Corporate Finance Law

CORPORATE FINANCE LAW
(FOR PRIVATE CIRCULATION ONLY)

2018
PROGRAMME COORDINATOR
Mr. Vishal Ranaware
COURSE DESIGN AND REVIEW COMMITTEE

Mrs. Medha Kolhatkar Ms. Carolin Dennis
Adv. Vaishali Bhagwat Ms. Ujjwala Sakhalkar
Dr. Shashikala Gurpur Ms. Mukta Mane

COURSE WRITERS
Ms. Parimala Veluvali Ms. Rajul Agarwal
Mr. Shrikant Shirodkar Mr. Atul Bohra
Mr. Nitin Bhandare
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2011 (Revision 02, 2015)
Copyright © 2018 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
It is a pleasure to contribute to the book on ‘Corporate Finance Law’. Corporate finance law is a
specific field of finance that gives an insight into the different financial decisions taken by companies
for enhancing the corporate value and minimizing financial risks. The smooth functioning of the
financial sector depends on the regulatory framework within which companies operate. Knowledge
of corporate finance law gives the student a comprehensive understanding of various laws enacted to
ensure a healthy capital market backed by investor participation and protection.
The traditional source of Capital has been Banks and Financial institutions funded and supported by
Government. However, this Capital is not sufficient to take care of growing requirement or at times it
is not possible to run the business with entire interest bearing money borrowed from various sources.
On the other hand, there are people who have money but no entrepreneurship.
The gap is to be filled in by Foreign Institutional Investors and Domestic Investors. It is therefore
imperative that we have robust system in place to protect the Investors. Government of India has
achieved this through Securities and Exchange Board of India Act 1992 and guidelines are issued in
this regard. The document clearly spells out all procedures in this regards and compliances.
The Securities and Exchange Board of India has issued various guidelines and regulations to regulate
and streamline the functioning of the Indian Corporate world. The units give a detailed overview of
these guidelines issued on various transactions of listed companies in order to protect the investor’s
interest and ensure maximum disclosure.
The main topics covered in the book include guidelines issued by SEBI on book building process,
provisions of Companies Act on Buy Back of shares and various disclosure requirements for listed
companies. The units also include meaning and guidelines on ESOP, insider trading, substantial
acquisition and takeovers. SEBI guidelines and regulations include provisions on every minute aspect
of the above mentioned processes and hence every care has been taken to incorporate these details in
a very simplified manner.
Ms. Parimala Veluvali

Mr. Shrikant Shirodkar
Ms. Rajul Agarwal
Mr. Atul Bohra
Mr. Nitin Bhandare
iii
ABOUT THE AUTHORS
Parimala Veluvali is a Company Secretary by profession and a faculty with Symbiosis Centre for
Management Studies. She is also a post graduate in Economics from Osmania University, Hyderabad.
She has more than 8 years of teaching experience at graduate and post graduate level in many reputed
management institutes. Her areas of teaching include Company Law, Labour Law, Labour Economics
and Legal Aspects of Business. Apart from her teaching experience, she also has industry experience
as a practising company secretary.
She has been associated with Symbiosis Centre for Management Studies since 2004 till date and
has been actively involved in classroom teaching and other academic pursuits. Her unique teaching
methodology which is student friendly has earned her a lot of recognition and affection from her
students. She has contributed to articles in the areas of company law and labour law and has also
authored a book on Business and Industrial Law. Presently, she is working towards her PhD in Law
from Symbiosis International University. To excel in the field of teaching and attain proficiency in the
broad area of legal aspects of business is her mission.
Shrikant J. Shirodkar is a Fellow Member of Institute of Cost and Works Accountants of India. He
holds a Bachelor’s Degree in Commerce from University of Mumbai.
He has been in the profession for the last twenty years. He has handled Working Capital and Term
Finances of various companies. He has handled assignments like shaping up newly set up units, start
up companies, integration of systems post acquisition and mergers during this tenure. He has also been
involved in implementation of systems. He has been keenly interested in putting on track the finances
who have turned into loss making.
Rajul Agarwal has completed her CA from The Institute of Chartered Accountants of India. She has
also done her Diploma in Information System Audit and holds AMFI Certification. Rajul Agarwal
has over 9 years of deep domain knowledge and experience of functioning of Indian Accounting and
Taxation system. She has successfully completed various statutory and tax audits and worked on
various assignments in supply chain, global sourcing and credit.
Along with a practicing tax consultant, she is also a corporate trainer for the finance domain. She
visits various management institutes in Pune as a visiting faculty for various finance related subjects.
Atul Bohra is a Bachelor of Commerce, Master of Business Administration (Finance), a Fellow
Member of The Institute of Company Secretaries of India, and associated member of The Institute
of Chartered Accountants of India. He has worked for various medium and large companies while
he was practicing as Company Secretary in Pune. Presently, he is working with Magna Steyr India
Private Limited as Manager - Finance & Company Secretary. He has been a Guest Faculty at various
Management and Professional Institutes and he has also been a key speaker at various programs
and seminars. He has good experience in the areas of Finance, Taxation, Corporate Restructuring,
Secretarial, Accounts, Project Finance.
Nitin Bhandare has completed his LL.M. in Criminal Law and Business Law from Symbiosis Law
School. He has qualified UGC NET in Law. He has participated in number of seminars and conferences.
He has also done Internship in the Supreme Court of India with Hon’ble Justice Mr. C.K. Thakker.
iv
CONTENTS
Unit No. TITLE Page No.

1 Introduction to Corporate Entity 1-32
1.1 Introduction to Corporate in India
1.2 Definition and Characteristics of the Modern Corporate
1.3 Corporation and its Legal Independence
1.4 Corporate Personality - A Legal Entity
1.5 Dual Power and Control
1.6 Introduction to the Concept of Corporate Governance
1.7 Evolution and Regulation of Corporate Governance
1.8 Need and Significance of Corporate Governance
1.9 Regulation of Corporate Governance
1.10 Corporate Litigation
1.11 Investors in Corporate
1.12 Raising of Finance by Corporate
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Securities Exchange Board of India 33-54
2.1 SEBI − Objectives and Purpose
2.2 Securities Exchange Board of India Act, 1992
2.3 Powers and Functions of the Board
2.4 Finance, Accounts and Audit
2.5 Penalties and Adjudication
2.6 Establishment of Securities Exchange Board of India
2.7 Appellate Tribunal
Summary
Key Words
Suggested Reading
v
3 Securities Contract (Regulation) Act, 1956 55-72
3.1 Introduction
3.2 Scope of the Act
3.3 Definitions
3.4 Corporatisation and Demutualisation of the Stock Exchange
3.5 Recognised Stock Exchanges related Provisions
3.6 Prohibition of Contracts
3.7 Powers of Recognised Stock Exchanges
3.8 Right to Appeal
3.10 Listing and Delisting of Securities
3.11 Clearing Corporation
3.12 Penalties
Summary
Key Words
Suggested Reading
4 Securities Exchange Board of India (SEBI) Guidelines Part- I 73-88
4.1 Introduction
4.2 Various Aspects covered under Guidelines
4.3 Applicability of Securities and Exchange Board of India (Disclosure
and Investor Protection) Guidelines, 2000
4.4 Eligibility Norms
4.5 Terms of Issue
4.6 Matters to be stated in Prospectus
Summary
Key Words
Suggested Reading
5 SEBI Guidelines Part-II on Pricing of Issue 89-112
5.1 Introduction
5.2 Pricing of the Issue
5.3 Promoters’ Contribution
5.4 Lock-in Period Requirements
5.5 Pre-Issue Obligations
5.6 Post-Issue Obligations
Summary
Key Words
Suggested Reading
vi
6 Book Building 113-136
6.1 Book Building – An Introduction
6.2 Why Book Building
6.3 Book-Building Process
6.4 SEBI Guidelines on Book Building
Summary
Key Words
Suggested Reading
7 Buyback and ESOP 137-168
7.1 Introduction
7.2 Provisions of Companies Act on Buy-Back
7.3 The Securities and Exchange Board of India Regulations on
Buy-Back
7.4 Contents of Letter of Offer
7.5 Meaning of ESOS and ESPS
7.6 SEBI Guidelines on Employee Stock Option Scheme (ESOS)
7.7 SEBI Guidelines on Employee Stock Purchase Scheme (ESPS)
7.8 Listing of Shares
Summary
Key Words
Suggested Reading
8 Insider Trading, Substantial Acquisition and Takeover 169-198
8.1 Meaning of Insider
8.2 Prohibition on Dealing, Communicating and Counselling
8.3 Investigation into Insider Trading
8.4 Policy on Disclosures and Internal Procedure for Prevention of
Insider Trading
8.5 Model Code of Conduct for Prevention of Insider Trading for
Listed Companies
8.6 Code of Corporate Disclosure Practices for Prevention of Insider
Trading
8.7 Disclosure of Shareholding and Control in a Listed Company
8.8 Substantial Acquisition of Shares or Voting Rights in and
Acquisition of Control over a Listed Company
8.9 Public Announcement of Offer
8.10 General Obligations of Various Parties to Acquisition
8.11 Investigation and Action by Board
Summary
Key Words
Suggested Reading
vii
9 Overseas Financing 199-214
9.1 Introduction
9.2 Advantages of Overseas Financing
9.3 Concept of Depository Receipts
9.4 American Depository Receipts
9.5 Advantages of going for an ADR Issue
9.6 Global Depository Receipts
9.7 Advantages of a GDR Issue
9.8 Procedure for an ADR Issue
9.9 External Commercial Borrowings
9.10 Foreign Currency Convertible Bonds (FCCBs)
Summary
Key Words
Suggested Reading
10 Foreign Exchange Management Act, 1999 215-226
10.1 Introduction
10.2 Important Definitions under the Act
10.3 Regulation and Management of Foreign Exchange
10.4 Powers of RBI
10.5 Penalties
10.6 Directorate of Enforcement
Summary
Key Words
Suggested Reading
11 Foreign Investment 227-244
11.1 Introduction
11.2 Setting up Business in India
11.3 Foreign Investment- Meaning
11.4 Who can invest through Foreign Investment
11.5 FDI in Various Sectors or Activity
11.6 Prohibited Sector for FDI
11.7 Foreign Investment Routes in India
11.8 Reporting and Intimations for FDI
11.9 Penalties and Compounding of Offence
Summary
Key Words
Suggested Reading
viii
12 Competition Act and its Relevance with Finance 245-264
12.1 Introduction
12.2 Abuse of Dominant Position
12.3 Prohibition of Certain Agreements
12.4 Competition Commission of India
12.5 Duties, Powers and Functions of Competition Commission
12.6 Regulation of Combinations
Summary
Key Words
Suggested Reading
13 Depositories Act, 1996 265-284
13.1 Introduction
13.2 Need for Dematerialisation
13.3 Depository Services
13.4 Difference between a Depository and Custodian
13.5 Advantages of the Depository System
13.6 Disadvantages of Demat
13.7 Important Constituents of the Depository System
13.8 Procedure of Dematerialisation
13.9 Rematerialisation
13.10 Trading and Settlement of Shares in Demat
13.11 NSDL and CDSL
13.12 Legal Framework for Depositories
13.13 SEBI (Depositories and Participants Regulations), 1996
13.14 Bye-Laws and Business Rules
Summary
Key Words
Suggested Reading
ix
14 Listing of Securities 285-300
14.1 Introduction
14.2 Meaning of Listing
14.3 Advantages of Listing
14.4 Disadvantages of Listing
14.5 Types of Listing
14.6 Procedure for Listing
14.7 SEBI Guidelines for Listing
14.8 Stock Exchange Guidelines
14.9 Listing Requirements in case of BSE
14.10 The Concept of Delisting
14.11 Provisions of SEBI (Delisting Regulations), 2009
14.12 Delisting through Reverse Book Building
Summary
Key Words
Suggested Reading
15 Mutual Funds 301-320
15.1 Introduction
15.2 Technical Jargons used
15.3 Net Asset Value (NAV)
15.4 Asset Management Company (AMC)
15.5 Types of Schemes offered by the Mutual Funds
15.6 Regulatory Aspects
Summary
Key Words
Suggested Reading
References 321-324
x
Introduction to Corporate Entity
UNIT
1
Structure:
1.1 Introduction to Corporate in India

1.2 Definition and Characteristics of the Modern Corporate
1.3 Corporation and its Legal Independence
1.4 Corporate Personality - A Legal Entity
1.5 Dual Power and Control
1.6 Introduction to the Concept of Corporate Governance
1.7 Evolution and Regulation of Corporate Governance
1.8 Need and Significance of Corporate Governance
1.9 Regulation of Corporate Governance
1.10 Corporate Litigation
1.11 Investors in Corporate
1.12 Raising of Finance by Corporate
Summary
Key Words
Suggested Reading
Introduction to Corporate Entity 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Review the nature and characteristics of corporate in India
----------------------
• Examine corporation as a separate legal entity
---------------------- • Discuss the concept of corporate governance
---------------------- • Identify the investors in corporate
---------------------- • Analyse the raising of finance by corporate
----------------------
1.1 INTRODUCTION TO CORPORATE IN INDIA
----------------------
In common law a company is a “legal person” or “legal entity” separate
----------------------
from its members, capable of surviving beyond the lives of its members. It has
---------------------- a capital divisible into parts, known as shares. At the same time it is an artificial
person created by a process of law. It has perpetual succession and a common
---------------------- seal, if any. It exists only in contemplation of law, i.e.,, it is regarded by the law
as a person, just as a human being. But is has no physical existence.
----------------------
A company is nothing but a group of persons who have come together
---------------------- or who have contributed money for some common purpose. A company as an
---------------------- entity has several distinct features which together makes it a unique organisation.
The Company legislations in India have always been influenced by the English
---------------------- Companies’ Legislations; however, the new legislations are now been altered
and amended as per the requirements of Indian business scenario.
----------------------
The companies that could be governed by the Indian Companies Act are
---------------------- public companies limited by shares, pubic companies limited by guarantee,
public unlimited companies, private companies limited by shares, private
---------------------- companies limited by guarantee, private unlimited companies, foreign
---------------------- companies and government companies.
Meaning of Corporation
----------------------
The emerging global business environment has undergone extraordinary
---------------------- changes and raised challenges for existing business models to accommodate
these changes. While globalisation has been an advantage in business operations,
----------------------
it has also made corporations vulnerable to greater risk, abuse and fraud on
---------------------- a global scale. This emerging scenario has given rise to the serious issue of
the inadequacies of governance and demands for new reforms, bringing new
---------------------- models of operation and re-evaluation of systems.
---------------------- A company is an association of persons (either human beings or legal
persons, or both). It is formed to conduct business or other activities in the
---------------------- name of association and incorporated by registration under the Act. A company
is also called ‘corporation’, meaning a company or any other body incorporated
----------------------
2 Corporate Finance Law

under law (and not Municipal Corporation). A company comes into existence Notes
by incorporation. ‘Incorporation’ is the act of forming a legal corporation. It
denotes the formation of an association that has a corporate personality, i.e.,, a ----------------------
personality distinct from those of its members.
----------------------
1.2 DEFINITION AND CHARACTERISTICS OF THE ----------------------
MODERN CORPORATE
----------------------
Company is a ‘juristic person’ and it can file a suit as an ‘indigent person’.
----------------------
The expression ‘person’ includes not merely a natural person but also
other juridical persons. A company being a juristic person would be represented ----------------------
before a court of law or any other place by a person competent to represent
----------------------
it. It is enough that the person competent to represent a company presents the
application on behalf of the company. Minors, lunatics or person under any ----------------------
disability are also entitled to file a suit either through guardian or the next friend.
In such a case it is the guardian or next friend who is competent to represent the ----------------------
petitioner.
----------------------
Company is a separate legal entity
----------------------
A company is a separate legal entity distinct from its shareholders. The
major constituents of a company are its members, who are the ultimate owners ----------------------
and its directors. It is an important feature of the company form of business that
----------------------
there is a gap between the ownership and control over the affairs of the company.
In real sense the members are the owners of a company; but it is managed ----------------------
by the directors who are elected representatives of its members, because it is
absolutely necessary for it to have a human agency called as the Company’s ----------------------
Board of Directors. The Board of Directors comprises the directors.
----------------------
Definition
----------------------
A corporation is defined as a legal entity or structure created under the
authority of the laws of a State. It consists of a person or group of persons ----------------------
who become shareholders. The entity’s existence is considered separate and
distinct from that of its members. Like a real person, a corporation can enter ----------------------
into contracts, sue and be sued, pay taxes separately from its owners, and do the ----------------------
other things necessary to conduct business. The existence of a corporation is not
dependent upon who the owners or investors are at any one time. Once formed, ----------------------
a corporation continues to exist as a separate entity, even when shareholders die
or sell their shares. ----------------------
A corporation is a person who may be ordered to produce documents ----------------------

under the Evidence (Proceedings in Other Jurisdictions) Act, although it is
incapable of being ordered to attend for the purpose of being examined on oath ----------------------
under that Act. A corporation may be a person within the legislation relating to ----------------------
food and drugs and other enactments of a penal character.
----------------------
A corporation continues to exist until the shareholders decide to dissolve
it or merge it with another business. A corporation may be a ‘person of full ----------------------

Notes age’ within the meaning of the Settled Land Act, 1925 and the Law of Property
Act, 1925. Since a corporation is an entity in its own right, it is liable for its
---------------------- own debts and obligations. A corporation cannot fill the office of treasurer of
a friendly society, act as a dentist or a veterinary surgeon, or be admitted as a
---------------------- solicitor, or become a pharmaceutical chemist.
---------------------- A corporation is both ‘respectable and responsible person’ for the purpose
of a provision in a lease, which provides that consent to assignment is not to be
----------------------
withheld in respect of such a person.
---------------------- A summons requiring appearance before a magistrates’ court may be
issued to a corporation as well as to a natural person.
----------------------
Characteristics of a Modern Corporate
----------------------
Following are the main characteristic features of a company:
----------------------
● Limited Liability
---------------------- The privilege of limited liability for business debts is one of the
---------------------- principal advantages of doing business under the corporate form of
business organisation. “Unlike in a partnership or sole proprietorship,
---------------------- shareholders of a modern business corporation have “limited liability” for
the corporation’s debts and obligations. As a result their potential losses
---------------------- cannot exceed the amount which they contributed to the corporation as
---------------------- dues or paid for shares. Limited liability regulations enable corporations to
socialise their costs for the primary benefit of shareholders. The economic
---------------------- rationale for this lies in the fact that it allows anonymous trading in
the shares of the corporation by virtue of eliminating the corporation’s
---------------------- creditors as a stakeholder in such a transaction. Without limited liability,
---------------------- a creditor would not likely allow any share to be sold to a buyer of at
least equivalent creditworthiness as the seller. Limited liability further
---------------------- allows corporations to raise tremendously more funds for enterprises by
combining funds from the owners of stock. Limited liability reduces the
---------------------- amount that a shareholder can lose in a company. This in turn greatly
---------------------- reduces the risk for potential shareholders and increases both the number
of willing shareholders and the amount they are likely to invest.
---------------------- The privilege of limiting liability for debts is one of the principal advantages
---------------------- of doing business under the corporate form of organisation. One of the
primary and accepted motivations behind incorporating a company is to
---------------------- limit personal risks by obtaining the benefit of limited liability. Limited
liability means the status of being legally responsible only to a certain
---------------------- amount debts of a trading company.
---------------------- ● Common Seal
---------------------- Since a company has no physical existence, it must act through its agent;
and all such contracts entered into by its agents may be under the seal of
---------------------- the company.
----------------------

On incorporation a company becomes legal entity with perpetual Notes
succession and common seal, if any. The common seal of the company
is of great importance. The name of the company must be engraved on ----------------------
the common seal, if any. The requirement of common seal has been
made optional under the Companies Act and as a consequence changes ----------------------
have been made with regards to the authorisation for the execution of ----------------------
documents.
----------------------
● Owning Property
As a company is a legal person distinct from its members, it is capable of ----------------------
owning, enjoying and disposing of property in its own name. Although ----------------------
its capital and assets are contributed by its shareholders, they are not the
private and joint owners of its property. The company is the real person in ----------------------
which all its property is vested and by which it is controlled, managed and
disposed of. In Perumal vs. John Deavin case, it was observed that “no ----------------------
member can claim himself to be owner of the company’s property during ----------------------
its existence or on its winding up.” A shareholder does not have even an
insurable interest in the property of the company. Hence “the property of ----------------------
the company is not the property of the shareholders.
----------------------
A company being a juristic person, can acquire, own, enjoy and alienate
property in its own name. No shareholder can claim upon the property of ----------------------
the company so long as the company is a going concern. The shareholders
are not the owners (or joint owners) of the company’s property. The ----------------------
company itself is the true owner. The company is the real person in which ----------------------
all its property is vested, and by which it is controlled, managed and
disposed of. Thus, incorporation helps the property of the company to be ----------------------
clearly distinguished from that of its members. The assets of a company
were not allowed to be used for the payment of a shareholder’s debts. ----------------------
• Limitations of Work ----------------------

The field of a work of a company is fixed by its charter, i.e., the ----------------------
memorandum of association. A Company cannot do anything beyond the
powers defined in it. Its action, therefore, is limited. In order to do the work ----------------------
beyond the Memorandum of Association, there is need for alteration.
----------------------
• Representative Management
----------------------
Shareholders of a company are widely scattered. It is not possible for all
the shareholders to take part in the management of the company. They ----------------------
leave this to the representatives elected by them. Board of directors
----------------------
manages the Board of Directors and the company.
• Legal Entity ----------------------
An entity means something which has a real existence; it is a thing with ----------------------
distinct existence. On incorporation company acquires its own personality.
It is an artificial person created by law and has its own legal entity, distinct ----------------------
from the members comprising it. The personality has nothing to do with ----------------------
personality of the shareholders.

Notes • Perpetual Succession
A company is a juristic person with a perpetual succession. Its life does
----------------------
not depend upon the life of its members. It is not affected by insolvency,
---------------------- mental disorder or retirement of any of its members. It is created by
a process of law and can be put to an end only by the process of law.
---------------------- Members may come and go but the company can go on forever until
dissolved. It continues to exist even if all its human members are dead.
----------------------
Perpetual means continuing, enduring forever, and everlasting, continuous
---------------------- or uninterrupted. Succession means series of things or people in succession.
A corporation being a legal person, is unaffected by the death or other
----------------------
departure of any member but continues to be in existence irrespective of
---------------------- the changes in membership.
---------------------- ● Free and easy transferability of shares

The capital of a company is divided into parts called shares. These shares
---------------------- are subject to certain conditions, freely transferable, so that no shareholder
---------------------- is permanently or necessarily wedded to a company.
Shares of a company limited by shares are transferable by a shareholder
----------------------
to any other person. The transfer is easy as compared to the transfer of
---------------------- interest in a business run as a proprietary concern or a partnership. Under
the articles of association, a company can put certain restrictions on the
---------------------- transfer of shares but it cannot altogether stop it.
---------------------- ● Capacity to sue and be sued
---------------------- A company can sue and be sued in its corporate name. It may also inflict
or suffer wrongs. A company, being a body corporate, can sue and be sued
---------------------- in its own name. A company has right to protect its fair name. It can sue
for such defamatory remarks against it as are likely to damage its business
---------------------- or property etc.
---------------------- ● Company is not a property
---------------------- A company is not a property. Earlier the ownership was identified with the
person, who brought capital. This concept has changed and a company is today
---------------------- recognised as a living, vital and dynamic social organism with firm and deep-
rooted affiliations with the rest of the community, in which it functions.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. A capital divisible into parts is known as ______.
----------------------
2. A company comes into existence by ________.
----------------------
3. A company is also called a _______.
4. The expression ‘_______’ includes not merely a natural person but ----------------------
also other juridical persons. ----------------------
5. A company can sue and be sued in its _________ name.
----------------------
6. It can sue for such defamatory remarks against it as are likely to
______ its business or property etc. ----------------------
7. A company is a juristic person with a _______ succession. ----------------------
8. The field of work of a company is fixed by its charter, i.e., the _________.
----------------------
----------------------
Activity 1
----------------------
1. Read and comment on Perumal vs. John Deavin case. ----------------------

2. Study one memorandum and articles of association of a company and ----------------------
note down the main objects of the company.
----------------------
1.3 CORPORATION AND ITS LEGAL INDEPENDENCE ----------------------
----------------------
Section 7(2) of the Companies Act, 2013 provides that the Registrar on
the basis of documents and information filed under sub-section (1) of section 7 ----------------------
shall register all the documents and information referred to in that subsection in
the register and issue a certificate of incorporation in the prescribed form to the ----------------------
effect that the proposed company is incorporated under this Act.
----------------------
Section 9 of the Companies Act, 2013 says that from the date of
incorporation mentioned in the certificate of incorporation, such subscribers ----------------------
to the memorandum and all other persons, as may, from time to time, become
----------------------
members of the company, shall be a body corporate by the name contained in
the memorandum, capable of exercising all the functions of an incorporated ----------------------
company under this Act and having perpetual succession and a common seal,
if any with power to acquire, hold and dispose of property, both movable and ----------------------
immovable, tangible and intangible, to contract and to sue and be sued, by the
----------------------
said name.
Personality means a person as an embodiment of a collection of qualities. ----------------------
Corporate personality is the personality of the corporation distinct from those ----------------------
of its members. Corporate personality is a reality and not an illusion or fictitious

Notes construction of the law. A company acquires a corporate personality on its birth
by incorporation, i.e., when it comes into existence. A company comes into
---------------------- existence by registration at the office of the Registrar of Companies.
---------------------- Saloman vs. Saloman & Co. 1897, a leading English case laid down the
principle of “Independent Corporate Existence.”
----------------------
This case is related to Salomon who was a leather merchant, specialised
---------------------- in manufacturing leather boots. For many years he ran his business as a sole
proprietor. By 1892, his sons had become interested in taking part in the
---------------------- business. Salomon decided to incorporate his business as a limited company,
Salomon & Co. Ltd.
----------------------
At the time the legal requirement for incorporation was that at least
---------------------- seven persons subscribe as members of a company, i.e., as shareholders. The
shareholders were Mr. Salomon, his wife, daughter and four sons. Two of
----------------------
his sons became directors; Mr. Salomon himself was managing director. Mr.
---------------------- Salomon owned 20,001 of the company’s 20,007 shares - the remaining six
were shared individually between the other six shareholders. Mr. Salomon sold
---------------------- his business to the new corporation for almost £39,000, of which £10,000 was
a debt to him. He was thus simultaneously the company’s principal shareholder
----------------------
and its principal creditor.
---------------------- When the company went into liquidation, the liquidator argued that the
---------------------- debentures used by Mr. Salomon as security for the debt were invalid, on the
grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling
---------------------- that since Mr. Salomon had created the company solely to transfer his business
to it, the company was in reality his agent and he as principal was liable for
---------------------- debts to unsecured creditors.
---------------------- The House of Lords unanimously overturned this decision, rejecting the
arguments from agency and fraud. They held that there was nothing in the Act
---------------------- about whether the subscribers (i.e., the shareholders) should be independent of
---------------------- the majority shareholder. The company was duly constituted in law and it was
not the function of judges to read into the statute limitations they themselves
---------------------- considered expedient. The 1862 Act created limited liability companies as legal
persons separate and distinct from the shareholders. Lord Halsbury stated that
---------------------- the statute “enacts nothing as to the extent or degree of interest which may be
---------------------- held by each of the seven [shareholders] or as to the proportion of interest or
influence possessed by one or the majority over the others.”
---------------------- Lord Halsbury remarked that - even if he were to accept the proposition that
---------------------- judges were at liberty to insert words to manifest the intention they wished to
impute to the Legislature - he was unable to discover what affirmative proposition
---------------------- the Court of Appeal’s logic suggested. He considered that identifying such
an affirmative proposition represented an “insuperable difficulty” for anyone
---------------------- putting forward the argument propounded by the lord justices of appeal.
---------------------- Lord Macnaghten asked what was wrong with Mr. Salomon taking
advantage of the provisions set out in the statute, as he was perfectly legitimately
----------------------
entitled to do. It was not the function of judges to read limitations into a statute

on the basis of their own personal view that, if the laws of the land allowed such Notes
a thing, they were “in a most lamentable state”, as Malins V-C had stated in an
earlier case in point, In Re Baglan Hall Colliery Co., which had likewise been ----------------------
overturned by the House of Lords.
----------------------
The House of Lords held “Either the limited company was a legal entity
or it was not. If it were, the business belonged to it and not to Mr. Salomon. If ----------------------
it was not, there was no person and nothing to be an agent [of] at all; and it is
----------------------
impossible to say at the same time that there is a company and there is not.”
The House further noted, “The company is at law a different person ----------------------
altogether from the shareholders and, though it may be that after incorporation
----------------------
the business is precisely the same as it was before, and the same persons are
managers, and the same hands received the profits, the company is not in law ----------------------
the agent of the shareholders or trustee for them. Nor are the shareholders, as
members, liable in any shape or form, except to the extent and in the manner ----------------------
provided for by the Act.”
----------------------
The principle ‘Independent Corporate Existence’ was enunciated as
follows: “Once the company is legally incorporated, it must be treated like ----------------------
any other independent person with its rights and liabilities appropriate to itself,
----------------------
and the motives of those who took part in the promotion of the company are
absolutely irrelevant in discussing what those rights and liabilities are. As soon as ----------------------
a company is registered, it becomes a distinct legal ‘person’ even if the member
thereof consist of seven persons, only one of whom holds all the shares and the ----------------------
rest are mere cestui que trust. If they are shareholders, they are shareholders for
----------------------
all purposes, and even if the statute was silent as to the recognition of trusts… if
the six of them were the cestui que trust of the seventh, whatever might be their ----------------------
rights inter se, the statute would have made them shareholders to all intents and
purposes company; the only relation which…the law would sanction would be ----------------------
that they were corporations of the corporate body.”
----------------------
Check your Progress 2 ----------------------
----------------------
Fill in the blanks.
----------------------
1. The registration of the memorandum of a company is done by the
_________. ----------------------
2. The ____________ 1897 a leading English case laid down the ----------------------
principle of “Independent Corporate Existence.”
----------------------
----------------------
Activity 2
----------------------
Find the recent cases which disagree with the principle of “Independent
----------------------
Corporate Existence.”
----------------------

Notes 1.4 CORPORATE PERSONALITY - A LEGAL ENTITY
---------------------- A body corporate during the 17th and 18th centuries could be brought into
---------------------- existence either by a Royal Charter or by a Special Act of Parliament. Both these
methods were very expensive and dilatory. Consequently, to meet the growing
---------------------- commercial needs of the nation, large unincorporated partnership came into
existence, trading, however, in corporate form. The membership of each of such
---------------------- concern being very large, the management of the business was left to very few
---------------------- trustees. This resulted in separation of ownership from management. The best
example of this was the East India Company.
---------------------- A shareholder is a person who holds share in a company. In common
---------------------- parlance, a shareholder is called owner of a company like partner in partnership
firm.
----------------------
Partnership
---------------------- It is to be noted that unlike a company, a partnership firm is not a legal
entity. Thus, a partnership firm cannot enter into contract, take or give loan or
----------------------
purchase property in its own name. It is not a distinct legal entity apart from
---------------------- the partners constituting it. However, for the purpose of income tax laws, a
partnership firm is a legal entity. Section 4 of The Indian Partnership Act,
---------------------- 1932 puts down that a “Partnership” is the relation between persons who have
agreed to share the profits of a business carried on by all or any of them acting
----------------------
for all. Persons who have entered into partnership with one another are called
---------------------- individually, “partners” and collectively “a firm” and the name under which
their business is carried on is called the “firm-name”.
----------------------
A partnership is a profit-based business association of two or more persons.
---------------------- Each partner shares directly in the organisation’s profits and shares control of
the business operation. The consequence of this profit sharing is that partners
---------------------- are jointly and independently liable for the partnership’s debts. In a partnership,
---------------------- the liability of the partners is unlimited. Hence, any partner can bind the firm
and the firm is liable for all liabilities incurred by any partner on behalf of the
---------------------- firm. If property of partnership firm is insufficient to meet liabilities, personal
property of any partner can be attached to pay the debts of the firm. This is seen
---------------------- to be a major disadvantage of a partnership.
---------------------- In general, partners are bound to carry out their business to seek greatest
common advantage, be just and faithful and to render true accounts and full
---------------------- information to other partners. Partners are agents on behalf of each other.
---------------------- Hence, any act of one partner is binding upon all other partners and thus the act
of a single partner extends its liability to all partners, which is also termed as
---------------------- ‘implied authority’. In case of any loss caused by the fraud of a partner, such
partner shall indemnify for such losses. As under section 11 of the Partnership
---------------------- Act, partners may determine their rights and duties specifically by way of
---------------------- contract, which may also be varied by consent of all partners.
----------------------

Shareholder Notes
A company is distinct from the members who constitute it. The theory
----------------------
of corporate existence independent of its shareholders and its capacity to
exercise rights has been built on Saloman v. Saloman & Co. case. The rights ----------------------
and obligations of company are different from the rights and obligations of
the members/shareholder. For any action taken against the company, the ----------------------
shareholders may be indirectly affected because their interest in the capital of the
----------------------
company is reduced. But an action taken against the company does not directly
affect the shareholders. The company in holding its property and carrying on its ----------------------
business is not the agent or trustee of the shareholders but stands in a fiduciary
position vis a vis the members of the company. ----------------------
On the other hand, a shareholder has an interest in a company; the share he ----------------------
holds represents this interest. A share is movable property with all the attributes
of such property. The shareholder is not an agent of the company and thus has ----------------------
no power to bind the company by his acts. Ordinarily, a shareholder is entitled
----------------------
to enjoy the income arising from the shares in the shape of dividends. The share,
like any other marketable commodity, can be sold or transferred by way of ----------------------
mortgage or pledge. The holding of the share in his name gives him right at the
general meetings of accompany for taking various decisions, e.g., the election ----------------------
of directors, and thereby take a part, through indirectly, in the management of
----------------------
the company’s affairs.
A company is a person in the sense that it exists in the contemplation of law. ----------------------
----------------------
----------------------
State True or False. ----------------------
1. A body corporate during the 17th and 18th centuries could be brought ----------------------
into existence either by a Royal Charter or by a Special Act of
Parliament. ----------------------
2. A company is a profit-based business association of two or more ----------------------
persons.
----------------------
3. In a partnership, the liability of the partners is unlimited.
4. The shareholder is an agent of the company and thus has no power to ----------------------
bind the company by his acts.
----------------------
----------------------
Activity 3 ----------------------
----------------------
Carry out a comparative analysis of company and partnership.
----------------------
----------------------

Notes 1.5 DUAL POWER AND CONTROL
---------------------- Since a corporation is a legal entity existing only in the contemplation
---------------------- of law, it makes it necessary that the company’s business should be entrusted
to same human agents. Hence, the directors are appointed by the company.
---------------------- However, the position that the directors occupy in a corporate enterprise is
not easy to explain. They are professional men hired by the company to direct
----------------------
its affairs. Yet, they are not the servants of the company. They are rather the
---------------------- officers of the company. A director is not a servant of any master. He cannot
be described as a servant. A director is, in fact, a director or controller of the
---------------------- company’s affairs. He is not a servant. A director may, however, work as an
---------------------- employee in a different capacity. Directors are described sometimes as agents,
sometimes as trustees and sometimes as managing partners. But each of these
---------------------- expressions is used not as exhaustive of their powers and responsibilities, but
as indicating useful points of view from which they may for the moment and
----------------------
for the particular purpose be considered ‘servant of the company or of anyone’.
---------------------- The phrase ‘alter ego’ is used to denote a person’s secondary or alternative
---------------------- personality; a second self. Thus, your alter ego is the other side of your personality
from the one which people normally see, the side of someone’s personality that
---------------------- is not usually seen by the other people. This doctrine, sometimes also called as
the company’s ‘directing mind and will doctrine’, has been developed, with no
----------------------
divergence of approach, in both criminal and civil jurisdictions, the authorities
---------------------- in each being cited differently in the other.
A company having mind or will of its own, the need for it arises of natural
----------------------
persons because the criminal law often requires mens rea as constituent of
---------------------- crime, and the civil law intention or knowledge as an ingredient of the cause
of action or defence. The attributes to the company is the mind and will of the
---------------------- natural person or persons who manage its actions. Their minds are its mind;
---------------------- their intention is its intention; their intention is its knowledge.
The alter ego was propounded in 1915 in England in a case where the judge
----------------------
called a director of a company ‘active spirit’, ‘directing mind of the company’,
---------------------- ‘life and soul of the company’, (a company’s) ‘active and directing will’ and
held that person’s (being a natural person) action was the very action of the
---------------------- company. “A corporation is an abstraction. It has no mind of its own any more
---------------------- than it has a body of its own; its acting and directing will must consequently be
sought in the person of somebody who for some purposes may be called as an
---------------------- agent, but who is really the directing mind and will of the corporation, the very
ego and centre of the personality of the corporation. That person may be under
----------------------
the direction of the shareholders in the general meeting; that person may be the
---------------------- Board of Directors itself, or it may be, and in some companies it is so, that that
person has an authority to co-ordinate with Board of Directors, given to him
---------------------- under the Articles of association, and is appointed by the general meeting of
---------------------- the company, and can be removed by the general meeting of the company….”

Thus, company in law is, to a large extent, equal to natural person and Notes
has a legal entity of its own, but though a company itself is a ‘person’, it is an
artificial legal person created by law, and can, therefore by necessity, act only ----------------------
through the agency of natural persons. It is owing to the peculiar character of a
----------------------
company that the need for directors arises.
The need for the directors also emanates from the nature of the company ----------------------
as a form of business organisation, especially a large sized company having a ----------------------
numerous shareholders. The shareholders are scattered and have neither time
nor will nor expertise to manage its day-to-day affairs. They are a heterogeneous ----------------------
group of people residing far and wide out being in a position to manage the
----------------------
affairs of a company. Companies are like miniature democratic states. The
Board has collective responsibility for the running of the company and it has ----------------------
power to delegate the detail of the company’s day-to-day management to
managers, officers and other employees. The Board, in theory, is accountable ----------------------
to the company in general meeting. Day-to-day power and control, however, ----------------------
in large companies invariably lies in boardroom and not with the shareholders.
This phenomenon is sometimes referred to as the divorce of ownership and ----------------------
management.
----------------------
The directors are the brain of a company. They occupy the pivotal position
in the structure of the company. They are, in fact, the mainspring of company. ----------------------
Nevile J., observed in Bath v. Standard Land Co. (1910) 2 ch. 408 that “the ----------------------
Board of the Directors are the brain and the only brain of the company can
and does act only through them.” It is only “when brain functions that the ----------------------
corporation is said to function.”
----------------------
Thus, we can say that for effective and representative management a company
needs Board of Directors. ----------------------
----------------------
----------------------
1. A company is a person in the sense that it exists in the ________ of law. ----------------------
2. He is not a servant
----------------------
3. A ________ having mind or will of its own, the need for it arises of
natural persons because the criminal law often requires mens rea as ----------------------
constituent of crime.
----------------------
4. The _________ are scattered and have neither time nor will nor
expertise to manage a company’s day-to-day affairs. ----------------------
5. The ______ has collective responsibility for the running of the company. ----------------------
----------------------
----------------------

Notes 1.6 INTRODUCTION TO THE CONCEPT OF CORPORATE
GOVERNANCE
----------------------
---------------------- Ownership and management patterns in businesses have changed

phenomenally over decades. The number of stakeholders in every business has
---------------------- also multiplied. This has given rise to agency costs and ethical issues. However,
whether it is the proprietor or the executive managing the business, the basic
---------------------- objective of wealth generation still remains. Even an owner needs to learn
---------------------- to govern. So how do we understand the concept of governance? Corporate
governance represents the value framework, the ethical framework and the moral
---------------------- framework under which business decisions are taken. Corporate Governance
may be defined as a set of systems, processes and principles which ensure that
---------------------- a company is governed in the best interest of all stakeholders. It is the system
---------------------- by which companies are directed and controlled. It ensures commitment of the
board in managing the company in a transparent manner for maximising long-
---------------------- term value of the company for its shareholders. It is about promoting corporate
fairness, transparency and accountability. In other words, ‘good corporate
---------------------- governance’ is nothing but ‘good business’.
---------------------- The concept of corporate governance has been attracting public attention
for quite some time in India. Progressive firms in India have voluntarily put in
---------------------- place systems of good corporate governance which allow sufficient freedom
---------------------- to the boards to take decisions towards the progress of their companies, to
innovate, while remaining within a framework of effective accountability. In
---------------------- other words they have system of good corporate governance.
---------------------- Corporate governance has been defined by various experts and agencies as
follows:
----------------------
1. According to Economist and Noble laureate Milton Friedman, “Corporate
---------------------- Governance is to conduct the business in accordance with owner or
shareholders’ desires, which generally will be to make as much money as
---------------------- possible, while conforming to the basic rules of the society embodied in
law and local customs.”
----------------------
2. According to Sir Adrian Cadbury, “Corporate Governance is the system
---------------------- by which companies are directed and controlled.”
---------------------- 3. “Corporate Governance is concerned with holding the balance between
economic and social goals and between individual and communal goals.
---------------------- The corporate governance framework is there to encourage the efficient
---------------------- use of resources and equally to require accountability for the stewardship
of those resources. The aim is to align as nearly as possible the interests
---------------------- of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global
Corporate Governance Forum’, World Bank, 2000)
----------------------
4. According to OECD, “The corporate governance structure specifies the
---------------------- distribution of rights and responsibilities among different participants
in the corporation, such as the board, managers, shareholders and other
---------------------- stakeholders, and spells out the rules and procedures for making decisions

on corporate affairs. By doing this, it also provides the structure through Notes
which the company objectives are set, and the means of attaining those
objectives and monitoring performance.” ----------------------
5. Report of SEBI Committee (India) on Corporate Governance defines ----------------------
corporate governance as “the acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their ----------------------
own role as trustees on behalf of the shareholders. It is about commitment
----------------------
to values, about ethical business conduct and about making a distinction
between personal & corporate funds in the management of a company.” ----------------------
----------------------
Fill in the blanks.
----------------------
1. Corporate Governance may be defined as a set of systems, processes
and _______. ----------------------
2. ______________ensures that a company is governed in the best interest ----------------------
of all stakeholders.
----------------------
----------------------
Activity 4
----------------------
Find few more definitions of Corporate Governance. ----------------------
----------------------
1.7 EVOLUTION AND REGULATION OF CORPORATE ----------------------

GOVERNANCE ----------------------
The “corporate governance concept” dwells in India from the Arthshastra ----------------------
time; instead of CEO at that time there were kings and subjects. Today, corporate
and shareholders replace them but the principles still remain same, unchanged, ----------------------
i.e., good governance. The 20th century witnessed the glory of Indian Economy
----------------------
due to liberalisation, globalisation, and privatisation. Indian economy for the
first time was together with world economy for product, capital and labour ----------------------
market and which resulted into world of capitalisation, corporate culture,
business ethics which was found important for the existence of corporation in ----------------------
the world market place.
----------------------
Throughout the 19th and the early 20th centuries, companies were both
owned and managed by business families and there was no separation of ----------------------
powers in the corporation. After World War I, firms became bigger and more
----------------------
complex, requiring greater financial resources and broader managerial skills
than possessed by the typical owner. Great corporations grew out of once small ----------------------
family businesses and needed professional management to deal with the new
challenges of size, product diversity and modern manufacturing, even in those ----------------------

Notes cases in which ownership remained in family hands. This put too much control
in the hands of managers. Managers needed to address the different concerns of
---------------------- various stakeholder groups. Not only in the United States, but also in France,
Germany and the United Kingdom executives were put under pressure by
---------------------- stakeholders and analysts to explain their actions.
---------------------- The 1950s was the era of excessive managerial power with the separation
of ownership and control giving managers great freedom to do what they
----------------------
pleased. Managerial power was curbed by antitrust policy. In the 1960s and
---------------------- 1970s companies evolved into modern-day conglomerates. But ultimately,
inefficiencies began to creep into these vast organisations, creating indiscriminate
---------------------- corporate expansion and diminishing of profits. This led to the evolution of
hostile takeovers. The 1980s saw insider trading suddenly hold out the potential
----------------------
for vast riches. To counter this, stock options gained popularity as an incentive
---------------------- to create shareholder value, not to destroy it. However in the 1990s, favourable
accounting norms encouraged boards to grant options with abandon. The longest
---------------------- bull market in history helped in converting them into almost unimaginable
wealth for top executives. Instead of an incentive to create shareholder value,
----------------------
in many cases they were an incentive to misrepresent the financial numbers. At
---------------------- the same time, governance activists began attacking managerial power on other
fronts pushing for better disclosure, independent boards, and splitting the roles
---------------------- of chairman and CEO.
---------------------- The collapse of Enron and massive accounting fraud at WorldCom in the
2000s ushered in an age of scandal. A massive regulatory push to curb CEO
---------------------- power including the Sarbanes-Oxley Reform Act of 2002 was the fallout of the
situation. The outcome was that directors, auditors, and lawyers emerged with
----------------------
far more power than they had and CEOs with far less.
----------------------
----------------------
---------------------- Match the following.

---------------------- i. Arthshastra a. Excessive managerial power
ii. 20th century b. Origin of the concept of Corporate Governance
----------------------
iii. 1950s era c. Age of corporate scandals and rebirth of
---------------------- corporate governance
----------------------
---------------------- 1.8 NEED AND SIGNIFICANCE OF CORPORATE

GOVERNANCE
----------------------
The adequacy and the quality of corporate governance can shape the growth
---------------------- and the future of any capital market and economy. Good corporate governance
---------------------- helps an organisation to achieve its outcomes and obligations through sound
planning and risk management. It provides a means to assist in decision
---------------------- making and to improve accountability. It also helps to provide a framework for

establishing responsibility to the stakeholders. It seeks to achieve the following Notes
objectives:
1. A properly structured and balanced board comprising adequate number of ----------------------
non-executive and independent directors capable of taking independent ----------------------
and objective decisions is in place at the helm of affairs.
----------------------
2. The board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information; ----------------------
3. The board keeps the shareholders informed of relevant developments
----------------------
impacting the company;
4. The board effectively and regularly monitors the functioning of the ----------------------
management team;
----------------------
5. The board has no conflict of interest in its functioning in the interests of
all the stakeholders. ----------------------
The overall endeavour of the board should be to take the organisation forward ----------------------
so as as to maximise long-term value and shareholders’ wealth. It ensures:
----------------------
1. Adequate disclosures and effective decision-making to achieve corporate
objectives ----------------------
2. Transparency in business transactions
----------------------
3. Statutory and legal compliances
----------------------
4. Protection of shareholder interests
----------------------
5. Commitment to values and ethical conduct of business
Corporate governance depends upon two factors. The first is the commitment ----------------------
of the management for the principle of integrity and transparency in business ----------------------
operations.
The second is the legal and the administrative framework created by the ----------------------
government. ----------------------
There are several important issues in corporate governance and they play a great
role. All the issues are inter-related, interdependent to deal with each other. ----------------------
Each issues connected with corporate governance have different priorities in ----------------------
each of the corporate bodies. The issues are listed as below:
----------------------
1. Value-based corporate culture: For any organisation to run in an
effective way, it needs to have certain ethics, values. Long-run business ----------------------
needs to have based corporate culture. Value- based corporate culture
is good practice for corporate governance. It is a set of beliefs, ethics, ----------------------
principles which are inviolable. It can be a motto, i.e., a short phrase
----------------------
which is unique and helps in running organisation, there can be vision,
i.e., dream to be fulfilled, mission and purpose, objective, goal, target. ----------------------
2. Holistic view: This holistic view is more or less godly, religious attitude
----------------------
which helps in running organisation. It is not easier to adopt it, it needs
----------------------

Notes special efforts and once adopted it leads to developing qualities of nobility,
tolerance and empathy.
----------------------
3. Compliance with laws: Those companies which really need progress,
---------------------- have high ethical values and need to run long-run business, abide and
comply with laws of Securities Exchange Board of India (SEBI), Foreign
---------------------- Exchange Regulation Act, Competition Act ,2002, Cyber Laws, Banking
Laws, etc.
----------------------
4. Disclosure, transparency and accountability: Disclosure, transparency
---------------------- and accountability are important aspect for good governance. Timely
and accurate information should be disclosed on the matters like the
----------------------
financial position, performance, etc. Transparency is needed in order
---------------------- that government has faith in corporate bodies and consequently it has
reduced corporate tax rates from 30% today as against 97% during the
---------------------- late 1970s. Transparency is needed towards corporate bodies so that due
to tremendous competition in the market place the customers having
----------------------
choices don’t shift to other corporate bodies.
---------------------- 5. Corporate Governance and Human Resource Management: For any
corporate body, the employees and staff are just like family. For a company
----------------------
to be perfect the role of Human Resource Management becomes very
---------------------- vital, they both are directly linked. Every individual should be treated
with individual respect, his achievements should be recognised. Each
---------------------- individual staff and employee should be given best opportunities to prove
their worth and these can be done by Human Resource Department. Thus,
----------------------
in Corporate Governance, Human Resource has a great role.
---------------------- 6. Innovation: Every corporate body needs to take risk of innovation, i.e.,
---------------------- innovation in products, in services and it plays a pivotal role in corporate
governance.
---------------------- 7. Necessity of judicial reform: There is necessity of judicial reform for
---------------------- a good economy and also in today’s changing time of globalisation and
liberalisation. Our judicial system though having performed salutary role
---------------------- all these years, certainly are becoming obsolete and outdated over the
years. The delay in judiciary is due to several interests involved in it. But
---------------------- then with changing scenario and fast growing competition, the judiciary
---------------------- needs to bring reforms accordingly. It needs to speedily resolve disputes
in cost-effective manner.
---------------------- 8. Globalisation helping Indian companies to become global giants
---------------------- based on good governance: In today’s age of competition and due to
globalization, several Indian corporate bodies are becoming global giants
---------------------- which are possible only due to good corporate governance.
---------------------- 9. Lessons from corporate failure: Every story has a moral to learn from,
every failure has success to learn from, in the same way, corporate body
---------------------- have certain policies which if goes as a failure they need to learn from
it. Failure can be both internal as well as external whatever it may be, in
----------------------

good governance, corporate bodies need to learn from their failures and Notes
need to move to the path of success.
----------------------
----------------------
Multiple Choice Single Response.
1. Which are the long-term objectives of corporate governance? ----------------------
i. Adequate disclosure to ensure effective decision making by ----------------------
investors.
----------------------
ii. Transparency in business transactions.
iii. Protection of shareholder’s interest. ----------------------
iv. All of the above. ----------------------
----------------------
1.9 REGULATION OF CORPORATE GOVERNANCE ----------------------
The international legal and regulatory frameworks for corporate governance ----------------------
include the CG Rules, the Sarbanes-Oxley Act, the UK Cadbury Code of
Corporate Governance, EU Regulations, the South African King Report, and ----------------------
similar regulations and recommendations from other parts of the world.
----------------------
The organisational framework for corporate governance initiatives in
India consists of the Ministry of Corporate Affairs (MCA) and the Securities ----------------------
and Exchange Board of India (SEBI). SEBI monitors and regulates corporate ----------------------
governance of listed companies in India through Clause 49. MCA through
its various appointed committees and National Foundation for Corporate ----------------------
Governance (NFCG), a not-for-profit trust, facilitates exchange of experiences
and ideas amongst corporate leaders, policy makers, regulators, law enforcing ----------------------
agencies and non- government organisations. ----------------------
In India, the Companies Act, was the principle legislation providing the
formal structure for corporate governance. Till May 1992, the office of the ----------------------
Controller of Capital Issues was the regulation authority for the capital market. ----------------------
Thereafter, SEBI has assumed a primary role in this regard.
In addition to various Acts and guidelines by the regulator, non-regulatory ----------------------
bodies like Confederation of Indian Industries (CII) have also published codes ----------------------
and guidelines on Corporate Governance. The issue of corporate governance for
listed companies came into prominence with the report of the Kumar Mangalam ----------------------
Birla Committee (2000), the Naresh Chandra Committee (2002) and Narayana
Murthy Committee (2003) to examine various corporate governance issues. ----------------------
Many of their recommendations were then incorporated in the Revised Clause ----------------------
49 that is seen as an important statutory requirement.
----------------------
The Companies Bill 2009 provides for greater shareholder democracy and
less government intervention. The new legislation will try to promote protection ----------------------

Notes of rights of minority shareholders, self-regulation with adequate disclosure and
accountability, and lesser government control over internal corporate processes.
----------------------
Components of Corporate Governance
---------------------- The main constituents that create a framework of good corporate governance
---------------------- are:
● Clear identification of powers, roles, responsibilities and accountability
---------------------- of the Board, CEO and the Chairman of the board.
---------------------- ● A clear and unambiguous legislative and regulatory framework.
---------------------- ● The organisation should have a prescribed code of conduct which is
communicated clearly to all stakeholders. Periodic measurement and
---------------------- evaluation of adherence to such code of conduct by each member of the
organisation should also be done regularly.
----------------------
● The majority of board members should be independent of both the
---------------------- management team and any commercial dealings with the company. Such
independence ensures the effectiveness of the board in supervising the
----------------------
activities of management as well as make sure that there are no actual or
---------------------- perceived conflicts of interests.
● In order to be able to undertake its functions effectively, the board must
----------------------
possess the necessary blend of qualities, skills, knowledge and experience
---------------------- so as to make quality contribution. It includes operational or technical
expertise, financial skills, legal skills as well as knowledge of government
---------------------- and regulatory requirements.
---------------------- ● The business environment should be such that there are clear objectives,
appropriate ethical framework, due processes providing for transparency,
---------------------- sound business planning, constant business risk assessment, clear
---------------------- boundaries for acceptable behaviour, clear statement of responsibility and
accountability, and performance evaluation measures which recognise
---------------------- individual and group contribution.
---------------------- ● A well-defined and open procedure must be in place for reappointments

as well as for appointment of new directors to ensure that the most
---------------------- competent people are appointed in the board.
---------------------- ● It is essential to ensure that directors are groomed in the necessary
financial and other decision-making skills required for their role and
---------------------- remain abreast of all regulatory and economic developments which may
impact governance and other related issues.
----------------------
● Board Meetings should have carefully planned agendas and relevant
---------------------- papers and materials should be provided to directors to enable them to
discharge their responsibilities.
----------------------
● The company’s long-term corporate strategy including an annual business
---------------------- plan together with achievable and measurable performance targets and
milestones must be clearly documented.
----------------------

● The business must also take care of its community obligations and inform Notes
the stakeholders about the proposed and ongoing initiatives.
----------------------
● Comprehensive, reliable, timely, and relevant financial and operational
information must be provided to the board for it to discharge its function ----------------------
of monitoring corporate performance.
----------------------
● The board must also monitor and evaluate its combined performance
as well as that of individual directors at periodic intervals, using key ----------------------
performance indicators besides peer review.
----------------------
● An effective Audit Committee is responsible for liaison with management,
internal and statutory auditors, reviewing the adequacy of internal control ----------------------
and compliance with significant policies and procedures and reporting to
the board on the key issues. ----------------------
● The board has the ultimate responsibility for identifying major risks which ----------------------
could prevent the company from effectively achieving its objectives,
setting acceptable levels of risks and ensuring that senior management ----------------------
takes steps to detect, monitor and control these risks. ----------------------
----------------------
Match the following.
----------------------
i. Sarbanes-Oxley Act a. Statutory audit
ii. Narayana Murthy Committee b. International regulation ----------------------
iii. Audit Committee c. National review of corporate ----------------------
governance
----------------------
1.10 CORPORATE LITIGATION ----------------------
----------------------
Corporates represent a distinct and powerful force at the regional, national
and global levels and they wield enormous economic powers. Corporate crimes ----------------------
result from a corporate business house’s motive to profit at any cost. The major
corporate crimes prevalent in the global economic scenario include within ----------------------
its realm: financial crimes, insider trading, tax evasion, anti-trust, bribery,
----------------------
siphoning company funds, embezzlement, falsification of financial documents
and data, public corruption, etc. ----------------------
Lack of corporate governance is one of the primary factors contributing
----------------------
to corporate crimes. Corporate governance denotes the set of processes,
customs, policies and laws governing the manner in which a corporation is ----------------------
directed, administered and controlled. One of the principle objects of corporate
governance is to ensure accountability of individuals in an organisation. ----------------------
The incidence of various frauds and scandals of enormous proportions ----------------------
have disrupted both the international and domestic capital markets, which
has resulted in market regulators being constrained to devise mechanisms ----------------------

Notes and establish standards which act as a barrier to prevent the re-occurrence of
corporate scams and frauds, in the form of corporate governance standards.
----------------------
The legal, regulatory and political environment within which a corporation
---------------------- operates, determines in large measure the quality of corporate governance.
Corporate governance mechanisms are economic and legal and are often the
---------------------- outcome of political decisions. Properly constituted audit committees and board
risk committees play an important role in the sustained growth of a corporation
----------------------
and eliminate the risk of corporate crimes. With the increase in the number
---------------------- of business transactions, combined with the lack of effective monitoring and
adequate risk management strategies, corporate frauds are a real-time threat for
---------------------- most corporations globally. Corporate criminality represents the means through
which the trust of investors is betrayed by persons in position of responsibility,
----------------------
authority and power in the business sector.
---------------------- In the United Kingdom, the Cadbury Committee was set up in 1991 to make
recommendations on Corporate Governance which, inter alia, recommended that
----------------------
all listed companies should mandatorily appoint audit committees comprising
---------------------- of non-executive directors with clear duties and authority. The guidelines
laid down by the Cadbury Committee underscore shareholder accountability
---------------------- and transparency by recommending a non-executive board of directors in
professionally managed companies and a non-family board in family run
----------------------
companies.
---------------------- Similarly, the Blue Ribbon Committee set up in USA made recommendations
on the effectiveness of Corporate Audit Committees, which should disclose its
----------------------
self-determined role, structure, and practices. Such transparency is at the heart
---------------------- of good governance, serves to inform investors, and also acts as a disciplinary
measure.
----------------------
In India, as a part of Corporate Governance practices to be followed,
---------------------- the Code on Corporate Governance released by the Confederation of Indian
Industries (CII) in 1997, recommended the establishment of Audit Committees
---------------------- by listed and public companies having a prescribed paid-up capital and turnover.
---------------------- The Audit Committees have been mandated to consider and evaluate all
financial parameters and policies, internal controls, review of auditing, project
---------------------- implementation, reconstruction, merger and amalgamation and any financial
irregularities. Audit Committees are also required to periodically consider
---------------------- internal control systems, the scope of audit including the observations of the
---------------------- auditors, review half-yearly and annual financial statements and also ensure
compliance of internal control systems.
---------------------- The J.J. Irani Committee Report on Indian Company Law, proposed that
---------------------- in order to ensure compliance with corporate governance, the appointment of
independent directors well versed in financial management, audit or accounts
---------------------- should be made by Indian companies.
---------------------- In order to deal with increasing incidents of white collar crimes globally,
the CBI has formed an Economic Intelligence Wing, to investigate and tackle
---------------------- the growing menace of economic crimes. This Wing has been tasked to gather

intelligence and also share and act on information furnished by regulatory Notes
authorities.
----------------------
Further, Indian companies listed on the US stock exchanges are obligated
to adhere to and comply with the provisions of the US Foreign Corrupt Practices ----------------------
Act that requires them to accurately record their transactions and imposes
several sanctions, fines and penalties for potential violations. ----------------------
In India, establishment of the Serious Fraud Investigation Office is a ----------------------
landmark development for forensic accountants. Increasing cybercrimes, failure
of regulators to track security scams have necessitated forensic accounting. ----------------------
The SFIO was set up in the backdrop of the recent stock market scams, ----------------------
failure of non-financial banking companies and the phenomena of vanishing
companies. The SFIO is a multidisciplinary organisation comprising of experts ----------------------
from the financial sector, capital market, accountancy, forensic audit, taxation,
----------------------
law, information technology, corporate laws, customs and investigation.
The prime responsibility of the SFIO is to investigate corporate frauds, ----------------------
referred to it by the governmental authorities and forward its investigation ----------------------
reports on violations of the provisions of Indian law to the concerned agencies,
for prosecution and appropriate action. ----------------------
----------------------
1.11 INVESTORS IN CORPORATE
----------------------
Investors are the main stake holders in a company. As shareholders, they
are the ultimate owners of the company. An incorporated association operates ----------------------
on the principle of separation of ownership and management where the Board
of Directors has to run the company keeping in view the shareholder’s interests. ----------------------
While the term shareholders is limited to people holding shares of the company,
----------------------
the term investors is broad taking into the purview all classes of investors.
The company starts its business on the basis of investments made by different ----------------------
investors and as agents of the company, the board of directors should try to
maximise shareholders wealth. ----------------------
When corporates fail to follow ethical practices, the people who suffer ----------------------
directly are the investors. Investor protection is the foundation of a healthy
capital market. There are different categories of investors; small or retail ----------------------
investors, institutional investors and high net worth individuals. Not all of them ----------------------
need the same degree of protection.
It is generally the small investors who considering his lack of financial ----------------------
literacy and lack of information need greater protection. ----------------------
The Joint Parliamentary Committee (JPC) set up to investigate the
securities market scam of 1999−2001 involving the Ketan Parekh, some other ----------------------
brokers and bankers, observed as follows: Investors’ confidence in the market − ----------------------
“investor protection is a continues exercise and not a one-time effort. A recent
survey done by National Council of Applied Economic Research for SEBI ----------------------
reveals that only a nominal portion of household savings flows into the capital
----------------------

Notes market. The main reason for such insignificant flow can be attributed to lack
of confidence of the retail investors in the capital market. It has been observed
---------------------- that poor disclosures at the time of public issue and manipulative pricing of
the ‘issues’ by the companies often result in robbing the uninformed investor.
---------------------- In order, therefore, to ensure that the investors are’ well informed, it is not
---------------------- only very important to have full disclosures but also to ensure that these are
authentic.” (Para 14.52 of the Report). The J.J. Irani Committee working on the
---------------------- Draft Companies Bill has recommended that effective measures be initiated for
protecting the interests of stakeholders and investors, including small investors,
---------------------- through legal basis for sound corporate governance practices.
----------------------
----------------------
---------------------- Fill in the blanks.

---------------------- 1. _________ are the ultimate owners of the company.
2. Investor protection is the ________ of a healthy capital market.
----------------------
3. The Joint Parliamentary Committee (JPC) was set up to investigate
---------------------- the securities market scam of 1999−2001 involving the ________.
---------------------- 4. The ________ committee working on the Draft Companies Bill has
recommended that effective measures for protecting the interests of
---------------------- stakeholders and investors.
----------------------
---------------------- 1.12 RAISING OF FINANCE BY CORPORATE

---------------------- The next question which arises is what should be the various sources from
which the long-term capital may be raised The various sources from which a
----------------------
company may meet its long-term and medium-term requirement of funds are
---------------------- discussed under the following headings:
---------------------- 1. Shares
A share indicates a smaller unit into which the overall requirement of
---------------------- capital of a company is subdivided. For example, if the capital required
---------------------- by a company is Rs. 10 crore, it can be subdivided into 1 crore smaller
units called ‘shares’, each one of the units having the value of Rs. 10
---------------------- each, which in technical words is referred to as ‘Face Value’ or ‘Nominal
Value’. In the Indian circumstances, the Face Value or Nominal Value can
---------------------- be decided by the company on its own. Generally, found face value or
---------------------- nominal value is Rs. 10 or Rs. 100 each share.
In the Indian circumstances, a company can raise the long-term funds by
----------------------
issuing two types of shares:
---------------------- a. Equity Shares
---------------------- b. Preference Shares

2. Debentures Notes
In simple words, debenture means a document containing an
----------------------
acknowledgement of indebtedness issued by a company and giving an
undertaking to repay the debt at a specified date or at the option of the ----------------------
company and in the meantime to pay the interest at a fixed rate and at the
intervals stated in the debenture. ----------------------
3. Term Loans ----------------------
Term loans indicate liabilities accepted by the company which are for the ----------------------
purpose of purchasing the fixed assets and are repayable over a period of
3 to 10 years. The term loans may be granted by the Banks (nationalised, ----------------------
cooperative, rural, etc.) or the Financial Institutions like Industrial
Development Bank of India (IDBI), Industrial Credit and Investment ----------------------
Corporation of India (ICICI), Industrial Finance Corporation of India ----------------------
(IFCI), etc.
----------------------
4. Public Deposits
In the recent past, public deposits have become one of the most important ----------------------
sources available to the companies for meeting the medium term
----------------------
requirement of funds. The companies find public deposits as an attractive
source mainly due to the following reasons: ----------------------
a. Raising the funds in the form of public deposits is more convenient ----------------------
than borrowing the funds from banks and financial institutions.
Borrowing the funds from banks or financial institutions is a tedious ----------------------
job involving the compliance with many procedural requirements
like margin money stipulations, security requirements, submission ----------------------
of periodical statements, etc. None of these procedural requirements ----------------------
are required to be complied with in case of public deposits. The rate
of interest which the company is required to pay on public deposits ----------------------
is comparatively less than the rate of interest payable on the funds
borrowed from banks or financial institutions. ----------------------
b. Public Deposits are unsecured borrowings for the company. ----------------------
c. The company can raise the funds in the form of public deposits ----------------------
which can be used for any purpose. The end use of the funds raised
in the form of public deposits is not committed by the company. ----------------------
d. In the situations of credit squeeze introduced by the banks, public ----------------------
deposits plays a very important role.
----------------------
5. Lease Financing
In the recent years, the lease financing has emerged as one of the most ----------------------
important sources of long-term financing. Under the leasing agreements, ----------------------
the company acquires the right to use the asset without holding the title
to it. Thus, it is the written agreement between the owner of the assets, ----------------------
called ‘the lessor’, and the user of the assets, called ‘the lessee’ whereby
the lessor permits the lessee to economically use the asset for a specific ----------------------

Notes period of time but the title of the asset is retained by the lessor. This
economical use of the asset is permitted by the lessor on the payment of
---------------------- periodical amount which is in the form of ‘lease rent’.
---------------------- 6. Hire Purchasing
---------------------- Nowadays, in addition to lease financing, hire purchasing is also emerging

as a popular source of long-term financing whereby the company can
---------------------- acquire long term infrastructural facilities, say fixed assets.
---------------------- It will be pertinent to note here the relationship between lease financing and
hire purchasing. Hire purchase indicates an agreement between the owner of
---------------------- goods, called as ‘the hire’ and the user of the goods, called as ‘the hirer’ whereby
the hire deliver the goods to the hirer but the ownership of the goods remains
---------------------- with the hire. In return, the hirer makes the periodical payments of hire charges
---------------------- which are partly against the capital repayment and sources of long-term and
medium-term finance partly against the interest payable. For accounting and tax
---------------------- purposes, only the interest is treated as revenue expenditure and is considered
to be a tax-deductible expenditure. The hirer capitalises the asset purchased
---------------------- under the hire purchase agreement though he is not the owner of the assets.
---------------------- Depreciation is considered by the hirer as an expenditure, debiting the same
to profit and loss account and hence becomes the tax deductible expenditure.
---------------------- The further hire purchase instalments towards capital which are not yet due are
shown as liability on the Balance Sheet.
----------------------
After the hire charges are paid by the hirer in full, he gets an option of
---------------------- purchasing the asset entirely in which case the instalments paid earlier are
converted into the purchase price and the ownership of the asset is transferred
---------------------- to the hirer. If the hirer fails to pay any instalment, hiree can take the possession
---------------------- of the asset without refunding any instalment paid earlier. It is the duty of the
hirer to keep the asset in good condition. As such, the hiree may stipulate that
---------------------- the assets should be properly insured, the premium being paid by the hirer.
Further, it may also be stipulated that the hirer will not sell or exchange the asset
---------------------- till he becomes the owner of the asset. The hirer has a right to put an end to the
---------------------- agreement before the last instalment is paid, but the instalments paid by him
previously are not refunded to him.
----------------------
Accounting for Leasing and Hire Purchase
---------------------- It can be seen from the above discussion that leasing and hire purchase are
---------------------- similar to each other in certain respects. In both the cases, right to use the asset
is available to the lessee or hirer but ownership of the asset remains with the
---------------------- lessor or hiree. Accounting of lease transactions from Lessee’s point of view:
---------------------- Accounting implications of lease transactions need to be considered from

financial accounting point of view as well as from income tax point of view.
---------------------- For financial accounting, the provisions of Accounting Standard 19 (AS19) are
relevant. From financial accounting point of view, the lease rent paid by the
---------------------- lessee in respect of the operating lease is treated as revenue expenditure and is
---------------------- debited to Profit and Loss Account. For income tax purposes also the same is
treated as revenue expenditure which reduces the taxable profits of the lessee.
From financial accounting point of view, the lease rent paid by the lessee Notes
in respect of the financial lease is split into two parts – finance charges and
principal amount. The finance charges are treated as revenue expenditure and ----------------------
debited to Profit and Loss Account.
----------------------
Retained Earnings
----------------------
Retained earnings or ploughed back profit is one of the best sources of
raising long term funds for the company. It indicates that whatever profits are ----------------------
earned by the company are not distributed by it by way of dividend but are kept
aside for being used in future for expansion or other purposes. If the company ----------------------
follows a regular policy of ploughing back of profits, i.e., keeping aside profits ----------------------
without distributing them, the shareholders may resent this policy. As such,
while deciding the amount of profits to be retained, the company has to be very ----------------------
careful, about its consequences on the expectations of shareholders and also on
the prices of the shares. ----------------------
----------------------
Activity 5
----------------------
1. Find the general eligibility criteria for issuing debentures. ----------------------
2. Meet the Branch Manager of a bank. Obtain details of various loan
----------------------
facilities offered by the bank. Write a report on eligibility requirements
for obtaining such loans and the terms and conditions subject to which ----------------------
these loans are sanctioned.
----------------------
Summary ----------------------
----------------------
• A corporation is a separate legal entity from its owners. In other words,
if a corporation, in the course of doing business, is involved in any legal ----------------------
action, then the corporation, for legal purposes, is its own person. The
corporation is liable for its taxes, not the owner. This is how corporations ----------------------
may sue and be sued, and their assets are tracked separately. If a corporation
----------------------
is sued, then the owners will not have their personal belongings at risk
unless those belongings were purchased with illegal returns from the ----------------------
corporation.
----------------------
• In a sole proprietorship or partnership, the owner is the company, and is
also personally liable. For all intents and purposes, all acts taken by these ----------------------
two company types are taken by the owners themselves.
----------------------
• A good corporate governance mechanism recognises the diverse interests of
shareholders, lenders, employees, government, etc. Markets and investors ----------------------
respond positively to well-managed companies. In today’s globalised
world, unless a corporation demonstrates ethical conduct, it will not be ----------------------
able to attract or retain the best human capital. The credibility offered by ----------------------
good corporate governance procedures also helps maintain the confidence
of investors both foreign and domestic to attract more long-term capital. ----------------------

Notes It contributes not only to the efficiency of a business enterprise, but also,
to the growth and progress of a country’s economy. Legal, economic and
---------------------- financial disparities around the world can influence the choice and adoption
of a particular governance model.
----------------------
• The long-term finance refers to the permanent source of finance or
---------------------- finance available for a long period such as more than 10 years. The
financial sources are broadly classified into share capital (both equity
----------------------
and preference) and debt (including debentures, long-term borrowings
---------------------- or other debt instrument). Debenture refers to a document containing an
acknowledgement of indebtedness issued by the company and a fixed
---------------------- rate of interest. Generally, debentures are secured against the asset of
the company. A public limited company can only accepts deposits from
----------------------
public.
---------------------- • Public deposits are unsecured borrowing for the company. In lease
financing, the company acquires the right to use the asset without holding
----------------------
the title to it and lease agreement or lease deed is the document in leasing
---------------------- activity. In hire purchase agreement, the ownership is not transferred
but goods are transferred for use to the other party against a periodical
---------------------- payment of hire charges.
----------------------
Keywords
----------------------
• Incorporation: The forming of a new corporation being a legal entity
----------------------
that is effectively recognised as a person under the law.
---------------------- • Liability: Something that someone is responsible for, or something that
increases the chance of something occurring (i.e., it is a cause).
----------------------
• Corporate governance: The relationship between the shareholders,
---------------------- directors and management of a company, as defined by the corporate
---------------------- charter, bylaws, formal policy and rule of law.
• Agency costs: The incremental costs of having an agent make decisions
---------------------- for a principal that arise from the inefficiency of a relationship between
---------------------- an agent and a principal.
• Stakeholders: All parties that have an interest, financial or otherwise,
---------------------- in a firm and can be affected by the organisation’s actions, objectives,
---------------------- and policies such as stockholders, creditors, bondholders, employees,
customers, management, the community and the government.
----------------------
• Insider trading: Insider trading is the trading in a security (buying or
---------------------- selling a stock) by someone who has access to material information (the
important information about a company that affects its stock price or
---------------------- might influence investors’ decisions) that is not available to the general
public.
----------------------
----------------------

Notes
----------------------
1. Explain the characteristics of the corporate in India.
----------------------
2. Write a short note on company and its legal importance.
3. Examine the merits and demerits of raising finance by a company. ----------------------
4. Define the term corporate governance. ----------------------

5. Elaborate regulation of corporate governance. ----------------------
6. Identify the model of corporate governance relevant to India.
----------------------
----------------------
----------------------
----------------------
Fill in the blanks.
1. A capital divisible into parts is known as shares. ----------------------
2. A company comes into existence by incorporation. ----------------------
3. A company is also called a corporation. ----------------------
4. The expression ‘person’ includes not merely a natural person but also
other juridical persons. ----------------------
5. A company can sue and be sued in its corporate name. ----------------------

6. A company can sue for such defamatory remarks against it as are likely to ----------------------
damage its business or property, etc.
----------------------
7. A company is a juristic person with a perpetual succession.
8. The field of work of a company is fixed by its charter, i.e., the memorandum ----------------------
of association. ----------------------
----------------------
Fill in the blanks.
----------------------
1. The registration of the memorandum of a company is done by the Registrar
of Companies. ----------------------
2. The Saloman vs. Saloman & Co1897 a leading English case laid down
----------------------
the principle of “Independent Corporate Existence.”
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Check your Progress 3
State True or False.
----------------------
1. True
---------------------- 2. False
---------------------- 3. True
---------------------- 4. True
----------------------
Fill in the blanks.
---------------------- 1. A company is a person in the sense that it exists in the contemplation of
---------------------- law.
2. Director is not a servant
----------------------
3. A company having mind or will of its own, the need for it arises of natural
---------------------- persons because the criminal law often requires mens rea as constituent of
crime.
----------------------
4. The shareholders are scattered and have neither time nor will nor expertise
---------------------- to manage a company’s day-today affairs.
5. The Board has collective responsibility for the running of the company.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Corporate Governance may be defined as a set of systems, processes and
principles.
----------------------
2. Corporate Governance ensures that a company is governed in the best
---------------------- interest of all stakeholders.
---------------------- Check your Progress 6

----------------------
i. – b.
---------------------- ii. – c.
---------------------- iii. – a.

----------------------
1. Which are the long-term objectives of corporate governance?
---------------------- iv. All of the above.

i. – b.
----------------------
ii. – c.
---------------------- iii. – a.

Check your Progress 9 Notes
Fill in the blanks.
----------------------
1. Shareholders are the ultimate owners of the company.
----------------------
2. Investor protection is the foundation of a healthy capital market.
3. The Joint Parliamentary Committee (JPC) was set up to investigate the ----------------------
securities market scam of 1999−2001 involving Ketan Parekh. ----------------------
4. The J.J. Irani committee working on the Draft Companies Bill has
recommended that effective measures for protecting the interests of ----------------------
stakeholders and investors. ----------------------
Suggested Reading ----------------------
----------------------
1. Cadbury Committee Report: A report by the committee on the financial
aspects of corporate governance. ----------------------
2. Corporate Governance Voluntary Guidelines. 2009. Ministry of Corporate ----------------------
Affairs. Government of India.
----------------------
3. Report on Corporate Governance by committee headed by Shri Naresh
Chandra on regulation of private companies and partnership. ----------------------
4. Securities and Exchange Board of India Clause 49 of Listing Agreement. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Securities Exchange Board of India
UNIT
2
Structure:
2.1 SEBI − Objectives and Purpose

2.2 Securities Exchange Board of India Act, 1992
2.4 Finance, Accounts and Audit
2.5 Penalties and Adjudication
2.6 Establishment of Securities Exchange Board of India
2.7 Appellate Tribunal
Summary
Key Words
Suggested Reading
Securities Exchange Board of India 33

Notes
Objectives
----------------------
----------------------
• Describe the history and of the Securities and Exchange Board of
---------------------- India
---------------------- • Identify the need for creation of the independent body
---------------------- • State the Board’s composition and administration
• Enumerate the responsibilities and authorities of the Board
----------------------
----------------------
2.1 SEBI − OBJECTIVES AND PURPOSE
----------------------
Indian Security Market is one of the few large markets in the world and
---------------------- ranks third in Asia after China and Hong Kong. It was necessary to have an
independent Authority or Corporate Body to supervise the functioning of the
----------------------
Market, protecting interest of investors and to ensure implementation of laws
---------------------- framed by the Government.
Every country has its own mechanism to supervise the Markets. The USA
----------------------
has in place the Securities and Exchange Commission (SEC); the UK has
---------------------- the Securities and Investment Board (SIB) in place and China has Securities
Regulatory Commission (CSRC).
----------------------
In India the market had grown from Rs. 6750 crore in 1980−81 to Rs.
---------------------- 25,000 crore in 1987−88 and was growing speedily. It was therefore felt that
India should also have an independent Board to supervise the markets, protect
---------------------- the investors and ensure there are no trading malpractices.
---------------------- Indian Government’s intention to set up a separate Board for the regulation
and orderly functioning of the market was first declared in the budget speech
---------------------- of Shri Rajiv Gandhi, the then Prime Minister and Minister of Finance. While
---------------------- presenting the Budget for 1987−88 he stated: “The capital markets in India
have shown tremendous growth in the last few years. Approvals for capital
---------------------- issues have exceeded Rs. 5,000 crore in 1986−87. They were only about Rs.
500 crore in 1980−81. For a healthy growth of capital markets, investors’ rights
---------------------- must be fully protected. Trading malpractices must be prevented. Government
---------------------- has decided to set up a separate Board for the regulation and orderly functioning
of Stock Exchanges and the securities industry.”
---------------------- This was the first step in the direction of setting up a separate Board and the
---------------------- SEBI that we see today has evolved over a period of last fifteen years.
In 1988, the Securities and Exchange Board of India (SEBI) was
----------------------
established by the Government of India through an executive resolution, and
---------------------- was subsequently upgraded as a fully autonomous body (a statutory Board)
in the year 1992 with the passing of the Securities and Exchange Board of
---------------------- India Act (SEBI Act) on 30th January 1992. In place of Government Control,

a statutory and autonomous regulatory board with defined responsibilities, to Notes
cover both development & regulation of the market, and independent powers
has been set up. Paradoxically, this is a positive outcome of the Securities Scam ----------------------
of 1990−91.
----------------------
The primary objectives behind setting up SEBI:
----------------------
● To protect orderly and healthy growth of the securities market in India.
● To protect the rights and interest of investors through necessary regulations. ----------------------
● To create proper market environment for orderly functioning of securities ----------------------
market.
----------------------
● To regulate operations of financial intermediaries such as brokers,
underwriters, portfolio managers and mutual funds. In addition, to promote ----------------------
professionalism among the intermediaries.
----------------------
● To create healthy market environment so as to enable companies (issuers
of capital) to raise adequate funds for their business through the sale of ----------------------
securities (shares, debentures and bonds).
----------------------
● To provide suitable education and guidance to investors so as to enable
them to protect their interest. ----------------------
● To develop Securities Market over a period. ----------------------
In short, SEBI is for the protection of investors, regulation of stock ----------------------
exchanges and financial intermediaries and healthy growth of capital market
in India. ----------------------
By July 1988, SEBI constituted as above came out with an approach paper ----------------------
on ‘Comprehensive Legal Issues for Securities Market’.
Though the SEBI was given statutory status in 1992, it was functional as a ----------------------
body from 1988. In 1992 an Act named Securities and Exchange Board of India ----------------------
Act 1992 was passed.
----------------------
SEBI has to function within the framework laid down by three major statutes:
1. The Companies Act, 2013 ----------------------
2. Securities Contract (Regulation) Act, 1956 ----------------------
3. The Depositories Act,1996 ----------------------
Since its inception SEBI has been targeting the securities and is attending to
the fulfillment of its objectives with commendable zeal and dexterity. The ----------------------
improvements in the securities markets like capitalization requirements, ----------------------
margining, establishment of clearing corporations, etc. reduced the risk of credit
and also reduced the market. ----------------------
SEBI has introduced the comprehensive regulatory measures, prescribed ----------------------
registration norms, the eligibility criteria, the code of obligations and the code
of conduct for different intermediaries like bankers to issue, merchant bankers, ----------------------
brokers and sub-brokers, registrars, portfolio managers, credit rating agencies,
----------------------

Notes underwriters and others. It has framed by-laws, risk identification and risk
management systems for Clearing houses of stock exchanges, surveillance
---------------------- system etc. which has made dealing in securities both safe and transparent to
the end investor.
----------------------
---------------------- 2.2 SECURITIES EXCHANGE BOARD OF INDIA ACT, 1992

---------------------- On 4th April, 1992, The Securities and Exchange Board of India Act, 1992 was
passed by the Parliament and received the President of India’s assent.
----------------------
The entire Act has been divided into 10 chapters. Each chapter is being dealt
---------------------- with in detail as we progress.
---------------------- Definitions
---------------------- The Chapter I of the Act deals with definitions of various terms used in the Act.
The key terms defined in the Act are as follows:
---------------------- • Board: Board means the Securities and Exchange Board of India
---------------------- established under Section 3 of SEBI Act 1992.
• Chairman: Chairman means the Chairman of the Board.
----------------------
• Existing Board: This refers to the Board that was created in 1988 as per
---------------------- Notification No. 1 (44) SE/86 issued by Department of Economic Affairs.
[As mentioned earlier the SEBI was first constituted as a Body by way of
----------------------
a notification and was functioning when the Act was passed. This body
---------------------- was given statutory status by way of an Act. Hence, it was necessary to
establish the connection between the two Boards].
----------------------
• Securities: The term “Securities has been defined under Section 2 (42)
---------------------- of the Securities Contract (Regulation) Act, 1956 (42 of 1956). It is not
separately defined under SEBI.
----------------------
Word and Expressions not defined in SEBI Act: This is an important
---------------------- Clause. It states here that those terms and expressions that are not defined in
SEBI will have the meaning assigned to them respectively in Securities Contract
---------------------- Regulation (SCR) Act, 1956.
---------------------- This Act was later amended in 1996 to include those terms and expressions
that are not defined in it but are defined under Depositories Act, 1996.
----------------------
In case of any dispute on definition there if the same is absent in SEBI the
---------------------- definition as per Securities Contract Regulation Act, 1956 or Depositories Act,
1996 will prevail and will be considered final.
----------------------
Establishment of the Securities and Exchange Board of India:
---------------------- Chapter II of SEBI deals with Composition, Management and Administration
of the Board. It covers important aspects like qualification of members, their
---------------------- appointment, retirement, removal from office and filling of vacancies. It
---------------------- includes procedures for holding meetings and passing of resolutions. This has
been dealt with extensively in a separate chapter on the topic.
----------------------

Automatic transfer of Assets to the new SEBI from Old SEBI: Chapter Notes
III of SEBI brings out clearly that all the assets and liabilities of the then existing
SEBI (Established by way of Notification No. 1 (44)SE/86 issued by Department ----------------------
of Economic Affairs) will get transferred to the new Board constituted under the
SEBI Act. It also deals with all the suits filed by the SEBI and suites pending ----------------------
against SEBI, disputes pending with various authorities. ----------------------
The Chapter focuses on clarifying that all the assets and liabilities of
----------------------
the Old SEBI, cases pending, all disputes pending will be automatically get
transferred to the new SEBI. ----------------------
----------------------
----------------------
----------------------
i. Securities and Exchange Commission a. China
----------------------
ii. Securities and Investment Board b. USA
iii. Securities Regulatory Commission c. UK ----------------------
----------------------
2.3 POWERS AND FUNCTIONS OF THE BOARD ----------------------
Chapter IV deals with roles and responsibilities of the Board. The basic role of ----------------------
the Board has been stated to:
----------------------
● Protect interest of investors
● Promote development of securities market ----------------------
● Regulate securities market ----------------------

● Monitoring and regulating functioning of stock exchanges ----------------------
● Registering and regulating the functioning of stock brokers, sub-brokers,
----------------------
transfer agents, underwriters, merchant bankers, etc.
● Regulating and functioning of mutual funds and venture capitalists. ----------------------
● Exercise such powers delegated to the Board under the Securities Contracts ----------------------
(Regulation) Act, 1956 (42 of 1956) which were hitherto carried out by
Central Government. ----------------------
Functions of the Board ----------------------

Section 11 of the Act provides the various functions which are to be carried out ----------------------
by the Board. The functions are as follows:
----------------------
1. Protecting the interests of investors in securities and promoting the
development of, and regulating the securities market, by such measures ----------------------
as it thinks fit.
----------------------
2. Regulating the business in stock exchanges and any other securities markets;
----------------------

Notes 3. Registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to
---------------------- an issue, merchant bankers, underwriters, portfolio managers, investment
advisers and such other intermediaries who may be associated with
---------------------- securities markets in any manner;
---------------------- 4. Registering and regulating the working of the depositories, participants,
custodians of securities, foreign institutional investors, credit rating
----------------------
agencies and such other intermediaries as the Board may, by notification,
---------------------- specify in this behalf;
5. Registering and regulating the working of venture capital funds and
----------------------
collective investment schemes, including mutual funds;
---------------------- 6. Promoting and regulating self-regulatory organisations;
---------------------- 7. Prohibiting fraudulent and unfair trade practices relating to securities
markets;
----------------------
8. Promoting investors’ education and training of intermediaries of securities
---------------------- markets;
---------------------- 9. Prohibiting insider trading in securities;
10. Regulating substantial acquisition of shares and take-over of companies;
----------------------
(i) Calling for information from, undertaking inspection, conducting
---------------------- inquiries and audits of the stock exchanges, mutual funds, other
persons associated with the securities market intermediaries and
----------------------
self-regulatory organisations in the securities market;
---------------------- “(ia) Calling for information and record from any bank or any other
---------------------- authority or board or corporation established or constituted by
or under any Central, State or Provincial Act in respect of any
---------------------- transaction in securities which is under investigation or inquiry by
the Board; ”
----------------------
11. Performing such functions and exercising such powers under the
---------------------- provisions of the Securities Contracts (Regulation) Act, 1956 (42 of
1956), as may be delegated to it by the Central Government;
----------------------
12. Levying fees or other charges for carrying out the purposes of this Section;
----------------------
13. Conducting research for the above purposes;
---------------------- “(la) Calling from or furnishing to any such agencies, as may be specified
by the Board, such information as may be considered necessary by
----------------------
it for the efficient discharge of its functions;”
---------------------- 14. Performing such other functions as may be prescribed.
---------------------- 15. Without prejudice the Board may take measures to undertake inspection
of any book, or register, or other document or record of any listed public
---------------------- company or a public company (not being intermediaries referred to in
---------------------- section 12) which intends to get its securities listed on any recognised

stock exchange where the Board has reasonable grounds to believe that Notes
such company has been indulging in insider trading or fraudulent and
unfair trade practices relating to securities market.” ----------------------
The Board shall have the same powers as are vested in a civil court under ----------------------
the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit.
----------------------
16. Board may, by an order, for reasons to be recorded in writing, in the
interests of investors or securities market, take any of the following ----------------------
measures, either pending investigation or inquiry or on completion of
such investigation or inquiry, namely – ----------------------
(a) Suspend the trading of any security in a recognised stock exchange; ----------------------
(b) Restrain persons from accessing the securities market and prohibit ----------------------
any person associated with securities market to buy, sell or deal in
securities; ----------------------
(c) Suspend any office-bearer of any stock exchange or self-regulatory ----------------------
organisation from holding such position;
(d) Impound and retain the proceeds or securities in respect of any ----------------------
transaction which is under investigation; ----------------------
(e) Attach, after passing of an order on an application made for approval
----------------------
by the Judicial Magistrate of the first class having jurisdiction,
for a period not exceeding one month, one or more bank account ----------------------
or accounts of any intermediary or any person associated with
the securities market in any manner involved in violation of any ----------------------
of the provisions of this Act, or the rules or the regulations made
----------------------
thereunder:
Provided that only the bank account or accounts or any transaction entered ----------------------
therein, so far as it relates to the proceeds actually involved in violation of any
----------------------
of the provisions of this Act, or the rules or the regulations made thereunder
shall be allowed to be attached; ----------------------
(f) Direct any intermediary or any person associated with the securities ----------------------
market in any manner not to dispose of or alienate an asset forming part of any
transaction which is under investigation: ----------------------
Provided that the Board may, without prejudice to the provisions contained ----------------------
in Sub- Section (2) or Sub-Section (2A), take any of the measures specified in
clause (d) or clause (e) or clause (f), in respect of any listed public company ----------------------
or a public company (not being intermediaries referred to in Section 12 which
intends to get its securities listed on any recognised stock exchange where the ----------------------
Board has reasonable grounds to believe that such company has been indulging ----------------------
in insider trading or fraudulent and unfair trade practices relating to securities
market: ----------------------
Provided further that the Board shall, either before or after passing such ----------------------
orders, give an opportunity of hearing to such intermediaries or persons
concerned. ----------------------

Notes Board to regulate or prohibit issue of prospectus, offer document or advertisement
soliciting money for issue of securities.
----------------------
Section 11A
---------------------- (1) Without prejudice to the provisions of the Companies Act, 2013, the
---------------------- Board may, for the protection of investors −
(a) Specify, by regulations –
----------------------
(i) The matters relating to issue of capital, transfer of securities and
---------------------- other matters incidental thereto; and
---------------------- (ii) The manner in which such matters shall be disclosed by the
companies;
----------------------
(b) By general or special orders –
---------------------- (i) Prohibit any company from issuing prospectus, any offer document,
or advertisement soliciting money from the public for the issue of
----------------------
securities;
---------------------- (ii) Specify the conditions subject to which the prospectus, such offer
---------------------- document or advertisement, if not prohibited, may be issued.
(2) Without prejudice to the provisions of Section 21 of the Securities
---------------------- Contracts (Regulation) Act, 1956(42 of 1956), the Board may specify
---------------------- the requirements for listing and transfer of securities and other matters
incidental thereto.”]
----------------------
Collective Investment Scheme.
---------------------- 11AA (1) Any scheme or arrangement which satisfies the conditions referred to
in sub-section (2) shall be a collective investment scheme.
----------------------
(2) Any scheme or arrangement made or offered by any company under
---------------------- which,
---------------------- (i) The contributions, or payments made by the investors, by whatever
name called, are pooled and utilised solely for the purposes of the
---------------------- scheme or arrangement;
---------------------- (ii) The contributions or payments are made to such scheme or
arrangement by the investors with a view to receive profits, income,
----------------------
produce or property, whether movable or immovable from such
---------------------- scheme or arrangement;
(iii) The property, contribution or investment forming part of scheme or
----------------------
arrangement, whether identifiable or not, is managed on behalf of
---------------------- the investors;
(iv) The investors do not have day to day control over the management
----------------------
and operation of the scheme or arrangement.
----------------------
----------------------

(3) Notwithstanding anything contained in sub-section (2), any scheme or Notes
arrangement.
----------------------
(i) Made or offered by a co-operative society registered under the co-
operative societies Act,1912(2 of 1912) or a society being a society ----------------------
registered or deemed to be registered under any law relating to
cooperative societies for the time being in force in any state; ----------------------
(ii) Under which deposits are accepted by non-banking financial ----------------------
companies as defined in clause (f) of Section 45 – I of the Reserve
Bank of India Act, 1934(2 of 1934); ----------------------
(iii) Being a contract of insurance to which the Insurance Act,1938(4 of ----------------------
1938), applies;
----------------------
(iv) Providing for any scheme, Pension Scheme or the Insurance Scheme
framed under the Employees Provident Fund and Miscellaneous ----------------------
Provisions Act, 1952(19 of 1952);
----------------------
(v) Under which deposits are accepted under Section 73 of the
Companies Act, 2013; ----------------------
(vi) Under which deposits are accepted by a company declared as a Nidhi ----------------------
or a mutual benefit society under Section 406 of the Companies
Act, 2013; ----------------------
(vii) Falling within the meaning of Chit business as defined in clause (d) ----------------------
of Section 2 of the Chit Fund Act, 1982(40 of 1982);
----------------------
(viii) Under which contributions made are in the nature of subscription to
a mutual fund; shall not be a collective investment scheme .] ----------------------
Registration Certificate ----------------------
Chapter V clarifies the categories of people/associations dealing in securities
that need to register themselves with the Board and need to conduct their ----------------------
business in accordance with the conditions of the Registration Certificate: ----------------------
● Banker to an Issue
----------------------
● Investment Advisory
----------------------
● Merchant Banker
● Portfolio Manager ----------------------
● Registrar to an Issue ----------------------

● Share Transfer Agent ----------------------
● Stock brokers and Sub Brokers
----------------------
● Trustee to a Trust Deed
----------------------
Any other type of intermediary
----------------------
It is also clarified that those covered in the above categories but not
required to be registered under the old SEBI may continue their business for ----------------------

Notes three months from the date of this Act coming into force and if they have
applied for registration then till the disposal of the said application. This was
---------------------- the transition time allowed to agencies dealing in Securities and not required to
register themselves under the Old SEBI.
----------------------
Prohibition of Manipulative and Deceptive Devices, Insider Trading and
---------------------- Substantial Acquisition of Securities or Control
---------------------- The Sixth Chapter VA deals with the issues related to insider trading,
manipulative and deceptive devices used in Securities trading and in protection
---------------------- of minority shareholder, etc. in case of substantial acquisition of shares by an
individual or group of individuals.
----------------------
Insider Trading
---------------------- This is a prohibitory section and prohibits anyone from using insider trading
---------------------- or any other deceptive methods or techniques that lead to contravention of the
SEBI guidelines.
----------------------
Insider trading has been described as follows:
---------------------- “Insider trading is the trading of a corporation’s stock or the securities
(e.g., bonds or stock options) by individuals with potential access to non-
----------------------
public information about the company. In most countries, trading by corporate
---------------------- insiders such as officers, key employees, directors, and large shareholders
may be legal, if this trading is done in a way that does not take advantage
---------------------- of non-public information. However, the term is frequently used to refer to a
practice in which an insider or a related party trades based on material non-
---------------------- public information obtained during the performance of the insider’s duties at
---------------------- the corporation, or otherwise in breach of a fiduciary or other relationship of
trust and confidence or where the non-public information was misappropriated
---------------------- from the company.”[Wikipedia]
---------------------- Some key people like the officers of the company, teams that prepare
financials and budgets of the company are privy to lot of information on the
---------------------- existing status of the company as well as the prospects. This information is not
available to the outsiders. The insiders can therefore trade in shares, i.e., acquire
---------------------- the shares if the things are going good or sale them off if they get to know that
currents status is not so good or prospects are not looking bright. This gap of
----------------------
knowledge puts the outside shareholder in great disadvantage. To prevent this,
---------------------- rules relating to insider trading have been brought into force.
According to Section 11 of the Securities Exchange Board of India Act,
----------------------
1992:
---------------------- 1. It shall be the duty of the Board to protect the interests of investors in
securities and to promote and regulate the development of the securities
----------------------
market, by such measures as it thinks fit.
---------------------- 2. The Board is empowered and expected to take steps that will lead to:
---------------------- (a) Regulating the business in the various stock exchanges and the
securities Markets.
----------------------

(b) There are various agencies that are connected with functioning of Notes
Stock Exchange and Securities Market namely:
----------------------
● Stock brokers including sub-brokers
● Share transfer agents ----------------------
● Bankers to an issue ----------------------
● Trustees of trust deeds ----------------------
● Registrars to an issue
----------------------
● Merchant bankers
----------------------
Other agencies like underwriters, portfolio managers, investment advisers
and such other intermediaries who may be associated with securities ----------------------
markets.
----------------------
The Board should register all these agencies and make rules for regulating
the functioning of the same. There needs to be control mechanism in place ----------------------
that will that ensure the registered agents follow the rules of stock market
and do not indulge in practices that are against the interest of the stock ----------------------
markets or the investors.
----------------------
3. There are quite a few other agencies that are created out of statutes or
by way of Government notification whose function also needs to be ----------------------
regulated and supervised. Few such agencies are listed below: ----------------------
● Depositories
----------------------
● Foreign Institutional Investors
----------------------
● Credit Rating Agencies
● Mutual Funds ----------------------
● Venture Capital Funds ----------------------
4. Once the agencies are registered and get operational they need to be ----------------------
monitored on regular basis. The various aspects of their functioning need
to be scrutinized and SEBI needs to ensure that they are following the ----------------------
guidelines laid down in this regard. The tool and techniques used for the
----------------------
same are as follows:
● Calling for information on their activities on a regular basis in ----------------------
structured formats. SEBI needs to prepare formats which can ----------------------
be filled in by the agencies and sent to its office. SEBI can monitor
the performance based on the information it gets from the MIS ----------------------
(Management Information System).
----------------------
● In case it is observed that one of them has taken deviation or has
not complied with the rules, SEBI needs to conduct enquiries and ----------------------
conduct audits. SEBI can call for information from the concerned ----------------------
agency or call for information from other agencies like Banks,
Exchanges or other constituted agencies. This helps check the reports ----------------------

Notes submitted by the agencies and claims made by them.
● As stated at the beginning of the chapter, SEBI works within the
----------------------
ambit of Companies Act, Securities Contract Regulation Act and
---------------------- Depositories Act. Lot of authorities have been delegated to SEBI
which were hitherto with the Central Government. This includes
---------------------- levying fees, conducting search etc. SEBI needs to carryout to all
---------------------- those tasks.

----------------------
----------------------
i. Chapter I a. Composition, Management and Administration
---------------------- of the Board
---------------------- ii. Chapter IV b. Definitions
iii. Chapter II c. Roles and responsibilities of the Board
----------------------
iv. Chapter V d. Insider trading
----------------------
v. Chapter VI e. Conditions of the Registration Certificate
----------------------
---------------------- 2.4 FINANCE, ACCOUNTS AND AUDIT

----------------------
Seventh Chapter, i.e., Chapter VIA deals with bookkeeping, management
---------------------- of funds and Audit of the Books of Accounts.
Management of Finances through Fund: All the money received by
----------------------
way of grant, fees or charges received by the Board shall be credited to a Fund
---------------------- called Securities and Exchange Board of India General Fund.
The funds shall be utilised for the payment of:
----------------------
● The salaries, allowances and other remuneration of members, officers and
---------------------- other employees of the Board;
---------------------- ● The expenses of the Board in the discharge of its functions under Section
11;
----------------------
● The expenses on objects and for purposes authorised by this Act.
----------------------
Accounting Records: The Board shall maintain record of all the money
---------------------- received and spent from time to time. The forms in which records are to be
maintained are prescribed by the Comptroller and Auditor General (CAG) of
---------------------- India.
---------------------- Audit: The Comptroller and Auditor General of India (CAG) will conduct
the Audit of Accounts at intervals deemed fit by the CAG and expenses incurred
---------------------- by CAG in this regard will be reimbursed by the SEBI.
----------------------

The Auditor appointed by the CAG will have right to ask for the books of Notes
accounts, connected vouchers and other documents and papers and to inspect
any of the offices of the Board. ----------------------
After the Audit is completed, the Auditor will compile the Audit report ----------------------
and send to the Central Government which will be laid in both the Houses of
Parliament. ----------------------
----------------------
Activity 1
----------------------
Find the composition and functions of CAG. ----------------------
----------------------
2.5 PENALTIES AND ADJUDICATION ----------------------
Eighth Chapter, i.e., VI A prescribes the penalties for failures in compliances ----------------------
on the part of all the Agencies dealing in Securities or other connected agencies
like the intermediaries. It covers any type of failures like failure to file returns ----------------------
or to comply with the SEBI directives.
----------------------
Following failures/acts have been dealt with more specifically:
----------------------
• Failure to Furnish Return/Information: The timelines for filing various
documents, returns and reports have been prescribed under the Act. Failure ----------------------
to submit the same on time can attract heavy penalties like an amount of
rupees one lakh per day for days on which the failure continued. ----------------------
Similarly, a failure to maintain books of accounts or records as prescribed ----------------------
by SEBI can attract similar penalties as failure to submit reports and returns.
----------------------
• Failure to enter into an agreement: Failure by any person to enter into
an agreement with a Client [Any person here means broker, sub-broker, ----------------------
merchant banker, advisor, registrar to an issue, share transfer agent, etc.]
----------------------
• Failure of redress grievances: In cases where the Board has asked a
Company or a registered intermediary to address the grievances of any ----------------------
investor within a time frame and if the Company or the Intermediary fails
to do so, the Company or the Intermediary will be liable to pay fine which ----------------------
will be rupees one lakh per day on which the failure has occurred, ----------------------
2.6 ESTABLISHMENT OF SECURITIES EXCHANGE ----------------------

BOARD OF INDIA ----------------------
Ninth Chapter, i.e., Chapter VIB of SEBI deals with areas related to ----------------------
establishment of the Board, the Judicial Authorities that it carries and procedures
related to Appeals. Section 3 of SEBI Act, 1992 has defined the Board related ----------------------
matters. The Board will have its office at Bombay (now Mumbai). The Board is,
however, empowered to open new offices at such places as it desires. The Board ----------------------
shall be a body Corporate known as SEBI. It will have perpetual succession ----------------------

Notes and common seal, if any. This gives the Board status of an independent Body
i.e., independent of members. For some reason even if all members cease to be
---------------------- members at a particular point in time, the Board still continues.
---------------------- The Board will be empowered to acquire, hold and dispose of property,
both movable and immovable, it can contract with other bodies; and it can sue
---------------------- or be sued by the same name. The Board being an independent Body can file
suit against other individuals/body corporates as well the other Individuals/
----------------------
body corporates can sue the Board. The members who run the board remain
---------------------- independent and get insulated on account of this status.
---------------------- Management of the Board

(1) The Board shall consist of the following members, namely:
----------------------
● A Chairman.
----------------------
● Two members from amongst the officials of the Ministry of the
---------------------- Central Government dealing with finance and administration of the
Companies Act, 2013.
----------------------
● One member from amongst the officials of the Reserve Bank.
---------------------- ● Five other members of whom at least three shall be the whole-time
members to be appointed by the Central Government.
----------------------
(2) The general superintendence, direction and management of the affairs
---------------------- of the Board shall vest in a Board of members, which may exercise all
---------------------- powers and do all acts and things which may be exercised or done by the
Board.
---------------------- (3) The Chairman shall also have powers of general superintendence and
---------------------- direction of the affairs of the Board and may also exercise all powers
and do all acts and things which may be exercised or done by that Board
---------------------- unless anything contrary is stated in the Act.
---------------------- (4) The Chairman and members referred to in clauses (a) and (d) of sub-
Section
----------------------
(1) shall be appointed by the Central Government and the members
---------------------- referred to in clauses (b) and (c) shall be nominated by the Central
Government and the Reserve Bank respectively.
----------------------
(5) The Chairman and all the Members will be persons with knowledge
---------------------- and experience of the relevant fields like Administration, Accountancy,
Finance, Economics, Law or any other field which the appointing authority
---------------------- feels is useful for functioning and effectiveness of the Board.
---------------------- Terms of Office
---------------------- The term of office and other conditions of service of the Chairman and
all the members shall be such as may be prescribed. Government reserves the
---------------------- right to terminate the Chairman or any member of the office by giving three
months’ notice or salary in lieu thereof. Chairman or any member can also
----------------------
relinquish the office by giving three months’ notice to the Government. All the

terms like salary, perks, etc. will be decided from time to time. The basic right Notes
of termination of services has been provided to the Government and also the
right to resign has been explicitly provided to the Members. ----------------------
Removal of Member from Office ----------------------
The Central Government has right to remove the member from the office if it is ----------------------
noticed that the member:
● Abuses the position such that his/her continuance in the office proves ----------------------
detrimental to the interest of the Public/Nation. Any kind of misuse of ----------------------
office is covered in this Section.
● If a Court competent in this regard declares the member to be of unsound ----------------------
mind. ----------------------
● It may so happen that when a person is appointed as a Member, he/
----------------------
she was sound but later on turns unsound or had unsound mind but not
noticed during the process of appointment. At a later stage, if this fact ----------------------
comes to light and a competent Court passes a Judgment then he/she will
be removed from the office. ----------------------
● The same is the case with insolvency. If a member is declared insolvent ----------------------
he will be removed from the office.
----------------------
Notice of Removal
The Act also provides that members can be removed only after giving ----------------------
them a chance to be heard. This implies, there is going to be a notice to the ----------------------
members stating that he is going to be removed explaining the grounds of
removal and he will be given chance to defend himself. ----------------------
Meetings ----------------------
The Act prescribes that the meetings should be conducted as per the regulations ----------------------
laid down in this respect. The business of the SEBI is conducted in accordance
with Securities and Exchange Board of India (Procedure for Board Meetings) ----------------------
Regulations, 2001.
----------------------
Some important provisions in this regard are as follows:
----------------------
● Meeting of the Board will be convened at least once in every quarter.
● The Chairman should call for the meeting and in his absence a member ----------------------
nominated by him should call for the meeting.
----------------------
● If any two members of the Board feel that the meeting should be convened
and they approach the Chairman, he is bound to call for a meeting and in ----------------------
case the Chairman is not available the Secretary should call for the meeting. ----------------------
● The place of the meeting can be other than the Head Office and the place
should be prescribed in the notice. ----------------------
● The members should be given notice of 10 working days and an agenda ----------------------
also should be sent to them.
----------------------

Notes ● All the matters/issues that are discussed in the meeting of the Board shall
be decided by a majority of votes of the members present and voting. If
---------------------- the result of the voting is such that the votes cast are equal for and against
a proposal, the Chairman or any other person conducting the meeting will
---------------------- conduct a second round of voting.
---------------------- ● A director who is an interested party in the discussions will abstain from
the meeting and the fact will be recorded in the minutes of the meeting.
----------------------

----------------------
----------------------
1. Three members of the Board are nominated by the Reserve Bank of
---------------------- India.
---------------------- 2. Government cannot terminate the Chairman before completion of

his/her term.
---------------------- 3. Meeting of the Board will be convened at least once in every quarter.
---------------------- 4. Board’s only function is to protect the Company and not the investors.
----------------------
---------------------- 2.7 APPELLATE TRIBUNAL
---------------------- Establishment of Securities Appellate Tribunals

The Central Government is empowered to establish by way of notification
----------------------
one or more Appellate Tribunals to be known as Securities Appellate Tribunal.
---------------------- The Appellate Tribunals function as per the procedures laid down in Securities
and Exchange Board of India Appellate Tribunal (Procedure) Rules, 1995.
---------------------- The rules came into force in 1995 by way of notification issued by Ministry of
Finance, Department of Economic Affairs.
----------------------
Composition of Securities Appellate Tribunal
----------------------
The Appellate Tribunal will comprise three members, i.e., one Presiding
---------------------- Officer and two other members. Members will be notified by the Government.
---------------------- Required Qualifications for appointment of Presiding Officer or Member
of the Securities Appellate Tribunal:
----------------------
Presiding Officer
---------------------- Following person will qualify for the post of Presiding Officer of the Tribunal:
---------------------- • If He or She is a sitting or retired Judge of the Supreme Court or
---------------------- • If He or She is a sitting or retired Judge of a High Court
• The Presiding Officer will be appointed by the Government in consultation
----------------------
with the Chief Justice of India or the Chief Justice of India will nominate
---------------------- the person

Member Notes
A person will qualify for being appointed as a Member of Securities
----------------------
Appellate Tribunal if he is a person of ability, integrity and standing who has
shown capacity in dealing with problems relating to securities market and ----------------------
has qualification and experience of corporate law, securities laws, finance,
economics or accountancy: ----------------------
However, he/she will not be appointed as a Member or the Presiding ----------------------
Officer if the person is holding a post at senior management level equivalent
to Executive Director in the Board Securities and will not be appointed as a ----------------------
Member or Presiding Officer for at least two years after he ceases to hold the
----------------------
post.
Tenure of Office of Members of Securities Appellate Tribunal ----------------------
A Presiding Officer or a Member will be appointed for a maximum period ----------------------

of five years, i.e., he will hold the office for five years from the date on which he
enters upon his office. The tenure can be renewed on completion of five years. ----------------------
The age limit for the Presiding Officer to retire is sixty-eight years while ----------------------
that of a member is sixty-two years.
----------------------
Salaries, Allowances and Service Conditions
----------------------
The salaries, allowances and other service conditions will be prescribed
at the time of appointment. However, they cannot be varied subsequent to ----------------------
the appointment such that they could be disadvantageous to the appointee.
This implies after appointment any variation to be brought in has to be either ----------------------
favourable to the Presiding Officer/Member or should not be carried out. ----------------------
Resignation and Removal:
----------------------
Resignation
----------------------
The Presiding Officer or a Member can relinquish his office by giving three
months’ notice to the Government. He will have to continue in office till his ----------------------
successor takes the charge or completion of three months whichever is earlier.
----------------------
Removal
----------------------
The Presiding Officer or a Member can be removed only on the grounds
of proved misbehaviour or incapacity and that too only after inquiry is ----------------------
conducted by a Judge of a Supreme Court and the concerned member is given
an opportunity of being heard in respect of the charges made on him. ----------------------
Other Staff Members ----------------------

The Central Government shall provide the Securities Appellate Tribunal ----------------------
with such officers and employees as that Government may think fit and the
officers and employees of the Securities Appellate Tribunal shall discharge their ----------------------
functions under general superintendence of the Presiding Officer. The salaries
----------------------
and allowances and other conditions of service of the officers and employees of
the Securities Appellate Tribunal shall be such as may be prescribed. ----------------------

Notes Appeal to the Securities Appellate Tribunal
Any person who is aggrieved by an order of the Board made, on and after
----------------------
the commencement of the Securities Laws (Second Amendment) Act, 1999 or
---------------------- by on order made by an adjudication office under this Act, can file an appeal
with the Appellate Tribunal. The same has to be filed within forty five days from
---------------------- the date of receipt of the order of the Board or the adjudicating officer.
---------------------- In case he fails to file the appeal within forty-five days’ time period laid
down in this regard, the Tribunal can grant more time to file it, provided the
---------------------- Tribunal is satisfied that there was sufficient cause for not filing the same within
forty five days.
----------------------
Procedure and Powers of Appellate Tribunal
----------------------
The Securities Appellate Tribunal shall not be bound by the procedure
---------------------- laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided
by the principles of natural justice and, subject to the other provisions of this
---------------------- Act and any of its rules.
---------------------- The Securities Appellate Tribunal shall have powers to regulate its own
procedure including the places at which it shall have its sittings.
----------------------
The Securities Appellate Tribunal shall have the same powers as are
---------------------- vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908),
while trying a suit, in respect of the following matters, namely:
----------------------
a. Summoning and enforcing the attendance of any person and examining
---------------------- him on oath;
---------------------- b. Requiring the discovery and production of documents;
---------------------- c. Receiving evidence on affidavits;

d. Issuing commissions for the examination of witnesses or documents;
----------------------
e. Reviewing its decisions;
----------------------
f. Dismissing an application for default or deciding it ex parte;
---------------------- g. Setting aside any order of dismissal of any application for default or any
order passed by it ex parte;
----------------------
h. Any other matter which may be prescribed.
----------------------
Every proceeding before the Securities Appellate Tribunal shall be
---------------------- deemed to be a judicial proceeding within the meaning of Sections 193 and 228,
and for the purposes of section 196 of the Indian Penal Code (45 of 1860), and
---------------------- the Securities Appellate Tribunal shall be deemed to be a civil court for all the
---------------------- purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure,
1973(2 of 1974).
----------------------
Right to Legal Representation
---------------------- The appellant may either appear in person or authorise one or more
---------------------- Chartered Accountants or Company Secretaries or Cost Accountants or legal

practitioners or any of its officers to present his or its case before the Securities Notes
Appellate Tribunal.
----------------------
Appeal to Supreme Court
Any person aggrieved by any decision or order of the Securities Appellate ----------------------
Tribunal may file an appeal to the Supreme Court. ----------------------
The prescribed time limit for filing an Appeal is sixty days from the date
of communication of the decision or order of the Securities Appellate Tribunal ----------------------
to him. ----------------------
However, if the Supreme Court is satisfied that the person was prevented
from filing the appeal within sixty it can grant another sixty days’ time to file ----------------------
the appeal. ----------------------
Investigation
----------------------
The Board can order an inquiry if it believes that the transactions in
securities are being dealt with in a manner detrimental to the investors or if ----------------------
the securities market or any intermediary or any person associated with the ----------------------
securities market has violated any of the provisions of this Act or the rules or
the regulations. ----------------------
In such cases it may, by order in writing, direct any person (Investigating ----------------------
Authority) to investigate the affairs of such intermediary or persons associated
with the securities market and to report thereon to the Board. ----------------------
Every manager, managing director, officer and other employee of the ----------------------
company and every intermediary or every person associated with the securities
market is bound by the Act to preserve and to produce to the Investigating ----------------------
Authority or any person authorised by it in this behalf, all the books, registers,
other documents and record of transactions. ----------------------
If the investigating authority feels that it is necessary to do so, it can ask ----------------------
any person associated with securities market in any capacity to furnish such
----------------------
information or produce such books, or registers, or other documents, or record
before it and Authority appointed by it. ----------------------
The Investigating Authority is empowered to keep any book, register, other
----------------------
documents and record produced in its custody for six months. After completion
of six months the Authority will have to return the same to the concerned person ----------------------
or Authority on whose behalf the same were produced.
----------------------
Failing to comply with the directions issued by the investigating Authority
in regard to submission of any document, papers, books of accounts or any such ----------------------
thing, the person will be liable for punishment leading to imprisonment up to a
period of one year and/or fine which may extend up to rupees one crore. He can ----------------------
also be liable for fine of rupees five lakh per day if the person fails to comply
----------------------
with the directions or refuses to do the same.’
----------------------
----------------------

Notes Summary
---------------------- • SEBI has three functions rolled into one body: quasi-legislative, quasi-
---------------------- judicial and quasi-executive. It drafts regulations in its legislative capacity,
it conducts investigation and enforcement action in its executive function
---------------------- and it passes rulings and orders in its judicial capacity. Though this makes
it very powerful, there is a process of appeal to create accountability.
---------------------- There is a Securities Appellate Tribunal which is a three-member tribunal.
---------------------- A second appeal lies directly to the Supreme Court.
• SEBI has enjoyed success as a regulator by pushing systemic reforms
----------------------
aggressively and successively (e.g., the quick movement towards making
---------------------- the markets electronic and paperless rolling settlement on T+2 basis).
SEBI has been active in setting up the regulations as required under law.
----------------------
---------------------- Keywords
---------------------- • Public issue: When an issue/offer of securities is made to new investors
for becoming part of shareholders’ family.
----------------------
• Initial public offer: When an unlisted company makes either a fresh
---------------------- issue of securities or offers its existing securities for sale or both for the
first time to the public.
----------------------
• Prospectus: An offer document in case of a public issue, which has all
---------------------- relevant details including price and number of shares being offered.
---------------------- • Money market: A market for debt securities that pay off in the short term
usually less than one year, for example, the market for 90-days treasury
---------------------- bills.
----------------------
----------------------
1. Explain SEBI and its role.
----------------------
2. What is SEBI Risk Management System?
---------------------- 3. What is the structure of the stock exchanges in India?
---------------------- 4. Explain the procedure for appeal in Securities Appellate Tribunal.
----------------------
----------------------

----------------------
i. – b.
----------------------
ii. – c.
---------------------- iii. – a.

Check your Progress 2 Notes
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i. – b.
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ii. – c.
iii. – a. ----------------------
iv. – e. ----------------------
v. – d. ----------------------
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1. False
----------------------
2. False
3. True ----------------------
4. False ----------------------
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Suggested Reading
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1. Agarwal, Sanjeev. 2000. Guide to Indian Capital Market. Bharat Law
----------------------
House.
2. SEBI Act. ----------------------
3. www.sebi.gov.in ----------------------
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Notes
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Securities Contract (Regulation) Act, 1956
UNIT
3
Structure:
3.1 Introduction
3.2 Scope of the Act
3.3 Definitions
3.4 Corporatisation and Demutualisation of the Stock Exchange
3.5 Recognised Stock Exchanges related Provisions
3.6 Prohibition of Contracts
3.7 Powers of Recognised Stock Exchanges
3.8 Right to Appeal
3.10 Listing and Delisting of Securities
3.11 Clearing Corporation
3.12 Penalties
Summary
Key Words
Suggested Reading
Securities Contract (Regulation) Act, 1956 55

Notes
Objectives
----------------------
----------------------
• Examine the nature and scope of Securities Contract Regulation
---------------------- Act, 1956
---------------------- • State the various terms related to securities market
---------------------- • Assess the concept of demutualisation and corporatisation of stock
exchanges
----------------------
• Explain the procedure relating to registration and powers of recognised
---------------------- stock exchanges
----------------------
3.1 INTRODUCTION
----------------------
A sound financial system well regulated by laws creates a foundation for a
----------------------
robust economy. Regulation of the activities of the securities market is necessary
---------------------- to prevent irregularities and the smooth out differences caused by imperfect
conditions prevailing in the market. The law relating to securities in India is
---------------------- regulated amongst other regulations, such as the Companies Act, 2013 and
the Securities Exchange Board of India, by the Securities Contract Regulation
----------------------
Act, 1956. The law was enacted for the purpose of preventing undesirable
---------------------- transaction in the securities market. The securities market in India has received
a lot of boost keeping in line with the economic and financial reforms. The
---------------------- capital market underwent a paradigm shift from a controlled environment to a
regulated environment to keep in tune with economic reforms. With the onset of
----------------------
liberalisation there has been a tremendous growth in the capital market resulting
---------------------- in many companies opting for public issues as a preferred means of acquiring
risk capital. The flip side to this growth was that many irregularities and scams
---------------------- had hit the capital market which has eroded the confidence of the investors in
the market. The absence of the conditions of perfect conditions in the market
----------------------
makes it necessary for the regulation of the stock market.
---------------------- Studying the historical perspective of the regulation of the securities market,
we can say that there was no particular legislation regulating the functioning of
----------------------
the stock exchanges even though stock markets were functioning. The Bombay
---------------------- Securities Contracts Control Act which was enacted in 1925 was found to be
inadequate in dealing with the complexities of the stock exchange. Subsequently,
---------------------- a committee in the name of A. D. Gorwala Committee was formed in 1951 to a
formulate legislation for the regulation of the stock exchanges and of contracts
----------------------
in securities. Based on the recommendations of the committee, the Securities
---------------------- Contract Regulation Act (SCRA) was enacted in 1956. The following are the
salient features of SCRA:
----------------------
1. It regulates all aspects of securities trading and the running of stock
---------------------- exchanges in order to prevent undesirable transactions in securities.

2. It regulates the functioning of the stock exchanges through a process Notes
of recognition and continued supervision.
----------------------
3. It directly and indirectly controls the contracts in securities, and the
listing of securities on stock exchanges. ----------------------
3.2 SCOPE OF THE ACT ----------------------
The object of SCRA is to prevent undesirable transactions in the securities ----------------------

market and to regulate the buying and selling of securities within the market ----------------------
and outside the market. The stock exchanges have in turn their own byelaws
which listed companies are required to comply with as a condition for listing. ----------------------
The Act defines various terms relating to the securities market and provides the
procedure for the recognition of the stock exchanges and the regulations of the ----------------------
members of the stock exchange. The Act does not apply to the Government and ----------------------
the Reserve Bank of India.
----------------------
3.3 DEFINITIONS ----------------------
Section 2 of the Act contains the definitions. ----------------------
1. Stock Exchange and Recognised Stock Exchange: Stock Exchange is
----------------------
defined as any body of individuals, whether incorporated or not, constituted
before the corporatisation and demutualisation under Sections 4A and 4B ----------------------
or a body corporate incorporated under the Companies Act, 2013 whether
under a scheme of corporatisation or not for the purpose of assisting, ----------------------
regulating or controlling the business of buying, selling or dealing in
----------------------
securities. Stock exchange could be a regional stock exchange whose
area of operation/jurisdiction is specified at the time of its recognition or ----------------------
national exchanges, which are permitted to have nationwide trading since
inception. NSE was incorporated as a national stock exchange. ----------------------
2. Recognised Stock Exchange: It means a stock exchange which is for the ----------------------
time being recognised by the Central Government. Within the provisions
of the Act the dealings in the stock exchange are possible only with the ----------------------
registration from SEBI. Any Stock Exchange which is desirous of being
----------------------
recognized has to make an application under Section 3 of the Act to
SEBI, which is empowered to grant recognition and prescribe conditions. ----------------------
This recognition can be withdrawn in the interest of the trade or public.
Under Section 3, any stock exchange desirous of being recognized for the ----------------------
purpose of this Act should make an application along with the required
----------------------
particulars along with a copy of the byelaws.
3. Securities: Securities include - ----------------------
i. Shares, scrips, stocks, bonds, debentures, debenture stock or other ----------------------
marketable securities of a like nature in or of any incorporated
company or other body corporate, ----------------------
ii. Derivative, ----------------------

Notes iii. Units or any other instrument issued by any collective investment
scheme to the investors in such schemes,
----------------------
iv. Security receipts as defined in clause (zg) of Section 2 of the
---------------------- Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI),
----------------------
v. Units or any other such instrument issued to the investors under any
---------------------- mutual fund scheme,
vi. Any certificate or instrument issued to an investor by any issuer
----------------------
being a special purpose distinct entity which possesses any debt or
---------------------- receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or
---------------------- receivable, including mortgage debt, as the case maybe,
---------------------- vii.
Government securities,
---------------------- viii.
Such other instruments as may be declared by the Central
Government to be securities, and
---------------------- ix. Rights or interests in securities.
---------------------- 4. Derivatives: The provisions of Sec 2 [(ac)] includes −
---------------------- (A) A security derived from a debt instrument, share, loan, whether
secured or unsecured, risk instrument or contract for differences or
---------------------- any other form of security;
---------------------- (B) A contract which derives its value from the prices, or index of prices
of underlying securities;
----------------------
5. Spot Delivery Contract: It has been defined in Section 2(i) to mean
---------------------- a contract which provides for (a) actual delivery of securities and the
payment of a price therefore either on the same day as the date of the
---------------------- contract or on the next day, the actual period taken for the dispatch of the
---------------------- securities or the remittance of money therefore through the post being
excluded from the computation of the period aforesaid if the parties to
---------------------- the contract do not reside in the same town or locality; (b) transfer of the
securities by the depository from the account of a beneficial owner to the
---------------------- account of another beneficial owner when such securities are dealt with
---------------------- by a depository.
6. Member: Member means a member of the stock exchange.
----------------------
7. Securities Appellant Tribunal: When the stock exchange refuses to list
---------------------- securities of any company, the company shall be entitled to be furnished
with the reasons of refusal and can appeal to the securities appellant
----------------------
tribunal against such refusal. The procedure for appeal is laid down in the
---------------------- Securities Contract Regulation (Appeal to securities Appellate Tribunal)
Rules 2000.
----------------------
8. Appellate Tribunal: It means the securities Appellate Tribunal appointed
---------------------- under Section 15L of the Securities Exchange Board of India 1992.

9. Spot Delivery Contract: It means (1) a contract that provides for actual Notes
delivery of securities and the payment of price therefore either on the same
day or on the next day, the actual period taken for dispatch of securities or ----------------------
the remittance of money being excluded for the purpose of computation of
the period. (2) Transfer of securities by the Depository form the account ----------------------
of a beneficial owner to the account of another beneficial owner. ----------------------
----------------------
Fill in the blanks.
----------------------
1. Recognised stock exchange means a stock exchange which for the
time being is recognised by the______. ----------------------
2. _____________is a security derived from a debt instrument, share, ----------------------
loan, whether secured or unsecured, risk instrument or contract for
differences or any other form of security. ----------------------
3. _____________ means a contract that provides for actual delivery of ----------------------
securities and the payment of price either on the same day or on the
next day. ----------------------
----------------------
3.4 CORPORATISATION AND DEMUTUALISATION OF ----------------------
THE STOCK EXCHANGE
----------------------
Sec. 4A of the Act provides that on and from the appointed date all recognised
stock exchanges if not corporatised and demutualised shall be corporatised and ----------------------
demutualised within the provisions contained in 4B. Demutualisation means
----------------------
separation of the ownership rights and trading rights. Earlier the stock exchanges
in India with the exception of NSE and the OCTEI were broker owned and ----------------------
broker controlled. As both the ownership rights and the managerial rights were
vested with the brokers it often leads to conflict of interest. Brokers as agents ----------------------
for the investors owed a responsibility to the investors which was influenced
----------------------
by their powers as owners. This gave room to price rigging and misuse of
authority by the office bearers. In order to prevent this, demutualisation of ----------------------
stock exchanges was introduced. Through demutualization, a stock exchange
becomes a corporate entity and from a member owned organisation it becomes ----------------------
a shareholder owned company.
----------------------
One of the features of a corporate entity is separation of ownership and
management. When a stock exchange gets demutualised the trading rights of ----------------------
the members are separated from the ownership rights. By reducing conflict of ----------------------
interests of the brokers it helps in maintaining transparency in the dealings.
As a demutualised stock exchange a stock exchange can get listed on a stock ----------------------
exchange and be closely held by its members. The stock exchange can enjoy
benefits in terms of alliances with other stock exchange, greater infrastructure. ----------------------
The brokers of the stock exchange can become shareholders of the exchange ----------------------

Notes and enjoy the profits. Hence, all these lead to better functioning of the stock
exchange.
----------------------
The Securities Contract Regulation Act was amended in 2004 through
---------------------- an ordinance making it compulsory for the stock exchanges to convert
into corporate entities and delink the members form the management of
---------------------- the exchange. The ordinance restricted the broker’s representation on the
governing body in the stock exchange to 25% and reduces the shareholding
----------------------
in the exchange from 100% to 49%. The BSE completed the process of
---------------------- demutualisation in June 2007.
----------------------
----------------------
Fill in the blanks.
----------------------
1. _________ means separation of the ownership rights and trading rights.
----------------------
2. ______ as agents for the investors owed a responsibility to the investors
---------------------- which was influenced by their powers as owners.
---------------------- 3. The BSE completed the process of _________ in June 2007.
----------------------
3.5 RECOGNISED STOCK EXCHANGES RELATED
----------------------
PROVISIONS
----------------------
A stock exchange which is desirous of getting listed has to make an
---------------------- application in the prescribed manner to the Central Government. The application
has to be accompanied with a copy of the byelaws of the stock exchange and
---------------------- a copy of the rules relating to general constitution of the stock exchange. The
---------------------- details of the governing body of the stock exchange, powers and duties of the
stock exchange, its constitution and powers and duties of the office bearers of
---------------------- the stock exchange have to be provided along with the application. Details as
to the admission into the stock exchange of various classes of members, the
---------------------- qualifications for membership, and the exclusion, suspension, expulsion and
---------------------- re-admission of members there from or there into have to be provided.
A. Conditions to be fulfilled for Grant of Recognition
----------------------
Recognition of the stock exchange is granted by Central Government
---------------------- after being satisfied of the following:
---------------------- a. That the rules and bye-laws of a stock exchange applying for
registration are in conformity with such conditions as may be
---------------------- prescribed with a view to ensure fair dealing and to protect investors.
---------------------- b. That the stock exchange is willing to comply with any other
conditions in carrying out the objects of this Act; and
----------------------
c. That it would be in the interest of the trade and also in the public
---------------------- interest to grant recognition to the stock exchange.

The conditions which the Central Government may prescribe under clause Notes
a. of sub-Section (1) for the grant of recognition to the stock exchanges
----------------------
may include:
i. The qualifications for membership of stock exchanges; ----------------------
ii. The manner in which contracts shall be entered into and ----------------------
enforced as between members;
----------------------
iii. The representation of the Central Government on each of the
stock exchanges by such number of persons not exceeding three ----------------------
as the Central Government may nominate in this behalf; and
----------------------
iv. The maintenance of accounts of members and their audit by
chartered accountants whenever such audit is required by the ----------------------
Central Government.
----------------------
B. Granting of Recognition
----------------------
When a stock exchange is granted recognition it shall be published in the
Gazette of India and also in the Official Gazette of the State in which the ----------------------
principal office as of the stock exchange is situated, and such recognition
shall have effect as from the date of its publication in the Gazette of ----------------------
India. An opportunity of being heard is granted whenever an application
----------------------
is rejected and reasons for such refusal shall be communicated to the
stock exchange in writing. Amendments of the rules of a recognised stock ----------------------
exchange can only happen with the approval of the Central Government.
The recognition given to a stock exchange can be withdrawn by the ----------------------
Central Government in the interests of the public. Every recognised stock
----------------------
exchange shall furnish to the Securities and Exchange Board of India with
such periodical returns relating to its affairs as may be prescribed. ----------------------
C. Books of the Accounts to be maintained ----------------------
Every recognised stock exchange and every member thereof shall
----------------------
maintain and preserve for such periods not exceeding five years such
books of account, and other documents as the Central Government, after ----------------------
consultation with the stock exchange concerned, may prescribe in the
interest of the trade or in the public interest, and such books of account, ----------------------
and other documents shall be subject to inspection at all reasonable times
----------------------
by the Securities and Exchange Board of India. Every recognised stock
exchange shall furnish the Central Government with a copy of the annual ----------------------
report, and such annual report shall contain such particulars as may be
prescribed. ----------------------
D. Suspension of business of the stock exchange ----------------------
The Central Government may, by notification in the Official Gazette, ----------------------
for reasons to be set out therein, direct a recognised stock exchange to
suspend such of its business for such period not exceeding seven days and ----------------------
subject to such conditions as may be specified in the notification, in the
interests of trade or the public interest. ----------------------

Notes
----------------------
---------------------- State True or False.

1. Rules relating to recognition of stock exchange view to ensure fair
----------------------
dealing and protection of investors.
---------------------- 2. State Government is responsible for recognising the stock exchanges.
---------------------- 3. There is no need of publication of grant of recognition, only suspension
notice publication is necessary.
----------------------
----------------------
3.6 PROHIBITION OF CONTRACTS
----------------------
To prevent undesirable speculation in specified securities in any State or
---------------------- area, it may, by notification in the Official Gazette, declare that no person in
the State or area specified in the notification shall, save with the permission of
----------------------
the Central Government, enter into any contract for the sale or purchase of any
---------------------- security specified in the notification except to the extent and in the manner, if
any, specified therein. Contracts in contravention of these provisions will be
---------------------- treated illegal.
----------------------
3.7 POWERS OF RECOGNISED STOCK EXCHANGES
----------------------
Any recognised stock exchange may, subject to the previous approval
---------------------- of the Central Government, make byelaws for the regulation and control of
contracts. Such byelaws may provide for:
----------------------
a. The opening and closing of markets and the regulation of the hours of
---------------------- trade;
---------------------- b. A clearing house for the periodical settlement of contracts and differences
there under, the delivery of and payment for securities, the passing on
---------------------- of delivery orders and the regulation and maintenance of such clearing
house;
----------------------
c. The submission to the Central Government by the clearing house as soon
---------------------- as may be after each periodical settlement of all or any of the following
particulars as the Central Government may, from time to time, require,
----------------------
namely:
---------------------- i. The total number of each category of security carried over from one
---------------------- settlement period to another;
ii. The total number of each category of security, contracts in respect of
---------------------- which have been squared up during the course of each settlement period;
---------------------- iii. The total number of each category of security actually delivered at each
clearing;
----------------------

d. The publication by the clearing house of all or any of the particulars Notes
submitted to the Central Government under clause (c) subject to the
directions, if any, issued by the Central Government in this behalf; ----------------------
e. The regulation or prohibition of blank transfers; ----------------------
f. The number and classes of contracts in respect of which settlements shall
----------------------
be made or differences paid through the clearing house;
g. The regulation, or prohibition of badlas or carry-over facilities; ----------------------
h. The fixing, altering or postponing of days for settlements; ----------------------
i. The determination and declaration of market rates, including the opening, ----------------------
closing, highest and lowest rates for securities;
j. The terms, conditions and incidents of contracts, including the prescription ----------------------
of margin requirements, if any, and conditions relating thereto, and the ----------------------
forms of contracts in writing;
----------------------
k. The regulation of the entering into, making, performance, rescission
and termination, of contracts, including contracts between members or ----------------------
between a member and his constituent or between a member and a person
who is not a member, and the consequences of default or insolvency on ----------------------
the part of a seller or buyer or intermediary, the consequences of a breach
----------------------
or omission by a seller or buyer, and the responsibility of members who
are not parties to such contracts; ----------------------
l. The regulation of taravani business including the placing of limitations
----------------------
thereon;
m. The listing of securities on the stock exchange, the inclusion of any ----------------------
security for the purpose of dealings and the suspension or withdrawal of ----------------------
any such securities, and the suspension or prohibition of trading in any
specified securities; ----------------------
n. The method and procedure for the settlement of claims or disputes, ----------------------
including settlement by arbitration;
o. The levy and recovery of fees, fines and penalties; ----------------------
p. The regulation of the course of business between parties to contracts in ----------------------

any capacity;
----------------------
q. The fixing of a scale of brokerage and other chargers;
----------------------
r. The making, comparing, settling and closing of bargains;
s. The emergencies in trade which may arise, whether as a result of pool ----------------------
or syndicated operations or cornering or otherwise, and the exercise of ----------------------
powers in such emergencies, including the power to fix maximum and
minimum prices for securities; ----------------------
t. The regulation of dealings by members for their own account; ----------------------
u. The separation of the functions of the jobbers and brokers;
----------------------

Notes v. The limitations on the volume of trade done by any individual member in
exceptional circumstances;
----------------------
w. The obligation of members to supply such information or explanation and
---------------------- to produce such documents relating to the business as the governing body
may require.
----------------------

----------------------
---------------------- 1. Any recognised stock exchange may, subject to the previous approval
of the Central Government, make:
----------------------
i. Byelaws
----------------------
ii. Control of contracts
---------------------- iii. Regulate working of stock exchange
---------------------- iv. All of the above
----------------------
---------------------- Activity 1
----------------------
Visit the website of any two recognised stock exchanges and do a comparative
---------------------- analysis of their byelaws.
----------------------
----------------------
3.8 RIGHT TO APPEAL
---------------------- Where a recognised stock exchange acting in pursuance of any power

given to it by its byelaws, refuses to list the securities of any public company, the
---------------------- company shall be entitled to be furnished with reasons for such refusal, and may −
---------------------- a. Within 15 days from the date on which the reasons for such refusal are
furnished to it, or
----------------------
b. Where the stock exchange has omitted or failed to dispose of, within the
---------------------- time specified in sub-Section (1) of Section 40 of the Companies Act,
2013 (hereafter in this Section referred to as the “specified time”), the
---------------------- application for permission for the shares or debentures to be dealt with
on the stock exchange, within 15 days from the date of expiry of the
----------------------
specified time or within such further period, not exceeding one month,
---------------------- as the Central Government may, on sufficient cause being shown, allow,
appeal to the Central Government against such refusal, omission or
---------------------- failure, as the case may be, and thereupon the Central Government may,
after giving the stock exchange an opportunity of being heard -
----------------------
i. Vary or set aside the decision of the stock exchange, or
----------------------

ii. Where the stock exchange has omitted or failed to dispose of the Notes
application within the specified time, grant or refuse the permission,
and where the Central Government sets aside the decision of the ----------------------
recognised stock exchange or grants the permission, the stock
exchange shall act in conformity with the orders of the Central ----------------------
Government. ----------------------
3.9 POWERS AND FUNCTIONS OF THE BOARD ----------------------
For the purpose of protection of interests of the investors and to promote ----------------------
the development and regulation of the securities market the Securities and
Exchange Board of India has undertaken the following measures: ----------------------
a. Regulating the business in stock exchanges and any other securities markets; ----------------------
b. Registering and regulating the working of stock brokers, sub-brokers, share ----------------------
transfer agents, bankers to an issue, trustees of trust deeds, registrars to
an issue, merchant bankers, underwriters, portfolio managers, investment ----------------------
advisers and such other intermediaries who may be associated with
securities markets in any manner; ----------------------
(ba) Registering and regulating the working of the depositories, ----------------------

participants, custodians of securities, foreign institutional investors,
credit rating agencies and such other intermediaries as the Board ----------------------
may, by notification, specify in this behalf. ----------------------
c. Registering and regulating the working of venture capital funds and
collective investment schemes including mutual funds; ----------------------
d. Promoting and regulating self-regulatory organisations; ----------------------

e. Prohibiting fraudulent and unfair trade practices relating to securities ----------------------
markets;
f. Promoting investors’ education and training of intermediaries of securities ----------------------
markets; ----------------------
g. Prohibiting insider trading in securities;
----------------------
h. Regulating substantial acquisition of shares and takeover of companies;
----------------------
i. Calling for information from, undertaking inspection, conducting
inquiries and audits of the stock exchanges, mutual funds, other persons ----------------------
associated with the securities market] intermediaries and self- regulatory
organisations in the securities market; ----------------------
ia. Calling for information and record from any bank or any other ----------------------
authority or board or corporation established or constituted by
or under any Central, State or Provincial Act in respect of any ----------------------
transaction in securities which is under investigation or inquiry by
the Board; ----------------------
j. Performing such functions and exercising such powers under the provisions ----------------------
of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be
delegated to it by the Central Government; ----------------------

Notes k. Levying fees or other charges for carrying out the purposes of this Section;
l. Conducting research for the above purposes;
----------------------
la. Calling from or furnishing to any such agencies, as may be specified by
---------------------- the Board, such information as may be considered necessary by it for the
efficient discharge of its functions;”
----------------------
m. Performing such other functions as may be prescribed.
----------------------
2a. Without prejudice to the provisions contained in sub-Section (2),
---------------------- the Board may take measures to undertake inspection of any book, or
register, or other document or record of any listed public company or
---------------------- a public company (not being intermediaries referred to in Section 12)
---------------------- which intends to get its securities listed on any recognised stock exchange
where the Board has reasonable grounds to believe that such company has
---------------------- been indulging in insider trading or fraudulent and unfair trade practices
relating to securities market.
----------------------
3. Notwithstanding anything contained in any other law for the time being
---------------------- in force while exercising the powers under clause (i) or clause (ia) of sub-
section (2) or sub-Section (2A), the Board shall have the same powers as
---------------------- are vested in a civil court under the Code of Civil Procedure, 1908, while
---------------------- trying a suit, in respect of the following matters, namely:
i. The discovery and production of books of account and other
---------------------- documents, at such place and such time as may be specified by the
---------------------- Board; (ii) Summoning and enforcing the attendance of persons and
examining them on oath; (iii) inspection of any books, registers and
---------------------- other documents of any person referred to in Section 12, at any
place; (iv) inspection of any book, or register, or other document or
---------------------- record of the company referred to in sub-section (2A); (v) issuing
---------------------- commissions for the examination of witnesses or documents.
4. Without prejudice to the provisions contained in sub-Sections (1), (2),
----------------------
(2A) and (3) and Section 11B, the Board may, by an order, for reasons to
---------------------- be recorded in writing, in the interests of investors or securities market,
take any of the following measures, either pending investigation or inquiry
---------------------- or on completion of such investigation or inquiry, namely:
---------------------- (a) Suspend the trading of any security in a recognised stock exchange;
(b) restrain persons from accessing the securities market and prohibit any
---------------------- person associated with securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self- regulatory
----------------------
organisation from holding such position; (d) impound and retain the
---------------------- proceeds or securities in respect of any transaction which is under
investigation; (e) attach one or more bank account or accounts of any
---------------------- intermediary or any person associated with the securities market in any
manner involved in violation of any of the provisions of this Act, or the
----------------------
rules or the regulations made there under; (f) direct any intermediary or
---------------------- any person associated with the securities market in any manner not to

dispose of or alienate an asset forming part of any transaction which is Notes
under investigation.
----------------------
3.10 LISTING AND DELISTING OF SECURITIES ----------------------
A company desirous of getting its shares listed on a stock exchange can do ----------------------
so on more than one stock exchange. Earlier it was mandatory for companies to
list their shares on a regional stock exchange now there is no such mandate. Under ----------------------
Sec. 40 of the Companies Act, 2013 before a company goes for a public issue, it
has to make an application to a stock exchange before filing the prospectus. The ----------------------
Prospectus needs to contain the names of the stock exchanges where the company ----------------------
has taken the in principle approval to list. The company has to enter into a listing
agreement. Listing requirements are governed by the following ----------------------
1. The Securities Contract (Regulation) Act, 1956 ----------------------
2. The Companies Act, 2013
----------------------
3. The SEBI Guidelines
----------------------
4. The Stock Exchange Guidelines
Sec. 21 of the SCRA deals with the listing requirements of the Public ----------------------
companies. Under the provisions of the Act where securities are listed on the ----------------------
application of any person in any recognised stock exchange, such person shall
comply with the conditions of the listing agreement with that stock exchange. ----------------------
Sec. 19 of the SCRA, 1956 deals with the requirements and the documents to
be submitted for the purpose of listing which have been discussed in the chapter ----------------------
on listing. ----------------------
3.11 CLEARING CORPORATION ----------------------
Section 8A(1) provides that a recognised stock exchange with the prior ----------------------
approval of SEBI transfer the duties and the functions of the clearing house to
----------------------
a clearing corporation being a company incorporated under the Companies Act,
2013 for the purpose of : ----------------------
● Periodic settlement of contracts and differences there under ----------------------
● The delivery and the payment of securities
----------------------
● Any other matter incidental to and connected with the transfer
----------------------
Every clearing corporation shall make byelaws and submit them to SEBI
for approval. On ensuring that the bye laws of the corporation are in the interests ----------------------
of trade and public interest SEBI may grant approval.
----------------------
Trading Floor: A trading floor means a trading ring or a trading facility offered
by a recognised stock exchange to enable investors to buy and sell securities. ----------------------
Licensing of Dealers: No person shall carry on either on his own behalf or on ----------------------
behalf of another person the business of dealing in securities in any state except
under the authority of a license. ----------------------

Notes 3.12 PENALTIES
---------------------- The Act prescribes for various penalties against persons who are found
guilty under the following offences:
----------------------
1. Without reasonable excuse fails to comply with the provisions of the
---------------------- following sections 6(4), 17,17A 19,18A and Section 30.
---------------------- 2. Owns or keeps a place or manages controls or assists in keeping any
place other than that of a recognized stock exchange which is used for the
---------------------- purpose of entering into or performing any contracts in contravention of
the provisions of the Act.
----------------------
3. Without being a member or an agent of the member or a dealer of a
---------------------- recognised stock exchange willfully represents to or induces any person
---------------------- to believe that contracts can be entered into through him or canvasses,
advertises or touts in any manner either on behalf of himself or on behalf
---------------------- of any person.
---------------------- 4. Joins, gathers or assists in any place other than the place of business
specified in the byelaws of the recognised stock exchange.
----------------------
Persons found guilty shall be punished without prejudice to any award or
---------------------- penalty by the adjudicating officer under this Act with imprisonment for a term
which may extend to ten years or with a fine which may extend to Rs. 25 crore
---------------------- or both.
---------------------- Penalty for Failure to Furnish Information: Failure to furnish information,
documents, books, returns or report to a recognised stock exchange or maintain
---------------------- books of account or records within the time prescribed in the listing agreement
or the byelaws of the stock exchange shall be liable to penalty of Rs. 1 lakh for
----------------------
every day during which the default continues or Rs. 1 crore whichever is less.
---------------------- Penalty for Failure by any Person to enter into an Agreement with Clients:
---------------------- If any person, who is required under this Act or any byelaws of a recognised
stock exchange made thereunder, to enter into an agreement with his client,
---------------------- fails to enter into such an agreement, he shall be liable to a penalty of one
---------------------- lakh rupees for each day during which such failure continues or Rs. 1crore,
whichever is less for every such failure.
----------------------
Penalty for Failure to Redress Investor’s Grievances: If any broker or sub-
---------------------- broker or a company whose securities are listed or proposed to be listed in a
recognised stock exchange after having called upon by SEBI to redress the
---------------------- grievances of investors with the stipulated time he shall be liable to a fine of one
lakh for every day of default or one crore whichever is less.
----------------------
Other offences where penalty is levied are:
----------------------
1. Failure to segregate securities or moneys of clients: If any person,
---------------------- who is registered under Section 12 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992) as a stock broker or sub-broker,
----------------------

fails to segregate securities or moneys of the client or clients or uses Notes
the securities or moneys of a client or clients for self or for any other
client, he shall be liable to a penalty not exceeding Rs. 1 crore. ----------------------
2. Failure to comply with listing conditions or delisting conditions or ----------------------
grounds: If a company or any person managing collective investment
scheme or mutual fund, fails to comply with the listing conditions or ----------------------
delisting conditions or grounds or commits a breach thereof, it or he ----------------------
shall be liable to a penalty not exceeding Rs. 25 crore.
----------------------
3. Excess dematerialisation or delivery of unlisted securities: If any
issuer dematerialises securities more than the issued securities of a ----------------------
company or delivers in the stock exchanges the securities which are not
listed in the recognised stock exchange or delivers securities where no ----------------------
trading permission has been given by the recognised stock exchange, ----------------------
he shall be liable to a penalty not exceeding Rs. 25 crore.
----------------------
4. Failure to furnish periodical returns: If a recognised stock exchange
fails or neglects to furnish periodical returns to the Securities and ----------------------
Exchange Board of India or fails or neglects to make or amend its
rules or byelaws as directed by the Securities and Exchange Board of ----------------------
India or fails to comply with directions issued by the Securities and ----------------------
Exchange Board of India, such recognised stock exchange shall be
liable to a penalty which may extend to Rs. 25 crore. ----------------------
5. For contravention where separate penalty has been provided: ----------------------
Whoever fails to comply with any provision of this Act, the rules or
articles or byelaws or the regulations of the recognised stock exchange ----------------------
or directions issued by the Securities and Exchange Board of India
----------------------
for which no separate penalty has been provided, shall be liable to a
penalty which may extend to Rs. 1 crore. ----------------------
----------------------
Activity 2
----------------------
Find out the number of cases wherein above penalties were enforced. ----------------------
----------------------
Summary
----------------------
●● The law relating to securities in India is regulated amongst other ----------------------
regulations, such as the Companies Act, 2013 and the Securities Exchange
Board of India, by the Securities Contract Regulation Act; 1956. ----------------------
●● There was no particular legislation regulating the functioning of the stock ----------------------
exchanges even though stock markets were functioning. The Bombay
Securities Contracts Control Act which was enacted in 1925 was found ----------------------
to be inadequate in dealing with the complexities of the stock exchange.
----------------------

Notes ●● a committee in the name of A. D. Gorwala Committee was formed in 1951
to a formulate legislation for the regulation of the stock exchanges and of
---------------------- contracts in securities. Based on the recommendations of the committee
the SCRA was enacted in 1956.
----------------------
●● The object of SCRA is to prevent undesirable transactions in the securities
---------------------- market and to regulate the buying and selling of securities within the
market and outside the market. Moreover, the stock exchanges have their
----------------------
own byelaws which listed companies are required to comply with as a
---------------------- condition for listing.
●● The Act defines various terms relating to the securities market and
----------------------
provides the procedure for the recognition of the stock exchanges and the
---------------------- regulations of the members of the stock exchange. The Act does not apply
to the Government and the Reserve Bank of India.
----------------------
●● A stock exchange which is desirous of getting listed has to make an
---------------------- application in the prescribed manner to the Central Government. Any
recognised stock exchange may, subject to the previous approval of the
---------------------- Central Government, make byelaws for the regulation and control of
contracts.
----------------------
●● Sec 4A of the Act provides that on and from the appointed date all
---------------------- recognised stock exchanges if not corporatised and demutualised shall
---------------------- be corporatised and demutualised within the provisions contained in 4B.
●● Demutualisation means separation of the ownership rights and trading
---------------------- rights. Demutualisation enables the stock exchange to get the benefit of
---------------------- earnings profits, partnering with other stock exchanges and sharing of
infrastructure. The brokers of the stock exchange can become shareholders
---------------------- of the exchange and enjoy the profits. Hence, all these lead to better
functioning of the stock exchange.
----------------------
●● The Securities Contract Regulation Act was amended in 2004 through an
---------------------- ordinance making it compulsory for the stock exchanges to convert into
corporate entities and delink the members form the management of the
---------------------- exchange. A recognised stock exchange has to comply with the provisions
---------------------- of the Act, failing which, the registration is cancelled.
---------------------- Keywords
---------------------- ●● Stock exchange: Any body of individuals, whether incorporated or not,
constituted before the corporatisation and demutualisation under Sections
----------------------
4A and 4B or a body corporate incorporated under the Companies Act,
---------------------- 2013 whether under a scheme of corporatisation or not for the purpose
of assisting, regulating or controlling the business of buying, selling or
---------------------- dealing in securities.
---------------------- ●● Demutualisation: Separation of the ownership rights and trading rights.
----------------------

Notes
----------------------
1. Discuss the objectives and scope of the Securities Contract Regulation
Act, 1956. ----------------------
2. Define the terms recognised stock exchange and state the procedure for ----------------------
registration of the stock exchange.
----------------------
3. What are the powers of SEBI in regulating the securities market?
4. Explain in detail the powers of recognised stock exchanges. ----------------------
5. What are the penalties imposed on stock exchanges and members of the ----------------------
stock exchanges for failure to comply with the provisions of the Securities
----------------------
Contract Regulation Act, 1956?
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Recognised stock exchange means a stock exchange which for the time
being is recognised by the Central Government. ----------------------
2. Derivative is a security derived from a debt instrument, share, loan, ----------------------
whether secured or unsecured, risk instrument or contract for differences
or any other form of security. ----------------------
3. Spot Delivery Contract means a contract that provides for actual delivery ----------------------
of securities and the payment of price either on the same day or on the
next day. ----------------------
1. Demutualisation means separation of the ownership rights and trading
----------------------
rights.
2. Brokers as agents for the investors owed a responsibility to the investors ----------------------
which was influenced by their powers as owners. ----------------------
3. The BSE completed the process of demutualisation in June 2007.
----------------------
----------------------
1. True ----------------------
2. False ----------------------
3. False ----------------------
----------------------

----------------------
1. Any recognised stock exchange may, subject to the previous approval of
---------------------- the Central Government, make:
----------------------
Suggested Reading
----------------------
1. Securities Contract (Regulation) Act, 1956 and the new Amendments
----------------------
2. www.sebi.gov.in
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Securities Exchange Board of India (SEBI) Guidelines
Part- I UNIT
Structure: 4
4.1 Introduction
4.2 Various Aspects covered under Guidelines
4.3 Applicability of Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 2000
4.4 Eligibility Norms
4.5 Terms of Issue
4.6 Matters to be stated in Prospectus
Summary
Key Words
Suggested Reading
Securities Exchange Board of India (SEBI) Guidelines Part- I 73

Notes
Objectives
----------------------
----------------------
• Outline the Securities and Exchange Board of India (Disclosure and
---------------------- Investor Protection) Guidelines, 2000
---------------------- • Define the key terms used in the guidelines
---------------------- • Assess eligibility norms for companies issuing securities
----------------------
---------------------- 4.1 INTRODUCTION

---------------------- The Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000 (hereinafter referred to as “Guidelines”) were
---------------------- issued in the interest of the investors, domestic as well as the outsiders like NRI
and FIIs who invest in India. However studied and informed the investor is,
----------------------
ultimately, the offer document and material and advertisements released by the
---------------------- Company with respect to the issue have an impact on the minds of the investors.
Decisions are greatly influenced by the material issued by the Company that is
---------------------- one way or the other authenticated by some agencies or to be precise vetted by
them. In order to bring in transparency and to ensure that certain information
----------------------
that is critical for the investor to have before he makes up his mind has to be
---------------------- contained in the offer document and related material. If there is no binding on
the Company to disclose certain facts or bring out the details of the Company’s
---------------------- financial strengths or weaknesses in a systematic way; there is tendency to
suppress facts that can adversely impact the decision to invest or can have
----------------------
adverse impact on pricing.
---------------------- Guidelines have therefore been framed taking into consideration the view
---------------------- point of investor protection. Companies are bound to follow the guidelines and
there are less chance that crucial information and material facts will now be
---------------------- hidden or remain under carpet.
----------------------
4.2 VARIOUS ASPECTS COVERED UNDER GUIDELINES
----------------------
The various aspects covered under the Securities and Exchange Board of India
---------------------- (Disclosure and Investor Protection) Guidelines, 2000 are:
---------------------- ● Eligibility of the Companies that can issue various types of Securities.
● The listing related clearances and approvals that are required to be
---------------------- obtained by the Issuer of Securities.
---------------------- ● The formalities to be complied with by the existing Company that wants
to issue the Securities as well by the Company that was hitherto a Private
----------------------
Company and wants to issue Securities for the First time.
---------------------- ● Exemption from certain formalities in case of fast-track companies. Fast-

track companies are those that comply with conditions with respect to Notes
market capitalisation, Investor grievances, have been listed for certain
period, etc. This has been dealt with extensively in the unit later. ----------------------
● In case of Debt instruments the Credit Rating related formalities that are ----------------------
supposed to be complied with.
----------------------
● Pricing of the issues by the existing Companies.
● Pricing of IPO (Initial Public Offer) by the un-listed Companies. ----------------------
● Payment of Commission to Promoters, etc. and discounts that can be ----------------------
offered on the issue price.
----------------------
● Promoters’ contribution in the Share Capital of the Company and the lock-
in period applicable to promoters. Lock-in period is the period during ----------------------
which the promoters and promoter group is not allowed to sale or transfer
the securities held by them. ----------------------
● There is a separate Chapter on pre-issue obligations that prescribes the ----------------------

various conditions to be fulfilled by the Companies before the Securities
are issued and also the formalities that are to be complied with. This ----------------------
includes the requirements of Securities and Exchange Board of India, ----------------------
Registrar of Companies and the respective Stock Exchange where the
Shares are to be listed. ----------------------
● Appointment of intermediaries and their eligibility criteria. ----------------------
● The format and contents of the Offer document and procedure of filing
----------------------
the same with the SEBI and the Registrar of Companies. There are very
clear guidelines right from structure and thickness of the cover page, ----------------------
the contents, what kind of material can be included in the document and
which material like Advertisements that is prohibited from being included ----------------------
in the offer document.
----------------------
● Basic Terms of issue, i.e., Issue Price, how to deal with excess subscription
and also what the Company needs to do if the minimum subscription is ----------------------
not received. There is concession to Infrastructure Companies if they do ----------------------
not receive the minimum subscription. While in case of other Companies
the Company is bound to return the money in case of infrastructure ----------------------
Companies the Management needs to prove the alternate source of
funding the shortfall. ----------------------
● Monitoring of the post issue activities. ----------------------
The Guidelines cover every aspect of the issue. It is a very detailed ----------------------
document that covers policy matters, procedures, steps to be taken at
various stages of issue. It covers the legal aspects as well the commercial ----------------------
angle. The aim of issuing such detailed guidelines is to ensure that the
Investor is protected in all the case like under- subscription of the issue to ----------------------
oversubscription. In case there is under-subscription and if the Company ----------------------
is allowed to keep whatever money it has collected, the Investor will be at
risk since there is going to be shortfall and project may not succeed. In the ----------------------

Notes reverse case, if the issue is over-subscribed Company has to allot Shares
to the eligible ones and has to return the money to those who applied for
---------------------- Shares, paid the application money but are could not be allotted Shares. It
is a comprehensive and extensive document.
----------------------

----------------------
---------------------- 1. Eligibility of the companies that can issue various types of securities is
---------------------- decided by SEBI.
2. Guidelines by SEBI are not applicable to pricing of IPO of an unlisted
---------------------- company.
---------------------- 3. Any person or entity can become intermediary and work in the market.
---------------------- 4. There are strict guidelines from the Board relating to the Offer Document.
----------------------
Activity 1
----------------------
---------------------- Make a list of FII who are allowed to trade in the Indian market.
----------------------
---------------------- 4.3 APPLICABILITY OF SECURITIES AND EXCHANGE

BOARD OF INDIA (DISCLOSURE AND INVESTOR
----------------------
PROTECTION) GUIDELINES, 2000
----------------------
The Guidelines apply to all public issues made by:
---------------------- ● Companies already listed on any of the Stock Exchange in India and
---------------------- wanting to make further issue.
● Unlisted Companies which so far Private and want to issue securities to
----------------------
Pubic.
---------------------- ● All offers for sale by Listed Companies.
---------------------- ● Rights issues made by Listed Companies [except where the total value
of rights offered does not exceed Rs. 50 lakh]. However, in that case
---------------------- Company will prepare a letter of offer in accordance with the guidelines,
file the same with the Board and will be put on the website of the SEBI.
----------------------
● Unless otherwise explicitly stated, the guidelines applicable for public
---------------------- issue by unlisted Company will also be applicable for offer for sale to
---------------------- public by unlisted Company.
----------------------
----------------------

4.4 ELIGIBILITY NORMS Notes
The Guidelines prescribe the conditions that a Company should fulfill at ----------------------
the time of filing of the draft offer document with SEBI and at the time of filing
----------------------
the final offer document with Registrar of Companies and the designated Stock
Exchange. ----------------------
● A draft Prospectus will be filed with the Board (SEBI) through a Merchant
----------------------
Banker at least 30 days before the filing of the Prospectus with the
Registrar of Companies. ----------------------
● In case the Board has suggested any changes in the Prospectus the same
----------------------
will be carried out before filing the Prospectus with the ROC (Registrar
of Companies) or if the Board has made any observations on the draft the ----------------------
same will be complied with before filing the Prospectus with the ROC.
----------------------
● The Board is bound to make observations or suggest changes only up to
30 days from the receipt of the draft Prospectus by its office. ----------------------
● If the Board has sought any clarification from the Lead Manager/s to the ----------------------
issue, the Board is bound to respond to the same within 15 days from the
receipt of the clarification. ----------------------
● The Board can suggest changes or make observations only after receipt of ----------------------
in- principle approval from all the stock exchanges on which the Company
intends to list the shares. ----------------------
● Fast-track issue: Companies fulfilling following conditions are covered ----------------------
under Fast-Track Category if the aggregate value of securities including
the premium if any exceeds Rs. 50 lakh. ----------------------
● Shares of the Company are listed for three years on as Stock Exchange ----------------------
having nation vide terminals.
----------------------
● Average market capitalisation of the Public Shareholding is not less than
Rs. 10, 000 crore for a period of up to one year till the end the quarter ----------------------
immediately preceding the quarter in which shares are being issued.
----------------------
● The annualised trading turnover has been at least 2% of the weighted
average Shares listed. ----------------------
● The Company has redressed at least 95% of the investor grievances or ----------------------
complaints received till the end the previous quarter.
----------------------
● Company has complied with the listing agreement for a period of at least
three years. ----------------------
● The impact of Auditors’ qualification if any does not impact more than
----------------------
five percent of the net profits of those respective three years.
● No show cause issued by the SEBI against the Company, its promoters, ----------------------
whole-time directors is pending.
----------------------
● The entire holding of the promoter group is held in the dematerialised
form. ----------------------

Notes Concessions for Fast-Track Companies
The Companies qualifying for fast-track will not have to go through the
----------------------
stages and process as prescribed and can file directly, the Prospectus with the
---------------------- ROC and letter of offer with Designated Stock Exchange. The Company needs
to file copy of the Prospectus with the SEBI simultaneously but before the
---------------------- opening date of the issue.
---------------------- As is evident above, the process of filing the draft with the SEBI and time
which is otherwise lost in answering queries of the Board etc. is saved.
----------------------
Barred Companies: If the Board has issued an order barring a Company from
---------------------- accessing the market, such Company cannot issue any kind of securities even if
it satisfies all the conditions listed above.
----------------------
Listing application: No Company will issue the securities unless it has made
---------------------- an application to the respective stock exchange for listing of the same. In case of
unlisted Company, if the Company is unlisted then it has to make at application
---------------------- to at least one Stock exchange having nationwide trading terminals.
---------------------- Issue of Securities and Dematerialised Format: It is compulsory for a
Company in the process of issuing securities to get into an agreement with a
---------------------- depository for dematerialisation of securities proposed to be issued to existing
---------------------- Shareholder or the Prospective Shareholders. The Company has to also give
an option to the existing and Prospective Shareholders to hold Shares in
---------------------- dematerialised format.
---------------------- Initial Public Offer by an Unlisted Company: Initial Public Offer is first time
issue of Shares to Public by a Company that was hitherto not listed or had not
---------------------- issued Shares to Public. The following conditions have to be fulfilled by such
a Company:
----------------------
● The Company should have net tangible assets of at least Rs. 3 crore in
---------------------- each of the preceding three years out which not more than 50% can be in
monetary assets.
----------------------
● The Company has net worth of at least Rs. 1crore in each of the last three
---------------------- preceding years.
---------------------- ● The company has a track record of distributable profits in terms of section
123 the Companies Act, 2013 for at least last three out of immediately
---------------------- preceding five years.
---------------------- ● In case the Company has changed name in last one year, at least 50% of
the revenue has be earned by the suggested new name.
----------------------
● Aggregate of all the issues, i.e., already made and fresh proposed, does
---------------------- not exceed the five times of the pre-issue net worth as per last Audited
Financials.
----------------------
Exception: If a Private Company which does not fulfill any of the conditions
---------------------- as prescribed; it can still issue the securities only if it meets both the conditions
prescribed below:
----------------------

● The issue is made through book building process and at least 50% of Notes
shares are issued to QIB (Qualified Institutional Buyers) or
----------------------
● Financial Institutions or Scheduled Banks has at least 15% participation
in the Project AND ----------------------
● The post issue face value of Companies Shares will be minimum Rs. 10
----------------------
crore
or ----------------------
● There shall be market making for at least two years from the date of ----------------------
listing of the Shares such that market makers agree to buy and sell quotes
for minimum of three hundred Shares and agree that the bid-ask spread ----------------------
will not be more than 10%. ----------------------
----------------------
----------------------
1. A draft Prospectus will be filed with the Board (SEBI) through a ______
at least 30 days before the filing of the Prospectus with the Registrar of ----------------------
Companies.
----------------------
i. Merchant Banker
----------------------
ii. Director of the Company
iii. Broker ----------------------
2. If the Board has issued an order barring a Company from accessing the ----------------------
market, such Company ______ issue any kind of securities.
----------------------
i. Can
ii. Cannot ----------------------
iii. Guidelines are silent on this point ----------------------

3. Initial Public Offer is first time issue of shares to public by a company ----------------------
that was hitherto not listed or had not issued shares to public. The
following conditions have to be fulfilled by such a Company: ----------------------
i. Company has net worth of at least Rs. 1 crore in each of the last ----------------------
three preceding years
----------------------
ii. Aggregate of all the issues, i.e., already made and fresh proposed,
does not exceed the five times of the pre-issue net worth as per ----------------------
last Audited Financials
----------------------
iii. In case the Company has changed name in last one year, at least
50% of the revenue has be earned by the suggested new name ----------------------
iv. All of the above ----------------------
----------------------

Notes 4.5 TERMS OF ISSUE
---------------------- ● Issue Price: The issue price of the Share is decided based on various
parameters.
----------------------
The Company needs to provide and disclose all the relevant and the
---------------------- prices needs to be calculated using Schedule XV of the SEBI (Discloser
& Investors protection) Guidelines.
----------------------
● The major parameters are briefly discussed below.
----------------------
Earning per Share for last three years: Weighted average Earning per Share is
---------------------- calculated as follows:
---------------------- Period Shares outstanding Earning EPS

Year-1 100,000 500,000 5.00
----------------------
Year-2 150,000 450,000 3.00
---------------------- Year-3 200,000 700,000 3.50
450,000 1,650,000 3.67
----------------------
• In the above example Rs. 3.67 will be considered as the Weighted Average
---------------------- earning per Share for last three years.
---------------------- • Price earning ratio pre-issue: The Weighted Price Earning ratio is worked
out on the lines of Earning per Share demonstrated above.
----------------------
• Last three years average return on net worth: The weighted average rate
---------------------- of return on net worth is calculated based on the net worth of immediately
preceding three years and corresponding earning.
----------------------
• Minimum Return on increased net worth required maintaining Earning
---------------------- Per Share as at pre-issue stage.
---------------------- • Net Asset Value as at Last Balance Sheet Date.

• Net Asset Value per Share post issue and comparison thereof with the pre-
---------------------- issue Net Asset Value.
---------------------- • The offer price for share is worked out based on the parameters mentioned
above and the guidelines have prescribed a format contained Schedule
----------------------
XV to the Guidelines.
---------------------- • All factors cited above together decide the price at which the Securities
can be issued. From Company perspective therefore it is imperative that,
----------------------
much before it takes decision to list the issue it should start monitoring
---------------------- itself on the parameters listed above.
---------------------- 4.6 MATTERS TO BE STATED IN PROSPECTUS

----------------------
Section 26 the Companies Act, 2013 has prescribed the contents of the
---------------------- prospectus. The key information is as follows:
A prospectus may be issued by or behalf of a public company either with
----------------------
reference to its formation or subsequently, or by or on behalf of any person who
is or has been engaged or interested in the formation of a public company. Notes
Information in Prospectus:
----------------------
Every prospectus shall state following information:-
----------------------
i. names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, bankers, ----------------------
trustees, if any, underwriters and such other persons as may be prescribed;
----------------------
ii. dates of the opening and closing of the issue, and declaration about the
issue of allotment letters and refunds within the prescribed time; ----------------------
iii. a statement by the Board of Directors about the separate bank account ----------------------
where all monies received out of the issue are to be transferred and
disclosure of details of all monies including utilised and unutilised monies ----------------------
out of the previous issue in the prescribed manner;
----------------------
iv. details about underwriting of the issue;
----------------------
v. consent of the directors, auditors, bankers to the issue, expert’s opinion, if
any, and of such other persons, as may be prescribed; ----------------------
vi. the authority for the issue and the details of the resolution passed there for;
----------------------
vii. procedure and time schedule for allotment and issue of securities;
----------------------
viii. capital structure of the company in the prescribed manner;
ix. main objects of public offer, terms of the present issue and such other ----------------------
particulars as may be prescribed; ----------------------
x. main objects and present business of the company and its location,
----------------------
schedule of implementation of the project;
xi. particulars relating to— ----------------------
● management perception of risk factors specific to the project; ----------------------
● gestation period of the project; ----------------------
● extent of progress made in the project;
----------------------
● deadlines for completion of the project; and
----------------------
● any litigation or legal action pending or taken by a Government
Department or a statutory body during the last five years immediately ----------------------
preceding the year of the issue of prospectus against the promoter
of the company; ----------------------
xii. minimum subscription, amount payable by way of premium, issue of ----------------------
shares otherwise than on cash;
----------------------
xiii. details of directors including their appointments and remuneration, and
such particulars of the nature and extent of their interests in the company ----------------------
as may be prescribed; and
----------------------
xiv.
Disclosures in such manner as may be prescribed about sources of
promoter’s contribution. ----------------------

Notes Reports with Prospectus:
Every prospectus shall set out following reports for the purpose of financial
----------------------
information:
---------------------- i. Reports by the auditors of the company with respect to its profits and losses
and assets and liabilities and such other matters as may be prescribed;
----------------------
ii. Reports relating to profits and losses for each of the five financial years
---------------------- immediately preceding the financial year of the issue of prospectus
including such reports of its subsidiaries and in such manner as may be
----------------------
prescribed. Where company has not completed five financial years than
---------------------- such report for all financial years is required.
---------------------- iii. Reports made in the prescribed manner by the auditors upon the profits
and losses of the business of the company for each of the five financial
---------------------- years immediately preceding issue and assets and liabilities of its business
on the last date to which the accounts of the business were made up, being
---------------------- a date not more than one hundred and eighty days before the issue of the
---------------------- prospectus. Where company has not completed five financial years than
such report for all financial years is required.
---------------------- iv. Reports about the business or transaction to which the proceeds of the
---------------------- securities are to be applied directly or indirectly.
Declaration of Compliance:
----------------------
Every prospectus shall make a declaration about the compliance of the provisions
---------------------- of this Act and a statement to the effect that nothing in the prospectus is contrary
to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956
----------------------
and the Securities and Exchange Board of India Act, 1992 and the rules and
---------------------- regulations made there under.
Besides the information provided in Section 26 the Companies Act, 2013, the
----------------------
information as provided in Chapter VI to the Guidelines and summarised in
---------------------- Schedule VII A to the Guidelines will have to be provided..
Chapter VI of the Guidelines deals extensively with all the aspects of the
----------------------
offer document right from paper thickness, its contents and formatting etc. The
---------------------- key points are discussed here as follows:
---------------------- ● Prospectus Printing: The front outside and inside cover pages will be
white and no pictures will be printed here.
---------------------- ● Cover page will be of sufficient thickness.
---------------------- ● The paper quality should be minimum 100 gcm. Paper quality is always
measured as weight per centimeter square. Higher the weight per meter
----------------------
square thicker is the paper
---------------------- ● It should contain the word Prospectus.
---------------------- ● All the details of the instrument offered like nature of instrument, size of
offer, pricing, etc.
----------------------

● Disclosure in case of first issue: In case of first issue the Company needs Notes
to disclose that this being the first issue there is no formal market for the
securities of the Company. The fact that price has been determined by the ----------------------
Lead Merchant Banker as per prescribed format and based on historical
data. ----------------------
● General Risk Clause: The standard general risk clause is as follows: ----------------------
“Investment in equity and equity related securities involve a degree of risk ----------------------
and investors should not invest any funds in this offer unless they can afford
to take the risk of losing their investment. Investors are advised to read the ----------------------
risk factors carefully before taking an investment decision in this offering. For
----------------------
taking an investment decision, investors must rely on their own examination
of the issuer and the offer including the risks involved. The securities have not ----------------------
been recommended or approved by Securities and Exchange Board of India
(SEBI) nor does SEBI guarantee the accuracy or adequacy of this document.” ----------------------
[Securities and Exchange Board of India (Disclosure and Investor Protection)
----------------------
Guidelines, 2000]
The attention of the investor will draw to the Risk Factors indicated in the ----------------------
document.
----------------------
● Issuers Absolute Responsibility Clause: Statement to the effect that all the
facts disclosed in the Prospectus has been verified. There is no misstatement. ----------------------
The opinions and intensions expressed in the document are honest. ----------------------
● Lead Banker Details: All the details of the Lead Banker like their name,
address, logo, telephone number, fax number, etc. ----------------------
● Registrar to the issue: All the details pertaining to the Registrar to the ----------------------
issue same as that of Lead Bankers.
----------------------
● Credit Rating if applicable.
----------------------
● Grade of the IPO.
● Names of Exchanges were listed or proposed to be listed. ----------------------
● Table of Content should appear immediately after the front cover page. ----------------------
● Definitions and abbreviations. ----------------------
● Promoters’ contribution: This should contain the percentage of share held
----------------------
by promoters, lock in period for the promoters. The illustrative format for
disclosure on promoter related matters is provided in Schedule VIII to the ----------------------
Guideline.
----------------------
● Major Share holders’ details: The documents should contain details of
the 10 major shareholders. The number of Share held by them and their ----------------------
holding when warrants if any held by them are converted into Shares.
These particulars should be of two years prior to the date of filing of ----------------------
the Prospectus. If the Company has made Initial Public Offer within
----------------------
immediately preceding two years then the details of shareholder who
acquired Shares through Public issue and Private Placement. ----------------------

Notes ● Filing of the offer document with ROC and SEBI: Here will contain the
information about office of SEBI where the offer document has been filed
---------------------- so also the address of the Office of Registrar where the offer document
has been filed.
----------------------
● Names of designated stock exchanges where the application has been
---------------------- filed.
---------------------- ● Section 38 of Companies Act, 2013 prescribes punishment for fictitious
application.
----------------------
The same needs to be mentioned.
---------------------- ● Minimum subscription clause: The following text that needs to be
---------------------- mentioned in the offer document is reproduced:
“ If the company does not receive the minimum subscription of 90% of
----------------------
the issued amount on the date of closure of the issue, or if the subscription
---------------------- level falls below 90% after the closure of issue on account of cheques
having being returned unpaid or withdrawal of applications, the company
---------------------- shall forthwith refund the entire subscription amount received. If there is a
delay beyond 8 days after the company becomes liable to pay the amount,
----------------------
the company shall pay interest as per Section 73 of the Companies Act
---------------------- 1956.” [Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000]
----------------------
● Public issue by infrastructure Companies: The minimum requirement of
---------------------- 90% subscription that is applicable to other Companies is not so applicable
to infrastructure Company provided that it discloses the alternate source
---------------------- of funding the short fall if the subscription falls below 90%.
---------------------- ● Disposal of odd lots: Some time odd lots get created in the hands of
share- Holders due to issue of bonus shares or rights issues. The Company
---------------------- needs to make arrangement for disposal of odd lot and same needs to be
intimated to shareholders.
----------------------

----------------------
Fill in the blanks.
----------------------
1. If the minimum 90% of the Shares are not prescribed, Company will
---------------------- refund all the money within _____ days from the closure of the issue.
2. The paper quality of Prospectus should be minimum______.
----------------------
3. Sometime _______ get created in the hands of Share Holders due to
---------------------- issue of bonus Shares or rights issues.
----------------------
----------------------
----------------------

Notes
Summary
----------------------
• Against the backdrop of an increasing integration of global financial
----------------------
markets, SEBI channelised its efforts to bring out regulations to handle
the domestic and global developments. ----------------------
• Steps were taken to strengthen the regulatory framework by reviewing
----------------------
existing policies and programmes and issuing new guidelines and
regulations to promote orderly growth of Securities Market. ----------------------
• A developed primary market is crucial for resource mobilisation by ----------------------
corporate to meet their investment needs for growth.
• SEBI mandated that all institutional trades in the cash market would ----------------------
be subject to payment of margins as applicable to transactions by other ----------------------
investor to provide a level playing field to all class of investors.
• SEBI advised Stock Exchanges to ensure that brokers provide daily report ----------------------
to each of their clients, clearly bringing out the client trades and margin ----------------------
liability.
----------------------
Keywords ----------------------
• Advertisement: It means and includes notices, brochures, pamphlets, ----------------------

circulars, show cards, catalogues, hoardings, placards, posters, insertions
in newspaper, pictures, films, cover pages of offer documents or any ----------------------
other print medium, radio, television programmes through any electronic ----------------------
medium.
----------------------
• Designated stock exchange: Stock exchange in which securities of the
company are listed or proposed to be listed and which is chosen by the ----------------------
company for purposes of a particular issue under these guidelines
----------------------
• Net tangible assets: The sum of all net assets of the company, excluding
‘intangible assets’, as defined in Accounting Standard 26 (AS 26) issued ----------------------
by the Institute of Chartered Accountants of India.
----------------------
• Project: The object for which the monies proposed to be raised to cover
the objects of the issue. ----------------------
• Promoter: A promoter who was a party to the preparation of the prospectus ----------------------
or of the portion thereof containing the untrue statement, but does not
include any person by reason of his acting in a professional capacity for ----------------------
persons engaged in procuring the formation of the company.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
---------------------- 1. What is the minimum subscription that is required for public issue to be
successful?
----------------------
2. What is the special provision related to Infrastructure Companies as
---------------------- regards minimum subscription?
---------------------- 3. What is the time gap companies have to maintain between filing draft
prospectus with SEBI and Registrar of Companies?
----------------------
4. Is the SEBI authoriced to suggest changes in the Draft Prospectus?
---------------------- 5. Mention any three conditions that a Company has to fulfill to qualify as
fast- track company.
----------------------
6. What are the concessions fast-track companies enjoy as compared to
---------------------- other companies?
---------------------- 7. Mention any two conditions needed to be fulfilled by a private company
to be eligible for IPO (Initial Public Offer).
----------------------
8. Can a private company be eligible for IPO if it has changed name within
---------------------- last one year and if yes, what are the conditions?
---------------------- 9. Is there a requirement that application money received should be kept in
a separate bank account created for this purpose?
----------------------
10. Mention any three parameters that are checked for deciding issue price of
---------------------- an IPO.
----------------------
Answer to Check your Progress
----------------------
----------------------
----------------------
1. True
---------------------- 2. False
---------------------- 3. False
---------------------- 4. True.
----------------------
----------------------
1. A draft Prospectus will be filed with the Board (SEBI) through a ______
---------------------- at least 30 days before the filing of the Prospectus with the Registrar of
Companies.
----------------------
i. Merchant Banker
----------------------

2. If the Board has issued an order barring a Company from accessing the Notes
market, such Company ______ issue any kind of securities.
----------------------
ii. Cannot
3. Initial Public Offer is first time issue of shares to public by a company that ----------------------
was hitherto not listed or had not issued shares to public. The following
----------------------
conditions have to be fulfilled by such a Company:

1. If the minimum 90% of the Shares are not prescribed, Company will ----------------------
refund all the money within 60 days from the closure of the issue.
2. The paper quality of Prospectus should be minimum 100 gcm. ----------------------
3. Sometime odd lots get created in the hands of shareholders due to issue of ----------------------
bonus shares or rights issues.
----------------------
----------------------
1. Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

SEBI Guidelines Part-II on Pricing of Issue
UNIT
5
Structure:
5.1 Introduction
5.2 Pricing of the Issue
5.3 Promoters’ Contribution
5.4 Lock-in Period Requirements
5.5 Pre-Issue Obligations
5.6 Post-Issue Obligations
Summary
Key Words
Suggested Reading
SEBI Guidelines Part-II on Pricing of Issue 89

Notes
Objectives
----------------------
----------------------
• Examine pricing of the issues and freedom that the companies enjoy
---------------------- in pricing
---------------------- • State how much the promoters are expected to contribute in different
circumstances and the lock-in period during which promoters cannot
---------------------- pullout their share
---------------------- • Identify the obligations to be fulfilled by various agencies involved in
the process before the issue is opened and after it is opened
----------------------
----------------------
5.1 INTRODUCTION
----------------------
Securities and Exchange Board of India was formulated on the lines of
---------------------- Securities Exchange Commission of USA. The main role of SEBI is to act as a
---------------------- regulator of the capital markets and its constituents. These powers were initially
with the Central Government Ministries like Law, Finance and Company Affairs.
---------------------- These powers are now given to SEBI and it has become the sole regulator of the
Capital Markets.
----------------------
SEBI seeks to create an environment, which would facilitate mobilisation
---------------------- of adequate resources through the securities market and its efficient allocation.
This environment would include rules and regulations, institutions and their
---------------------- interrelationships, instruments, practices, infrastructure within an appropriate
---------------------- policy framework and an overall air of fairness. The market must create
confidence in the minds of the investors.
----------------------
5.2 PRICING OF THE ISSUE
----------------------
---------------------- ● Free pricing of issue:

The Companies that are eligible to make an issue have freedom for decide
----------------------
the price of the issue for Equity Shares and Securities that they are issuing
---------------------- for converting them into Shares at some later date.
---------------------- ● Listed Company:

The Company whose Shares are listed on a Stock Exchange can price its
---------------------- Shares at its discretion for the Shares that are going to be offered through
---------------------- public issue or the rights issue. This implies that freedom for fixation
of offer price is only for Shares Issued through Public Offer and not for
---------------------- private placement.
---------------------- ● Unlisted Company:

An unlisted Company that is issuing Share for the first time, i.e., getting
----------------------

listed has the same freedom as that of Listed Company. It can freely price Notes
its Shares or Securities that are going to get converted into Shares at some
future date. ----------------------
● Infrastructure Company: ----------------------
 Infrastructure Company is allowed to freely price its Share subject ----------------------
to the guidelines issued in this regard by SEBI.
 Infrastructure Company means, a company wholly engaged in the ----------------------
business of developing, maintaining and operating infrastructure ----------------------
facility. [Definition as per Guidelines]
----------------------
● Banks’ Initial Public Issues:
Banks have certain restrictions from Reserve Bank of India with respect ----------------------
to Initial Public Issue. Any Bank whether in Public Sector or Private
----------------------
Sector can price the issues freely subject to approval by Reserve Bank of
India. ----------------------
● Differential Pricing: ----------------------
At the time of Initial Public Issue or Subsequent Issues some Shares are
----------------------
allotted to buyers in firm allotment category. Prices for such category can
be different than the one offered to general public. However, the price ----------------------
offered to buyers in firm allotment category cannot be lower than the
price offered to buyers in general category. This provision is applicable ----------------------
for Shares as well all other Securities issued with intention or condition
----------------------
of converting them into Shares at some later date.
● Price Band: ----------------------
 Issuer company can mention a price band of 20% (cap in the price ----------------------
band should not be more than 20% of the floor price) in the offer
documents filed with the Board and actual price can be determined ----------------------
at a later date before filing of the offer document with ROCs.
----------------------
 If the Board of Directors has been authorised to determine the offer
price within a specified price band such price shall be determined ----------------------
by a Resolution to be passed by the Board of Directors. ----------------------
 The Lead Merchant Bankers shall ensure that in case of the listed
companies, a 48 hours’ notice of the meeting of the Board of ----------------------
Directors for passing resolution for determination of price is given ----------------------
to the Designated Stock Exchange.
 In case of public issue by listed issuer company, issue price or price ----------------------
band may not be disclosed in the draft prospectus filed with the ----------------------
Board.
----------------------
 In case of a rights issue, issue price or price band may not be
disclosed in the draft letter of offer filed with the Board. The issue ----------------------
price may be determined any time before fixation of the record date,
in consultation with the Designated Stock Exchange ----------------------

Notes  The final offer document shall contain only one price and one set of
financial projections, if applicable.
----------------------
 There is concession to the listed Companies going with Public
---------------------- issue. They need not mention the price in the offer document filed
with Board.
----------------------
● Payment of Discount/Commission:
---------------------- Those persons who receive the firm allotment are not supposed to get any
---------------------- commission from the Company or Promoters of the Company and the
Company or the Promoters are not supposed to pay such commission.
----------------------
● Denominations of Shares:
----------------------  The Company will have discretion to fix the denomination of the
---------------------- Shares to be issued. Where the issue price is more that Rs. 500
Company can fix the face of value of the Share below Rs. 10 but the
---------------------- face value cannot be less than Rs. 1.
----------------------  If the issue price is less than Rs. 500, the face value cannot be less
than Rs.10. This condition however has an exception, i.e., if the
---------------------- Company is engaged in infrastructure sector.
---------------------- Infrastructure sector means and includes:
● Transportation by any of the following means:
----------------------
● By any road whether national highway, state highway, bridge, i.e., any
---------------------- kind of road ways.
---------------------- ● Railway including metro and other related services.
---------------------- ● Aviation, airports, heliport, and other airport related services.
 Ports including minor ports, harbours, shipping lines and other port
----------------------
related services.
----------------------  Logistic services.
---------------------- Agriculture includes the following:
----------------------  Construction related to projects involving supply of inputs to agriculture
and agro processing.
----------------------
 Infrastructure related to storage facilities.
----------------------  Any construction for preservation of fruits, vegetables and flowers.
---------------------- Water Management includes the following:
----------------------  Water treatment
 Water supply
----------------------
 Irrigation
----------------------
----------------------

Telecommunication includes the following: Notes
 Cellular service, basic telephone service including paging.
----------------------
 Internet, broadband, trucking network.
----------------------
Social, Commercial and Industrial Development includes the following:
 Industrial Parks, Special Economic Zones ----------------------
 Tourism, entertainment centres ----------------------

 Urban development, solid waste management ----------------------
 Setting up educational institutions
----------------------
 Generation, Distribution and transmission of power
----------------------
 Exploration, storage, liquefaction, re-gasification, etc.
 Mass housing, slum rehabilitation, drainage, lighting, lying of roads, ----------------------
sanitation, etc. ----------------------
 Mining, environment related infrastructure, etc.
----------------------
----------------------
Fill in the blanks.
----------------------
1. There is freedom to fix the offer price of the Shares Issued through
Public Offer and not for ______. ----------------------
2. _______means, a company wholly engaged in the business of ----------------------
developing, maintaining and operating infrastructure facility.
3. Issuer company can mention a price band of _____ in the offer ----------------------
documents filed with the Board. ----------------------
4. Persons who receive the firm allotment are not supposed to get any
_______ from the company or Promoters of the Company. ----------------------
----------------------
5.3 PROMOTERS’ CONTRIBUTION ----------------------
As per Companies Act, 2013, Section 2(69) Promoter is defined as follows: ----------------------
“promoter” means a person— ----------------------

(a) who has been named as such in a prospectus or is identified by the ----------------------
company in the annual return referred to in section 92; or
----------------------
(b) who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or ----------------------
(c) in accordance with whose advice, directions or instructions the Board of
----------------------
Directors of the company is accustomed to act:
----------------------

Notes Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity;
----------------------
The Promoters’ Contribution in any issue of Securities will be as per the
---------------------- provisions laid down below:
---------------------- Reference date:

To calculate the Promoters’ contribution there has to be a reference day or a date
---------------------- on which this should be calculated. Guidelines have defined the following date
---------------------- as the reference date for calculating contribution:
• In case of book building issue - the date of filing the red herring prospectus.
----------------------
• In case of fixed price issue
----------------------
• The date of filing prospectus or
---------------------- • Date of filing letter of offer with designated Stock Exchange
---------------------- • In any other case:
----------------------  Date of filing the draft offer document with the Securities and Exchange
Board of India.
----------------------  Depending on the type of issue, i.e., whether it is a fast-track issue or
---------------------- otherwise the above dates will be applicable.
Amount or Ratio of Promoters’ Contribution
----------------------
The amount of Shares that the Promoters should hold or the percentage of their
---------------------- shareholding is to be calculated as follows:
---------------------- Public Issue of an Unlisted Company: The Promoters shall contribute not less
than 20% of the post issue Share Capital. The same is tabulated as follows:
----------------------
Particulars Amount Rupees
---------------------- 1. Current Share Capital 1,00,00,000/-
---------------------- 2. Fresh Issue (Face Value) 2,00,00,000/-
3. Total Share Capital Post issue 3,00,00,000/-
----------------------
Promoters Contribution should be 20% of 3 60,00,000/-
---------------------- Promoters Contribution in case of Offer for Sale
---------------------- In case of offer for Sale also the Promoters’ contribution has to be 20% of the
Post Issue Share Capital.
----------------------
• Promoters Contribution in case of Public Issue by a Listed Company:
---------------------- • The promoters can either contribute 20% of the Fresh issue or ensure that
---------------------- their Contribution post issue of 20% of the post issue capital. Promoters
therefore have either of the following two options:-
---------------------- • Assume the existing Share capital is Rs. 10,00,00,000 and Fresh Issue is
---------------------- 5,00,00,000; the two options that Promoters will have are as follows:
----------------------

Existing Position Option-I Option-II Notes
Promoters’ 2,50,00,000/- 1,00,00,000/- 50,00,000/-
----------------------
Contribution
Others 7,50,00,000/- 4,00,00,000/- 4,50,00,000/- ----------------------
Total 10,00,00,000/- 5,00,00,000/- 5,00,00,000/-
----------------------
The promoters can exercise either of the above options I or II based on their
intention. ----------------------
● Composite Issue: In case of composite issue also the promoters can have ----------------------
either 20% of the fresh issue or ensure that their Share remains minimum
20% at the post issue level of the Share Capital. The Rights Issue portion ----------------------
of the Composite Issue will be excluded while calculating the minimum
----------------------
requirement of Promoters Contribution.
● Securities ineligible for computation of Promoters’ contribution: ----------------------
● While calculating the Promoters’ Contribution certain Securities though ----------------------
in the name of the promoters are excluded for calculation of Promoters’
Share of 20%. The same are as follows: ----------------------
1. In case of Listed Company: ----------------------

• If the Promoter has acquired the Securities during three years before ----------------------
filing of the offer document and
----------------------
• Such securities are acquired for consideration other than Cash, or
• Are result of Bonus Issue, are out of creation of revaluation reserves ----------------------
or have been created by way other than accrual of cash resources, or ----------------------
• Shares which are otherwise ineligible for computation of Promoters’
Contribution. ----------------------
2. In case of Public Issue by Listed Company: ----------------------

• The Securities that are acquired by Promoters within one year if ----------------------
they are acquired at a price lower than the price offered to Pubic.
If Promoters acquire Shares at a certain price and within one year ----------------------
if they wish to come out with a Public Issue they should offer the ----------------------
same price or lower at which they have acquired the Securities.
• These provisions are however not applicable to unlisted Government ----------------------
Company, Statutory Body or Corporation or special purpose vehicle ----------------------
set up by any of them and is engaged in infrastructure structure.
• Infrastructure sector has the same meaning as defined earlier in the ----------------------
Unit. ----------------------
• In case of companies formed by conversion of partnership firms,
----------------------
where the partners of the erstwhile partnership firm and the
promoters of the converted company are the same, the Shares ----------------------
allotted to the promoters during previous one year out of the funds
brought in during that period shall not be considered eligible for ----------------------

Notes computation of promoters contribution unless such Shares have
been issued at the same price at which the Public Offer is made and
---------------------- there is no change in the management.
---------------------- ● Exception is that if the Share that are ineligible for computation of
Promoters Contribution will be not be so if the same are acquired
---------------------- by the Promoters pursuant to scheme of Merger or Amalgamation
approved by High Court.
----------------------
● Securities that are pledged by the Promoters shall not be counted
---------------------- while Shares eligible for Promoters Contribution.
---------------------- ● No Securities forming part of promoters’ contribution shall consist
of any private placement made by solicitation of subscription from
---------------------- unrelated persons either directly or through any intermediary.
---------------------- ● For any security to be counted in promoter’s contribution the holder
of the Security has to give in writing his willingness to the same. In
---------------------- the absence of written consent from the owner of the security the
---------------------- same cannot be considered in promoter’s contribution.
3. Contribution in case of convertible security:
----------------------
• In case of issues of convertible Securities the Promoters can opt
---------------------- for bringing their contribution through purchase of convertible
Securities or through acquisition of Shares. They need to ensure that
----------------------
the condition laid down in regard to their Share of contribution has
---------------------- to be fulfilled. It is not necessary that if the issue is of convertible
Securities, they have to contribute to the relevant percentage of
---------------------- the convertible Securities only. They can fulfil their quote through
purchase of Shares also.
----------------------
• However, if the conversion price of emerging equity is not
---------------------- predetermined and the same has not been specified in the offer
document (instead a formula for conversion price is indicated), the
----------------------
promoters cease to have option to either subscribe to convertible
---------------------- Securities or Shares but will have to subscribe to the relevant
security only.
----------------------
• In case of issue of convertible Securities whose future conversion
---------------------- price has been fixed (irrespective of whether the Securities are
issued at par or premium) the price at which the Shareholder will
---------------------- purchase the Shares will not be less than the weighted average price
---------------------- of Share capital arising out of conversion. This is to be calculated
based on the following factors:
----------------------  Weight means the number of Shares that arise out of conversion of
---------------------- convertible security into Shares and Price means the price arrived
at after taking into account the conversion price at various stages.
----------------------  In case of Listed Company, the subscription by the Promoters in
---------------------- excess of the minimum subscription will attract the provision laid
down in guideline related to preferential allotment.
When the promoters should bring in their contribution: Notes
Promoters will bring in their contribution including premium at least a day
----------------------
before the issue opens. This contribution will be kept in Escrow Account with
a Scheduled Commercial Bank and will be released to the Company along with ----------------------
proceeds of Public Issue.
----------------------
If the Promoters contribution is already brought before the Public Issue
and utilised by the Company; Company will submit a cash flow document in ----------------------
offer document showing utilisation of the money.
----------------------
If the Promoters minimum contribution exceeds Rs. 100 crore, the
Promoters are not bound to bring in the entire contribution before the opening ----------------------
of the Public Issue. They need to bring in Rs. 100 crore first and the balance
should be brought in advance on pro-rata basis as and when the calls are made ----------------------
on public.
----------------------
This provision is to safeguard the investors. Assume a case, promoters
have to contribute say 20% issue opens; market subscribes but if the promoters ----------------------
fail to get in their contribution it will be difficult to make the project a success. ----------------------
Keeping such factors in mind and in the interest of investors the provision has
been put in place. ----------------------
----------------------
----------------------
Multiple Choice Single Response. ----------------------
1. The Promoters shall contribute not less than 20% of the post-issue
share capital in case of: ----------------------
i. Private company ----------------------

ii. Public Company ----------------------
iii. Unlisted company
----------------------
2. Promoters will bring in their contribution including premium at least
_____ before the issue opens. ----------------------
i. 2 days ----------------------
ii. 1 day ----------------------
iii. 10 days
----------------------
----------------------
5.4 LOCK-IN PERIOD REQUIREMENTS
----------------------
Lock-in ----------------------
The lock-in period for promoter contribution is three years. To elaborate,
all those Shareholders who have been included in the list of promoters shall not ----------------------
be able to sale or transfer their Share for a period of three year. ----------------------

Notes The lock-in period shall be calculated as follows:
It will start from the date of the allotment in the proposed public issue
----------------------
and it shall be reckoned as three years from the date of allotment or date of
---------------------- commencement of commercial production, whichever is later. That is Promoter
shall remain locked in for the minimum period of three year from the date
---------------------- of allotment or three years from the date of commencement of commercial
production.
----------------------
Special provision regarding lock-in for excess contribution and other share
---------------------- capital:
---------------------- ● In case of public issue by an earlier Unlisted Company; if the promoter’s
contribution exceeds the minimum required then such excess contribution
---------------------- shall remain locked in for a period of one year instead of three year for the
normal contribution.
----------------------
● The provisions also apply for the excess contribution by the Promoters in
---------------------- case of Public Listed Company also.
---------------------- ● In case there is shortfall in the firm allotment category and the same is
made good by Promoters by subscribing to Shares; such Shares also get
---------------------- counted along with excess Shares for lock-in of one year.
---------------------- ● The entire pre-issue Share capital other than the one considered for locked
in period will remain locked in for a period of one year from the date of
---------------------- allotment.
---------------------- Applicability of Lock-in Period to Venture Capital Fund or Foreign Venture
Capital Investor
----------------------
If the Shares are held by the Venture Capital Fund or Foreign Venture
---------------------- Capital Investor for a period as on the date of filing of the Draft prospectus only
then these provision becomes applicable and Share shall be locked in as per the
----------------------
provisions, if any, in SEBI (Venture Capital Funds) Regulations, 1996 or SEBI
---------------------- (Foreign Venture Capital Investors) Regulations, 2000, as the case may be.)
Lock-in for Securities allotted on Firm Allotment Basis
----------------------
Securities allotted on firm allotment basis shall be locked in for a period of
---------------------- one year from the date of commencement of commercial production or date of
---------------------- allotment of Public Issue whichever is later.
Other provisions with respect to Lock-in period
----------------------
The Securities that qualify for lock-in period can be pledged with banks or
---------------------- financial institution only if:
----------------------  The loan has been granted by such banks or financial institutions for the
purpose of financing one or more of the objects of the issue and
----------------------
 Pledge of Shares is one of the terms of sanction of loan.
---------------------- In case of Share of a Listed Company that are locked in, the same can be
---------------------- transferred to other Shareholders within the Promoter Group subject to lock-in
period continuing in the hands of the transferee.
Notes
----------------------
Match the following. ----------------------
i. Lock-in period for promoter contribution a. 3 years ----------------------
ii. Securities allotted on firm allotment basis b. 1 year
shall be locked in for ----------------------
----------------------
5.5 PRE-ISSUE OBLIGATIONS
----------------------
The obligations to be fulfilled pre-issue and post issue by various agencies
----------------------
involved in the issue process are set out in the Guidelines in detailed. This is an
exhaustive list. The prominent ones are discussed here below: ----------------------
● Lead Banker shall exercise due diligence in the whole process of issue and ----------------------
standard of due diligence shall be such that lead banker shall satisfy itself
about the completeness of disclosures made in the offer documents and ----------------------
ensure that all aspects are covered. The liability of the Banker continues
----------------------
even after the issue process is completed.
----------------------
● Merchant banker shall pay the requisite fee required to be paid.
● No Company shall make an issue unless the Memorandum of Understanding ----------------------
is signed with the Merchant banker and aspects listed below are covered in ----------------------
the same:
----------------------
● All items listed in Schedule I to the Guidelines are covered.
● It will not contain any clause that can lead to diminishing/diluting of ----------------------
the responsibilities of the Merchant Banker set out either under SEBI, ----------------------
Companies Act, 2013 or under any such Act.
----------------------
● The Lead Banker responsible for drafting of the offer document shall
ensure that along with the draft offer document the copy of MOU is also ----------------------
submitted to the Board.
----------------------
● In case there is more than one Merchant Banker, the rights, obligations
and responsibilities of each Merchant Banker as outlined in Schedule II ----------------------
will be demarcated.
----------------------
● In case of under subscription, the Lead Merchant Banker responsible for
----------------------
underwriting arrangements shall invoke underwriting obligations and
ensure that the underwriters pay the amount of devolvement. The same ----------------------
shall be spelt out in Schedule II.
----------------------
● The Lead Merchant Banker shall submit the due diligence certificate as
per ----------------------
----------------------

Notes Schedule III. This shall be submitted along with offer document.
● The issuer shall give an undertaking to the Board that any transaction by
----------------------
Promoter or Promoter Group between date of filing of document with
---------------------- ROC or Board and date of closure of the issue shall be reported to the
Stock Exchange within twenty four hours of such transaction.
----------------------
● A list of Promoter and Promoter Groups shall be submitted to the Board.
----------------------
● Lead Banker shall ensure that all the other intermediaries are registered
---------------------- with the Board if they are supposed to be so registered.
---------------------- ● Lead Merchant Banker Underwriting related responsibilities:

 Lead Banker should satisfy itself about the ability of the Underwriter
----------------------
to discharge their responsibilities.
----------------------  Obtain written consent from the Underwriters to include their name
---------------------- as Underwriters.
 Lead banker will make a statement in the offer document that the
----------------------
underwriters’ assets are sufficient enough to meet their underwriting
---------------------- obligations.
---------------------- ● Offer document will be made public for 21 days from the date of filing of
the document with the Board.
----------------------
● Make the offer document available to the public through the websites of
---------------------- the Lead Managers/Syndicate Managers and also ensure that the matter
published on the electronic media matches with the matter published on
---------------------- the print media.
---------------------- ● Advertisement is to be released in the English National daily with wide
circulation and with one Hindi National newspaper and a regional
----------------------
language paper of wide circulation of the place where the registered office
---------------------- of the issuer is located.
----------------------
----------------------
Fill in the blanks.
----------------------
1. No Company shall make an issue unless the _____________ is signed
---------------------- with the Merchant banker.
---------------------- 2. The ______ is responsible for drafting of the offer document.
---------------------- 3. ____________ is to be released in the English National daily and

with one Hindi National newspaper and a regional language paper of
---------------------- wide circulation of the place where the registered office of the issuer
is located.
----------------------
----------------------

5.6 POST-ISSUE OBLIGATIONS Notes
Post-issue monitoring formats have been prescribed in Schedule XVI ----------------------

to the Guidelines. The Lead Merchant Banker needs to comply with the same
----------------------
irrespective of the size of the issue. There are quite a few reports to be submitted
at various intervals. Some are called third-day reports to be submitted within three ----------------------
days from the milestone event; one report, i.e., the Final post issue monitoring
report is to be submitted within 50th day from date of closure of the issue. ----------------------
● Due diligence certificate in format prescribed under Schedule XVI-A ----------------------
shall be submitted along with Final post monitoring issue report.
----------------------
● The Post-issue Lead Merchant Banker shall be actively involved in
redressal of grievances, allotment, refund etc. ----------------------
● Post-issue Lead Merchant Banker shall co-ordinate with the intermediaries
and ensures compliances of procedures. ----------------------
● If the issue is proposed to be closed at the earliest closing date the Lead ----------------------
Merchant Bankers will satisfy itself that the issue is fully subscribed.
----------------------
● In case of devolvement Lead Merchant Banker should ensure that the
Underwriters fulfill their commitment within sixty days from the close of ----------------------
the issue.
----------------------
● In case the issue is under subscribed the Lead Merchant Bankers should
inform the Board about it in prescribed Schedule XVII. ----------------------
● Lead Bankers have a responsibility to ensure that post issue the money ----------------------
kept in a separate bank pursuant to Section 40 of Companies Act, 2013 is
released to the Company. ----------------------
● Post-issue advertisement need to be issued giving details about the issue ----------------------
which the Lead Banker needs to ensure is released. The advertisement
will carry details like oversubscription, basis of allotment, details of ----------------------
successful allotters, etc.
----------------------
● The Company Management along with the Registrar to the issue and
Lead Merchant Bankers will be responsible to ensure that share is allotted ----------------------
in a fair and proper manner in accordance with guidelines issued in this
regard. ----------------------
● There is a provision in relation to Reservation for Retail Individual ----------------------
Investor.
----------------------
A minimum of 50% of the net offer of Securities needs to be made available
to Retail Individual Investor. The remaining offer shall be made available ----------------------
to Individual Investors other than Retail ones, Corporate Bodies, etc.
----------------------
● The other responsibilities include:
 Ensuring that Share Certificates are dispatched. ----------------------
 Demat Credit is completed. ----------------------
 Formalities for trading of stocks on the Stock Exchange have been
complied with. ----------------------

Notes  Payment of interest to applicants towards delayed payment of
refund, delayed dispatch of allotment letters, etc.
----------------------  Release of advertisement that all such activities have been carried out.
---------------------- Comparison between old and new Guidelines:
---------------------- Sr. Subject Changes brought about by Remarks/Rationale behind the
No. Matter the new regulations vis-à- Change
----------------------
vis the old Guidelines
---------------------- 1. Preferential Promoters now will Promoters will now have
Warrants have to forfeit the up to be more careful, as their
----------------------
front payment made on upfront payment made only
---------------------- unexercised warrants. against exercised warrants
will now be adjusted, said an
---------------------- expert familiar with regulatory
matters.
----------------------
Provision modified in the
---------------------- ICDR Regulations provide
that in preferential issue of
----------------------
warrants, where the warrant
---------------------- holder exercises his option
to convert only some of the
---------------------- warrants held by him, margin
money paid against only such
----------------------
warrants can be adjusted. The
---------------------- balance amount against the
remaining warrants/ margin
---------------------- money payable against the
unexercised warrants shall be
----------------------
forfeited.
---------------------- Also, taking note of the fact
---------------------- that due to lack of clarity,
there have been different
---------------------- interpretations. It is therefore
decided to provide the same
---------------------- clearly in ICDR regulations,
---------------------- that Warrant holder is allowed
to adjust payment only against
---------------------- that many warrants on which
he decides to exercise the
---------------------- option to get equity shares and
---------------------- not against all the warrants
which were initially allotted to
---------------------- him.
----------------------

2. Group Under the new SEBI has made some alterations Notes
Companies Regulations, if the in the matter of group
----------------------
promoter of a debarred companies and also explained
company is also a the term in order to avoid ----------------------
promoter, director or confusions that had surfaced
person in control of any under the old Guidelines. ----------------------
other company, even that The new norms also ban firm
----------------------
company would now be allotment to privileged people,
barred from accessing the who generally used to be ----------------------
capital markets. relatives, associates or friends
of promoters or promoters’ ----------------------
group. Even these categories
----------------------
have to apply through the
regular process. Promoters ----------------------
with majority shareholding in a
listed company can offer shares ----------------------
to the public straightaway.
----------------------
This would help the
Government, as it is keen on ----------------------
disinvestment opportunities.
----------------------
3. Public Mandatory provisions for By adopting the new inclusions
Issues inclusion of the option the new Regulations have ----------------------
of offer for sale by listed gone a long way to ensure a
----------------------
companies, and omissions credible and stable framework
of provisions pertaining for disclosure and investor ----------------------
to OCTEI issues, E-IPO, protection, which would go a
reservation on competitive long way in streamlining the ----------------------
basis in public issues for process of issue of capital.
----------------------
institutions, MFs, FIIs and
scheduled banks and firm ----------------------
allotment of public issues.
----------------------
Compulsory conversion of By mandating compulsory
all outstanding convertible conversion the new ----------------------
instruments held by any Regulations have broadened
person, as compared the scope of scrutiny and also ----------------------
to promoters and ensured that all investors and
----------------------
shareholders (according holders of instruments be
to DIP Guidelines). treated at par. SEBI has also ----------------------
sought to ensure that there are
no additional equity shares ----------------------
after IPO irrespective of who
----------------------
is holding the outstanding
convertible instruments. ----------------------
----------------------

Notes The allotment/refund period This is a welcome change in
in public issues has been comparison to the old Guidelines
---------------------- reduced to 15 days for both wherein the time limit was fixed
---------------------- fixed-price and book-built at 30 days for fixed price issue
issues. and 15 days for book-built
---------------------- issues, thereby making it more
time taking and cumbersome a
---------------------- process. Moreover, there was no
valid reason for giving extra 15
---------------------- days to complete the process in
---------------------- case of a fixed price issue.
Removal exemption These companies had until now
---------------------- available to banking enjoyed exemptions on norms
---------------------- companies for IPOs. such as track record, minimum
tangible assets, distributable
---------------------- profits, etc. and hence now with
the new regulations in force,
---------------------- they will be subject to stricter
scrutiny. However, this is a
---------------------- welcome change especially in
---------------------- the present market scenario, with
many weak companies seeking
---------------------- to utilise the exemptions for
bringing out IPO much to the
---------------------- suffering of shareholders.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

The issue period for SEBI has noted that is no Notes
infrastructure companies apparent reason for giving more
has now been brought on period for subscription to only ----------------------
a par with that for other issuers of one sector more so ----------------------
companies, and is now when most of the subscription
down to 10 days from 21, come at the fag end of the issuer ----------------------
including any revision in period irrespective of the length
price band. of issue period. Longer issue ----------------------
period is not desirable for issuer
as well as for investors. ----------------------
Hence, in the proposed ICDR ----------------------

Regulations, the existing
provision of DIP Guidelines has ----------------------
not been retained and the issue ----------------------
period provisions have been
made applicable uniformly to all ----------------------
issuers.
----------------------
Also by stipulating the total
issue period not to exceed 10 ----------------------
days, including any revision in
price band, SEBI has clarified its ----------------------
stand on issue period in case of
Public issues, which under the ----------------------
old Guidelines was not clear in
----------------------
case of revision of Price band in
book-built public issues. ----------------------
As institutional and mutual Currently, the features of firm
----------------------
funds have a separate allotment are contained in pre-
window for allotment IPO placement, wherein shares ----------------------
through QIPs now, SEBI can be allotted on firm basis
has removed mandatory during the period from filing of ----------------------
firm allotment to them as draft offer document with SEBI
it has become redundant. till filing of offer document with ----------------------
However, a shareholder of ROC, except that such pre-IPO
----------------------
a listed company whose placement is subject to lock-in.
group/sister concern is The issuers are not using this ----------------------
coming out with IPO will facility of firm allotment and
have a special reservation therefore in the new market ----------------------
window. design, the same has become
redundant. ----------------------
The ICDR Regulations would ----------------------
therefore, empower the regulator
to deal with non-compliance ----------------------
with appropriate enforcement
----------------------
actions, which would be legally
sustainable. ----------------------

Notes In the case of follow-on By including provisions under
offers SEBI has introduced the earlier DIP guidelines
---------------------- a sub-clause to Clause 19 in (now rescinded) into the
---------------------- the equity listing agreement, equity listing agreement, SEBI
saying minimum 48- has tried to ensure coherent
---------------------- hour intimation should be working amongst all streams of
given to the bourses of any working affecting public issues
---------------------- proposed Board meeting and thereby mandated that all
for determination of issue Guidelines are in sync. It has also
---------------------- price. Earlier, Clause 19 was noted the important fact that the
---------------------- about prior notification to equity listing agreement entered
the stock exchanges, while into by them is much more
---------------------- it directed companies to give comprehensive than the listing
7 days’ prior notification agreement signed for listing other
---------------------- to stock exchanges in case instruments such as debt.
of buyback of securities,
----------------------
declaration/recommending
---------------------- of Dividends, Rights
Issue, Issue of Convertible
---------------------- Debentures.
---------------------- As per the new norms, the SEBI has taken note of all
requirement pertaining to redundant provisions of the
---------------------- the issue of Disclosure of draft prospectus, which were not
Price or Price band of public providing any futility, and hence
---------------------- issues has been done away these exemptions will go a long
with and the same is not way in making draft prospectuses
---------------------- required to be disclosed in crisp and valuable. This has also
---------------------- draft prospectus. been done with the view allow
the issuer to announce the price of
---------------------- any type of the issue as close as
possible to the issue opening date
---------------------- to contain the market risk.
---------------------- The extent of underwriting By ensuring that the obligation
obligations have been of underwriters must be for
---------------------- clarified under the new the entire net offer to public
Regulations, to include that and must not be limited to the
---------------------- where 100% of the offer extent of minimum subscription
---------------------- through offer document an issuer may agree to have
is underwritten, the the issue underwritten with an
---------------------- underwriting obligations understanding to get the full
shall be for the entire amount of funds.
---------------------- amount underwritten.
----------------------
----------------------
----------------------

Pre-issue advertisement By mandating such a change, Notes
now to be made after SEBI has ensured that
registering of prospectus/ advertisements be made only ----------------------
red herring prospectus with once the prospectus/ red ----------------------
Registrar of Companies herring prospectus is finalised
before opening of the issue, and thereby the prospective ----------------------
as compared to the old shareholders are intimated
Guidelines which mandated about the correct position of the ----------------------
that Pre-issue advertisement proposed IPO of the company,
be made immediately after before the issue opens. ----------------------
receipt of observations from ----------------------
the Board.
4. Book- The option of a 75% book SEBI has observed that, though ----------------------
Building building and 25% fixed 75% book-building option ----------------------
Issue price issue—which was has been provided in the DIP
rarely exercised—has been Guidelines since inception of ----------------------
done away with. It has to be book-building guidelines, there
either a fixed price issue or a has not been any issue for last ----------------------
book-built one. 10 years using 75% BB route.
Further, 75% BB route has been ----------------------
found to be very inefficient ----------------------
in terms of time and other
operational problems. Hence, ----------------------
the same has been removed
from the ICDR Regulations. ----------------------
5. Disclosure a) SEBI has directed stock This is a welcome change and ----------------------
Norms exchanges to disclose an important move to bring
details of complaints in more transparency in the ----------------------
lodged by investors grievance redress mechanism.
against trading members ----------------------
and companies listed ----------------------
on the exchange, on
their website. These ----------------------
disclosures would also
include details pertaining ----------------------
to arbitration and penal
action against trading ----------------------
members. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes b) Further, with respect to Presently there are different
the issue of disclosure provisions for Government
---------------------- of currency of financial companies and non-government
---------------------- statements disclosed in companies. The provision
the offer document, the enables a government companies
---------------------- old Guidelines mandated to access the market with
that particulars as audited financials, which can be
---------------------- per audited financial as old as nine months whereas
statements not to be for non-government companies
---------------------- more than 6 months old this period is 6 months. A need
---------------------- from the issue opening is felt to bring uniformity so that
date for all issuers, all issuers access market with
---------------------- except Government audited accounts not older than
companies. Also, 6 months at the time of issue
---------------------- the new Regulations opening.
mandate that disclosure Hence, the new Regulations,
----------------------
of pledge of shares by with a view to ensure smooth
---------------------- promoters – a feature working of both various
that was not provided in Government agencies and
---------------------- the old Guidelines. private bodies have mandated
---------------------- that Government and non-
government issuers be treated
---------------------- at par.
c) New norms pertaining Apart from ensuring stricter
----------------------
to Minimum promoters’ disclosure norms this also gels
---------------------- contribution to mandate with the objective of showing
that the same shall continued commitment to the
---------------------- be brought in only company or project by the main
by promoters whose promoters.
---------------------- identity photograph, etc.
---------------------- are disclosed in the offer
document.
---------------------- 6. Monetary The new regulations also Transferring surplus funds to
Control gives SEBI the control of IPEF of SEBI instead of stock
----------------------
the surplus money in green Exchanges will augment the
---------------------- shoe option bank account, IEPF of SEBI.
as this money would have
---------------------- to be transferred to SEBI’s
Investor Protection and
---------------------- Education Fund (IPEF).
Earlier, this surplus money
----------------------
was transferred to the
---------------------- Investor Protection Fund of
stock exchanges.
----------------------
----------------------

7. Other a) The new guidelines These changes have been Notes
Highlights have also clarified the brought to bring about more
definition of employees, clarity as compared to the ----------------------
key management rescinded Guidelines and also ----------------------
personnel, restrictions to harmonize the definition with
on advertisements, and the definition provided under ----------------------
the documents that have the SEBI (PIT) Regulations,
to be attached with the 1992. ----------------------
due diligence certificate.
----------------------
b) The term “Financial The word “financial institution”
Institution” is no longer is not defined anywhere. Hence ----------------------
open to interpretation the term “public financial
and has been replaced institution” is used, which is ----------------------
under the new defined in section 4A of the ----------------------
Regulations by “public Companies Act. Also, SEBI is
financial institution or a of the view that since the entity ----------------------
scheduled commercial is expected to monitor the issue
bank”. proceeds, it is felt that banks can ----------------------
also do this job more effectively.
----------------------
c)
Under the new In the new ICDR Regulations,
Regulations, a company the term “employee” is used ----------------------
making a public offer mainly for reservation for
can allot shares only to employees of the issuer and to ----------------------
its own employees and give benefit of no-lock-in on
----------------------
not to employees of its options allotted to employees of
parent organisation or the issuer before an IPO. ----------------------
subsidiary under the Therefore, it was felt that, this
employee quota. ----------------------
benefit should be confined to
only employees of the issuer ----------------------
company. Hence, employees
and directors of subsidiary or ----------------------
holding company of the issuer
have been excluded from the ----------------------
definition of the term.
----------------------
----------------------
----------------------
i. Due diligence certificate in a. Schedule XVI-A
format prescribed ----------------------
ii. Lead Bankers has to keep the b. A separate bank ----------------------
post issue money
iii. Reservation for Retail Individual c. Minimum of 50% of the net ----------------------
Investor offer of securities
----------------------

Notes
Activity 1
----------------------
---------------------- Read the SECURITIES AND EXCHANGE BOARD OF INDIA

(DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES,
---------------------- 2000 and list the Pre- Issue and Post-Issue Obligations.
----------------------
Summary
----------------------
 The Companies have freedom to decide the prices at which they want
---------------------- to offer the Securities to Public but if Listed Company wants to opt for
private placement it has the restrictions to do so.
----------------------
 For Banking Companies there are special provisions and Reserve Bank of
---------------------- India has say in their initial pricing.
----------------------  The Promoters have to keep their Shares locked-in for the period prescribed
under the Guidelines. While calculating the Securities purchased by the
---------------------- Promoters the Securities purchased by them become ineligible if they
---------------------- do not fulfill certain conditions laid down in this regard. Any Company
planning to go public therefore has to be careful while allotting Shares to
---------------------- Promoters, has to keep this factor in mind well before actually the issue
comes up.
----------------------
 The time when promoters have to get in their money has also been
---------------------- prescribed under the Guidelines. Pre-issue and Post-issue obligations
of the Company issuing Securities and also the various intermediaries
---------------------- involved in the process have been clearly defined under the Guidelines.
----------------------
Keywords
----------------------
• Composite issue: An issue of securities by a listed company on a public-
---------------------- cum-rights basis offered through a single offer document wherein the
allotment for both public and rights components of the issue is proposed
----------------------
to be made simultaneously.
---------------------- • Escrow account: An arrangement made under contractual provisions
between transacting parties, whereby an independent trusted third party
----------------------
receives and disburses money and/or documents for the transacting parties,
---------------------- with the timing of such disbursement by the third party dependent on the
fulfilment of contractually agreed conditions by the transacting parties.
----------------------
• Merchant bank: A financial institution which provides capital to
---------------------- companies in the form of share ownership instead of loans.
----------------------
----------------------
----------------------

Notes
----------------------
1. If a Private Company wants to offer shares to public, can the company
decide the price or is it decided by the SEBI? ----------------------
2. Is it necessary that the prices of share allotted to buyers in Firm Allotment ----------------------
Category should have some relation to prices offered to Public or they can
as low as 50% of the prices offered to Public? ----------------------
3. Can the people who have received shares in the Firm Allotment Category ----------------------
receive Commission from the company or promoters or they are barred
from the same? ----------------------
4. If the promoters have acquired some securities within six months before ----------------------
the public issue and if the same are acquired by way other than cash
payment, can the same be included while counting their 20% share? ----------------------
5. In case of an issue of Convertible Securities whose conversion price is pre- ----------------------

determined, can the Promoters bring in their share of 20% through share
----------------------
capital or it should necessarily be through subscription of the Securities
of the same type that is offered to Public? ----------------------
6. List down any three responsibilities of the Lead Merchant Banker pre-
----------------------
issue.
7. What is the period within which the Final Monitoring Report has to be ----------------------
submitted?
----------------------
8. What action Lead Merchant Banker should take in case of devolvement
by Underwriter? ----------------------
----------------------
Answer for Check your Progress
----------------------
----------------------
Fill in the blanks.
1. There is freedom to fix the offer price of the Shares Issued through Public ----------------------
Offer and not for private placement. ----------------------
1. Infrastructure Company means, a company wholly engaged in the
business of developing, maintaining and operating infrastructure facility. ----------------------
2. Issuer company can mention a price band of 20% in the offer documents ----------------------
filed with the Board.
----------------------
4. Persons who receive the firm allotment are not supposed to get any
commission from the company or Promoters of the Company. ----------------------
----------------------
----------------------
----------------------

----------------------
1. The Promoters shall contribute not less than 20% of the post-issue share
---------------------- capital in case of:
---------------------- iii. Unlisted company
---------------------- 2. Promoters will bring in their contribution including premium at least

_____ before the issue opens.
---------------------- ii. 1 day
i. – a.
----------------------
ii. – b.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. No Company shall make an issue unless the Memorandum of Understanding
---------------------- is signed with the Merchant banker.
2. The Lead Banker is responsible for drafting of the offer document.
----------------------
3. Advertisement is to be released in the English National daily and with
---------------------- one Hindi National newspaper and a regional language paper of wide
circulation of the place where the registered office of the issuer is located.
----------------------
----------------------
---------------------- i. – a.
---------------------- ii. – b.
---------------------- i. – c.
---------------------- Suggested Reading

---------------------- 1. www.sebi.gov.in
---------------------- 2. SEBI (Discloser & Investors Protection) Guidelines, 2000
----------------------
----------------------
----------------------
----------------------
----------------------

Book Building
UNIT
6
Structure:
6.1 Book Building – An Introduction

6.2 Why Book Building
6.3 Book-Building Process
6.4 SEBI Guidelines on Book Building
Summary
Key Words
Suggested Reading
Book Building 113

Notes
Objectives
----------------------
----------------------
• Identify the term book building
----------------------
• Discuss book building process
---------------------- • Identify why book building process is preferred over the traditional
---------------------- fixed price process
• Examine the steps involved in the book building process
----------------------
• List SEBI guidelines on book building
----------------------
---------------------- 6.1 BOOK BUILDING − AN INTRODUCTION

---------------------- The Government of India has been making efforts to bring the Indian capital
market in line with the international practices by deregulating the economy.
----------------------
With the increased liberalisation of capital markets in India there was a need to
---------------------- strengthen the capital markets by way of structural modifications, introduction
of new mechanisms and instruments and most importantly safeguarding the
---------------------- interest of investors through more disclosures and transparency. As a result the
Book-Building Mechanism was introduced by Securities and Exchange Board
----------------------
of India (SEBI) for the pricing of Initial Public Offers (IPOs).
---------------------- The introduction of book-building in India in 1995 was on account
of the recommendations of an expert committee appointed by SEBI under
----------------------
Chairmanship of YH Malegam “to review the (then) existing disclosure
---------------------- requirements in offer documents.” Two of the terms of reference being “the
basis of pricing the issue” and “whether substantial reduction was possible
---------------------- in the time taken for processing applications by SEBI”. The committee has
submitted its report with several recommendations and the SEBI accepted the
----------------------
same in November 1995. The book-building route should be open to issuer
---------------------- companies, subject to certain terms and conditions. Some of them are presented
below:
----------------------
1. The option should be available only to issues exceeding Rs. 100 crore;
---------------------- 2. The book-building issuer companies could either reserve the securities
---------------------- for firm allotment or avail themselves of the book-building process;
3. Draft prospectus to be submitted to SEBI could exclude information
---------------------- about the offer price;
---------------------- 4. A book runner to be nominated from among the lead merchant bankers,
charged with specific responsibilities and the name is to be submitted to the
----------------------
SEBI’s approval; and
---------------------- 5. The requirement of 25% of the securities to be offered to the public will
be continued.
----------------------

There have been several amendments/revisions to the above guidelines; Notes
the first one in December 1996 made available the option of book-building to
all corporate bodies which were otherwise eligible to make an issue of capital ----------------------
to the public, and in case of under subscription, the spill-over from the public
portion could be permitted to the placement area and vice-versa. In 1997, the ----------------------
restriction of the facility to 75 per cent of the issue was thought to severely ----------------------
constrain the benefits arising out of price and demand discovery, and the facility
was extended to 100 percent of the issue, available only if the issue amount was ----------------------
Rs. 100 crore and above, compulsorily offering an additional 10 per cent of the
issue size to the public through prospectus, and reserving at least 15 per cent of ----------------------
the issue size to individual investors applying up to ten tradable lots. Further, ----------------------
audited financial ratios had to be disclosed, namely, EPS, P/E, average return
on net worth for the last three years and net asset value based on last year’s ----------------------
balance sheet.
----------------------
However, there were no takers for the 100 per cent book-building facility.
Based on suggestions made by leading merchant bankers, the following ----------------------
amendments were made to the guidelines in 1999:
----------------------
1. The issuer may be allowed to disclose either the issue size or the number
of securities to be offered to the public; ----------------------
2. Allotment should be in demat mode only; and ----------------------
3. Reservation of 15 per cent of issue amount for individual investors need ----------------------
to the public at a fixed price.
Some of the earliest mega issues through the book-building route were ----------------------
those of Larsen & Toubro, ICICI, Tisco and others. ----------------------
Book building is the process of determining the price of an Initial Public
Offer (IPO) and Follow-on Public Offers (FPO) based on the demand from ----------------------
institutional investors. Under this mechanism, bids are collected from various ----------------------
investors during the time period for which the offer is open. These bids are
within the price band specified by the issuer and are directed both towards the ----------------------
retail as well as institutional investors. The final issue price is determined once
the bid is closed based on the demand generated in the process. ----------------------
SEBI defines book building as “a process undertaken by which a demand ----------------------

for the securities proposed to be issued by a body corporate is elicited and
----------------------
built up and the price for such securities is assessed for the determination of
the quantum of such securities to be issued by means of a notice, circular, ----------------------
advertisement, document or information memoranda or offer document”.
----------------------
6.2 WHY BOOK BUILDING ----------------------
Initial Public Offer for securities can be made by fixed price method, Book ----------------------
Building
----------------------
Method or a combination of both.
----------------------
Book Building 115

Notes A. Fixed Price Issue
Key highlights of the fixed price issue are as under:
----------------------
1. The price at which securities are offered and allotted is pre decided and
---------------------- the investors are aware of it.
---------------------- 2. The issuer gets to know the demand for the security only after the closure
of the issue.
----------------------
3. Investors are required to pay 100% advance at the time of application.
----------------------
B. Book-Building Issue
---------------------- Key highlights of the Book-Building issue are as under:
---------------------- 1. A price band is offered by the issuer and the investors bid within that
Price Band.
----------------------
2. Final price of the security is determined after closure of the bid.
---------------------- 3. Demand for the security at various prices is known during the period the
---------------------- bid is open.
4. 10% advance payment is required to be made by the QIBs along with the
---------------------- application, while other categories of investors have to pay 100% advance
---------------------- along with the application.
C. Drawbacks of Fixed Price Method
----------------------
The key drawbacks of the fixed price method are:
----------------------
1. The issue can be underpriced as demand is known only after closure of
---------------------- issue.
---------------------- 2. No flexibility in terms of price and number of securities to be issued.
3. Individual investors are least informed about the pricing mechanism and
----------------------
hence they cannot distinguish between a good and bad issue.
---------------------- 4. It delays the IPO process.
---------------------- 5. High risk of failure if the issuer does not receive 90% of total subscription.
---------------------- In order to overcome these drawbacks, book-building mechanism has been

introduced and widely accepted to determine the issue price effectively. Under
---------------------- the book-building process the risk can be avoided as the issuer can withdraw the
issue if there isn’t sufficient demand for the security.
----------------------
---------------------- 6.3 BOOK-BUILDING PROCESS

---------------------- ● The Issuer Company who is planning an IPO appoints a lead merchant
banker as ‘Book Runner’.
----------------------
● The issuer company prepares a draft prospectus in consultation with the
---------------------- merchant banker mentioning the size of the issue, past history of the
company and the price band.
----------------------

● Securities available to the public are separately identified as “net offer to Notes
the public”
----------------------
● A legal standing a given to the draft prospectus by filing the same with
SEBI. ----------------------
● A bid period is fixed during which the bid will remain open and based
----------------------
on that the merchant banker advertises the security in order to generate
demand for it. ----------------------
● The Merchant Banker appoints syndicate members, who are SEBI
----------------------
registered Intermediaries, with whom orders are to be placed by the
investors. They act as underwriters to the issue. ----------------------
● The syndicate members create demand for the security and ask various ----------------------
classes of investors to bid in terms of number of shares and offer price.
● The syndicate members input the orders into an ‘electronic book’. This ----------------------
process is called ‘bidding’ and is similar to open auction. ----------------------
● The book normally remains open for a period of 3 to 7 days and the
prospective investors can revise the bid at any time during the bid period. ----------------------
● The Merchant banker receives feedback from the syndicate members ----------------------
about the various bids received and prepare an order book showing the
----------------------
demand for shares at various prices.
● The merchant banker and the Issuer decide the final price at which the ----------------------
securities shall be issued after evaluating the bids received and the demand
----------------------
at various price levels.
● Once the final price is determined, the final prospectus is filed with the ----------------------
registrar of Companies. ----------------------
Applications are allotted to successful bidders and refunds are issued to rest of
the investors. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Book Building 117

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 6.1: Book-Building Process

----------------------
Fill in the blanks.
----------------------
1. The Merchant Banker appoints ______.
---------------------- 2. The syndicate members input the orders into an ‘_____________’.
----------------------
---------------------- 6.4 SEBI GUIDELINES ON BOOK BUILDING

---------------------- Rules governing Book building are covered in Chapter XI of the Securities
and Exchange Board of India (Disclosure and Investor Protection) Guidelines,
---------------------- 2000. The brief highlights of the guidelines are as under:
---------------------- Compliance for Book Building Process
---------------------- An issuer company proposing to issue capital through book building shall
comply with the following:
----------------------

A. 75% Book-Building Process Notes
In an issue of securities to the public through a prospectus the option for 75%
----------------------
book building shall be available to the issuer company subject to the following:
i. The option of Book Building shall be available to all body corporate ----------------------
which are otherwise eligible to make an issue of capital to the public.
----------------------
ii. a. The Book-Building facility shall be available as an alternative
to, and to the extent of the percentage of the issue which can be ----------------------
reserved for firm allotment, as per these Guidelines.
----------------------
b. The issuer company shall have an option of either reserving the
securities for firm allotment or issuing the securities through Book ----------------------
Building process. ----------------------
iii. The issue of securities through book-building process shall be separately
identified/indicated as ‘placement portion category’ in the prospectus. ----------------------
iv. a. The securities available to the public shall be separately identified ----------------------
as ‘net offer to the public’.
----------------------
b. The requirement of minimum 25% of the securities to be offered to
the public shall also be applicable. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 6.2: 75% Book-Building Process
----------------------
v. In case the book-building option is availed of, underwriting shall be
mandatory to the extent of the net offer to the public. ----------------------
vi. The draft prospectus containing all the information except the information ----------------------
regarding the price at which the securities are offered shall be filed with
the Board. ----------------------
----------------------
Book Building 119

Notes vii. One of the lead merchant bankers to the issue shall be nominated by the
issuer company as a Book Runner and his name shall be mentioned in the
---------------------- prospectus.
---------------------- viii. a. The copy of the draft prospectus filed with the Board may be
circulated by the Book Runner to the institutional buyers who are
---------------------- eligible for firm allotment and to the intermediaries eligible to act
as underwriters inviting offers for subscribing to the securities.
----------------------
b. The draft prospectus to be circulated shall indicate the price band
---------------------- within which the securities are being offered for subscription.
---------------------- ix. The Book Runner on receipt of the offers shall maintain a record of
the names and number of securities ordered and the price at which the
---------------------- institutional buyer or underwriter is willing to subscribe to securities
under the placement portion.
----------------------
x. The underwriter(s) shall maintain a record of the orders received by him
---------------------- for subscribing to the issue out of the placement portion.
---------------------- xi. a. The underwriter(s) shall aggregate the offers so received for
subscribing to the issue and intimate to the Book Runner the
---------------------- aggregate amount of the orders received by him.
---------------------- b. The institutional investor shall also forward its orders, if any, to the
Book Runner.
----------------------
xii. On receipt of the information, the Book Runner and the issuer company
---------------------- shall determine the price at which the securities shall be offered to the
public.
----------------------
xiii. The issue price for the placement portion and offer to the public shall be
---------------------- the same.
---------------------- xiv. On determination of the price, the underwriter shall enter into an
underwriting agreement with the issuer indicating the number of
---------------------- securities as well as the price at which the underwriter shall subscribe
---------------------- to the securities. Provided that the Book Runner shall have an option of
requiring the underwriters to the net offer to the public to pay in advance all
---------------------- moneys required to be paid in respect of their underwriting commitment.
---------------------- xv. On determination of the issue price within two day, thereafter the
prospectus shall be filed with the Registrar of Company.
---------------------- xvi. The issuer company shall open two different accounts for collection of
---------------------- application moneys, one for the private placement portion and the other
for the public subscription.
----------------------
xvii. One day prior to the opening of the issue to the public, Book Runner shall
---------------------- collect from the institutional buyers and the underwriters the application
forms along with the application moneys to the extent of the securities
---------------------- proposed to be allotted to them/subscribed by them.
----------------------

xviii. a. Allotments for the private placement portion shall be made on the Notes
second day from the closure of the issue.
----------------------
b. However, to ensure that the securities allotted under placement
portion and public portion are pari passu in all respects, the issuer ----------------------
company may have one date of allotment which shall be the deemed
date of allotment for the issue of securities through book building ----------------------
process.
----------------------
xix. In case the Book Runner has exercised the option of requiring the
underwriter to the net offer to the public to pay in advance all moneys ----------------------
required to be paid in respect of their underwriting commitment by the
----------------------
eleventh day of the closure of the issue. The shares allotted as per the
private placement category shall be eligible to be listed. ----------------------
xx. a. The bidding terminals shall contain an online graphical display of
----------------------
demand and bid prices updated at periodic intervals, not exceeding
30 minutes. The book running lead manager shall ensure the ----------------------
availability of adequate infrastructure with syndicate member(s) for
data entry of the bids in a timely manner. ----------------------
b. Allotment of securities under the public category shall be eligible to ----------------------
be listed.
----------------------
xxi. a. In case of under subscription in the net offer to the public spill
over to the extent of under subscription shall be permitted from the ----------------------
placement portion to the net offer to the public portion subject to the
condition that preference shall be given to the individual investors. ----------------------
b. In case of under subscription in the placement portion spill over ----------------------

shall be permitted from the net offer to the public to the placement
portion. ----------------------
xxii. The issuer company may pay interest on the application moneys till the ----------------------
date of allotment or the deemed date of allotment provided that payment
----------------------
of interest is uniformly given to all the applicants.
xxiii. a. The Book Runner and other intermediaries associated with the ----------------------
book building process shall maintain records of the book building
----------------------
process.
b. The Board shall have the right to inspect such records. ----------------------
B. Offer to Public through Book-Building Process ----------------------

An issuer company may, subject to the requirements specified in this chapter, ----------------------
make an issue of securities to the public through a prospectus in the following
manner: ----------------------
a. 100% of the net offer to the public through book building process, or ----------------------
b. 75% of the net offer to the public through book building process and 25%
at the price determined through book building. ----------------------
----------------------
Book Building 121

Notes Compliance norms for Offer to Public through Book Building Process
i. Reservation or firm allotment to the extent of percentage specified in
---------------------- these Guidelines shall not be made to categories other than the categories
mentioned in sub-clause (ii) below.
----------------------
ii. Book Building shall be for the portion other than the promoter’s
---------------------- contribution and the allocation made to:
---------------------- a. Permanent employees of the issuer company and in the case of a new
company the permanent employees of the promoting companies;
----------------------
b. Shareholders of the promoting companies in the case of a new
---------------------- company and shareholders of group companies in the case of an
existing company either on a ‘competitive basis’ or on a ‘firm
---------------------- allotment basis’.
---------------------- c. Persons who, on the date of filing of the draft offer document with
the Board, have business association, as depositors, bondholders
---------------------- and subscribers to services, with the issuer making an initial public
---------------------- offering, provided that allotment to such persons shall not exceed
5% of the issue size.
---------------------- Provided further that, no reservation shall be made for the issue management
---------------------- team, syndicate members, their promoters, directors and employees
and for the group/associate companies of issue management team and
---------------------- syndicate members and their promoters, directors and employees.
---------------------- iii. The issuer company shall appoint an eligible Merchant Banker(s) as Book
Runner(s) and their name(s) shall be mentioned in the draft prospectus.
----------------------
a. The issuer company shall enter into an agreement with one or
---------------------- more of the Stock Exchange(s) which have the requisite system of
on-line offer of securities. The agreement shall specify the rights,
---------------------- duties, responsibilities and obligations of the company and stock
exchange. The agreement may also provide for a dispute resolution
----------------------
mechanism between the company and the stock exchange.
---------------------- b. The company may apply for listing of its securities on an exchange
other than the exchange through which it offers its securities to
----------------------
public through the online system.
---------------------- iv. The Lead Merchant Banker shall act as the Lead Book Runner.
---------------------- a. In case the issuer company appoints more than one merchant
banker(s), the names of all such merchant bankers(s) who have
---------------------- submitted the due diligence certificate to SEBI, may be mentioned
---------------------- on the front cover page of the prospectus. A disclosure to the effect
that “the investors may contact any of such merchant bankers(s),
---------------------- for any complaint pertaining to the issue” shall be made in the
prospectus, after the “risk factors”.
----------------------
b. The lead book runner/issuer may designate, in any manner, the
---------------------- other Merchant Banker(s), subject to the following:

1. The inter-se allocation of responsibilities amongst the Notes
merchant bankers shall be disclosed in the prospectus on the
page giving the details of the issue management team. ----------------------
2. A coordinator shall be appointed amongst the lead book ----------------------
runners, for the purpose of co-ordination with SEBI.
----------------------
3. The names of only those merchant bankers who have signed
the allocation of responsibilities shall be mentioned in the ----------------------
offer document on the page where the details of the issue
management team are given. ----------------------
v. The primary responsibility of building the book shall be that of the Lead ----------------------
Book Runner.
----------------------
vi. The Book Runner(s) may appoint those intermediaries who are registered
with the Board and who are permitted to carry on activity as an ‘Underwriter’ ----------------------
as syndicate members.
----------------------
a. The Book Runner(s)/syndicate members shall appoint brokers of
the exchange, who are registered with SEBI, for the purpose of ----------------------
accepting bids, applications and placing orders with the company
and ensure that the brokers so appointed are financially capable of ----------------------
honouring their commitments arising out of defaults of their clients/ ----------------------
investors, if any.
Provided that in case of Application Supported by Blocked Amount, ----------------------
Self-Certified Syndicate Banks shall accept and upload the details of ----------------------
such applications in electronic bidding system of the stock exchanges.
----------------------
b. The brokers and Self-Certified Syndicate Banks accepting
applications and application monies shall be considered as ‘bidding/ ----------------------
collection centres’.
----------------------
c. The broker so appointed, shall collect the money from his client for
every order placed by him and in case the client/investors fails to ----------------------
pay for shares allocated as per the Guidelines, the broker shall pay
such amount. ----------------------
In case of Applications Supported by Blocked Amount, the Self- ----------------------
Certified Syndicate Banks shall follow the procedure specified by
the Board in this regard. ----------------------
d. The company shall pay to the broker/Self-Certified Syndicate Banks ----------------------
a commission/fee for the services rendered by hem. The exchange
shall ensure that the broker does not levy a service fee on his clients/ ----------------------
investors in lieu of his services. ----------------------
vii. The draft prospectus containing all the disclosures as laid down in
Chapter VI except that of price and the number of securities to be offered ----------------------
to the public shall be filed by the Lead Merchant Banker with the Board ----------------------
provided that the total size of the issue shall be mentioned in the draft
prospectus. ----------------------
Book Building 123

Notes a. The red herring prospectus shall disclose either the floor price of
the securities offered through it or a price band along with the range
---------------------- within which the price can move, if any.
---------------------- Provided that the issuer may not disclose the floor price or price
band in the red herring prospectus if the same is disclosed in case of
---------------------- an initial public offer, at least two working days before the opening
of the bid and in case of a further public offer, at least one working
----------------------
day before the opening of the bid, by way of an announcement in all
---------------------- the newspapers in which the pre-issue advertisement was released
by the issuer or the merchant banker provided further that the
---------------------- announcement shall contain the relevant financial ratios, computed
for both upper and lower end of the price band and also a statement
----------------------
drawing attention of the investors to the section titled “basis of issue
---------------------- price” in the offer document.
Provided further that where the issuer opts not to make the disclosure
----------------------
of the price band or floor price in the red-herring prospectus,
---------------------- the following shall be additionally disclosed in the red-herring
prospectus:
----------------------
a. A statement that the floor price or price band, as the case may
---------------------- be, shall be disclosed at least two working days (in case of an
initial public offer) and at least one working day (in case of a
---------------------- further public offer) before the opening of the bid;
---------------------- b. A statement that the investors may be guided in the meantime
by the secondary market prices in case of a further public
---------------------- offer;
---------------------- c. Names and editions of the newspapers where the announcement
of the floor price or price band would be made;
----------------------
d. Names of websites (with address), journals or other media in
---------------------- which the said announcement will be made.
---------------------- b. Where the issuer decides to opt for price band instead of floor price,
the lead book runner shall ensure compliance with the following
---------------------- conditions:
---------------------- a. The cap of the price band should not be more than 20% of the
floor of the band, i.e., cap of the price band shall be less than
---------------------- or equal to 120% of the floor of the price band
---------------------- b. The price band can be revised during the bidding period in
which case the maximum revision on either side shall not
---------------------- exceed 20%, i.e., floor of price band can move up or down to
---------------------- the extent of 20% of floor of the price band disclosed in the
red herring prospectus and the cap of the revised price band
---------------------- will be fixed in accordance with Clause (a) above;
---------------------- c. Any revision in the price band shall be widely disseminated

by informing the stock exchanges, by issuing press release
and also indicating the change on the relevant website and the Notes
terminals of the syndicate members.
----------------------
d. In case the price band is revised, the bidding period shall be
extended for a further period of three days, subject to the total ----------------------
bidding period not exceeding thirteen days.
----------------------
e. The manner in which the shortfall, if any, in the project
financing, arising on account of lowering of price band to the ----------------------
extent of 20% will be met shall be disclosed in the red herring
prospectus. It shall also be disclosed that the allotment shall ----------------------
not be made unless the financing is tied up.
----------------------
viii. a. In case of appointment of more than one Lead Merchant Banker
or Book Runner for book building, the rights, obligations and ----------------------
responsibilities of each should be clearly defined.
----------------------
b. In case of an under subscription in an issue, the shortfall shall have
to be made good by the Book Runner(s) to the issue and the same ----------------------
shall be incorporated in the allocation of responsibility. ----------------------
ix. The issuer company shall circulate the application forms to the Brokers
----------------------
x. The pre-issue obligations and disclosure requirements as specified by
SEBI shall be applicable to issue of securities through book building. ----------------------
xi. The Book Runner(s) and the issuer company shall determine the issue ----------------------
price based on the bids received through the ‘syndicate members’ and
‘Self Certified Syndicate Banks’. ----------------------
xii. Retail individual investors may bid at “cut-off” price instead of their ----------------------
writing the specific bid prices in the bid forms.
----------------------
xiii. On determination of the price, the number of securities to be offered shall
be determined (issue size divided by the price which has been determined). ----------------------
xiv. Once the final price (cut-off price) is determined all those bidders whose ----------------------
bids have been found to be successful (i.e., at and above the final price or
cut-off price) shall become entitle for allotment of securities. ----------------------
xv. No incentive, whether in cash or kind, shall be paid to the investors who ----------------------
have become entitled for allotment of securities.
----------------------
xvi. The broker may collect an amount to the extent of 100% of the application
money as margin money from the clients/investors before he places an ----------------------
order on their behalf. The margin collected from categories other than
Qualified Institutional Buyers shall be uniform across the book runner/ ----------------------
syndicate members/Self Certified Syndicate Banks for each such category.
----------------------
xvii. a. The broker/syndicate member shall collect an amount of not less
than ten percent of the application money as margin money in ----------------------
respect of bids placed by qualified institutional buyers.
----------------------
----------------------
Book Building 125

Notes b. Bids for securities beyond the investment limit prescribed under
relevant laws shall not be accepted by the syndicate members/
---------------------- brokers from any category of clients/investors.
---------------------- c. The lead book runner may reject a bid placed by a qualified
institutional buyer for reasons to be recorded in writing provided
---------------------- that such rejection shall be made at the time of acceptance of the
bid and the reasons therefore shall be disclosed to the bidders.
----------------------
Necessary disclosures in this regard shall also be made in the offer
---------------------- document.
xviii. On determination of the entitlement, the information regarding the same
----------------------
(i.e., the number of securities which the investor becomes entitled) shall
---------------------- be intimated immediately to the investors.
xix. The final prospectus containing all disclosures as per these Guidelines
----------------------
including the price and the number of securities proposed to be issued
---------------------- shall be filed with the Registrar of Companies.
---------------------- xx. Arrangement shall be made by the issuer for collection of the applications
from mandatory collection centres.
---------------------- The bidding terminals shall contain an online graphical display of demand
---------------------- and bid prices updated at periodic intervals, not exceeding 30 minutes.
The book running lead manager shall ensure the availability of adequate
---------------------- infrastructure with syndicate members for data entry of the bids in a
timely manner.
----------------------
xxi. The investors who had not participated in the bidding process or have
---------------------- not received intimation of entitlement of securities may also make an
application.
----------------------
C. Additional Disclosures Requirements
----------------------
Apart from meeting the disclosure requirements as specified in these Guidelines,
---------------------- the following disclosures shall be suitably made:
---------------------- i. The particulars of syndicate members, brokers, Self-Certified Syndicate

Banks, registrars, bankers to the issue, etc.
---------------------- ii. The following statement shall be given under the ‘basis for issue price’:-
---------------------- “The issue price has been determined by the Issuer in consultation with
the Book Runner(s), on the basis of assessment of market demand for the
---------------------- offered securities by way of book building”.
---------------------- iii. The following accounting ratios shall be given under the basis for issue
price for each of the accounting periods for which the financial information
---------------------- is given:
---------------------- 1. EPS, pre-issue, for the last three years (as adjusted for changes in
capital).
----------------------
2. P/E pre-issue.
---------------------- 3. Average return on net-worth in the last three years.

4. Net-Asset value per share based on last balance sheet. Notes
5. Comparison of all the accounting ratios of the issuer company as
----------------------
mentioned above with the industry average and with the accounting
ratios of the peer group, i.e., companies of comparable size in the ----------------------
same industry. (Indicate the source from which industry average
and accounting ratios of the peer group has been taken). ----------------------
6. The accounting ratios disclosed in the offer document shall be ----------------------
calculated after giving effect to the consequent increase of capital
on account of compulsory conversions outstanding, as well as on ----------------------
the assumption that the options outstanding, if any, to subscribe for ----------------------
additional capital shall be exercised.
iv. The proposed manner of allocation among respective categories of ----------------------
investors, in the event of under subscription. ----------------------
Underwriting the Issue
----------------------
i. a. The ‘syndicate members’ shall enter into an underwriting agreement
with the Book Runner(s) indicating the number of securities which ----------------------
they would subscribe at the predetermined price ----------------------
b. The Book Runner(s) shall in turn enter into an underwriting
agreement with the Issue Company. ----------------------
ii. In the event of the syndicate members not fulfilling their underwriting ----------------------
obligations the Book Runner(s) shall be responsible for bringing in the
amount devolved. ----------------------
Procedure for bidding ----------------------

The method and process of bidding shall be subject to the following: ----------------------
i. Bid shall be open for at least three working days and not more than seven ----------------------
working days, which may be extended to a maximum of ten working days
in case the price band is revised ----------------------
ii. Bidding shall be permitted only if an electronically linked transparent ----------------------
facility is used.
----------------------
iii. The ‘syndicate members’ shall be present at the bidding centres so that at
least one electronically linked computer terminal at all the bidding centres ----------------------
is available for the purpose of bidding.
----------------------
iv. a. The number of bidding centres, in case 75% of the net offer, to
the public is offered through the book-building process shall not be ----------------------
less than the number of mandatory collection centres as specified
in these regulations. In case 100% of the net offer to the public is ----------------------
made through book building process, the bidding centres shall be at
----------------------
all the places, where the recognised stock exchanges are situated.
b. The same norms as applicable for collection centres shall be ----------------------
applicable for the bidding centres also. ----------------------
Book Building 127

Notes v. Individual as well as qualified institutional buyers shall place their bids
only through the ‘brokers’ who shall have the right to vet the bids.
----------------------
Provided that ASBA investors shall place their Application Supported by
---------------------- Blocked Amount through Self Certified Syndicate Banks.
---------------------- vi. During the period the issue is open to the public for bidding, the applicants
may approach the brokers of the stock exchange/s through which the
----------------------
securities are offered under online system or Self-Certified Syndicate
---------------------- Banks, as the case may be, to place an order for bidding for the securities.
Every broker shall accept orders from all clients/investors who place
---------------------- orders through him and every Self-Certified Syndicate Bank shall accept
---------------------- Applications Supported by Blocked Amount from ASBA investors.
vii. The investors shall have the right to revise their bids provided that
----------------------
Qualified Institutional Buyers shall not be allowed to withdraw their bids
---------------------- after the closure of the bidding.
---------------------- Provided that ASBA, investors shall not have the right to revise their bids.
viii. Bidding Form:
----------------------
a. g form before being issued to the bidder shall be serially numbered at the
---------------------- bidding centres and date and time stamped.
---------------------- d. The serial number may be system generated or stamped with an automatic
numbering machine.
----------------------
e. The bidding form shall be issued in duplicate signed by the investor and
---------------------- countersigned by the syndicate member, with one form for the investor
and the other for the syndicate member(s)/Book Runner(s).
----------------------
f. The bidding form for Applications Supported by Blocked Amount shall
---------------------- contain details as specified by the Board and shall be uniform for all
---------------------- ASBA investors.
ix. At the end of each day of the bidding period the demand shall be shown
----------------------
graphically on the terminals for information of the syndicate members as
---------------------- well as the investors.
---------------------- x. The identities of the Qualified Institutional Buyers making the bidding,
shall not be made public.
----------------------
xi. The stock exchanges shall display data pertaining to book built issues in
---------------------- a uniform format, giving category wise details of bids received. The data
pertaining to an issue shall be displayed on the site for a period of at least
---------------------- three days after closure of bids.
----------------------
----------------------
----------------------

Allocation/Allotment Procedure Notes
i. In case an issuer company makes an issue of 100% of the net offer to
----------------------
public through 100% book building process:
a. Not less than 35% of the net offer to the public shall be available for ----------------------
allocation to retail individual investors;
----------------------
b. Not less than 15% of the net offer to the public shall be available for
allocation to non-institutional investors, i.e., investors other than retail ----------------------
individual investors and Qualified Institutional Buyers;
----------------------
c. Not more than 50% of the net offer to the public shall be available for
allocation to Qualified Institutional Buyers. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 6.3: 100% of the Net Offer to Public through 100% Book Building ----------------------
ii. In case an issuer company makes an issue of 75% of the net offer to ----------------------
public through book-building process and 25% at the price determined
through book building – ----------------------
a. In the book built portion, not less than 25% of the net offer to the ----------------------
public, shall be available for allocation to non-qualified institutional
----------------------
buyers and not more than 50% of the net offer to the public shall be
available for allocation to Qualified Institutional Buyers. ----------------------
b. The balance 25% of the net offer to the public, offered at a price
----------------------
determined through book building, shall be available only to retail
individual investors who have either not participated or have not ----------------------
received any allocation, in the book built portion.
----------------------
----------------------
Book Building 129

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 6.4: 75% of the Net Offer to Public through Book-Building Process
---------------------- iii. Out of the portion available for allocation to qualified institutional buyers
under sub-clause (i) or (ii) or any proviso thereof, as the case may be,
---------------------- 5% shall be allocated proportionately to mutual funds. Mutual fund
applicants shall also be eligible for proportionate allocation under the
---------------------- balance available for Qualified Institutional Buyers.
---------------------- iv. Out of the portion available for allocation to Qualified Institutional Buyers
under sub-clause (i) or (ii) or any proviso thereof, as the case may be, up
---------------------- to 30% may be allocated to Anchor Investors subject to the following:
---------------------- a. Anchor Investors shall necessarily be Qualified Institutional Buyers
as defined in these guidelines.
---------------------- b. The minimum application size by an Anchor Investor shall be Rs.
---------------------- 10 crore.
c. One-third of the Anchor Investor portion shall be reserved for
---------------------- domestic mutual funds.
---------------------- d. The bidding for Anchor Investors shall open one day before the
issue opens and shall be completed on the same day.
---------------------- e. Allocation to Anchor Investors shall be on a discretionary basis
subject to minimum number of 2 investors for allocation of up to
----------------------
Rs. 250 crore and 5 investors for allocation of more than Rs. 250
---------------------- crore.
f. The number of shares allocated to Anchor Investors and the price
---------------------- at which the allocation is made, shall be made available in public
---------------------- domain by the merchant banker before opening of the issue.
g. Anchor Investors shall pay a margin of at least 25% on application
---------------------- with the balance to be paid within two days of the date of closure of
---------------------- the issue.
h. If the price fixed for the public issue through book building process
---------------------- is higher than the price at which the allocation is made to Anchor
Investors, the additional amount shall be paid by the Anchor
----------------------
Investors. However, if the price fixed for public issue is lower

than the price at which the allocation is made to Anchor Investors, Notes
difference shall not be payable to the Anchor Investors.
i. There shall be a lock-in of 30 days on the shares allotted to the ----------------------
Anchor Investors from the date of allotment in the public issue.
----------------------
j. No person related to the book running lead managers/promoters/
promoter group in the concerned public issue or the book running ----------------------
lead managers to the concerned public issue can apply under Anchor
----------------------
Investor category.
k. The parameters for selection of Anchor Investors shall be clearly ----------------------
identified by the merchant banker and shall be available as part of
records of the merchant banker for inspection by SEBI. ----------------------
l. The applications made by Qualified Institutional Buyers under ----------------------
Anchor Investor category and under Non Anchor Investor category
may not be considered as multiple applications. ----------------------
v. Allotment to retail individual investors, non-institutional investors and ----------------------
qualified institutional buyers shall be made proportionately.
vi. In the event of under subscription in any category, the undersubscribed ----------------------
portion shall be allocated to the bidders as per disclosures made.
----------------------
vii. Allotment shall be made not later than 15 days from the closure of the
issue failing which interest at the rate of 15% shall be paid to the investors. ----------------------
viii. The broker shall refund the margin money collected earlier, within 3 days ----------------------
of receipt of basis of allocation, to the applicants who did not receive
allocation. ----------------------
ix. On payment and receipt of the sum payable on application for the amount
----------------------
towards minimum subscription, the company shall allot the shares to the
applicants as per these Guidelines. ----------------------
x. In case the issuer company has made an issue of 75% of the net offer to
public through book building process and 25% at the price determined ----------------------
through book building: ----------------------
a. The offer of 25% of the net offer to the public, made at a price
determined through book building, shall open within 15 days from ----------------------
the date of closure of bidding;
----------------------
b. The offer for subscription to the public, shall remain open for a period
of at least 3 working days after completing all the requirements ----------------------
of advertisement and dispatch of issue material to all the stock
exchanges; ----------------------
c. During the time when the offer is open, the investors who have ----------------------
received an intimation of entitlement of securities shall submit the
application forms along with the application moneys; ----------------------
d. The other retail individual investors who had not participated in the ----------------------
bidding process or have not received intimation of entitlement of
securities may also make an application. ----------------------
----------------------
Book Building 131

Notes Maintenance of Books and Records
i. A final book of demand showing the result of the allocation process shall
---------------------- be maintained by the book runner/s.
---------------------- The Allotment details shall be put on the website (if available) of the
Registrar to the issue and the issuer.
---------------------- Further, online messaging facility of NSDL/CDSL or of stock exchanges
---------------------- may be used to communicate the Allotment details to Brokers, as an
alternative of physical Confirmation of Allocation Note”.
---------------------- ii. The Book Runner/s and other intermediaries in the book-building process
associated shall maintain records of the book building prices.
----------------------
iii. The Board shall have the right to inspect the records, books and documents
---------------------- relating to the book-building process and such person shall extend full co-
operation.
----------------------
D. Applicability to fast-track issues
---------------------- Unless specified otherwise in this Chapter and unless the context
otherwise requires, all references in this Chapter to “draft prospectus”
---------------------- shall be construed as having been made to “red herring prospectus”, in
---------------------- application to fast track issues.
----------------------
----------------------
Fill in the blanks.
----------------------
1. In an issue of securities to the public through a ______ the option for
---------------------- 75% book building shall be available to the issuer company.
---------------------- 2. One day prior to the opening of the issue to the public, ______
shall collect from the institutional buyers and the underwriters the
---------------------- application forms along with the application moneys to the extent of
the securities proposed to be allotted to them/subscribed by them.
----------------------
3. The primary responsibility of building the book shall be of the
---------------------- _________.
---------------------- 4. The ______ shall disclose either the floor price of the securities
offered through it or a price band along with the range within which
---------------------- the price can move.
---------------------- 5. The cap of the price band should not be more than ____ of the floor
of the band.
----------------------
6. One-third of the ________ portion shall be reserved for domestic
---------------------- mutual funds.
---------------------- 7. The __________ details shall be put on the website of the Registrar
to the issue and the issuer.
----------------------
----------------------

Notes
Activity 1
----------------------
List the principal intermediaries involved in a book building process. ----------------------
----------------------
Summary
----------------------
• Book Building is the process of determining the price of an Initial Public
Offer (IPO) and Follow-on Public Offers (FPO) based on the demand ----------------------
from institutional investors.
----------------------
• Initial Public Offer for securities can be made by fixed price method,
book- building method or a combination of both. ----------------------
• Under the fixed price method the price of the security is pre-decided and ----------------------
the issuer gets to know if the demand only after the closure of the issue.
----------------------
• Under the book-building method, a price band is given to investors and
based on the demand, the final price is decided. ----------------------
• Issue of securities through book building can be either through: ----------------------
 75% Book Building
----------------------
 100% Book Building
----------------------
• Book-building process starts with appointment of Merchant Banker as
Book Runner who in turn appoints syndicate members. ----------------------
• The ‘syndicate members’ shall enter into an underwriting agreement with ----------------------
the Book Runner indicating the number of securities which they would
subscribe at the predetermined price. The Book Runner shall in turn enter ----------------------
into an underwriting agreement with the Issuer Company.
----------------------
• The syndicate members accept bids from different classes of investors
during the period the bid is open. ----------------------
• The cap of the price band should not be more than 20% of the floor of the ----------------------
band. The price band can be revised during the bidding period in which
case the maximum revision on either side shall not exceed 20%. ----------------------
• The issue should remain open for minimum 3 days and maximum 7 days. ----------------------
• The investors shall have the right to revise their bids provided that ----------------------
Qualified Institutional Buyers shall not be allowed to withdraw their bids
after the closure of the bidding. ----------------------
• The bidding form should be standard to ensure uniformity, with serial ----------------------
number, date and time mentioned. It should provide information about the
investor, quantity and bid price and should be issued in duplicate. ----------------------
• Upon closure of the bid the Issuer and Merchant Banker decide the final ----------------------
offer price of the security and submit the final prospectus to the Registrar
of Companies. ----------------------
Book Building 133

Notes • The issuer needs to disclose the name of the Merchant Banker, details
of syndicate member, basis of determination of price band, key financial
---------------------- ratios and the proposed manner of allotment.
---------------------- • In case an Issuer Company makes an issue of 100% of the net offer to
public through 100% Book-building process, 35% of the net offer shall be
---------------------- allocated to retail individual investors, 15% to non-institutional investors
and not more than 50% to Qualified Institutional Buyers.
----------------------
• In case an Issuer Company makes an issue of 75% of the net offer to
---------------------- public through book-building process and 25% at the price determined
through book building, in the book built portion, 25% shall be available
----------------------
for allocation to non-qualified institutional buyers and 50% to Qualified
---------------------- Institutional Buyers. The balance 25% offered at a price determined
through book building, shall be available only to retail individual investors.
----------------------
• Allotment shall be made not later than 15 days from the closure of the
---------------------- issue failing which interest at the rate of 15% shall be paid to the investors.
---------------------- • A final book of demand showing the result of the allocation process shall
be maintained by the Book Runner.
---------------------- • All references to “draft prospectus” shall be construed as having been
---------------------- made to “red herring prospectus”, in application to fast-track issues.
---------------------- Keywords
----------------------
• Bid: The demand for a security on behalf of an investor that is entered
---------------------- into by the syndicate members in the system.
---------------------- • Bidder: The person who places the bid with the syndicate member.
• Floor price: The minimum offer price below which bids cannot be
----------------------
entered.
---------------------- • Merchant banker: An entity registered under the Securities and
Exchange Board of India (Merchant Bankers) Regulations, 1999.
----------------------
• Order book: An ‘electronic book’ that shows the demand for the shares
---------------------- of the company at various prices on a real-time basis.
---------------------- • ASBA: An application for subscribing to an issue, containing an
authorisation to block the application money in a bank account.
----------------------
• Qualified institutional buyers: Those institutional investors who are
---------------------- generally perceived to possess expertise and the financial muscle to
evaluate and invest in the capital markets.
----------------------
• Private placement: Issue of shares to a selected group of persons which
---------------------- is neither right issue nor public issue.
---------------------- • Preferential allotment: Term given to private placement by a Listed
Company.
----------------------

• Red herring prospectus: Prospectus which does not have details of Notes
either price or number of shares being offered or the amount of issue.
----------------------
• Placement document: Document prepared by Merchant Banker for the
purpose of Qualified Institutions’ placement and contains all the relevant ----------------------
and material disclosures to enable QIBs to make an informed decision.
----------------------
• Differential pricing: When the issue price for one category is different
from the issue price for another category. ----------------------
• Anchor investor: A qualified institutional buyer who makes an application
----------------------
for a value of Rs. 10 crore more in a public issue made through the book-
building process. ----------------------
----------------------
----------------------
1. Define the term Book Building and elaborate on why Book-Building
Method is preferred more than fixed price method. ----------------------
2. List down the main conditions to be fulfilled by a company to be eligible ----------------------

to make 75% book-building issue.
----------------------
3. What are the additional disclosure requirements specified by SEBI for
companies opting for 100% book building? ----------------------
4. Explain the bidding process in detail and highlight the key features of ----------------------
bidding form.
----------------------
5. Explain the allotment procedure in case of net offer to the public through
book building. ----------------------
6. Which guidelines have been given by SEBI regarding maintenance of
----------------------
books and records under the book building process?
----------------------
Answers to Check your Progress ----------------------

1. The Merchant Banker appoints syndicate members. ----------------------
2. The syndicate members input the orders into an ‘electronic book’.
----------------------
1. In an issue of securities to the public through a prospectus, the option for ----------------------
75% book building shall be available to the issuer company.
----------------------
2. One day prior to the opening of the issue to the public, Book Runner shall
collect from the institutional buyers and the underwriters the application ----------------------
forms along with the application money to the extent of the securities
proposed to be allotted to them/subscribed by them. ----------------------
Book Building 135

Notes 3. The primary responsibility of building the book shall be of the Lead Book
Runner.
---------------------- 4. The red herring prospectus shall disclose either the floor price of the
---------------------- securities offered through it or a price band along with the range within
which the price can move.
---------------------- 5. The cap of the price band should not be more than 20% of the floor of the
---------------------- band.
6. One-third of the anchor investor’s portion shall be reserved for domestic
----------------------
mutual funds.
---------------------- 7. The allotment details shall be put on the website of the Registrar to the
issue and the issuer.
----------------------

----------------------
4. Chandratre, K R and Dr. A N Navare. 2010. Corporate Governance – A
---------------------- Practical Handbook. Bharat Law House.
---------------------- 5. SEBI Guidelines for Book Building.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Buyback and ESOP
UNIT
7
Structure:
7.1 Introduction
7.2 Provisions of Companies Act on Buy-Back
7.3 The Securities and Exchange Board of India Regulations on Buy-Back
7.4 Contents of Letter of Offer
7.5 Meaning of ESOS and ESPS
7.6 SEBI Guidelines on Employee Stock Option Scheme (ESOS)
7.7 SEBI Guidelines on Employee Stock Purchase Scheme (ESPS)
7.8 Listing of Shares
Summary
Key Words
Suggested Reading
Buyback and Esop 137

Notes
Objectives
----------------------
----------------------
• Describe the meaning of buy back of shares or securities
----------------------
• Identify provisions of Companies Act on buy back
---------------------- • Classify the different methods of buy back
---------------------- • Examine SEBI guidelines on methods and disclosures of buy back
---------------------- • Evaluate meaning of employee stock option
---------------------- • Outline the procedure for implementation of ESOS/ESPS

• Discuss the listing of securities post ESOS/ESPS
----------------------
----------------------
7.1 INTRODUCTION
----------------------
Buy-back is defined as the process of buying its own shares by a company.
---------------------- As a result of buy-back the total number of outstanding shares of the company
in the market gets reduced which in turn increases the value of available shares
---------------------- in the market. Some companies buy back their shares in order to increase their
---------------------- controlling stake or reduce the threat of other shareholders intending to buy
controlling stake in the company. Other reasons for buy-back include paying of
---------------------- surplus cash not required by business and rationalisation of capital structure by
writing off capital not represented by available assets.
----------------------
---------------------- 7.2 PROVISIONS OF COMPANIES ACT ON BUY-BACK

---------------------- The provisions regulating Buy-Back of shares are contained in Sections
68, 69 and 70 of the Companies Act, 2013. A summary of provisions is as
---------------------- under:
---------------------- A. Section 68 – Power of A Company to Purchase its own Securities
---------------------- 1. A company may purchase its own shares or other specified securities out
of:
----------------------
i. Its free reserves; or
---------------------- ii. The securities premium account; or
---------------------- iii. The proceeds of any shares or other specified securities:
---------------------- No buy-back of any kind of shares or securities shall be made out of the
proceeds of an earlier issue of the same kind of shares or securities.
----------------------
2. No company shall purchase its own shares or other specified securities
---------------------- unless—
i. The buy-back is authorised by its articles;
----------------------

ii. A special resolution has been passed in general meeting of the Notes
company authorising the buy-back:
----------------------
Provided that nothing contained in this clause shall apply in any case
where— ----------------------
a. The buy-back is or less than 10% of the total paid-up equity capital and ----------------------
free reserves of the company; and
b. Such buy-back has been authorised by the Board by means of a resolution ----------------------
passed at its meeting: ----------------------
Provided further that no offer of buy-back shall be made within a period
of one year reckoned from the date of the closure of the preceding offer ----------------------
of buy-back,, if any. ----------------------
●
The buy-back is or less than 25% of the total paid-up capital and free
----------------------
reserves of the company:
Provided that the buy-back of equity shares in any financial year shall not ----------------------
exceed 25% of its total paid-up equity capital in that financial year;
----------------------
● The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back: ----------------------
Provided that the Central Government may prescribe a higher ratio of ----------------------
the debt than that specified under this clause for a class or classes of
companies. ----------------------
● All the shares or other specified securities for buy-back are fully paid-up; ----------------------
● The buy-back of the shares or other specified securities listed on any ----------------------
recognised stock exchange is in accordance with the regulations made by
the Securities and Exchange Board of India in this behalf. ----------------------
3. The notice of the meeting at which special resolution is proposed to be ----------------------
passed shall be accompanied by an explanatory statement stating—
----------------------
a. A full and complete disclosure of all material facts;
b. The necessity for the buy-back; ----------------------
c. The class of security intended to be purchased under the buy-back; ----------------------
d. The amount to be invested under the buy-back; and ----------------------
e. The time limit for completion of buy-back.
----------------------
4. Every buy-back shall be completed within a period of one year from the
date of passing the special resolution or a resolution passed by the Board ----------------------
5. The buy-back may be— ----------------------
a. From the existing security holders on a proportionate basis; or ----------------------
b. From the open market; or
----------------------

----------------------

Notes c. By purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
----------------------
7. Where a company has passed a special resolution to buy back its own
---------------------- shares or other securities under this section, it shall, before making such
buy-back, file with the Registrar and the Securities and Exchange Board
---------------------- of India a declaration of solvency in the prescribed and signed by at least
two directors of the company, one of whom shall be the managing director.
----------------------
Provided that the above declaration is not required to be filed with SEBI
---------------------- is case of unlisted companies.
---------------------- 8. Where a company buys back its own securities, it shall extinguish and
physically destroy the securities so bought-back within 7 days of the last
---------------------- date of completion of buy-back.
---------------------- 9. Where a company completes a buy-back of its shares or other specified
securities under this section, it shall not make further issue of the same
---------------------- kind of shares or securities within a period of 6 months except by way
---------------------- of bonus issue or in the discharge of subsisting obligations such as
conversion of warrants, stock option schemes, sweat equity or conversion
---------------------- of preference shares or debentures into equity shares.
---------------------- 10. Where a company buys back its securities under this Section, it shall
maintain a register of the securities so bought, the consideration paid for
---------------------- the securities bought-back, the date of cancellation of securities, the date
of extinguishing and physically destroying of securities and such other
---------------------- particulars as may be prescribed.
---------------------- 11. A company shall, after the completion of the buy-back under this Section,
file with the Registrar and the Securities and Exchange Board of India, a
---------------------- return containing such particulars relating to the buy-back within 30 of
---------------------- such completion, as may be prescribed:
Provided that no return shall be filed with SEBI in case of unlisted
----------------------
companies.
---------------------- 12. If a company makes any default in complying with the provisions of this
section or any regulation made by the Securities and Exchange Board, for
----------------------
the purposes of clause (f) of sub-section (2), of section 68 the company
---------------------- shall be punishable with fine which shall not be less than one lakh rupees
but which may extend to three lakh rupees and every officer of the company
---------------------- who is in default shall be punishable with imprisonment for a term which
may extend to three years or with fine which shall not be less than one lakh
----------------------
rupees but which may extend to three lakh rupees, or with both.
---------------------- B. Section 69 - Transfer of certain sums to capital redemption reserve
---------------------- account
Where a company purchases its own shares out of free reserves, or
---------------------- securities premium account, then a sum equal to the nominal value of the
---------------------- share so purchased shall be transferred to the capital redemption reserve
account and details of such transfer shall be disclosed in the balance sheet.
C. Section 70 - Prohibition for buy-back in certain circumstances Notes
1. No company shall directly or indirectly purchase its own shares or
----------------------
other specified securities —
a. Through any subsidiary company including its own subsidiary ----------------------
companies; or
----------------------
b. Through any investment company or group of investment
companies; or ----------------------
c. If a default, by the company, in repayment of deposit or ----------------------
interest payable thereon, redemption of debentures or
preference shares or payment of dividend to any shareholder ----------------------
or repayment of any term loan or interest payable thereon to ----------------------
any financial institution or bank, is subsisting.
2. No company shall directly or indirectly purchase its own shares or ----------------------
other specified securities in case such company has not complied ----------------------
with the provisions of Sections 92, 123, 127 and 129.
----------------------
Multiple Choice Multiple Response. ----------------------
1. A company may purchase its own shares or other specified securities ----------------------
out of:
----------------------
i. Its free reserves
----------------------
ii. The securities premium account
iii. An earlier issue of the same kind of shares or securities ----------------------

2. The notice of the meeting at which special resolution is proposed to ----------------------
be passed shall be accompanied by an explanatory statement stating:
----------------------
i. A full and complete disclosure of all material facts
ii. The necessity for the buy-back ----------------------
iii. The amount to be invested under the buy-back ----------------------
iv. None of the above ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
---------------------- 1. The buy-back may be:
---------------------- i. From the existing security holders on a proportionate basis
---------------------- ii. From the open market
iii. From odd lots
----------------------
iv. All of the above
----------------------
2. Which of the following companies shall directly or indirectly purchase
---------------------- its own shares or other specified securities?
---------------------- i. Subsidiary company
ii. Investment company
----------------------
iii. Any defaulting company
----------------------
----------------------
---------------------- 7.3 THE SECURITIES AND EXCHANGE BOARD OF INDIA

---------------------- REGULATIONS ON BUY-BACK
---------------------- The Securities and Exchange Board of India (SEBI) framed the SEBI
(Buy-Back of Securities) Regulations, 1999. These regulations are applicable
---------------------- to buy-back of shares or securities of a company listed on a stock exchange.
---------------------- A company listed on a stock exchange shall not buy back its shares or
securities so as to de-list its shares or securities from the stock exchange.
----------------------
Methods of Buy-back
----------------------
A company may buy-back its shares or securities by any one of the following
---------------------- methods:
---------------------- a. From the existing shares or securities on a proportionate basis through the
tender offer;
---------------------- b. From open market through –
---------------------- i. Book-building process
---------------------- ii. Stock exchange
c. From odd-lot holders.
----------------------
A company shall not buy back its shares or securities from any person
---------------------- through negotiated deals, whether on or of the stock exchange or through
---------------------- spot transactions or through any private arrangement.
Any person or an insider shall not deal in securities of the company on
---------------------- the basis of unpublished information relating to buy-back of shares or
---------------------- securities of the company.

Special Resolution Notes
A special resolution needs to be passed for Buy-Back as per the provisions
----------------------
of the Companies Act. An explanatory statement should be annexed to the notice
for the general meeting containing necessary disclosures. ----------------------
A copy of the resolution passed at the General meeting shall be filed with
----------------------
the Board and the stock exchanges where the shares or securities of the company
are listed, within seven days from the date of passing of the resolution. ----------------------
Board resolution ----------------------
A company, authorised by a resolution passed by the Board of Directors at
its meeting to Buy Back its shares or securities may Buy Back its shares or ----------------------
securities subject to the following conditions: ----------------------
a. Before making a public announcement a public notice shall be given in at
----------------------
least one English national daily, one Hindi national daily and a regional
language daily, with all wide circulation at the place where the registered ----------------------
office of the company is situated;
----------------------
b. The public notice, shall be given within 2 days of the passing of the
resolution by the Board of Directors; ----------------------
c. The public notice shall contain the all the necessary disclosures
----------------------
A copy of the resolution, passed by the Board of Directors at its meeting
authorising Buy Back of its shares or securities, shall be filed with the ----------------------
Board and the stock exchanges, where the shares or securities of the ----------------------
company are listed, within two days of the date of the passing of the
resolution. ----------------------
A. Buy-back from existing security holders ----------------------
A company may buy back its shares or securities from its existing shares
or securities on a proportionate basis. Provided 15% of the number of ----------------------
securities which company proposes to buy back or number of securities ----------------------
entitled as per their shareholding , whichever higher shall be reserved for
small shareholders. ----------------------
Additional Disclosures ----------------------
a. The maximum price at which the buy-back shall be made and whether ----------------------
the Board of Directors of the company are being authorised at the general
meeting to determine subsequently the specific price at which the buy- ----------------------
back may be made at the appropriate time;
----------------------
b. If the promoter intends to offer their shares or securities,
i. The quantum of shares or securities proposed to be tendered, and ----------------------
ii. The details of their transactions and their holdings for the last six ----------------------
months prior to the passing of the special resolution for buy-back
including information of number of shares or securities acquired, ----------------------
the price and the date of acquisition. ----------------------

Notes Filing of offer document
1. The company which has been authorised by a special resolution or a
---------------------- resolution passed by the Board of Directors at its meeting shall before
---------------------- Buy Back make a public announcement in at least one English National
Daily, one Hindi National Daily and a Regional language daily with all
---------------------- wide circulation at the place where the Registered office of the company
is situated and shall broadly contain the following information:
----------------------
a. Number and percentage on total paid up capital and free reserves
---------------------- proposed to be bought back and price.
---------------------- b. The time table for the entire period during which the offer will be
open along with the specified date.
---------------------- c. Method of Buy-Back, necessity to Buy-Back and the maximum
---------------------- amount to be invested.
d. Audited financial statements of last 3 years.
----------------------
e. Details of escrow account.
---------------------- f. Listing details and stock market data.
---------------------- g. Pre- and post-Buy-Back capital structure and shareholding pattern
along with promoters shareholding.
----------------------
h. Details of statutory approvals, collection and bidding centres and
---------------------- compliance officers.
---------------------- 2. The Company shall within 5 working days of the public announcement
file with the Board a draft-letter of offer containing disclosures through a
---------------------- merchant banker who is not associated with the company along with soft
copy of the same.
----------------------
3. The draft letter of offer shall be accompanied with specified fees.
---------------------- 4. The board may give comment on draft letter within 7 days.
---------------------- 5. The company shall file along with the draft letter of offer, a declaration of
solvency in the prescribed form and in a manner prescribed in sub-section
---------------------- (6) of section 68 of the Companies Act, 2013.
---------------------- Escrow account
---------------------- 1. The company shall as and by way of security for performance of its
obligations under the regulations, on or before the opening of the offer
---------------------- deposit the specified sum in an escrow account.
---------------------- 2. The escrow amount shall be payable in the following manner,-
i. If the consideration payable does not exceed Rs. 100 crore - 25% of
----------------------
the consideration payable;
---------------------- ii. If the consideration payable exceeds Rs. 100 crores– 25% up to Rs.
---------------------- 100 crore and 10% thereafter.
3. The escrow account shall consist of:
----------------------

a. Cash deposited with a scheduled commercial bank or; Notes
b. Bank guarantee in favour of the merchant banker; or
----------------------
c. Deposit of acceptable securities with appropriate margin, with the
merchant banker, or ----------------------
d. A combination of (a), (b) and (c) above. ----------------------
4. On payment of consideration to all the security holders who have accepted
----------------------
the offer and after completion of all formalities of Buy Back, the amount,
guarantee and securities in the escrow, if any, shall be released to the ----------------------
company.
----------------------
5. The Board in the interest of the security holders may in case of non-
fulfilment of obligations under the regulations by the company forfeits ----------------------
the escrow account either in full or in part.
----------------------
6. The amount forfeited may be distributed pro rata amongst the security
holders who accepted the offer and balance, if any, shall be utilised for ----------------------
investor protection.
----------------------
Payment to security holders
1. The company shall immediately after the date of closure of the offer open ----------------------
a special account with a bankers to an issue registered with the Board ----------------------
and deposit therein, such sum as would, together with ninety percent of
the amount lying in the escrow account make-up the entire sum due and ----------------------
payable as consideration for buy-back in terms of these regulations and
for this purpose, may transfer the funds from the escrow account. ----------------------
2. The company shall within seven days of the acceptance of the offer make ----------------------
payment of consideration in cash to those security holders whose offer
has been accepted or return the shares or securities to the security holders. ----------------------
B. Odd-lot Buy-back ----------------------

The provisions pertaining to Buy-Back through tender offer as specified in this ----------------------
Chapter shall be applicable to odd-lot Buy-back of shares or securities. ----------------------
C. Buy-back from open market
----------------------
1. The buy-back of shares or securities from the open market may be in any
one of the following methods: ----------------------
a. Through stock exchange ----------------------
b. Book Building process.
----------------------
1. Buy-back through stock exchange
----------------------
A company shall buy back its shares or securities through the stock
exchange as provided hereunder; ----------------------
a. The special resolution or the resolution passed by the Board of Directors ----------------------
at its meeting shall specify the maximum price at which the buy-back
shall be made; ----------------------

Notes b. The buy-back of the shares or securities shall not be made from the
promoters or persons in control of the company;
----------------------
c. The company shall appoint a merchant banker and make a public
---------------------- announcement
d. The public announcement shall be made at least seven days prior to the
----------------------
commencement of buy-back and contain disclosures as under Schedule
---------------------- II, Part B;
e. A copy of the public announcement shall be filed with the Board within
----------------------
two days of such announcement along with the fee.
---------------------- f. The public announcement shall also contain disclosures regarding details
---------------------- of the brokers and stock exchanges through which the buy-back of shares
or securities would be made;
---------------------- g. The buy-back shall be made only on stock exchanges having nationwide
---------------------- trading terminals
h. The buy-back of shares or securities shall be made only through the order
---------------------- matching mechanism except ‘all or none’ order matching system;
---------------------- i. The company and the merchant banker shall submit the information
regarding the shares or securities bought-back to the stock exchange on
----------------------
a daily basis and publish the said information in a national daily on a
---------------------- fortnightly basis and every time when an additional five per cent of the
Buy Back has been completed.
----------------------
Provided that where there is no Buy-Back during a particular period the
---------------------- company and the Merchant Banker shall not be required to publish the
details in a national daily.
----------------------
j. The identity of the company as a purchaser shall appear on the electronic
---------------------- screen when the order is placed.
---------------------- 2. Buy-back through book building

1. A company may buy back its shares or securities through the book-
----------------------
building process as provided hereunder:
---------------------- a. The special resolution or the resolution passed by the Board
of Directors at its meeting shall specify the maximum price at
----------------------
which the buy-back shall be made.
---------------------- b. The company shall appoint a merchant banker and make a
---------------------- public announcement.
c. The public announcement shall be made at least seven days
---------------------- prior to the commencement of buy-back.
---------------------- d. The deposit in the escrow account shall be made before the
date of the public announcement. The amount to be deposited
---------------------- in the escrow account shall be determined with reference to
---------------------- the maximum price as specified in public announcement.

e. A copy of the public announcement shall be filed with the Notes
Board within two days of such announcement along with the
fees. ----------------------
f. The public announcement shall also contain the detailed ----------------------
methodology of the book-building process, the manner of
acceptance, the format of acceptance to be sent by the security ----------------------
holders pursuant to the public announcement and the details
of bidding centres. ----------------------
g. The book-building process shall be made through an ----------------------
electronically linked transparent facility.
----------------------
h. The number of bidding centres shall not be less than 30 and
there shall be at least one electronically linked computer ----------------------
terminal at all the bidding centres.
----------------------
i. The offer for Buy-Back shall remain open to the security
holders for a period not less than 15 days and not exceeding ----------------------
30 days.
----------------------
j. The merchant banker and the company shall determine the
buy-back price based on the acceptances received. ----------------------
k. The final buy-back price which shall be the highest price
----------------------
accepted shall be paid to all holders whose shares or securities
have been accepted for buy-back. ----------------------
2. The provisions pertaining to verification of acceptances and opening of
----------------------
special account and payment of consideration shall be.
Extinguishment of Certificate ----------------------
1. The company shall extinguish and physically destroy the security ----------------------
certificates so bought back in the presence of a Registrar to issue or the
Merchant Banker and the Statutory Auditor within fifteen days of the date ----------------------
of acceptance of the shares or securities. Provided that the company shall ----------------------
ensure that all the securities bought back are extinguished within seven
days of the last date of completion of buy-back. ----------------------
2. The shares or securities offered for buy-back, if already dematerialised,
----------------------
shall be extinguished and destroyed in the manner specified under
Securities and Exchange Board of India (Depositories and Participants) ----------------------
Regulations, 1996 and the bye-laws framed there under.
----------------------
3. a.
The company shall furnish a certificate to the Board certifying
compliance of extinguishment of certificates duly certified and ----------------------
verified by−
i. The registrar and whenever there is no registrar by the merchant ----------------------
banker; ----------------------
ii. Two Directors of the company one of whom shall be a Managing
Director where there is one, ----------------------
iii. The statutory auditor of the company ----------------------

Notes b. The certificate shall be furnished to the Board on a monthly basis
by the 7th day of the month succeeding the month in which the
---------------------- securities certificate are extinguished and destroyed.
---------------------- 4. The Company shall furnish, the particulars of the security certificates
extinguished and destroyed under sub-regulation (1), to the stock
---------------------- exchanges where the shares of the company are listed on a monthly
basis by the seventh day of the month succeeding the month in which the
----------------------
securities certificates are extinguished and destroyed.
---------------------- 5. The Company shall maintain a record of security certificates, which have
---------------------- been cancelled and destroyed as prescribed in Section 68 of the Companies
Act, 2013.
----------------------
Obligations of the Company
---------------------- The company shall ensure that -
---------------------- a. The letter of offer, the public announcement of the offer or any other
advertisement should not contain any misleading information;
----------------------
b. The company shall not issue any shares or securities including by way of
---------------------- bonus till the date of closure of the offer made under these regulations;
---------------------- c. The company shall pay the consideration only by way of cash;
d. The company shall not withdraw the offer to buy-back after the draft
----------------------
letter of offer is filed with the Board or public announcement of the offer
---------------------- to buy-back is made;
e. The promoter or the person shall not deal in the shares or securities of the
----------------------
company in the stock exchange during the period the buy-back offer is
---------------------- open;
f. The company shall within two days of the completion of buy-back issue
----------------------
a public advertisement in a national daily, inter alia, disclosing:
---------------------- i. Number of shares or securities bought;
---------------------- ii. Price at which the shares or securities bought;
---------------------- iii. Total amount invested in buy-back;
iv. Details of the security holders from whom shares or securities exceeding
----------------------
one per cent of total shares or securities bought back; and,
---------------------- v. The consequent changes in the capital structure and the shareholding
pattern after and before the buy-back.
----------------------
Power of the Board to order investigation
----------------------
The Board may, on its own or upon information received by it, cause an
---------------------- investigation to be made in respect of the conduct and affairs of any person
associated with the process of Buy-Back, by appointing an officer of the Board.
----------------------
It shall be the duty of every person in respect of whom an investigation
---------------------- has been ordered under to produce before the Investigating Officer such book,

accounts and other documents in his custody or control and furnish him with Notes
such statements and information as the said officer may require from the
purposes of the investigation. ----------------------
The Investigating Officer shall for the purpose of investigation, have the full ----------------------
powers:
----------------------
a. Of summoning and enforcing the attendance of persons;
b. To examine orally and to record on oath the statement of the persons ----------------------
concerned − any director, partner, member or employee of such person.
----------------------
Submission of Report to the Board
----------------------
The Investigating Officer shall, on completion of the investigation, after
taking into account all relevant facts and circumstances, submit a report to the ----------------------
Board.
----------------------
On the receipt of report the Board may initiate such action as may be
empowered to do so in the interests of investors and the securities market. ----------------------
----------------------
----------------------
1. The public notice shall be given within _____ of the passing of the ----------------------
resolution by the Board of Directors.
2. The Company shall within ___ working days of the public ----------------------
announcement file with the Board a draft letter of offer ----------------------
3. The buy-back of shares or securities from the open market may be
done by either through _________or ________ process. ----------------------
4. The buy-back of the shares or securities shall not be made from the ----------------------
______ or persons in control of the company.
----------------------
5. The book-building process shall be made through an ___________.
----------------------
6. The company shall pay the consideration only by way of ______.
----------------------
7.4 CONTENTS OF LETTER OF OFFER ----------------------
----------------------
The letter of offer shall contain the following;
1. Disclaimer Clause as may be prescribed by the Board. ----------------------
2. Details of the offer including the total number and percentage of the total ----------------------
paid-up capital and free reserves proposed to be bought back and price.
----------------------
3. The proposed time table from opening of the offer till the extinguishment
of the certificates. ----------------------
4. The specified date. ----------------------

Notes 5. Authority for the offer of buy-back.
6. A full and complete disclosure of all material facts including the contents
----------------------
of the explanatory statement annexed to the notice for the general meeting
---------------------- at which the special resolution approving the buy-back was passed or the
contents of public notice issued after the passing of the resolution by the
---------------------- Board of Directors authorising the buy-back.
---------------------- 7. The necessity for the buy-back.
8. The process to be adopted for the buy-back.
----------------------
9. The maximum amount to be invested under the buy-back.
----------------------
10. The minimum and the maximum number of securities that the company
---------------------- proposes to buy-back, sources of funds from which the buy-back would
be made and the cost of financing the buy-back.
----------------------
11. Brief information about the company.
----------------------
12. Audited financial information for the last 3 years and the lead manager
---------------------- shall ensure that the particulars (audited statement and unaudited
statement) contained therein shall not be more than 6 months old from
---------------------- the date of the offer document together with financial ratios as may be
specified by the Board.
----------------------
13. Details of escrow account opened and the amount deposited therein.
----------------------
14. Listing details and stock market data:
---------------------- a. High, low and average market prices of the securities of the company
---------------------- proposed to be bought back, during the preceding three years;
b. Monthly high and low prices for the six months preceding the
---------------------- date of filing the draft letter of offer with the Board which shall be
---------------------- updated till the date of the letter of offer;
c. The number of securities traded on the days when the high and low
----------------------
prices were recorded on the relevant stock exchanges during the
---------------------- period stated at (a) and (b) above;
d. The stock market data referred to above shall be shown separately
----------------------
for periods marked by a change in capital structure, with such period
---------------------- commencing from the date the concerned stock exchange recognises
the change in the capital structure (e.g., when the securities have
---------------------- become ex-rights or ex-bonus);
---------------------- e. The market price immediately after the date on which the resolution
of the Board of Directors approving the buy-back; and
----------------------
f. The volume of securities traded in each month during the six months
---------------------- preceding the date of the offer document along with high, low and
average prices of securities of the company, details relating to volume
---------------------- of business transacted should also be stated for respective periods.
----------------------

15. Present capital structure (including the number of fully paid and partly Notes
paid securities) and shareholding pattern.
----------------------
16. The capital structure including details of outstanding convertible
instruments, if any, post buy-back. ----------------------
17. The aggregate shareholding of the promoter group and of the directors of
----------------------
the promoters, where the promoter is a company and of persons who are
in control of the company. ----------------------
18. The aggregate number of shares or other specified securities purchased or
----------------------
sold by persons mentioned in clause 17 above during a period of twelve
months preceding the date of the public announcement and from the date ----------------------
of public announcement to the date of the letter of offer; the maximum
and minimum price at which purchases and sales referred to above were ----------------------
made along with the relevant dates.
----------------------
19. Management discussion and analysis on the likely impact of buy-back
on the company’s earnings, public holdings, holdings of NRIs/FIIs, etc., ----------------------
promoters holdings and any change in management structure. ----------------------
20. The details of statutory approvals obtained.
----------------------
21. Collection and bidding centres.
----------------------
22. Name of compliance officer and details of investors service centres.
23. 1. A declaration to be signed by at least two directors of the company ----------------------
one of whom shall be a managing director where there is one that
----------------------
there are no defaults subsisting in repayment of deposits, redemption
of debentures or preference shares or repayment of a term loans to ----------------------
any financial institutions or banks.
----------------------
2. A declaration to be signed by at least two directors of the company
one of whom shall be a managing director where there is one ----------------------
stating that the Board of Directors has made a full enquiry into the
affairs and prospects of the company and that they have formed the ----------------------
opinion— ----------------------
a. As regards its prospects for the year immediately following
the date of the letter of offer that, having regard to their ----------------------
intentions with respect to the management of the company’s ----------------------
business during that year and to the amount and character of
the financial resources which will in their view be available ----------------------
to the company during that year, the company will be able to
meet its liabilities and will not be rendered insolvent within a ----------------------
period of one year from that date; ----------------------
b. In forming their opinion for the above purposes, the directors
shall take into account the liabilities as if the company were ----------------------
being wound up under the provisions of the Companies Act, ----------------------
1956 (including prospective and contingent liabilities).
----------------------

Notes 24. The declaration must in addition have annexed to it a report addressed to
the directors by the company’s auditors stating that—
----------------------
i. They have inquired into the company’s state of affairs; and
---------------------- ii. The amount of permissible capital payment for the securities in
---------------------- question is in their view properly determined; and they are not aware
of anything to indicate that the opinion expressed by the directors in
---------------------- the declaration as to any of the matters mentioned in the declaration
is unreasonable in all the circumstances.
----------------------
25. Such other disclosures as may be specified by the Board from time to time
---------------------- by way of guidelines.
---------------------- 26. The letter of offer shall be dated and signed on behalf of the Board of
Directors of the company by its manager or secretary, if any, and by not
----------------------
less than two directors of the company one of whom shall be a managing
---------------------- director where there is one.
---------------------- The letter of offer shall be dated and signed on behalf of the Board of
Directors of the company by its manager or secretary, if any, and by not
---------------------- less than two directors of the company one of whom shall be a managing
director where there is one.
----------------------
The letter of offer shall, inter-alia, contain the following;
----------------------
i. Disclosures in Schedule II;
---------------------- ii. Disclaimer Clause as may be specified by the Board;
---------------------- iii. Record date and ratio of buyback as per the entitlement in each category.
----------------------
7.5 MEANING OF ESOS AND ESPS
----------------------
SEBI defines employee stock option as the option given to the whole-
---------------------- time Directors, Officers or employees of a company which gives such Directors,
Officers or employees, the benefit or right to purchase or subscribe at a future
----------------------
date, the securities offered by the company at a predetermined price.
---------------------- In other words, employee stock option gives the right to the staff members
---------------------- of the company to buy shares of the company at a reduced price which forms
part of their salary. This option gives a sense of ownership to the employees,
---------------------- which, in turn improves their productivity and dedication towards work.
---------------------- Employee stock option scheme (ESOS) means a scheme under which a
company grants employee stock option.
----------------------
Employee stock purchase scheme (ESPS) means a scheme under which the
---------------------- company offers shares to employees as part of a public issue or otherwise.
----------------------
----------------------

7.6 SEBI GUIDELINES ON EMPLOYEE STOCK OPTION Notes
SCHEME (ESOS)
----------------------
A. Eligibility ----------------------
1. An employee shall be eligible to participate in ESOS of the company.
----------------------
Where such employee is a director nominated by an institution as its
representative on the Board of Directors of the company – ----------------------
i. The contract/agreement entered into between the institution ----------------------
nominating its employee as the director of a company and the
director so appointed shall, inter-alia, specify the following: ----------------------
a. Whether options granted by the company under its ESOS can ----------------------
be accepted by the said employee in his capacity as director
of the company; ----------------------
b. That options, if granted to the director, shall not be renounced ----------------------

in favour of the nominating institution; and
----------------------
c. The conditions subject to which fees, commissions, ESOSs,
other incentives, etc. can be accepted by the director from the ----------------------
company.
----------------------
ii. The institution nominating its employee as a director of a company
shall file a copy of the contract/agreement with the said company, ----------------------
which shall, in turn, file the copy with all the stock exchanges on
----------------------
which its shares are listed.
iii. The director so appointed shall furnish a copy of the contract/ ----------------------
agreement at the first Board meeting of the company attended by
----------------------
him after his nomination
2. A director who either by himself or through his relative or through any body ----------------------
corporate, directly or indirectly holds more than 10% of the outstanding ----------------------
equity shares of the company shall not be eligible to participate in the
ESOS. ----------------------
B. Compensation Committee: ----------------------
1. No ESOS shall be offered unless the disclosures, as specified in Schedule
----------------------
IV, are made by the company to the prospective option grantees and the
company constitutes a Compensation Committee for administration and ----------------------
superintendence of the ESOS.
----------------------
2. The Compensation Committee shall be a Committee of the Board of
directors consisting of a majority of independent directors. ----------------------
3. The Compensation Committee shall, inter alia, formulate the detailed ----------------------
terms and conditions of the ESOS including:
a. The quantum of option to be granted under an ESOS per employee ----------------------
and in aggregate. ----------------------

Notes b. The conditions under which option vested in employees may lapse
in case of termination of employment for misconduct;
----------------------
c. The exercise period within which the employee should exercise the
---------------------- option and that option would lapse on failure to exercise the option
within the exercise period;
----------------------
d. The specified time period within which the employee shall exercise
---------------------- the vested options in the event of termination or resignation of an
employee.
----------------------
e. The right of an employee to exercise all the options vested in him at
---------------------- one time or at various points of time within the exercise period;
---------------------- f. The procedure for making a fair and reasonable adjustment to the
number of options and to the exercise price in case of corporate
---------------------- actions such as rights issues, bonus issues, merger, sale of division
and others. In this regard following shall be taken into consideration
---------------------- by the compensation committee:
---------------------- i. The number and the price of ESOS shall be adjusted in a manner
such that total value of the ESOS remains the same after the
---------------------- corporate action
---------------------- ii. For this purpose, global best practices in this area including the
procedures followed by the derivative markets in India and abroad
---------------------- shall be considered.
---------------------- iii. The vesting period and the life of the options shall be left unaltered
as far as possible to protect the rights of the option holders.
----------------------
g. The grant, vest and exercise of option in case of employees who are on
---------------------- long leave; and
---------------------- h. The procedure for cashless exercise of options.
---------------------- 4. The Compensation Committee shall frame suitable policies and systems
to ensure that there is no violation of;
---------------------- a. Securities and Exchange Board of India (Insider Trading) Regulations,
---------------------- 1992; and
b. Securities and Exchange Board of India (Prohibition of Fraudulent and
----------------------
Unfair Trade Practices relating to the Securities Market) Regulations,
---------------------- 1995, by any employee.
---------------------- C. Shareholder approval:

1. No ESOS can be offered to employees of a company unless the shareholders
---------------------- of the company approve ESOS by passing a special resolution in the
---------------------- general meeting.
2. The explanatory statement to the notice and the resolution proposed
---------------------- to be passed in general meeting for ESOS shall contain the following
---------------------- information:

a. The total number of options to be granted; Notes
b. Identification of classes of employees entitled to participate in the
----------------------
ESOS;
c. Requirements of vesting and period of vesting; ----------------------
d. Maximum period within which the options shall be vested; ----------------------
e. Exercise price or pricing formula; ----------------------
f. Exercise period and process of exercise;
----------------------
g The appraisal process for determining the eligibility of employees
to the ESOS; ----------------------
h Maximum number of options to be issued per employee and in ----------------------
aggregate;
----------------------
i A statement to the effect that the company shall confirm to the
accounting policies ----------------------
j. The method which the company shall use to value its options ----------------------
whether fair value or intrinsic value;
k. The following statement: ----------------------
‘In case the company calculates the employee compensation cost using the ----------------------
intrinsic value of the stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that ----------------------
shall have been recognised if it had used the fair value of the options, ----------------------
shall be disclosed in the Directors report and also the impact of this
difference on profits and on EPS of the company shall also be disclosed ----------------------
in the Directors’ report.’
----------------------
3. Approval of shareholders by way of separate resolution in the general
meeting shall be obtained by the company in case of: ----------------------
a. Grant of option to employees of subsidiary or holding company ----------------------
and,
----------------------
b. Grant of option to identified employees, during any one year, equal
to or exceeding 1% of the issued capital (excluding outstanding ----------------------
warrants and conversions) of the company at the time of grant of
option. ----------------------
D. Variation of terms of ESOS ----------------------

1. The company shall not vary the terms of the ESOS in any manner, ----------------------
which may be detrimental to the interests of the employees.
----------------------
2. The company may by special resolution in a general meeting vary
the terms of ESOS offered pursuant to an earlier resolution of a ----------------------
general body but not yet exercised by the employee provided such
variation is not prejudicial to the interests of the option holders. ----------------------
----------------------

Notes 3. The notice for passing special resolution for variation of terms of
ESOS shall disclose full details of the variation and the details of
---------------------- the employees who are beneficiary of such variation.
---------------------- 4. A company may re price the options which are not exercised,
whether or not they have been vested if ESOSs were rendered
---------------------- unattractive due to fall in the price of the shares in the market.
---------------------- Provided that the company ensures that such re-pricing shall not be
detrimental to the interest of employees and approval of shareholders in General
---------------------- Meeting has been obtained for such re pricing.
---------------------- E. Pricing:
---------------------- 1. The companies granting option to its employees pursuant to ESOS

will have the freedom to determine the exercise price subject to
---------------------- conforming to the accounting policies
---------------------- F. Lock-in period and rights of the option-holder:
---------------------- 1. There shall be a minimum period of one year between the grant of
options and vesting of option.
---------------------- 2. The company shall have the freedom to specify the lock-in period
---------------------- for the shares issued pursuant to exercise of option.
3. The employee shall not have right to receive any dividend or to vote
---------------------- or in any manner enjoy the benefits of a shareholder in respect of
---------------------- option granted to him, till shares are issued on exercise of option.
G. Consequence of failure to exercise option:
----------------------
The amount payable by the employee, if any, at the time of grant of option:
----------------------
a. May be forfeited by the company if the option is not exercised by
---------------------- the employee within the exercise period; or
---------------------- b. The amount may be refunded to the employee if the option is not
vested due to non-fulfillment of condition relating to vesting of
---------------------- option as per the ESOS.
---------------------- H. Non-transferability of option:
---------------------- 1. Option granted to an employee shall not be transferable to any

person.
---------------------- 2. No person other than the employee to whom the option is granted
---------------------- shall be entitled to exercise the option.
3. Under the cashless system of exercise, the company may itself
---------------------- fund or permit the empanelled stock brokers to fund the payment
---------------------- of exercise price which shall be adjusted against the sale proceeds
of some or all the shares, subject to the provision of the Companies
---------------------- Act.
----------------------

4. The option granted to the employee shall not be pledged, Notes
hypothecated, mortgaged or otherwise alienated in any other
manner. ----------------------
5. In the event of the death of employee while in employment, all the ----------------------
option granted to him till such date shall vest in the legal heirs or
nominees of the deceased employee. ----------------------
6. In case the employee suffers a permanent incapacity while in ----------------------
employment, all the option granted to him as on the date of
permanent incapacitation, shall vest in him on that day. ----------------------
7. In the event of resignation or termination of the employee, all ----------------------
options not vested as on that day shall expire.
----------------------
I. Disclosure in the Directors’ Report:
----------------------
1. The Board of Directors, shall, inter alia, disclose either in the Directors’
Report or in the annexure to the Directors’ Report, the following details ----------------------
of the ESOS:
----------------------
a. Options granted;
b. The pricing formula; ----------------------
c. Options vested; ----------------------
d. Options exercised; ----------------------
e. The total number of shares arising as a result of exercise of
option; ----------------------
f. Options lapsed; ----------------------

g. Variation of terms of options; ----------------------
h. Money realised by exercise of options; ----------------------
i. Total number of options in force;
----------------------
j. Employee wise details of options granted to:
----------------------
i. Senior managerial personnel;
ii. Any other employee who receives a grant in any one ----------------------
year of option amounting to 5% or more of option
----------------------
granted during that year.
iii. Identified employees who were granted option, during ----------------------
any one year, equal to or exceeding 1% of the issued
----------------------
capital (excluding outstanding warrants and conversions)
of the company at the time of grant; ----------------------
k. Diluted Earnings Per Share (EPS) pursuant to issue of ----------------------
shares on exercise of option calculated in accordance with
Accounting Standard (AS) 20 ‘Earnings Per Share’ ----------------------
----------------------

Notes l. Where the company has calculated the employee compensation
cost using the intrinsic value of the stock options, the difference
---------------------- between the employee compensation cost so computed and the
employee compensation cost that shall have been recognised if
---------------------- it had used the fair value of the options, shall be disclosed. The
---------------------- impact of this difference on profits and on EPS of the company
shall also be disclosed.
----------------------
m. Weighted-average exercise prices and weighted-average fair
---------------------- values of options shall be disclosed separately for options
whose exercise price either equals or exceeds or is less than
---------------------- the market price of the stock.
---------------------- n. A description of the method and significant assumptions
used during the year to estimate the fair values of options,
---------------------- including the following weighted-average information:
---------------------- i. Risk-free interest rate
---------------------- ii. Expected life

iii. Expected volatility
----------------------
iv. Expected dividends
----------------------
v. The price of the underlying share in market at the time
---------------------- of option grant
2. Until all options granted in the three years prior to the IPO have
----------------------
been exercised or have lapsed, disclosures shall be made either in
---------------------- the Directors’ Report or in an Annexure thereto of the information
in respect of such options also.
----------------------
3. Until all options granted in the three years prior to the IPO have
---------------------- been exercised or have lapsed, disclosure shall be made either in
the Directors’ Report or in an Annexure thereto of the impact on the
---------------------- profits and on the EPS of the company if the company had followed
---------------------- the accounting policies specified in clause 13 in respect of such
options.
---------------------- J. Accounting Policies:
---------------------- a. In respect of options granted during any accounting period, the
accounting value of the options shall be treated as another form of
----------------------
employee compensation in the financial statements of the company.
---------------------- b. The accounting value of options shall be equal to the aggregate, over
all employee stock options granted during the accounting period, of
----------------------
the intrinsic value of the option or, if the company so chooses, the
---------------------- fair value of the option.
---------------------- c. Where the accounting value is accounted for as employee

compensation in accordance with clause (b), the amount shall be
---------------------- amortised as under

i. Where the scheme does not provide for graded vesting, the Notes
amount shall be amortised on a straight-line basis over the
vesting period. ----------------------
ii. Where the scheme provides for graded vesting: ----------------------
1. The vesting period shall be determined separately for each separate
----------------------
vesting portion of the option, as if the option was, in substance,
multiple option and the amount of employee compensation cost ----------------------
shall be accounted for and amortised accordingly on a straight-line
basis over the vesting period; ----------------------
or ----------------------
2. The amount of employee compensation cost shall be accounted for ----------------------
and amortised on a straight-line basis over the aggregate vesting
period of the entire option (that is, over the vesting period of the last ----------------------
separately vesting portion of the option):
----------------------
Provided that the amount of employee compensation cost recognised
at any date at least equals the fair value or the intrinsic value, as the ----------------------
case may be, of the vested portion of the option at that date.”
----------------------
a. When an unvested option lapses by virtue of the employee
not conforming to the vesting conditions after the accounting ----------------------
value of the option has already been accounted for as
employee compensation, this accounting treatment shall be ----------------------
reversed by a credit to employee compensation expense equal ----------------------
to the amortised portion of the accounting value of the lapsed
options and a credit to deferred employee compensation ----------------------
expense equal to the unamortised portion.
----------------------
b. When a vested option lapses on expiry of the exercise period,
after the fair value of the option has already been accounted ----------------------
for as employee compensation, this accounting treatment shall
----------------------
be reversed by a credit to employee compensation expense.
K. Certificate from Auditors: ----------------------
1. In the case of every company that has passed a resolution for an ----------------------
ESOS, the Board of Directors shall at each annual general meeting
place before the shareholders a certificate from the auditors of the ----------------------
company that the scheme has been implemented in accordance ----------------------
with these guidelines and in accordance with the resolution of the
company in the general meeting. ----------------------
----------------------
Activity 1
----------------------
Collect information and analyse Employee Stock Option Scheme of a ----------------------
company. Find whether it complies with the SEBI guidelines.
----------------------

Notes 7.7 SEBI GUIDELINES ON EMPLOYEE STOCK
PURCHASE SCHEME (ESPS)
----------------------
---------------------- A. Eligibility:
1. An employee shall be eligible to participate in the ESPS.
----------------------
2. An employee who is a promoter or belongs to the promoter group
---------------------- shall not be eligible to participate in the ESPS.
---------------------- 3. A director who either by himself or through his relatives or through
any body corporate, directly or indirectly holds more than 10% of
---------------------- the outstanding equity shares of the company shall not be eligible
to participate in the ESPS.
----------------------
B. Shareholder Approval:
----------------------
1. No ESPS shall be offered to employees of the company unless the
---------------------- shareholders of the company approve ESPS by passing special
resolution in the meeting of the general body of the shareholders.
----------------------
2. The explanatory statement to the notice shall specify:
----------------------
a. The price of the shares and also the number of shares to be
---------------------- offered to each employee.
---------------------- b. The appraisal process for determining the eligibility of

employee for ESPS.
---------------------- c. Total number of shares to be issued, name, designation and
---------------------- quantum of ESOS or ESPS shares and quantum they intend
to sell within three (3) months.
----------------------
d. A disclosure regarding all the options/shares issued in last
---------------------- three (3) years (separately for each year) and on a cumulative
basis for all the options/ shares issued prior to date of the
---------------------- prospectus.
---------------------- 3. The number of shares offered may be different for different
categories of employees.
----------------------
4. The special resolution shall state that the company shall confirm to
---------------------- the accounting policies.
---------------------- 5. Approval of shareholders by way of separate resolution in the

general meeting shall be obtained by the company in case of:
---------------------- a. Allotment of shares to employees of subsidiary or holding
---------------------- company and,
b. Allotment of shares to identified employees, during any one
----------------------
year, equal to or exceeding 1% of the issued capital (excluding
---------------------- outstanding warrants and conversions) of the company at the
time of allotment of shares.)
----------------------

C. Pricing and Lock-in: Notes
1. The company shall have the freedom to determine price of shares to
----------------------
be issued under an ESPS.
2. Shares issued under an ESPS shall be locked in for a minimum ----------------------
period of one year from the date of allotment.
----------------------
3. If the ESPS is part of a public issue and the shares are issued to
employees at the same price as in the public issue, the shares issued ----------------------
to employee pursuant to ESPS shall not be subject to any lock-in.
----------------------
D. Disclosure and Accounting Policies:
----------------------
1. The Directors’ Report or Annexure thereto shall contain, inter alia,
the following disclosures: ----------------------
a. The details of the number of shares issued in ESPS; ----------------------
b. The price at which such shares are issued;
----------------------
c. Employee-wise details of the shares issued to:
----------------------
i. Senior managerial personnel;
ii. Any other employee who is issued shares in any one ----------------------
year amounting to 5% or more shares issued during that ----------------------
year;
----------------------
iii. Identified employees who were issued shares during
any one year equal to or exceeding 1% of the issued ----------------------
capital of the company at the time of issuance;
----------------------
d. Diluted Earning Per Share (EPS) pursuant to issuance of
shares under ESPS; and ----------------------
e. Consideration received against the issuance of shares.
----------------------
E. Accounting Policies
----------------------
a. In respect of shares issued under an ESPS during any accounting
period, the accounting value of the shares so issued shall be ----------------------
treated as another form of employee compensation in the financial
----------------------
statements of the company.
b. The accounting value of shares issued under ESPS shall be equal to ----------------------
the aggregate of price discount over all shares issued under ESPS
----------------------
during any accounting period;
Preferential Allotment: ----------------------
Nothing in these guidelines shall apply to shares issued to employees in ----------------------

compliance with the Securities and Exchange Board of India Guidelines on
preferential Allotment. ----------------------
----------------------
----------------------

Notes 7.8 LISTING OF SHARES
---------------------- 1. The shares arising pursuant to an ESOS and shares issued under an ESPS
shall be listed immediately upon exercise in any recognised stock exchange
----------------------
where the securities of the company are listed subject to compliance of
---------------------- the following:
---------------------- a. The ESOS/ESPS is in accordance with these Guidelines.

b. In case of an ESOS the company has also filed with the concerned
---------------------- stock exchanges, before the exercise of option, a statement as per
---------------------- Schedule V and has obtained in-principle approval from such Stock
Exchanges.
---------------------- c. As and when ESOS/ESPS are exercised the company has notified
---------------------- the concerned Stock Exchanges as per the statement as per Schedule
VI.
----------------------
2. The shares arising after the IPO, out of options granted under any ESOS
---------------------- framed prior to its IPO shall be listed immediately upon exercise in all the
recognised stock exchanges where the equity shares of the company are
---------------------- listed subject to compliance with SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009.
----------------------
3. For listing of shares issued pursuant to ESOS or ESPS the company shall
---------------------- obtain the in-principle approval from Stock Exchanges where it proposes
to list the said shares.
----------------------
4. The listed companies shall file the ESOS or ESPS Schemes through
---------------------- EDIFAR filing.
---------------------- 5. When holding company issues ESOS/ESPS to the employee of its
subsidiary, the cost incurred by the holding company for issuing such
---------------------- options/shares shall be disclosed in the ‘notes to accounts’ of the financial
---------------------- statements of the subsidiary company.
6. In a case falling under clause 22.7, if the subsidiary reimburses the cost
---------------------- incurred by the holding company in granting options to the employees
---------------------- of the subsidiary, both the subsidiary as well as the holding company
shall disclose the payment or receipt, as the case may be, in the ‘notes to
---------------------- accounts’ to their financial statements.
---------------------- 7. The Company shall appoint a registered Merchant Banker for the
implementation of ESOS and ESPS as per these guidelines till the stage
---------------------- of framing the ESOS/ ESPS and obtaining in-principal approval from the
stock exchanges in accordance with clause 22.1 (b).
----------------------
----------------------
----------------------
----------------------

Summary Notes
----------------------
● Buy-back is the process of buying its own shares by a company.
● Buy-back results in increase in market price of share, change in controller’s ----------------------
stake and also reduces the threat of investor buying controlling interest in ----------------------
the company.
● The provisions regulating Buy-Back of shares are contained in Sections ----------------------
68, 69 and 70 of the Companies Act, 2013. ----------------------
● Section 68 defines the powers of a company to purchase its own securities.
----------------------
● Section 69 provides guidelines on the amount to be transferred to capital
redemption reserve account as a result of Buy-Back. ----------------------
● Section 70 provides prohibitions to Buy-Back in certain circumstances. ----------------------
● The Securities and Exchange Board of India (SEBI) framed the SEBI
----------------------
(Buy Back of Securities) Regulations, 1999 applicable to buy-back of
shares or securities of a company listed on a stock exchange. ----------------------
● A company can buy back its shares either from the existing shares or
----------------------
securities on a proportionate basis through the tender offer, or from open
market through book-building process or stock exchange, or from odd-lot ----------------------
holders.
----------------------
● Buy-Back must be authorised by either a special resolution passed at the
general meeting or a board resolution passed by the board of directors of ----------------------
the company.
----------------------
● The company shall make a public announcement of the Buy-Back in the
newspapers and within 7 days of the announcement file draft letter of ----------------------
offer with the board.
----------------------
● The company shall as and by way of security for performance of its
obligations under the regulations, on or before the opening of the offer ----------------------
deposit the specified sum in an escrow account.
----------------------
● The company shall extinguish and physically destroy the security
certificates so bought back in the presence of a Registrar to issue or the ----------------------
Merchant Banker and the Statutory Auditor within 15 days of the date of
acceptance of the shares or securities. ----------------------
● The Board may, on its own or upon information received by it, cause ----------------------
an investigation to be made in respect of the conduct and affairs of any
----------------------
person associated with the process of Buy-Back, by appointing an officer
of the Board. ----------------------
● Employee stock option gives the right to the staff members of the company
----------------------
to buy shares of the company at a reduced price which forms part of their
salary. ----------------------
----------------------

Notes ● Employee Stock Option Scheme (ESOS) means a scheme under which a
company grants employee stock option.
----------------------
● Employee Stock Purchase Scheme (ESPS) means a scheme under which
---------------------- the company offers shares to employees as part of a public issue or
otherwise.
----------------------
● The company must constitute a Compensation Committee for administration
---------------------- and superintendence of the ESOS comprising of the Board of directors
(majority of independent directors).
----------------------
● No ESOS and ESPS can be offered to employees of a company unless the
---------------------- shareholders of the company approve ESOS/ESPS by passing a special
resolution in the general meeting.
----------------------
● The company shall not vary the terms of the ESOS/ESPS in any manner,
---------------------- which may be detrimental to the interests of the employees.
---------------------- ● The companies granting option to its employees pursuant to ESOS will
have the freedom to determine the exercise price subject to conforming to
---------------------- the accounting policies.
---------------------- ● There shall be a minimum period of one year between the grant of options
and vesting of option.
----------------------
● Option granted to an employee shall not be transferable to any person.
---------------------- ● The details of option granted to employees through ESOS and shares
issued under ESPS should be disclosed in director’s report.
----------------------
● The accounting value of the options shall be treated as another form of
---------------------- employee compensation in the financial statements of the company.
---------------------- ● The shares arising pursuant to an ESOS and shares issued under an
ESPS shall be listed immediately upon exercise in any recognised stock
---------------------- exchange where the securities of the company are listed.
----------------------
Keywords
----------------------
---------------------- • Tender offer: An offer by a company to buy back its shares or other
specified securities through a letter of offer from the holders of the shares
---------------------- or other specified securities of the company.
---------------------- • Capital redemption reserve: A reserve created by company when it

buys its own shares resulting in reduction of capital.
----------------------
• Escrow account: A special-purpose account where the money is held by
---------------------- a third party on behalf of the transacting parties.
• Employee: A permanent employee of the company working in India or
----------------------
out of India or a director of the company, whether a whole-time director
---------------------- or not or an employee of a subsidiary, in India or out of India, or of a
holding company of the company.
----------------------

• Employee stock option scheme: A scheme under which a company Notes
grants employee stock option.
----------------------
• Employee stock purchase scheme: A scheme under which the company
offers shares to employees as part of a public issue or otherwise. ----------------------
• Exercise: Making of an application by the employee to the company for
----------------------
issue of shares against option vested in him in pursuance of the ESOS.
• Exercise period: The time period after vesting within which the employee ----------------------
should exercise his right to apply for shares against the option vested in
----------------------
him in pursuance of the ESOS.
• Exercise price: The price payable by the employee for exercising the ----------------------
option granted to him in pursuance of ESOS. ----------------------
• Grant: Issue of option to employees under ESOS.
----------------------
• Intrinsic value: The excess of the market price of the share under ESOS
over the exercise price of the option (including up-front payment, if any). ----------------------
• Market price: The latest available closing price, prior to the date of the ----------------------
meeting of the Board of Directors in which options are granted/shares are
issued, on the stock exchange on which the shares of the company are ----------------------
listed.
----------------------
• Price discount: The excess of the market price of the shares over the
price at which they are issued under the ESPS. ----------------------
• Vesting: The process by which the employee is given the right to apply ----------------------
for shares of the company against the option granted to him in pursuance
of ESOS. ----------------------
• Vesting period: The period during which the vesting of the option granted ----------------------
to the employee in pursuance of ESOS takes place.
----------------------
Self-Assessment Questions ----------------------
----------------------
1. What do you mean by the term buy-back of shares or securities? What are
the provisions of Companies Act on buy-back? ----------------------
2. What is the time line for filing the letter of offer to the Board? What are ----------------------
the contents of the letter?
3. Elaborate SEBI Guidelines on Extinguishment of Certificates. ----------------------
4. What are the obligations of the company for buy-back of its own shares ----------------------
or securities?
----------------------
5. What are the different ways of buy-back of shares or securities? Elaborate
on SEBI guidelines on each method. ----------------------
6. What do you mean by the term Employee Stock Option? What is the ----------------------
difference between the term ESOS and ESPS?
----------------------

Notes 7. Write short notes on:
i. Eligibility for ESOS/ESPS
----------------------
ii. Disclosures to be made in Directors report related to ESOS/ESPS
----------------------
iii. Accounting policies for employee stock option
---------------------- 8. What are the guidelines given by SEBI on listing of shares post ESOP/
---------------------- ESPS?
---------------------- Answer to Check your Progress

---------------------- Multiple Choice Multiple Response.
---------------------- 1. A company may purchase its own shares or other specified securities out
of:
---------------------- i. Its free reserves
---------------------- ii. The securities premium account
---------------------- 2. The notice of the meeting at which special resolution is proposed to be
passed shall be accompanied by an explanatory statement stating—
----------------------
i. A full and complete disclosure of all material facts
---------------------- ii. The necessity for the buy-back
---------------------- iii. The amount to be invested under the buy-back
---------------------- Multiple Choice Single Response.
1. The buy-back may be:
----------------------
----------------------
2. Which of the following companies shall directly or indirectly purchase its
---------------------- own shares or other specified securities?

----------------------
Fill in the blanks.
----------------------
1. The public notice, shall be given within two days of the passing of the
---------------------- resolution by the Board of Directors.
---------------------- 2. The Company shall within five working days of the public announcement
file with the Board a draft letter of offer
---------------------- 3. The buy-back of shares or securities from the open market may be done
---------------------- by either through stock exchange or Book-Building process.
4. The buy-back of the shares or securities shall not be made from the
---------------------- promoters or persons in control of the company.
----------------------

5. The book-building process shall be made through an electronically linked Notes
transparent facility.
----------------------
6. The company shall pay the consideration only by way of cash.
----------------------
1. Securities and Exchange Board of India (Buy Back Of Securities) ----------------------

Regulations, 1998
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Notes
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Insider Trading, Substantial Acquisition and Takeover
UNIT
8
Structure:
8.1 Meaning of Insider

8.2 Prohibition on Dealing, Communicating and Counselling
8.3 Investigation into Insider Trading
8.4 Policy on Disclosures and Internal Procedure for Prevention of Insider
Trading
8.5 Model Code of Conduct for Prevention of Insider Trading for Listed
Companies
8.6 Code of Corporate Disclosure Practices for Prevention of Insider Trading
8.7 Disclosure of Shareholding and Control in a Listed Company
8.8 Substantial Acquisition of Shares or Voting Rights in and Acquisition of
Control over a Listed Company
8.9 Public Announcement of Offer
8.10 General Obligations of Various Parties to Acquisition
8.11 Investigation and Action by Board
Summary
Key Words
Suggested Reading
Insider Trading, Substantial Acquisition and Takeover 169

Notes
Objectives
----------------------
----------------------
• Describe the meaning of the term insider trading
----------------------
• Evaluate restrictions imposed by the board on insider trading
---------------------- • Formulate powers of investigation of the board into matters relating
to insider trading
----------------------
• Discuss the disclosure requirements at the time of substantial acquisition
---------------------- • Explain the contents of public announcement
---------------------- • State the obligations of acquirer, company and merchant banker
----------------------
8.1 MEANING OF INSIDER
----------------------
Insider means any person who is or was connected with the company or is
----------------------
deemed to have been connected with the company and is reasonably expected to
---------------------- have access to unpublished price sensitive information in respect of securities of
company, or has received or has had access to such unpublished price sensitive
---------------------- information.
----------------------
8.2 PROHIBITION ON DEALING, COMMUNICATING
---------------------- AND COUNSELLING
---------------------- According to section 195 of the Companies Act, 2013
---------------------- • “insider trading” means—
---------------------- (i)
an act of subscribing, buying, selling, dealing or agreeing to
subscribe, buy, sell or deal in any securities by any director or key
---------------------- managerial personnel or any other officer of a company either as
principal or agent if such director or key managerial personnel or
---------------------- any other officer of the company is reasonably expected to have
---------------------- access to any non-public price sensitive information in respect of
securities of company; or
---------------------- (ii) an act of counselling about procuring or communicating directly or
---------------------- indirectly any non-public price-sensitive information to any person;
• “price-sensitive information” means any information, which relates,
----------------------
directly or indirectly, to a company and which if published is likely to
---------------------- materially affect the price of securities of the company.
Prohibition on insider trading of securities.
----------------------
According to section 195(1) of the Companies Act, 2013:
----------------------
No person including any director or key managerial personnel of a company
---------------------- shall enter into insider trading

Provided that nothing contained in this sub-section shall apply to any Notes
communication required in the ordinary course of business or profession or
employment or under any law. ----------------------
Violation of provisions relating to Insider Trading ----------------------
If any person contravenes the provisions of section 195, he shall be punishable
----------------------
with imprisonment for a term which may extend to five years or with fine which
shall not be less than five lakh rupees but which may extend to twenty-five ----------------------
crore rupees or three times the amount of profits made out of insider trading,
whichever is higher, or with both. ----------------------
----------------------
8.3 INVESTIGATION INTO INSIDER TRADING
----------------------
As per to section 458 of the Companies Act, 2013, the powers to enforce the
provisions contained in section 195 relating to insider trading shall be delegated ----------------------
to Securities and Exchange Board for listed companies or the companies which
----------------------
intend to get their securities listed and in such case, any officer authorised by
the Securities and Exchange Board shall have the power to file a complaint in ----------------------
the court of competent jurisdiction.
----------------------
Power to make Inquiries and Inspection
If the Board suspects that any person has violated any provision of these ----------------------
regulations, it may inquire into the case and form an opinion as to whether there ----------------------
is any violation of these regulations. Officers may be appointed by the board to
inspect the books and records of the insider for this purpose. ----------------------
Board’s Right to Investigate ----------------------
If the Board is of the opinion that it is necessary to investigate and inspect
----------------------
the books of account, either records or documents of an insider for it may
appoint an investigating authority for the following purposes: ----------------------
a. To investigate into the complaints received from investors, intermediaries ----------------------
or any other person on any matter having a bearing on the allegations of
insider trading; and ----------------------
b. To investigate upon its own knowledge or information in its possession ----------------------
to protect the interest of investors in securities against breach of these
regulations. ----------------------
If the Board deems fit it may appoint a qualified auditor as an investigating ----------------------
authority.
----------------------
Investigation Procedure
1. Before undertaking any investigation the Board shall give a reasonable ----------------------
notice to insider for that purpose. ----------------------
2. Where the Board is satisfied that in the interest of investors or in public
interest no such notice should be given, it may by an order in writing ----------------------
direct that the investigation be taken up without such notice. ----------------------

Notes 3. On being empowered by the Board, the investigation authority shall
undertake the investigation and inspection of books of account and the
---------------------- insider against whom an investigation is being carried out shall be bound
to discharge the following obligations:
----------------------
a. To produce to the investigating authority such books, accounts and
---------------------- other documents in his custody or control and furnish the authority
with the statements and information relating to the transactions in
----------------------
securities market within such time as the said authority may require.
---------------------- b. Allow the investigating authority to have reasonable access to
the premises occupied by such insider and also extend reasonable
----------------------
facility for examining any books, records, documents and computer
---------------------- data in the possession of the stockbroker or any other person and
also provide copies of documents or other materials which in the
---------------------- opinion of the investigating authority are relevant.
---------------------- c. The investigating authority, in the course of investigation, shall be
entitled to examine or record statements of any member, director,
---------------------- partner, proprietor and employee of the insider.
---------------------- d. It shall be the duty of every director, proprietor, partner, officer and
employee of the insider to give to the investigating authority all
---------------------- assistance in connection with the investigation.
---------------------- The investigating authority shall, within reasonable time of the conclusion
of the investigation, submit an investigation report to the Board.
----------------------
Communication of Findings
----------------------
1. The Board shall, after consideration of the investigation report communicate
---------------------- the findings to the person suspected to be involved in insider trading or
violation of these regulations.
----------------------
2. The person to whom such findings has been communicated shall reply to
---------------------- the same within 21 days; and
---------------------- 3. On receipt of such a reply or explanation, if any, from such person, the
Board may take such measures as it deems fit to protect the interests of
---------------------- the investors and in the interests of the securities market and for the due
compliance of the provisions of the Act.
----------------------
Directions by the Board
----------------------
The Board may issue any or all of the following order, namely:
---------------------- a. Directing the insider not to deal in securities in any particular manner;
---------------------- b. Prohibiting the insider from disposing of any of the securities acquired in
violation of these regulations;
----------------------
c. Restraining the insider to communicate or counsel any person to deal in
---------------------- securities;
---------------------- d. Declaring the transaction(s) in securities as null and void;

e. Directing the person who acquired the securities in violation of these Notes
regulations to deliver the securities back to the seller:
----------------------
Provided that in case the buyer is not in a position to deliver such securities,
the market price prevailing at the time of issuing of such directions or at ----------------------
the time of transactions whichever is higher, shall be paid to the seller;
----------------------
f. Directing the person who has dealt in securities in violation of these
regulations to transfer an amount or proceeds equivalent to the cost price ----------------------
or market price of securities, whichever is higher to the investor protection
fund of a recognised stock exchange. ----------------------
----------------------
Activity 1
----------------------
Find out how many cases have been registered for insider trading. ----------------------
----------------------
8.4 POLICY ON DISCLOSURES AND INTERNAL
----------------------
PROCEDURE FOR PREVENTION OF INSIDER
TRADING ----------------------
All listed companies and organisations associated with securities market ----------------------
shall frame a code of internal procedures and conduct as near thereto the
----------------------
Model Code specified in these Regulations without diluting it in any manner
and ensure compliance of the same. ----------------------
They shall also abide by the code of Corporate Disclosure Practices as ----------------------
specified in these Regulations.
Disclosure of interest or holding by directors and officers and substantial ----------------------
shareholders in listed companies ----------------------
Initial Disclosure
----------------------
1. Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company the number of shares or voting ----------------------
rights held by such person, on becoming such holder, within 2 working
----------------------
days of:
a. The receipt of intimation of allotment of shares; or ----------------------
b. The acquisition of shares or voting rights, as the case may be. ----------------------
2. Any person who is a director or officer of a listed company shall disclose ----------------------
to the company the number of shares or voting rights held and positions
taken in derivatives by such person and his dependents (as defined by the ----------------------
company), within two working days of becoming a director or officer of
the company. ----------------------
----------------------
----------------------

Notes Continual Disclosure
1. Any person who holds more than 5% shares for voting rights in any listed
----------------------
company shall disclose to the company the number of shares or voting
---------------------- rights held and change in shareholding or voting rights, even if such
change results in shareholding falling below 5%, if there has been change
---------------------- in such holdings from the last disclosure made and such change exceeds
2% of total shareholding or voting rights in the company.
----------------------
2. Any person who is a director or officer of a listed company, shall disclose
---------------------- to the company and the stock exchange where the securities are listed the
total number of shares or voting rights held and change in shareholding or
----------------------
voting rights, if there has been a change in such holdings of such person
---------------------- and his dependents (as defined by the company) from the last disclosure
made and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1%
---------------------- of total shareholding or voting rights, whichever is lower.
---------------------- 3. The disclosure mentioned in (1) and (2) shall be made within two working
days of:
----------------------
a. The receipts of intimation of allotment of shares, or
---------------------- b. The acquisition or sale of shares or voting rights, as the case may
---------------------- be.
The company, within two working days of receipt of initial or continual
---------------------- disclosure, shall disclose the information so received, to all stock exchanges on
---------------------- which the company is listed.
----------------------
Activity 2
----------------------
Study a case relating to non-disclosure of internal trading. Find the
----------------------
ways in which the investor can be protected from such trading practices.
----------------------
---------------------- 8.5 MODEL CODE OF CONDUCT FOR PREVENTION OF

INSIDER TRADING FOR LISTED COMPANIES
----------------------
---------------------- 1. Compliance Officer

The listed company should appoint a Compliance Officer, being a senior
---------------------- level employee, reporting to the Managing Director/Chief Executive
---------------------- Officer.
He shall be responsible for setting forth policies and procedures,
---------------------- monitoring adherence to the rules for the preservation of “Price Sensitive
---------------------- Information”, monitoring of trades and the implementation of the code of
conduct.
----------------------
He shall maintain a record of the designated employees and any changes
---------------------- made in the list of designated employees.

2. Preservation of “Price-Sensitive Information” Notes
a. Employees/directors shall maintain the confidentiality of all Price
----------------------
Sensitive Information. They should not pass on such information to
any person directly or indirectly by way of making a recommendation ----------------------
for the purchase or sale of securities.
----------------------
b. Price-Sensitive Information should be disclosed only to those within
the company who need the information to discharge their duty. ----------------------
c. Files containing confidential information shall be kept secure.
----------------------
Computer files must have adequate security of login and password
etc. ----------------------
3. Prevention of misuse of “Price-Sensitive Information” ----------------------
a. The company shall specify a trading period, to be called “trading
----------------------
window”, for trading in the company’s securities. The trading window
shall be closed during the time the information is unpublished and ----------------------
employees/directors shall not trade in such period.
----------------------
b. The trading window shall be closed at the time:
i. Declaration of financial results (quarterly, half-yearly and ----------------------
annually).
----------------------
ii. Declaration of dividends (interim and final).
----------------------
iii. Issue of securities by way of public/rights/bonus, etc.
iv. Any major expansion plans or execution of new projects. ----------------------
v. Amalgamation, mergers, takeovers and buy-back. ----------------------

vi. Disposal of whole or substantially whole of the undertaking. ----------------------
vii.
Any changes in policies, plans or operations of the company.
----------------------
The trading window shall be opened 24-hours after the above
information is made public. ----------------------
c. In case of ESOPs, exercise of option may be allowed in the period ----------------------

when the trading window is closed. However, sale of shares allotted
on exercise of ESOPs shall not be allowed when trading window is ----------------------
closed. ----------------------
d. Pre-clearance of trades:
----------------------
An application may be made to the Compliance Officer indicating
the estimated number of securities that the designated employee/ ----------------------
officer/director intends to deal in and the details of the depository
----------------------
account.
An undertaking shall be executed in favour of the company by such ----------------------
designated employee/director/officer incorporating the following
----------------------
clauses, as may be applicable:
----------------------

Notes i. That the employee/director/officer does not have any access
or has not received “Price-Sensitive Information” up to the
---------------------- time of signing the undertaking.
---------------------- ii. That in case the employee/director/officer has access to or
receives “Price Sensitive Information” after the signing of
---------------------- the undertaking but before the execution of the transaction
he/she shall inform the Compliance Officer of the change in
----------------------
his position and that he/she would completely refrain from
---------------------- dealing in the securities of the company till the time such
information becomes public.
----------------------
iii. That he/she has not contravened the code of conduct for
---------------------- prevention of insider trading as notified by the company from
time to time.
----------------------
iv. That he/she has made a full and true disclosure in the matter.
---------------------- 4. Other Restrictions
---------------------- a. All directors/officers/designated employees shall execute their
order in respect of securities of the company within one week after
----------------------
the approval of pre-clearance is given. If the order is not executed
---------------------- within one week after the approval is given, the employee/director
must pre-clear the transaction again.
----------------------
b. All directors/officers/designated employees who buy or sell any
---------------------- number of shares of the company shall not enter into an opposite
transaction, i.e., sell or buy any number of shares during the next
---------------------- six months following the prior transaction. All directors/officers/
designated employees shall also not take positions in derivative
----------------------
transactions in the shares of the company at any time.
---------------------- In the case of subscription in the primary market (initial public
offers), the above-mentioned entities shall hold their investments
----------------------
for a minimum period of 30 days.
---------------------- c. In case the sale of securities is necessitated by personal emergency,
---------------------- the holding period may be waived by the compliance officer after
recording in writing his/her reasons in this regard.
----------------------
5. Reporting Requirements for Transactions in Securities
---------------------- a. All directors/officers/designated employees of the listed company
shall be required to forward following details of their securities
----------------------
transactions to the Compliance Officer:
---------------------- i. All holdings in securities of that company by directors/officers/
designated employees at the time of joining the company;
----------------------
ii. Periodic statement of any transactions in securities (the
---------------------- periodicity of reporting may be defined by the company. The
---------------------- company may also be free to decide whether reporting is
required for trades where pre-clearance is also required); and
iii. Annual statement of all holdings in securities. Notes
b. The Compliance Officer shall maintain records of all the declarations
----------------------
for a minimum period of three years.
c. The Compliance Officer shall place before the Managing Director/ ----------------------
Chief Executive Officer or a committee specified by the company,
----------------------
on a monthly basis all the details of the dealing in the securities by
employees/director/officer of the company and the accompanying ----------------------
documents that such persons had executed under the pre-dealing
procedure as envisaged in this code. ----------------------
6. Penalty for contravention of code of conduct ----------------------
a. Any employee/officer/director that trades in securities or communicates ----------------------
any information for trading in securities in contravention of the code
of conduct may be penalised and appropriate action may be taken by ----------------------
the company.
----------------------
b. Employees/officers/directors of the company who violate the code of
conduct shall also be subject to disciplinary action by the company, ----------------------
which may include wage freeze, suspension, ineligible for future
----------------------
participation in employee stock option plans, etc.
c. In case it is observed by the company/Compliance Officer that ----------------------
there has been a violation of SEBI (Prohibition of Insider Trading)
----------------------
Regulations, 1992. SEBI shall be informed by the company.
----------------------
----------------------

1. Before undertaking any investigation the Board shall give ________ ----------------------
to insider for that purpose.
----------------------
2. The listed company should appoint a _______, being a senior level
employee, reporting to the Managing Director/Chief Executive ----------------------
Officer.
----------------------
8.6 CODE OF CORPORATE DISCLOSURE PRACTICES ----------------------

FOR PREVENTION OF INSIDER TRADING ----------------------
To ensure timely and adequate disclosure of price sensitive information, ----------------------
the following norms shall be followed by listed companies:
----------------------
1. Prompt disclosure of Price-Sensitive Information
Price-sensitive information shall be given by listed companies to stock ----------------------
exchanges and disseminated on a continuous and immediate basis and
----------------------
efforts should be made by the company to improve investor access to
their public announcements. ----------------------

Notes 2. Overseeing and coordinating Disclosure
Listed companies shall designate a senior official to oversee corporate
----------------------
disclosure and ensure compliance with corporate disclosure requirements.
---------------------- All information should be approved by him before disclosure and if any
information is disclosed without prior approval then the person responsible
---------------------- should inform the designated officer immediately.
---------------------- 3. Responding to the Market Rumours
Listed companies shall have clearly laid-down procedures for responding
----------------------
to any queries or requests for verification of market rumours by exchanges.
---------------------- The official designated for corporate disclosure shall be responsible for
deciding whether a public announcement is necessary for verifying or
---------------------- denying rumours and then making the disclosure.
---------------------- 4. Timely reporting of Shareholdings/Ownership and changes in Ownership
---------------------- Disclosure of shareholdings/ownership by major shareholders and

disclosure of changes in ownership as provided under any Regulations
---------------------- made under the Act and the listing agreement shall be made in a timely
and adequate manner.
----------------------
5. Disclosure/dissemination of Price-Sensitive Information with Special
---------------------- Reference to Analysts, Institutional Investors
---------------------- Listed companies should follow the following guidelines while dealing
with analysts and institutional investors:
----------------------
i. The information given to the analyst should be simultaneously
---------------------- made public at the earliest.
---------------------- ii. At least, two company representatives should be present at meetings

with Analysts, brokers or Institutional Investors and discussion
---------------------- should preferably be recorded.
---------------------- iii. A listed company should be careful when dealing with analysts’
questions that raise issues outside the intended scope of discussion.
---------------------- Unanticipated questions may be taken on notice and a considered
response given later. If the answer includes price sensitive
---------------------- information, a public announcement should be made before
---------------------- responding.
iv. When a company organises meetings with analysts, the company
---------------------- shall make a press release or post relevant information on its website
---------------------- after every such meet. The company may also consider live web-
casting of analyst meets.
----------------------
6. Medium of Disclosure/Dissemination
---------------------- i. Disclosure/dissemination of information may be done through various
media so as to achieve maximum reach and quick dissemination.
----------------------
ii. Corporate shall ensure that disclosure to stock exchanges is made
---------------------- promptly.

iii. Corporate may also facilitate disclosure through the use of their Notes
dedicated Internet website.
----------------------
iv. Company’s websites may provide a means of giving investors a
direct access to analyst briefing material, significant background ----------------------
information and questions and answers.
----------------------
v. The information filed by corporate with exchanges under continuous
disclosure requirement may be made available on the company ----------------------
website.
----------------------
7. Dissemination by Stock Exchanges
i. The disclosures made to stock exchanges may be disseminated by ----------------------
the exchanges to investors in a quick and efficient manner through ----------------------
the stock exchange network as well as through stock exchange
websites. ----------------------
ii. Information furnished by the companies under continuous disclosure ----------------------
requirements, should be published on the website of the exchange
instantly. ----------------------
iii. Stock exchanges should make immediate arrangement for display ----------------------
of the information furnished by the companies instantly on the stock
exchange website. ----------------------
----------------------
Activity 3
----------------------
Make a comparative study of international codes relating to Corporate ----------------------
Disclosure Practice especially those adopted by USA and EU.
----------------------
8.7 DISCLOSURE OF SHAREHOLDING AND CONTROL ----------------------

IN A LISTED COMPANY ----------------------
Transitional Provision ----------------------

1. Any person, who holds more than five per cent shares or voting rights in ----------------------
any company shall disclose his aggregate shareholding in that company,
to the company. ----------------------
2. A promoter or any person having control over a company shall disclose ----------------------
the number and percentage of shares or voting rights held by him and by
person(s) acting in concert with him in that company, to the company. ----------------------
3. Such disclosure is required to be made within 2 months from the date of ----------------------
notification of these regulations.
----------------------
Every company whose shares are held by the persons referred above shall,
within three months from the date of notification of these regulations, disclose ----------------------
to all the stock exchanges on which the shares of the company are listed, the
aggregate number of shares held by each person. ----------------------

Notes Acquisition of 5% and More Shares or Voting Rights of a Company
1. Any acquirer, who acquires shares or voting rights which (taken together
----------------------
with shares or voting rights, if any, held by him) would entitle him to
---------------------- more than 5% or 10% or 14% or 54% or 74% shares or voting rights
in a company, in any manner whatsoever, shall disclose at every stage
---------------------- the aggregate of his shareholding or voting rights in that company to the
company and to the stock exchanges where shares of the target company
----------------------
are listed.
---------------------- 2. The disclosures shall be made within two days of:
---------------------- a. The receipt of intimation of allotment of shares; or
---------------------- b. The acquisition of shares or voting rights, as the case may be.
The stock exchange shall immediately display the information received
---------------------- from the acquirer on the trading screen, the notice board and also on its
---------------------- website.
3. Every company, whose shares are acquired in a manner referred above
---------------------- shall disclose to all the stock exchanges on which the shares of the said
---------------------- company are listed the aggregate number of shares held by each of such
persons referred above within seven days of receipt of information.
----------------------
Continual Disclosures
---------------------- 1. Every person who holds more than 15% shares or voting rights in any
---------------------- company, shall, within 21 days from the financial year ending March 31,
make yearly disclosures to the company, in respect of his holdings as on
---------------------- 31st March.
---------------------- 2. A promoter or every person having control over a company shall, within
21 days from the financial year ending March 31, as well as the record
---------------------- date of the company for the purposes of declaration of dividend, disclose
the number and percentage of shares or voting rights held by him and by
---------------------- persons acting in concert with him, in that company to the company.
---------------------- 3. Every company whose shares are listed on a stock exchange, shall within
30 days from the financial year ending March 31, as well as the record
---------------------- date of the company for the purposes of declaration of dividend, make
---------------------- yearly disclosures to all the stock exchanges on which the shares of the
company are listed, the changes, if any, in respect of the holdings of the
---------------------- persons referred above. It shall also maintain a register in the specified
format for recording the information so received.
----------------------
Disclosure of Pledged Shares
----------------------
1. A promoter or every person forming part of the promoter group of any
---------------------- company shall, within seven working days of:
---------------------- a. Commencement of SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations.
----------------------

b. Date of creation of pledge on shares. Notes
Disclose details of such pledge of shares to the company. Similarly, he
----------------------
needs to give information of invocation of pledge on shares to the company
within 7 working days from the date of invocation. ----------------------
The company shall disclose the information so received to all the stock
----------------------
exchanges, on which the shares of company are listed, within 7 working days
of the receipt thereof. ----------------------
Power to call for information ----------------------
The stock exchanges and the company shall furnish to the Board
information with regard to the above disclosures when required by the Board. ----------------------
----------------------
8.8 SUBSTANTIAL ACQUISITION OF SHARES OR
VOTING RIGHTS IN AND ACQUISITION OF CONTROL ----------------------
OVER A LISTED COMPANY
----------------------
Acquisition of 15% or more of the shares or voting rights of any company ----------------------
No acquirer shall acquire shares or voting rights which entitle such
acquirer to exercise 15% or more of the voting rights in a company, unless such ----------------------
acquirer makes a public announcement to acquire shares of such company in ----------------------
accordance with the regulations.
----------------------
Consolidation of holdings
1. No acquirer who has acquired, in accordance with the provisions of law, ----------------------
15% or more but less than 55% of the shares or voting rights in a company,
----------------------
shall acquire additional shares or voting rights entitling him to exercise
more than 5% of the voting rights, with post acquisition shareholding ----------------------
or voting rights not exceeding 55% in any financial year ending on 31st
March unless such acquirer makes a public announcement to acquire ----------------------
shares in accordance with the regulations.
----------------------
2. No acquirer, who holds 55% or more but less than 75% of the shares
or voting rights in a target company, shall acquire any additional shares ----------------------
entitling him to exercise voting rights or voting rights therein, unless he ----------------------
makes a public announcement to acquire shares in accordance with these
Regulations. ----------------------
Public announcement is not required in the following situation: ----------------------
a. The acquisition is made through open market purchase in normal segment
----------------------
on the stock exchange but not through bulk deal/block deal/negotiated
deal/ preferential allotment/buy back. ----------------------
b. The post-acquisition shareholding of the acquirer shall not increase
----------------------
beyond 75%.
----------------------
----------------------

Notes Acquisition of control over a company
Irrespective of whether or not there has been any acquisition of shares
----------------------
or voting rights in a company, no acquirer shall acquire control over the target
---------------------- company, unless such person makes a public announcement to acquire shares
and acquires such shares in accordance with the regulations.
----------------------
Provided that nothing contained herein shall apply to any change in
---------------------- control which takes place in pursuance to a special resolution passed by the
shareholders in a general meeting.
----------------------
Appointment of a merchant banker
---------------------- Before making any public announcement of the acquisition, the acquirer
---------------------- shall appoint a merchant banker in Category I, holding a certificate of registration
granted by the Board, who is not an associate of or group of the acquirer or the
---------------------- target company.
---------------------- 3. In case of indirect acquisition or change in control, a public announcement
shall be made by the acquirer within three months of consummation of
---------------------- such acquisition or change in control.
----------------------
----------------------
---------------------- Fill in the Blanks

1. If any person contravenes the provisions of section 195, he shall be
---------------------- punishable with imprisonment for a term, which may extend to _____
---------------------- years.
State True or False
----------------------
1. Insider trading does not include acts of counselling about procuring or
---------------------- communicating directly or indirectly any non-public price-sensitive
information to any person.
----------------------
2. Price-sensitive information means any information which relates,
---------------------- directly or indirectly, to a company and which if published is likely to
materially affect the price of securities of the company.
----------------------
----------------------
8.9 PUBLIC ANNOUNCEMENT OF OFFER
----------------------
1. The public announcement shall be made in all editions of one English
---------------------- national daily, one Hindi national daily and a regional language daily
with wide circulation at the place where the registered office of the target
----------------------
company is situated and at the place of the stock exchange where the
---------------------- shares of the target company are most frequently traded.
2. Simultaneously with publication of the public announcement in the
----------------------
newspaper a copy of the public announcement shall be:
---------------------- i. Submitted to the Board through the merchant banker

ii. Sent to all the stock exchanges on which the shares of the company Notes
are listed for being notified on the notice board,
----------------------
iii. Sent to the target company at its registered office for being placed
before the Board of Directors of the company. ----------------------
Timing of the Public Announcement of Offer ----------------------
1. The public announcement shall be made by the merchant banker not later
than four working days of entering into an agreement for acquisition ----------------------
of shares or voting rights or deciding to acquire shares or voting rights ----------------------
exceeding the respective percentage specified therein.
Provided that in case of disinvestment of a Public Sector Undertaking, ----------------------
the public announcement shall be made by the merchant banker not later ----------------------
than four working days of the acquirer executing the Share Purchase
Agreement or Shareholders Agreement with the Government. ----------------------
2. The public announcement shall be made by the merchant banker not later ----------------------
than four working days after any such change or changes are decided
to be made as would result in the acquisition of control over the target ----------------------
company by the acquirer.
----------------------
Contents of the Public Announcement of Offer
----------------------
The public announcement shall contain the following particulars, namely:
The paid-up share capital of the target company, the number of fully paid- ----------------------
up and partly paid-up shares. ----------------------
i. The total number and percentage of shares proposed to be acquired from
----------------------
the public.
ii. The minimum offer price for each fully paid-up or partly paid-up share; ----------------------
iii. Mode of payment of consideration; ----------------------
iv. The identity of the acquirer. ----------------------
v. The existing holding of the acquirer in the shares of the target company.
----------------------
vi. The salient features of the agreement, if any, such as the date, the name
of the seller, the price at which the shares are being acquired, the manner ----------------------
of payment of the consideration and the number and percentage of shares
----------------------
acquired.
vii. The highest and the average price paid by the acquirer for acquisition, ----------------------
if any, of shares of the target company made by him during the twelve
----------------------
months period prior to the date of public announcement;
viii. The object and purpose of the acquisition of the shares and future plans of ----------------------
the acquirer for the target company.
----------------------
ix. An undertaking that the acquirer shall not sell, dispose of or otherwise
encumber any substantial asset of the target company except with the ----------------------
prior approval of the shareholders; ----------------------

Notes xi. The specified date.
xii. The date by which individual letters of offer would be posted to each of
----------------------
the shareholders;
---------------------- xiii. The date of opening and closure of the offer and the manner in which
and the date by which the acceptance or rejection of the offer would be
----------------------
communicated to the shareholders;
---------------------- xiv. The date by which the payment of consideration would be made.
---------------------- xv. Disclosure to the effect that firm arrangement for financial resources
required to implement the offer is already in place.
----------------------
xvi. Provision for acceptance of the offer by person(s) who own the shares but
---------------------- are not the registered holders of such shares;
---------------------- xvii. Statutory approvals, if any, required to be obtained for the purpose of
acquiring the shares.
----------------------
xviii. Approvals of banks or financial institutions required, if any;
---------------------- xix. Whether the offer is subject to a minimum level of acceptances from
the shareholders; and such other information as is essential for the
----------------------
shareholders to make an informed decision in regard to the offer.
---------------------- xx. Brochures, advertising material, etc.
---------------------- Submission of Letter of Offer to the Board
---------------------- The draft letter of offer must be submitted within 14 days of date of public
announcement. The same should be dispatched to the shareholders not earlier
---------------------- than 21 days from its submission to the Board.
---------------------- If, within 21 days from the date of submission of the letter of offer, the
Board specifies changes, if any, in the letter of offer the merchant banker and
---------------------- the acquirer shall carry out such changes before the letter of offer is dispatched
to the shareholders.
----------------------
If the disclosures in the draft letter of offer are inadequate or the Board has
---------------------- received any complaint or has initiated any enquiry or investigation in respect
---------------------- of the public offer, the Board may call for revised letter of offer with or without
rescheduling the date of opening or closing of the offer. The board has to give
---------------------- its comments on the revised offer within seven working days of receipt of the
same.
----------------------
The acquirer shall, while filing the draft letter of offer with the Board pay
---------------------- a fee as mentioned in the regulations.
---------------------- Specified date

The public announcement shall specify a date, which shall be the specified
----------------------
date for the purpose of determining the names of the shareholders to whom the
---------------------- letter of offer should be sent and should be within 30 days of the date of public
announcement.
----------------------

Offer price Notes
The offer price shall be payable:
----------------------
a. In cash;
----------------------
b. By issue, exchange and/transfer of shares (other than preference shares)
of acquirer company. ----------------------
c. By issue, exchange and, or transfer of secured instruments of acquirer ----------------------
company.
----------------------
d. A combination of clause (a), (b) or (c).
The offer price shall be the highest of: ----------------------
a. The negotiated price under the agreement. ----------------------
b. The highest price paid by the acquirer for acquisition during the 26-week ----------------------
period prior to the date of public announcement;
----------------------
c. The average of the weekly high and low of the closing prices of the shares
of the target company during the 26 weeks or the average of the daily high ----------------------
and low of the prices of the shares during the two weeks preceding the
date of public announcement (not applicable for disinvestment of a Public ----------------------
Sector Undertaking) as quoted on the stock exchange where the shares of
----------------------
the company are most frequently traded whichever is higher:
Where the shares of the target company are infrequently traded, the offer ----------------------
price shall be determined by the acquirer and the merchant banker taking into
----------------------
account the points (a) and (b) stated above and other parameters including
return on net worth, book value of the shares of the target company, earning per ----------------------
share, price earning multiple as compared to the industry average.
----------------------
If considered necessary, the Board may require valuation of such
infrequently traded shares by an independent merchant banker or a chartered ----------------------
accountant.
----------------------
Where the acquirer has acquired shares in the open market or through
negotiation or otherwise, after the date of public announcement at a price higher ----------------------
than the offer price stated in the letter of offer, then, the highest price paid for
such acquisition shall be payable for all acceptances received under the offer ----------------------
provided that no such acquisition shall be made by the acquirer during the last ----------------------
seven working days prior to the closure of the offer.
In case where shares or secured instruments of the acquirer company are ----------------------
offered in lieu of cash payment, the value of such shares or secured instruments ----------------------
shall be determined in the same manner.
The offer price for partly paid-up shares shall be calculated as the ----------------------
difference between the offer price and the amount due towards calls-in-arrears ----------------------
or calls remaining unpaid together with interest, if any, payable on the amount
called up but remaining unpaid. The letter of offer shall contain justification or ----------------------
the basis on which the price has been determined.
----------------------

Notes Minimum Number of Shares to be acquired
1. The public offer made by the acquirer to the shareholders of the target
----------------------
company shall be for a minimum twenty per cent of the voting capital of
---------------------- the company.
2. If the acquisition made in pursuance of a public offer results in the public
----------------------
shareholding in the target company being reduced below the minimum
---------------------- level required as per the Listing Agreement, the acquirer shall take
necessary steps to facilitate compliance of the target company with the
---------------------- relevant provisions thereof, within the time period mentioned therein.
---------------------- 3. The letter of offer shall state clearly the option available to the acquirer.
---------------------- 4. For the purpose of computing the percentage the voting rights as at the
expiration of 15 days after the closure of the public offer shall be reckoned.
---------------------- 5. Where the number of shares offered for sale by the shareholders are more
---------------------- than the shares agreed to be acquired by the person making the offer,
such person shall accept the offers received from the shareholders on a
---------------------- proportional basis, in consultation with the merchant banker, taking care to
ensure that the basis of acceptance is decided in a fair and equitable manner
---------------------- and does not result in non-marketable lots. Provided that acquisition of
---------------------- shares from a shareholder shall not be less than the minimum marketable
lot or the entire holding if it is less than the marketable lot.
----------------------
Offer Conditional upon Level of Acceptance
---------------------- An acquirer or any person acting in concert with him may make an offer
conditional as to the level of acceptance which may be less than twenty per
----------------------
cent: Provided that where the public offer is in pursuance of a Memorandum of
---------------------- Understanding, the Memorandum of Understanding shall contain a condition to
the effect that in case the desired level of acceptance is not received the acquirer
---------------------- shall not acquire any shares under the Memorandum of Understanding and shall
rescind the offer.
----------------------
---------------------- 8.10 GENERAL OBLIGATIONS OF VARIOUS PARTIES TO

----------------------
ACQUISITION
---------------------- A. Acquirer
1. The public announcement of an offer to acquire the shares of the target
----------------------
company shall be made only when the acquirer is able to implement the
---------------------- offer.
2. Within 14 days of the public announcement of the offer, the acquirer
----------------------
shall send a copy of the draft letter of offer to the target company at its
---------------------- registered office address, for being placed before the board of directors
and to all the stock exchanges where the shares of the company are listed.
----------------------
3. The acquirer shall ensure that the letter of offer is sent to all the shareholders
---------------------- (including non-resident Indians) of the target company, whose names

appear on the register of members of the company as on the specified Notes
date mentioned in the public announcement, so as to reach them within
45 days from the date of public announcement. ----------------------
4. The date of opening of the offer shall be not later than the 55th day from ----------------------
the date of public announcement.
5. The offer to acquire shares from the shareholders shall remain open for a ----------------------
period of 20 days. ----------------------
6. In case the acquirer is a company, the public announcement of offer,
brochure, circular, letter of offer or any other advertisement or publicity ----------------------
material issued to shareholders in connection with the offer must state ----------------------
that the directors accept the responsibility for the information contained
in such documents. ----------------------
7. During the offer period, the acquirer or persons acting in concert with him ----------------------
shall not be entitled to be appointed on the board of directors of the target
company. ----------------------
8. Where an offer is made conditional upon minimum level of acceptances, ----------------------
the acquirer or any person acting in concert with him (i) shall, irrespective
of whether or not the offer received response to the minimum level of ----------------------
acceptances, acquire shares from the public to the extent of the minimum
specified percentage (ii) shall not acquire, during the offer period, any ----------------------
shares in the target company, except by way of fresh issue of shares of the ----------------------
target company, as provided for under regulation 3;
9. On or before the date of issue of public announcement of offer, the ----------------------
acquirer shall create an escrow account as provided under regulations. ----------------------
10. The acquirer shall ensure that firm financial arrangement has been made
for fulfilling the obligations under the public offer and suitable disclosures ----------------------
in this regard shall be made in the public announcement of offer. ----------------------
11. The acquirer shall, within a period of 15 days from the date of the closure
of the offer, complete all procedures relating to the offer including ----------------------
payment of consideration to the shareholders. ----------------------
12. In the event of withdrawal of offer in terms of the regulations, the acquirer
shall not make any offer for acquisition of shares of the target company ----------------------
for a period of six months from the date of public announcement of ----------------------
withdrawal of offer.
----------------------
Board of Directors of the Target Company
1. Unless the approval of the general body of shareholders is obtained after ----------------------
the date of the public announcement of offer, the board of directors of the ----------------------
target company shall not, during the offer period:
a. Sell, transfer, encumber or otherwise dispose of assets in the ----------------------
ordinary course of business, of the company or its subsidiaries; or ----------------------
b. Issue or allot any authorised but unissued securities carrying voting
rights during the offer period; or ----------------------

Notes c. Enter into any material contracts.
2. The target company shall furnish to the acquirer, within seven days of
----------------------
the request of the acquirer or within seven days from the specified date
---------------------- whichever is later, a list of shareholders or warrant holders or convertible
debenture.
----------------------
3. Once the public announcement has been made, the board of directors of
---------------------- the target company shall not:
a. Appoint as additional director or fill in any casual vacancy on the
----------------------
board of directors, by any person(s) representing or having interest
---------------------- in the acquirer, till the date of certification by the merchant banker.
---------------------- b. Allow any person or persons representing or having interest in

the acquirer, if he is already a director on the board of the target
---------------------- company before the date of the public announcement, to participate
in any matter relating to the offer, including any preparatory steps
---------------------- leading thereto.
---------------------- 4. The board of directors of the target company may, if they so desire, send
their unbiased comments and recommendations on the offer(s) to the
---------------------- shareholders.
---------------------- 5. The board of directors of the target company shall facilitate the acquirer
in verification of securities tendered for acceptances.
----------------------
6. Upon fulfillment of all obligations by the acquirers under the regulations
---------------------- as certified by the merchant banker, the board of directors of the target
company shall transfer the securities acquired by the acquirer.
----------------------
Merchant Banker
----------------------
1. Before the public announcement of offer is made, the merchant banker
---------------------- shall ensure that:
---------------------- a. The acquirer is able to implement the offer;
b. The provision relating to escrow account 28 has been made;
----------------------
c. Firm arrangements for funds and money for payment through
---------------------- verifiable means to fulfill the obligations under the offer are in
place;
----------------------
d. The public announcement of offer is made in terms of the regulations;
----------------------
e. His shareholding, if any in the target company is disclosed in the
---------------------- public announcement and the letter of offer.
---------------------- 2. The merchant banker shall furnish to the Board a due diligence certificate
which shall accompany the draft letter of offer.
----------------------
3. The merchant banker shall ensure that the public announcement and the
---------------------- letter of offer is filed with the Board, target company and also sent to all
the stock exchanges on which the shares of the target company are listed.
----------------------

4. The merchant banker shall ensure that the contents of the public Notes
announcement of offer as well as the letter of offer are true, fair and
adequate and based on reliable sources, quoting the source wherever ----------------------
necessary.
----------------------
5. The merchant banker shall ensure compliance of the regulations and any
other laws or rules as may be applicable in this regard. ----------------------
Competitive Bid ----------------------
Any person, other than the acquirer who has made the first public ----------------------
announcement, who is desirous of making any offer, shall, within 21 days of
the public announcement of the first offer, make a public announcement of his ----------------------
offer for acquisition of the shares of the same target company.
----------------------
Any competitive offer by an acquirer shall be for such number of shares
which, when taken together with shares held by him along with persons acting ----------------------
in concert with him, shall be at least equal to the holding of the first bidder
including the number of shares for which the present offer by the first bidder ----------------------
has been made. ----------------------
Upon the public announcement of a competitive bid or bids, the acquirer(s)
----------------------
who had made the public announcement(s) of the earlier offer(s), shall have
the option to make an announcement revising the offer. Provided that if no ----------------------
such announcement is made within fourteen days of the announcement of the
competitive bid(s), the earlier offer(s) on the original terms shall continue to ----------------------
be valid and binding on the acquirer(s) who had made the offer(s) except that
----------------------
the date of closing of the offer shall stand extended to the date of closure of the
public offer under the last subsisting competitive bid. ----------------------
Upward Revision of Offer ----------------------
Irrespective of whether or not there is a competitive bid, the acquirer who
has made the public announcement of offer may make upward revisions in his ----------------------
offer in respect of the price and the number of shares to be acquired, at any time ----------------------
up to seven working days prior to the date of the closure of the offer. Provided
that any such upward revision of offer shall be made only upon the acquirer. ----------------------
a. Making a public announcement in respect of such change. ----------------------
b. Inform the Board, all the stock exchanges on which the shares of the
----------------------
company are listed, and the target company at its registered office;
c. Increasing the value of the escrow account. ----------------------
Withdrawal of offer ----------------------

No public offer, once made, shall be withdrawn except under the following ----------------------
circumstances:
----------------------
a. The statutory approval(s) required have been refused;
b. The sole acquirer, being a natural person, has died; ----------------------
c. Such circumstances as in the opinion of the Board merit withdrawal. ----------------------

Notes In the event of withdrawal of the offer under any of the above circumstances
the acquirer or the merchant banker shall:
----------------------
a. Make a public announcement in the same newspapers in which the public
---------------------- announcement of offer was published, indicating reasons for withdrawal
of the offer;
----------------------
b. Simultaneously with the issue of such public announcement, inform:
---------------------- i. The Board;
---------------------- ii. All the stock exchanges on which the shares of the company are
listed; and
----------------------
iii. The target company at its registered office.
----------------------
Provision of Escrow
---------------------- 1. The acquirer shall as and by way of security for performance of his
obligations under the regulations, deposit in an escrow account the
----------------------
following amount:
---------------------- ● Up to and including Rs. 100 crore – 25%;
---------------------- ● Exceeding Rs. 100 crore – 25% up to Rs. 100 crore and 10% thereafter
---------------------- For offers which are subject to a minimum level of acceptance, and
the acquirer does not want to acquire a minimum of 20%, than 50% of the
---------------------- consideration payable under the public offer in cash shall be deposited in the
escrow account.
----------------------
The total consideration payable under the public offer shall be calculated
---------------------- assuming full acceptances and at the highest price if the offer is subject to
differential pricing, irrespective of whether the consideration for the offer is
----------------------
payable in cash or otherwise.
---------------------- In case there is any upward revision of offer, consequent upon a competitive
bid or otherwise, the value of the escrow account shall be increased to equal at
----------------------
least 10% of the consideration payable upon such revision.
---------------------- Payment of Consideration
---------------------- 1. For the amount of consideration payable in cash, the acquirer shall, within
a period of seven days from the date of closure of the offer, open a special
----------------------
account with a banker to an issue registered with the Board and deposit
---------------------- therein, such sum as would, together with 90% of the amount lying in the
escrow account, if any, make up the entire sum due and payable to the
---------------------- shareholders as consideration for acceptances received and accepted in
terms of these regulations and for this purpose, transfer the funds from the
----------------------
escrow account.
---------------------- 2. The unclaimed balance lying to the credit of the account referred to in sub-
regulation (1) at the end of three years from the date of deposit thereof
----------------------
shall be transferred to the investor protection fund of the regional stock
---------------------- exchange of the target company.

3. In respect of consideration payable by way of exchange of securities, the Notes
acquirer shall ensure that the securities are actually issued and dispatched
to the shareholders. ----------------------
----------------------
8.11 INVESTIGATION AND ACTION BY BOARD
----------------------
Board’s Right to investigate
----------------------
The Board may appoint one or more persons as investigating officer to
undertake investigation for any of the following purposes, namely: ----------------------
a. To investigate into the complaints received from the investors, the
----------------------
intermediaries or any other person on any matter having a bearing on the
allegations of substantial acquisition of shares and takeovers; ----------------------
b. To investigate upon its own knowledge or information, in the interest ----------------------
of the securities market or investors‘ interest, for any breach of the
regulations; ----------------------
c. To ascertain whether the provisions of the Act and the regulations are ----------------------
being complied with for any breach of the regulations.
----------------------
Notice before Investigation
1. Before ordering an investigation the Board shall give not less than 10 ----------------------
days’ notice to the acquirer, the seller, the target company, the merchant
----------------------
banker, as the case may be.
2. Notwithstanding anything contained in sub-regulation (1), where the ----------------------
Board is satisfied that in the interest of the investors no such notice should ----------------------
be given, it may, by an order in writing direct that such investigation be
taken up without such notice. ----------------------
3. During the course of an investigation, the acquirer, the seller, the target ----------------------
company, the merchant banker, against whom the investigation is being
carried out, shall be bound to discharge his obligation as mentioned below. ----------------------
Obligations on Investigation by the Board ----------------------
1. It shall be the duty of the acquirer, the seller, the target company, the
----------------------
merchant banker whose affairs are being investigated and of every
director, officer and employee thereof, to produce to the investigating ----------------------
officer such books, securities, accounts, records and other documents in its
custody or control and furnish him with such statements and information ----------------------
relating to his activities as the investigating officer may require, within
----------------------
such reasonable period as the investigating officer may specify.
2. They shall allow the investigating officer to have reasonable access ----------------------
to the premises occupied by him or by any other person on his behalf ----------------------
and also extend reasonable facility for examining any books, records,
documents and computer data in their possession and also provide copies ----------------------
of documents or other materials which, in the opinion of the investigating
officer are relevant for the purposes of the investigation. ----------------------

Notes 3. The investigating officer, in the course of investigation, shall be entitled
to examine or to record the statements of any director, officer or employee
---------------------- of the acquirer, the seller, the target company, the merchant banker.
---------------------- 4. It shall be the duty of every director, officer or employee of the acquirer,
the seller, the target company, the merchant banker to give to the
---------------------- investigating officer all assistance in connection with investigation, which
the investigating officer may reasonably require.
----------------------
Submission of Report to the Board
----------------------
The investigating officer shall, as soon as possible, on completion of the
---------------------- investigation, submit a report to the Board.
---------------------- Communication of Findings

1. The Board shall, after consideration of the investigation report
----------------------
communicate the findings of the investigating officer to the acquirer, the
---------------------- seller, the target company, the merchant banker, as the case may be, and
give him an opportunity of being heard.
----------------------
2. On receipt of the reply, if any, from the acquirer, the seller, the target
---------------------- company, the merchant banker, as the case may be, the Board may call
upon him to take such measures as the Board may deem fit in the interest
---------------------- of the securities market and for due compliance with the provisions of the
---------------------- Act and the regulations.
Appointment of Auditor
----------------------
Notwithstanding anything contained in this regulation, the Board may
---------------------- appoint a qualified auditor to investigate into the books of account or the affairs
of the person concerned. Provided that the auditor so appointed shall have the
----------------------
same powers as vested to the investigation officer the person under investigation
---------------------- will be bound by the same obligations.
---------------------- Directions by the Board

The Board may, in the interest of securities market or for protection of
---------------------- interest of investors, issue such directions as it deems fit including:
---------------------- a. Directing appointment of a merchant banker for the purpose of causing
disinvestment of shares acquired in breach of regulations either through
----------------------
public auction or market mechanism.
---------------------- b. Directing transfer of any proceeds or securities to the Investors Protection
Fund of a recognised stock exchange;
----------------------
c. Directing the target company or depository to cancel the shares where an
---------------------- acquisition of shares pursuant to an allotment is in breach of regulations.
---------------------- d. Directing the target company or the depository not to give effect to
transfer or further freeze the transfer of any such shares and not to permit
---------------------- the acquirer or any nominee or any proxy of the acquirer to exercise any
---------------------- voting or other rights attached to such shares acquired in violation of
regulations.
e. Debarring any person concerned from accessing the capital market or Notes
dealing in securities for such period as may be determined by the Board;
----------------------
f. Directing the person concerned to make public offer to the shareholders
of the target company to acquire such number of shares at such offer price ----------------------
as determined by the Board;
----------------------
g. Directing disinvestment of such shares as are in excess of the percentage
of the shareholding or voting rights specified for disclosure requirements; ----------------------
h. Directing the person concerned not to dispose of assets of the target
----------------------
company contrary to the undertaking given in the letter of offer;
i. Directing the person concerned, who has failed to make a public offer or ----------------------
delayed the making of a public offer in terms of these regulations, to pay to ----------------------
the shareholders, whose shares have been accepted in the public offer made
after the delay, the consideration amount along with interest at the rate not ----------------------
less than the applicable rate of interest payable by banks on fixed deposits.
----------------------
Penalties for Non-compliance
----------------------
1. Any person violating any provisions of the regulations shall be liable for
action in terms of the regulations and the Act. ----------------------
2. If the acquirer or any person acting in concert with him, fails to carry out
----------------------
the obligations under the regulations, the entire or a part of the sum in the
escrow account shall be liable to be forfeited and the acquirer or such a ----------------------
person shall also be liable for action in terms of the regulations and the Act.
----------------------
3. The board of directors of the target company failing to carry out the
obligations under the regulations shall be liable for action in terms of the ----------------------
regulations and the Act.
----------------------
4. The Board may, for failure to carry out the requirements of the regulations
by an intermediary, initiate action for suspension or cancellation of ----------------------
registration of an intermediary.
----------------------
5. For any mis-statement to the shareholders or for concealment of material
information required to be disclosed to the shareholders, the acquirers or ----------------------
the directors where the acquirer is a body corporate, the directors of the
target company, the merchant banker to the public offer and the merchant ----------------------
banker engaged by the target company for independent advice would be ----------------------
liable for action in terms of the regulations.
----------------------
----------------------
1. Price-Sensitive Information should be disclosed only to those within ----------------------
the company who need the information to discharge their duty.
2. A public offer once made can be withdrawn under certain ----------------------
circumstances. ----------------------

Notes
Summary
----------------------
● “Insider” means a person connected with the company and expected
----------------------
to have access to unpublished price-sensitive information in respect to
---------------------- securities of the company.
● The “insider” should not deal in securities of the company or communicate
----------------------
the unpublished price-sensitive information to some other person.
---------------------- ● No company shall deal in the securities of another company while
---------------------- in possession of any unpublished price-sensitive information of that
company.
---------------------- ● A company can deal in securities of another company if it ensures that
---------------------- proper internal controls are in place that the person having access to
information and the person buying the securities are different and there is
---------------------- no exchange of information between them.
---------------------- ● If the Board suspects that any person has violated any provision of these
regulations, it may inquire into the case and form an opinion as to whether
---------------------- there is any violation of these regulations.
---------------------- ● Upon investigation the board may give directions to insider not to deal in
securities or prohibit him from disposing securities so acquired or deliver
---------------------- the securities back to seller or declare the transaction null or void.
---------------------- ● Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company the number of shares or voting
---------------------- rights held by such person, on becoming such holder.
---------------------- ● Every listed company should appoint a compliance officer for drafting
policies and procedures for preserving price sensitive information.
----------------------
● The company shall specify a trading period, to be called “trading window”,
---------------------- for trading in the company’s securities. The trading window shall be
closed during the time the information is unpublished and employees/
---------------------- directors shall not trade in such period.
---------------------- ● Any trade entered in by the designated employee/officer/director of the
company needs to be pre-cleared by the compliance officer.
----------------------
● All directors/officers/designated employees who buy or sell any number
---------------------- of shares of the company shall not enter into an opposite transaction, i.e.,
sell or buy any number of shares during the next six months following the
---------------------- prior transaction.
---------------------- ● The Compliance Officer shall maintain records of all the transactions
entered by the directors/officers/designated employees of the company
----------------------
for a minimum period of three years.
---------------------- ● Listed companies shall have clearly laid down procedures for responding
to any queries or requests for verification of market rumours by exchanges.
----------------------

● Disclosure/dissemination of information may be done through various Notes
media so as to achieve maximum reach and quick dissemination.
----------------------
● A listed company should be careful when dealing with analysts’ questions
that raise issues outside the intended scope of discussion. ----------------------
● Person holding more than 5% of shares of voting rights of the company
----------------------
and promoters having control over the company need to disclose details
of holdings to the company. ----------------------
● Every person who holds more than 15% shares or voting rights in any
----------------------
company, shall, within 21 days from the financial year ending March 31,
make yearly disclosures to the company, in respect of his holdings as on ----------------------
31st March.
----------------------
● The promoters need to give information of creating a pledge and invocation
of pledge on shares to the company. ----------------------
● No acquirer shall acquire shares or voting rights which entitle such ----------------------
acquirer to exercise 15% or more of the voting rights in a company, unless
such acquirer makes a public announcement. ----------------------
● Before making any public announcement of the acquisition, the acquirer ----------------------
shall appoint a merchant banker.
----------------------
● The public announcement shall be made by the merchant banker not later
than four working days of entering into an agreement for acquisition of ----------------------
shares or voting rights or deciding to acquire shares or voting rights.
----------------------
● Public announcement should contain shareholding details pre- and post-
acquisition, mode of payment, sources of funds, date of closure of offer ----------------------
and such other information as required by the regulations.
----------------------
● The draft letter of offer must be submitted within 14 days of date of public
announcement. The same should be dispatched to the shareholders not ----------------------
earlier than 21 days from its submission to the Board.
----------------------
● The offer price shall be the highest of the negotiated price, the highest
price paid by the acquirer for acquisition during the 25-week period prior ----------------------
to the date of public announcement and the average of the weekly high
and low of the closing prices of the shares of the target company during ----------------------
the 26 weeks or the average of the daily high and low of the prices of the ----------------------
shares during the two weeks preceding the date of public announcement.
● Any person, other than the acquirer who has made the first public ----------------------
announcement, who is desirous of making any offer, shall, within 21 days ----------------------
of the public announcement of the first offer, make a public announcement
of his offer for acquisition of the shares of the same target company. ----------------------
● The acquirer may make upward revisions in his offer in respect of the ----------------------
price and the number of shares to be acquired, at any time up to seven
working days prior to the date of the closure of the offer. ----------------------
----------------------

Notes ● The acquirer needs to open an escrow account and deposit specified sum
in it in order to discharge his obligations under the acquisition.
----------------------
● The board can investigate into the details of any acquisition and issue
---------------------- such directions as it deems necessary in order to protect the interest of the
investors.
----------------------
---------------------- Keywords
---------------------- • Insider: Any person who is or was connected with the company or is
deemed to have been connected with the company and is reasonably
----------------------
expected to have access to unpublished price-sensitive information in
---------------------- respect of securities of company, or has received or has had access to
such unpublished price-sensitive information.
----------------------
• Price-sensitive information: Any information which relates directly or
---------------------- indirectly to a company and which if published is likely to materially
affect the price of securities of company.
----------------------
• Unpublished: Information which is not published by the company or its
---------------------- agents and is not specific in nature.
---------------------- • Designated employee: It includes (i) officers comprising the top three
tiers of the company management, (ii) the employees designated by the
---------------------- company to whom trading restrictions shall be applicable, keeping in
mind the objectives of this code of conduct.
----------------------
• Investigating authority: Any officer of the Board or any other person,
---------------------- not being a firm, body corporate or an association of persons, having
experience in dealing with the problems relating to the securities market
---------------------- and who is authorised by the Board.
---------------------- • Acquirer: Any person, who, directly or indirectly, acquires or agrees to
acquire shares or voting rights in the target company, or acquires or agrees
---------------------- to acquire control over the target company, either by himself or with any
---------------------- person acting in concert with the acquirer.
----------------------
----------------------
1. What do you mean by the term Insider? What are the restrictions imposed
---------------------- by the board on Insider Trading?
---------------------- 2. Upon investigation into a transaction of insider trading what directions
can be issued by the Board?
----------------------
3. What are the disclosure requirements of SEBI on substantial acquisition
---------------------- of share/voting rights?
---------------------- 4. What are the contents of public announcement to be made before
acquisition of shares?
----------------------

5. What the obligations of the company, acquirer and merchant banker at the Notes
time of substantial acquisition?
----------------------
6. What are the powers vested with the board for investigation into the
matters of substantial acquisition? What directions can be issued by the ----------------------
board?
----------------------
7. What do you mean by the term competitive bid? What are the regulations
regarding upward revision of bid? ----------------------
8. Elaborate on the regulations related to creation of escrow account and
----------------------
payment of purchase consideration.
----------------------
----------------------
----------------------
Fill in the blanks.
1. Before undertaking any investigation the Board shall give a reasonable ----------------------
notice to insider for that purpose.
----------------------
2. The listed company should appoint a Compliance Officer, being a senior
level employee, reporting to the Managing Director/Chief Executive ----------------------
Officer. ----------------------
----------------------
Fill in the Blanks
----------------------
1. If any person contravenes the provisions of section 195, he shall be
punishable with imprisonment for a term which may extend to five ----------------------
years.
----------------------
State True or False
1. False ----------------------
2. True ----------------------
----------------------
1. True
----------------------
2. True
----------------------
Suggested Reading
----------------------
1. Securities and Exchange Board of India (Prohibition of Insider Trading) ----------------------
Regulations, 1992.
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Overseas Financing
UNIT
9
Structure:
9.1 Introduction
9.2 Advantages of Overseas Financing
9.3 Concept of Depository Receipts
9.4 American Depository Receipts
9.5 Advantages of going for an ADR Issue
9.6 Global Depository Receipts
9.7 Advantages of a GDR Issue
9.8 Procedure for an ADR Issue
9.9 External Commercial Borrowings
9.10 Foreign Currency Convertible Bonds (FCCBs)
Summary
Key Words
Suggested Reading
Overseas Financing 199

Notes
Objectives
----------------------
----------------------
• Explain the need and importance of overseas financing
----------------------
• Analyse the concepts of depository receipts as a source of international
---------------------- finance
• Identify the eligibility guidelines of external commercial borrowings
----------------------
• Discuss foreign currency convertible bonds
----------------------
---------------------- 9.1 INTRODUCTION
---------------------- Financial markets around the world are witnessing unprecedented

development. As increasing number of domestic companies are looking into
---------------------- overseas market for their financial requirements, the boundaries between the
national and the overseas markets are fast disappearing leading to the emergence
---------------------- of a global unified financial market. Today both the potential borrowers and
---------------------- potential investors in any country have a wide range of markets to choose from.
They are looking outside their geographical boundaries for possible investments.
---------------------- The pace of financial innovation has also accelerated, thereby providing varied
options to borrowers accessing international capital. India has embarked on the
---------------------- global path particularly after globalisation and deregulation.
---------------------- A company can raise finance from the domestic market as well as from
international market. Prior to the introduction of economic reforms, companies
----------------------
could not raise equity but only debt from the international market. In the
---------------------- early 90s the foreign exchange reserves of the country were reduced and the
government could not meet the import requirements of Indian companies.
---------------------- Hence, to wriggle out of this foreign exchange crunch the government permitted
Indian companies to invest in the equity and bond market in Europe, and this
----------------------
helped Indian companies to become global.
---------------------- Since 1991 after the reforms were initiated, Indian companies are
allowed to raise resources using equity issues in international market. With the
----------------------
opening up of Indian economy, the corporate sector has got the opportunity
---------------------- to raise resources from international market for two specific purposes. Firstly,
to meet the requirements of foreign currency for import, expansion and other
---------------------- business purposes. Secondly, to lower the overall cost of capital as international
resources are likely to be cheaper than in India. This change from a developing
----------------------
economy to globally competitive and fastest growing economy has been fuelled
---------------------- by a strategy and vision of the Indian corporate sector and commitment by the
government in providing an environment where the companies can expand and
---------------------- grow.
---------------------- Indian companies have raised resources from the international capital
market through various sources like the depository receipts including American
---------------------- Depositary Receipts (ADR), Global Depositary Receipts (GDR), Foreign

Currency Convertible Bonds and External Commercial Borrowings. ECBs are Notes
used in the last resort after all external equity sources have been used.
----------------------
Global depository receipts (GDRs)
The 2013 Act includes a new section to enable the issue of depository receipts ----------------------
in any foreign country subject to prescribed conditions [section 41 of 2013 Act].
----------------------
In several aspects across the 2013 Act, it appears that the 2013 Act supplements
the powers of SEBI by incorporating requirements already mandated by SEBI. ----------------------
Sec.2 (32) “depository” means a depository as defined in clause (e) of sub-
----------------------
section (1) of section 2 of the Depositories Act, 1996;
Sec. 2 (44) “Global Depository Receipt” means any instrument in the form of ----------------------
a depository receipt, by whatever name called, created by a foreign depository ----------------------
outside India and authorized by a company making an issue of such depository
receipts; ----------------------
(48) “Indian Depository Receipt” means any instrument in the form of a ----------------------
depository receipt created by a domestic depository in India and authorized
by a company incorporated outside India making an issue of such depository ----------------------
receipts;
----------------------
Global Depository receipt
----------------------
41. A company may, after passing a special resolution in its general meeting,
issue depository receipts in any foreign country in such manner, and subject to ----------------------
such conditions, as may be prescribed.
----------------------
Sec. 56 (7) Without prejudice to any liability under the Depositories Act, 1996,
where any depository or depository participant, with an intention to defraud a ----------------------
person, has transferred shares, it shall be liable under section 447.
----------------------
Section 390 of the 2013 Act empower the Central Government that it may make
rules applicable for— ----------------------
(a) the offer of Indian Depository Receipts; ----------------------
(b) the requirement of disclosures in prospectus or letter of offer issued in
connection with Indian Depository Receipts; ----------------------
(c) the manner in which the Indian Depository Receipts shall be dealt with in ----------------------
a depository mode and by custodian and underwriters; and
----------------------
(d) the manner of sale, transfer or transmission of Indian Depository Receipts,
by a company incorporated or to be incorporated outside India, whether ----------------------
the company has or has not established, or will or will not establish, any
----------------------
place of business in India.
----------------------
9.2 ADVANTAGES OF OVERSEAS FINANCING
----------------------
Ever since resource mobilisation from International markets has been
----------------------
allowed many companies have preferred investments from overseas market in
view of the definite advantages some of which are discussed below. ----------------------

Notes Visibility of the company increases with overseas issuance as the
company gets exposure to international investors. Listing on the stock markets
---------------------- abroad also mandates certain standards of disclosure of information which in
turn benefits the investors.
----------------------
The time taken for an overseas issue is shorter and the cost involved in
---------------------- less. Indian companies can raise huge amounts of capital from international
market than the domestic market.
----------------------
The World Investment Community particularly Foreign Institutional
---------------------- Investors have responded strongly to share the Indian growth story. The
Government of India has started very large national programme for infrastructure
----------------------
modernisation and creation. This has also resulted in unprecedented business
---------------------- prospects. Higher disposal income of ever increasing young population
is also offering strong demand for consumer goods, which in turn fuels the
---------------------- manufacturing and services sectors.
---------------------- Overseas financing also offers certain advantages for Foreign Institutional
Investors as they do not have to register with SEBI and they do not have to pay
---------------------- capital gains on the GDRs traded on the foreign stock exchanges. This has been
a significant reason why foreign Institutional investors prefer participating in
----------------------
Depository receipts.
---------------------- Overseas financing is also gaining popularity due to flourishing Euro
---------------------- Bond market. Euro bonds are underwritten by an International syndicate of
banks and placed in countries other than the country in whose currency it is
---------------------- denominated. They offer many merits as there are less regulatory controls and
less stringent disclosure norms as compared to dollar denominated bonds in the
---------------------- US.
---------------------- The country’s growing GDP has made it a good destination for investment
in the outlook of the foreign investors. Along with the policies on inward FDI,
---------------------- the policies on outward investment are also liberalised. Controls on inward FDI
---------------------- and external commercial borrowing by domestic firms have been eased and the
emergence of world-class Indian corporate is being encouraged by the lifting of
---------------------- controls on outward investment.
----------------------
9.3 CONCEPT OF DEPOSITORY RECEIPTS
----------------------
Simply put a depository receipt is a negotiable instrument, each receipt
---------------------- denoting a fixed number of equity shares of a certain issuing company which is
generally denominated in a foreign currency. Generally, companies going for a
---------------------- public issue are mandated to getting their shares listed on a stock exchange having
---------------------- a nationwide terminal like the BSE and the NSE. However, companies might
want to list their shares even in an overseas stock exchange like London Stock
---------------------- exchange (LSE), New York stock Exchange (NYSE) and the National Association
of Security Dealers Automated Quotation (NASDAQ) thereby increasing their
---------------------- chances of getting funds and their visibility internationally. Listing on any
---------------------- exchange requires the compliance of various clauses of the listing agreements of
the stock exchanges. Listing conditions of overseas stock exchanges are generally
more stringent than Indian stock exchanges. This deters companies from listing Notes
their shares directly on the foreign stock exchange. An indirect listing on the
foreign stock exchange is possible by issuing Depository receipts namely GDR or ----------------------
ADR. This is possible in the following manner. The Company intending to issue
shares deposits a large number of the shares with a Bank located in a country ----------------------
where it wants to list its shares indirectly. The Bank issues receipts against ----------------------
these shares each receipt representative of certain shares of the company. These
receipts are then sold to foreign investors and are listed on the foreign Stock ----------------------
exchange. They are traded like ordinary shares and their prices are determined
by the market forces and the fundamentals of the domestic company. Hence, ----------------------
depository receipts are essentially equity instruments issued abroad by authorised ----------------------
overseas corporate bodies against the shares or bonds of Indian companies held
with nominated domestic custodian Bank. Both ADR and GDRs are depository ----------------------
receipts the difference being the country from which they are traded. If they are
traded in America they are termed as American Depository receipts (ADR) and if ----------------------
they are traded else where they are termed as Global Depository receipts (GDR). ----------------------
9.4 AMERICAN DEPOSITARY RECEIPTS ----------------------
American Depository Receipts known as ADRs for short is essentially a ----------------------

security issued by a company outside the US, which physically remains in the ----------------------
country of issue, usually in the custody of a bank, but is traded on US stock
exchanges. In other words, ADR is a stock that trades in the United States but ----------------------
represents a specified number of shares in a foreign corporation. Hence, they
are negotiable instruments denominated in dollars and issues by an American ----------------------
Depository Bank. ADRs are listed on the NYSE, AMEX or NASDAQ. A non-US ----------------------
Company intending to list in the US deposits its shares with a Bank and receives
a receipt which enables the company to issue American Depository shares. They ----------------------
are traded just like regular stocks of other corporate but are issued in the US
by a bank or brokerage. The concept of American Depository receipts was the ----------------------
outcome of the drive to simplify the physical handling and legal technicalities ----------------------
governing foreign securities as a result of the complexities involved in buying
shares in foreign countries. These complexities include differences in prices, ----------------------
currency valuations which are fluctuating on a regular basis. In view of such
problems, US banks found a simple methodology wherein they purchase a bulk ----------------------
lot of shares from foreign company and then bundle these shares into groups, ----------------------
and reissue them and get these quoted on American stock markets.
ADR simplify investing for the Americans as when they take up an ----------------------
ADR they are investing in an Indian company in dollars and not in rupees. As ----------------------
they are treated like any other stocks of companies declaring financial results
and adhering to accounting standards it makes their investment transparent. ----------------------
American investors also get to enjoy the benefit of emerging economies growing
opportunities. ----------------------
For Indian companies ADR issues offer access to foreign institutional and retail ----------------------
investors. However not every company can think of an ADR Issue. They are
----------------------
accessible only to good companies with good corporate governance practices.

Notes
----------------------

1. _______________ is a negotiable instrument each receipt denoting
----------------------
a fixed number of equity shares of a certain issuing company which is
---------------------- generally denominated in a foreign currency.

1. Overseas financing is losing popularity due to flourishing Euro Bond
---------------------- market.
---------------------- 2. American Depository Receipts is a stock that trades in the United States
but represents a specified number of shares in a foreign corporation.
----------------------
----------------------
9.5 ADVANTAGES OF GOING FOR AN ADR ISSUE
----------------------
Going for an ADR issue gives companies the freedom to decide the
---------------------- deployment of funds whether in the US or India. Companies can also make their
presence felt in the global arena which increases the liquidity of the company’s
---------------------- stock. It helps the company to have access to US capital market.
---------------------- From the investors perspective ADRs are cost-effective and easy to obtain
and trade as they can be purchased and sold just like shares of any companies
---------------------- or organisations. Investors do not need to operate through a new broker as the
---------------------- broker dealing with the ordinary stocks also deals with ADRs. As the ADRs are
quoted in US dollars and the dividend is also paid in dollars the investors are
---------------------- protected from exchange risks.
----------------------
9.6 GLOBAL DEPOSITARY RECEIPTS
----------------------
Similar to an American Depository Receipt is a Global Depository Receipt
---------------------- which is a negotiable instrument that represents a company’s equity shares
denominated in foreign currency terms usually in Dollars or Euros. GDRs are
---------------------- certificates that are issued by banks in more than one country for buying shares
---------------------- of foreign companies. GDR is like ADR, and is a kind of depositary receipt
which is sold outside the United States and the home country of the issuing
---------------------- company. These shares are registered in the name of an intermediary, which is
the Overseas Depository and is called the Overseas Depository Bank and the
---------------------- share certificates are delivered to another Domestic intermediary called as the
---------------------- Domestic Custodian Bank. The Domestic bank acts as an agent of the overseas
custodian bank. These GDR shares are issued to non-resident investors. These
---------------------- shares are freely transferable. The underlying shares of a GDR are denominated
in local currency of the issuing company. Companies prefer to go for GDR issue
---------------------- as they enjoy the benefit of collection of issue proceeds in foreign currency
---------------------- which can be utilised for meeting the foreign exchange requirements of the

Company. The dividend in respect of these shares is paid in rupees only...Most Notes
of the GDRs are listed on the Luxembourg stock exchange.
----------------------
Two-way fungibility of the GDR
Under the limited two-way fungibility scheme, a registered broker in ----------------------
India can purchase shares of an Indian company on behalf of a person resident ----------------------
outside India for the purpose of converting the shares so purchased into ADRs/
GDRs. The Scheme provides for purchase and re-conversion of only as many ----------------------
shares into ADRs/GDRs which are equal to or less than the number of shares
emerging on surrender of ADRs/GDRs which have been actually sold in the ----------------------
market. Thus, it is only a limited two-way fungibility wherein the headroom ----------------------
available for fresh purchase of shares from domestic market is restricted to
the number of converted shares sold in the domestic market by non-resident ----------------------
investors. So long the ADRs/GDRs are quoted at discount to the value of shares
in domestic market, an investor will gain by converting the ADRs/GDRs into ----------------------
underlying shares and selling them in the domestic market. In case of ADRs/ ----------------------
GDRs being quoted at premium, there will be demand for reverse fungibility,
i.e., purchase of shares in domestic market for re-conversion into ADRs/GDRs. ----------------------
The scheme is operationalised through the Custodians of securities and stock
brokers under SEBI. ----------------------
For the purpose of Conversion of GDR into shares the following procedure ----------------------
is followed. For this purpose the holder of the GDR has to surrender the GDR
with a request to the overseas Bank. The overseas Bank will in turn instruct the ----------------------
domestic bank to release the shares. The Bank shall either sell the shares on the ----------------------
stock exchange and remit the proceeds to the holder or make him a registered
member of the company. There is no foreign exchange risk to the issuing ----------------------
company as the Domestic Custodian Bank converts the net sales proceeds into
foreign exchange at the market rate. The GDRs are subject to a lock-in period ----------------------
of 45 after which they can be converted into ordinary shares. Just as GDR are ----------------------
converted into shares the reverse is also possible.
----------------------
9.7 ADVANTAGES OF A GDR ISSUE
----------------------
By issuing GDRs Indian companies have recognition in the global market ----------------------
which in turn has helped them enhance the value of their shares in the Indian
market. This has helped in terms of increase in share prices of these companies ----------------------
in Indian market. There is no dilution of ownership as the GDR holders don’t
acquire voting rights of the company. The Companies have a diverse shareholder ----------------------
base with foreign investors who in turn have increased the chances for the ----------------------
company to raise capital in the international capital market.
As GDRs are negotiable instruments they are easily transferable. By ----------------------
subscribing to a GDR issue the investors get to trade and settle their transactions ----------------------
in their own market even though it is an international portfolio of securities.
GDRs have enabled investors to invest in foreign companies irrespective of the ----------------------
differences in terms of diversified trading practices, different laws, or cross-
border transactions. ----------------------

Notes In conclusion we can say that both ADR and GDR have made the capital
market in India more responsive to International capital market. Companies now
---------------------- need to follow international disclosure norms and good governance practices as
they need to cater to international investors. As a result of all this the financial
---------------------- reporting of such companies has improved.
---------------------- The following is a list of companies in India that have gone for an ADR/
GDR issues.
----------------------
Company ADR GDR
---------------------- Bajaj Auto No Yes
Dr. Reddy’s Yes Yes
----------------------
HDFC Bank Yes Yes
----------------------
Hindalco No Yes
---------------------- ICICI Bank Yes Yes
Infosys Technologies Yes Yes
---------------------- ITC Yes No
L&T No Yes
---------------------- MTNL Yes Yes
---------------------- Patni Computers Yes No
Ranbaxy Laboratories No Yes
---------------------- Tata Motors Yes No
State Bank of India No Yes
---------------------- VSNL Yes Yes
WIPRO Yes Yes
----------------------
---------------------- 9.8 PROCEDURE FOR AN ADR ISSUE

---------------------- The company planning to issue ADRs must get its group accounts
consolidated and audited according to US GAAP by an independent agency.
---------------------- It also has to appoint a team of legal and compliance experts as well as Lead
---------------------- managers and investment bankers to the issue. The teams will then have to
prepare the draft prospectus or the registration statement which will be submitted
---------------------- to SEC. SEC reverts with its comments and requirements, and this goes on
till SEC is satisfied with the information given. The draft prospectus is then
---------------------- distributed to prospective investors. Simultaneously, the company will also
---------------------- have to start the application process to list with the particular stock exchange.
With the draft prospectus ready, the company can launch its road shows or the
---------------------- selling exercise for getting subscription to the issue. Prospective investors give
their price and amount to the lead managers to the issue.
----------------------
Based on investor response, the lead managers fix the price of the issue,
---------------------- which is intimated to the SEC and the concerned stock exchanges.
---------------------- Eligibility guidelines for ADR and GDR Issues
---------------------- Issue of Depository Receipts is regulated by the Reserve Bank of India.

Foreign investment in India is governed by sub-section (3) of Section 6 of
---------------------- the Foreign Exchange Management Act, 1999 as amended form time to time.

Depository receipts are treated as Foreign Direct Investment in India. The Notes
following is the brief summary of the guidelines issues by the Reserve Bank of
India with respect to ADR and GDR. ----------------------
Indian companies can raise foreign currency resources abroad through ----------------------
the issue of ADRs/GDRs, in accordance with the Scheme for issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt ----------------------
Mechanism) Scheme, 1993 and guidelines issued by the Government of India.
----------------------
A company can issue ADRs/GDRs, if it is eligible to issue shares to
person resident outside India under the FDI Scheme. Listed companies that ----------------------
have been prohibited to access Indian capital market by SEBI are not eligible to
----------------------
issue ADR and GDR.
In case of unlisted companies, which have not yet accessed the ADR/ ----------------------
GDR route for raising capital in the international market, while seeking to issue
----------------------
such overseas instruments simultaneous listing in the domestic market is also
required. ----------------------
DRs/GDRs in the international market have to list in the domestic market ----------------------
on making profit or within three years of such issue of ADRs/GDRs, whichever
is earlier. ----------------------
ADRs/GDRs are issued on the basis of the ratio worked out by the Indian ----------------------
company in consultation with the Lead Manager to the issue. The proceeds so
raised have to be kept abroad till actually required in India. Pending repatriation ----------------------
or utilisation of the proceeds, the Indian company can invest the funds in:
----------------------
a. Deposits with or Certificate of Deposit or other instruments offered
by banks who have been rated by Standard and Poor, Fitch, IBCA or ----------------------
Moody’s, etc. and such rating not being less than the rating stipulated by
the Reserve Bank from time to time for the purpose; ----------------------
b. Deposits with branches of Indian Authorised Dealers outside India ----------------------

c. Treasury bills and other monetary instruments with a maturity or unexpired ----------------------
maturity of one year or less.
----------------------
d. There are no end-use restrictions except for a ban on deployment/
investment of such funds in real estate or the stock market. There is no ----------------------
monetary limit up to which an Indian company can raise ADRs/GDRs.
----------------------
9.9 EXTERNAL COMMERCIAL BORROWINGS ----------------------
External Commercial Borrowings (ECBs) are considered as an important ----------------------
component of the overall external debt. External Commercial Borrowings
include bank loans, suppliers’ and buyers’ credits, fixed and floating rate ----------------------
bonds (without convertibility) and borrowings from private sector windows of
multilateral Financial Institutions such as International Finance Corporation. For ----------------------
the purpose of providing an additional source of funds to the Indian corporate, ----------------------
External Commercial Borrowings are being permitted by the Government.
ECBs can be used for any purpose except for investment in stock market and ----------------------
speculation in real estate.
Notes The Government has formulated policies and procedures governing
each of the above categories. ECBs were first permitted by the Government
---------------------- in 1999 as a source of finance for Indian entities or individuals for setting up
new projects (known as green field projects), expansion of existing business,
---------------------- infrastructure projects and fresh investment in general. Policy on ECBs is
framed by the Government of India in consultation with RBI. Government has
----------------------
been liberalising ECB procedures in order to enable Indian corporates, to have
---------------------- greater access to international financial markets. It has empowered Reserve
Bank of India to give ECB approvals in accordance with the guidelines brought
---------------------- out by the RBI. There are basically two routes for raising the ECBs – Automatic
route and Approval route.
----------------------
• Automatic route: It implies that approval of government is not needed.
---------------------- ECBs for investment in the real sector are under the Automatic Route.
---------------------- • Approval route: All cases which fall outside the purview of the automatic
route come under approval route and will be decided by an Empowered
---------------------- Committee set up by RBI.
---------------------- i. Eligible borrowers include:
Corporates registered under the Companies Act except financial
----------------------
intermediaries (such as banks, Financial Institutions (FIs), housing
---------------------- finance companies and NBFCs) are eligible.
ii. Recognised lenders include the following:
----------------------
a. Borrowers can raise ECB from internationally recognised sources
---------------------- such as
---------------------- i. international banks, (ii) international capital markets, (iii) multilateral
financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit
---------------------- agencies, (v) suppliers of equipment, (vi) foreign collaborators and
(vii) foreign equity holders. Furthermore, overseas organisations and
---------------------- individuals complying with following safeguards may provide ECB to
---------------------- NGOs engaged in microfinance activities.
b. Overseas organisations planning to extend ECB would have to
---------------------- furnish a certificate of due diligence from an overseas bank which in
---------------------- turn is subject to regulation of host country regulator and adheres to
Financial Action Task Force (FATF) guidelines to the designated AD.
---------------------- The certificate of due diligence should comprise the following (i) that
the lender maintains an account with the bank for at least a period of
---------------------- two years, (ii) that the lending entity is organised as per the local law
---------------------- and held in good esteem by the business/local community and (iii)
that there is no criminal action pending against it.
----------------------
c. Individual lender has to obtain a certificate of due diligence from
---------------------- an overseas bank indicating that the lender maintains an account
with the bank for at least a period of two years. Other evidence/
---------------------- documents such as audited statement of account and income tax
return which the overseas lender may furnish need to be certified
----------------------
and forwarded by the overseas bank. Individual lenders from

countries wherein banks are not required to adhere to Know Your Notes
Customer (KYC) guidelines are not permitted to extend ECB.
----------------------
d. The key operative part in the credential of the overseas lender is that
ECB should be availed from an internationally recognised source and ----------------------
one of the recognised categories is ‘foreign equity holder’ as indicated
above. It is clarified that for a ‘foreign equity holder’ to be eligible as ----------------------
‘recognised lender’ under the automatic route would require minimum
----------------------
holding of equity in the borrower’s company as under:
i. ECB up to USD 5 million – minimum equity of 25% held directly by the ----------------------
lender,
----------------------
ii. ECB more than USD 5 million – minimum equity of 25% held directly by
the lender and debt-equity ratio not exceeding 4:1(i.e., the proposed ECB ----------------------
not exceeding four times the direct foreign equity holding).
----------------------
iii. Amount and Maturity
----------------------
a. ECB up to USD 20 million or equivalent with minimum average
maturity of three year. ----------------------
b. ECB above USD 20 million and up to USD 500 million or equivalent ----------------------
with minimum average maturity of five year.
----------------------
c. The maximum amount of ECB which can be raised by a corporate
is USD 500 million during a financial year. ----------------------
d. NGOs engaged in microfinance activities can raise ECB up to USD
----------------------
5 million during a financial year.
e. ECB up to USD 20 million can have call/put option provided the ----------------------
minimum average maturity of 3 years is complied before exercising ----------------------
call/put option.
----------------------
9.10 FOREIGN CURRENCY CONVERTIBLE BONDS
----------------------
(FCCBs)
----------------------
A Foreign Currency Convertible Bond is a quasi-debt instrument which
is issued by any corporate entity, international agency or sovereign state to ----------------------
investors all over the world. There are in the nature of an equity linked debt
security which can be converted into shares or into depository receipts. The ----------------------
investor in the FCCB has the option to convert it into equity usually in accordance ----------------------
with a predetermined formula and sometimes also at a predetermined exchange
rate. This offers capital appreciation on sale. He has also the option to retain it ----------------------
as a bond. Investors have an option to convert the bond if the market price of
the stock goes up beyond a percentage of the share price at the time of issue ----------------------
at a predetermined premium. Alternatively, some companies retain the right to ----------------------
convert compulsorily.
----------------------
----------------------

Notes By virtue of their convertibility FCCBs offer a privilege of lower interest
cost than that of the similar non-convertible debt instrument. By issuing these
---------------------- bands, a company can also avoid any dilution in earnings per share that a further
issue of equity might cause whereas such a security still can be traded on the
---------------------- basis of underlying equity value.
---------------------- The following are some of the special features of the FCCBs:
---------------------- Convertible Euro Bonds are similar to convertible bonds since they give
the investor the right to convert the fixed interest bond into equity shares or
---------------------- common stock of issuing company.
---------------------- The conversion rights stipulate that the bond holder may convert the bond
into ordinary shares either on a series of given shares or at any time between
---------------------- specified dates in future. The price at which the shares may be purchased through
such conversion provisions are specified at the time the convertible bonds are
----------------------
issued.
---------------------- Convertible bonds are beneficial to the issuer because they are available
---------------------- to the investor at a cost less than the fixed interest debt instruments. It gives the
investor an opportunity to participate in the growth of the company. He enjoys a
---------------------- fixed income and capital gains on the conversion of the debt into equity. Hence
they offer a mix of fixed interest instruments and equity instruments.
----------------------
As with all financial instruments FCCB suffer from exchange risk, as the
---------------------- interest is required to be paid in foreign currency. Consequently, only companies
with low debt equity ratios and large forex earnings potential opt for FCCBs.
----------------------
Although convertible bonds have rates of interest around 3-4% that is
---------------------- relatively low, the exchange risk on both the interest as well as the principal is
high if the bonds are not converted in to equity. Furthermore, if stock prices go
---------------------- down drastically, investors would opt for redemption and not for conversion.
---------------------- This means that companies would have to refinance to fulfill the redemption
promise and this could affect their earnings adversely. FCCBs will remain as
---------------------- debt in the balance sheets unless they are converted.
---------------------- FCCBs can be issued by Indian companies in the overseas market in
accordance with the Scheme for Issue of Foreign Currency Convertible Bonds
---------------------- and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993.
The FCCB being a debt security, the issue needs to conform to the External
----------------------
Commercial Borrowing guidelines, issued by RBI from time to time.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. _____________ and _______________ are the two routes for raising
----------------------
External Commercial Borrowings.
2. __________________ is a quasi-debt instrument which is issued ----------------------
by any corporate entity, international agency or sovereign state to
----------------------
investors all over the world.
3. The FCCB being a debt security, the issue needs to conform to the ----------------------
External Commercial Borrowing guidelines, issued by _____ from ----------------------
time to time.
----------------------
Activity 1 ----------------------
----------------------
Visit RBI’s website and go through the database on External Commercial
Borrowings. ----------------------
----------------------
Summary
----------------------
• As increasing number of domestic companies are looking into overseas ----------------------
market for their financial requirements, the boundaries between the
national and the overseas markets are fast disappearing leading to the ----------------------
emergence of a global unified financial market.
----------------------
• Since 1991 after the reforms were initiated, Indian companies are allowed
to raise resources using equity issues in international market. ----------------------
• With the opening up of Indian economy, the corporate sector has got the ----------------------
opportunity to raise resources from international market for two specific
purposes. Firstly, to meet the requirements of foreign currency for import, ----------------------
expansion and other business purposes. Secondly, to lower the overall
----------------------
cost of capital as international resources are likely to be cheaper than in
India. ----------------------
• Indian companies have raised resources from the international capital ----------------------
market through various sources like the depository receipts including
American depositary receipts (ADR), Global depositary receipts (GDR), ----------------------
Foreign Currency Convertible Bonds and External Commercial Borrowings. ----------------------
• ECBs are used in the last resort after all external equity sources have
been used. Simply put a depository receipt is a negotiable instrument ----------------------
each receipt denoting a fixed number of equity shares of a certain issuing ----------------------
company which is generally denominated in a foreign currency.
----------------------

Notes • American Depository Receipts known as ADRs for short is essentially a
security issued by a company outside the U.S. which physically remains
---------------------- in the country of issue, usually in the custody of a bank, but is traded on
U.S. stock exchanges. In other words, ADR is a stock that trades in the
---------------------- United States but represents a specified number of shares in a foreign
---------------------- corporation. Hence, they are negotiable instruments denominated in
dollars and issues by an American Depository Bank.
----------------------
• ADRs are listed on the NYSE, AMEX or NASDAQ. A non-US Company
---------------------- intending to list in the US deposits its shares with a Bank and receives a
receipt which enables the company to issue American Depository shares.
----------------------
• External Commercial Borrowings are considered as an important component
---------------------- of the overall external debt. External Commercial Borrowings include bank
loans, suppliers’ and buyers’ credits, fixed and floating rate bonds (without
---------------------- convertibility) and borrowings from private sector windows of multilateral
Financial Institutions such as International Finance Corporation.
----------------------
• A Foreign Currency Convertible Bond is a quasi-debt instrument which is
---------------------- issued by any corporate entity, international agency or sovereign state to
investors all over the world. They are in the nature of an equity linked debt
----------------------
security which can be converted into shares or into Depository Receipts.
----------------------
----------------------
Keywords
---------------------- • Depository receipts: A negotiable instrument each receipt denoting

a fixed number of equity shares of a certain issuing company which is
---------------------- generally denominated in US Dollars.
---------------------- • American depositary receipts: (ADRs): A security issued by a company
outside the US which physically remains in the country of issue, usually
---------------------- in the custody of a bank, but is traded on US stock exchanges.
---------------------- • Foreign currency convertible bond: A quasi-debt instrument which is
issued by any corporate entity, international agency or sovereign state to
---------------------- investors all over the world.
----------------------
----------------------
---------------------- 1. Discuss the advantages of overseas financing for a country like India.
2. Explain the concept of depository receipts and discuss ADRs and GDRs.
----------------------
3. Elucidate the procedure for a company to go for an issue of ADR.
----------------------
4. What are external commercial borrowings? Explain ECB approvals in
---------------------- accordance with the guidelines brought out by the RBI.
---------------------- 5. What are Foreign Currency Convertible Bonds (FCCBs)? Discuss the
special features relating to them.
----------------------

Answers to Check your Progress Notes

1. Depository receipt is a negotiable instrument each receipt denoting a
----------------------
fixed number of equity shares of a certain issuing company which is generally
denominated in a foreign currency. ----------------------
1. False
----------------------
2. True
----------------------
1. Automatic route and Approval route are the two routes for raising External ----------------------
Commercial Borrowings.
----------------------
1. Foreign Currency Convertible Bond is a quasi-debt instrument which is
issued by any corporate entity, international agency or sovereign state to ----------------------
investors all over the world.
----------------------
2. The FCCB being a debt security, the issue needs to conform to the External
Commercial Borrowing guidelines, issued by RBI from time to time. ----------------------
----------------------
Suggested Reading
----------------------
1. www.rbi.org.in ----------------------
2. www.sebi.gov.in
----------------------
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----------------------
----------------------
----------------------

Notes
----------------------
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----------------------
----------------------
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Foreign Exchange Management Act, 1999
UNIT
10
Structure:
10.1 Introduction
10.2 Important Definitions under the Act
10.3 Regulation and Management of Foreign Exchange
10.4 Powers of RBI
10.5 Penalties
10.6 Directorate of Enforcement
Summary
Key Words
Suggested Reading
Foreign Exchange Management Act, 1999 215

Notes
Objectives
----------------------
---------------------- After going through this unit, you will be able to:
• Explain the meaning of the concept ‘authorised person’
---------------------- • State the meaning of ‘foreign exchange’
---------------------- • Examine the concept of ‘person resident in India’
• List the activities permitted involving foreign exchange
---------------------- • Discuss the exemption available while holding foreign exchange
----------------------
---------------------- 10.1 INTRODUCTION
---------------------- The main objective of the Foreign Exchange Regulation Act, 1973 (FERA)
was to consolidate and amend the existing laws that regulated certain payments
---------------------- and dealings in foreign exchange and securities transactions, indirectly affecting
foreign exchange; the import and export of currency, the conservation of the
---------------------- foreign exchange resources and finally, the proper utilisation of this foreign
---------------------- exchange so as to promote the economic development of the country. The FERA
has been repealed and replaced by FEMA, i.e., Foreign Exchange Management
---------------------- Act, 1999.
---------------------- The objective behind the Foreign Exchange Management Act, 1999
(FEMA) is to consolidate and amend the law relating to foreign exchange with
---------------------- the objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market in India.
----------------------
The provisions of the FEMA extends to all over India and also applies to
---------------------- all branches, offices and agencies outside India owned or controlled by a person
resident in India and also to any contravention committed outside India by any
----------------------
such person to whom this Act applies.
----------------------
10.2 IMPORTANT DEFINITIONS UNDER THE ACT
----------------------
Authorised Person: The term ‘authorised person’ is defined under Section
----------------------
2(c) as to mean an authorised dealer, money changer, offshore banking unit or
---------------------- any other person for the time being authorised to deal in foreign exchange or
foreign securities.
----------------------
Capital Account Transaction: ‘Capital account transaction’ has been
---------------------- defined under Section 2(e) as to mean any transaction which alters the assets
or liabilities including contingent liabilities, outside India of persons resident
---------------------- in India or assets or liabilities in India of person resident outside India and
includes the transactions referred in sub-section (3) of Section 6.
----------------------
Currency: The term Currency as defined under Section 2(h) includes
---------------------- all currency notes, postal notes, postal orders, money orders, cheques, drafts,
travellers cheques, letters of credit, bills of exchange and promissory notes,
----------------------

credit cards or such other similar instruments, as may be notified by the Reserve Notes
Bank.
----------------------
Current Account Transactions: Section 2(j) of the Act defines the term
Current Account Transactions as to mean a transaction other than a Capital ----------------------
Account Transaction and includes payments due in connection with foreign
trade, other current business, services, short-term banking and credit facilities ----------------------
in the ordinary course of business; payment due as interest on loans and as net
----------------------
income from investments, remittance for living expenses of parents, spouse
and children residing abroad; and expenses in connection with foreign travel, ----------------------
education and medical care of parents, spouse and children.
----------------------
Foreign Exchange: Clause (n) of Section 2 defines the term ‘foreign
exchange’ as to mean foreign currency and includes deposits, credits, balances ----------------------
payable in foreign currency, drafts, travellers cheques, letters of credits, bills
of exchange expressed or drawn in Indian currency but payable in any foreign ----------------------
currency. Any draft, travellers cheque, letters of credit or bills of exchange
----------------------
drawn by banks, institutions or persons outside India but payable in Indian
currency have also been included in the definition of foreign exchange. ----------------------
Foreign Security: In terms of clause (o) of Section 2, Foreign Security
----------------------
has been defined as to mean any security in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency ----------------------
and includes securities expressed in foreign currency but where redemption or
any form of return such as interest or dividend is payable in Indian currency. ----------------------
Under the FEMA ‘security’ is defined to include shares, stocks, bonds ----------------------
and debentures, Government securities, savings certificates, deposit receipts
and units of any mutual fund, etc. However, it does not include bills of exchange ----------------------
or promissory notes other than Government promissory notes or any other ----------------------
instruments which may be notified by the RBI.
Person: Under Section 2(u) includes, a ‘person’ is defined to include ----------------------
the following entities: (i) an individual; (ii) a Hindu Undivided Family; (iii) ----------------------
a company; (iv) a firm; (v) an association of persons or a body of individuals,
whether incorporated or not; (vi) every artificial juridical person; and (vii) any ----------------------
agency, office or branch owned or controlled by such person.
----------------------
Person Resident in India: Under Section 2(v), ‘Person resident in
India’ means the following: ----------------------
i. A person residing in India for more than one 182 days in the preceding ----------------------
financial year but does not include
----------------------
A. A person who has gone out of India or who stays outside India:
a. for taking up employment outside India, or ----------------------
b. for carrying on a business or vocation outside India, or ----------------------
c. for any other purpose, in such circumstances as would indicate his ----------------------
intention to stay outside India for an uncertain period;
----------------------

Notes B. A person who has come to India or stay in India, otherwise than:
a. for taking up employment in India, or
----------------------
b. for carrying on a business or vocation in India; or
----------------------
c. for any other purpose, in such circumstances as would indicate his
---------------------- intention to stay in India for an uncertain period;
---------------------- ii. Any person or body corporate registered or incorporated in India;

iii. An office, branch or agency in India owned or controlled by a person
---------------------- resident outside India;
---------------------- iv. An office, branch or agency outside India owned or controlled by a person
resident in India. Accordingly, a ‘person resident outside India’ means
---------------------- a person who is not resident in India as above.
---------------------- ‘Repatriate to India’ means bringing into India, foreign exchange and
selling it to an authorised person in India in exchange for rupees.
----------------------
---------------------- Activity 1
----------------------
Study and write down five points of difference between FERA and FEMA.
----------------------
---------------------- 10.3 REGULATION AND MANAGEMENT OF FOREIGN

---------------------- EXCHANGE
---------------------- Prohibits dealing in Foreign Exchange (Section 3)

 The Act prohibits any person other than an authorised person from dealing
----------------------
in or transferring any foreign exchange or foreign security to any person
---------------------- or make any payment to or for the credit of any person resident outside
India in any manner; or receive otherwise through an authorised person
---------------------- any payment by order or on behalf of any person resident outside India in
any manner except as provided in the Act, rules or regulations made there
----------------------
under or with the general or special permission of the Reserve Bank of
---------------------- India.
Any person in or resident in India receives any payment by order or on
----------------------

behalf of any person resident outside India through any other person
---------------------- (including an authorised person) without a corresponding inward
remittance from any place outside India, then such person shall be deemed
---------------------- to have received such payment otherwise than through an authorised
person.
----------------------
 A person, other than the authorised person, is prohibited to enter into any
---------------------- financial transaction in India as consideration for or in association with
---------------------- acquisition or creation or transfer of rights to acquire, any asset outside
India by any person, except as otherwise provided in the Act and Rules
---------------------- or Regulations made there under. For this purpose, financial transaction

has been defined to mean making any payment to or for the credit of any Notes
person or receiving any payment for by order or on behalf of any person
or drawing, issuing or negotiating any bill of exchange or promissory ----------------------
note or transferring any security or acknowledging any debt.
----------------------
Any person who wants to carry out the following activities has to do so in
accordance with the provisions of the FEMA. ----------------------
 To deal/transfer any foreign exchange or foreign security to any person ----------------------
other than an authorised person;
----------------------
 To make any payment to any person resident outside India;
 To receive (otherwise through an authorised person) any payment on ----------------------
behalf of any person resident outside India. ----------------------
 To enter into any financial transaction in India in relation to a right to
acquire any asset outside India by any person. ----------------------
At any point of time, if the Act prescribes the approval of the RBI, it has ----------------------
to be obtained.
----------------------
A person resident in India can hold, own, transfer or invest in foreign
currency, foreign security or any immoveable property situated outside India ----------------------
if it was acquired, held or owned by such person when he was resident outside
----------------------
India.
There is no bar on a person resident outside India to hold, own, transfer or ----------------------
invest in foreign currency, foreign security or any immoveable property situated
----------------------
outside India.
Every exporter of goods and services has to furnish the necessary data by ----------------------
way of a declaration to the RBI. Such export proceeds cannot be held in foreign ----------------------
countries and has to be repatriated to India. Non-repatriation is a violation of
the provisions of the FEMA. ----------------------
Current Account Transactions: Section 5 of the Act allows any person ----------------------
to sell or draw foreign exchange to or from an authorised person if such sale or
withdrawal is a current account transaction. However, the Central Government ----------------------
may, in the public interest and in consultation with the Reserve Bank impose
such reasonable restrictions for current account transactions. ----------------------
Capital Account Transaction: Section 6 allows capital account ----------------------

transactions as specified by the Reserve Bank of India. Reserve Bank of India
may in consultation with the Central Government specify any class or classes ----------------------
of capital account transactions permissible and the limit up to which foreign ----------------------
exchange shall be permissible for such transactions. However, Reserve Bank
shall not impose any restrictions on the withdrawal of foreign exchange for ----------------------
payments due on account of amortisation of loans or for depreciation of direct
investments in the ordinary course of business. ----------------------
----------------------
----------------------

Notes 10.4 POWERS OF RBI
---------------------- Powers of Reserve Bank of India (Section 6(3))
----------------------  RBI is empowered to make regulations to prohibit, restrict or regulate the
transfer or issue of any foreign security by a person resident in India or by
---------------------- a person resident outside India.
----------------------  RBI may also regulate, prohibit or restrict transfer or issue of any security
or foreign security through any branch, office, or agency in India of a
---------------------- person resident outside India. Any borrowing or lending in foreign
---------------------- exchange in whatever form or by whatever name called may also be
regulated or prohibited by the Reserve Bank.
----------------------  RBI may prohibit or restrict any borrowing or lending in rupees in
---------------------- whatever form or by whatever name called between a person resident
in India and a person resident outside India. Deposits between persons’
---------------------- resident in India and person resident outside India may also be restricted,
prohibited by the Reserve Bank of India.
----------------------
 RBI may also regulate the export, import or holding of currency or
---------------------- currency notes.
----------------------  RBI may also prohibit acquisition or transfer of immovable property in
India other than a lease not exceeding five years by person outside India.
----------------------
 RBI has also been empowered to prohibit or regulate giving of guarantee
---------------------- or surety in respect of any debt, obligation or other liability incurred by a
person resident in India and owed to a person resident outside India or by
---------------------- a person resident outside India.
----------------------  RBI under Section 6(6) has been empowered to prohibit, restrict or regulate
establishment in India of a branch, office or other place of business by a
---------------------- person resident outside India, for carrying on any activity relating to such
---------------------- branch, office or other place of business.
Requirement under the Act regards Export of Goods & Services (Section 7)
----------------------
 Every exporter is required to furnish to Reserve Bank or any other
---------------------- authority as prescribed, a declaration containing true and correct
particulars regarding the amount representing the full export value or
---------------------- if the full export value of the goods is not ascertainable at the time of
---------------------- export, the value which the exporter having regard to prevailing market
conditions expects to receive on sale of the goods in a market outside
---------------------- India.
----------------------  Every exporter is also required to furnish to the Reserve Bank such other
information as may be required by the Reserve Bank for the purpose of
---------------------- ensuring the realisation of the export proceeds.
----------------------  The Reserve Bank may, for the purpose of ensuring that the full export
value of the goods or such reduced value of the goods as the Reserve Bank
---------------------- determines having regard to the prevailing market conditions, is received

without delay, direct any exporter to comply with such requirements as it Notes
deems fit.
----------------------
 The exporters of services are required to submit to the Reserve Bank or
any other authorities as may be prescribed, a declaration containing the ----------------------
true and correct particulars in relation to payment for such services.
----------------------
Exemptions to hold Foreign Exchange (Section 9)
The exemptions in respect of holding of foreign exchange, realisation and ----------------------
repatriation of foreign exchange in certain circumstances are as follows:
----------------------
 Possession of foreign currency or coins by any person up to such limit as
the Reserve Bank may specify is not prohibited. ----------------------
 A person or class of persons may hold and operate foreign currency ----------------------
account within the prescribed limits as may be specified by the Reserve
Bank. ----------------------
 Foreign exchange acquired or received before 8th July 1947, or any income ----------------------
arising or accruing thereon, which is held outside India, in pursuance of a
general or special permission of RBI, is also exempted. ----------------------
 Provisions relating to holding of foreign exchange shall not be applicable ----------------------

to person resident in India up to such limit as the Reserve Bank may specify,
----------------------
if such foreign exchange was acquired by way of gift or inheritance from
certain persons mentioned above and any income arising therefrom. ----------------------
 Reserve Bank may also specify the exemption limit up to which the
----------------------
foreign exchange earned by a person from employment, business, trade,
vocation services, honorarium, gifts, inheritance or other legitimate ----------------------
means. Reserve Bank may also exempt such other receipts as it thinks fit.
----------------------
Power of Reserve Bank to appoint Authorised Person (Section10)
 The Act empowers the RBI to authorise any person, on an application ----------------------
made to be known as authorised person. The person is permitted to deal in ----------------------
foreign exchange or in foreign securities as an authorised dealer, money
changer or offshore banking unit or in any other manner as the RBI deems ----------------------
fit.
----------------------
 The authorisation shall be in writing and subject to the conditions laid
down by the RBI. ----------------------
 The Act also empowers the Reserve Bank of India to revoke the ----------------------
authorisation granted to any person at any time in the public interest.
----------------------
 It may also revoke the authorisation in case the authorised person failed
to comply with the conditions subject to which the authorisation was ----------------------
granted or contravened any of the provisions of the Act, rules, regulations,
notifications or directions. ----------------------
 The RBI gives the authorised person an opportunity to present his case, ----------------------
prior to revoking such authorisation.
----------------------

Notes Duties of the authorised person
 Authorised person is required to comply with the directions of the Reserve
----------------------
Bank with regard to all his dealing in foreign exchange or foreign security.
----------------------  Authorised person shall not engage in any transaction involving any
foreign exchange or foreign security, which is not in conformity with the
----------------------
terms of his authorisation.
----------------------  An authorised person, before undertaking any transaction in foreign
exchange on behalf of any person, shall require that person to make
----------------------
such declaration and give such information as will reasonably satisfy the
---------------------- authorised person. The declaration should state that the transaction will
not involve or is not intended to violate or contravene any provisions of
---------------------- the Act, rules, notifications or directions. In case, the person refuses to
comply with such requirement or makes only unsatisfactory compliance,
----------------------
the authorised person shall refuse in writing to act on behalf of such
---------------------- person in such transaction and report the matter to RBI.
----------------------  Any person, other than an authorised person, who has acquired or
purchased foreign exchange for any purpose mentioned in the declaration
---------------------- made by him to the authorised person does not use it for such purpose or
does not surrender it to authorised person within the specified period, or
---------------------- uses the foreign exchange for any other purpose, which is not permitted
---------------------- under the provisions of the Act, such person shall be deemed to have
committed contravention of the provisions of the Act.
---------------------- Power of Reserve Bank to issue Directions to Authorised Person (Section
---------------------- 11)
 The Act empowers the RBI to issue directions to authorised person in
---------------------- regard to making of payment or doing or desist from doing any act relating
---------------------- to foreign exchange or foreign security.
 The Reserve Bank has also been empowered to issue directions to the
----------------------
authorised persons to furnish such information in such manner as it deems
---------------------- fit.
 An authorised person contravening any direction given by the RBI or fails
----------------------
to file the return as directed by RBI, shall be liable to a fine not exceeding
---------------------- Rs. 10,000 and in the case the contravention continues, with an additional
penalty which may extend to Rs. 2,000 for every day during which such
---------------------- contravention continues.
---------------------- Power of Reserve Bank to inspect Authorised Person (Section12)
----------------------  The Act empowers the RBI to inspect the business of any authorised
person for the purpose of verifying the correctness of any statement,
---------------------- information or particulars furnished.
----------------------  In case the authorised person fails to furnish the information sought, the
RBI can initiate inspection of the authorised person for obtaining such
---------------------- information.

 The RBI may also inspect the business of an authorised person for securing Notes
compliance with the provisions of the Foreign Exchange Management
Act or any of the Rules, Regulations or directions. ----------------------
 The Reserve Bank may make an order in writing authorising any of its ----------------------
officers for this purpose.
----------------------
 When an inspection is initiated by the Reserve Bank, it shall be the duty
of every authorised person, (where the authorised person is a company ----------------------
or firm, every director, partner or officer of such a company or firm) to
produce before the inspecting officer such books, accounts and other ----------------------
documents in his custody and to furnish any statement or information
----------------------
relating to the affairs of such person, company or firm within such time
and the manner as directed by the inspecting officer. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. _____ may regulate the export, import or holding of currency or currency
notes. ----------------------
2. Foreign exchange acquired or received before________, or any ----------------------
income arising or accruing thereon, which is held outside India, in
pursuance of a general or special permission of RBI, is exempted. ----------------------
3. Authorised person is required to comply with the directions of the ----------------------

________ with regard to all his dealing in foreign exchange or foreign
security. ----------------------
----------------------
----------------------
Activity 2
----------------------
Study the various regulations made by the Reserve Bank of India. Make a list
----------------------
of at least 10 such regulations.
----------------------
10.5 PENALTIES ----------------------
 If any person contravenes any provisions of the Act, rules, regulations, ----------------------
etc. or contravenes any condition subject to which the authorisation is
granted by the RBI, he shall be liable for penalty upon adjudication. ----------------------
 The penalty may extend up to thrice the sum involved in such contravention ----------------------
where such amount is quantifiable or up to two lakh rupees where the
amount is not quantifiable. If the contravention continues, the penalty ----------------------
of Rs. 5,000 per day after the first day during the period in which the ----------------------
contravention continues shall be imposed.
----------------------

Notes  The Adjudicating Authority adjudging any contravention is empowered
to confiscate any currency, security or any other money or property in
---------------------- respect of which the contravention has taken place.
----------------------  It may further direct that the foreign exchange holdings if any, of the
persons committing the contravention shall be brought back either to
---------------------- India or retained outside India.
----------------------  The property shall include deposits in a bank, where such property
has been converted into such deposits; Indian currency, where the said
---------------------- property is converted into such currency; and any other property, which
has resulted out of the conversion of that property.
----------------------
---------------------- 10.6 DIRECTORATE OF ENFORCEMENT

----------------------  The Central Government shall establish a Directorate of Enforcement
with a director and such other officers or class of officers as it thinks fit,
----------------------
who shall be called officers of Enforcement.
----------------------  An officer of Enforcement may exercise the powers and discharge the
duties conferred or imposed on him under this Act.
----------------------  The Director of Enforcement and other officers not below the rank of an
Assistant Director shall take up for investigation on the contravention of
----------------------
any provisions of Section13.
----------------------  In addition, the Central Government may by notification authorise any
officer or class of officers in the Central Government, State Government,
---------------------- Reserve Bank of India, not below the rank of under-secretary to
Government of India to investigate any such contravention.
----------------------
 The officer so appointed shall exercise the like powers which are conferred
---------------------- on the income-tax authorities under the Income-tax Act, 1961, subject to
such conditions and limitation as the Central Government may impose.
----------------------
Powers of the Directorate
----------------------  The director of enforcement and other officers of enforcement, not below
---------------------- the rank of an assistant director can investigate contraventions.
 The Central Government can also authorise any class of officers in the Central
---------------------- Government, State Government or the RBI to investigate contraventions.
 The Central Government can (subject to conditions and limitations),
---------------------- authorize any customs officer/central excise officer/any police officer/any
---------------------- other officer of the Central Government or a State Government to exercise
the powers and discharge the duties of the director of enforcement or any
---------------------- other officer of enforcement.
---------------------- Summary
----------------------
• FERA was introduced at a time when foreign exchange reserves of the
---------------------- country were abnormally low and considered to be a scarce commodity.
FERA therefore worked on the presumption that all foreign exchange earned
---------------------- by Indian residents rightfully belonged to the Government of India and had

to be collected and surrendered to the Reserve bank of India. It regulated Notes
not only transactions in foreign exchange, but also all financial transactions
with non-residents. FERA primarily prohibited all transactions, except to ----------------------
the extent permitted by general or specific permission by RBI. Violations
under the FERA were referred to as a criminal offence. ----------------------
• With the winds of liberalisation blowing in the early 1990s, many ----------------------
changes came in − foreign exchange reserves swelled, the rupee was
made convertible on current account and the Government relaxed the ----------------------
harsh provisions of FERA by issuing notifications.
----------------------
• In the changing atmosphere, it was realised by the Government of India
that possession of forex could no longer be regarded as a crime. There ----------------------
was a need to refer it to as an economic offence and the more appropriate
----------------------
punishment was a penalty. As a result came the need for the amendment
of the FERA. So the FERA was repealed and was replaced by FEMA. The ----------------------
primary difference between FERA and FEMA therefore lies in the fact
that offences under FEMA are not regarded as criminal offences and only ----------------------
invite penalties, not prosecution and imprisonment.
----------------------
• FEMA emphasises on the management of foreign exchange; it is much
needed in times when the foreign exchange reserves have swelled, ----------------------
controls are no longer needed. There is no need to seek permission in case
of remittances regards external trade except for transactions in terms of ----------------------
foreign exchange. Similarly, restrictions on all drawal of foreign exchange ----------------------
transactions on current account transactions have been relaxed. Likewise,
capital account transactions are also permitted by the Reserve Bank as ----------------------
specified and up to permissible limits. Violations under the FEMA are
treated as a civil offence, unlike under FERA, with certain penalties and ----------------------
fines. ----------------------
Keywords ----------------------
• Authorised person: An authorised dealer, money changer, offshore ----------------------
banking unit or any other person for the time being authorised to deal in
foreign exchange or foreign securities. ----------------------
• Currency: All currency notes, postal notes, postal orders, money orders, ----------------------
cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and
promissory notes, credit cards or such other similar instruments, as may ----------------------
be notified by the Reserve Bank.
----------------------
• Foreign exchange: Foreign currency and includes deposits, credits,
balances payable in foreign currency, drafts, travellers’ cheques, letters ----------------------
of credits, bills of exchange expressed or drawn in Indian currency but
payable in any foreign currency. ----------------------
• Foreign security: Any security in the form of shares, stocks, bonds, ----------------------
debentures or any other instrument denominated or expressed in foreign
currency and includes securities expressed in foreign currency but where ----------------------
redemption or any form of return such as interest or dividend is payable
----------------------
in Indian currency.

Notes • Person: Includes (i) an individual; (ii) a Hindu Undivided Family; (iii) a
company; (iv) a firm; (v) an association of persons or a body of individuals,
---------------------- whether incorporated or not; (vi) every artificial juridical person; and (vii)
any agency, office or branch owned or controlled by such person.
----------------------
----------------------
---------------------- 1. Who is an Authorised Person? What are the functions of an Authorised

Person?
----------------------
2. Explain in detail the meaning of a ‘Person Resident in India’.
---------------------- 3. State the activities permitted/allowed under the Foreign Exchange
Management Act, 1999.
----------------------
4. Briefly explain the meaning of current account and capital account
---------------------- transactions.
How are these transactions connected to the Foreign Exchange Management
----------------------
Act, 1999?
---------------------- 5. What are the provisions of the Foreign Exchange Management Act, 1999
with reference to export of goods and services?
----------------------
6. Explain the powers of the Reserve Bank with reference to regulation and
---------------------- management of foreign exchange.
7. Explain the powers of the Reserve Bank with reference to the Authorised
---------------------- Persons.
---------------------- 8. Discuss the duties of the Authorised Person.
9. What are the exemptions available under the Foreign Exchange Management
----------------------
Act, 1999?
---------------------- 10. State the penalties for violating the provisions of the Foreign Exchange
Management Act, 1999.
----------------------
---------------------- Answers for Check your Progress

Fill in the blanks.
----------------------
1. RBI may regulate the export, import or holding of currency or currency
---------------------- notes.
2. Foreign exchange acquired or received before 8th July 1947, or any income
----------------------
arising or accruing thereon, which is held outside India, in pursuance of a
---------------------- general or special permission of RBI, is exempted.
3. Authorised person is required to comply with the directions of the Reserve
---------------------- Bank with regard to all his dealing in foreign exchange or foreign security.
----------------------
Suggested Reading
----------------------
---------------------- 1. Foreign Exchange Management Act

Foreign Investment
UNIT
11
Structure:
11.1 Introduction
11.2 Setting up Business in India
11.3 Foreign Investment- Meaning
11.4 Who can invest through Foreign Investment
11.5 FDI in Various Sectors or Activity
11.6 Prohibited Sector for FDI
11.7 Foreign Investment Routes in India
11.8 Reporting and Intimations for FDI
11.9 Penalties and Compounding of Offence
Summary
Key Words
Suggested Reading
Foreign Investment 227

Notes
Objectives
----------------------
• State the meaning of foreign investment
---------------------- • Discuss foreign direct investment
---------------------- • List various routes for foreign investment
• Compare permissible and prohibited sector for foreign investment
----------------------
---------------------- 11.1 INTRODUCTION

---------------------- Indian economy had started liberalisation and economic reforms policies
for more than two decade. It has evolved the Foreign Investment at a large
----------------------
extent. Liberalisation and economic reforms through foreign investment in
---------------------- India focus at speedy and significant economic growth; it also achieves the
integration of Indian economy with the global economy in a synchronised way.
---------------------- India has remarkable prospect for absorbing larger flow of Foreign Investment
now as well in the coming years. Various efforts are made to attract larger
----------------------
flow of foreign investment in the country. Various measures on policy and its
---------------------- implementation were initiated. Promotion of foreign direct investment in India
is important in order to supplement domestic capital, accelerated economic
---------------------- growth and for better technology.
---------------------- Legal framework for foreign exchange transactions in India is administered
through Foreign Exchange Management Act. All transactions involving foreign
---------------------- exchange have been classified either as capital or current account transactions.
---------------------- Foreign Direct Investment (FDI) is playing important role to accelerate the
economic growth.
----------------------
11.2 SETTING UP BUSINESS IN INDIA
----------------------
India is one of the attractive Investment destinations for foreign companies
----------------------
as it is one of the biggest consumer markets in the world. Any foreign company
---------------------- or investor planning to set up its business operations in India may come through
various ways such as:
----------------------
1. Liaison Office
---------------------- A Liaison Office is also known as Representative Office. Liaison Office
---------------------- may undertake only liaison activities or identifying, establishing business
prospectus in India, i.e., it can act as a channel of communication between
---------------------- Head Office abroad and parties in India. It is not allowed to manufacture
any goods in India through Liaison Office.
----------------------
Liaison Office is permitted to acquire property for their own use and to
---------------------- carry out permitted or incidental activities but not for leasing or renting
out the property.
----------------------

Procurement and sale of goods for export are allowed only on wholesale Notes
basis. Liaison Office has undertaken only those activities permitted by
Reserve Bank of India. ----------------------
Without prior permission of the Reserve Bank of India, no person being ----------------------
a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China
can establish in India, a Branch or a Liaison Office or a Project Office or ----------------------
any other place of business.
----------------------
No Liaison office is permitted to Partnership or Proprietary concerns
established abroad are allowed to establish Branch/Project Offices in ----------------------
India.
----------------------
Any foreign companies or any foreign entity keen for setting up of Liaison
Office or Branch Office are required to make an application in Form FNC ----------------------
along with the requisite documents as mentioned in to Foreign Investment
----------------------
Division, Foreign Exchange Department, Reserve Bank of India through
an Authorised Dealer. ----------------------
Permission to set up such offices is initially granted for a period of 3 years ----------------------
and this may be extended from time to time by the Authorised Dealer in
whose jurisdiction the office is set up. ----------------------
The application form of liaison office in Form FNC is considered by the ----------------------
Reserve Bank under two routes:
1. Reserve Bank Route: The first route is Reserve Bank Route where ----------------------
principle business of the foreign entity falls under sectors, where 100 per ----------------------
cent Foreign Direct Investment (FDI) is permissible under the automatic
route. ----------------------
2. Government Route: The second route is Government route. This route is ----------------------
applicable where the principle business of any foreign entity eligible under
those sectors where 100% Foreign Direct Investment is not permissible ----------------------
under the automatic route.
----------------------
In addition to other the following criteria are also considered by the
Reserve Bank while sanctioning Liaison/Branch Offices of foreign ----------------------
entities:
----------------------
1. Track Record of business or entity.
----------------------
2. For Liaison Office - a profit-making track record during the immediately
preceding three financial years in the home country. ----------------------
3. For Branch Office - a profit-making track record during the immediately ----------------------
preceding five financial years in the home country.
----------------------
4. Net worth, i.e., the total of paid-up capital and free reserves less intangible
assets as per the latest Audited Balance Sheet. ----------------------
5. The Branch/Liaison offices established with the Reserve Bank’s approval
----------------------
will be allotted a Unique Identification Number (UIN).
----------------------

Notes 6. The Liaison Office shall also obtain Permanent Account Number (PAN)
from the Income Tax Authorities on setting up the offices in India.
---------------------- 7. Liaison Offices are allowed to open non-interest bearing INR current
---------------------- accounts in India.
2. Branch Office
----------------------
Branch Office of any foreign entity is permitted to acquire property in
---------------------- India for their own use and to carry out permitted activities. Entities from
Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are
---------------------- not allowed to acquire immovable property in India even for a Branch
---------------------- Office. These entities are allowed to lease such property for a period not
exceeding five years.
---------------------- Branch Offices are permitted to remit the profit of branch (net of Indian
---------------------- taxes) to outside India. Such remittance is permitted subject to the
satisfaction of the Authorised Dealer on production of the following
---------------------- documents:
---------------------- a. A Certified copy of the audited Balance Sheet and Profit and Loss account
for the relevant year;
---------------------- b. A Chartered Accountant’s certificate certifying that the entire remittable
---------------------- profit has been earned by undertaking the permitted activities.
No Branch office is permitted to Partnership or Proprietary concerns
---------------------- established abroad are allowed to establish.
---------------------- Any foreign companies or any foreign entity keen for setting up of
Branch Office are required to make an application in Form FNC along
---------------------- with the requisite documents as mentioned in to Foreign Investment
Division, Foreign Exchange Department, Reserve Bank of India through
----------------------
an Authorised Dealer.
---------------------- The applications forms of branch office in Form FNC are considered by
the Reserve Bank under two routes:
----------------------
1. Reserve Bank Route: The first route is Reserve Bank Route where
---------------------- principle business of the foreign entity falls under sectors where, 100 per
cent Foreign Direct Investment (FDI) is permissible under the automatic
----------------------
route.
---------------------- 2. Government Route: The second route is Government Route. This route is
applicable where the principle business of any foreign entity eligible under
----------------------
those sectors where 100% Foreign Direct Investment is not permissible
---------------------- under the automatic route.
In addition to other the following criteria are also considered by the
----------------------
Reserve
---------------------- Bank while sanctioning Branch Offices of foreign entities:
---------------------- 1. Track Record of business or entity.
2. For Branch Office - a profit making track record during the
----------------------
immediately preceding five financial years in the home country.

3. Net Worth i.e., the total of paid-up capital and free reserves less Notes
intangible assets as per the latest Audited Balance Sheet.
4. The Branch offices established with the Reserve Bank’s approval ----------------------
will be allotted a Unique Identification Number (UIN). ----------------------
5. The Branch office shall also obtain Permanent Account Number
(PAN) from the Income Tax Authorities on setting up the offices in ----------------------
India. ----------------------
6. In case the annual accounts of the Branch Office are finalized, the
audited Balance Sheet may be submitted within six months from ----------------------
the due date of the Balance Sheet. ----------------------
7. Branch Offices are allowed to open non-interest bearing INR current
accounts in India. ----------------------
3. Project Office ----------------------
Project Office of a foreign entity is permitted to acquire property for their ----------------------
own use and to carry out permitted or any incidental activities. However,
entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan ----------------------
or China are not allowed to acquire immovable property in India even for
a Branch Office. These entities are allowed to lease such property for a ----------------------
period not exceeding five years. ----------------------
The Reserve Bank of India has granted general permission to establish
Project Offices in India; this permission is subject to condition that they ----------------------
have secured a contract from an Indian company to execute a project in
----------------------
India, and following additional conditions:
1. The project is approved by an appropriate authority; or ----------------------
2. The project should be funded from abroad; or the project is funded ----------------------
by a bilateral or multilateral International Financing Agency; or
----------------------
3. The company or entity in India awarding the contract has been
granted Term Loan by a Public Financial Institution or a bank in ----------------------
India for the project.
----------------------
4. Project Offices are allowed to open non-interest bearing INR current
accounts in India. ----------------------
4. Foreign Investment
----------------------
Investment is of two kinds:
----------------------
i. Foreign Direct Investment (FDI)
ii. Foreign Portfolio Investment ----------------------
----------------------
Activity 1
----------------------
Find out a liaison office and branch office of a company in India and make a ----------------------
note on their difference in working.
----------------------

Notes 11.3 FOREIGN INVESTMENT- MEANING
---------------------- Investment in Indian companies can be made both by non-resident as well
as resident Indian entities. Any non-resident investment in an Indian company
----------------------
is Foreign Investment. It can be through direct foreign investment or portfolio
---------------------- investment. Investment by resident Indian entities could again comprise both
resident and non-resident investment.
----------------------
1. Foreign Direct Investment
---------------------- Investment is a financial or monetary contribution toward the capital of any
enterprise; it can be purchase of shares also; whereas foreign investment
----------------------
is the investment in an enterprise, through non-resident or foreign entity.
---------------------- The objectives of direct investment are different from those of portfolio
---------------------- investment. Foreign Direct Investment allows the investor to gain
access to the business enterprise. International Monetary Fund (IMF)
---------------------- and Organisation for Economic Cooperation and Development (OECD)
defined Foreign Direct Investment (FDI) as a category of cross border
---------------------- investment made by a resident of one economy with the objective of
---------------------- establishing of lasting interest in that enterprise that is resident in an
economy other than that of the direct investor. The motivation of the
---------------------- direct investment is a strategic or long term relationship and to ensure the
control in the business or management of the direct investment enterprise.
----------------------
FDI means investment in the capital of an Indian company by a non-
---------------------- resident entity or by a person resident outside India with the objective of
establishing of controlling the entity and lasting interest. It is the policy
---------------------- of the Government to attract and promote productive FDI in activities
---------------------- which significantly contribute to industrialization and socio-economic
development. FDI supplements domestic capital and technology.
----------------------
Foreign Direct Investment is freely allowed in all sectors including the
---------------------- services sector, except a few sectors where the existing and notified
sectoral policy does not permit FDI beyond a ceiling.
----------------------
2. Portfolio Investment
---------------------- Portfolio Investment Scheme means the Portfolio Investment Scheme
referred to in Schedules 2 & 3 of FEM (Transfer or Issue of Security by
----------------------
a Person Resident outside India) Regulations 2000. Non-Resident Indian
---------------------- (NRls) and Persons of Indian Origin (PIOs) can purchase or sell shares,
fully and mandatorily convertible debentures of Indian companies on
---------------------- the Stock Exchanges under the Portfolio Investment Scheme. All sales,
purchase transactions are to be routed through the AD.
----------------------
An NRI or a PIO can purchase shares up to 5% of the paid-up capital of
---------------------- an Indian company. The Indian company which has issued shares to FIIs
---------------------- under the FDI Policy for which the payment has been received directly
into company’s account should report these figures separately in Form
---------------------- FC-GPR. Only SEBI registered FIIs and NRIs as per Foreign Exchange

Management (Transfer or Issue of Security by a Person Resident outside Notes
India) Regulations 2000, all NRIs, PIOs taken together cannot purchase
more than 10% of the paid-up value of the company. This limit can be ----------------------
increased by the Indian company to 24% by passing a shareholders
resolution. ----------------------
The sale proceeds of the repatriable investments can be credited to the ----------------------
NRE, NRO, etc. accounts of the NRI or PIO whereas the sale proceeds of
----------------------
non- repatriable investment can be credited only to NRO accounts.
The FII investment in Government securities and corporate debt is subject ----------------------
to a ceiling decided in consultation with the Government of India.
----------------------
Authorised Person
----------------------
Authorised Person means an authorised dealer or offshore banking unit
or money changer or any other person for the time being authorised under ----------------------
sub-section (a) of Section 10 of FEMA to deal in foreign exchange or foreign
securities. ----------------------
Capital ----------------------
Capital means equity shares, fully convertible preference shares; fully ----------------------
convertible debentures.
----------------------
Foreign Institutional Investor (FII)
Foreign Institutional Investor (FII) means an entity established or ----------------------
incorporated outside India which proposes to make investment in India and ----------------------
which is registered as a FII in accordance with the SEBI (FII) Regulations,
1995. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Legal framework for foreign exchange transactions In India is
administered through________________. ----------------------
1. Portfolio Investment is a type of Foreign investment ----------------------
2. Any non-resident investment in an Indian company is Foreign
Investment. ----------------------
----------------------
11.4 WHO CAN INVEST THROUGH FOREIGN ----------------------
INVESTMENT
----------------------
A non-resident entity other than a citizen of Pakistan or an entity
incorporated in Pakistan can invest in India, as per the FDI Policy and limit. ----------------------
A citizen of Bangladesh or an entity incorporated in Bangladesh can invest ----------------------

Notes only under the Government Route. Under the Portfolio Investment Scheme,
FII may invest in the capital of an Indian Company which limits the individual
---------------------- holding of an FII to 10% of the capital of the company and the aggregate limit
for FII investment to 24% of the capital of the company. The aggregate limit of
----------------------
24% can be increased by the Indian Company concerned through a resolution
---------------------- by its Board of Directors followed by a special resolution to that effect by its
General Body. However the aggregate FII investment in the FDI and Portfolio
---------------------- Investment Scheme should be within the caps for FDI.
---------------------- Investments can be made by non-residents in the equity shares, fully
compulsorily convertible debentures, fully compulsorily convertible preference
---------------------- shares of an Indian company, through the Automatic Route or the Government
Route. Under the Automatic Route, the non-resident investor or the Indian
----------------------
company does not require any approval from Government of India for the
---------------------- investment. Under the Government Route, prior approval of the Government
of India is required. Proposals for foreign investment under Government Route
---------------------- are considered by PIPB.
---------------------- Foreign investment through preference shares is treated as foreign direct
investment. However, the preference shares should be fully and mandatorily
---------------------- convertible into equity shares within a specified time to be reckoned as part of
share capital under FDI.
----------------------
Debentures which are fully and mandatorily convertible into equity within
---------------------- a specified time would be reckoned as part of equity under the FDI Policy.
---------------------- Foreign Investments can be made by any non-residents in an Indian
company’s equity shares or convertible debentures; convertible preference
---------------------- shares of, through two routes, i.e., the Automatic and the Government Route.
---------------------- Foreign investment can be through various entities as discussed below, and
these entities may issue securities or capital of such Indian companies against FDI.
----------------------
FDI in Partnership Firm or Proprietary Concern
----------------------
A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) who is
---------------------- resident outside India can invest in the capital of a proprietary concern or a firm
in India on non-repatriation basis subject to following conditions:
----------------------
● Amount is invested by inward remittance or out of NRE or FCNR or
---------------------- NRO account maintained with Authorised Dealers.
---------------------- ● Proprietary concern or firm is not engaged in any agricultural or plantation

or real estate business or in print media.
---------------------- ● Amount invested shall not be eligible for repatriation outside India.
---------------------- ● If Investments with repatriation option then NRIs or PIO may requires
obtaining prior permission of Reserve Bank of India.
----------------------
● NRI or PIO is not allowed to invest in a firm or proprietorship concern
---------------------- engaged in any agricultural or plantation activity or real estate business or
print media.
----------------------

FDI in Limited Liability Partnerships (LLPs) Notes
FDI in LLPs is permitted, subject to the following conditions:
----------------------
● FDI will be allowed in LLPs operating in sectors or activities where
100% FDI is allowed, through the automatic route and other are allowed ----------------------
through the Government approval route.
----------------------
● LLPs with FDI will not be allowed to operate in agricultural, plantation
activity, print media or real estate business. ----------------------
FDI in Trusts ----------------------
FDI in Trusts other than Venture Capital Fund is not permitted. ----------------------
FDI in Company
----------------------
Foreign investment in Domestic Company is permitted as per Foreign
Direct Investment policy. The investment is subject to Issue price of shares. ----------------------
Price of shares issued to persons resident outside India under the FDI Policy,
----------------------
shall not be less than -
a. Where the shares of the company are listed on any recognised stock ----------------------
exchange in India, the price should be in accordance with the SEBI
----------------------
guidelines, as applicable.
b. Where the shares of the company is not listed on any recognised stock ----------------------
exchange in India then the fair valuation of shares done by a SEBI registered
----------------------
Merchant Banker or a Chartered Accountant as per the discounted free cash
flow method. ----------------------
c. Where the issue of shares is on preferential allotment, the price as ----------------------
applicable to transfer of shares from resident to non-resident as per the
pricing guidelines laid down by the Reserve Bank from time to time. ----------------------
Transfer of shares and convertible debentures ----------------------
A non-resident investor can also invest in Indian companies by purchasing
----------------------
or acquiring existing shares from shareholders subject to FDI sectoral policy.
General permission has been granted to non-residents for acquisition of shares ----------------------
by way of transfer subject to the following:
----------------------
a. A person resident outside India may transfer by way of sale or gift, the
shares or convertible debentures to any person resident outside India. ----------------------
b. NRIs may transfer by way of sale or gift the shares or convertible debentures
----------------------
held by them to another NRI.
c. A person resident outside India can transfer any security to a person ----------------------
resident in India by way of gift. ----------------------
d. A person resident outside India can sell the shares and convertible
debentures of an Indian company on a recognized Stock Exchange in ----------------------
India through a stock broker registered with stock exchange or a merchant ----------------------
banker registered with SEBI.
----------------------

Notes e. Within 60 days from the date of receipt of the amount of consideration,
the Form FC-TRS should be submitted to the AD.
----------------------
f. The sale consideration in respect of equity instruments purchased by a
---------------------- person resident outside India, remitted into India through normal banking
channels, shall be subjected to a Know Your Customer (KYC).
----------------------
---------------------- 11.5 FDI IN VARIOUS SECTORS OR ACTIVITY
---------------------- Investments can be made by non-residents in the capital of a resident

entity only to the extent of the percentage of the total capital as specified in the
---------------------- FDI policy.
---------------------- In various different sectors or activities FDI up to permissible limit or
caps is allowed, in the sectors like defense, production, air transport services,
---------------------- ground handling services, asset reconstruction companies, private sector
banking, broadcasting, commodity exchanges, credit information companies,
----------------------
insurance, print media, telecommunications and satellites, etc. The permissible
---------------------- limit or caps may be different with automatic or Government approval route as
the cases may be, details for FDI cap for some of the sectors are discussed as
---------------------- below:
---------------------- FDI up to 100% is permitted under automatic route subject to certain
conditions if any in the following sectors or activity:
----------------------
● Floriculture, Horticulture, Development and production of Seeds and
---------------------- planting
---------------------- ● Mining and exploration

● Coal & Lignite mining
----------------------
● Exploration activities of oil and natural gas fields
----------------------
● Townships, housing, built-up infrastructure and construction-development
---------------------- projects
● Industrial Park
----------------------
● Infrastructure
----------------------
● Cash & Carry, Wholesale, trading/Wholesale trading, would mean sale of
---------------------- goods/ merchandise to retailers, industrial, commercial, institutional
---------------------- ● E-commerce activities

● Non-banking finance companies in the following activities:
----------------------
● Financial Consultancy
----------------------
 Stock Broking
----------------------  Asset Management
----------------------  Venture Capital
----------------------  Custodian Services

 Merchant Banking Notes
 Leasing & Finance
----------------------
 Housing Finance
----------------------
 Portfolio Management Services
 Investment Advisory Services ----------------------
 Factoring ----------------------
 Credit Rating Agencies ----------------------
Sectors like Telecom services or Banking-Private sector – FDI is permitted
----------------------
through automatic route up to 49%, beyond 49% and up to 74% Government
route. ----------------------
In case of Banking – Public sector- FDI is permitted up to 20% through ----------------------
Government route.
In Insurance sector – FDI is permitted up to 49% through automatic route. ----------------------
Tea sector including tea plantations – FDI is permitted up to 100 % through ----------------------
government approval route.
----------------------
Defense Industry subject to Industrial license − FDI is permitted up to 49%
through government route above 49% through approval of CCS. ----------------------
----------------------
11.6 PROHIBITED SECTOR FOR FDI
----------------------
It is not that FDI is welcome always in all sectors. On the contrary, FDI is
prohibited in India in following sectors such as: ----------------------
• Retail Trading except for single brand product retailing ----------------------
● Lottery business including Government or private lottery or online
----------------------
lotteries, etc.
● Gambling and Betting including casinos, etc. ----------------------
● Trading in Transferable Development Rights (TDRs) ----------------------
● Real Estate Business or Construction of Farm Houses ----------------------
● Chit funds
----------------------
● Nidhi Company
----------------------
● Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or
of tobacco substitutes ----------------------
11.7 FOREIGN INVESTMENT ROUTES IN INDIA ----------------------
----------------------
Any non-residents can be made Foreign Investments in an Indian
company’s equity shares or convertible debentures, convertible preference ----------------------
shares.
----------------------

Notes The foreign investment can be through two routes:
---------------------- ● The Automatic Route

● The Government Route
----------------------
Under the Automatic Route the non-resident investor or the Indian
---------------------- company needs to intimate to RBI it does not require any approval from the
RBI or Government of India for the investment.
----------------------
Under the second route Proposals for foreign investment under
---------------------- Government route should be as per FDI policy. In the Government Route prior
approval of the Government of India through Foreign Investment Promotion
----------------------
Board (FIPB) is required.
----------------------
11.8 REPORTING AND INTIMATIONS FOR FDI
----------------------
Foreign investment need to be intimate and reported in timely manner to the
----------------------
concern authorities. The reporting is simply intimation.
---------------------- A. Reporting of Inflow
---------------------- i. An Indian company receiving investment under the FDI Scheme
from outside India for issuing shares or convertible debentures
---------------------- or preference shares should report the details of the amount of
---------------------- consideration to the concerned Office of the Reserve Bank within
30 days from the date of receipt.
----------------------
ii. Indian companies are required to report the details of the receipt
---------------------- of the amount of consideration for issue of shares or convertible
debentures, through an AD together with a copy of the FIRCs
---------------------- evidencing the receipt of the remittance along with the KYC report.
---------------------- iii. The report would be acknowledged by the Regional Office
concerned and will allot a Unique Identification Number (UIN) for
---------------------- the amount reported.
---------------------- B. Reporting of Issue of Shares
---------------------- i. After issue of shares including bonus and rights shares or convertible
preference shares or convertible debentures in such case the Indian
---------------------- company has to file Form FC-GPR, within 30 days from the date of
issue of shares.
----------------------
ii. Form FC-GPR has to be duly filled up and signed by Managing
---------------------- Director/Director/Secretary of the Company and submitted to the
Authorised Dealer, who will forward it to the Reserve Bank.
----------------------
The following documents have to be submitted along with the form:
----------------------
a. A certificate from the Company Secretary of the company, certifying that
---------------------- all the requirements of the Companies Act have been complied with;
----------------------

b. Terms and conditions of the Government’s approval, if any, have been Notes
complied with;
----------------------
c. The company has all original certificates issued by authorised dealers in
India evidencing receipt of amount of consideration; ----------------------
d. The company is eligible to issue shares under these Regulations;
----------------------
e. A certificate from Statutory Auditor or Chartered Accountant indicating
the manner of arriving at the price of the shares issued to the persons ----------------------
resident outside India.
----------------------
iii. The report of receipt of consideration as well as Form FC-GPR has
to be submitted by the AD to the Regional Office concerned of the ----------------------
Reserve Bank. ----------------------
iv. The return on Foreign Liabilities and Assets should be filed on
an annual basis by the Indian company, directly with the Reserve ----------------------
Bank. This is an annual return to be submitted by 31st of July every ----------------------
year.
----------------------
A two-stage reporting procedure has to be followed.
On receipt of share application money within 30 days of receipt of share ----------------------
application money or consideration from the non-resident investor, the Indian
----------------------
company is required to report to the Reserve Bank of India, under whose
jurisdiction its Registered Office is located, the Advance Reporting Form, ----------------------
containing the following details:
----------------------
• Name and address of the foreign investors;
● Date of receipt of funds and the Rupee equivalent; ----------------------
● Name and address of the authorised dealer through whom the funds have ----------------------
been received;
----------------------
● Details of the Government approval, if any; and
----------------------
● KYC report on the non-resident investor from the overseas bank remitting
the amount of consideration. ----------------------
Upon issue of shares to non-resident investors within 30 days from the date of ----------------------
issue of shares, a report in Form FC-GPR, PART A together with the following
documents should be filed with the Reserve Bank of India: ----------------------
Certificate from the Company Secretary of the company accepting investment ----------------------
from persons resident outside India certifying that -
● The company has complied with the procedure for issue of shares as laid ----------------------
down under the FDI scheme as − ----------------------
● The investment is within the sectoral cap or within statutory ceiling
----------------------
permissible under the Automatic Route of the Reserve Bank
● The company is not an Industrial Undertaking manufacturing items ----------------------
reserved for small sector OR
----------------------

Notes ● Certificate from Statutory Auditors, SEBI registered Category - I Merchant
Banker or Chartered Accountant indicating the manner of arriving at the
---------------------- price of the shares issued to the person’s resident outside India.
---------------------- Reporting of transfer of shares
---------------------- Reporting of transfer of shares between residents and non-residents and vice-
versa is to be done in Form FC-TRS. The Form FC-TRS should be submitted to
---------------------- the AD within 60 days from the date of receipt of the amount of consideration.
The onus of submission of the Form FC-TRS within the given timeframe would
---------------------- be on the transferor or transferee who is resident in India.
----------------------
----------------------
---------------------- 1. LLPs with FDI are allowed to operate in agricultural, plantation

activity, print media or real estate business.
----------------------
2. FDI in Trusts other than Venture Capital Fund is not permitted.
---------------------- i. FII a. SEBI (FII) Regulations 1995.
---------------------- ii. E- commerce activities b. 100% FDI

iii. Cigarette manufacturing c. FDI prohibited
----------------------
iv. Portfolio Investment d. Types of foreign Investment
----------------------
---------------------- 11.9 PENALTIES AND COMPOUNDING OF OFFENCE

----------------------
FDI is a capital account transaction and thus any violation of FDI
---------------------- regulations are covered by the penal provisions of the FEMA. Reserve Bank of
India administers the FEMA and Directorate of Enforcement, under the Ministry
---------------------- of Finance, is the authority for the enforcement of FEMA. The Directorate takes
up investigation in any contravention of FEMA.
----------------------
Penalties
----------------------
i. If a person violates or contravenes any FDI Regulations, by way of breach
---------------------- or non-compliance or contravention of any rule, regulation, notification,
press note, press release, circular, direction or order issued in exercise of
---------------------- the powers under FEMA or contravenes any conditions subject to which
---------------------- an authorisation is issued by the Government of India or Reserve Bank of
India, he shall, upon adjudication, be liable to a penalty up to thrice the
---------------------- sum involved in such contraventions where such amount is quantifiable,
or up to two lakh Rupees where the amount is not quantifiable.
----------------------
ii. Where a person committing a contravention of any provisions of this Act
---------------------- or of any rule, direction or order made there under is a company, every

person who, at the time the contravention was committed, was in charge Notes
of, and was responsible to, the company for the conduct of the business
of the company as well as the company, shall be deemed to be guilty of ----------------------
the contravention and shall be liable to be proceeded against and punished
accordingly. ----------------------
iii. Any Adjudicating Authority adjudging any contraventions, if he thinks fit ----------------------
in addition to any penalty which he may impose for such contravention
----------------------
direct that any currency, security or any other money or property in
respect of which the contravention has taken place shall be confiscated to ----------------------
the Central Government.
----------------------
Compounding Proceedings
Central Government may appoint Compounding Authority either from ----------------------
Enforcement Directorate or Reserve Bank of India as per Foreign Exchange ----------------------
(Compounding Proceedings) Rules, 2000. The Compounding Authority is
authorised to compound the penalty involved in the contravention of the Act. ----------------------
The Compounding Authority have right to call for any information, ----------------------
record or any other documents relevant to the compounding proceedings. No
compounding shall be made unless the amount involved in such contravention is ----------------------
quantifiable. The Compounding Authority shall pass an order of compounding
after giving an opportunity of being heard to all the concern parties and then ----------------------
shall issue order in respect of which contravention has taken place. ----------------------
Summary ----------------------
• Liberalisation and economic reforms through foreign investment in India ----------------------

focus at speedy and significant economic growth. India is one of the ----------------------
attractive Investment destinations for foreign companies.
• Foreign Direct Investment (FDI) is playing important role to accelerate ----------------------
the economic growth. Foreign Direct Investment allows the investor to ----------------------
gain access to the business enterprise.
• FDI means investment in the capital of an Indian company by a non- ----------------------
resident entity or by a person resident outside India with the objective of ----------------------
establishing of controlling the entity and lasting interest.
----------------------
• It is the policy of the Government to attract and promote productive FDI
in activities which significantly contribute to industrialisation and socio- ----------------------
economic development.
----------------------
• FDI supplements domestic capital and technology. Foreign direct
investment is freely allowed in all sectors including the services sector, ----------------------
except a few sectors where the existing and notified sectoral policy does
not permit FDI beyond a ceiling. ----------------------
• Foreign Investments can be made by any non-resident in an Indian ----------------------
company’s equity shares or convertible debentures through two routes,
----------------------

Notes i.e., the Automatic and the Government Route. Under the Automatic
Route the non-resident investor or the Indian company need to intimate
---------------------- to RBI, it does not require any approval from the RBI or Government of
India for the investment. Under the second route, proposals for foreign
---------------------- investment under Government route should be as per FDI policy, in the
---------------------- Government Route, prior approval of the Government of India through
Foreign Investment Promotion Board (FIPB) is required.
----------------------
---------------------- Keywords
---------------------- • Foreign direct investment: Investment in the capital of an Indian
company by a non-resident entity or by a person resident outside India
---------------------- with the objective of establishing of controlling the entity and lasting
---------------------- interest.
• Foreign institutional investor: An entity established or incorporated
----------------------
outside India which proposes to make investment in India and which is
---------------------- registered as a FII in accordance with the SEBI (FII) Regulations, 1995.
• Capital: Equity shares, fully convertible preference shares, fully convertible
----------------------
debentures.
----------------------
----------------------
---------------------- 1. Explain the various ways to set up business operations in India by foreign
entities.
----------------------
2. Explain the penalties and compounding of offence for breach of any
---------------------- provisions applicable to foreign investment.
---------------------- 3. What is two-stage reporting procedure? What are the reporting for FDI?
4. What is Portfolio Investment? Who can invest through portfolio investment?
----------------------
5. Which are prohibited sector for FDI?
----------------------
6. Explain the automatic route for FDI. Also explain some of the sectors for
---------------------- which automatic route is applicable.
----------------------
----------------------

Fill in the blanks.
----------------------
1. Legal framework for foreign exchange transactions In India is administered
---------------------- through Foreign Exchange Management Act.
----------------------
----------------------

State True or False. Notes
1. False ----------------------
2. True
----------------------
----------------------
1. False ----------------------
2. True ----------------------
i. – a. ----------------------
ii. – b.
----------------------
iii. – c.
----------------------
iv. – d.
----------------------
1. Nagaraj, R. 2003. Foreign Direct Investment in India in the 1990s: Trends ----------------------
and Issues. Economic and Political Weekly.
----------------------
2. Tomlinson, B. R. 1978. Foreign Private Investment in India 1920−1950.
Modern Asian Studies. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------
----------------------
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----------------------

Competition Act and its Relevance with Finance
UNIT
12
Structure:
12.1 Introduction
12.2 Abuse of Dominant Position
12.3 Prohibition of Certain Agreements
12.4 Competition Commission of India
12.5 Duties, Powers and Functions of Competition Commission
12.6 Regulation of Combinations
Summary
Key Words
Suggested Reading
Competition Act and its Relevance with Finance 245

Notes
Objectives
----------------------
• Examine prohibition of agreements under Competition Act
----------------------
• Describe Competition Commission of India
---------------------- • Identify its duties, powers and functions
---------------------- • Discuss the Director General and Appellate Authorities under
Competition Commission
----------------------
----------------------
12.1 INTRODUCTION
----------------------
Over the last 100 or so years there has been an evolution in the importance
----------------------
given to different objectives of competition policy. The goal of this unit is
---------------------- to describe that prohibition of agreements under Competition Act. Initially,
protecting market processes and rights to engage in commerce were accorded
---------------------- a high priority in national competition policies. World Bank and OECD study
points out:
----------------------
“While many objectives have been ascribed to competition policy during
---------------------- the past 100 years, certain major themes stand out. The most common of
these objectives cited is the maintenance of the competitive process or of free
----------------------
competition, or the protection or promotion of effective competition. These are
---------------------- seen as synonymous with striking down or preventing unreasonable restraints
on competition. Associated objectives are freedom to trade, freedom of choice,
---------------------- and access to markets. In some countries, such as Germany, freedom of
individual action is viewed as the economic equivalent of a more democratic
----------------------
constitutional system. In France emphasis is placed on competition policy as a
---------------------- means of securing economic freedom, that is, freedom of competition.”
This quotation suggests that protecting economic freedom and competitive
----------------------
processes as well as fairness have historically been seen as objectives of
---------------------- competition policy in many countries. In a similar vein, the new competition
law of India refers, in its preamble, to the objectives of preventing practices
---------------------- having adverse effects on competition, promoting and sustaining competition
in markets, protecting the interests of consumers, and ensuring freedom of trade
----------------------
carried on by other participants in markets in India.
---------------------- The goal of this unit is to describe the major conceptual linkages between
---------------------- the competition law and the factors which are thought to influence dynamic
economic efficiency.
---------------------- Proponents are of the view that rivalry between firms can improve national
---------------------- economic performance over time, pointed to a wide range of circumstances
under which competition contributes to innovation, productivity and growth.
----------------------

12.2 ABUSE OF DOMINANT POSITION Notes
Dominance is the position of strength enjoyed by an enterprise, in the ----------------------

relevant market which enables it to operate independently of competitive forces ----------------------
prevailing in relevant market.
The word independently here specifically means that such an enterprise ----------------------
works out of the rules of market, like determination of price by market forces ----------------------
like demand and supply, and related rules of market. Such behavior leads to
appreciable adverse effect to the economy. ----------------------
Thus, dominance is the power that could affect competitors or consumers ----------------------
or the relevant market in flavour of such dominant enterprise. In simple words,
abuse of dominance is nothing but ability and practice to prevent effective ----------------------
competition and to behave independently from two sets of market actors,
namely other competitors and consumers. ----------------------
Dominance is not considered bad per se but its abuse is. Abuse is stated to ----------------------
occur when an enterprise or a group of enterprises uses its dominant position
----------------------
in the relevant market in an exclusionary or/and an exploitative manner. The
Act gives an exhaustive list of practices that shall constitute abuse of dominant ----------------------
position and therefore, are prohibited. Such practices shall constitute abuse
only when adopted by an enterprise enjoying dominant position in the relevant ----------------------
market in India.
----------------------
Abuse of dominance is judged in terms of the specified types of acts
committed by a dominant enterprise alone or in concert. Such acts are ----------------------
prohibited under the law. There is no need for any reference by the Competition
----------------------
Commission, to see whether there had been any adverse effect on competition.
Rather, any abuse of the type specified in the Act by a dominant firm shall stand ----------------------
prohibited.
----------------------
Section 4 (2) of the Act specifies the following practices by dominant
enterprises or group of enterprises as abuses: ----------------------
- directly or indirectly imposing unfair or discriminatory condition in ----------------------
purchase or sale of goods or service;
----------------------
Factors to Determine Dominant Position
Dominance has been traditionally defined in terms of market share of the ----------------------
enterprise or group of enterprises concerned. However, a number of other
----------------------
factors play a role in determining the influence of an enterprise or a group of
enterprises in the market. These include: ----------------------
● Market share of the enterprise;
----------------------
● Size and resources of the enterprise;
----------------------
● Size and importance of the competitors;
● Economic power of the enterprise including commercial advantages over
----------------------
competitors; ----------------------

Notes ● Vertical integration of the enterprises or sale or service network of such
enterprises;
----------------------
● Dependence of consumers on the enterprise;
---------------------- ● Monopoly or dominant position whether acquired as a result of any statute
or by virtue of being a government company or a public sector undertaking
----------------------
or otherwise;
---------------------- ● Entry barriers including barriers such as regulatory barriers, financial
risk, high capital cost of entry, marketing entry barriers, technical entry
----------------------
barriers, economies of scale, high cost of substitutable goods or service
---------------------- for consumers;
---------------------- ● Countervailing buying power;

● Market structure and size of market;
----------------------
● Social obligations and social costs;
----------------------
● Relative advantage, by way of the contribution to the economic development,
---------------------- by the enterprise enjoying a dominant position having or likely to have an
appreciable adverse effect on competition;
----------------------
● Any other factor which the Commission may consider relevant for the
---------------------- inquiry.
---------------------- The Competition Commission is also authorised to take into account any
other factor which it may consider relevant for the determination of dominance.
---------------------- Abuses as specified in the Act fall into two broad categories
---------------------- Exploitative (excessive or discriminatory pricing, including predatory
pricing) and exclusionary for example, denial of market access, etc.
----------------------
Predatory Pricing
----------------------
The “predatory price” under the Act means “the sale of goods or
---------------------- provision of services, at a price which is below the cost, as may be determined
by regulations of production of goods or provision of services, with a view to
---------------------- reduce competition or eliminate the competitors.”
---------------------- Predation is exploitative behaviour and can be indulged in only by
enterprises(s) having dominant position in the concerned relevant market. The
---------------------- major elements involved in the determination of predatory behaviour are:
---------------------- ● Establishment of dominant position of the enterprise in the relevant
market.
----------------------
● Pricing below cost for the relevant product in the relevant market by the
---------------------- dominant enterprise.
---------------------- ● Intention to reduce competition or eliminate competitors.
Barrier to entry of new enterprises into the relevant market is a major
----------------------
restraint on the dynamics of competition. When a dominant enterprise in the
---------------------- relevant market controls an infrastructure or a facility that is necessary for

accessing the market and which is neither easily reproducible at a reasonable Notes
cost in the short term nor interchangeable with other products/services,
the enterprise may not without sound justification refuse to share it with its ----------------------
competitors at reasonable cost. This has come to be known as the Essential
Facility Doctrine (EFD). It has been recognised that any application of the EFD ----------------------
should satisfy the following: ----------------------
● The facility must be controlled by a dominant firm in the relevant market;
----------------------
● Competing enterprises/persons should lack a realistic ability to reproduce
the facility; ----------------------
● Access to the facility is necessary in order to compete in the relevant ----------------------
market;
----------------------
● It must be feasible to provide access to the facility.
Subject to such conditions being satisfied, the Competition Commission ----------------------
may under the provisions of Section 4 (2) (c) of the Act which is related to denial ----------------------
of market access by a dominant enterprise, pass a remedial order under which
the dominant enterprise must share an essential facility with its competitors in ----------------------
the downstream markets.
----------------------
Dominance in the Context of Relevant Market
----------------------
Dominance has significance for competition only when the relevant
market has been defined. ----------------------
The relevant market means “the market that may be determined by the ----------------------
Commission with reference to the relevant product market or the relevant
geographic market or with reference to both the markets”. The Act lays down ----------------------
several factors of which any one or all shall be taken into account by the
Commission while defining the relevant market. ----------------------
The Act defines dominant position in terms of a position of strength enjoyed by ----------------------
an enterprise, in the relevant market in India, which enables it to:
----------------------
● Operate independently of the competitive forces prevailing in the relevant
market; or ----------------------
● Affect its competitors or consumers or the relevant market in its flavour. ----------------------
It is the ability of the enterprise to behave or act independently of the
----------------------
market forces that determines its dominant position. In a perfectly competitive
market, no enterprise has control over the market, especially in the determination ----------------------
of price of the product. However, perfect market conditions are more of an
economic “ideal” than reality. Keeping this in view, the Act specifies a number ----------------------
of factors that should be taken into account while determining whether an
----------------------
enterprise is dominant.
Relevant market is based on ----------------------
● Relevant product market ----------------------
● Relevant geographic market ----------------------

Notes Relevant Product Market
The relevant product market is defined in terms of substitutability. It is
----------------------
the smallest set of products (both goods and services) which are substitutable
---------------------- among themselves, given a Small but Significant Non-Transitory Increase
in Price (SSNIP). The market for cars, for example, may consist of separate
---------------------- ‘relevant product markets’ for small cars, mid-size cars, luxury cars etc. as
these are not substitutable for each other on a small change in price. A relevant
----------------------
product in a relevant geographic market is what matters.
---------------------- Relevant product market is the smallest set of close substitutes. The
substitutes might be of goods or services available in the market. Substitutability
----------------------
of the products is to be determined by demand side substitutability that is shift
---------------------- of demand, to competing product on price rise, or supply side substitutability,
that is shift of production, to meet demand.
----------------------
Factors to be considered while determining relevant product market:
---------------------- ● Physical characteristic of product
---------------------- ● End-use of product
---------------------- ● Price
● Consumer preference - empirical evidence
----------------------
● Classification of industrial products
----------------------
In determining ‘Relevant Product Market’, Competition Commission of India
---------------------- is required to consider:
---------------------- ● Physical characteristics or end-use of goods
● Price of goods or service
----------------------
● Consumer preferences
----------------------
● Exclusion of in-house production
---------------------- ● Existence of specialised producers
---------------------- ● Classification of industrial products
---------------------- Relevant Geographic Market
---------------------- Relevant geographic market is defined in terms of “the area in which the
conditions of competition for supply of goods or provision of services or demand
---------------------- of goods or services are distinctly homogenous and can be distinguished from
the conditions prevailing in the neighbouring areas.”
----------------------
Following factors are considered significant for determination of the relevant
---------------------- geographic market:
---------------------- ● Shipment cost

● Regulatory trade barriers such as octroi, sales tax, or concerned duty
----------------------
● Local specification requirements
----------------------

● National procurement policy Notes
● Adequate distribution facilities
----------------------
● Transport costs
----------------------
● Consumer preferences
● Need for secure or regular supplies or rapid after-sales services ----------------------
Intellectual property and related laws give abuse of dominance provisions ----------------------
different dimensions. While reasonable use of IPRs stand exempted from the
rigours of Section 3 related to anti-competitive agreements, no such derogation ----------------------
is available in case of abuse of Intellectual Property Rights by right holders, in ----------------------
respect of specified abusive acts.
Intellectual Property Rights (IPR) involve grant of exclusive rights to the ----------------------
right holders to exploit the results of their innovation so as to provide incentive ----------------------
to innovate. Competition Act, 2002 exempts the reasonable use of such rights by
right holders from the provisions of Section 3 related to agreements. However, the ----------------------
actions by enterprises that shall be treated as abuse (specified under Section 4 (2))
shall stand applicable equally to IPR holders provided such rights are considered ----------------------
by the Commission to render the holder a dominant player in the relevant market. ----------------------
12.3 PROHIBITION OF CERTAIN AGREEMENTS ----------------------
The nature of the Anti-Competitive agreements has been explored ----------------------

in Section 3 of the Competition Act, 2002, which lays down the criteria for ----------------------
any agreement entered by an enterprise. It is important to note that the Act
does not define competitive agreement; however it rather quotes what is an ----------------------
Anti-Competitive agreement. Hence, it could be derived from the provisions
that any such an agreement which is not an Anti-Competitive Agreement is ----------------------
a Competitive agreement. Thus, provisions under the Act related to Anti- ----------------------
competitive agreements are drafted in negative way. Any agreement to be legal
under the Act must not fall within the periphery of the provisions laid down ----------------------
under the Act. If the mentioned provisions in Section 3 are not followed, then
any such agreement entered into shall be void. ----------------------
Arrangement and Interpretation of Section 3 ----------------------

The object of the Competition Act is to provide for the establishment ----------------------
of a Commission to prevent practices having adverse effect on competition,
to promote and sustain competition in markets, to protect the interests of ----------------------
consumers and to ensure freedom of trade carried on by other participants in
----------------------
markets, in India, and for matters connected therewith or incidental thereto.
In the objectives itself, it is clearly mentioned that any such practices which ----------------------
caused an adverse effect on competition, shall be prevented.
----------------------
The provisions mentioned in Section 3(3), regarding Anti-Competitive
practices, describes what causes the Appreciable Adverse Effect on competition ----------------------
and going further, it declares any such agreement which causes or likely to
cause an Appreciable Adverse Effect on Competition as void. ----------------------

Notes An agreement may be horizontal, i.e., between enterprises, persons,
associations, etc. engaged in identical or similar trade of goods or provision of
---------------------- services, or it may be vertical, i.e., amongst enterprises or persons at different
stages or levels of the production chain in different markets.
----------------------
Types of Anti-Competitive Agreements
----------------------
There are several types of Anti-Competitive Agreements. The list is not
---------------------- close ended. Cartel and Bid rigging can be mentioned as most common forms
of Anti- Competitive Agreements in the business practices. ‘Cartelisation’ is
---------------------- one of the horizontal agreements that shall be presumed to have appreciable
---------------------- adverse effect on competition under Section 3 of the Competition Act, 2002.
Cartel is defined in Section 2, Sub-Section (c) of the Act
----------------------
“Cartel” includes an association of producers, sellers, distributors, traders
---------------------- or service providers who, by agreement amongst themselves, limit, control or
attempt to control the production, distribution, sale or price of, or, trade in goods
----------------------
or provision of services;
---------------------- Cartels are agreements between enterprises (including a person, a
government department and association of persons/enterprises) not to compete
----------------------
on price, product (including goods and services) or customers.
---------------------- The Act gives a detailed definition of an enterprise in Section 2 (h). The
---------------------- objective of a cartel is to raise price above competitive levels, resulting in injury
to consumers and to the economy. For the consumers, cartelisation results in
---------------------- higher prices, poor quality and less or no choice for goods or/and services.
The Consumer Protection Act, 1986 confers right to choice and other rights
---------------------- mentioned in Section 6 of the Act, however if there are no choices available in
---------------------- the market these rights would be meaningless.
A cartel is said to exist when two or more enterprises enter into an explicit
---------------------- or implicit agreement to fix prices, to limit production and supply, to allocate
---------------------- market share or sales quotas, or to engage in collusive bidding or bid-rigging
in one or more markets. An important dimension in the definition of a cartel is
---------------------- that it requires an agreement between competing enterprises not to compete or
to restrict competition, which is fatal for competition to prevail in the market.
---------------------- An international cartel is said to exist, when not all of the enterprises in a cartel
---------------------- are based in the same country or when the cartel affects markets of more than
one country.
----------------------
12.4 COMPETITION COMMISSION OF INDIA
----------------------
---------------------- Establishment of Commission

Competition Commission of India is an independent authority of the Indian
----------------------
government. It was established on 14th October 2003, on the recommendation
---------------------- of SVS Raghavan Committee to achieve the objectives of the Competition Act,
2002. The CCI has been proposed to consist of a chairperson and 10 members.
----------------------

The main objective of competition law is to promote economic efficiency Notes
using competition as one of the means of assisting the creation of market
responsive to consumer preferences. ----------------------
The advantages of perfect competition are three-fold: allocative efficiency, ----------------------
which ensures the effective allocation of resources; productive efficiency,
which ensures that costs of production are kept at a minimum and dynamic ----------------------
efficiency, which promotes innovative practices. The aim of the Commission
----------------------
is to make markets work well for consumers through effective competition.
The Commission shall be a body corporate having perpetual succession and a ----------------------
common seal with power, subject to the provisions of this Act, to acquire, hold
and dispose of property, both moveable and immoveable and to contract and ----------------------
shall, by the said name, sue or to be sued.
----------------------
The head office of the Commission shall be at Delhi. With effect from such
date as the Central Government may, by notification appoint, there shall be ----------------------
established, for the purposes of this Act a Commission to be called ‘Competition
----------------------
Commission of India’.
----------------------

i. Cartel a. Anti-Competitive Agreement ----------------------
ii. Market share of enterprise b. Factor to determine dominant position
----------------------
iii. Predatory pricing c. Eliminate competitors
iv. Consumer preferences d. Factor to determine relevant product ----------------------
market ----------------------
Fill in the blanks.
----------------------
1. The Competition Commission of India was established on 14th
October, 2003 on the recommendation of ____________Committee. ----------------------
----------------------
Activity 1
----------------------
Find out the names of the present Chairperson and members of the ----------------------
Competition Commission of India.
----------------------
----------------------
12.5 DUTIES, POWERS AND FUNCTIONS OF
COMPETITION COMMISSION ----------------------
Duties of the Competition Commission ----------------------

Subject to the provisions of this Act, it shall be the duty of the Commission ----------------------
to eliminate practices having adverse effect on competition, promote and
sustain competition, protect the interest of consumers and ensure freedom of ----------------------

Notes trade carried on by other participants, in markets in India. The Commission
may, for the purpose of discharging its duties or performing its functions under
---------------------- this Act, enter into any memorandum or arrangement, with the prior approval
of the Central Government, with any agency of any foreign country.
----------------------
The provisions of Section 19 give power to the Commission for the
---------------------- inquiry into certain agreements and dominant position of enterprises. Section
26 deals with the procedure for inquiry under Section 19. Section 27 deals with
----------------------
the orders by Commission after inquiry into agreement or abuse of dominant
---------------------- position. Section 28 deals with the division of enterprise enjoying dominant
position by the order of Commission. The provisions of Section 20 give power
---------------------- to the Commission for the inquiry into combinations. Section 29 of the Act
deals with the procedure for investigation of combinations. Section 31 deals
----------------------
with the orders by Commission on certain combinations. Section 39 deals with
---------------------- execution of orders of Commission imposing monetary penalty.
---------------------- Powers of the Commission

The Commission shall, notwithstanding that:
----------------------
● An agreement (anti-competitive agreement) has been entered into outside
---------------------- India; or
---------------------- ● Any party to such agreement is outside India; or
● Any enterprise abusing the dominant position is outside India; or
----------------------
● A combination has taken place outside India; or
----------------------
● Any party to combination is outside India; or
---------------------- ● Any other matter or practice or action arising out of such agreement or
---------------------- dominant position or combination is outside India.
Where during an inquiry, the Commission is satisfied that an act in
---------------------- contravention of Sec. 3(1) or Sec. 4(1) or Sec. 6 has been committed and continues
---------------------- to be committed or that such act is about to be committed, the Government may,
by order, temporarily restrain any party from carrying on such act until the
---------------------- conclusion of such inquiry or until further orders, without giving notice to such
party, where it deems necessary. In discharge of its functions, the Commission
---------------------- shall be guided by the principles of Natural Justice and, subject to the other
---------------------- provisions of this Act and of any rules made by the Central Government, the
Commission shall have the powers to regulate its own procedure.
----------------------
The Commission shall have, for the purpose of discharging its functions
---------------------- under this Act, the same powers as are vested in a Civil Court under the Code
of Civil Procedure, while trying a suit in respect of the following matters:
----------------------
● Summoning and enforcing the attendance of any person and examining
---------------------- him on oath;
---------------------- ● Requiring the discovery and production of documents;

● Receiving evidence on affidavit;
----------------------

● Issuing commissions for the examination of witnesses or documents; Notes
● Requisitioning subject to the provisions of Section 123 and 124 of the
----------------------
Indian Evidence Act 1872, any public record or document or copy of
such record or document from any office, the Commission may call upon ----------------------
such experts, from the fields of economics, commerce, accountancy,
international trade or from any other disciplines it deems necessary to ----------------------
assist the Commission in the conduct of any inquiry by it.
----------------------
The Commission may direct any person
----------------------
● To produce before the Director General or the Secretary or an officer
authorised by it, such books or other documents in the custody or under ----------------------
the control of such person so directed as may be specified or described in
the direction, being documents relating to any trade, the examination of ----------------------
which may be required for the purposes of this Act; ----------------------
● To furnish to the Director General or the Secretary or any other Officer
authorised by it, as respects the trade or such other information as may be ----------------------
in his possession in relation to the trade carried on by such person, as may ----------------------
be required for the purposes of this Act.
----------------------
Rectification of Orders
With a view to rectifying any mistake apparent from the record, the Commission ----------------------
may amend any order passed by it under the provisions of the Act. The ----------------------
Commission may make –
● An amendment on its own motion; ----------------------
● An amendment for rectifying any such mistake which has been brought to ----------------------
the notice by any part to the order;
----------------------
● The Commission shall not, while rectifying any mistake apparent from
record amends substantial part of its order passed under the provisions of ----------------------
this Act.
----------------------
Consumer Protection Act, 1986 & Competition Act
----------------------
Representation
----------------------
A person or an enterprise or the Director General may either appear in
person or authorize one or more Chartered Accountants or Company Secretaries ----------------------
or Cost Accountants or Legal Practitioners or any of his or its officers to present
his or its case before the Commission. Thus, it is the core area for practicing ----------------------
professionals.
----------------------
Appellate Tribunal
----------------------
The Central Government established appellate tribunal to be known as
Competition Appellate Tribunal under Section 53 A of the Competition Act, ----------------------
2002 to hear and dispose of appeals against any direction issued or decision
made or order passed by the Commission and to adjudicate on claim for ----------------------
compensation that may arise from the findings of the Commission or the orders ----------------------

Notes of the Appellate Tribunal in an appeal against any finding of the Commission
and pass orders for the recovery of Compensation under Section 53N of this
---------------------- Act.
---------------------- The Central Government or the State Government or a local authority
or enterprise or any person, aggrieved by any direction, decision or order may
---------------------- prefer an appeal to the Appellate Tribunal. Every appeal shall be filed within a
period of sixty days from the date on which a copy of the direction or decision
----------------------
or order made by the Commission is received by the Central Government or the
---------------------- State Government or a local authority or enterprise or any person referred to and
it shall be in such form and be accompanied by such fee as may be prescribed.
----------------------
Appellate Tribunal may entertain an appeal after the expiry of the said
---------------------- period of sixty days if it is satisfied that there was sufficient cause for not filing
it within that period. Then, the Appellate Tribunal may, after giving the parties
---------------------- to the appeal, an opportunity of being heard, pass such orders thereon as it
thinks fit, confirming, modifying or setting aside the direction, decision or order
----------------------
appealed against. The Appellate Tribunal shall send a copy of every order made
---------------------- by it to the Commission and the parties to the appeal. The appeal filed before
the Appellate Tribunal shall dispose of the same within six months from the
---------------------- date of receipt of the appeal.
---------------------- The Appellate Tribunal shall consist of a Chairperson and not more than
two other members to be appointed by the Central Government. The Chairperson
---------------------- of the Appellate Tribunal shall be a person, who is, or has been a Judge of the
Supreme Court or the Chief Justice of a High Court.
----------------------
---------------------- 12.6 REGULATION OF COMBINATIONS

---------------------- The provisions for regulation of combinations are encoded in Sec. 6 of the
Competition Act. Section 6 is to be read with Section 30, 31, 43A, 44 and 45 of
----------------------
the Act which lays down procedures and penalty for contravening the provisions
---------------------- of the Act relating to the regulations of combinations. It is important to note
again, that only those mergers will fall in the category of Sec 5, which falls in
---------------------- the thresholds prescribed under Section 5, however any such combination must
be notified compulsorily, after proposal is made, and before execution. Any
----------------------
combination which causes an Appreciable Adverse effect on Competition will
---------------------- be considered as void. Any person or enterprise who proposes to enter into the
combination must give notice, in prescribed form and with prescribed payment
---------------------- of fees to the Commission, disclosing the details of proposed combination,
within 30 days, once the proposal for combination is approved, or execution
----------------------
of any document for acquisition. The proposed combination cannot take effect
---------------------- for a period of 210 days from the date it notifies the Commission or till the
Commission passes an order, whichever is earlier. If the Commission does
---------------------- not pass an order during the said period of 210 days, the combination shall be
deemed to have been approved.
----------------------
The draft regulations propose to dispose of notifications within 30 days
---------------------- in respect of mergers, which, in the opinion of the Commission, has little or

no potential for appreciable adverse effect on competition in Indian markets. Notes
Merger evaluation involves the following process:
----------------------
a. Identification of the relevant market, consisting of relevant product market
and relevant geographic market. ----------------------
b. Consideration whether the merger has appreciable adverse effect on
----------------------
competition in the relevant market in India.
c. Approval, rejection, or approval with modification of the merger. ----------------------
d. Identification of the relevant market. ----------------------
The Act envisages appreciable adverse effect on competition in the ----------------------
relevant market in India as the touchstone. The concept of relevant market is
clearly defined in the Act. It consists of the relevant product (including goods ----------------------
and services) market and the relevant geographic market.
----------------------
The relevant market means “the market that may be determined by the
Commission with reference to the relevant product market or the relevant ----------------------
geographic market or with reference to both the markets”. The Act lays down the
factors, any one or all of which shall be taken into account by the Commission ----------------------
while defining the relevant product/geographic market as the case may be. ----------------------
Relevant product market is defined in terms of substitutability of
----------------------
products. It means “a market comprising all those products or services which
are regarded as interchangeable or substitutable by the consumer, by reason of ----------------------
characteristics of the products or services, their prices and intended use.” It can
be taken as the smallest set of products which are substitutable given a small ----------------------
but significant non-transitory increase in price. Relevant geographic market is
----------------------
defined in the Act in terms of “the area in which the conditions of competition
for supply of goods or provision of services or demand of goods or services are ----------------------
distinctly homogenous and can be distinguished from the conditions prevailing
in the neighbouring areas”. It can be understood as the geographic region within ----------------------
which substitutable products can be made available at similar price.
----------------------
Evaluation of ‘appreciable adverse effect on competition’
----------------------
Mergers are regulated under the Act in view of their potential appreciable
adverse effect on competition in the relevant market in India. Evaluation of ----------------------
the adverse effects is not based on any single criterion. The Act empowers the
Commission to evaluate the effect of merger on competition in the relevant ----------------------
market in India based on a number of factors (sub-Section (4) of Section 20). The ----------------------
Commission will use the rule of reason approach for evaluation of combination.
The beneficial and adverse effects of the proposed combination on competition ----------------------
in the relevant market in India would be evaluated by the Commission with
reference to the factors indicated in Sub Section (4) of Section 20 of the Act. ----------------------
Factors to be considered by the commission while evaluating appreciable ----------------------
adverse effect of combinations on competition in the relevant market:
----------------------
a. Actual and potential level of competition through imports in the market;
----------------------

Notes b. Extent of barriers to entry into the market;
c. Level of concentration in the market;
----------------------
d. Degree of countervailing power in the market;
----------------------
e. Likelihood that the combination would result in the parties to the
---------------------- combination Being able to significantly and sustainably increase prices or
profit margins;
----------------------
f. Extent of effective competition likely to sustain in a market;
---------------------- g. Extent to which substitutes are available or are likely to be available in
---------------------- the market;
h. Market share, in the relevant market, of the persons or enterprise in a
---------------------- combination, individually and as a combination;
---------------------- i. Likelihood that the combination would result in the removal of a vigorous
and effective competitor or competitors in the market;
----------------------
j. Nature and extent of vertical integration in the market;
----------------------
k. Possibility of a failing business;
---------------------- l. Nature and extent of innovation;
---------------------- m. Relative advantage, by way of the contribution to the economic development,
by any combination having or likely to have appreciable adverse effect on
---------------------- competition;
---------------------- n. Whether the benefits of the combination outweigh the adverse impact of
the combination, if any.
----------------------
Approval, rejection or approval with modification of the merger based on
---------------------- evaluation of the combination as above, the Commission may decide to approve
the merger, reject the merger or approve the merger subject to modifications.
----------------------
International experience shows, that less than 10 per cent of mergers
---------------------- evaluated by competition authorities have been found to have adverse effect
on competition/ have the potential for lessening of competition in the relevant
----------------------
market. A large portion of such cases are eventually approved by competition
---------------------- authorities subject to modifications. It can be reasonably expected that only a
small percentage of the total notified mergers may be found to have appreciable
---------------------- adverse effect on competition in India.
---------------------- Procedure for investigation of mergers has been prescribed in Section 29
of the Act which lays down the following provisions:
----------------------
1. Issue of notice by the Commission: When it is prima facie opinion of
---------------------- the Commission that combination is likely to cause, or has caused an
appreciable adverse effect on competition, the Commission shall issue
---------------------- notice of show cause to the parties concerned.
---------------------- Such parties concerned have to give response within 30 days of the receipt
of the notice, as to why investigation relating to such combination should
---------------------- not be conducted.

2. Report by Director General to Commission: After response of notice, Notes
from parties concerned to combination, the Commission may call for a
report from Director General, who is appointed by Central Government ----------------------
under Section 16 of the Act, for assisting the commission. The Director
General has to file report to commission within time limit as commission ----------------------
may direct. ----------------------
3. Publication of details of combination to Commission by parties concerned:
----------------------
If the Commission is of prima facie of opinion that, combination causes
or may cause adverse effect on competition, directs the parties concerned, ----------------------
to publish the details of combination within 10 working days of such
direction, to bring the knowledge of combination to public, and persons ----------------------
affected or likely to be affected by such combination.
----------------------
The Commission may call such persons to file the objection, within 15
days of date of publication to public. The Commission may call for any ----------------------
additional information from the parties concerned.
----------------------
4. Orders of Commission: According to Section 31, if the commission is
of the opinion that the concerned combination does cause or is likely ----------------------
to cause appreciable adverse effect on competition, it may approve
----------------------
such combination. And if the commission is of the opinion that such
combination causes or is likely to cause appreciable adverse effect on ----------------------
competition, it directs that such combination shall not take effect.
----------------------
5. If commission finds that concerned combination causes is or likely to
cause appreciable adverse effect on competition, however such adverse ----------------------
effect can be eliminated by any modification to such combination, it
may propose, appropriate modifications to parties concerned. Such ----------------------
combination to be modified by the parties within time prescribed by ----------------------
the Commission, failure of which, the Commission will deal with such
combination as such combination causes an Appreciable Adverse effect ----------------------
on Competition. If parties agree and follow the modifications suggested
by Commission, the Commission may approve such combination. ----------------------
6. Under Section 32, the Commission has power to investigate the Acts ----------------------
taking place outside India but having effect on competition in India.
This provision gives extra-territorial jurisdiction to the working of the ----------------------
Commission. ----------------------
It is important to note here that the provisions mentioned in Section 6, does
not apply to the share subscription, or financial institution, foreign institutional ----------------------
investors, bank or venture capital fund pursuant to any covenant of loan agreement ----------------------
or investment agreement, however public financial banks foreign institutional
investors or venture capital funds must file the information of acquisition within 7 ----------------------
days of such acquisition including details of control and consequences of default
arising out of such loan agreement or investment agreement as the case may be. ----------------------
This is because, according to Section 62 of the Act, the provisions of the Act ----------------------
shall be applicable in addition to and not in derogation with the provisions of
any other law for the time being in force. If banks and financial institutions are ----------------------

Notes to be included under the purview of this Section, then it may hamper the object
of Competition Act, to develop and promote the competition in the economy, as
---------------------- the banks and financial institutions has major business of acquisition of assets
and interest in the companies, and if they are supposed to wait for 210 days for
---------------------- investigation, it will slow down the speed of the economy. Most of the expected
anti-competitive effects of mergers can be remedied without holding back the
----------------------
merger itself. Merger analysis consists of assessment of the likely anti-competitive
---------------------- effect of the merger under analysis and how such effect could be minimized or
eliminated. Prohibition is considered only when remedies are either not available
---------------------- or not feasible. Remedies can be either structural or behavioural.
---------------------- Although behavioural remedy is preferable, its implementation is
difficult. On the other hand, a structural remedy would entail requiring the
---------------------- merged enterprise to make structural adjustment which could be in the form of
sale of assets, divestment of a division or a unit or creation or strengthening of
---------------------- competitors through, for example, licensing of an Intellectual Property Right
---------------------- (IPR).
Procedure of Investigation and Order thereof
----------------------
If a prima-facie case exists with respect to anti-competitive agreements
---------------------- and abuse of dominant position, CCI is empowered to direct the Director
General to conduct an investigation in the matter.
----------------------
In determining the nature of agreements, the following factors are to be taken
---------------------- into account:
---------------------- ● Barriers to new entrants in the market
● Driving existing competitors out of the market
----------------------
● Foreclosure of competition by hindering entry into the market
----------------------
● Accrual of benefits of consumers
---------------------- ● Improvements in production or distribution of goods or provision of
---------------------- services
● Promotion of technical, scientific and economic development.
----------------------
In determining the nature of the dominant position enjoyed by an enterprise,
---------------------- following factors are to taken into account:
---------------------- ● Market share of the enterprise and market structure and size
● Size and resources of the enterprise
----------------------
● Economic power of the enterprise including commercial advantages over
---------------------- the
---------------------- competitors
● Size and importance of the competitors
----------------------
● Dependence of consumers on the enterprise
---------------------- ● The extent of vertical integration and consumer dependence
---------------------- ● Whether the monopoly was gained by reason of statute or otherwise

● Entry barriers including barriers such as regulatory barriers, financial risk, Notes
high capital cost of entry, market entry barriers, technical entry barriers,
economies of scale ----------------------
● “Countervailing buying power” and “social obligations and costs” ----------------------
● Any other factor which CCI may consider relevant for the enquiry ----------------------
The Director General would submit his report with recommendations. If CCI ----------------------
is of the view that there are no merits to the case, the complaint would be
dismissed, with costs. However, during the course of enquiry, CCI may grant ----------------------
interim relief by way of temporary injunctions restraining a party from
continuing with the ant- competitive agreements or abuse of dominant position. ----------------------
An order of CCI subsequent to an enquiry could consist of: ----------------------

● Directing the persons or entities ruled against to desist from abusing ----------------------
a dominant position or discontinuing acting upon anti-competitive
agreements ----------------------
● Imposing penalty to the maximum extent of ten percent of the average ----------------------
turnover for the last preceding three financial years upon each person or
entity party to the abuse ----------------------
● Award compensation ----------------------
● Modify agreements
----------------------
● Recommend the division of the dominant enterprise to the Centre, which
has the ultimate authority to decide the fate of a dominant enterprise ----------------------
● Recovery of compensation from any enterprise for any loss or damage ----------------------
shown to have suffered by the other party.
----------------------
The procedure for investigation of combinations is somewhat different, as
the Act contemplates direct investigation to be conducted by CCI rather than ----------------------
by resorting to the via media of the Directorate General. It may call upon any
party to furnish all relevant information with regard to their business operation ----------------------
to come to a conclusion as to the nature of the combination.
----------------------
While the factors to be taken into account are similar to the parameters to be
applied while examining anti-competitive agreements and abuse of dominant ----------------------
position the CCI shall also have due regard to the following factors:
----------------------
● Actual and potential level of competition through imports in the market
● Extent of effective competition likely to sustain in the market ----------------------
● Likelihood that the competition would result in the removal of a vigorous ----------------------
and effective competitor or competitors in the market
----------------------
● Possibility of a failing business
----------------------
● Nature and extent of innovation
● Relative advantage, by way of the contribution to the economic development ----------------------
----------------------

Notes ● Whether the benefits of the combination outweigh the adverse impact of
the Combination, if any
----------------------
In case of combination, CCI may pass following orders:
---------------------- ● Approval of the combination if no appreciable adverse effect on competition
is found
----------------------
● Disapproval of the combination in case of adverse effect
----------------------
● It may propose suitable modification as accepted by the parties
---------------------- ● During enquiry grant interim relief by way of temporary injunctions
---------------------- ● Award compensation
---------------------- Penalties
---------------------- In case of failure to comply with the directions of CCI and Director
General or false representation of facts by parties, penalties ranging from Rs. 1
---------------------- lakh to Rs 1 crore may be imposed as the case may be.
---------------------- Execution of the order

As far as the execution of the order is concerned, it is the responsibility
----------------------
of CCI. However, in the event of its inability to execute it, CCI may send such
---------------------- order for execution to the High Court or the principal civil court, as the case
may be.
----------------------
Post-Decisional Options
---------------------- The aggrieved person may apply to CCI for review of the order within
---------------------- thirty days from the date of the order, provided that the below mentioned
conditions are fulfilled:
----------------------
● An appeal is allowed by this Act
---------------------- ● No appeal has been preferred
---------------------- Provision has been made for an appeal against any order or decision of
CCI by any aggrieved person. An application for this purpose has to be made
---------------------- to the Supreme Court within sixty days from the date of communication of the
decision or order.
----------------------

----------------------
----------------------
1. The Competition Appellate Tribunal shall hear and dispose of appeals
---------------------- against any direction issued or decision made or order passed by the
Competition Commission of India.
----------------------
2. If a prima-facie case exists with respect to anti-competitive agreements
---------------------- and abuse of dominant position, CCI is empowered to direct the
Director General to conduct an investigation in the matter.
----------------------

Summary Notes
• The Act is comprehensive enough and meticulously carved out to meet ----------------------
the requirements of the new era of market economy, which has dawned ----------------------
upon the horizon of Indian economic system. It is in synchronisation
with other set of policies such as liberalised trade policy, relaxed FDI ----------------------
norms, FEMA, deregulation etc., that would ensure uniformity in overall
competition policy. ----------------------
• It’s just a matter of time when the Act is made effective and CCI becomes ----------------------
functional, which would, in turn, help realise our aspiration to catch up
----------------------
with the global economy.
• However, the Act is truly reflective of changing economic milieu of ----------------------
our country and is well equipped to promote fair competition and take
----------------------
care of impinging market practices, facilitate domestic players vis-à-vis
outsiders, safeguard the interests of consumers and thus, ensure vibrancy ----------------------
and stability in the Indian market.
----------------------
Keywords ----------------------
• Competition: The act of seeking or endeavouring to gain, what another ----------------------

is endeavouring to gain at the same time.
----------------------
• Perpetual succession: Continuation of an incorporated firm’s existence,
unaffected by the death of any of its owner(s) or the transfer of its shares ----------------------
to a new entity.
----------------------
• Allocative efficiency: The action of satisfying as far as possible customer
demands for goods and services by pricing them at a price which is near ----------------------
to the production cost while still allowing a margin to the producer. ----------------------
• Cartel: A combination of independent business organisations formed to
regulate production, pricing and marketing of goods by the members. ----------------------
• Collusion: An agreement between two or more persons to defraud a ----------------------

person of his rights, by the forms of law, or to obtain an object forbidden
----------------------
by law.
----------------------
----------------------
1. What are the objectives of the Competition Act? ----------------------
2. What is an anti-competitive agreement? ----------------------
3. Explain the powers of the Commission to initiate the enquiry on its own.
----------------------
4. What is a combination under the Act?
----------------------
5. What kind of combination is regulated under the Act?
----------------------

Notes Answer to Check your Progress
---------------------- i. − a.
---------------------- ii. − b.
iii. − c.
----------------------
iv. − d.
----------------------
Fill in the blanks.
---------------------- 1. The Competition Commission of India was established on 14th October,
---------------------- 2003 on the recommendation of SVS Raghavan Committee.
----------------------
----------------------
1. True
---------------------- 2. True
----------------------
Suggested Reading
----------------------
---------------------- 1. Competition Act, 2002.
---------------------- 2. www.cci.gov.in
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Depositories Act, 1996
UNIT
13
Structure:
13.1 Introduction
13.2 Need for Dematerialisation
13.3 Depository Services
13.4 Difference between a Depository and Custodian
13.5 Advantages of the Depository System
13.6 Disadvantages of Demat
13.7 Important Constituents of the Depository System
13.8 Procedure of Dematerialisation
13.9 Rematerialisation
13.10 Trading and Settlement of Shares in Demat
13.11 NSDL and CDSL
13.12 Legal Framework for Depositories
13.13 SEBI (Depositories and Participants Regulations), 1996
13.14 Bye-Laws and Business Rules
Summary
Key Words
Suggested Reading
Depositories Act, 1996 265

Notes
Objectives
----------------------
• Examine prohibition of agreements under Competition Act
----------------------
• Describe Competition Commission of India
---------------------- • Identify its duties, powers and functions
---------------------- • Discuss the Director General and Appellate Authorities under
Competition Commission
----------------------
----------------------
13.1 INTRODUCTION
----------------------
The capital market is a market accessed by those entities who seek funds
---------------------- for productive assets on the demand side. Those who are willing and able to
invest on the supply side foster the growth of the economy. The capital market
---------------------- in India has witnessed tremendous changes in terms of advanced technology,
---------------------- online transactions, stringent norms and greater transparency, all with a unified
objective of enhancing the utility, reliability and the delivery of the markets.
---------------------- Keeping in tune with the economic and financial reforms, the capital market
underwent a paradigm shift from a controlled environment to a regulated
---------------------- environment. With the liberalisation of the Indian economy in 1991, there has
---------------------- been an explosive growth of the market through fiscal incentives. This growth
has translated in terms of greater funds mobilisation, market capitalisation and
---------------------- expansion of investor population. With the introduction of online automated
trading in India, there was a lot of transparency in trading; and new players were
---------------------- introduced to the market. However, a lot of problems were encountered because
---------------------- of the sheer volumes of the paperwork. There were problems associated with
settlement of trades, bad deliveries, etc. The traditional trading and settlement
---------------------- and clearing system was found inadequate to deal with large volumes of activity.
To find a solution to these problems and to facilitate an efficient and secure
---------------------- settlement process the Depositories Act, 1996 was introduced. This paved way
---------------------- for paperless electronic settlement of trading. The efficient and development of
the capital market is possible with the Depository system.
----------------------
13.2 NEED FOR DEMATERIALISATION
----------------------
Prior to dematerialisation, shares were held in physical form, the share
----------------------
certificate being the document to title to shares. Transfer of shares in the
---------------------- physical form involved a lengthy share transfer procedure prescribed in the
Companies Act, 2013 which was time taking and costly as it involved payment
---------------------- of stamp duty. When shares were held in physical form certain security risks
such as loss of share in transit, theft and mutilation were encountered. In case of
----------------------
loss of share certificates the shareholder had to apply for a duplicate certificate
---------------------- and give an advertisement in the newspaper regarding the loss. The Securities

scam of 1992 which shook the Capital Market also exposed the problems Notes
inherent in the prevailing settlement system. A lot of time was consumed in
the process of allotment and transfer of shares hindering the healthy growth of ----------------------
the market. Hence, the paper based system was not considered to be investor
friendly. The Depositories Act, 1996, brought in revolution in the functioning of ----------------------
the capital market infrastructure. It improved investor protection, reduced risks ----------------------
and increased transparency of transactions in the securities market. Companies,
issuing shares also benefitted in terms of reduced costs and the other expenses in ----------------------
managing their investor population. The Depositories Act has made the handling
of shares very convenient and hassle free. The Act enabled the establishment of ----------------------
multiple depositories to allow a healthy competition in the capital market. ----------------------
Dematerialisation denotes holding the securities in electronic form where
----------------------
the securities are no longer in material form. Also known as Demat, it facilitated
the holding of shares in electronic form and enabled the transfer of securities ----------------------
without physically handling them. In the process of dematerialisation the
physical certificate of the investor are surrendered to the company and an equal ----------------------
number of securities are credited to the account of the investor. The conversion
----------------------
of shares into Dematerialised form is optional however trading of shares on the
stock exchange can happen only when the shares are in the Demat form. Also ----------------------
Under Section 29 of the Companies Act 2013, it is mandated that every Initial
Public Offering (IPO) made by a listed Company in the excess of Rs. 10 crore ----------------------
has to be compulsorily in the Dematerialised form. Hence for investor applying
----------------------
for shares in a public Issue they have to open a Demat account before bidding
for shares. ----------------------
13.3 DEPOSITORY SERVICES ----------------------
In layman’s language a depository is a place where something is deposited ----------------------

for safe keeping. A Depository is an organisation which enables holding of ----------------------
securities in electronic form where securities transactions can be processed by
book entry. Dematerialisation is a process by which physical certificates are ----------------------
converted into electronic form. The depository dematerialises the securities so
that they exist only as electronic records. India has chosen the dematerialisation ----------------------
route. In India, a depository is an organisation, which holds the beneficial owner’s ----------------------
securities in electronic form, through a registered Depository Participant (DP).
A depository functions somewhat similar to a commercial bank. To avail of ----------------------
the services offered by a depository, the investor has to open an account with a
registered Depository Participant. ----------------------
According to Section 2(1)(e) of the Depositories Act, 1996, “Depository ----------------------

means a company formed and registered under the Companies Act and which
----------------------
has been granted a certificate of registration under Section 12(1A) of the
Securities Exchange Board of India. ----------------------
According to Section 2(20) of the Companies Act, 2013 a Company
----------------------
means a company as defined under Section 2(67)(68)(71) of the Act. Under
Section 2(20) a, Company means a company incorporated under the Companies ----------------------

Notes Act, 2013. Hence, a depository is a company which can offer services of a
depository only after attaining a certificate of commencement of business from
---------------------- SEBI.
---------------------- In India there are two depositories offering depository services. The
National Securities Depository Limited (NSDL) promoted by the IDBI, UTI
---------------------- and the National Stock Exchange and the Central Depository Services Limited
(CDSL).These Depositories offer services to various intermediaries in the
----------------------
securities market including clearing member’s stock exchanges, Financial
---------------------- Institutions and companies going for a public issue of shares. Depository can
be in two forms namely dematerialised and immobilised. In the former, the
---------------------- physical certificates are totally eliminated after verifications by the custodians
whereas in the later the certificates are kept in the safe custody making their
----------------------
further movement impossible.
----------------------
13.4 DIFFERENCE BETWEEN A DEPOSITORY AND
----------------------
CUSTODIAN
----------------------
Agencies that provide custodial services are called Custodians. A custodian
---------------------- ensures the safety of the securities and a trustee. They also offer services such
as physical transfer of securities, collecting dividends and interest warrants. It
---------------------- maintains the track of the clients’ investment by keeping a check on the book
closure dates and record dates for bonus and rights issue. Although there are
----------------------
certain similarities between the depository and custodian in the sense that both
---------------------- are involved in the safe keeping of the securities yet they differ with respect to
their powers. While a depository can legally transfer the beneficial ownership
---------------------- a custodian cannot do so. Custodians act as a complement to depositories.
Custodians are clearing members but no trading members. They settle the trades
----------------------
on behalf of the trading members. In India the Stock Holding Corporation of
---------------------- India (SHCIL) and the SBI shareholding corporation are important custodians.
Just like a Depository a custodian has to be registered with SEBI.
----------------------

----------------------
---------------------- 1. The Depositories Act, 1996, brought in revolution in the functioning of
---------------------- the capital market infrastructure.
2. The conversion of shares into dematerialised form is compulsory.
----------------------
3. A depository functions somewhat similar to a commercial bank.
----------------------
----------------------
----------------------
----------------------

Notes
Activity 1
----------------------
Visit the website of National Securities Depository Limited (NSDL) and find ----------------------
the facilities offered by it.
----------------------
13.5 ADVANTAGES OF THE DEPOSITORY SYSTEM ----------------------
----------------------
1. Shares are held in electronic form.
2. Immediate allotment transfer and registration of securities. ----------------------
3. No need to safe keep share certificates. ----------------------
4. No need to remember record dates of various companies. ----------------------
6. Risk of bad delivery, fake securities eliminated.
----------------------
7. Reduced paper work for transfer of securities.
----------------------
8. Reduced transaction cost.
9. Nomination facility available. ----------------------
10. Automatic noting of change of address (updating changed address in the ----------------------
demat account will have the effect of updating changed address with all
companies, the shares of which is held/will be held in electronic form). ----------------------
11. Easy transmission of securities. It is sufficient to submit one set of claim ----------------------
papers to DP for transmission of all securities lying in demats account of
the deceased. ----------------------
12. Automatic credit of Dividend/bonus shares. ----------------------

13. Investment in various mutual funds may also be held in demat accounts. ----------------------
14. Pledge against the securities held by the BO to take loans. Loans against
----------------------
the pledged demat shares come at an interest rate that is lower by 0.25%
to 1.5 % when compared with. ----------------------
15. The concept of an “odd lot” in respect of dematerialised shares stands
----------------------
abolished, i.e., in the demat mode, market lot becomes one share.
16. Even in the electronic mode of trading, the payment mechanism (through ----------------------
a broker) between the buyer and seller continues to be as before. Also the ----------------------
usual brokerage charges would have to be incurred. However, after the
settlement, pay in and pay out are on the same day for scrip less trading ----------------------
which means you get your securities as well as cash immediately.
----------------------
13.6 DISADVANTAGES OF DEMAT ----------------------
Although the advantages of the depository system are manifold there are ----------------------
also certain challenges involved in the process. Firstly, Trading in securities
may become uncontrolled in case of dematerialised securities. Hence it becomes ----------------------

Notes necessary for the capital market regulator to keep a close watch on the trading in
dematerialised securities and see to it that trading happens in the interests of the
---------------------- investors. The role of key market players in case of dematerialised securities,
such as stock-brokers, needs to be supervised as they have the capability of
---------------------- manipulating the market. Multiple regulatory frameworks have to be conformed
---------------------- to, including the Depositories Act, Regulations and the various By-Laws of
various depositories. The process of opening a demat account has become
---------------------- tedious with the investors having to fill up Multiple KYC forms. The charges
levied for the demat services by the DP are not linked to the trading volumes
---------------------- hence are considered unreasonable for investors who do not trade frequently.
---------------------- The Depositories Act, 1996
---------------------- The Depositories Act, 1996 is an Act to provide for regulation of
depositories in securities and for matters connected therewith or incidental
---------------------- thereto. The depositories Act initially came into force as an ordinance viz.
The Depositories Ordinance, 1995 promulgated on 7th January 1996. It was
----------------------
designed to provide a legal framework for establishment of depositories to
---------------------- record ownership details in book entry form. The Act also made consequential
amendments in the Companies Act, 2013; the Securities and Exchange Board
---------------------- of India Act, 1992, the Indian Stamp Act, 1899, The Income Tax Act, 1961.
---------------------- The Act provides for establishment of one or more depositories. Under
Section 3 (1) of the Act the depository is required to obtain a certificate of
---------------------- commencement of business from the Securities and Exchange Board of India.
According to Subsection 3 the Board shall not grant a certificate under Sub-
----------------------
Section (1) unless it is satisfied that the depository has adequate systems and
---------------------- safeguards to prevent manipulation of records and transactions. Investors
opting to join the system will be required to be registered with one or more
---------------------- participants who will be agents for the depository. Investors will have the choice
of continuing with the existing securities certificates or opt for the depository
----------------------
mode.
---------------------- The Depository Act provides for the establishment of depositories like
---------------------- the National Securities Depository Limited (NSDL) and the Central Depository
Services Limited providing depository services in the electronic form for
---------------------- securities traded in equity and debt markets. These companies encourage
dematerialisation in view of the advantages this system offers to issuers,
---------------------- investors, mutual funds and to the market players. The minimum net worth
---------------------- stipulated by SEBI for a depository is Rs. 100 crore.
---------------------- 13.7 IMPORTANT CONSTITUENTS OF THE DEPOSITORY

---------------------- SYSTEM
---------------------- The Depository system involves the following entities:

1. The Depository:
----------------------
The Depository is the registered owner of the shares while the shareholder
---------------------- is the beneficial owner. Depository is like a bank wherein the deposits are

securities (viz., shares, debentures, bonds, government securities, units, Notes
etc.) in electronic form. To avail the services offered by a depository,
the investor has to open an account with any Depository Participant ----------------------
registered with the Depository. Besides holding securities, a depository
also provides services related to transactions in securities. This facilitates ----------------------
faster, risk free and low cost settlement. It enables surrender and ----------------------
withdrawal of securities to and from the depository through the process
of demats and remats. It maintains investor’s holdings in electronic form ----------------------
and effect settlement of securities traded in depository made on the stock
exchanges. The Depository also carries out settlement of traders not ----------------------
done on the stock exchanges (off-market trades). The following are the ----------------------
functions of the Depository:
----------------------
1. Account Opening
2. Dematerialisation ----------------------
3. Rematerialisation ----------------------
4. Settlement ----------------------
5. Initial Public Offers (IPOs)Corporate benefits
----------------------
6. Pledging
----------------------
7. Securities that can be dematerialised
The following securities are eligible for holding in dematerialised form: ----------------------
1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable ----------------------
securities of Company or other body corporate.
----------------------
2. Units of mutual funds, rights under collective investment schemes and
venture capital funds, commercial paper, certificate of deposit, securitized ----------------------
debt, money market instruments, government securities, national saving
certificates and unlisted securities ----------------------
Depository is much like a bank and can be compared with a Bank. ----------------------
The difference between Bank and Depository is as follows: ----------------------
Bank Depository ----------------------
Holds funds in accounts. Holds securities in account.
----------------------
Funds are transferred between Securities are transferred between
accounts. demat. ----------------------
Transfer of fund is possible without Transfers of securities is possible ----------------------
actual. without physical handling of
securities. ----------------------
Ensures the safe keeping of the Ensures the safe keeping of securities. ----------------------
money.
----------------------
----------------------

Notes Account is debited when the money Account is credited when the
is coming in and debited when the securities
----------------------
money is going out. are bought and debited when the
---------------------- securities are sold.
---------------------- At this stage, it is important to understand the difference between the

physical shares and the demat shares.
----------------------
Physical Shares Dematerialised Shares
---------------------- Physical shares are held by the Dematerialised shares are held by the
---------------------- investor himself. investor.
Shares are held in the form of a share Shares are held in electronic form.
---------------------- Certificate or a share Warrant.
---------------------- Physical shares have distinctive Shares in Demat are fungible where
Number and Folio Number. allb certificates of the same security
---------------------- shall become interchangeable.
---------------------- Risk of loss, fraud and mutilation is As the shares is in electronic form no
there. such risk.
----------------------
2. The Depository Participant:
----------------------
A “Depository Participant” (DP) is an agent of the depository who is
---------------------- authorised to offer depository services to investors. Financial institutions,
banks, custodians and stockbrokers complying with the requirements
---------------------- prescribed by SEBI/Depositories can be registered as DP. Depository
Participant (DP) interfaces with the investor and provides depository services.
----------------------
Public Financial Institutions, Scheduled Commercial Banks, Foreign Banks
---------------------- operating in India with the approval of the Reserve Bank of India, State
Financial Corporations, custodians, stock-brokers, clearing corporations/
---------------------- clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent
complying with the requirements prescribed by SEBI can be registered as
---------------------- DP. Banking services can be availed through a branch whereas depository
---------------------- services can be availed through a DP. The DP could be a Custodian, a bank,
a broker or individual with a minimum net worth of Rs 1 crore.
---------------------- Services offered by a DP include:
---------------------- 1. Dematerialisation where the physical shares are converted into electronic
form.
----------------------
2. Rematerialisation where the demat shares are recovered into physical
---------------------- shares.
---------------------- 3. Maintain the records of the holdings in electronic form.
4. Settlement of trades between the accounts of the beneficial owners.
----------------------
5. Facilitating off market trades happening outside the stock market
----------------------
6. Enabling the credit of securities into the demat account of the successful
---------------------- bidders in an IPO.

7. Transferring the corporate benefits such as bonus shares, rights shares to Notes
the demat account holders.
----------------------
3. The Beneficial Owner:
Under the Companies Act, 2013 all companies are required to maintain ----------------------
an index of members, wherein they are required to keep a record or the
----------------------
owners of the Company. With the concept of dematerialisation of securities
and transfer of shares through book entry system, the Depositories, i.e., ----------------------
NSDL and CDSL are considered as registered owners.
----------------------
In the Depository system share certificates belonging to the Investor
are dematerialised and the name of the shareholder is removed from the ----------------------
register of members. The name of the Depository is entered in that place.
In the books of the depository the name of the shareholder is written as a ----------------------
beneficial owner. Hence, a “Beneficial Owner” is a person in whose name
----------------------
a demat account is opened with the Depository for the purpose of holding
securities in the electronic form and whose name is recorded as such with ----------------------
Depository. Section 2(55) of the Companies Act lays down two modes of
acquiring membership of a company and in both an entry of the name of ----------------------
a person as a member in the register of the members of the company is a
----------------------
condition precedent for a person to be regarded a member of the company.
However, to facilitate the beneficial owner of shares, on whose behalf the ----------------------
depository holds the shares, to be recognized as members, Section 2(55)
provides that every person holding equity share capital of a company and ----------------------
whose name is entered as a beneficial owner in the records of a depository
----------------------
shall be deemed to be a member of the concerned company.
Even though the name of the shareholder is removed from the registered ----------------------
members, yet for all purposes he is still the owner deriving all the benefits ----------------------
routed through the depository. Whenever a company declares a bonus
issue, the securities are transferred in the name of the two depositories ----------------------
and they further transfer it to the clients through their participants. Every
depository is required to maintain a register and an index of beneficial ----------------------
owners in the manner provided in Section 88 of the Companies Act, 2013. ----------------------
4. The Register and Transfer Agents
----------------------
The R&T agents are intermediaries responsible for processing the share
transfers and printing share certificates. In case of a public issue the ----------------------
entire work relating to processing of share applications form, sending
allotment letters and dispatching refund orders is handled by the R&T ----------------------
agents. Securities in Demat can be created in two different ways. The ----------------------
first method is by converting the physical securities into Demat form by
confirming Demat requests received. The second method is by way of ----------------------
corporate action. Under this method, issuer releases instructions to the
depository to credit eligible beneficial owners with securities as per their ----------------------
entitlements ----------------------
----------------------

Notes Hence, the depository system requires continuous electronic communication
between the depository and issuer. Issuer may establish such communication link
---------------------- by setting a computer facility called DPM-SHR by itself or by utilising such
facility set up by Registrar & Transfer Agents.
----------------------
---------------------- 13.8 PROCEDURE OF DEMATERIALISATION

---------------------- The Depository services can be availed only to those investors who have
a Demat account with a Depository Participant. The investor has to enter into
---------------------- an agreement with a DP. It is now mandatory for an investor to have a PAN card
---------------------- for opening a demat account. The following steps may be followed for getting
physical securities converted into Demat form.
---------------------- 1. The Investor submits a Demat Request Form (DRF) along with the physical
---------------------- certificates of the securities for demat. The Depository Participant defaces
the certificate by stamping ‘Surrendered for Dematerialisation” across the
---------------------- face of the certificate.
---------------------- 2. The DP upon receipt of the shares and the DRF will issue the client an
acknowledgement and will send an electronic request to the Company.
---------------------- DP enters the demat request in his system to be sent to the Depository.
---------------------- 3. DP dispatches the physical certificates along with the DRF to the R&T
Agent.
---------------------- 4. The Depository records the details of the electronic request in the system
---------------------- and forwards the request to the R&T Agent. R&T Agent, on receiving the
physical documents and the electronic request, verify and check them.
---------------------- Once the R&T Agent is satisfied, dematerialisation of the concerned
securities is electronically confirmed to the Depository.
----------------------
5. The Depository then credits the dematerialised securities to the beneficiary
---------------------- account of the investor and intimates the DP electronically.
---------------------- 13.9 REMATERIALISATION

---------------------- Rematerialisation is a reverse process of converting dematerialised
---------------------- securities into demats form. Section 14 of the Act provides the beneficial owner
with the right to opt out of a depository as well. The investor has to submit
---------------------- a Rematerialisation Request Form (RRF) through the concerned DP in the
same manner as Dematerialisation. The Depository Participant will forward
---------------------- the request to the Depository after verifying that the client has the necessary
---------------------- securities in balance. The Depository in turn will intimate the Registrar and
Transfer Agents of the Company who will print and dispatch the share certificates
---------------------- for the number of shares rematerialised and the beneficiary account will be
debited by the Depository and credited with the Company. It is not necessary
---------------------- that one gets the shares of the same folio number. The Registrars and Transfer
---------------------- Agents will print new certificates with a new range of certificate numbers. The
investor will be allotted a new folio number; however if one is already having
---------------------- an existing folio number, he may be allotted the same.

13.10 TRADING AND SETTLEMENT OF SHARES IN Notes
DEMAT ----------------------
The depository model adopted in India provides for a competitive multi- ----------------------
depository system. There can be various entities providing depository services.
A depository should be a company formed under the Companies Act, 2013 ----------------------
and should have been granted a certificate of registration under the Securities
and Exchange Board of India Act, 1992. Presently, there are two depositories ----------------------
registered with SEBI, namely: ----------------------
● National Securities Depository Limited (NSDL)
----------------------
● Central Depository Service Limited (CDSL)
----------------------
13.11 NSDL AND CDSL ----------------------
NSDL is a public limited company incorporated under the Companies Act, ----------------------
2013. It is promoted by the Unit Trust of India (UTI), Industrial Development
Bank of India (IDBI), National Stock Exchange of India (NSE), and State ----------------------
Bank of India (SBI). NSDL is managed by Board of directors headed by a
managing director. It is governed by its bye-laws and its business operations ----------------------
are regulated by business rules. NSDL interfaces with the investors through ----------------------
players or business partners. Constituents of depository comprises of clearing
corporation, brokers, clearing member, registrar and transfer agents, company ----------------------
or issuer, stock exchange, bank depository participant and investors. All are
electronically linked to the main depository for the settlement of trades and to ----------------------
perform a daily reconciliation of all accounts held with NSDL. ----------------------
Central Depository Service (India) Limited (CDSL)
----------------------
Central Depository Service (India) Limited is promoted by LIC, GIC
and the BSE. Its main functions are centralised database and accounting. ----------------------
This agency is set up with the object to keep in mind to accelerate growth of
----------------------
scrip less trading, with major thrust of individual participation and creating
competitive environment, responsible to the user’s interests and demands to ----------------------
enhance liquidity. CDSL aims to retain the entire data of the investors in the
central database of CDSL. ----------------------
----------------------
----------------------
1. A Depository Participant (DP) is an _______ of the depository who is ----------------------
authorised to offer depository services to investors.
2. The DP could be a custodian, a bank, a broker or individual with a ----------------------
minimum net worth of Rs ___________. ----------------------
----------------------

Notes
Activity 2
----------------------
---------------------- Find out the procedure of opening an account with a Depository Participant.
----------------------
13.12 LEGAL FRAMEWORK FOR DEPOSITORIES
----------------------
Although a depository system offers many advantages to the Issuing
----------------------
Company, to the investors and the intermediaries, one of the challenges in the
---------------------- system is that Trading in securities has become uncontrolled. This mandates
that the Capital market regulator SEBI keeps a close watch on the trading in
---------------------- dematerialised securities and see to it that trading does not act as a detriment to
investors. Scrutinising the actions of the stock brokers, Depository participants
----------------------
also is necessary to prevent manipulation of the market. Multiple regulatory
---------------------- frameworks have to be conformed to, including the Depositories Act.
As a part of its on-going market reforms, the Government of India
----------------------
promulgated the Depositories Ordinance in September 1995. Based on
---------------------- this ordinance, Securities and Exchange Board of India (SEBI) notified its
Depositories and Participants Regulations in May 1996. The enactment of the
---------------------- Depositories Act 1996 paved the way for the launch of National Securities
Depository Ltd. (NSDL) in November 1996. In exercise of the rights conferred
----------------------
by the Depositories Act, NSDL and CDSL framed their own Byelaws and Rules.
---------------------- The Depository business in India is regulated by the following:
---------------------- 1. The Depositories Act, 1996
2. The SEBI Depository Participant Regulations, 1996
----------------------
3. Bye-laws of the Depositories
---------------------- 4. Business Rules of the Depositories
---------------------- Apart from the above, depositories are also governed by certain provisions
of:
----------------------
1. The Companies Act, 2013
---------------------- 2. The Indian Stamp Act, 1899
---------------------- 3. Securities Exchange Board of India Act, 1992
4. Securities Contract Regulation Act, 1956
----------------------
5. Benami Transactions (Prohibition)Act, 1988
----------------------
6. Income Tax Act, 1891
---------------------- The Depositories Act, 1996 was enacted to provide for regulation of
----------------------
thereto. It came into force from 20th September, 1995.
---------------------- The terms used in The Depositories Act, 1996 are defined as under:
----------------------

1. “Beneficial owner” means a person whose name is recorded as such with Notes
a depository.
2. “Depository” means a company, formed and registered under the ----------------------
Companies Act, 2013 and which has been granted a certificate of ----------------------
registration under Sub- section (1A) of Section 12 of the SEBI Act, 1992.
3. “Issuer” means any person making an issue of securities. ----------------------
4. “Participant” means a person registered as such under Sub-section (1A) ----------------------

of Section 12 of the SEBI Act, 1992.
----------------------
5. “Registered owner” means a depository whose name is entered as such
in the register of the issuer. ----------------------
Agreement between depository and participant ----------------------
A depository shall enter into an agreement in the specified format with
one or more participants as its agent. ----------------------
Services of depository ----------------------

Any person, through a participant, may enter into an agreement, in such ----------------------
form as may be specified by the bye-laws, with any depository for availing its
services. ----------------------
Surrender of certificate of security ----------------------
Any person who has entered into an agreement with a depository shall
----------------------
surrender the certificate of security, for which he seeks to avail the services of a
depository, to the issuer in such manner as may be specified by the regulations. ----------------------
The issuer, on receipt of certificate of security, shall cancel the certificate of
security and substitute in its records the name of the depository as a registered ----------------------
owner in respect of that security and inform the depository accordingly. A
depository shall, on receipt of information enter the name of the person in its ----------------------
records, as the beneficial owner. ----------------------
Registration of transfer of securities with depository
----------------------
Every depository shall, on receipt of intimation from a participant, register
the transfer of security in the name of the transferee. If a beneficial owner or a ----------------------
transferee of any security seeks to have custody of such security, the depository
shall inform the issuer accordingly. ----------------------
Options to receive security certificate or hold securities with depository ----------------------
Every person subscribing to securities offered by an issuer shall have ----------------------
the option either to receive the security certificates or hold securities with a
depository. Where a person opts to hold a security with a depository, the issuer ----------------------
shall intimate such depository the details of allotment of the security, and on
receipt of such information the depository shall enter in its records the name of ----------------------
the allottee as the beneficial owner of that security.
----------------------
Securities in depositories to be in fungible form
----------------------
All securities held by a depository shall be dematerialised and shall be in
a fungible form. ----------------------

Notes Rights of depositories and beneficial owner
A depository shall be deemed to be the registered owner for the purposes
----------------------
of effecting transfer of ownership of security on behalf of a beneficial owner.
---------------------- The depository as a registered owner shall not have any voting rights or any
other rights in respect of securities held by it. The beneficial owner shall be
---------------------- entitled to all the rights and benefits and be subjected to all the liabilities in
respect of his securities held by a depository.
----------------------
Pledge or hypothecation of securities held in a depository
----------------------
A beneficial owner may with the previous approval of the depository
---------------------- create a pledge or hypothecation in respect of a security owned by him through
a depository. Every beneficial owner shall give intimation of such pledge or
---------------------- hypothecation to the depository and such depository shall thereupon make
entries in its records accordingly. Any entry in the records of a depository under
----------------------
Section 12 (2) shall be evidence of a pledge or hypothecation.
---------------------- Furnishing of information and records by depository and issuer
---------------------- Every depository shall furnish to the issuer information about the transfer
of securities in the name of beneficial owners at such intervals and in such
---------------------- manner as may be specified by the bye-laws. Every issuer shall make available
---------------------- to the depository copies of the relevant records in respect of securities held by
such depository.
---------------------- Option to opt out in respect of any security
---------------------- If a beneficial owner seeks to opt out of a depository in respect of any
security, he shall inform the depository accordingly. The depository shall on
----------------------
receipt of intimation make appropriate entries in its records and shall inform the
---------------------- issuer. Every issuer shall, within thirty days of the receipt of intimation from the
depository and on fulfilment of such conditions and on payment of such fees
---------------------- as may be specified by the regulations, issue the certificate of securities to the
beneficial owner or the transferee, as the case may be.
----------------------
Depository to indemnify loss in certain cases
----------------------
Any loss caused to the beneficial owner due to the negligence of the
---------------------- depository or the participant, the depository shall indemnify such beneficial
owner. Where the loss due to the negligence of the participant is indemnified by
---------------------- the depository, the depository shall have the right to recover the same from such
participant.
----------------------
Securities not liable to stamp duty
----------------------
As per Section 8-A of Indian Stamp Act, 1899:
----------------------
a. An issuer, by the issue of securities to one or more depositories shall,
---------------------- in respect of such issue, be chargeable with duty on the total amount of
security issued by it and such securities need not be stamped;
----------------------
b. Where an issuer issues certificate of security under sub-section (3) of
---------------------- Section 14 of the Depositories Act, 1996, on such certificate duty shall be

payable as is payable on the issue of duplicate certificate under the Indian Notes
Stamp Act, 1899;
----------------------
c. Transfer of registered ownership of securities from a person to a depository
or from a depository to a beneficial owner shall not be liable to any stamp ----------------------
duty;
----------------------
d. Transfer of beneficial ownership of shares, such securities dealt with by a
depository shall not be liable to duty under Article 62 of Schedule I of the ----------------------
Indian Stamp Act, 1899;
----------------------
e. Transfer of beneficial ownership of units, such units being units of mutual
fund including units of the Unit Trust of India, dealt with by a depository ----------------------
shall not be liable to duty under Article 62 of Schedule I of the Indian
Stamp Act, 1899. ----------------------
----------------------
13.13 SEBI (DEPOSITORIES AND PARTICIPANTS
REGULATIONS), 1996 ----------------------
SEBI has framed the Depositories and Participants Regulations, 1996 with ----------------------
the objective of controlling and regulating the functioning of the depositories ----------------------
and the participant. The rules are amended from time to time. The following is
the summary of the rules: ----------------------
Registration of the Depositories ----------------------
Chapter II of the rules contains provisions or the registration of the
Depositories. An application for the grant of a certificate of registration as ----------------------
a depository shall be made to the Board by the sponsor in Form A, shall be ----------------------
accompanied by the fee specified in Part A of the Second Schedule and be paid
in the manner specified in Part B thereof. The application shall be accompanied ----------------------
by draft bye-laws of the depository that is proposed to be set up. The Board
shall not consider an application under regulation 3, unless the sponsor belongs ----------------------
to one of the following categories, namely:
----------------------
i. A public financial institution as defined in Section 2(72) of the Companies
Act, 2013 ----------------------
ii. A bank included for the time being in the Second Schedule to the Reserve ----------------------
Bank of India Act, 1934
----------------------
iii. A foreign bank operating in India with the approval of the Reserve Bank
of India ----------------------
iv. A recognised stock exchange within the meaning of Clause (j) of Section
----------------------
2 of the Securities Contracts (Regulation) Act, 1956
v. A body corporate engaged in providing financial services where not ----------------------
less than seventy five per cent of the equity capital is held by any of
----------------------
the institutions mentioned in sub-clause (i), (ii), (iii) or (iv) jointly or
severally ----------------------
----------------------

Notes vi. A body corporate constituted or recognised under any law for the time
being in force in a foreign country for providing after considering the
---------------------- application under regulation 3, with reference to the qualifications
specified in regulation 6, if the Board is satisfied that the company
---------------------- established by the sponsor is eligible to act as depository, it may grant
a certificate of registration in Form B to the depository subject payment
----------------------
of the registration fee of Rs. 25,00,000 specified in Part A of the Second
---------------------- Schedule in the manner specified in Part B thereof, within fifteen days of
receipt of intimation from the depository.
----------------------
Rights and Obligations of Depositories and its Constituents:
---------------------- Regulations deal with rights and obligations of depositories and every depository
has to state in its bye-laws the eligible securities for dematerialisation. Every
---------------------- depository is required to enter into an agreement with the issuer in respect
of securities disclosed as eligible to be in demat form. The depository is also
---------------------- required to enter into a tripartite agreement with the issuer, its transfer agent and
---------------------- itself. Every Depository is required to maintain the following records:
1. Records of securities dematerialised.
----------------------
2. A register and index of beneficial owners.
----------------------
3. Details of holding of securities of the beneficial owners at the end of each
---------------------- day.
---------------------- 4. Records of instruction received from and sent to participants, issuers,

agents and beneficial owners.
---------------------- 5. Records of Notice approval entry and cancellation of pledge or hypothecation
---------------------- of securities.
6. Such other records as may be specified by SEBI for carrying on the
----------------------
activities as a depository.
---------------------- Audit under SEBI (Depositories and Participants Regulations), 1996
---------------------- Regulation 55A of SEBI (Depositories and Participants Regulations),
1996 provides that every issuer shall submit audit report on a quarterly basis to
---------------------- a concerned Stock exchange audited by a Practising Company Secretary or a
Chartered Accountant for the purpose of reconciliation of the total issues capital,
----------------------
listed capital and capital held by depositories in Demat form. The two Depositories
---------------------- have allowed Company Secretaries in whole-time practice to undertake the
internal audit operations of the depository participant. The audit report is required
---------------------- to give the updated status of the register of members of the Issuer and confirm that
the securities have been dematerialised as per requests within 21 days from the
----------------------
date of receipt of request from the Issuer and the reasons for delay if any.
----------------------
13.14 BYE-LAWS AND BUSINESS RULES
----------------------
Depository is required to frame its bye-laws with the prior approval of
----------------------
SEBI consistent with the provisions of the ACT. Under Section 26(2) of the Act
---------------------- the bye-laws would include:

1. The eligibility criteria for admission and removal of securities in the Notes
depositories.
----------------------
2. The conditions subject to which the securities shall be dealt with.
3. The eligibility criteria for the admission of a person as a participant. ----------------------
4. The procedure of transaction with the depository. ----------------------
5. Safeguards to protect the interests of the participants and beneficial ----------------------
owners.
6. The distribution of dividend, interests and other benefits received from ----------------------
the company to the beneficial owners. ----------------------
7. Pledge and hypothecation of the securities.
----------------------
8. Suspension and expulsion of members form the depository.
----------------------
9. The internal control standards including procedure for auditing, reviewing
and monitoring. ----------------------
The Board of Directors or Executive Committee shall formulate Business ----------------------
Rules for the functioning and operations of the Depository and to regulate the
functioning and operations of the Participants of the Depository with powers to ----------------------
amend and/or alter such Business Rules. The Board of Directors or Executive
Committee may formulate Business Rules inter alia, with respect to: ----------------------
i. Determination from time to time, as to the fees, system usage charges, ----------------------
deposits, margins and other monies payable to the Depository by the
Participants and by the Issuers of eligible securities or its Registrar & ----------------------
Transfer Agent whose securities have been admitted to dealings on the ----------------------
Depository;
ii. Norms and procedures for approval of Issuers and/or its Registrar & ----------------------
Transfer Agent to act as such; ----------------------
iii. Norms which shall be required to be followed by the Users while acting
----------------------
as such;
iv. Supervision of the market and formulation of Code of ethics as it may ----------------------
deem fit;
----------------------
v. Maintenance of records and books of accounts by Participants;
----------------------
vi. Administration, maintenance and investment of the corpus of the Fund(s)
set up by the Depository, including the Participant Fund; ----------------------
vii. Dissemination of information, announcements to be placed on the ----------------------
Depository system;
viii. Manner in which the accounts of the Participant shall be reconciled with ----------------------
the records of the Depository on a daily basis; ----------------------
ix. Requirements for submission of periodic returns to the Depository on its
----------------------
activities in relation to the Depository;
----------------------

Notes x. Manner and form in which the Participant shall maintain continuous
electronic means of communication to the Depository;
----------------------
xi. Manner and format in which every Participant shall submit periodic
---------------------- returns to the Depository;
xii. Administration and operation of the reserves created by the Depository
----------------------
including “Investor Protection Reserve.
---------------------- xiii. Any other matter as may be decided by the Board of Directors.
----------------------
----------------------
---------------------- 1. A depository shall be deemed to be the __________ for the purposes of

effecting transfer of ownership of security on behalf of a beneficial
---------------------- owner.

1.
The Depositories Act, 1996 was enacted to provide for regulation
----------------------
of depositories in securities and for matters connected therewith or
---------------------- incidental thereto.
----------------------
Summary
----------------------
• With the introduction of online automated trading in India, there was a
---------------------- lot of transparency in trading and new players were introduced to the
---------------------- market. However, a lot of problems were encountered because of the
sheer volumes of the paperwork. There were problems associated with
---------------------- settlement of trades, bad deliveries, etc. The traditional trading and
settlement and clearing system was found inadequate to deal with large
---------------------- volumes of activity. To find a solution to these problems and to facilitate
---------------------- an efficient and secure settlement process, the Depositories Act, 1996 was
introduced.
---------------------- • In India, there are two depositories offering depository services − the
---------------------- National Securities Depository Limited (NSDL) promoted by the IDBI,
UTI and the National Stock Exchange and the Central Depository Services
---------------------- Limited (CDSL).These Depositories offer services to various participants
in the securities market. These participants include clearing member’s
---------------------- stock exchanges, Financial Institutions and companies going for a public
---------------------- issue of shares.
• Depository can be in two forms namely dematerialised and immobilised.
----------------------
In the former the physical certificates are totally eliminated after
---------------------- verifications by the custodians whereas in the latter the certificates are
kept in the safe custody making their further movement impossible.
----------------------

• The Depositories Act, 1996 is an Act to provide for regulation of Notes
thereto. The Depositories Act initially came into force as an ordinance, ----------------------
viz., The Depositories Ordinance, 1995 promulgated on 7th January
1996. It was designed to provide a legal framework for establishment ----------------------
of depositories to record ownership details in book entry form. The ----------------------
Securities and Exchange Board of India Act, 1992; the Indian Stamp Act,
1899; The Income Tax Act, 1961. ----------------------
• A “Depository Participant” (DP) is an agent of the depository who is ----------------------
authorised to offer depository services to investors. Financial institutions,
banks, custodians and stockbrokers complying with the requirements ----------------------
prescribed by SEBI/Depositories can be registered as DP.
----------------------
• The Depository business in India is regulated by the following: (1)
The Depositories Act, 1996 (2) The SEBI Depository Participant ----------------------
Regulations, 1996(3) Bye-laws of the Depositories, (4) Business Rules
----------------------
of the Depositories. SEBI has framed the (Depositories and Participants
Regulations), 1996 with the objective of controlling and regulating the ----------------------
functioning of the depositories and the participant.
----------------------
Keywords ----------------------
• Depository: An organisation which enables holding of securities in ----------------------

electronic form where securities transactions can be processed by book
----------------------
entry.
• Dematerialisation: A process by which physical certificates are converted ----------------------
into electronic form.
----------------------
• Depositor participant: An agent of the depository who is authorised to
offer depository services to investors. ----------------------
• Beneficial owner: A person in whose name a demat account is opened ----------------------

with the Depository for the purpose of holding securities in the electronic
form and whose name is recorded as such with Depository. ----------------------
----------------------
----------------------
1. What are the limitations of physical holding of shares? In what way has ----------------------
the depository system taken care of these limitations?
----------------------
2. Define a Depository. How can a depository be compared to Bank?
3. What are the advantages of the Depository System? ----------------------
4. Elaborate on the Agencies involved in the depository system. Explain ----------------------

their role in the system.
----------------------
----------------------

Notes 5. Elaborate on the procedure of dematerialisation of shares.
6. Discuss the legal framework for depositories. What are the provisions of
----------------------
the Depositories Act, 1996?
---------------------- 7. Explain the role of SEBI in monitoring depository participants.
---------------------- 8. How does trading happen for shares in the Demat?
---------------------- 9. Write short notes on:

i. Registrar and Transfer Agent
----------------------
ii. Beneficial Owner
---------------------- iii. Physical Shares Vs. Dematerialised Shares
---------------------- iv. ISIN
v. Advantages of the Depository System
----------------------
---------------------- Answers to Check your Progress

---------------------- 1. True
2. False
----------------------
3. True
----------------------
---------------------- 1. A Depository Participant (DP) is an agent of the depository who is
authorised to offer depository services to investors.
----------------------
2. The DP could be a custodian, a bank, a broker or individual with a minimum
---------------------- net worth of Rs 1 crore.

Fill in the blanks.
----------------------
1. A depository shall be deemed to be the registered owner for the purposes
---------------------- of effecting transfer of ownership of security on behalf of a beneficial
owner.
----------------------
----------------------
1. True
----------------------
---------------------- 1. Competition Act, 2002

---------------------- 2. Kumar, Jayant and Abir Roy. 2008. Competition Law in India. Eastern
Law House.
Listing of Securities
UNIT
14
Structure:
14.1 Introduction
14.2 Meaning of Listing
14.3 Advantages of Listing
14.4 Disadvantages of Listing
14.5 Types of Listing
14.6 Procedure for Listing
14.7 SEBI Guidelines for Listing
14.8 Stock Exchange Guidelines
14.9 Listing Requirements in case of BSE
14.10 The Concept of Delisting
14.11 Provisions of SEBI (Delisting Regulations), 2009
14.12 Delisting through Reverse Book Building
Summary
Key Words
Suggested Reading
Listing of Securities 285

Notes
Objectives
----------------------
• Describe the concept of listing of securities
----------------------
• List the reasons and the procedure for listing
---------------------- • Outline the various compliances, procedures and regulatory
---------------------- framework for listing
• State the concept of delisting and the reasons to delist
----------------------
• Discuss the regulations of SEBI regarding delisting and exit option to
---------------------- shareholders
----------------------
14.1 INTRODUCTION
----------------------
One of the characteristics of a Company is transferability of shares. The
---------------------- shares of a public limited company are moveable and freely transferable subject
---------------------- to the provisions of the Companies Act, 2013, the Securities Contract Regulation
Act 1956 and the Depositories Act, 1996. The shares of a private company
---------------------- cannot get listed as it cannot offer shares to the Public. When a Company goes
for a public issue, after a successful issue the shares of the company are listed
---------------------- on a recognised stock exchange within a week. This facilitates trading of these
---------------------- securities. Trading in listed shares is faster and effective than unlisted shares.
This is because the price trends in case of listed shares are easily available to
---------------------- the investors through different media. In case of unlisted shares the interaction
between the buyer and the seller is on one to one basis.
----------------------
The secondary market for the securities is created on listing of the securities.
---------------------- There are two kinds of issues namely the primary issue and the secondary issue.
When the company is issuing fresh shares either through an IPO or an FPO
---------------------- then the capital is generated by the company from the shareholders. On listing
---------------------- a secondary market is created where the trading is now between the investors
themselves. SEBI has made it mandatory for a company going for a public issue
---------------------- to list its shares on the stock exchange.
---------------------- In case of a public issue it is usually noticed that there is a lot of volatility in
the market on the day of listing. In case of an IPO there is a perception that the
---------------------- investor can make listing gains as there will be difference between the issue
price and the price on listing. This is attributed to the underpricing of shares.
---------------------- However, the true value of a share is discovered in the secondary market on
---------------------- listing, as the price is determined by the market forces. On listing of the shares
an investor has to open a trading account along with a demat account with a
---------------------- registered stock broker to trade in the shares. Listing of securities with the stock
exchange is significant for a company and the investors as it provides liquidity
---------------------- to the company.
----------------------

14.2 MEANING OF LISTING Notes
Listing means admission of securities to dealings on a recognised stock ----------------------

exchange. The securities may be of any public limited company, Central or State
----------------------
Government, quasi-governmental and other financial institutions/corporations,
municipalities, etc. It implies entering the name of the company in the trading ----------------------
list of the stock exchange. The objectives of listing include:
----------------------
● Fostering the economic development by channelizing savings into productive
sources. ----------------------
● Creating an opportunity for investors to trade on shares more effectively.
----------------------
14.3 ADVANTAGES OF LISTING ----------------------
Company securities when they get listed on the stock exchange enjoy ----------------------
certain benefits in comparison to an unlisted company. The following are some
----------------------
of them:
1. Listing creates a market for the company’s shares. On listing the securities ----------------------
of the company are more liquid as the selling of shares is faster. The stock
exchange gives access to buyers and sellers across and also enables correct ----------------------
pricing of the company shares through price discovery of the scrip. ----------------------
2. The companies whose shares are listed enjoy an access to risk capital and
to make their securities more liquid by facilitating in an open market. The ----------------------
listed company gains reputation in the public as they adhere to regulations
----------------------
and provide for greater transparency due to regular reporting unlike an
unlisted company. It also enhances the status and financial standing of the ----------------------
company. The market capitalisation of the company also becomes one of
the indicators of the health of the company. Market capitalization is the ----------------------
total shares of the company listed on the exchange multiplied by their
----------------------
market price on any day. Hence, listing leads to better valuation of the
company. ----------------------
3. The investor base of the company broadens on listing as all categories of
----------------------
investors including retail investors, Institutional and FII can participate
in the company ownership. On listing a lot of regulations form the side ----------------------
of SEBI and stock exchanges ensure better corporate governance which
indirectly will maximize shareholders wealth. One of the prerequisites for ----------------------
listing is that the issuer company has to listing agreement with the stock
----------------------
exchanges where the securities are listed. The clauses in the agreement
enforce certain rules and regulations on the company failing which the ----------------------
stock exchanges have the right to de-list the shares.
4. It becomes easier for a listed company to generate funds from other ----------------------
sources of finance as bank and financial institutions, both domestic and ----------------------
overseas, are more forthcoming in giving funds to listed company as it is
considered more credit worthy. It is often noticed that listed companies ----------------------
attract more favourable terms and conditions in the credit market.
----------------------

Notes 5. Through constant media attention and coverage it enhances the visibility
of the company. This culminates into public awareness and the company
---------------------- and its products.
6. The benefits of listing also extend to the employees of the company as by
----------------------
exercising their stock options employees can become part owners of the
---------------------- company. They can also reap the benefits of the market capitalisation.
7. Tax concessions are made available to both to the investors and the
----------------------
company.
----------------------
14.4 DISADVANTAGES OF LISTING
----------------------
As already discussed, a company comes under the public view. Hence, a
---------------------- lot of disclosures are expected out of a listed company. A listed company will
---------------------- find it difficult to keep information from competitors. The ownership of the
company also could get diluted. The company may even become vulnerable
---------------------- to an unwelcome takeover. Compliance to various laws is costly and time
consuming. Listing can also be expensive as the companies need to pay listing
---------------------- fees as specified by the stock exchange. The true picture of a company cannot
---------------------- be reflected by the value of the securities quoted on the stock exchange as the
market is susceptible to manipulations, price rigging and irregularities.
----------------------
----------------------
14.5 TYPES OF LISTING
---------------------- Listing of securities can be of the following types:

1. Initial listing: In case of an Initial Public offering the securities are listed
---------------------- for the first time.
---------------------- 2. Listing for public issue: When accompany whose shares are already
listed on a stock exchange comes out with a fresh issue of securities which
---------------------- are listed on a stock exchange.
3. Listing for rights issue: In case of further public offerings the share are
----------------------
offered to existing shareholders. The shares of such rights issue are listed
---------------------- on the stock exchange.
---------------------- 4. Listing for bonus issue: Bonus shares are issued out of capitalisation of
profits and such shares are listed on the stock exchange.
----------------------
----------------------

---------------------- 1. _________means admission of securities to dealings on a recognised
stock exchange.
----------------------
2. Listing creates a ________ for the company’s shares.
---------------------- 1. Bonus shares are listed on the stock exchange.

14.6 PROCEDURE FOR LISTING Notes
A company desirous of getting its shares listed on a stock exchange ----------------------

exchange can do so on more than one stock exchange. Earlier, it was mandatory
----------------------
for companies to list their shares on a regional stock exchange now there is no
such mandate. Under Sec. 40 of the Companies Act, 2013 before a company ----------------------
goes for a public issue it has to make an application to a stock exchange before
filing the prospectus. The Prospectus needs to contain the names of the stock ----------------------
exchanges where the company has taken the in principle approval to list. The
----------------------
company has to enter into a listing agreement.
Listing requirements are governed by the following: ----------------------
1. The Securities Contract (Regulation)Act, 1956 ----------------------
2. The Companies Act, 2013 ----------------------
3. The SEBI Guidelines
----------------------
4. The Stock Exchange Guidelines
----------------------
Sec. 21 of the SCRA deals with the listing requirements of the public
companies. Under the provisions of the Act where securities are listed on the ----------------------
application of any person in any recognised stock exchange, such person shall
comply with the conditions of the listing agreement with that stock exchange. ----------------------
Sec. 19 of the SCRA, 1956 deals with the requirements and the documents to be
----------------------
submitted for the purpose of listing. The following are the documents required
to be filed: ----------------------
a. Memorandum and Articles of Association.
----------------------
b. Debenture Trust Deed in case of a Debenture Issue.
----------------------
c. All the copies of the Prospectus and the statement of Prospectus issued by
the company at any time. ----------------------
d. In case the securities of the company were issued in the last five years ----------------------
then copies of all offers for sale and circular or advertisements.
----------------------
e. Copies of balance sheet and profit and loss account for the last five years
or such period since the accounts have been made up in case of a new ----------------------
company.
----------------------
f. Dividend and bonuses if any paid in the last ten years or such shorter
period as the company has been in existence whether it is a private limited ----------------------
company or a public, private limited company.
----------------------
g. Certified copies of the agreement and other documents relating to
arrangements between Vendors and promoters, Underwrites and sub ----------------------
underwriters, Brokers and sub brokers.
----------------------
h. Certified copies of arrangements with Managing agents, secretaries and
treasures, selling and Managing Directors and technical directors etc. ----------------------
----------------------

Notes i. Certifies copy of every letter, report, balance sheet, valuation contract or
other document part of which is produced and referred to in the prospectus,
---------------------- offer for sale or an advertisement offering securities for subscription or
sale during the last five years.
----------------------
j. A Statement containing the particulars of the dates of and parties of all
---------------------- material contracts, agreements (including agreements for technical advice
and collaboration, concessions and similar other documents along with a
----------------------
brief description of the nature of the contact.
---------------------- k. A brief history of the company since incorporation giving details of its
activities including any reorganisation, reconstruction or amalgamation
----------------------
changes in the capital structure and borrowings in the nature of Debentures.
---------------------- l. Particulars of shares and debentures issued for consideration other than
cash, at a premium of discount or in pursuance of an option.
----------------------
m. A statement containing particulars of any commission, brokerage discount
---------------------- or other special terms.
---------------------- n. Certifies copies of the letters of consent of SEBI.
---------------------- o. Particulars of shares forfeited.
p. A List of highest ten holders of each class of securities as on the date of
----------------------
application along with their details.
---------------------- q. Particulars of shares and debentures for which permission to deal is
applied for.
----------------------
---------------------- Activity 1
----------------------
Visit the nearest stock exchange and write down the procedure for “Listing”.
----------------------
----------------------
14.7 SEBI GUIDELINES FOR LISTING
----------------------
Before going for listing the company, it is required to file an application,
---------------------- in the prescribed form, before issuing a prospectus in case of sale or offer for
sale. The company has to comply with the requirements of SEBI as specified
---------------------- from time to time and specified in the “bye-laws”. The following are some of
---------------------- the conditions:
● The issuer has to give a fair and equal opportunity for the subscription
---------------------- of the securities or purchase and on the same terms as to brokerage to all
---------------------- the trading members. Further all tenders and applications for subscription
or purchase or book-building shall be treated at par for the purpose of
---------------------- allotment.
---------------------- ● For admission of the Units of Mutual Funds on the Exchange, the
conditions of the Governing Body or the relevant authority may apply.
----------------------

● Options and futures in securities and in securities index or indices shall be Notes
admitted to dealings on the Exchange by the Governing Board or Relevant
Authority in accordance with the provisions of SCRA and norms issued ----------------------
by SEBI from time to time and as may be specified in the relevant bye-
laws and Regulations framed in this regard. ----------------------
Except when otherwise allowed by the Relevant Authority in any ----------------------

particular case and subject to compliance with such conditions as it may
----------------------
impose, a trading member shall not enter into an underwriting contract
nor shall he contract either as a principal or agent to subscribe or purchase ----------------------
or to procure, whether through the market or otherwise, nor shall he act
or agree to act as broker or underwriter in connection with any floatation ----------------------
or issue of any security, unless the trading member fulfills the capital
----------------------
adequacy requirements, as may be specified by SEBI or the Exchange
from time to time, and the issuer conforms or agrees to conform. ----------------------
14.8 STOCK EXCHANGE GUIDELINES ----------------------
In addition to the rules of SEBI, the concerned stock exchanges shall ----------------------
have their own regulations for the purpose of listing. The company has to enter ----------------------
into listing agreement with the stock Exchange. The listing agreement is a
contract in the nature of a bilateral agreement between the stock exchange and ----------------------
the company that provides for the terms and conditions of listing the obligations
of both the parties. Every listing agreement contains certain clauses which ----------------------
ensure proper disclosure of information about the company going to the stock ----------------------
exchanges. Adherence to certain standards and Corporate Governance norms is
also a prerequisite for listing and continuation of listing. Listing to subject to ----------------------
compliance to certain norms and payment of the listing fees ever year. Failure
to adhere will invite delisting of the securities. ----------------------
In case a company whose application for listing on a stock exchange gets ----------------------
rejected cannot proceed with the public issue. The Company can however file
----------------------
for appeal under SEBI or under Sec. 22 of the SCRA, 1956.
----------------------
14.9 LISTING REQUIREMENTS IN CASE OF BSE
----------------------
The BSE Limited has a dedicated Listing Department to grant approval
for listing of securities of companies in accordance with the provisions of the ----------------------
Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) ----------------------
Rules, 1957, Companies Act, 2013, Guidelines issued by SEBI and Rules, bye-
laws and Regulations of BSE. ----------------------
BSE has set various guidelines and forms that need to be adhered to and ----------------------
submitted by the companies. These guidelines will help companies to expedite
the fulfillment of the various formalities and disclosure requirements that are ----------------------
required at various stages of Public Issues:
----------------------
● Initial Public Offering
----------------------

Notes ● Further Public Offering
● Preferential Issues
----------------------
● Indian Depository Receipts
----------------------
I. Minimum Listing Requirements for New Companies
---------------------- Eligibility criteria that has been prescribed by SEBI with effective August
---------------------- 1, 2006 for listing of companies on BSE, through Initial Public Offerings
(IPOs) & Follow-on Public Offerings (FPOs):
---------------------- Companies have been classified as large cap companies and small cap
---------------------- companies.
a. In respect of Large Cap Companies:
----------------------
● The minimum post-issue paid-up capital of the applicant company
---------------------- (hereinafter referred to as “the Company”) shall be as prescribed
and
----------------------
● The minimum issue size shall be as per rules and
----------------------
● The minimum market capitalization of the Company shall be as per
---------------------- rules.
---------------------- b. In respect of Small Cap Companies:

● The minimum post-issue paid-up capital of the Company shall be as
---------------------- per rules and
---------------------- ● The minimum issue size shall be as per rules and
---------------------- ● The minimum market capitalization of the Company shall be as per
rules (market capitalization shall be calculated by multiplying the
---------------------- post-issue paid-up number of equity shares with the issue price);
and
----------------------
● The minimum income/turnover of the Company shall be as per
---------------------- rules in each of the preceding three 12-month period; and
---------------------- ● A due diligence study may be conducted by an independent team
of Chartered Accountants or Merchant Bankers appointed by BSE,
---------------------- the cost of which will be borne by the company. The requirement
---------------------- of a due diligence study may be waived if a financial institution
or a scheduled commercial bank has appraised the project in the
---------------------- preceding 12 months.
---------------------- c. For all companies:

In respect of the requirement of paid-up capital and market capitalisation,
---------------------- the issuers shall be required to include in the disclaimer clause forming
---------------------- a part of the offer document that in the event of the market capitalization
(product of issue price and the post issue number of shares) requirement
---------------------- of BSE not being met, the securities of the issuer would not be listed on
BSE.
----------------------

The applicant, promoters and/or group companies, shall not be in default Notes
in compliance of the listing agreement.
----------------------
The above eligibility criteria would be in addition to the conditions
prescribed under SEBI (Disclosure and Investor Protection) Guidelines, ----------------------
2000.
----------------------
II. Minimum requirements for Companies de-listed by BSE seeking re-
listing on BSE ----------------------
Companies de-listed by BSE and seeking re-listing at BSE are required to
----------------------
make a fresh public offer and comply with the extant guidelines of SEBI
and BSE regarding initial public offerings. ----------------------
III. Permission to use the Name of BSE in an Issuer Company’s Prospectus ----------------------
Companies desiring to list their securities offered through a public issue
are required to obtain prior permission of BSE to use the name of BSE in ----------------------
their prospectus or offer for sale documents before filing the same with ----------------------
the concerned office of the Registrar of Companies.
BSE has a Listing Committee, comprising market experts, which decides ----------------------
upon the matter of granting permission to companies to use the name ----------------------
of BSE in their prospectus/offer documents. This Committee evaluates
the promoters, company, project, financials, risk factors and several other ----------------------
aspects before taking a decision in this regard.
----------------------
Decision with regard to some types/sizes of companies has been delegated
to the Internal Committee of BSE. ----------------------
IV. Submission of Letter of Application ----------------------
As per Section 40 of the Companies Act, 2013, a company seeking listing ----------------------
of its securities on BSE is required to submit a Letter of Application to all
the stock exchanges where it proposes to have its securities listed before ----------------------
filing the prospectus with the Registrar of Companies.
----------------------
V. Allotment of Securities
As per the Listing Agreement, a company is required to complete the ----------------------
allotment of securities offered to the public within 30 days of the date ----------------------
of closure of the subscription list and approach the Designated Stock
Exchange for approval of the basis of allotment. ----------------------
In case of Book-Building issues, allotment shall be made not later than ----------------------
15 days from the closure of the issue, failing which interest at the rate of
15% shall be paid to the investors. ----------------------
VI. Trading Permission ----------------------
As per SEBI Guidelines, an issuer company should complete the
----------------------
formalities for trading at all the stock exchanges where the securities are
to be listed within 7 working days of finalization of the basis of allotment. ----------------------
A company should scrupulously adhere to the time limit specified in SEBI
(Disclosure and Investor Protection) Guidelines 2000 and SEBI (ICDR) ----------------------

Notes Guidelines, 2009 for allotment of all securities and dispatch of allotment
letters/share certificates/credit in depository accounts and refund orders
---------------------- and for obtaining the listing permissions of all the exchanges whose
names are stated in its prospectus or offer document. In the event of listing
---------------------- permission to a company being denied by any stock exchange where it
---------------------- had applied for listing of its securities, the company cannot proceed with
the allotment of shares. However, the company may file an appeal before
---------------------- SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956.
---------------------- VIII. Requirement of 1% Security
Companies making public/rights issues are required to deposit 1% of the
----------------------
issue amount with the Designated Stock Exchange before the issue opens.
---------------------- This amount is liable to be forfeited in the event of the company not
resolving the complaints of investors regarding delay in sending refund
---------------------- orders/share certificates, non- payment of commission to underwriters,
brokers, etc.
----------------------
IX. Payment of Listing Fees
----------------------
All companies listed on BSE are required to pay to BSE the Annual
---------------------- Listing Fees by 30th April of every financial year as per the Schedule of
Listing Fees prescribed from time to time.
----------------------
---------------------- Activity 2
----------------------
Make a list of stock exchanges in India.
----------------------
---------------------- 14.10 THE CONCEPT OF DELISTING

---------------------- Delisting of securities means removal of securities from the trading list
of the stock exchange. It is the reverse of listing. It implies permanent removal
----------------------
of securities of a listed company from a stock exchange. As a consequence of
---------------------- delisting, the securities of that company would no longer be tradable at that
stock exchange.
----------------------
Types of delisting:
---------------------- Delisting can be compulsory or voluntary.
---------------------- Compulsory delisting in when the stock exchange removes the securities
from the trading list as a penal action for non-compliance of the terms of the
---------------------- listing agreement. A recognised stock exchange may, by order, delist any equity
---------------------- shares of a company on any ground prescribed in the rules made under Section
21A of the Securities Contracts (Regulation) Act, 1956. It is in the nature of a
---------------------- disciplinary action. However, an opportunity of being heard will be given to the
aggrieved persons. The circumstances when the stock exchange may delist the
---------------------- securities are studied below:
---------------------- a. Non-compliance of the listing agreement for a minimum period of 6
months.
b. Failure to maintain minimum trading levels in the stock exchange. Notes
c. Company’s Promoters or Directors are guilty of insider trading,
----------------------
manipulation of share prices, and unfair trade practices.
d. Inability to meet its current debt obligations. ----------------------
e. The company has become sick or defunct. ----------------------
The recognised stock exchange can file prosecutions under relevant ----------------------
provisions of the Securities Contracts (Regulation) Act, 1956 or any other law
for the time being in force against identifiable promoters and directors of the ----------------------
company for the alleged non-compliances. The recognized stock exchange
can also file a petition for winding up the company under section 271 of the ----------------------
Companies Act, 2013 or make a request to the Registrar of Companies to strike ----------------------
off the name of the company from the register under section 248, 252 of the said
Act. ----------------------
Under compulsory delisting the promoters of the company shall be liable ----------------------
to provide the shareholders of the company to compensate by giving the fair
value of the shares and acquiring them while giving them an option to remain ----------------------
security holders of the company. In such case there is no exit option given to the
shareholders however the securities the stock exchange would permit trading in ----------------------
securities in the permitted category for a period of one year after delisting. ----------------------
Voluntary delisting is when the company opts out of listing in view of
the fact that the securities of the company are not being actively traded in the ----------------------
exchange. Company can get delisted from all stock exchanges following a ----------------------
substantial acquisition of shares. Voluntary delisting could be from some stock
exchanges where the securities continue to list at least in one stock exchange ----------------------
having a nationwide terminus. Or it could be delisting from all the stock
exchanges. In case of the former there is no need for the company to provide ----------------------
for an exit option. In case of complete delisting the promoters of the company ----------------------
provide an exit opportunity to the shareholders. An exit price mechanism known
as reverse book building is used to determine the price at which the securities ----------------------
are taken back by the shareholders.
----------------------
14.11 PROVISIONS OF SEBI (DELISTING REGULATION), ----------------------
2009
----------------------
SEBI Guidelines for delisting has constantly been amended since the
----------------------
enactment of the SEBI (Delisting Regulations), 1998. They were amended in the
year 2003 and the latest amendment was in the year 2009. The SEBI (Delisting ----------------------
Regulations 2009 have certain improvements over the 2003 guidelines in the
sense that they have tried to ensure protection of minority shareholders who are ----------------------
at a loss due to delisting. The specific features of these regulations are as follows.
----------------------
a. These regulations do not apply to those companies which are sick
companies opting for delisting through reconstruction and revival and in ----------------------
whose case exit option to public shareholders have been given.
----------------------

Notes b. Public shareholders have been defined as those shareholders of equity
shares who are not promoters and the holders of depository receipts issues
---------------------- overseas against underlying shares.
---------------------- c. Those Companies who have securities pending for conversion pursuant to
any buyback or preferential allotment are not eligible for delisting.
----------------------
d. In case the securities continue to remain listed on any stock exchange
---------------------- which has a nationwide terminus, approval of shareholder is not needed.
e. As per the new guidelines the stock exchange need to ensure a speedy
----------------------
and timely disposal of applications seeking in principal approval. Within
---------------------- 30 days on receipt of the application the stock exchange has to give the
approval or give reasons for not granting permission.
----------------------
f. In principle approval is also needed in case when the company is seeking
---------------------- delisting from all stock exchanges and when exit opportunity is being in
case of public shareholders.
----------------------
g. The special resolution passed for the delisting giving exit option to the
---------------------- shareholders will be valid for a period of 1 year within which the final
application will be required to be made to the exchange for delisting.
----------------------
h. The shareholders’ approval should be sought from the shareholders via
---------------------- postal ballot in case the exit opportunity is given to the shareholders. The
votes cast by the public shareholders in favour of the delisting proposal
---------------------- should be at least 2 times of the numbers of votes cast against it.
---------------------- i. The Opening Date of the Offer should not be later than 55 working days
from the Public Announcement. The Offer should remain open for a
----------------------
minimum period of 3 working days and a maximum of 5 working days.
---------------------- j. Promoters and PAC, GDR and ADR/Receipt Holders cannot participate
in the delisting bid. If Depository Receipt holders wish to participate then
----------------------
they have to first convert them into Equity shares.
---------------------- k. Under the Regulations, the Promoters are not bound to accept the
---------------------- Offer Price, as may be determined by the Book Building Process. If
the Promoters do not accept the price arising out of bidding, then the
---------------------- promoter will be responsible to comply with the clause 40A of the Listing
agreement within 6 months of closing of bidding process. Clause 40-A
---------------------- talks about minimum public shareholding.
---------------------- Under the Regulations, to get delisted, post offer, the Promoter holding
should reach the higher of the following:
----------------------
90% of total issued shares of that class;
----------------------
Or
---------------------- (pre-offer promoter holding +50% of the Offer Size), otherwise the offer
shall be deemed to have failed.
----------------------
l. Under the Regulations, the final exit price to remain open for a period of
---------------------- 1 year from the date of delisting, for the remaining shareholders who have
not exercised the option at the time the offer is open.
The Exchanges are required to constitute a Panel for taking decisions Notes
regarding the compulsory delisting and also to appoint an “Independent
Valuer” for determining the fair value of such compulsorily delisted ----------------------
shares, at which the promoters of the company have to accept the shares
of the public shareholders. ----------------------
The promoters, the whole time directors, and the companies which ----------------------
are promoted by any of them shall not directly or indirectly access the
----------------------
securities market or seek listing for 10 years.
m. Relisting of sick companies: In case of Delisted companies who were ----------------------
sick in the past, can be given opportunity of listing through Restructuring
----------------------
scheme passed by BIFR
Table 14.1: A comparison between SEBI Guidelines 2003 and 2009 ----------------------
SEBI (Delisting Guidelines) 2003 SEBI(Delisting Guidelines) 2009 ----------------------

Promoters and persons acting in concert The definition of public shareholders ----------------------
with the promoters were excluded for been refined as, along with Promoters
the definition of Public shareholders. holders of Depositors receipts and the ----------------------
custodian thereof are also included.
----------------------
There was no specific mention of in The guidelines are inapplicable to
applicability. companies who have been declared ----------------------
sick & their reconstruction scheme
provides the delisting including the ----------------------
provisions of the exit option to the
shareholders. ----------------------
Passing a Special resolution for the Now the requirement of special ----------------------
purpose of delisting the shareholders resolution for the delisting without
is compulsory. Exit route is deleted. Only public ----------------------
announcement and the disclosure in
the first annual report after delisting ----------------------
will suffice the requirement.
----------------------
There was no time limit prescribed The stock exchanges are now required
for the disposal of the Delisting to dispose of the applications with 30 ----------------------
application filed by the companies by days from the date of receiving the
the stock exchanges. applications. ----------------------
The companies cannot be relisted at The companies delisted voluntarily ----------------------
the exchange for a period of 2 years cannot be relisted for a period 5 years
from the period of delisting. and the companies compulsorily ----------------------
delisted cannot be relisted for a period
of 10 years from the date of delisting. ----------------------
----------------------
14.12 DELISTING THROUGH REVERSE BOOK BUILDING
----------------------
It has been noticed by the securities regulator SEBI that many companies
are opting for delisting whether it is through substantial acquisition of shares ----------------------
by the acquirer, through mergers and acquisitions or compulsory delisting ----------------------

Notes mandated by the stock exchange. In the process of delisting the people who get
affected are the shareholders of the company who are stuck with shares that are
---------------------- no longer tradable. In many cases the shareholders have not been compensated
adequately for loss of investment opportunity in case of delisting. In order to
----------------------
provide a fair deal to the shareholders the concept of reverse book building
---------------------- has been introduced wherein the investors themselves decide at what rate they
will sell their securities to the company. A regular book building is in case of
---------------------- a public issue when the investors bid for the shares within the price band. In
---------------------- case of reverse book building the shares are sold back to the company at a price
fixed by the bidding process. The process of reverse book building is similar to
---------------------- that adopted in the initial public offering process where is a book is kept open
for a specific number of days. The details like floor price, bidding methodology
----------------------
to arrive at the accepted price, period of open offer will be disclosed when
---------------------- the book-building process commences through the appointment of a merchant
banker. Unlike the regular book building the floor price is specified but not the
---------------------- cap price.
---------------------- An exit price that has been recommended earlier was not adequately
compensating the investors as the ext price depended on the average of the
----------------------
preceding 26-week high and low prices. Owning to the depressed economic
---------------------- factors the market price was not a clear indicator of the actual worth of the
security. Hence it was felt that the reverse book-building process would provide
---------------------- an effective method to price shares.
----------------------
----------------------

1. Delisting can be compulsory or voluntary.
----------------------
2. The definition of public shareholders been refined by the SEBI
---------------------- (Delisting Guidelines), 2009.
---------------------- 3. All companies listed on BSE are required to pay to BSE the Annual
Listing Fees by 30th April of every financial year.
----------------------
----------------------
Summary
----------------------
---------------------- • When a Company goes for a public issue, after a successful issue the
shares of the company are listed on a recognised stock exchange within a
---------------------- week. This facilitates trading of these securities. Trading in listed shares
is faster and effective than unlisted shares.
----------------------
• Listing means admission of securities to dealings on a recognised stock
---------------------- exchange. The securities may be of any public limited company, Central
or State Government, quasi-governmental and other financial institutions/
----------------------

corporations, municipalities, etc. It implies entering the name of the Notes
company in the trading list of the stock exchange.
----------------------
• The company securities when they get listed on the stock exchange enjoy
certain benefits in comparison to an unlisted company. A company desirous ----------------------
of getting it shares listed on a stock exchange on a stock exchange can do
so on more than one stock exchange. ----------------------
• Earlier, it was mandatory for companies to list their shares on a regional ----------------------
stock exchange now there is no such mandate. Under Sec. 40 of the
Companies Act, 2013 before a company goes for a public issue it has to ----------------------
make an application to a stock exchange before the prospectus.
----------------------
• The Prospectus needs to contain the names of the stock exchanges where
the company has taken the in-principle approval from the stock exchanges. ----------------------
The company has to enter into a listing agreement.
----------------------
• Listing requirements are governed by the Securities Contract (Regulation)
Act, 1956, The Companies Act, 2013, the SEBI Guidelines and the Stock ----------------------
Exchange guidelines. ----------------------
Keywords ----------------------
----------------------
• Listing: Admission of securities to dealings on a recognised stock exchange.
• Delisting: Removal of securities from the trading list of the stock exchange. ----------------------
• Reverse booking building: The process of reverse book building is ----------------------

similar to that adopted in the initial public offering process where a book
is kept open for a specific number of days. The details like floor price, ----------------------
bidding methodology to arrive at the accepted price, period of open offer ----------------------
will be disclosed when the book-building process commences through the
appointment of a merchant banker. Unlike the regular book building the ----------------------
floor price is specified but not the cap price.
----------------------
----------------------
1. Explain the concept of listing of securities and bring out the advantages
of listing for a company. ----------------------
2. State the procedure for listing. ----------------------
3. Explain the various compliance procedures and regulatory framework for
----------------------
listing.
4. Define delisting and the reasons to delist. ----------------------
5. Bring the regulation of SEBI regarding delisting and exit option to ----------------------
shareholders.
----------------------
----------------------

Notes Answers to Check your Progress

1. Listing means admission of securities to dealings on a recognised stock
---------------------- exchange.
---------------------- 2. Listing creates a market for the company’s shares.
1. True
----------------------
----------------------
----------------------
1. True
---------------------- 2. True
---------------------- 3. True
----------------------
Suggested Reading
----------------------
1. http://www.singhania.com/listing-and-delisting-of-companies.php
----------------------
2. http://www.legalserviceindia.com/article/l329-Listing-&-Delisting-Of-
---------------------- Securities.html
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Mutual Funds
UNIT
15
Structure:
15.1 Introduction
15.2 Technical Jargons used
15.3 Net Asset Value (NAV)
15.4 Asset Management Company (AMC)
15.5 Types of Schemes offered by the Mutual Funds
15.6 Regulatory Aspects
Summary
Key Words
Suggested Reading
Mutual Funds 301

Notes
Objectives
----------------------
• Explain a mutual fund
----------------------
• List the technical words that are used
---------------------- • Describe the concept of Net Asset Value
---------------------- • Discuss the functions of an Asset Management Company
---------------------- • Compare the different types of schemes offered by a Mutual Fund
• Evaluate the regulatory aspects relating to Mutual Funds
----------------------
---------------------- 15.1 INTRODUCTION

---------------------- Depending upon the risk profile, one should look at investing some part
of the savings or earnings in the stock market. But direct investing puts a person
----------------------
at great risk. So, the next best alternative is going for ‘mutual fund’.
---------------------- One can define a mutual fund as a trust that pools in the savings and funds
---------------------- from a large number of investors who have a common financial goal. Mutual
funds issue units to investors, which represent equitable rights in the assets of
---------------------- the mutual fund.
---------------------- Mutual fund by its nature is diversified, i.e., its assets are invested in
many different securities.
---------------------- Investments in the mutual funds may be in the form of stocks, bonds or
---------------------- money market securities or combination of these.
These are professionally managed on behalf of the shareholders and each
----------------------
investor holds a pro-rata share of the portfolio entitled to any profits when the
---------------------- securities are sold, but subject to any losses as well.
There are a number of schemes of Mutual Fund and all of them have
----------------------
different character and objective.
---------------------- It is the skill of the investor to keep in view the objective and then take
---------------------- decision where to invest, e.g., in the wake of boom in the software sector, the
Indian Mutual Fund launched various sector specific schemes that entailed only
---------------------- to software stocks for that period.
---------------------- A lot of activity is taking place in the Mutual Fund industry in India,
especially in the field of mergers and acquisitions.
---------------------- Recently, Principal mutual fund has acquired the entire stake of their
---------------------- partner IDBI in their AMC. On the other hand, it has also taken over the
operations of Sun & F C another mutual fund. This comes on the back of the
---------------------- acquisition of Pioneer-IIT by Franklin Templeton. In March 2003, HDFC
mutual fund has acquired Zurich Mutual Fund. It is believed that such mergers
---------------------- and acquisitions will continue in future too.

There are at present 31 players in the field, out of which 6 players are Notes
marginal.
----------------------
Mutual fund conceptual framework
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 15.1: Mutual Fund Conceptual Framework ----------------------

Regulators of the mutual fund ----------------------
 SEBI
----------------------
 RBI
 MOF ----------------------
 Tribunal ----------------------
 STOCK EXCHANGE
----------------------
 PUBLIC TRUSTEE OFFICE
Role of regulators ----------------------
SEBI ----------------------
 Formed in 1992 ----------------------
 Apex body to regulate capital market activities
----------------------
 All mutual funds have to be registered with them
----------------------
 SEBI guidelines govern mutual fund operations, investments, income-
expense accounting, and disclosures for investor protection ----------------------
RBI ----------------------
 Dual supervisory role in mutual fund regulation
----------------------
 Bank owned mutual fund: RBI and SEBI both jointly regulate mutual
funds ----------------------
SEBI-market related and investor related ----------------------
RBI - issues regarding ownership of AMC, fund mergers, capital adequacy
----------------------
for assured returns
 Money Market Mutual Fund guidelines were formulated in 1995. Bank ----------------------
institutions and private sector were allowed to set up money market ----------------------
mutual fund.
Ministry of Finance ----------------------
 Supervises both RBI and SEBI ----------------------
Mutual Funds 303

Notes  Plays the role of appellate authority for disputes in SEBI guidelines
Tribunal, Department of Company Affairs, Registrar of Company
----------------------
 Tribunal is the regulatory authority under Companies Act. Tribunal is a
---------------------- body specially constituted by the Central Government for carrying out
judicial proceedings with respect to company affairs. Tribunal has the
----------------------
legal standing of a civil court, and may call for inspection of documents,
---------------------- enforce attendance.
 Overall responsibility for formulating and modifying regulations relating
----------------------
to companies lies with the DCA.
----------------------  ROC ensures that AMC or the Trustee Company as the case may be is
---------------------- in compliance with all Companies Act Provision. All AMC accounts and
records are filed with the ROC. He plays the role of watchdog.
---------------------- Office of Public Trustee
----------------------  The Board of Trustees or the Trustee Company is accountable to the
Office of
----------------------
Public Trustee.
----------------------
 The Office reports to the charity commissioner.
---------------------- Self-\regulatory Organisations (SRO)
----------------------  SROs are the organisations, which group market participants and have
been granted some powers to regulate their own members, e.g., Stock
---------------------- Exchange regulating its broker under overall supervisory by SEBI.
----------------------  SROs regulate admissions, set code of conduct, rules and bye-laws.
----------------------  Every Trade Associations is not necessarily a SRO.
 Investment Company plays the role as industry association for mutual
----------------------
funds in USA. AMFI is not a SRO as on date.
----------------------  Stock Exchange is a SRO supervised by SEBI.
---------------------- Who can invest?
----------------------  Banks and Insurance companies

 Primary Dealers
----------------------
 Provident Funds
----------------------
 Trusts
----------------------  Mutual Funds
----------------------  Foreign Institutional Investors
----------------------  Corporates and NBFCs

 Retail Investors
----------------------
Non-residents including
----------------------
 Non-Residents Indians
 Overseas Corporate Bodies Notes
Foreign Institutional Investors registered with SEBI can invest in mutual
----------------------
fund. Here, the important thing to remember is foreign citizens are not allowed
to invest in mutual fund. ----------------------
Investor’s rights and Obligations
----------------------
 Right in beneficial ownership of the assets
----------------------
 Right to get dividend
 Right to get information from trustees ----------------------
 Right to receive dividend warrants within 42 days ----------------------

 75% of the unit holders can terminate the AMC ----------------------
 Right to inspect major documents
----------------------
 Fundamental attributes of a closed end fund can be changed by 75%
consent ----------------------
 Right to receive financial statement, personal statement ----------------------
Investor Obligation ----------------------
Offer Document Financial Statement
----------------------
Due diligence Certificate from compliance officer
----------------------
Advantages of mutual fund
 Portfolio diversification ----------------------
Normally mutual funds invest in well-diversified portfolio. As each ----------------------

investor is a part owner of all fund’s assets, so he can invest in diversified
----------------------
portfolio even with a small amount.
 Professional management ----------------------
The investment management skills along with the needed research into ----------------------
available investment options ensure a much better return than what an
investor can manage on his own. ----------------------
 Reduction or diversification of risk ----------------------
Diversification reduces risk of loss as compared to investing directly in ----------------------
one or two shares or debentures or other instruments. When an investor
invests directly then the risk of loss is his own. But if he invests in well- ----------------------
diversified securities then loss is automatically shared with the other
investors. ----------------------
 Reduction of transaction cost ----------------------

A direct investor bears all the costs of investing such as brokerage or ----------------------
custody of securities, but if he goes through a fund he has the benefit of
economies of scale, less cost due to large volume. ----------------------
----------------------
Mutual Funds 305

Notes  Liquidity
An investor can liquidate the investment by selling the units to the fund if
----------------------
open-ended or selling them in the market if the fund is close end.
----------------------  Convenience and flexibility
---------------------- Here, investor can easily transfer his holdings from one scheme to the
other, get updated information and so on.
----------------------
In July 04, Can MF has decided to acquire the GIC Mutual. This fund
---------------------- currently has five schemes in operation and has an asset portfolio of Rs. 100
crore. In another interesting move, SBI Mutual has decided to sell 37% stake
---------------------- in its AMC to Societe Generale Asset Management for a consideration of $ 35
---------------------- million. SBI’s fund has assets base of around Rs. 5,600 crore. The induction of
a foreign partner is expected to improve the working of this mutual fund. SBI
---------------------- was trying to rope in an overseas partner for a very long time.
---------------------- Mutual Fund industry is also rocked by some scandals from time to time.
There have been schemes of mutual funds, which are run almost like Portfolio
---------------------- management schemes. SEBI found out that some schemes seemed to have
been devised for such a purpose itself. A leading MF in its discloser recently
---------------------- has shown one investor accounting for 90% of the assets under management.
---------------------- The minimum number of investors per scheme is now proposed to be 20 and
maximum investment by a single investor is capped at 25% of the corpus and
---------------------- has set a time frame for existing schemes to comply with this rule. UTI has
since foreclosed some of its schemes in line with these regulations. Bajaj Auto
---------------------- has taken the UTI to court against this foreclosure. It will be interesting to see
---------------------- what stand the courts will take in this matter.
There has also been the problem of dividend stripping that is getting a lot of
---------------------- attention. The growth schemes, which are designed to allow capital appreciation
---------------------- to the investors, have declaring dividends and bonuses. It has also been found
that many funds are declaring in advance the dates on which the dividends will
---------------------- be declared and releasing advertisements asking investors to invest before the
date and take immediate dividends. This is a new trend. Economic Times has
---------------------- reported in April 04 that some funds whose NAV is below par have declared
---------------------- dividends! Dividend stripping involves investors entering a scheme shortly
before a dividend is announced. Investors enjoy tax-free dividends and book a
---------------------- short-term capital loss as the value of the MF units decline after the dividend is
announced. These losses are offset against some other capital gains.
----------------------
The budget for 2004−05 has incorporated amendments to stop the practice
---------------------- of dividend stripping by increasing the holding period to 9 months.
---------------------- Indian MFs are also reported to have learnt from their American
counterparts the art of indulging in late trading that has become a global practice,
---------------------- which has sparked off a major investigation in the US. Late trading refers to the
practice of buying and selling shares after the close of market hours, but at the
----------------------
closing price of the day. Recently, some Indian funds were found to be allowing
---------------------- large investors to enter funds after the cut-off timing. This was done to allow

these investors to take advantage of price sensitive information announced by Notes
companies after the close of the markets. SEBI is now planning to take action
against both these practices of dividend stripping and late trading deals. ----------------------
The latest scam reported by The Economic Times pertains to the assured ----------------------
returns offered by some funds to Provident Funds, which is a violation of SEBI
regulations. PFs are forced to generate a return of 9.5% in the face of falling ----------------------
interest rates and have turned to mutual funds for this. This is reminiscent of
----------------------
Harshad Mehta scam, where banks in search of higher return turned to him to
deal on their behalf in securities markets. This is indeed a dangerous thing. One ----------------------
must realise that the interest paid on PFs will have to be brought in line with that
available in the market. The PFs are allowed to invest in Gilts directly or through ----------------------
the MFs. However, these investments cannot at present generate the returns that
----------------------
are required. There is a fear that the MFs may be diverting such investments in the
equity markets to cash in on the Bull Run in the stock markets. ----------------------
With the strong performance of stock markets in the last year, it is becoming
----------------------
apparent that many investors are now looking at Mutual Fund investments to
participate in this rally. Figures show that equity related schemes are attracting ----------------------
huge inflows for the last few months. During Jan-Feb 2005, mutual funds
schemes have attract inflows worth Rs. 3,000 crore. Out of this mobilisation ----------------------
Franklin Templeton’s Flexi Cap collected Rs. 1,950 crore.
----------------------
With all the action on the interest rate front of last year the debt schemes
have lost their attractiveness for the investors and the fund managers are hard ----------------------
pressed to give its investors decent returns. It was found out that many funds had
----------------------
parked their corpus in bank fixed deposits. This essentially was done to generate
some return, as an opportunity in other debt instruments was not available. ----------------------
SEBI has however clamped down on this practice and has instructed funds to
desist from this practice. Following this directive from the regulator banks have ----------------------
decided to issue Certificates of Deposits to retain these funds. Converting the
----------------------
funds held in FDs till now into CDs will be beneficial to both the parties.
In March 2006, Reliance Mutual Fund created history in the Indian ----------------------
mutual fund industry when it collected a record amount of Rs. 5,700 crore in ----------------------
its New Fund Offering “Reliance Equity Fund”. It is reported that a record
one million investors participated in this offer, which also is a record. Reliance ----------------------
has claimed that they were able to collect such a large amount due to their
innovating marketing of this scheme - they marketed this scheme in smaller ----------------------
towns and rural areas. ----------------------
This goes to show that there are a lot of investors spread across India who
need to bring into the mutual fund. What is lacking on the part of the mutual ----------------------
funds is that they are not willing to do the hard work of educating the investors ----------------------
in smaller areas and then sell the various schemes to them. Reliance has made
the beginning and hopefully their success will encourage other mutual funds ----------------------
also to take this route.
----------------------
Indian mutual funds have assets under management worth Rs. 2, 00,000
crore and the total investor population is in the region of three crore. ----------------------
Mutual Funds 307

Notes The budget 2006 has allowed mutual funds to invest $ billion cumulatively
every financial years in markets abroad. Earlier this limit was $1 billion with
---------------------- many restrictions on where to invest. All restrictions have now been removed.
It remains to be seen if the industry takes advantage of this in the coming years
---------------------- if not months. Funds will have to do a lot of research if they are going to make
---------------------- investments abroad. It will interest to also see if Indian investors will invest in
funds which are willing to take this route.
----------------------
----------------------
15.2 TECHNICAL JARGONS USED
---------------------- Portfolio
Portfolio is the group of securities that the fund managers plan to invest.
---------------------- The fund manager can change the composition of securities.
---------------------- Asset Management Company (AMC)
---------------------- The AMC is formed by a group of trustees, which has been formed by the
board of directors.
----------------------
AMC has worth not less than 10 crore.
---------------------- Every Mutual Fund on behalf of the unit-holders sets up an Asset
---------------------- Management Company (AMC) or assigns its fund to an AMC for managing its
funds.
---------------------- The AMC invests on behalf of the respective schemes. Regular expenses like
---------------------- Custodial fees, Cost of dividend warrants, registrar fees, AMC Fee are borne by
the individual schemes. However, these regular expenses cannot exceed 3% of
---------------------- the assets of a scheme in a year.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig.15.2: Technical Jargons

----------------------

Notes
----------------------
1. __________ and _________ jointly regulate bank-owned mutual
----------------------
funds.
2. Investors have right to receive dividend warrants within ___ days. ----------------------
----------------------
Activity 1 ----------------------
----------------------
1. Find out from the prospectus of Reliance Equity Scheme the investment
objectives of this scheme. ----------------------
2. Visit the website of AMFI and find out how many mutual funds are ----------------------
operating in India and how many different schemes do they offer to the
investors. ----------------------
----------------------
15.3 NET ASSET VALUE (NAV) ----------------------
The net asset value of the fund is the cumulative market value of the assets ----------------------
fund net of its liabilities. In other words, if the fund is dissolved or liquidated,
by selling off all the assets in the fund, this is the amount that the shareholders ----------------------
would collectively own. This gives rise to the concept of net asset value per
----------------------
unit, which is the value, represented by the ownership of one unit in the fund.
It is calculated simply by dividing the net asset value of the fund by the number ----------------------
of units. However, most people refer to the ‘NAV per unit ‘as ‘NAV’, ignoring
the “per unit”. ----------------------
Calculation of NAV ----------------------
The most important part of the calculation is the valuation of the assets
----------------------
owned by the fund. Once it is calculated, the NAV is simply the net value of
assets divided by the number of units outstanding. ----------------------
Asset value is equal to ----------------------
Sum of market value of shares/debentures Liquid assets/cash held, if any
Dividends/ interest accrued - Current liabilities - Expenses accrued but not paid. ----------------------
Asset value of the fund ----------------------
NAV =
No. of units outstanding
----------------------
Load ----------------------
Some Asset Management Companies (AMCs) levy service charges for
allowing subscribers entry into or exit from mutual fund schemes. The service ----------------------
charge is termed as entry/exit load and such schemes are called “load” schemes. ----------------------
Mutual Funds 309

Notes With the vibrancy of capital markets in India and the returns available in
these markets, it was natural that more and more people wanted to enter these
---------------------- markets. However, during the bad times in stock markets the small investors
did suffer heavy losses, mainly because of their lack of knowledge about
----------------------
the working of these markets. These investors also are unable to spread the
---------------------- risks across securities and are carried away by market gossip, rather than the
knowledge that is essential to make investments in these markets. The mutual
---------------------- funds are the natural answer to many of these problems. It is thought to be much
---------------------- better for the investors to invest in capital markets, through the mutual funds.
Professional portfolio managers, who can spread the risks inherent in these
---------------------- investments, manage the mutual funds. The small investors thus get to invest
their money in many companies as, members of the funds, something they are
----------------------
unable to do, due to their limited resources.
---------------------- Until 1987, UTI was the only mutual fund in India. This was the year when
---------------------- public sector banks’ subsidiaries were allowed to start the mutual funds, followed
by the state run insurance companies. The early entrants in this field were led
---------------------- by State bank, Canara Bank, Bank of India and Life Insurance Corporation
and General Insurance Corporation. Post 1992, mutual funds sponsored by
----------------------
other public and private sector financial institutions, corporates in collaboration
---------------------- with foreign investment and fund managers, and foreign institutional investors
emerged on the scene.
----------------------
Mutual funds are defined by SEBI regulations as funds established in the
---------------------- form of a trust to raise money through the sale of units - that is, the interest of the
unit holders in a scheme, which consists of each unit representing one undivided
----------------------
share in the assets of a scheme-to public under one/more scheme for investing
---------------------- in securities including money market instruments consisting of commercial
papers, commercial bills, etc. According to the procedure laid down by SEBI,
---------------------- mutual funds have to be registered with SEBI. The application for registration
---------------------- together with a non-refundable fee should be made in the prescribed form.
A mutual fund can be constituted in the form of a trust and the instrument of trust
----------------------
should be in the form of a deed, duly registered under the Indian Registration
---------------------- Act, executed by the sponsor in favour of the trustees named in the instrument.
---------------------- Trustees mean the Board of trustees or the Trustee Company who hold the
property of the mutual fund in trust for the benefit of the unit holder.
----------------------
---------------------- Activity 2
---------------------- Find out which schemes of HDFC mutual fund has entry and exit load. (You
---------------------- can use Big Bucks supplement of Economic Times or search any website that
may give this information.)
----------------------
----------------------

15.4 ASSET MANAGEMENT COMPANY (AMC) Notes
The AMC appointed by the trustees with the prior approval of the SEBI ----------------------
would be responsible for floating schemes for the mutual fund after approval
----------------------
of the same by the trustees and managing the funds mobilised under various
schemes, in accordance with the provisions of the trust deed and SEBI ----------------------
regulations.
----------------------
It cannot undertake any other business other than the management of
mutual funds and activities as financial consultants and like, as long as they ----------------------
are not in conflict with the fund management activity itself without the prior
approval of the trustees and SEBI. ----------------------
The AMC has to ensure that no offer document of a scheme, key ----------------------
information memorandum, annual results is issued without the trustee’s prior
approval, and disclose the basis of calculating the repurchase price and NAV of ----------------------
the various schemes of the mutual fund in the scheme particulars and disclose ----------------------
the same to the investors at such intervals as may be specified by the trustees
and SEBI. ----------------------
The Trustees have the right to obtain all information concerning the ----------------------
operations of the various schemes of the funds managed by the AMC. The MAC
has to submit a quarterly report on the functioning of the schemes of the mutual ----------------------
fund to the trustees or at such intervals as may be required by the trustees or
----------------------
SEBI.
The trustees have the power to dismiss the AMC under specific events ----------------------
with the approval of SEBI. They also have the right to obtain from the AMC
----------------------
such information as is considered necessary by them.
Where the trustees have reason to believe that the conduct of business of ----------------------
the mutual fund is not in accordance with the SEBI regulations and the fund ----------------------
scheme, they should forthwith take such remedial steps as are necessary by
them and immediately inform the SEBI of the violation and the action taken by ----------------------
them.
----------------------
The trustees must obtain consent of the unit holders:
 Whenever required to do so by SEBI. ----------------------
 Whenever required to do so on the requisition made by three-fourths of ----------------------

the unit holders of any scheme.
----------------------
 When the majority of the trustees decide to wind up or prematurely redeem
the units. ----------------------
 When a change is being made in the fundamental attributes of a scheme. ----------------------
 The trustees are also governed by a code of conduct. ----------------------
Constitution of AMC
----------------------
The AMC has to fulfill certain criterions for grant of approval by SEBI as
follows: ----------------------
Mutual Funds 311

Notes  An existing AMC should have a sound track record, reputation and
fairness in transactions.
----------------------
 The directors should have adequate professional experience in finance
---------------------- and financial service related field.
 The board of directors of AMC must have at least 50% independent
----------------------
directors.
----------------------  The chairman of AMC should not be trustee of any mutual fund.
----------------------  The AMC must have net worth of Rs. 10 crore.
----------------------  No director of AMC other than an independent director can hold the office
as director in another AMC.
---------------------- Any change in controlling interest of the AMC can be only with the prior
---------------------- approval of trustees, SEBI and the unit holders.
AMC cannot act as a trustee of any mutual fund or undertake any other
----------------------
business activities expect activities in the nature of portfolio management
---------------------- services, etc.
The mutual fund should appoint a custodian to carry out the custodial
----------------------
services for the schemes and send intimation of the same to SEBI within fifteen
---------------------- days of the appointment.
----------------------
Activity 3
----------------------
---------------------- Visit the website of SEBI and find out if SEBI has initiated action against any
AMC for not following its guidelines.
----------------------
---------------------- 15.5 TYPES OF SCHEMES OFFERED BY THE MUTUAL

---------------------- FUNDS
---------------------- Open-Ended Vs. Close-Ended Schemes

An open-ended scheme is a scheme, in which an investor can buy and sell
----------------------
units on daily basis; the scheme has a perpetual existence and a flexible, ever
---------------------- changing corpus. The investors are free to buy and sell any number of units, any
point of time, at prices that are linked to the NAV of the units. In these schemes
---------------------- the investor can invest or disinvest any amount, any time after the initial lock
in period. These schemes are extremely liquid and the funds announce sale and
----------------------
repurchase prices from time to time. These are not listed in stock exchanges and
---------------------- can be only bought and sold to the mutual fund.
A close-ended scheme is one in which, the subscription period for the
----------------------
mutual fund remains only for the specific period, called the redemption period.
---------------------- At the end of this period, the entire corpus is disinvested and the proceeds
distributed to the various unit holders. Thus, after final distribution, the scheme
----------------------

ceases to exist. However, such schemes can be rolled over with the approval of Notes
the unit holders. They can be listed on the stock exchanges.
----------------------
Pure Growth Schemes
A pure growth scheme aims at generating long-term capital appreciation ----------------------
for the investors. The objective is achieved by investing a substantial portion of ----------------------
the corpus in high growth equity shares or other equity-related instruments of
corporate bodies. The dividend can be declared and distributed as and when the ----------------------
boards of trustees approve it but the principal remains capital appreciation.
----------------------
Pure Income Schemes
----------------------
Their aim is to generate and distribute regular income to the investors. This
is done by investing a substantial portion of the corpus in high-income yield/ ----------------------
fixed income instruments, such as debentures, bonds and so on. Declaration of
regular dividends is the main objective of the scheme. ----------------------
Balanced Schemes ----------------------
The aim of these schemes is both, to distribute regular income and also ----------------------
provide capital to the investors by balancing the investments of the corpus
between the high growth equity shares and the regular income earning securities. ----------------------
Tax Saving Scheme ----------------------
These are basically growth schemes, which also offer tax rebates to the ----------------------
investors under the Income tax act, under Section 80 (C), which entitles an
investor rebate in income tax up to a maximum investment of Rs. 1,00,000 per ----------------------
annum. When EET regime will come into force, as it will shortly, this scheme
will become more attractive as investments in equities is exempt from all taxes. ----------------------
There are two types of mutual funds according to the investment target: ----------------------
Debt-oriented Schemes ----------------------
This type of schemes invest most of the funds in fixed income instruments
----------------------
like debentures of the private sector companies, public sector bonds, Government
securities and money market instruments, the balance is invested in equity ----------------------
shares. Given the portfolio composition of such schemes, a reasonably firm
indication is provided about the returns investors can expect from schemes. ----------------------
Equity-oriented Schemes ----------------------

As against the debt-oriented schemes, these schemes invest the bulk of ----------------------
their funds in equity shares and in fixed income avenues.
----------------------
Sector funds
As the name suggests, sector funds specialise in the stock of single ----------------------
industry or market sector. The fund’s portfolio is invested among a handful of ----------------------
stocks in the same industry and thus these can be regarded as aggressive funds.
Such schemes concentrate their investments in the specified sector/industry ----------------------
such as Pharma/IT/ FMCG, etc. They also focus on Government securities. The
diversification is lower in the case of these funds and hence the risk borne by the ----------------------
Mutual Funds 313

Notes investor is higher. These sector fund buyers are likely to be more sophisticated
and look for a balance between the diversification of a conventional fund and
---------------------- the narrow focus of buying shares in an individual company.
---------------------- Money market mutual funds
---------------------- These are designed as a conduit through which the investors can earn
market related yield on the money market instruments. They have to operate
---------------------- within the framework of RBI guidelines.
---------------------- It has been a year now since the government has allowed domestic mutual
funds to invest in the foreign equity markets; Principal MF has become the
---------------------- first mutual fund to launch a global equity scheme. They are in the process
of launching The Principal Global Opportunities Fund, which is opening for
---------------------- subscription in February 2004.
---------------------- Under the guidelines issued by the RBI the domestic funds are allowed to
invest in foreign companies, which have more than a 10% stake in listed Indian
---------------------- companies. The regulations also stipulate that there will be a cap of $ 1 billion
---------------------- on the MF industry’s overseas investments and an individual MF investments
limit of Rs. 200 crore.
----------------------
The funds is an innovative concept that will allow investors to diversify
---------------------- their investments in blue-chip global equities for the first time.
---------------------- Tax treatment of mutual funds

Income of notified mutual funds authorised by SEBI is exempt from tax
---------------------- provided 90% of the profit of a mutual fund is mandatorily distributed to the
---------------------- unit holders.
Units of mutual funds held for a continuous period of 12 months preceding
---------------------- the date of sale/transfer/redemption/repurchase are treated as long-term capital
---------------------- assets and taxed at 10% capital gain tax.
No discussion on mutual funds is ever complete without the mention of
----------------------
Unit Trust of India. The fund has gone through one crisis after the other in the
---------------------- recent past. Many investors in the fund’s flagship scheme US-64 have suffer
losses. There were almost 2 crore investors in this scheme. The government
---------------------- had to bail out this scheme first in 1998, by investing close to Rs. 3,500 crore.
The bigger crisis came three years later, when the fund suspended sale and
----------------------
repurchase in this scheme and also expressed its inability to pay any dividend
---------------------- for the first time in its history. These proposals were later rolled back and another
bail out had to be worked out.
----------------------
After the crisis of 1998, a committee was appointed under the chairmanship
---------------------- of Deepak Parekh, which suggested many fundamental changes in the working
of the fund. All suggestions were not implemented before the crisis of 2001.
---------------------- Since then many more investigations in the working of India’s largest and oldest
mutual fund have been conducted by a Joint Parliamentary Committee.
----------------------
Recently, the government has decided to split UTI into two. It has also
---------------------- constituted AMC to manage UTI-II and it is likely to privatise this in the future.

The mutual fund industry is going through exiting times these days. Many Notes
public sector and private sector banks who are active in mutual fund industry
are restructuring their AMCs by inviting foreign funds to participate in their ----------------------
AMCs by investing in the equity of these companies. IDBI has recently decided
to disinvest in favour of their foreign partners Principal. State Bank of India is ----------------------
also looking for a partner for its AMC. ----------------------
Many Indian companies are already running their mutual fund schemes
----------------------
in partnerships with foreign collaborators. HDFC and ICICI have both got such
tie-ups. ----------------------
On the other hand, some foreign mutual funds like Zurich are in the
----------------------
process of winding up their Indian operations. This fund has now been acquired
by HDFC mutual fund. ----------------------
In another case of consolidation recently UTI has acquired the mutual
----------------------
fund of IL
& FS. ----------------------
In the future, mutual funds are likely to introduce innovative products for the, ----------------------
investors. There is already an application filed with the SEBI, by HDFC, to start
a scheme related to Real Estate markets. ----------------------
Securitisation is a new product for Indian markets, and this is likely to open up ----------------------
newer opportunities for mutual funds as well as, for investors.
----------------------
Indian investors will have to look towards mutual funds as investors seek to
increase their returns on investments. This is going to be a major challenge for ----------------------
the industry, as they must strive to give the investors, better returns than the
----------------------
average return available and to provide capital appreciation in equity oriented
schemes. ----------------------
----------------------
Activity 4
----------------------
Find out money market schemes offered by any two AMCs.
----------------------
----------------------
15.6 REGULATORY ASPECTS
----------------------
The asset management company shall launch no scheme unless the
trustees approve such scheme and a copy of the offer document has been filed ----------------------
with the Board.
----------------------
Every mutual fund shall along with the offer document of each scheme
pay filing fees. ----------------------
The offer document shall contain disclosures which are adequate in order ----------------------
to enable the investors to make informed investment decision including the
disclosure on maximum investments proposed to be made by the scheme in the ----------------------
listed securities of the group companies of the sponsor. A close-ended scheme
----------------------
Mutual Funds 315

Notes shall be fully redeemed at the end of the maturity period unless a majority of the
unit holders otherwise decide for its rollover by passing a resolution.
----------------------
The mutual fund and asset management company shall be liable to refund
---------------------- the application money to the applicants
i. If the mutual fund fails to receive the minimum subscription amount
----------------------
referred to in clause (a) of sub-regulation (1).
---------------------- ii. If the money is received from the applicants for units are in excess of
subscription as referred to in clause (b) of sub-regulation (1).
----------------------
The asset management company shall issue to the applicant whose
---------------------- application has been accepted, unit certificates or a statement of accounts
---------------------- specifying the number of units allotted to the applicant as soon as possible but
not later than six weeks from the date of closure of the initial subscription list
---------------------- and or from the date of receipt of the request from the unit holders in any open
ended scheme.
----------------------
Rules regarding advertisement
----------------------
The offer document and advertisement materials shall not be misleading
---------------------- or contain any statement or opinion, which are incorrect or false.
---------------------- Investment Objectives and Valuation Policies

The price at which the units may be subscribed or sold and the price at
---------------------- which such units may at any time be repurchased by the mutual fund shall be
---------------------- made available to the investors.
General Obligations
----------------------
Every asset management company for each scheme shall keep and
---------------------- maintain proper books of accounts, records and documents, for each scheme so
---------------------- as to explain its transactions and to disclose at any point of time the financial
position of each scheme and in particular give a true and fair view of the state
---------------------- of affairs of the fund and intimate to the Board the place where such books of
accounts, records and documents are maintained.
----------------------
The financial year for all the schemes shall end as of March 31 of each
---------------------- year. Every mutual fund or the asset management company shall prepare in
respect of each financial year an annual report and annual statement of accounts
---------------------- of the schemes and the fund as specified in Eleventh Schedule.
---------------------- Every mutual fund shall have the annual statement of accounts audited
by an auditor who is not in any way associated with the auditor of the asset
---------------------- management company.
---------------------- Procedure for action in case of default
---------------------- On and from the date of the suspension of the certificate or the approval, as
the case may be, the mutual fund, trustees or asset management company, shall
---------------------- cease to carry on any activity as a mutual fund, trustee or asset management
---------------------- company, during the period of suspension, and shall be subject to the directions

of the Board with regard to any records, documents, or securities that may be in Notes
its custody or control, relating to its activities as mutual fund, trustees or asset
management company. ----------------------
Restrictions on Investments ----------------------
A mutual fund scheme shall not invest more than 15% of its NAV in debt ----------------------
instruments issued by a single issuer, which are rated not below investment
grade by a credit rating agency authorised to carry out such activity under ----------------------
the Act. Such investment limit may be extended to 20% of the NAV of the
scheme with the prior approval of the Board of Trustees and the Board of Asset ----------------------
Management Company. ----------------------
A mutual fund scheme shall not invest more than 10% of its NAV in
unrated debt instruments issued by a single issuer and the total investment in ----------------------
such instruments shall not exceed 25% of the NAV of the scheme. All such ----------------------
investments shall be made with the prior approval of the Board of Trustees and
the Board of Asset Management Company. ----------------------
No mutual fund under all its schemes should own more than ten per cent ----------------------
of any company’s paid up capital carrying voting rights.
----------------------
Such transfers are done at the prevailing market price for quoted
instruments on spot basis. ----------------------
The securities so transferred shall be in conformity with the investment
----------------------
objective of the scheme to which such transfer has been made.
A scheme may invest in another scheme under the same asset ----------------------
management company or any other mutual fund without charging any fees,
----------------------
provided that aggregate inter-scheme investment made by all schemes under
the same management or in schemes under the management of any other asset ----------------------
management company shall not exceed 5% of the net asset value of the mutual
fund. ----------------------
The initial issue expenses in respect of any scheme may not exceed six ----------------------
per cent of the funds raised under that scheme.
----------------------
Every mutual fund shall buy and sell securities on the basis of deliveries
and shall in all cases of purchases, take delivery of relative securities and in all ----------------------
cases of sale, deliver the securities and shall in no case put itself in a position
whereby it has to make short sale or carry forward transaction or engage in ----------------------
badla finance. ----------------------
Every mutual fund shall, get the securities purchased or transferred in
the name of the mutual fund on account of the concerned scheme, wherever ----------------------
investments are intended to be of long-term nature. ----------------------
Pending deployment of funds of a scheme in securities in terms of
----------------------
investment objectives of the scheme a mutual fund can invest the funds of the
scheme in short term deposits of scheduled commercial banks. ----------------------
No mutual fund scheme shall make any investment in;
----------------------
Mutual Funds 317

Notes i. Any unlisted security of an associate or group company of the sponsor; or
ii. Any security issued by way of private placement by an associate or group
----------------------
company of the sponsor; or
---------------------- The listed securities of group companies of the sponsor which is in excess
of 30% of the net assets [of all the schemes of a mutual fund]
----------------------
No mutual fund scheme shall invest more than 10 per cent of its NAV in
---------------------- the equity shares or equity related instruments of any company. Provided that,
the limit of 10 per cent shall not be applicable for investments in index fund or
----------------------
sector or industry specific scheme.
---------------------- A mutual fund scheme shall not invest more than 5% of its NAV in the
---------------------- equity shares or equity related investments in case of open-ended scheme and
10% of its NAV in case of close-ended scheme.
----------------------

---------------------- 1. Trustees mean the Board of trustees or the Trustee Company who hold
the property of the mutual fund in trust for the benefit of the unit
---------------------- holder.
---------------------- 2. Income of notified mutual funds authorised by SEBI is exempt from
tax provided 100% of the profit of a mutual fund is mandatorily
----------------------
distributed to the unit holders.
---------------------- 3. A mutual fund scheme shall not invest more than 10% of its NAV
in unrated debt instruments issued by a single issuer and the total
----------------------
investment in such instruments shall not exceed 25% of the NAV of the
---------------------- scheme.
----------------------
Activity 5
----------------------
---------------------- Find out from the SEBI website action taken by SEBI against any mutual
fund in respect of non-compliance with the regulations.
----------------------
----------------------
Summary
----------------------
• Mutual funds are defined by SEBI regulations as funds established in the
---------------------- form of a trust to raise money through the sale of units, that is, the interest
of the unit holders in a scheme, which consists of each unit representing
----------------------
one undivided share in the assets of a scheme-to public under one/more
---------------------- scheme for investing in securities including money market instruments
consisting of commercial papers, commercial bills, etc.
----------------------

• A mutual fund is a trust that pools in the savings and funds from a large Notes
number of investors who have a common financial goal.
----------------------
• Mutual funds issue units to investors, which represent equitable rights in
the assets of the mutual fund. ----------------------
• Investments in the mutual funds may be in the form of stocks, bonds or
----------------------
money market securities or combination of these.
• According to the procedure laid down by SEBI, mutual funds have to be ----------------------
registered with SEBI. The application for registration together with a non-
----------------------
refundable fee should be made in the prescribed form.
• SEBI, RBI, MOF, Tribunal, stock exchange, Public Trustee Office, etc. ----------------------
are the regulators of the mutual funds. ----------------------
Keywords ----------------------
----------------------
• Asset management company: The entity that manages the schemes of
the fund. ----------------------
• Equity linked saving schemes: A special scheme offered by a fund that ----------------------
enjoys income tax benefits.
• Load: Extra money paid while entering or leaving of the fund. ----------------------
• Net asset value: Value per unit of the scheme that is calculated on the ----------------------
daily basis.
----------------------
----------------------
1. What are mutual funds?
----------------------
2. Describe the different types of schemes offered by the mutual funds.
3. Comment on the future of mutual fund industry in India. ----------------------
4. Discuss the case of US-64. ----------------------
5. What are the SEBI guidelines for mutual funds? ----------------------
6. Explain the concept of Fund of Funds and discuss its usefulness or
otherwise. ----------------------
7. Compare the mutual funds with the ULIP schemes of insurance companies. ----------------------
8. Explain NAV and Load structure. ----------------------
----------------------
----------------------
----------------------
----------------------
Mutual Funds 319

Notes Answers to Check your Progress
---------------------- 1. RBI and SEBI jointly regulate bank-owned mutual funds.

2. Investors have right to receive dividend warrants within 42 days.
----------------------
----------------------
---------------------- 1. True
---------------------- 2. False
---------------------- 3. True
----------------------
Suggested Reading
----------------------
1. www.sebi.gov.in
----------------------
2. http://www.investopedia.com/university/mutualfunds/
---------------------- 3. http://www.moneycontrol.com/news/mf-experts/learnfundamentalsmutual-
---------------------- funds_718340.html
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

References
• “Give equal trading rights to foreign players: Sinha panel.(Market

News)”, The Economic Times, Sept 1 2010 Issue
• “Legislation”, Commonwealth Law Bulletin
• Agarwal and Pawan Kumar Vijay, Depository System in India, Mashbra
Industries Ltd (Publication Divisions)
• Bharathi Pathak ‘The Indian Financial System’, Pearson
• Budget Speech of Finance Minister of India
• Competition Law in India -Abir Roy, Jayant Kumar
• Competition Law Today -Vinod Bhalla
• Corporate Governance - A Practical Handbook by Dr. K R Chandratre &
Dr. A N Navare
• H.R Machiraju The working of stock exchange in India
• India: Indian Competition Act: An Overview, 27 July 2005, Article by
Rajkumar Dubey
• Indian Subsidiary of Foreign Body corporate - An Appraisal of Related
Legal Issues.”, Mondaq Business Briefing, May 15 2003 Issue
• N. Gopalaswamy ‘Inside Capital Market’
• Panigrahi Ashok Kumar “Capital Structure of Indian Corporates -
Changing Trends - Asian Journal of Management Research
• RH. Patil. “National stock exchange: leveraging IT for creating an investor
oriented exchange”, International Journal of Services Technology and
Management, 2005
• S M. Dugar’s Guide to Competition Law 2 Volumes
• SEBI (Discloser & Investors Protection) Guideline, 2000
• Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992
• Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997
• Securities and Exchange Board of India Act 1992
• Shailesh Rastogi Performance of Depositories in India: As Viewed By
Issuers, Investors and Depository Participants
• The Indian Financial System-Markets, Institutions and Services by
Bharati V. Pathak Pearson.
• The National Securities Depositories Limited, An Investor’s Guide to
Depositories
References 321
• Article Source: http://EzineArticles.com/3649670
• articles.economictimes.indiatimes.com/keyword/competition-act
• http://dipp.gov.in/English/Investor/Japan_Desk/india_favoured_inv_
destination
• http://knol.google.com/k/adr-gdr-fccb-issues-indian-regulations#
• http://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MFI300611F.pdf
• http://www.allbankingsolutions.com
• http://www.evenett.com/research/chapters/
competitionlawandeconomicdevelopment150305
• http://www.legalserviceindia.com/article/l329-Listing-&-Delisting-Of-
Securities.html
• http://www.mondaq.com/article.asp?articleid=33971.pdf
• http://www.raagvamdatt.com
• ieg.nic.in
• legalserviceindia.com/articles/compet.htm
• www.bse.co.in
• www.bse.com
• www.capitalmarket.com
• www.cbse.nic.in
• www.cci.gov.in/
• www.cdslindia.com
• www.delisting.in
• www.icsi.edu
• www.indiajuris.com/comlaw.pdf
• www.indiajuris.com/comlaw.pdf
• www.indiamoney.com
• www.legalserviceindia.com/article/l131-Competition-Act.html
• www.legalservicesindia.com
• www.mois.gov.in
• www.moneycontrol.com
• www.netlawman.co.in/acts/competition-act.php
• www.nsdl.com
• www.nse.co.in
• www.scribd.com

• www.sebi.gov.in
• www.sebi.gov.in
• www.sebi.gov.in
• www.sebi.gov.in
• www.sebi.gov.in
• www.sharewealtindia.com
• www.slideshare..net
• www.vakilno1.com
• www.valkilno1.com
References 323

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CORPORATE FINANCE LAW

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2018 Symbiosis Open Education Society

Ms. Parimala Veluvali

Unit No. TITLE Page No.

1.1 Introduction to Corporate in India

Introduction to Corporate Entity 1

2 Corporate Finance Law

A corporation is a person who may be ordered to produce documents ----------------------

Introduction to Corporate Entity 3

4 Corporate Finance Law

• Limitations of Work ----------------------

Introduction to Corporate Entity 5

---------------------- ● Free and easy transferability of shares

6 Corporate Finance Law

1. Read and comment on Perumal vs. John Deavin case. ----------------------

1.3 CORPORATION AND ITS LEGAL INDEPENDENCE ----------------------

Introduction to Corporate Entity 7

8 Corporate Finance Law

Check your Progress 2 ----------------------

Introduction to Corporate Entity 9

10 Corporate Finance Law

Introduction to Corporate Entity 11

12 Corporate Finance Law

Introduction to Corporate Entity 13

---------------------- Ownership and management patterns in businesses have changed

14 Corporate Finance Law

Check your Progress 5 ----------------------

1.7 EVOLUTION AND REGULATION OF CORPORATE ----------------------

Introduction to Corporate Entity 15

---------------------- Match the following.

---------------------- 1.8 NEED AND SIGNIFICANCE OF CORPORATE

16 Corporate Finance Law

Introduction to Corporate Entity 17

18 Corporate Finance Law

iv. All of the above. ----------------------

Introduction to Corporate Entity 19

---------------------- ● A well-defined and open procedure must be in place for reappointments

20 Corporate Finance Law

Check your Progress 8 ----------------------

1.10 CORPORATE LITIGATION ----------------------

Introduction to Corporate Entity 21

22 Corporate Finance Law

Introduction to Corporate Entity 23

---------------------- Fill in the blanks.

---------------------- 1.12 RAISING OF FINANCE BY CORPORATE

24 Corporate Finance Law

Introduction to Corporate Entity 25

---------------------- Nowadays, in addition to lease financing, hire purchasing is also emerging

---------------------- Accounting implications of lease transactions need to be considered from

Introduction to Corporate Entity 27

28 Corporate Finance Law

4. Define the term corporate governance. ----------------------

5. A company can sue and be sued in its corporate name. ----------------------

Introduction to Corporate Entity 29

---------------------- Check your Progress 6

---------------------- Check your Progress 7

---------------------- Match the following.

30 Corporate Finance Law

Suggested Reading ----------------------

Introduction to Corporate Entity 31

32 Corporate Finance Law