inancial

)rod+ct e% racin the /+risdiction o two re +lators i4e4 "M* and 7EB 4

&1IPS ISS&/

$ho+ h the *ontro3ers. has een set at rest . the 6arlia%ent . i3in the /+risdiction

o3er nit-;in ed ns+rance 6lan ; 6 to &D8 was ca+ ht in a re +lator. lo /a%4


63/76

ns+rance co%)anies darlin )rod+ct, nit-;in ed ns+rance 6lan ( ; 6!, was ca+ ht in

a re +lator. lo /a% *a)ital %ar et re +lator, 7ec+rities and Exchan e Board o ndia

(7EB ! and ins+rance watchdo ns+rance &e +lator. and De3elo)%ent 8+thorit.

( &D8! the re +lator. ha3e loc ed horns o3er re +lator. ri hts with re ard to ; 6s4

&e +lation o ; 6s was the one o contention etween the two re +lators4 n act the

7EB order o 8)ril 10 anned 1 ins+rance co%)anies, incl+din those elon in to the

$atas, 7B , * * Ban , AD"* Ban and reliance 8nil 8% ani ro+), ro%

acc+%+latin +nds thro+ h ; 6s witho+t its )rior a))ro3al4 Aowe3er, s+ seC+entl.,

7EB so tened its stand and on 8)ril 1 , it ca%e o+t with a second order that exe%)tedthe existin ; 6 sche%es o these 1 )la.ers ro% the an4 7EB @s stance has een that

+nder section 11 o the 7EB 8ct, an. ir% that r+ns a collecti3e in3est%ent sche%e %+st

acC+ire a )rior a))ro3al ro% 7EB 4 ts lo ic has een that since ; 6s are a

co% ination o in3est%ent and ins+rance, co%)anies o erin ; 6s %+st see 7EB @s

)rior a))ro3al e ore in3estin their cor)+ses into the eC+it. %ar ets, which is o3erned

. 7EB 4 $he an was, howe3er, li ted a ter the o3ern%ent ro ered a te%)orar. tr+ce

etween the two warrin re +lators4

$ho+ h 7EB and &D8 ha3e een i htin with each other o3er the iss+e o re +latin

; 6s, ca+ ht etween this row are the +lli le )olic.holders4

; 6s-the loc +ster h. rid )rod+ct o the ins+rance co%)anies- essentiall. co% ine

two eat+res# ins+rance, which is analo o+s to a ter% ins+rance )lan and in3est%ent

which is si%ilar to %+t+al +nd4 8dditionall. ; 6s etch so%e tax sa3in ene its4 $his

+ncon3entional )rod+ct that )ro3ide %ar et- lin ed ret+rns the )olic. holders alon with

ins+rance co3er has ca+ ht the anc. o the in3estors in recent ti%es4 ns+rance a ents


64/76

ha3e also so%eti%es %is-sold ; 6s, l+red . its at co%%issions4 hatsoe3er ; 6s

o ered . the ins+rance co%)anies ha3e so ar een + iC+ito+sl. re +lated . the &D84

8nd interestin l. 7EB had ne3er inter ered in &D8@s territor. o3er the re +lation o

; 6s4 Aowe3er recentl. the ca)ital %ar et re +lator too a -t+rn- 7EB wanted

ins+rers o erin ; 6s to et re istered with it e ore oin ahead with new ; 6

sche%es4 7EB @s lo ic in doin so, accordin to a 7EB @s noti ication is# $he attri +tes

o ; 6s la+nched . ins+rers are di erent ro% traditional ins+rance )rod+cts and the.

are the co% ination o ins+rance and in3est%ent4 $he attri +tes o the in3est%ent

co%)onent o ; 6s la+nched . these entities (the 1 co%)anies! are a in to thecharacteristics o M"s4 $he in3est%ent co%)onent o ; 6 s is s+ /ect to in3est%ent

ris s associated with the sec+rities %ar et which are entirel. orne . the in3estors4 $his

esta lishes concl+si3el. that ; 6s are a )rod+ct with di erent co% inations and hence

the in3est%ent co%)onent needs to e re istered with and re +lated . 7EB 4 +st li e

c+rrenc. eat+res as a hed in instr+%ent are /ointl. o3erned . oth the &eser3e Ban

o ndia (&B , ndia@s an in re +lator that o3ersees c+rrenc. %atters! and 7EB (which

o3ersees stoc exchan es on which c+rrenc. +t+res are traded!, 7EB also want to

re +late or )art-re +late ; 6s- as the. collect %one. ro% in3estors and in3est in

eC+it.- esides &D8, the ins+rance re +lator, that now solel. re +lates ; 6s4

$he )re3ailin co%%ission str+ct+re %a. ha3e ind+ced 7EB to act li e this4 7ince

8+ +st 2009, 7EB has arred %+t+al +nds ro% char in in3estors the standard 245O

entr. load while +.in +nits4 Earlier asset %ana e%ent co%)anies were +sin this

co%)an. and the a ents that sold the )rod+ct to hi% and tr. and see co%)ensation ro%

the%4


65/76

!low to the insurers,

;i e ins+rance ind+str. in ndia is still at an e3ol3in sta e, with the state-owned ;i e

ns+rance *or)oration in ndia(; *! re%ainin as the do%inant )la.er and %an. )ri3ate li e ins+rers rad+all. enterin the arena4 $ho+ h li e ins+rance )enetration in

ndia is )altr., it has een increasin - ro% 14:O o GD6 in 2000 to O now4 8nd,

i%)ortantl., in recent ti%es, ; 6s ha3e een the cash cows or all the ins+rers ali e,

)ri3ate or state-owned4 7o the on oin re +lator. attle does not a+ er well or the

ex)andin ins+rance ind+str. as a whole4 8ccordin to the i +res +rnished . &D8,

in 200> 09, there were


66/76

. wa. o new and or additional s+ scri)tion or an. )rod+ct (incl+din ; 6s! ha3in

an in3est%ent co%)onent in the nat+re o %+t+al +nds, till the. o tain the reC+isite

certi icate o re istration ro% 7EB 4 7oon a ter the an, the &D8 as ed all the 1

co%)anies to contin+e their +siness as +s+al, notwithstandin the order o 7EB 4 $he

inance %inistr. inall. ste))ed in and as ed the re +lators to %aintain the stat+s C+o till

the %atter is resol3ed . an a))ro)riate co+rt4 =n 8)ril 1 , 7EB ca%e o+t with a second

order that exe%)ted the existin ; 6 sche%es o these 1 )la.ers ro% the an, while

howe3er, as ed ins+rance co%)anies to i nore this directi3e as well4 &ecentl. the 7EB

has inde)endentl. %o3ed the 7+)re%e *o+rt to et a 3erdict on this iss+e4

Root 0ause,

$he root ca+se o this contro3ers. see%s to e the an . 7EB 4 n +ne 2009, o entr.

load )aid . in3estors while )+rchasin %+t+al +nd +nits4 $his an %ade sellin o +nits

o %+t+al +nds +nattracti3e or distri +tors a ents, as co%)ared to ; 6s, there .

orcin the% to shi t to sellin ; 6s4 8))arentl. the %+t+al +nd ind+str. co%)lained

to 7EB a o+t the h+ e co%%issions )aid to a ents in res)ect o ; 6s, which )+t the%

at a disad3anta eo+s )osition, as a ents will )+sh ; 6s rather than M"s, as the. ot

h+ e co%%issions ro% these ins+rance )rod+cts4

S/!I # IR*A Ar uments,

$he %ain ar +%ents o 7EB are that the attri +tes o the ; 6s la+nched o ered are

di erent ro% those o the traditional ins+rance )rod+cts and the. are a co% ination o

ins+rance and in3est%ent4


67/76

$he attri +tes o the in3est%ent co%)onent o ; 6s are a in to the characteristics o

%+t+al +nds which iss+e +nits to the in3estors and )ro3ide exit at net asset 3al+e o the

+nderl.in )ort olio4

$he in3est%ent co%)onent o ; 6s is s+ /ect to in3est%ents ris associated with

sec+rities %ar et which are entirel. orne . the in3estors4 "+rther, ; 6s are ins+rance

c+%-in3est%ent )rod+cts, and o+t o the total )re%i+% )aid, onl. a )altr. a%o+nt o

aro+nd 2-:O oes as the ins+rance co%)onent4

8s a ainst this, the %ain ar +%ent o ins+rance co%)anies are that contracts o ins+rance

+nder $he ns+rance 8ct, 19:> are s)eci icall. excl+ded ro% the de initions o

collecti3e in3est%ent sche%es +nder the 7EB 8ct, 19924

"+rther +nli e %+t+al +nd +nits, the ; 6s ha3e a %andator. ins+rance co3er which

or%s a 3ital and inse)ara le )art o e3er. ; 64

8lso these )rod+cts were la+nched a ter ollowin a))ro)riate )roced+res and o tain

+niC+e identi ication n+% er ro% &D8, which is the re +lator in the case o li e

ins+rance )rod+cts4 $h+s, there was no need to o tain reC+isite certi icate o re istration

ro% the 7EB 4 t is i%)ortant to note that ; 6s are 3er. )o)+lar and i%)ortant )rod+cts

or ins+rance co%)anies, since ; 6s acco+nt or the +l o new +siness enerated

(%ore than >0O! . )ri3ate li e ins+rance co%)anies4

Is the S/!I mo'e justified

hile 7EB has concentrated on the act that collecti3e in3est%ent and s+ seC+ent

+nitiFation o +nd 3al+e are a eat+re o oth ; 6s as well as sche%es o a %+t+al +nd,


68/76

there co+ld e an ar +%ent that the ; 6s are di erent ro% the +nits o a %+t+al +nd4

$he ene its +nder a ; 6 in case o the death o a )olic.holder are t.)icall. the hi her

o the s+% ass+red or the +nd 3al+e re)resented . the n+% er o o+tstandin +nits4 8s

on the date o death in a %+t+al +nd, in all circ+%stances, the ene it is lin ed and

li%ited onl. to the +nd 3al+e o the +nits held . the +nit holder and ne3er to the death

o the +nit holder +rther, the ins+rance act de ines the li e ins+rance +siness to incl+de

an. contract where the )a.%ent o %one. is ass+red on the death or on the ha))enin o

an. contin enc. de)endent +)on h+%an li e and +rther incl+des ann+ities ranted on

h+%an li e4 8s is e3ident ro% the road sco)e o s+ch a de inition, the s+ /ect %atter oan ins+rance contract co+ld 3er. well e in3est%ent, while the contin enc. on which the

s+% ass+red is )a.a le co+

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