SEBI Act 1992: Regulation & Protection in India's Securities Market

1. INTRODUCTION The capital issue market was introduced in India for the first time in may 1943 by a rule framed under the defense of India act 1939. after cessation of war, it was continued from time to time by an act of parliament ,the capital issue act 1947. The act was placed permanently on the statue book in 1956. the control was administrated by the ministry of finance through the office of the controller of capital issue. The objective of the control of capital issue was the fostering of rational and healthy growth of corporate sector by ensuring that: That investment does not goes into wasteful channels which are not in accordance with the objectives of the plan. That companies have capital statute which is sound and conducive to public interest. That there is no undue congestion of offer for public subscription during a part of the year.

2. SECURITIES AND EXCHANGE BOARD OF INDIA ACT ,1992 The government issued an ordinance on January 30,1992 for giving statutory power to SEBI. This act was passed by the parliament as act no. 15 of 1992 which received the assent of the parliament on 4 April , 1992. further on may 29, 1992 the government issued an ordinance abolishing the capital issue control act 1947. the ordinance also supersedes the various guidelines issued by the CCI from time to time.

3. PURPOSE OF THE SEBI ACT The purpose of the board as laid down in its preamble as below: To protect the interest of investor in securities To promote the development of the securities market To regulate the security market For matters connecting there with or incidental there to.

4. MANAGEMENT OF THE BOARD Formation of the board The terms of office and conditions of service Removal of member from office Meetings

5. FORMATION OF THE BOARD According to section 4 of the SEBI act,1992 the board shall consist of following members: A chairman Two member from among the official of the ministry of central government dealing with finance and administration of the companies act 1956 One member from amongst the official of the reserve bank Five other member of whom at least three shall be the whole time member to be appointed by the central government

6. APPOINTMENTThe chairperson and members referred to clause (a) and (d) shall be appointed by the central government and member referred to in clause (b) and (c ) shall be nominated by central government and reserve bank respectively.QUALIFICATIONThe chairperson and other member shall be person of ability ,integrity and standing who have shown capacity in dealing with problem relating to security market or have special knowledge or experience of law, finance, economics, accountancy, administration or any other discipline which in the opinion of the central government shall be useful to the board.

7. 2. However the Central Government shall have the right to terminate the services of the Chairman or a member appointed under clause (d) of sub-section (1) of section 4, at any time before the expiry of the period prescribed under sub-section (1), by giving him notice of not less than three months in writing or three months’ salary and allowances in lieu thereof, and the Chairman or a member, as the case may be, shall also have the right to relinquish his office, at any time before the expiry of the period prescribed under sub-section (1), by giving to the Central Government notice of not less than three months in writing. THE TERMS AND CONDITION OF THE SERVICE 1. The terms and other condition of service of chairman and the member appointed by central government hall be such as may be prescribed

8. Removal of member from office The Central Government shall remove a member from office if he - (a) is, or at any time has been, adjudicated as insolvent; (b) is of unsound mind and stands so declared by a competent court; (c) has been convicted of an offence which, in the opinion of the Central Government, involves a moral turpitude; (d) has, in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest: Provided that no member shall be removed under this clause unless he has been given a reasonable opportunity of being heard in the matter.

9. Meetings (1) The Board shall meet at such times and places, and shall observe such rules of procedure in regard to the transaction of business at its meetings (including quorum at such meetings) as may be provided by regulations. (2) The Chairman or, if for any reason, he is unable to attend a meeting of the Board, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting. (3) All questions which come up before any meeting of the Board shall be decided by a majority votes of the members present and voting, and, in the event of an equality of votes, the Chairman, or in his absence, the person presiding, shall have a second or casting vote.

10. Member not to participate in meetings in certain cases. Any member, who is a director of a company and who as such director has any direct or indirect pecuniary interest in any matter coming up for consideration at a meeting of the Board, shall, as soon as possible after relevant circumstances have come to his knowledge, disclose the nature of his interest at such meeting and such disclosure shall be recorded in the proceedings of the Board, and the member shall not take any part in any deliberation or decision of the Board with respect to that matter”.] Vacancies etc., not to invalidate proceedings of Board. No act or proceeding of the Board shall be invalid merely by reason of - (a) any vacancy in, or any defect in the constitution of, the Board; or (b) any defect in the appointment of a person acting as a member of the Board ;or (c) any irregularity in the procedure of the Board not affecting the merits of the case.

11. FUNCTIONS OF SEBI PROTECTIVE FUNCTION DEVELOPMENTAL FUNCTION REGULATING FUNCTION • Check on price rigging • Check on insider trading • Check on manipulative and fraudulent activities • Educate customers • 5. Check on preferential allotment • Frames rules and regulations • Register and regulate intermediaries • Register and regulate mutual funds • SEBI conduct enquiries and audit the stock exchange • Training of intermediary • Promoting investor’s education • Conducting research and publishing information

12. POWERS • Power of inspection. • Powers of court. • Powers in the interest of securities market. • Powers regarding protection of investors . • Powers to issue directions(Section 11B). • Powers of investigation(Section 11C). • Power to cease and desist proceedings(Section 11D). • Registration of stock-brokers, sub-brokers, share • transfer agents ,etc(Section 12). • Prohibition of manipulative and deceptive devices, • insider trading and substantial acquisition of • securities or control(Section 12A).

13. Penalties and Adjudication • Penalty for failure to furnish information,return,etc.(Section 15A): If any person,who is required under this act or any rules or regulations made there under,- • To furnish any document , return or report to the board , fails to furnish the same , he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less; • To file any return or furnish any information , books or other documents within the time specified therefore in the regulations , fails to file return or furnish the same within the time specified therefore in the regulations , he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less;

14. To maintain books of accounts or records , fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less. • Penalty for failure by any person to enter into agreement with the clients(Section 15b): If any person , who is registered as an • intermediary and is required under this act or Any rules or regulations made there under, to enter into an agreement with his client , fails to enter into such agreement , he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. • Penalty for failure to redress investors’ grievances(Section 15C): If any listed company or any person who is registered as an

15. Intermediary , after having been called upon by the board in writing ,to redress the grievances of investors, fails to redress such grievances within the time specified by the board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. • Penalty for certain defaults in case of mutual funds(Section 15 D):If any person, who is- • Required under this act or any rules or regulations made there under to obtain a certificate of registration from the board for sponsoring or carrying on any collective investment scheme, including mutual funds ,sponsors or carries on any collective investment ,he shall be liable to a penalty

16. Of one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual fund or one crore rupees ,whichever is less; • Registered with the board as a collective investment scheme, including mutual funds , for sponsoring or carrying on any investment schemes , fails to comply with the terms • And conditions of certificate of registration , he shall • be liable to a penalty of one lakh rupees for • each day during which such failure continues • or one crore rupees, whichever is less; • Registered with the board as a investment • scheme, including mutual funds , fails to make an • application for listing of its schemes as provided for in • the regulations governing

17. Such listing , he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; • Registered as a collective investment scheme, including mutual fund , fails to despatch unit certificates of any scheme in a manner provided in the regulation governing such • Despatch , he shall be liable to a penalty of one lakh rupees for each day during which failure continues or one crore rupees , whichever is less; • Registered as a collective investment scheme, including mutual funds , fails to refund the application monies paid by the investors within the period specified in the regulations ,

18. He shall be liable to a penalty of one lakh rupees for each day during which such failures continues or one crore rupees, whichever is less; • Registered as a collective investment scheme, including mutual funds, fails to invest money collected by such collective investment schemes in the manner or within the period • Specified in the regulations, he shall be liable to a • penalty of one lakh rupees for each day during • which such failure continues or one crore • rupees, whichever is less. • Penalty for failure to observe rules and regulations by an asset management company(Section 15E): Where any asset management company of a mutual fund

19. Registered under this act ,fails to comply with any of the regulations providing for restrictions on the activities of the assets management company shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. • Penalty for default in case of stock brokers(Section 15F): If any person ,who is registered as a stock broker under this act,- • Fails to issue contract notes in the form and in the manner specified by the stock exchange of which such broker is a member , he shall be liable to a penalty not exceeding five times the amount for which such broker is a member,

20. He shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker; • Fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations , he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; • Charges the amount of brokerage which is in the excess of the brokerage specified in the regulations , he shall be liable to a penalty of one lakh rupees or five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher. • Penalty for insider trading(Section 15G): If any insider who.-

21. Either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or • Communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of Business or under any law; or • Counsels , or procures for any other person to deal in any securities of any body corporate on the basis of published price sensitive information, shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading , whichever is higher.

22. Penalty for non-disclosure of acquisition of shares and takeovers(Section 15H): If any person , who is required under this act or any rules or regulations made there under, fails to_ • Disclose the aggregate of his share holding in the body corporate before he acquires any shares of that body corporate ; • Make a public announcement to acquire shares at a minimum price; • Make a public offer by the sending letter of the shareholders of the concerned company; or • Make payment of consideration to the shareholders who sold their shares pursuant to letter of offer, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profit made out of such failure, whichever is higher.

23. Penalty for fraudulent and unfair practices(Section 15HA): If the person indulges in fraudulent and unfair trade practices relating to securities ,he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profit made out of such practices, whichever is higher. • Penalty for contravention where no separate penalty has been provided(Section 15HB): Whoever fails to comply with any provision of this act , the rules or the regulations made or directions issued by the board there under for which no separate penalty has been provided , shall be liable to a penalty which may extend to one crore rupees. • Powers to adjudicate(Section 15 I ): • For the purpose of adjudicating , the board

24. Shall appoint any of its officers not below the rank of division chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give Evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry , he is satisfied that the person has failed to comply with the provisions of the sections specified in sub-section(1) , he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.

25. Factors to be taken into account by the adjudicating officer(Section 15 J): While adjudging of penalty under section 15-I, the adjudging officer shall have due regard to the following factors, namely:- • The amount of disproportionate gain or unfair advantage , wherever quantifiable , made as a result of the default ; • The amount of loss caused to an investor or Group of investors as a result of the default ; • The repetitive nature of the default. All sums realized by way of penalties under this act shall be credited to the consolidated fund of India.

26. ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES Conditions for issuing of securities Filing of offer document No company shall make any public issue, unless a draft prospectus has been filed with the board, at least 30 days prior to the filling of prospectus with the ROCs. No listed issuer company shall make any rights issue of securities where the aggregate value of such securities, including premium, exceeds Rs. 50lac unless a draft letter has been filed with the board at least 30 days prior to the filling of letter of offer with the DSE. Fast track issues A listed issuer company satisfy all the requirements and filling a prospectus with ROC or letter the DSE shall simultaneously shall file a copy thereof with the board.

27. v. Companies barred not to issue securities. • vi. Application for listing • vii. Issue of securities in dematerialised form • Initial Public Offerings by Unlisted Companies • An unlisted company may make an IPO of equity or any other security which may be converted into or exchanged with equity on a later date only if it meets certain conditions. • An unlisted Public Company shall not make allotment pursuant to a Public issue or offer for sale of equity shares or any security convertible into equity shares unless in addition to satisfy certain conditions the prospective allottees are not less than 1000. • Offer for sale • Public Issue by Listed Companies • Exemption from eligibility norms

28. PRICING BY COMPANIES ISSUING SECURITIES Public/Rights issue by Listed Companies Public issue by unlisted companies Infrastructure Company Initial Public issue by Banks Differential Pricing Price band Payment of discounts/commissions etc. Freedom to determine the denomination of shares for public/rights issues and to change the standard denomination.

29. Pre-Issue Obligation Pre-issue management relates to the action initiated by the issuing company through its merchant banker prior to the issue of the shares. The merchant bankers must accomplish the following requirements on behalf of their clients before approaching the market: · Prepare a draft of the prospectus. · Send the prospectus to SEBI for approval. · Obtain approval for the prospectus from SEBI. · File the approved prospectus with registrar of companies. · Assist the clients to launch the publicity regarding the opening and closing issue. · Decide the price of issues.

30. The following are the pre-issue obligations: · Due diligence. · Requisite fee. · Submission of documents. · Appointment of intermediaries. · Underwriting. · Offer document made public. • Due diligence • Due diligence investigates or audits potential investments to verify all material facts to a sale. Generally, due diligence refers to the care taken by an individual before entering into an agreement or a transaction with another • party. The following are the three phases of due diligence: · Initial screening. · Business case analysis. · Detailed analysis (Due diligence).

31. Requisite fee • According to the Regulation 24-A of SEBI Merchant Bankers’ Rules and Regulations, the lead merchant banker must pay the requisite fee with the draft offer document filed with SEBI. • Table 3.1 displays the requisite fees that a merchant banker must pay. Table 3.1: Requisite Fees Payable by a Merchant Banker The fees must be paid by a draft in favour of `Securities and Exchange Board of India’ at Mumbai or at the regional offices.

32. Submission of documents • With the offer document, the lead manager (merchant banker) must submit the following documents: • Memorandum of Understanding (MOU) • A memorandum of understanding is an agreement between the lead manager and the issuing company. The memorandum specifies their mutual rights, liabilities and obligations relating to the issue in the form of a legal document. • The lead manager or merchant banker who drafts the offer documents ensures that a copy of the Memorandum of Understanding is submitted to the SEBI with the offer document. Inter-se allocation of responsibilities The inter-se allocation of responsibility is submitted to the Board and disclosed in the offer document if the issue is handled by more than one merchant banker. In case an issue is undersubscribed, the merchant banker claims underwriting obligations and ensures that the underwriters pay the transferred amount.

33. Due diligence certificate The instigator gets a certificate of due diligence stating whether or not the target company satisfies all the required eligibilities. This certificate is known as Due Diligence certificate. Certificate in case of further issues by listed companies The lead merchant banker has to provide the following documents with the offer document: · Refunding order of previous issue. · Sending of all security certificates to the allottees within the prescribed time and manner · Listing of the securities on the stock exchange(s) as shown in the offer documents

34. Undertaking An issuer must submit an undertaking to SEBI confirming the transaction in securities by promoters, between filing of documents with the stock exchange and closure of issue. He must inform about this undertaking within 24 hours to the stock exchange. Information about promoter’s group The issuer has to submit a list of promoter’s group and their individual shareholdings to SEBI. The issuer has to also submit the Permanent Account Number (PAN), bank account number and passport account number of the promoters listed on specific securities, to the SEBI. Appointment of Co-Managers As per the requirement of work the lead manager may appoint a co-manager to share the work. The lead merchant bankers must ensure that the number of co-managers do not exceed the number of merchant bankers. There must be only one advisor to the issue.

35. Appointment of intermediaries Merchant bankers To act as a merchant banker, a person or firm must hold a certificate granted by the regulator and the securities and exchange board of India. The following are the SEBI regulations provided for the four categories of merchant bankers: · Category I: They are allowed take up activities related to issue management. Capital adequacy norm for this category is Rs. 5 crores. · Category II: They are allowed to carry the roles of advisor, consultant, co-manager, underwriter and portfolio manager. Capital adequacy norm for this category is Rs. 50 lakhs. · Category III: They are allowed to act as an underwriter, advisor, and consultant. Capital adequacy norm for this category is Rs. 20 lakhs. · Category IV: They are allowed to act as an advisor or consultant. There is no capital adequacy norm for this category of merchant banker.

36. Table 3.2: Number of Merchant Bankers based on Issue Size Other Intermediaries The lead merchant bankers must ensure that other appointed intermediaries are duly registered with SEBI, and evaluate their capability to work. The lead merchant bankers must ensure: · Issuer companies enter into a MOU with intermediary or intermediaries concerned, whenever required. · Bankers to the issue are appointed in all the compulsory collection centres. If the bankers are handling the post-issue responsibilities, they cannot act as registrar to an issue. · In case of a specific issue, only registrars registered with SEBI are appointed in all public or rights issues. · An independent registrar to an issue is appointed to process the issue from outside, if the issue company acts as a registered registrar to an issue.

37. Underwriting The main function of underwriting is to subscribe to the new issue that is yet to be fully subscribed. In the offer document, the lead merchant banker has to incorporate a statement to show that the underwriters’ assets are adequate to meet the underwriting obligations. The lead merchant banker must obtain a written consent of the underwriters before including their names in the offer document. Offer document made public The lead merchant banker has to make the offer document public within a period of 21 days, from the date of filling. To make the offer document public, the lead merchant banker must do the following: · File the draft offer document with the stock exchange where the securities are proposed to be listed. · Make the copies of offer document available to public, host the draft and final offer documents on the websites of all the lead managers. · Obtain and send an ‘in-principle’ approval of the stock exchange(s) to SEBI for listing, within 15 days of filling of the offer document with them.

38. The lead merchant bankers must ensure the following: · Offer documents and other issue materials are dispatched to the various stock exchanges, brokers, underwriters or bankers to an issue or investor associations in advance. · Letters of offer in a rights issue are dispatched to all shareholders at least one week prior to the opening date of the issue. · The prospectus or letter of offer is forwarded to SEBI after filing with the ROC or stock exchange(s) at least 10 days prior to the issue opening date. The lead merchant banker files a statement with SEBI for the following: · Submitting a list of complaints received. · Stating whether it is necessary to amend the draft or not · Highlighting the changes made. The locations of stock exchanges for issue of capital in India are Mumbai, Delhi, Kolkata, and Chennai. The Issuer Company can recruit collection agents after consulting the lead merchant bankers whose names and addresses are mentioned in the offer document. The lead merchant banker must ensure that the collection agents are prepared in terms of infrastructure and money order.

39. Post-Issue Obligation or Requirements The following are the post-issue obligations: · Receiving of application forms. · Screening of applications. · Deciding allotment procedure. · Mailing of allotment letters. · Shares certificate or demat account entries and refund orders. Monitoring reports The lead merchant banker ensures the submission of the post-issue monitoring reports based on the formats, irrespective of the level of subscription. 3-day monitoring report for book-built portion 3-day monitoring report in other cases Final post-issue monitoring report for all issues Allotment procedure The Executive Director or Managing Director of the Regional Stock Exchange consults with the post-issue lead merchant banker and the registrars regarding public issue of securities.

40. Proportionate allotment procedure The lead banker must ensure that the allotment is made on a proportionate basis as explained below: · The applicants are divided into separate category based on the number of shares they have applied for. · The total number of shares to be allotted to each category is done on a proportionate basis. This is based on the product of the total number of shares applied for in that category and the inverse of the oversubscription ratio. Reservation for small individual applicants The proportionate allotment of securities in an issue, when oversubscribed, is subjected to the reservation for small individual applicants as explained below: · A minimum 50% of the net offer of securities to the public is first made available for allotment to individual applicants, who have applied for allotment of equal to or less than 10 marketable lots of shares or debentures or the securities offered. · The balance net offer of securities to the public is made available for allotment to the individual applicants, who have applied for allotment of more than 10 marketable lots of shares or debentures or the securities offered.

41. Redressal of investors’ grievances The post issue lead merchant banker must interact on a regular basis with the post-issue activities such as allotment and refund. The merchant banker must regularly monitor the redress of investors’ grievances arising from the activities. Coordination with intermediaries The post-issue lead merchant banker maintains close co-ordination with the registrars to an issue, and also arranges to assign the officers of intermediaries at regular intervals after the closure of the issue. This is done to monitor the flow of applications from collecting bank branches and processing of the applications till certain activities are completed. Post issue advertisements The post-issue lead merchant banker ensures that the advertisement gives the details regarding oversubscription, basis of allotment, number; value and percentage of applications received with the stock invest. An advertisement stating, "The subscription to the issue has been closed" can be issued after the issue has been closed.

42. Other responsibilities The other responsibilities of lead merchant bankers are as follows: · Ensures payment of interest to the applicants for delayed dispatch of allotment letters, refund orders and so on as given in the offer document. · Ensures that the dispatch of refund orders, allotment letters, and share certificates are carried out through registered post or certificate of posting as applicable. · Gives advertisement in case of all issues. The advertisement has to cover details like oversubscription, basis of allotment, number, value and percentage of applications received. Such advertisement will be released within 10 days from the date of completion of the different activities. Realisation of stock invests The post-issue lead merchant banker must submit a certificate within two weeks from the date of allotment to the board. The certificate must certify that the stock invests are released on the basis of the allotment finalised.