Professional Documents
Culture Documents
Batch: 2016-21
Semester: IX
PRN: 16010126469
INSTRUCTIONS
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name, contact detail etc. are written anywhere else in the answer script it will
be treated as adoption of unfair means.
2. Use diagrams and sketches wherever required.
3. Examiner will conduct viva voce based on entire question paper set on the
subject.
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by the examination department and all submissions must be in the word
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requirements of the question.
8. If the students copy from each other’s assignment, it will be considered as
unfair means case and performance will be treated as null and void for the
entire examination.
9. Please read all the instructions given by the faculty in every subject in the
question paper.
Q1. An Indian oil refinery company wants to raise money from foreign investors by listing
securities on a foreign stock exchange. Identify the kind of securities that can be issued by this
Indian company and the process of issuance of those securities. Also identify the key regulatory
requirements for issuance of such securities.
A1. The kind of securities that can be issued by Indian Listed Company for raising foreign
capital or for inviting foreign investors in the Indian Market are Depository Receipts.
The process to raise funds or allow investment from foreign market is as follows :-
In our case, an Indian Oil company wishes to raise funds from the American capital market.
As a result proceeds to institute issuance of depository receipts to be listed on the New York
Stock Exchange in our case. satisfying the preliminary requirements to qualify for a
depository issue.
The first step is to purchase the shares of the Indian company from the US broker
through their branch situated in India. This is followed by delivering the shares to the
custodian bank, ie. India.
The next step involves the activity of the custodian bank, signalling the depository
bank that it has received the underlying shares. This process is the confirmation of the
delivery of the shares underlying with the custodian bank, indicating to them that the
ADRs can now be equipped.
ADRs are equipped only when confirmation is received, a number of shares constitute
an ADR. This ratio is pronounced after taking into account several factors such as the
exchange rate of Indian Rupees to the United Nations Dollars as on that particular
date.
The next step involves the efforts of a broker, he receives the drawn out ADRs.
Acting as an intermediary between the American Exchange and the Indian Oil
Company. Lastly, concluding the whole process by-listing the ADRs on the New
York Stock Exchange in our case.
The Securities and Exchange Commission of India in October 2019 issued a detailed policy
on the issuance of debt by recognised stock exchanges. This new system specified who is
eligible and has set the requirements for the same. International Financial Service Centres
have been expanded in the 2018 scheme.
Indian sovereign bonds historically only materialised through the stock market and through
depository receipts. "This was extended under the Depository Receipts Scheme, 2014 to
permit issuance of depository receipts by both listed and unlisted firms." Even though the
DOE is extending DRs to non-listed firms, only listed companies should be considered.
Under the current scheme, securities include equity shares and debt securities, which are in
dematerialized form and rank pari passu with securities issued and listed on a registered stock
exchange. Prior to 2014, companies had to comply with certain governing laws before
complying with the laws. Another legal condition today is to not be treated as a debtor or an
alleged criminal defendant.
In addition to compliance with the Companies Act and Scheme, a director must also adhere to
all applicable legislative requirements. People with DR now excludes Indians and foreign
nationals, which is above and above the requirements for the scheme. This responsibility lies
with whoever presently holds public office (including beneficial owner). Indian companies
have to change their business records to comply with the Indian regulations.
As a public business, a company must file this in US stock exchanges within 24 hours of
making the announcement. The issuer would also need to send a bid document with SEBI and
the stock exchanges in order to obtain input on their proposed DRs. Regulatory authorities
are expected to stick to deadlines. This is a novel provision as both SEBI and the Indian
exchanges have never previously reviewed advance acquisition documents.
A public listed company shall comply with the investment and ownership restrictions
stipulated by the Government of Singapore. The framework requires domestic and foreign
investors to have similar economic outlooks.
The current legislation has been revised to tighten the law on voting rights. Since DR
Shareholders have no voting rights on the underlying stock of the DRs, their shares cannot be
counted for the public ownership standard. Under the revised scheme, voting rights are vested
only in the DR's and not in the underlying securities.
Q2. How are equity instrument and debt instruments different? What is the regulatory jurisdiction
of SEBI and what is its major function? Explain three important steps taken by SEBI to ensure that
public offer process is safe for the investors.
A2.
The Securities and Exchange Board of India Act 1992, was introduced with the purpose of regulating
the Securities market and providing protection to investors. The Act created the Securities Exchange
Board of India (SEBI) as the regulatory authority. Section 11 of the SEBI Act lists down the role and
responsibilities of the Board.
The Board has the duty to protect the market of its members and protect investors rights in the
market.
A. The financial market trades occur in a dishonest way which is harmful to investors and securities.
B.By order of the chairman, the CEO may advise the board members to examine the behaviour of
the stock market.
In addition, Section 11B sets out the option of issuing enforcement orders if:
in the interest of investors, or for the orderly growth of securities market, and to secure proper
management and conduct of that market, the board may give those directions,-.
(b) to any company in respect of matters mentioned in the subsection of section 11A, as required for
the protection of investors in securities and the securities market.
A trading licence was issued to the Securities and Exchange Board of India (SEBI) to set up specific
rules and regulations for stock broking.
These powers are far too vast for the authority responsible for economic control. There have been
several clashes between parties that include government regulators and non-government
regulators. These forms of disputes also exist in trade exchanges and companies. The most famous
case in India is that of the Sahara. The issue in the case was whether SEBI had jurisdiction and
whether the jurisdiction is extended to unlisted companies. Two unlisted companies Sahara India
Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited issued
Optionally fully convertible debentures to 3 million subscribers amounting to 26000 crore INR and a
paid up capital of 10000 crore.
SEBI can now take cognizance under Sec 67(3) Companies Act and issues a show cause notice and
gives direction as mentioned above from Sec 11 to provide deposit information. The Housing
Corporation contends before the Supreme Court that SEBI has no power to regulate the unlisted
company instead it is the Registrar of Companies Preferential Allotment Rules 2003.
Steps taken by SEBI to ensure that public offer process is safe for investors:-
In 2003, SEBI launched the Securities Market Awareness Campaign with the primary aim of
educating and creating awareness among the investors. The programme covers major
subjects like portfolio management, Mutual Funds, tax provisions, Investor Protection Fund,
Investors’ Grievance Redressal system of SEBI. The Programme has been marketed across all
formats like print media, radio, television, and the internet.
In 1992, SEBI framed the DIP guidelines and these guidelines have gone through various
amendments keeping the dynamic market conditions. There is a mandatory requirement on
part of the company approaching the market to raise money to comply with the DIP
guidelines 2000. The due diligence is taken care of by the merchant banker, and these
merchant bankers must be registered with SEBI. Officials from various levels of SEBI are
there to ensure not just the DIP guidelines but also ensure that information is disclosed in
the draft.
Q3. What are Alternate Investment Funds and how are they categorized? What is the basis for
such classification? Discuss the investment restrictions applicable to AIFs in general and to each
category in particular and explain why such restrictions are necessary.
A3. Alternate Investment Funds (AIFs) have been defined under Regulation 2(1) (b) of the Regulation
Act, 2012 of Securities and Exchange Board of India as any fund which has been created or
incorporated in India in the form of a trust, company, LLP or a body corporate. It is a privately pooled
investment vehicle that collects funds from investors as per a specifically defined investment policy.
Classification of AIFs:-
There are certain restrictions which are applicable to AIFs in general and to each category in
particular and why such restrictions are necessary.
Category I AIFs-
I. As mentioned above this category includes unlisted investee, Category II AIFs can invest
in Category I as well, but with a restriction that it cannot invest in Funds of Funds
II. The same restrictions apply to Category II AIFs for borrowing directly or indirectly, but
can be done only 4 times in a year and further restrictions of 10% of investible funds for
the purpose of temporary funding requirement.
III. Category II AIFs can hedge on conditions prescribed by the SEBI
IV. An agreement can be reached between merchant bankers to subscribe for the
unsubscribed proportion. Deliver these securities under Chapter XB of ICDR regulations.
V. After the due diligence of SME listed companies, Category II AIFs shall be exempted from
Regulation 3 and 3A of insider trading with further conditions that it must report
investment to stock exchange two days from being listed and the investment is locked
for a period of 1 year.
A 4.
A. The term Deposits have been defined under Rule 2(1) (c) of Companies (Acceptance of
Deposit) Rules, 2014 to include receipt of money by deposit or loan or in any other form by
company; it includes deposit in substance, any amount received from LLP, any instalment
scheme which promised a return in cash or in kind at the end of specified period.
The Rule further excludes any amount received from Central Government or State
Government or any other authority under the purview of the Government is not included as
deposits. Further loans from any banks or financial institutions or any Company or amount
issued as CCD, converted within 10 years etc.
Chapter 5 of the Act and Deposits Rules provides certain kinds of prohibitions, allowances
and requirements in relation to acceptance and deposits from members as well as the
public.
Section 73 prohibits acceptance of deposits from public and on a combined reading of sub
section (1) and (2) of Section 73, it gives an impression that this section wills to accept
deposits from members:-
● Deposit Circular to be registered with the Registrar of Companies.
●Requirement of maintenance of depository payment reserve account of at least 20% of the
amount of deposit maturing during the following year, which will be made on or before 30th
April every year.
●Rate of interest should not exceed the maximum rate as prescribed by the Reserve Bank of
India.
●Subsection (1) also states it shall not apply to Banking Company and NBFC as defined under
the 1934 Act.
As per Rule 16, every company to which Deposit Rules apply, shall on or before the 30th
June, of every year, file with the ROC, a return in e-Form DPT-3 and furnish the information
contained therein as on the 31st March of that year duly audited by the auditor of the
company.
Q5. How are foreign exchange transactions classified and regulated under FEMA?
Discuss the changes brought about in 2019 regarding regulation of foreign investment
into India. What is the effect of such changes?
A5. Foreign Exchange Transactions in are treated differently in terms of accounting and
taxation with respect to the economic impact of such transactions change the assets or
liabilities or even the contingent liabilities of a person in relation to any foreign country.
The foreign exchange transactions are classified into capital account transactions and current
account transactions. Current Account transactions refer to such transactions where a
payment is made right away while purchasing machinery and a huge plant, there is nothing to
be received or paid in other words its squared off, these kind of transactions will not change
the assets or liabilities. Capital Account transactions on the other hand refer to an investment
which is made in equity in a foreign country which helps in creation of an asset in that
country and will raise a liability position here in our country.
FEMA streamlines all the foreign exchange trades within India. Exchange purchases can be
divided into two groups.
The real balance of the company holds the record of the cash, products, and services.
Bilateral agreements are made between Indian people and other nations. It is also divided
into two types-
The current account transactions require international money flow in and out of the country
over a year. This exchanges occur as currencies are exchanged and when service and goods
are made. In addition, the Current Account tests the financial position of the government.
Accordingly, FEMA defines current account transactions under section 2(gg) of the FEMA
Act, as a transaction other than a capital account transaction and includes:
1. Payments related to foreign trade, other current business, services, and short-term
banking and credit facilities in the ordinary course of business or
3. Remittances for living expenses of parents, spouse, and children residing abroad or
4. Expenses in connection with foreign travel, education and medical care of parents,
spouse, and children
Current Account transactions are further categorized into three parts according to the FEMA,
namely-
As we've discussed, the payment balance includes the existing and savings accounts. In other
words, the balance of payments is the capital account. Yet the paper focuses on the flow of
capital within the economy, as a result of capital spending and sales. In addition, the capital
account considers domestic contributions within international reserves and vice-versa.
Foreign exchange is the conversion of one country's currency into another country's currency.
Each country's currency is valued against others. It involves daily volumes totalling in
trillions of dollars making it the largest financial market in the world. Foreign exchange
transactions are executed at the exchange bank, not on a centralised exchange. Foreign
exchange markets consist of investment firms, central banks, commercial companies, retail
forex brokers, and investors.
Foreign exchange transactions include all currency conversions and money transfers of a
traveller and payments by financial institutions and governments. The world's financial
institutions have seen an explosion in global currency transactions in recent years. Types of
foreign exchange transactions are:
A. Spot Transactions
This is the fastest way to exchange currencies. A spot transaction involves the exchange or
settlement of currencies within two days of the deal without a signed contract. The Spot
Exchange Rate is the current exchange rate.
B. Forward Transactions
Future transactions are transactions that will be entered into after 90 days. The agreement is
governed by a fixed exchange rate and a definite date. The exchange rate is fixed at a certain
rate.
C. Future Transaction
Future transactions are also exchanging of promises, like forward contracts. However, future
transactions should follow standardised contracts in terms of features, date, and size. Regular
forward transactions have flexibility and are customisable. It is known as the initial margin,
and it is to cover future transactions.
D. Swap Transactions
A simultaneous lending and borrowing of two different currencies are called a swap
transaction. One investor borrowed a currency and repaid in the form of a second currency.
Swap transactions allow trading without risk of currency exchange rates.
E. Options Transactions
Changes brought about in 2019 regarding regulation of foreign investment into India.
The Ministry of Finance has classified the following instruments as "debt" and "non- debt"
instruments. Additionally, all other instruments not covered below will be considered as
"debt instruments".
Debt instruments include: Government bonds, corporate bonds, all tranches of securitization,
and debt securities issued by Indian companies; loans made to Indian companies; depository
receipts whose underlying securities are securities issued by Indian companies.
The term "capital instruments" was recently omitted from the NDI Rules and later replaced
with "equity instruments". Equity instruments under the NDI Rules are equivalent to the
definition of financial instruments under the NDI Rules and there are no major improvements
in the definition.
Press Note No. 4 of 2019 as issued by Department of Promotion of Industry and Internal
Trade on 18 September 2019 ("Press Note 4"), which was adopted to liberalise the foreign
direct investment policy in different sectors of the Indian economy in relation to coal mining,
single brand retailing, contract manufacturing and digital media was not considered by the
NDI Regulations. After the notice of NDI Law, there was uncertainty about whether the
omission was intended or was an accidental typo. However, as a part of the reforms legislated
by Press Note 4, the new rules have been enforced.
Under Start-up Investment Scheme, FVCIs could invest in the protection of new start-ups.
"securities" wasn't specifically specified in TISPRO. Under the new NDIVA rules, an FVCI
can invest in "equity or equity-linked instrument or debt instrument issued by an Indian start-
up" irrespective of the sector in which the start-up conducts business. NDI Regulations
enable the deal to be structured as an equity-based or debt instrument issued by an Indian
start-up. Departing from the NDI guidelines, the words "irrespective of the sectors" are new
additions to the document.
FDI into India decreased by 11% from USD 22.6 billion to USD 19.3 billion for April to
September, 2018-2019. Overall, the amendment 2019 seems to be a promising step towards
reviving the economy through international investment and Make in India policy. The
potential that the 2021 Amendment will have on attracting FDI would need to be evaluated
Under the FEMA regulations, Current Account Transactions are permitted unless specifically
prohibited, whereas all Capital Account Transactions are prohibited unless specifically
permitted. These transactions are regulated by Section 5 and Section 6 respectively. The
major question which arises is to determine whether a transaction is Capital or Current. There
is no accurate rule for classifying the transaction other than the one mentioned above, which
changes or alters the asset-liability position.
ANSWER 6
The term Crowd funding is given to a new-age system of inviting and accepting funds from
the public at large, for particular ventures or projects, social programs, corporate activities or
creative projects, it can be anything. It appeals to a greater number of people as it makes the
expenditure, or even donation, or small sums. Crowd funding has evolved with the deepening
penetration of the internet, not only as a viable but a favoured means of raising funds, as it
allows for a broader scope and can be cheaper and more convenient than other traditional
investment methods.
Equity Crowd funding and Debt Crowd funding are two of the most relevant crowd financing
strategies for the investment domain. Equity Crowd funding requires donors to deposit a
certain sum through the possession, or just equity, of a company. Such means are somewhat
close to an initial public offering or further public offering, but equity crowd funding emerges
as a preferred choice due to less intensive regulations and increased convenience. On the
other hand, Debt Crowd financing, also known as peer-to-peer (P2P) loans, facilitates the
deposit of amounts to be repaid in the form of loans combined with the duty to comply with
the repayment.
Crowd funding has been viewed and embraced internationally as a preferred form of
investment as it enables investors to more easily access and invest. In order to allow greater
relations with a broader range of buyers, it also helps businesses seeking investment. This
also reduces the time wasted by investors in seeking acceptable investment opportunities and
is also cost-effective. Seen as an alternative to debt instruments, crowd lending allows
investors to face a higher interest rate on their alternatives due to the credit risk associated
with the borrowers by taking smaller sums from a wider pool of people.
On the basis of SEBI, equity crowd funding has been termed as “unauthorized, unregulated
and illegal”. The reason why SEBI has adopted such a sceptical approach is because of the
high risks associated with it, as the matter of convenience and accessibility can allow
inexperienced and unaware investors to also partake in the process. Also, the degree of due
diligence that lies behind this purely digital method cannot be ascertained, hence preventing
the investors from being misled or manipulated. As equity crowd funding provides the
investment of small amounts and guarantees larger returns, it can prove to be a lucrative
investment scheme for smaller investors with limited skills and experience to be trapped in
risky investments. Due to the lack of any governing provisions or regulatory authority, equity
crowd funding remains unlawful.
In order to provide some clarity on the scope of crowd funding as an investment mechanism,
SEBI published certain guidelines in 2014 through the ‘Consultation Paper on Crowd funding
in India’, to facilitate the access to crowd funding for small or medium enterprises as well as
star-ups. The paper opined on the following:
Presently, the Chit Funds Act of 1982 is the governing piece of legislation over chit funds in
India, which allows the registration and regulation of chit fund schemes by the respective
State Government, as well as the Registrar of Chits, as appointed thereunder. Under this
statute, a chit fund must be registered in order to be functional and accept deposits from its
investors.
Following the Saradha chit fund scam in 2013, calls were made for more vigorous and
strenuous regulation of chit funds in India. This scam had committed fraud on 14 lakh
investors, raising approximately Rs. 1,200 crores. With respect to the jurisdiction of SEBI
over chit funds, under the Act of 1992, chit funds have been explicitly excluded from the
scope of collective investment schemes. Hence, the limited approach adopted by SEBI in the
Saradha scam. Similar to this incident, in 2019, the country’s biggest chit fund scam was
uncovered, which was carried out by Pearl Agrotech Corporation Limited, which had
gathered around Rs. 50,000 crores. In addition to these, many chit fund scams have been
uncovered in the past, duping hundreds and even thousands of investors of their savings.
There still persist a large number of unregulated fund-raising corporations, which accept
deposits under the farce of chit fund schemes. This momentum can be attributed to many
things, but primarily the absence of a unified and centralized government regulatory. In order
to make things worse, no mechanism or procedure exists in order to ensure timely or
appropriate repayment to the investors looted.
The former Chairperson of SEBI U.K Sinha, has held the opinion that SEBI must be granted
the regulatory authority over chit funds. However owing to jurisdictional issues, SEBI has
been unable to overlook chit funds in India. It has been constrained in taking action against
companies that partake in the mobilization of funds as it is challenged by the jurisdiction
granted to it. Despite the multiple laws governing chit funds that are in force in India, the
issue lies with the implementation and enforcement. Many instances of multiplicity of
regulars, overlapping powers and unclear action has allowed firms unlawfully accepting
deposits to slip under the eyes of SEBI.
However, the Cabinet Committee on Economic Affairs had held the viewpoint that SEBI’s
jurisdiction over chit fund regulation must be expanded as illegal chit funds are more
prevalent than ever. SEBI ought to be granted with the power to attach assets, conduct
investigations, issue recovery proceedings and require the production of documents and
records in order to expand its control.