COMPLIANCE

AND LIABILITY
UNDER SECURTIES LAWS
COURSE: LEGAL ASPECTS OF BUSINESS

PRGRAMME: LEGAL ASPECTS OF BUSINESS

INSTRUCTORS: PROF.LALITHA SRINATH & PROF. M.R.

SRINATH

PARTICIPANT: ASHOK KUMAR MAURYA

ROLL NO.2008PGP1040D

DATE: 11.07.2008

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FIRST OF ALL I WOULD LILKE TO INTODUCE THE WORD ‘ SECURITIES’ AND
‘LIABILITY’ AS USED IN LAW I HAVE BORROWD THESE DEFINTION FROM THE WEBSITE
“LAW.COM” AS WELL AS “SHUDHIRLAW.COM” THEN COMES THE VARIOUS TYPES OF
LIABILITIES.THEN SECURITIES (SHARES,DEBENTURES,ETC.)

SECURITIES
GENERIC TERM FOR SHARES OF STOCK, BONDS AND DEBENTURES ISSUED BY
CORPORATIONS AND GOVERNMENTS TO EVIDENCE OWNERSHIP AND TERMS OF

PAYMENT OF DIVIDENDS OR FINAL PAY-OFF. THEY ARE CALLED SECURITIES BECAUSE

THE ASSETS AND/OR THE PROFITS OF THE CORPORATION OR THE CREDIT OF THE

GOVERNMENT STAND AS SECURITY FOR PAYMENT. HOWEVER, UNLIKE SECURED

TRANSACTIONS IN WHICH SPECIFIC PROPERTY IS PLEDGED, SECURITIES ARE ONLY AS

GOOD AS THE FUTURE PROFITABILITY OF THE CORPORATION OR THE MANAGEMENT

OF THE GOVERNMENTAL AGENCY. MOST SECURITIES ARE TRADED ON VARIOUS

STOCK OR BOND MARKET.

LIABLITY
ONE OF THE MOST SIGNIFICANT WORDS IN THE FIELD OF LAW, LIABILITY MEANS

LEGAL RESPONSIBILITY FOR ONE'S ACTS OR OMISSIONS. FAILURE OF A PERSON OR

ENTITY TO MEET THAT RESPONSIBILITY LEAVES HIM/HER/IT OPEN TO A LAWSUIT FOR

ANY RESULTING DAMAGES OR A COURT ORDER TO PERFORM (AS IN A BREACH OF

CONTRACT OR VIOLATION OF STATUTE). IN ORDER TO WIN A LAWSUIT THE SUING

PARTY (PLAINTIFF) MUST PROVE THE LEGAL LIABILITY OF THE DEFENDANT IF THE

PLAINTIFF'S ALLEGATIONS ARE SHOWN TO BE TRUE. THIS REQUIRES EVIDENCE OF

THE DUTY TO ACT, THE FAILURE TO FULFILL THAT DUTY AND THE CONNECTION

(PROXIMATE CAUSE) OF THAT FAILURE TO SOME INJURY OR HARM TO THE PLAINTIFF.

LIABILITY ALSO APPLIES TO ALLEGED CRIMINAL ACTS IN WHICH THE DEFENDANT

MAY BE

RESPONSIBLE FOR HIS/HER ACTS WHICH CONSTITUTE A CRIME, THUS MAKING

HIM/HER SUBJECT TO CONVICTION AND PUNISHMENT. A SIGNER OF A PROMISSORY

NOTE HAS LIABILITY FOR MONEY DUE IF IT IS NOT PAID AND SO WOULD A CO-SIGNER

WHO GUARANTEES IT. A CONTRACTOR WHO HAS AGREED TO COMPLETE A BUILDING

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HAS LIABILITY TO THE OWNER IF HE FAILS TO COMPLETE ON TIME.

JOINT LIABILITY
WHEN TWO OR MORE PERSONS ARE BOTH RESPONSIBLE FOR A DEBT, CLAIM OR

JUDGMENT. IT CAN BE IMPORTANT TO THE PERSON MAKING THE CLAIM, AS WELL AS

TO A PERSON WHO IS SUED, WHO CAN DEMAND THAT ANYONE WITH JOINT LIABILITY

FOR THE ALLEGED DEBT OR CLAIM FOR DAMAGES BE JOINED IN (BROUGHT INTO)

THE LAWSUI

C IV IL L IA BILIT Y
POTENTIAL RESPONSIBILITY FOR PAYMENT OF DAMAGES OR OTHER COURT-

ENFORCEMENT IN A LAWSUIT, AS DISTINGUISHED FROM CRIMINAL LIABILITY, WHICH

MEANS OPEN TO PUNISHMENT FOR A CRIME.

L IMIT ED L IA BILIT Y
THE MAXIMUM AMOUNT A PERSON PARTICIPATING IN A BUSINESS CAN LOSE OR BE

CHARGED IN CASE OF CLAIMS AGAINST THE COMPANY OR ITS BANKRUPTCY. A

STOCKHOLDER IN A CORPORATION CAN ONLY LOSE HIS/HER INVESTMENT, AND A

LIMITED PARTNER CAN ONLY LOSE HIS/HER INVESTMENT, BUT A GENERAL PARTNER

CAN BE RESPONSIBLE FOR ALL THE DEBTS OF THE PARTNERSHIP. PARTIES TO A

CONTRACT CAN LIMIT THE AMOUNT EACH MIGHT OWE THE OTHER, BUT CANNOT

CONTRACT AWAY THE RIGHTS OF A THIRD PARTY TO MAKE A CLAIM.

P RODUCT L IA BILIT Y
THE RESPONSIBILITY OF MANUFACTURERS, DISTRIBUTORS AND SELLERS OF

PRODUCTS TO THE PUBLIC, TO DELIVER PRODUCTS FREE OF DEFECTS WHICH HARM

AN INDIVIDUAL OR NUMEROUS PERSONS AND TO MAKE GOOD ON THAT

RESPONSIBILITY IF THEIR PRODUCTS ARE DEFECTIVE. THESE CAN INCLUDE FAULTY

AUTO BRAKES, CONTAMINATED BABY FOOD, EXPLODING BOTTLES OF BEER,

FLAMMABLE CHILDREN'S PAJAMAS OR LACK OF LABEL WARNINGS.THE KEY ELEMENT

IN PRODUCT LIABILITY LAW IS THAT A PERSON WHO SUFFERS HARM NEED PROVE

ONLY THE FAILURE OF THE PRODUCT TO MAKE THE SELLER, DISTRIBUTOR AND/OR

MANUFACTURER RELIABLE FOR DAMAGES. AN INJURED PERSON USUALLY NEED ONLY

SUE THE SELLER AND LET HIM/HER/IT BRING THE MANUFACTURER OR DISTRIBUTOR

INTO THE LAWSUIT OR REQUIRE CONTRIBUTION TOWARD A JUDGMENT. HOWEVER,

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ALL THOSE POSSIBLY RESPONSIBLE SHOULD BE NAMED IN THE SUIT AS DEFENDANTS

IF THE THEY ARE KNOWN.

S TRI CT L IABILI TY
AUTOMATIC (WITHOUT HAVING TO PROVE NEGLIGENCE) FOR
RESPONSIBILITY

DAMAGES DUE TO POSSESSION AND/OR USE OF EQUIPMENT, MATERIALS OR

POSSESSIONS WHICH ARE INHERENTLY DANGEROUS, SUCH AS EXPLOSIVES, WILD

ANIMALS, POISONOUS SNAKES OR ASSAULT WEAPONS.

S EVE RAL L IA BILIT Y

REFERRING TO RESPONSIBILITY OF ONE PARTY FOR THE ENTIRE DEBT (AS IN "JOINT
AND SEVERAL") OR JUDGMENT WHEN THOSE WHO JOINTLY AGREED TO PAY THE

DEBT OR ARE JOINTLY ORDERED TO PAY JUDGMENT DO NOT DO SO. A PERSON WHO

IS STUCK WITH "SEVERAL LIABILITY" BECAUSE THE OTHERS DO NOT PAY THEIR PART

MAY SUE THE OTHER JOINT DEBTORS FOR CONTRIBUTION TOWARD THE PAYMENT

HE/SHE HAS MADE.

V IC ARI OU S L IA BILIT Y
SOMETIMES CALLED "IMPUTED LIABILITY," ATTACHMENT OF RESPONSIBILITY TO A PERSON FOR

HARM OR DAMAGES CAUSED BY ANOTHER PERSON IN EITHER A NEGLIGENCE LAWSUIT OR CRIMINAL

PROSECUTION. THUS, AN EMPLOYER OF AN EMPLOYEE WHO INJURES SOMEONE THROUGH

NEGLIGENCE WHILE IN THE SCOPE OF EMPLOYMENT (DOING WORK FOR THE EMPLOYER) IS

VICARIOUSLY LIABLE FOR DAMAGES TO THE INJURED PERSON. IN MOST STATES A PARTICIPANT IN

A CRIME (LIKE A HOLD-UP) MAY BE VICARIOUSLY LIABLE FOR MURDER IF ANOTHER MEMBER OF

THE GROUP SHOOTS AND KILLS A SHOPKEEPER OR POLICEMAN.

PRE SENT G OVERN ING S ECURI TIE S LA WS I N IND IA:

THE SECURITIES TRANSACTIONS IN INDIA AT PRESENT ARE MAINLY GOVERNED BY TWO

ACTS. 1. THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, AND 2.

THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992.

THE DEPO SI TORI ES A CT, 1 99 6:

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THE PAPER BASED OWNERSHIP AND TRANSFER OF SECURITIES HAS BEEN A MAJOR

DRAWBACK OF THE INDIAN SECURITIES MARKETS SINCE IT OFTEN RESULTED IN DELAY IN

SETTLEMENT AND TRANSFER OF SECURITIES AND ALSO LEAD TO "BAD DELIVERY", THEFT,

FORGERY ETC. THE DEPOSITORIES ACT, 1996 WAS THEREFORE ENACTED TO PAVE THE

WAY FOR SMOOTH AND FREE TRANSFER OF SECURITIES.

THE OTHER RELEVANT LAWS WHICH AFFECT THE CAPITAL MARKET ARE :-

1. THE FOREIGN EXCHANGE REGULATIONS ACT, 1973;2. ARBITRATION AND

CONCILIATION ACT, 1996;3. COMPANIES ACT, 1956;4. DEBT RECOVERY ACT
(BANK AND FINANCIAL INSTITUTIONS RECOVERY OF DUES ACT, 1993);5. BANKING
REGULATION ACT;6. BENAMI PROHIBITION ACT;7. INDIAN PENAL CODE;8.
INDIAN EVIDENCE ACT, 1872 AND;9. INDIAN TELEGRAPH ACT, 1885.

THE SECUR IT IES CONTRA CTS (R EGULA TION) A CT, 1 95 6

THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (HEREINAFTER REFERRED TO

AS THE "ACT"), CONTAINING A MERE 31 SECTIONS, KEEPS A TIGHT VIGIL OVER ALL THE

STOCK EXCHANGES OF INDIA SINCE 20TH FEBRUARY, 1957. THE PROVISIONS OF THE
ACT WERE FORMALLY ADMINISTERED BY THE CENTRAL GOVERNMENT. HOWEVER, SINCE
THE ENACTMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 THE

BOARD ESTABLISHED UNDER IT (SEBI) IS CONCURRENTLY HAVING POWERS TO

ADMINISTER ALMOST ALL THE PROVISIONS OF THE ACT.

BY VIRTUE OF THE PROVISIONS OF THE ACT, CARRYING ON THE BUSINESS OF DEALING

IN SECURITIES WITHOUT A LICENSE FROM SEBI IS PROHIBITED. ANY STOCK EXCHANGE
WHICH IS DESIROUS OF BEING RECOGNIZED HAS TO MAKE AN APPLICATION UNDER

SECTION 3 OF THE ACT TO SEBI WHO IS EMPOWERED TO GRANT RECOGNITION AND

PRESCRIBE CONDITIONS INCLUDING THAT OF HAVING SEBI'S REPRESENTATION (MAXIMUM

THREE PERSONS) ON THE STOCK EXCHANGE AND PROHIBITING THE STOCK EXCHANGE
FROM AMENDING ITS RULES WITHOUT THE SEBI'S PRIOR APPROVAL. THE RECOGNITION

CAN BE WITHDRAWN IN THE INTEREST OF TRADE OR PUBLIC. SEBI IS AUTHORIZED TO

CALL FOR PERIODICAL RETURNS FROM THE RECOGNIZED STOCK EXCHANGES AND TO MAKE

ENQUIRIES IN RELATION TO THEIR AFFAIRS. EVERY STOCK EXCHANGE IS OBLIGED TO

FURNISH ANNUAL REPORTS TO SEBI. STOCK EXCHANGES ARE ALLOWED TO MAKE RULES

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ONLY WITH THE PRIOR APPROVAL OF SEBI. THE CENTRAL GOVERNMENT AND SEBI
CAN DIRECT STOCK EXCHANGES TO FRAME RULES. RECOGNIZED STOCK EXCHANGES ARE

ALLOWED TO MAKE BYE-LAWS FOR THE REGULATION AND CONTROL OF CONTRACTS BUT

SUBJECT TO THE PREVIOUS APPROVAL OF SEBI AND SEBI HAS THE POWER TO AMEND
THESE BYE-LAWS. THE CENTRAL GOVERNMENT AND SEBI HAVE THE POWER TO

SUPERSEDE THE GOVERNING BODY OF ANY RECOGNIZED STOCK EXCHANGE AND TO

SUSPEND ITS BUSINESS.

A PUBLIC LIMITED COMPANY IN INDIA, HAS NO OBLIGATION TO HAVE ITS SHARES LISTED
ON A RECOGNIZED STOCK EXCHANGE. BUT IF A COMPANY INTENDS TO OFFER ITS SHARES

OR DEBENTURES TO THE PUBLIC FOR SUBSCRIPTION BY ISSUE OF A PROSPECTUS, IT MUST,

BEFORE ISSUING SUCH PROSPECTUS APPLY TO ONE OR MORE OF THE RECOGNIZED STOCK

EXCHANGES FOR PERMISSION TO HAVE THE SHARES OR DEBENTURES INTENDED TO BE SO

OFFERED TO THE PUBLIC TO BE DEALT WITH IN EACH OF SUCH STOCK EXCHANGE IN TERMS

OF SECTION 73 OF THE COMPANIES ACT, 1956. SEBI CAN HOWEVER UNDER THE
PROVISIONS OF SECTION 21 OF THE SECURITIES CONTRACTS (REGULATION) ACT,

1956 COMPEL THE LISTING OF SECURITIES BY PUBLIC COMPANIES IF IT IS OF AN OPINION

THAT IT IS NECESSARY OR EXPEDIENT IN THE INTEREST OF TRADE OR PUBLIC. IN THE

EVENT OF THE STOCK EXCHANGE REFUSING TO LIST THE SECURITIES OF ANY PUBLIC

COMPANY AN APPEAL TO SEBI IS PROVIDED UNDER THE ACT.

A COMPANY ON THE GROUNDS SPECIFIED IN SECTION 22A OF THE ACT IS ENTITLED TO

REFUSE TO REGISTER TRANSFER OF ANY OF ITS SECURITIES, NOTWITHSTANDING ANYTHING

CONTAINED IN ITS ARTICLES OR SECTION 82 OR SECTION 111 OF THE COMPANIES

ACT, 1956.

T HE S ECU RIT IES AND E XCH AN GE B OARD OF I NDI A A CT , 19 92.

THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (HEREINAFTER

REFERRED AS "THE SEBI ACT") IS DEEMED TO HAVE COME INTO FORCE ON JANUARY

30, 1992. RELATIVELY A BRIEF ACT CONTAINING ONLY 35 SECTIONS, THE SEBI ACT
GOVERNS ALL THE STOCK EXCHANGES AND THE SECURITIES TRANSACTIONS IN INDIA.

A BOARD BY THE NAME OF THE SECURITIES

EXCHANGE BOARD OF INDIA (SEBI)
AND

CONSISTING OF ONE CHAIRMAN AND FIVE MEMBERS, TWO FROM THE DEPARTMENT OF THE

FINANCE AND LAW OF THE CENTRAL GOVERNMENT, ONE FROM THE RESERVE BANK OF

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INDIA AND TWO OTHER PERSONS AND HAVING ITS HEAD OFFICE IN BOMBAY AND REGIONAL

OFFICES IN DELHI, CALCUTTA MADRAS HAS BEEN CONSTITUTED UNDER THE SEBI
AND

ACT TO ADMINISTER ITS PROVISIONS. THE CENTRAL GOVERNMENT HAS THE RIGHT TO
TERMINATE THE SERVICES OF THE CHAIRMAN OR ANY MEMBER OF THE BOARD. THE

BOARD DECIDES ALL QUESTIONS IN ITS MEETING BY MAJORITY VOTE WITH THE CHAIRMAN
HAVING A SECOND OR CASTING VOTE.

SECTION 11 OF THE SEBI ACT PROVIDES THAT IT SHALL THE DUTY OF THE BOARD TO

PROTECT THE INTEREST OF INVESTORS IN SECURITIES AND TO PROMOTE THE

DEVELOPMENT OF AND TO REGULATE THE SECURITIES MARKET BY SUCH MEASURES AS IT

THINKS FIT. IT EMPOWERS THE BOARD TO REGULATE STOCK

THE BUSINESS IN

EXCHANGES, TO REGISTER AND REGULATE 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, ETC., TO REGISTER AND REGULATE THE WORKING OF COLLECTIVE

INVESTMENT SCHEMES INCLUDING MUTUAL FUNDS, TO PROHIBIT FRAUDULENT AND UNFAIR

TRADE PRACTICES AND INSIDER TRADING, TO REGULATE TAKE-OVERS, TO CONDUCT

ENQUIRIES AND AUDITS OF THE STOCK EXCHANGES, ETC.

AS ALL STOCK EXCHANGES ARE REQUIRED TO BE REGISTERED WITH SEBI UNDER THE
PROVISIONS OF THE ACT, UNDER SECTION 12 OF THE SEBI ACT ALL THE STOCK

BROKERS, SUB-BROKERS, SHARE TRANSFER AGENTS, BANKERS TO AN ISSUE, TRUSTEES OF

TRUST DEED, REGISTRARS TO AN ISSUE, MERCHANT BANKERS, UNDERWRITERS, PORTFOLIO

MANAGERS, INVESTMENT ADVISERS AND SUCH OTHER INTERMEDIARY WHO MAY BE

ASSOCIATED WITH THE SECURITIES MARKETS ARE OBLIGED TO REGISTER WITH THE

BOARD AND THE BOARD HAS THE POWER TO SUSPEND OR CANCEL SUCH REGISTRATION.
THE BOARD IS BOUND BY THE DIRECTIONS GIVEN BY THE CENTRAL GOVERNMENT FROM
TIME TO TIME ON QUESTIONS OF POLICY AND THE CENTRAL GOVERNMENT HAS THE RIGHT

TO SUPERSEDE THE BOARD. THE BOARD IS ALSO OBLIGED TO SUBMIT A REPORT TO THE

CENTRAL GOVERNMENT EVERY YEAR, GIVING TRUE AND FULL ACCOUNT OF ITS
ACTIVITIES, POLICIES AND PROGRAMMES. ANY ONE AGGRIEVED BY THE BOARD'S DECISION

IS ENTITLED TO APPEAL TO THE CENTRAL GOVERNMENT.

THE CENTRAL GOVERNMENT UP TILL NOW HAS FRAMED TEN RULES BY VIRTUE OF

SECTION 29 OF THE SEBI ACT.

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THE BOARD EMPOWERED BY SECTION 30 OF THE SEBI ACT HAS TILL NOW WITH THE

PREVIOUS APPROVAL OF THE CENTRAL GOVERNMENT MADE TWELVE REGULATIONS.

THE DEPO SI TORI ES A CT, 1 99 6 AND REGULA TIONS.

WITH EFFECT FROM 20TH SEPTEMBER 1995 AN ACT, TO PROVIDE REGULATION OF

DEPOSITORIES IN SECURITIES AND FOR MATTERS CONNECTED THEREWITH AND/OR

INCIDENTAL THERETO HAS BEEN ENACTED IN INDIA WHICH IS TITLED AS "THE

DEPOSITORIES ACT, 1996". IT EXTENDS TO THE WHOLE OF INDIA. AS PER THE
DEFINITION PROVIDED IN SECTION 2(E) OF THE SAID ACT, A "DEPOSITORY" MEANS A

COMPANY FORMED AND REGISTERED UNDER THE COMPANIES ACT, 1956 AND WHICH HAS

BEEN GRANTED CERTIFICATE OF REGISTRATION UNDER SUB-SECTION (1A) OF SECTION

12 OF THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992.

THE SECURITIES & EXCHANGE BOARD OF INDIA HAVE IN EXERCISE OF THE POWERS
CONFERRED UPON IT MADE REGULATIONS WHICH ARE CALLED "THE SECURITIES &

EXCHANGE BOARD OF INDIA (DEPOSITORIES & PARTICIPANTS) REGULATIONS, 1996".

REGULATION 3 OF THE SAID REGULATIONS PROVIDES AS FOLLOWS:

3. (1) 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.

(2) THE APPLICATION SHALL BE ACCOMPANIED BY DRAFT BYE-LAWS OF THE

DEPOSITORY THAT IS PROPOSED TO BE SET UP.

REGULATION 6 PROVIDES THAT THE BOARD SHALL NOT CONSIDER AN APPLICATION

UNDER REGULATION 3 FOR GRANT OF A CERTIFICATE FOR REGISTRATION AS A

DEPOSITORY UNLESS THE SPONSOR BELONGS TO ONE OF THE CATEGORIES MENTIONED IN

REGULATION 6. REGULATION 7 PROVIDES THAT AFTER CONSIDERING THE APPLICATION
UNDER SECTION 3 WITH REGARD TO THE CLARIFICATION SPECIFIED IN REGULATION 6 IF

THE BOARD IS SATISFIED WITH THE COMPANY ESTABLISHED BY THE SPONSOR BEING

ELIGIBLE TO ACT AS DEPOSITORY, IT MAY GRANT A CERTIFICATE OF REGISTRATION

SUBJECT TO THE CONDITIONS MENTIONED IN REGULATION 7. A DEPOSITORY WHICH HAS

BEEN GRANTED A CERTIFICATE OF REGISTRATION UNDER REGULATION 7 IS OBLIGED TO

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MAKE AN APPLICATION TO THE BOARD WITHIN ONE YEAR FROM THE DATE OF ISSUE OF

THE CERTIFICATE OF REGISTRATION FOR COMMENCEMENT OF BUSINESS IN A PRESCRIBED

FORM. REGULATION 12 EMPOWERS THE BOARD TO ASK THE DEPOSITORY TO FURNISH

FURTHER INFORMATION AND/OR CLARIFICATION REGARDING THE MATTERS RELEVANT FOR

THE GRANT OF CERTIFICATE OF COMMENCEMENT OF BUSINESS AND REGULATION 13 LAYS

DOWN THE MATTERS WHICH ARE RELEVANT FOR CONSIDERING GRANT OF CERTIFICATE FOR

COMMENCEMENT OF BUSINESS.

THE RIGHTS AND OBLIGATIONS OF DEPOSITORY ARE PROVIDED IN CHAPTER V OF THE

SAID REGULATIONS. THEY INTER ALIA PROVIDE FOR SECURITIES ELIGIBLE FOR
DEMATERIALIZATION, AGREEMENT BETWEEN DEPOSITORY AND ISSUER, INTERNAL AND

EXTERNAL MONITORING, REVIEW AND EVALUATION OF SYSTEMS AND CONTROLS,

INSURANCE AGAINST RISKS, MANNER OF KEEPING RECORDS, RECORDS TO BE MAINTAINED,

PROHIBITION OF ASSIGNMENT, AGREEMENT BY PARTICIPANT, OPENING OF SEPARATE

ACCOUNTS, TRANSFER OR WITHDRAWAL BY BENEFICIAL OWNER, RECONCILIATION, MANNER

OF SURRENDER OF CERTIFICATE OF SECURITY, MANNER OF CREATING PLEDGE OR

HYPOTHECATION, ETC.

T AK E O VER C ODE :

SEBI UNDER THE PROVISIONS OF SECTION 11 OF THE SECURITIES EXCHANGE BOARD

OF INDIA ACT 1992 IS INTER ALIA EMPOWERED TO REGULATE THE SECURITIES MARKET

BY SUCH MEASURES AS IT MAY DEEM FIT. ONE OF THE MATTERS SPECIFIED UNDER THAT

SECTION IS "REGULATING SUBSTANTIAL ACQUISITION OF SHARES AND TAKE OVER OF

COMPANIES". SECTION 30 OF THE SAME ACT EMPOWERS SEBI TO MAKE REGULATIONS

TO CARRY OUT THE PURPOSES OF THIS ACT. EMPOWERED BY THESE PROVISIONS OF THE

ACT SEBI ENACTED "THE SECURITIES & EXCHANGE BOARD OF INDIA (SUBSTANTIAL
ACQUISITION OF SHARES AND TAKE OVERS) REGULATIONS, 1997. THEY CAME INTO
EFFECT ON 20TH FEBRUARY 1997. AND COMPRISED OF 47 REGULATIONS.

THE REGULATIONS, AFTER DEFINING, INTER ALIA, AS TO WHAT THE TERMS "ACQUIRER"
MEANS, WHO COULD BE CALLED AS "PERSON ACTING IN CONSORT", WHAT IS MEANT BY

"OFFER PERIOD", WHO IS A "PROMOTER", WHICH IS A "TARGET COMPANY", ETC. GO TO

PROVIDE:

(I) PROVISIONS OF DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY,

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(II) PROVISIONS FOR SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AN

ACQUISITION OF CONTROL OVER A LISTED COMPANY,

(III) PROVISIONS FOR BAIL OUT TAKEOVERS APPLICABLE TO SUBSTANTIAL ACQUISITION OF

SHARES IN A FINANCIALLY WEAK COMPANY, NOT BEING A SICK INDUSTRIAL COMPANY, IN

PURSUANCE TO A SCHEME OF REHABILITATION APPROVED BY A PUBLIC FINANCIAL

INSTITUTION OR A SCHEDULED BANK.

THE REGULATIONS ALSO PROVIDE FOR SEBI'S RIGHT TO INVESTIGATE INTO THE

COMPLAINTS ON MATTERS HAVING A BEARING ON THE SUBSTANTIAL ACQUISITION OF

SHARES AND TAKE OVERS AND PROVIDE FOR PENALTIES FOR VIOLATION OF ANY OF THE

PROVISIONS OF THE REGULATIONS. ADEQUATE PROVISIONS HAVE BEEN MADE IN THE

1997 REGULATIONS FOR:

A) EQUALITY OF TREATMENT AND OPPORTUNITY TO ALL SHAREHOLDERS

B) PROTECTION OF SHAREHOLDERS INTEREST

C) FAIR & TRUTHFUL DISCLOSURE OF ALL MATERIAL INFORMATION BY THE ACQUIRER IN

ALL PUBLIC ANNOUNCEMENTS AND OFFER DOCUMENTS

D) PROHIBITING THE ACQUIRER AND OTHER PARTIES FOR FURNISHING INFORMATION

CONCERNING OFFER EXCLUSIVELY TO ONE GROUP OF SHAREHOLDERS

E) ALLOWING SUFFICIENT TIME TO SHAREHOLDERS FOR MAKING UNIFORM DECISIONS

F) ANNOUNCING THE OFFER ONLY AFTER MOST CAREFUL AND RESPONSIBLE

CONSIDERATION

G) HIGHEST STANDARD OF CARE AND ACCURACY TO BE UTILIZED IN PREPARING OFFER

DOCUMENTS BY THE ACQUIRER AND ALL OTHER INTERMEDIARIES PROFESSIONALLY

INVOLVED IN THE OFFER

H) REFRAINING FROM CREATING A FALSE MARKET IN SECURITIES BY ALL PARTIES TO AN

OFFER

I) TARGET COMPANY NOT TO TAKE ANY ACTION TO FRUSTRATE AN OFFER WITHOUT THE

APPROVAL OF THE SHAREHOLDERS, ETC.

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THE 1997 REGULATIONS REPEAL THE EARLIER REGULATIONS.

FORE IGN E XCHANGE MAN AGEM ENT BI LL 19 98 (FE MA ):

AS A PART OF THE ON GOING PROCESS OF ECONOMIC LIBERALIZATION RELATING TO

FOREIGN INVESTMENTS AND FOREIGN TRADE IN INDIA AND AS A MEASURE FOR CLOSER
INTERACTION WITH THE WORLD ECONOMY THE FOREIGN EXCHANGE REGULATION ACT,

1973 (FERA) WAS REVIEWED IN THE YEAR 1993 AND SEVERAL AMENDMENTS WERE
MADE THEREIN. FURTHER REVIEW OF THE FERA WAS UNDERTAKEN BY THE CENTRAL

GOVERNMENT OF INDIA IN THE LIGHT OF SUBSEQUENT DEVELOPMENTS AND ON ACCOUNT

OF THE EXPERIENCE IN RELATION TO FOREIGN TRADE AND INVESTMENT IN INDIA, THE

CENTRAL GOVERNMENT FELT THAT INSTEAD OF FURTHER AMENDING THE FERA, THE
BETTER COURSE WOULD BE TO REPEAL THE EXISTING ACT AND TO ENACT A NEW

LEGISLATION IN ITS PLACE. IN VIEW OF THE SAME, THE RBI WAS ASKED TO SUGGEST A

NEW LEGISLATION BASED ON THE REPORT SUBMITTED BY A TASK FORCE CONSTITUTED FOR

THIS PURPOSE BY THE RBI RECOMMENDING SUBSTANTIAL CHANGES IN FERA.

THERE HAS BEEN A SUBSTANTIAL INCREASE IN THE FOREIGN EXCHANGE RESERVES OF

INDIA. SINCE THE YEAR 1993, FOREIGN TRADE HAS GROWN UP. DEVELOPMENT HAS
TAKEN PLACE SUCH AS CURRENT ACCOUNT CONVERTIBILITY, LIBERALIZATION IN

INVESTMENTS ABROAD, INCREASED ACCESS TO EXTERNAL COMMERCIAL BORROWINGS BY

INDIAN COMPANIES AND PARTICIPATION BY FOREIGN INSTITUTIONAL INVESTORS IN

SECURITIES MARKETS IN INDIA. KEEPING IN VIEW THESE CHANGES THE CENTRAL

GOVERNMENT OF INDIA HAS INTRODUCED THE FEMA TO REPEAL FERA.

A ACCUSED IS PRESUMED TO
MARKED DIGRESSION FROM THE GENERAL RULE THAT THE

BE INNOCENT UNTIL PROVED GUILTY BEYOND REASONABLE DOUBT, IS FOUND IN THE

FEMA. A PRESUMPTION REGARDING DOCUMENTS, CONTAINED IN THIS BILL IS

CONTRARY TO THE GENERAL RULES OF EVIDENCE. FOR EXAMPLE, WHEN DOCUMENTS

PERTAINING TO A CRIME

UNDER FEMA ARE DISCOVERED THE COURT WILL PRESUME THAT THE CONTENTS OF THE

DOCUMENTS ARE TRUE AND CORRECT AND WILL NOT GO INTO THE QUESTION WHETHER

THE INCRIMINATING DOCUMENTS MAY HAVE BEEN FORGED. THUS, IT BECOMES THE

RESPONSIBILITY OF THE ACCUSED TO PROVE, IN CASE THAT THE DOCUMENTS ARE

FABRICATED. THE MAIN CHANGE BETWEEN FERA AND FEMA IS IN THE APPROACH.

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FERA SEEKS TO REGULATE ALMOST ALL THE TRANSACTIONS INVOLVING FOREIGN

EXCHANGE AND INBOUND/OUTBOUND INVESTMENTS. IN FERA EVERY PROVISION IS

RESTRICTIVE AND STARTS WITH A NEGATIVE PROPOSITION STATING THAT WHATEVER IS

MENTIONED IN THAT SECTION IS PROHIBITED UNLESS THE PRIOR PERMISSION EITHER

GENERAL OR SPECIAL, AS MAY BE REQUIRED IN THE SPECIFIC CASE, OF RBI IS OBTAINED.

FERA PROVIDES THAT NOTHING CAN BE DONE WITHOUT RBI'S PERMISSION. IN

COMPARISON TO THIS EXISTING NEGATIVE PIECE OF LEGISLATION, THE PROVISIONS OF THE

PROPOSED BILL HAS A POSITIVE APPROACH. THIS CAN BE FOUND FROM THE PROVISIONS
OF FEMA DEALING WITH CAPITAL ACCOUNT TRANSACTIONS WHICH ARE TO BE

REGULATED. UNLIKE FERA WHICH PROVIDES THAT THESE TRANSACTIONS CANNOT BE

ENTERED INTO WITHOUT PRIOR PERMISSION OF RBI, FEMA PROVIDES THAT ANY

PERSON MAY SELL OR DRAW FOREIGN EXCHANGE FOR SUCH TRANSACTIONS AND THEN

SPECIFIES THE POWERS OF THE RBI TO REGULATE THE CLASS OR LIMITS OF SUCH
CAPITAL ACCOUNT TRANSACTIONS. THUS THE BASIC PROPOSITION IN THE PROPOSED

FEMA BILL IS POSITIVE. FEMA CLASSIFIES FOREIGN EXCHANGE TRANSACTIONS INTO

CAPITAL ACCOUNT TRANSACTIONS AND CURRENT ACCOUNT TRANSACTIONS AND AMONGST

THE TWO REGULATES THE FORMER MORE CLOSELY. UNDER FEMA RESIDENTIAL STATUS

WILL NOT DEPEND UPON THE INTENT OF THE PERSON TO RESIDE IN INDIA BUT WOULD

DEPEND UPON THE EXACT PERIOD OF HIS STAY IN INDIA.

THE PROVISIONS OF THE FEMA BILL AIMS AT CONSOLIDATING AND AMENDING THE LAW

RELATING TO FOREIGN EXCHANGE WITH THE OBJECT OF FACILITATING EXTERNAL TRADE

AND PAYMENTS AND FOR PROMOTING THE ORDERLY PAYMENT AND AMENDMENTS IN

FOREIGN EXCHANGE MARKETS IN INDIA. THE FEMA BILL EMPOWERS THE RBI TO

AUTHORIZE PERSONS TO DEAL IN FOREIGN SECURITIES SPECIFYING THE CONDITIONS FOR

THE SAME. IT ALSO PROVIDES FOR A PERSON RESIDENT IN INDIA IN HOLDING, OWNING,

TRANSFERRING OR INVESTING IN FOREIGN SECURITY AND FOR A PERSON RESIDENT OUT

SIDE INDIA IN HOLDING, OWNING, TRANSFERRING OR INVESTING IN INDIAN SECURITIES.

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