Securities Law and Regulation

Market Regulation under the Companies Act,1956

The Companies Act was the earliest enactment that has regulatory provisions in the issuing of shares and securities by the company. It has provisions relating to issue, allotment and transfer of securities and the necessary disclosures to be made while making a public issue. The disclosures to be made in Prospectus It also has provisions relating to securities market. It regulates the entire process of allotment of shares and issuing of share certificates.

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The Provisions that have a bearing relating to Securities market are as follows:
• The different kinds of share capital that the company can raise and relating provisions. The provisions and restrictions relating to prospectus. To issue securities, how the company has to make application to a recognized stock exchange for seeking permission to get listed. Time limits are set to issue share certificates and debentures. Law relating to transfer and transmission of shares. It prescribes the procedure and conditions for raising capital like public issue, right issue, bonus issue, shares at premium, shares at discount, redeeming of shares etc.. The provisions stated in the Act are to be followed strictly and in case of non-compliance, it will lead to penal consequences.

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• The Securities Contracts (Regulations) Act,1956 was one of the special legislations enacted to regulate the securities market. • It was passed after the recommendations of the A D Gorwalla Committee after the draft was circulated to the principal stock exchanges, chamber of commerce and other interested associations. • After considering all the comments and suggestions, the Act was enacted in 1957. • According to the Act, Securities means and includes a) shares, scrip, stocks, bonds, debentures, debenture stock or other marketable securities of alike nature in or of any incorporated company or any other body corporate; b) government securities; c) such other instruments as may be declared by the Central Government to be securities and d) rights and interests in securities.

Objectives of the Act
• To prevent undesirable transactions in securities by regulating the business of dealing therein by providing for certain other matters connected therewith. • Every stock exchange to obtain recognition from the Central Government through an application. • The Securities Laws ( Second Amendment) Act, 1999 has empowered the SEBI also to grant recognition to stock exchanges. • The Act has prescribed the conditions for listing of securities with recognized stock exchanges, which has been made mandatory under the Companies Act.

Regulatory Measures
• The Act confers powers on the Central Government to make rules • To call for periodical returns to be furnished by the stock exchanges • To order suppressions of the governing body of a recognized stock exchanges • To suspend the business of any recognized stock exchange, if it thinks fit to do so. • To declare contracts for sale or purchase of any security in certain cases. • The Act requires the dealers in securities, operating in areas to be notified by SEBI for this purpose • To obtain license from SEBI in order to regulate their dealings in securities.

• To Act is made to keep a watch on all the stock exchanges of India and various transactions in securities. • The Central Govt to make rules by notification in the official gazette to govern and regulate the functioning of the stock exchanges in India. • Based on it, the Central Government framed the Securities Contracts (Regulation) Rules in the year 1957.

Role of SEBI
• The primary and secondary markets have grown in large number for the raising of the capital. • The number of stock exchanges (24),intermediatories, and other institutions have grown to a large extent making it obligatory for the State to control and regulate these markets for the protection of the investor population. • In order to achieve this the State has empowered SEBI to bring quantitative and qualitative changes in the nature of securities market.


Role of SEBI
• It was set up by the Government of India in 1988 as a non-statutory body to promote the growth of the securities market and also to protect the investors interest. It is now usually referred as ‘Board’. • Though in the beginning it was given the status of an interim body under the administrative control of the Ministry of Finance later, it was constituted through the Securities and Exchange Board of India Act, 1992 as a statutory body. • At present, both SERA and SEBI govern the securities market.

Objectives of SEBI
• • • To promote fair dealings by the issuers of securities and ensure a market place where they can raise funds at a relatively low cost. It has to have an effective surveillance mechanism and to regulate it for promoting market efficiency. To protect the investors interest and safeguard their rights and related interests so that there is a steady flow of savings into the market. To regulate and develop code of conduct and fair practices among intermediatories with a view to make them more competitive and professional. The intermediatories are like the brokers, merchant bankers etc… In order to achieve these objectives, SEBI can frame regulations.

Other roles of SEBI
• It seeks to accomplish the regulation and development of the Securities market by continual review and appraisal of its policies and programs. • It is the Apex authority to regulate the transactions in the Indian Securities market. • In order to regulate the market, the Act has made it compulsory for the intermediatories to register with SEBI. • It monitors the functioning, code of conduct, capital adequacy and other norms including inspecting their operations so as to effectively enforce its compliance.

Other functions of SEBI
• SEBI has committed portfolio investment only through broad based funds such as mutual Funds and others. • SEBI even manages to look into the affairs of the Foreign Institutional Investment, which has been a major development these days. • The SEBI needs to look into foreign investments because, foreign participation has been permitted in various areas of financial services, through Joint Ventures with the approval of the Foreign Investment Promotion Board (FIPB).

Powers of SEBI
• • • SEBI vested with the powers of CIVIL COURT as per CPC The Powers include: Discovery and production of any books of accounts and other documents including inspection of these books of accounts, registers and other documents etc… Even to inspect the books, register etc of companies which want to get its securities listed in the stock exchange, in order check as to any insider trading or fraudulent and unfair trade practices related to the securities market. Summoning and enforcing the attendance of persons and examining them on oath. Issuing commission for the examination of witness or documents.

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Other powers
• During investigation or pending any enquiry, it can suspend trading in stock exchanges, restrain persons to access the securities market, suspend any office bearer of stock exchange or self-regulatory authority Impend, retain any proceeds of any transactions Attach bank account etc.. Issue directions to the security market not to dispose of or alienate an asset forming part of any transactions under investigation. To protect investors , SEBI may specify some special regulations or orders in respect to prospectus, offer documents and advertisements that are offered to solicit money from the investors. It can also specify certain requirements for listing of securities and transfer of securities. It can levy fees, levy penalty, hear appeals etc.. It can suspend or cancel the registration of any intermediatory

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Stock Exchanges
• To sell and purchase shares, securities, stock and other financial products the centralized market place is the ‘stock exchanges’. The recognized stock exchanges in India are about 24 in number. The members may act either as agents for their customers, or as principals for their own accounts. • Stock exchanges facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. • The Indian Stock Exchanges are: • BSE- It is the principal Stock Exchange, traced back to the history of establishing around 1875 in Mumbai as an Non-profit Organization. • NSE- It has been established as a Public Limited Company. They are the main Stock Exchanges other than the Regional Stock Exchanges ( List of RSE in next slide)

Regional Stock Exchanges
• • • • • • • • • • • Ahmedabad Stock Exchange Bangalore Stock Exchange Bhubaneshwar Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhiana Stock Exchange • • • • • • • • • • Madhya Pradesh Stock Exchange Madras Stock Exchange Magadh Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange Of India Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange Vadodara Stock Exchange

• It accounts for nearly 70% of aggregate paid-up share capital all listed companies and aggregate of 80% of the market capitalization of the listed companies. It is the oldest Stock Market in Asia. Its operations are improved as per the International Standards. In order to increase the market transparency, the BSE has taken a major step to provide electronic trading for all the listed securities with the permission of SEBI. BSE Online Trading System (BOLT) has provided transparency, flexibility, liquidity and elimination of mismatches. The trading hours have been increased from 2 to 6 hrs. The BOLT network (Covers 227 centers )based on Very Small Aperture Terminal (VSAT) technology and TWS (Traders Work Stations).

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• It emerged as an endeavor by some of the institutional investors within the country to address the issues relating transparency, lack of trading facilities fair and accessible to all, undercapitalized trading members, etc.. It was established in 1992 and recognized as Stock Exchange in 1993 and started operating in 1994, to break the monopoly that was enjoyed by BSE brokers. The trading system in NSE is known as NEAT (National Exchange for Automated Trading), which is fully automated screen-based trading system that enables members from across the country to trade simultaneously with enormous ease and efficiency.

• The securities traded on NSE includes and provides a trading platform of all types securities- equity and debt, corporate and government and derivatives. • The Exchange provides products in three different segments-like Wholesale Debt Market (WDM), Capital Market (CM) and Futures and Options (F&O). • The products include equities, fixed income securities (sovereign and non-sovereign), future and options on indices to stocks and interest rates. • In NSE membership also means ownership of the exchange. The ownership and management of exchange is completely separated from the right to trading members, to trade on the NSE.

Over-The Counter-Market (OTCEI)
• The success of Over –the- counter market and its efficiency compared to the traditional markets led to the establishment of OTC in India under Section 25 of the Indian Companies Act, 1956 in 1990. • In order to encourage foreign investment, cheaper and faster sources of finance were found necessary. • It helps the companies to establish their operations and also helps in generation of employment opportunities and boosting of economic growth. • Most of the Banks, Financial Institutions, Venture capitalists, NBFC’s etc are the members of OTCEI are the promoters of OTCEI. It was set up to promote access of small and medium-sized companies to capital markets. • Companies with an issued capital ranging from Rs, 30 Lakhs to less than Rs 3 Crore are eligible to list their shares under the OTCEI

Characteristics and benefits of OTCEI
• • • • • • • • • It offered the first transparent and screen based trading. A ringless trading mechanism. Creation of Liquidity Computerized and transparent trading. Two way quotes, one for the sale and other for the purchase and an exclusive list of companies Permits trading of equity and debentures. It benefits the listed companies including the private company to offer their shares to public. Listing of companies with market capitalization as low as Rs 3 Crores A single platform for the companies to be listed nationwide, by removing the difficulty of listing it in different exchanges.

Advantages and the securities traded in OTCEI
• Investors need not go to far off places to trade • It helps the small investor • Price blindness removed because the investors will display security prices online. • It reduces the delay in settlements • It intends to provide information relating to the companies to all its investors. • The securities traded on the OTCEI are shares/ debentures listed with other stock exchanges and units of UTI and mutual funds are permitted to be traded on OTCEI. • The shares and debentures of the companies listed in the OTCEI can be bought or sold at any OTCEI counters.

Players and Members of OTCEI
The three players are: • Members • Dealers • Sponsors The main activities of the members and dealers are: • Buying and selling securities as per the order of the clients • Trading on their own account at the prices quoted by the market makers. • Becoming voluntary market makers. Any person to become a member of OTCEI has to fulfill the eligibility norms laid down by OTCEI such as network, approval of SEBI, infrastructure, standing and experience etc..

Regulation of Stock Exchanges
• The nominations to the post of president and the vice president of the stock exchanges and appointment of the executive chiefs and other nominations of public representatives on the governing body of stock Exchanges are with the Ministry of Finance as per the rules, bye-laws, and regulations of the Stock Exchanges. SEBI regulates the Stock Exchanges, securities markets, registration and regulations of intermediatories, including the regulations of mutual funds, prohibition of fraudulent and unfair practices and insider dealings. As per SERA, SEBI can call for periodical and annual returns from stock exchanges, amendments to rules and bye-laws of the stock exchanges, licensing of dealers in securities and suspension of business of any recognized stock exchanges.

The delegation of powers to SEBI
The Central Government has delegated the following powers to the SEBI under the SC(R)A,1956: • • • • • • Submission of applications for recognition of stock exchanges Granting and withdrawal of recognition of stock exchanges To amend rules and articles of association of SE relating to voting rights etc.. Regulation and control of business of dealing in spot delivery contracts Hearing appeals submitted by companies against refusal of stock exchanges to list their securities. The governing body has been empowered to deal with admissions, registration and expulsion of members, adjudication and imposition of penalties on members and regulation of the market etc…

Powers of SEBI over Stock Exchanges
• SEBI to direct the stock exchanges to make or amend rules if necessary . The rules so made to be published in the official gazette. • SEBI to declare the lawfulness of contracts in a specified state or area and prohibit contracts as a principal with any other person other than a member of the recognized stock exchange. • To prevent undesirable speculation in specified securities in any State or area as per the notification in the official gazette. SEBI may grant license for dealing in securities if it is satisfied with the manner in which securities are dealt. • SEBI to act in the interest of trade and public and regulate and control business of dealing in spot delivery contracts. No person to organize or assist in organizing or be a member of any stock exchange without permission of SEBI

Trading of securities
• • • • Trading and settlements of securities is the principal aspect of the capital markets particularly, the secondary markets. Each stock exchange has its own established procedures and systems for trading, clearing and settlement of securities. Most of the stock exchanges are fully automated and screen-based. The wholesale debt market as well as the retail debt market segments, comprising of the government securities are also traded in some stock markets.

NSE Trading System
• •     The trading is done through NEAT system. The NEAT System has four types of market: Normal Market. Odd Lot Market. Auction Market. Spot market.

Order Books are maintained distinctively for the purpose of looking into the order having best price so that it gets priority and if they are of same price, then the order which is entered first will get the priority.

Capital market/Equities Segment
• The trading in capital market commenced in NSE in 1994 and presently it is considered to be the largest trading terminal as per the trading volumes. The capital markets segment provides for the trading of the following instruments: • Shares- Equity and preference shares • Debentures-Convertible (partly and fully), Non-Convertible, Warrants, Bonds etc.. • Units of Mutual Funds.

BSE Trading System
• Established in 1875, it has been the first stock exchange to introduce a free float index; commence trading in derivates and to introduce centralized exchange managed internet trading platform. • The trading in BSE can be conducted by members of the exchange or through sub-brokers registered under SEBI. Membership of Exchange • The members can be an individual or a company. • The members needs to have 2 yrs experience as a partner or authorized clerk or apprentice with a member of the exchange or in other connected areas of the capital market. • A Company to have a minimum of paid-up capital of Rs.30 lakhs to become a member. It will be known as corporate member.

Securities Traded and BSE Online Trading ( BOLT)
• • • • The securities traded on the exchange are Listed Securities and permitted Securities Securities listed in the exchange are listed securities. Securities traded in the Regional Stock Market but not listed in the BSE are permitted Securities. The Objectives of BOLT system is to bring transparency in deals, improvement in liquidity, elimination of mismatches, mitigation of risks associated with settlement, instantaneous dissemination of information through various data- feed channels, increase market depth etc..

OTCEI Trading System
• It is a primary stock for trading listed securities. It permits listing of both listed and permitted securities in OTCEI. • Trading in the listed segment takes place through the OASIS system. It is a hybrid trading method, which is a combination of quota and order driven systems. It can take place through members/ dealers of exchange all over India. • The trading cycles are provided for both listed and permitted securities on particulars days of the week and fixed hours.

Procedure for Buy/Sell securities on OTCEI
• Investor may approach any brokers. He views the current quotes/ prices offered on the screen display in the same. • The investor can put in an order to match the best quote or the best order rate. • The investor may alternatively enter the order for a rate different from that displayed in such, case the order is executed against a corresponding order received within the same settlement period. • The investor also has an option for trading into speculative trades by first buying and later finalizing the trade at a higher price or selling first and later finalizing the trade at a lower price.

Trading of Unlisted Securities
• • It is a quite active and robust market in the financial sector. Based on the recommendations of the Dave Committee Report in 1996, the OTCEI has permitted for trading of equity shares of listed companies. The exchange has framed rules and guideline to facilitate this trading activity and has been submitted to SEBI. It has given option for venture capital/ private equity, offshore funds, corporates and other institutions to trade in unlisted securities with a well structured market. It has provided improved investment opportunities enterprises, especially in the growth sectors. in start-up

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Margin Trading
• To buy and sell the securities the investor must have funds in his account and the seller should have shares in his Demat account. • In case of insufficient funds in the account the investor can take loan from his broker up to a certain percentage as per the prescribed norms. • In case of fall in the share price, he has to pay the deficit amount to the broker. • In such a way the investor has to maintain a margin throughout the period, that in case the margin falls by a level fixed by the SEBI, the broker can liquidate the client’s holdings. • The margin here means the money actually borrowed from the broker, who uses the investor’s stocks thus purchased as collateral for the funds advanced. They are collected to safeguard against any adverse price movement. • Margins are quoted as a percentage of value of the transactions.

Listing of Securities
• Listing means admission of securities for trading on stock exchange through a formal agreement between the stock exchange and the company. Securities are listed in any of the stock exchanges on an application made by any person by complying with the conditions of the listing agreements of the stock exchanges. A public company desirous of getting its securities listed on a recognized stock exchange, shall apply to the stock exchange. An applicant company shall also satisfy the stock exchange that at least 25% of each class or kind of securities issued by the company was offered to the public for subscription through an advertisement in the newspaper for a period of not less than 2 days and the application received in pursuance of such offer was allotted fairly and unconditionally.

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Other related provisions
• SEBI can relax the requirement of this minimum subscription in respect of Government company, subject to some instructions as that the SEBI may issue in this behalf from time to time. • In case of refusal to list the company, SEBI shall furnish the reasons. There is a provision of appeal against such decision, which shall be given to the company for refusal to list its securities. • The price at which the securities are brought or sold on a recognized stock exchange is known as official quotation. • Listing has been made compulsory for companies intending to offer shares or debentures to the public for subscription by the issue of a prospectus, to make an application to one or more recognized stock exchanges.

Advantages of Listing
Advantages can be classified as Advantages to the company and advantages to the investors Advantages to the company are as follows: • • • Company enjoys concessions under the direct tax laws. The companies gain national and international importance if their share value is quoted on the stock exchange. Financial institutions and banks extend term loans facilities in form of rupee currency and foreign currency. Listing helps the companies to mobilize resources from the shareholders “ Right Issues” without depending on financial institution. It also ensures wide distribution of shareholding thus avoiding fears of easy takeover of the organizations by others.

Advantages to the investors
• As it is officially traded, the liquidity of investment by the investors is well ensured. Rights entitlement in respect of further issues can be disposed of in the market. Banks prefer to extend loans facility to the listed securities. The rules of the stock exchange protect the interests of the investors in respect of their holdings. Tax assessment for the investors will corroborate for the Income Tax and Wealth Tax purpose. The companies which are listed are have to furnish unaudited financial results half yearly, which will benefit the investing public to appreciate the financial results of companies between the financial years. Any offers relating to takeovers have to be announced to the public, which gives them the discretion in making decisions in these matters.

Types of Listing and other formalities
There are 5 types of listing: • • • • • Initial listing Listing of Public Issue of Shares and/or Debentures Listing of Right issue of Shares and /or Debentures. Listing of Bonus issue of Shares and Listing of Shares issued on Amalgamation,Mergers etc

Many formalities have to be fulfilled while executing an agreement on listing of securities in the stock markets as per the provisions of SERA, SEBI and Companies Act. Listing of securities makes the companies inform any significant developments pertaining to its business to the stock exchange. It helps in the process of information dissemination and draws attention of the academicians, consultants, analysts etc…

Buy-Back of Shares
• If any company which has listed its securities has to buy them back, it has to follow the regulations formulated by SEBI. If the shares are unlisted the Department of Companies Affairs will regulated the buying back of shares. • The buy back will be permitted only for restructuring the equity and not for treasury operations. The buying back of shares without following the rules will call for stringent punishment including imprisonment. • The companies have to pass a special resolution of the shareholders in order to mandate such decision following an approval from the Board of directors. • No rules have been formulated by the Government for buying back of the shares of the FERA Companies. They may have to seek the approval of FIPB/RBI approval for enhancing the promoters stake in the Company after buying back of shares.

• Depository is a company formed and registered under the Companies Act, 1956. The Depositaries are also granted a certificate of registration and commencement of business under the SEBI. • The Indian government passed the Depositories Act in 1996 to allow for establishment of depositories in India. • The main function of this depository is to dematerialize securities and enable their transaction in a book-entry form.

Other provisions
• SEBI has framed regulations for proper functioning of Depositories and Participants. The SEBI (Depositories and Participants) Regulations, 1996 contains details about various requirements and conditions to be satisfied by the depositories and participants. • In order to lessen the risk and delays in processing the securities in the physical form the preference was given to Non-physical Form i.e. in the electronic form. • In order to achieve the process of facilitating the investors in dealing with the securities and making it more efficient, the NSDL ( National Securities Depository Limited) was established in 1996. • NSDL is sponsored by IDBI, the UTI and the NSE.

Various Participants and Registration procedure for Depositories.
The various participants in this system are:  NSDL  Depositories participants  Registrars and Share Transfer Agents and  The Investors • To register as a depository, an application with a fee, to be paid to the SEBI has to be paid. SEBI can raise objections and reject the application. But before doing so, it has to give an opportunity for removing the objections raised by SEBI. • Once the application is accepted , the applicant has to appear for personal representation or through an authorized representative before SEBI in connection to grant of certificate of registration. • After getting convinced that all the formalities have been followed, the SEBI grants certificate of registration. • The depository has to pay a registration fee of Rs. 25,00,000 within fifteen days of receipt of grant of registration.

Advantages of Depository System
The advantages of the Depositories system to the investors are as follows: • Filling up the transfer deeds and lodging the same with the company for transfer will not be necessary. • Stamp duty to be exempted for transfer of shares. • Shares to be transferred after purchase in the name of investor within a day of completion of settlement. It will stop bad deliveries and facilitates faster payments for the sale of shares. • Scope of forgery of share certificate will be eliminated. • Even by holding the shares in the electronic form, the investors will be entitled to all the benefits that will evolve as an investor, as the depository will give the details to the Registrar in the record/book closure date. The securities can be easily pledged or hypothecated even in the electronic form.

Role of NSDL
• • NSDL functions as a bank. It is an organization where the securities of the participating investors are held in an electronic form (fungible form). The investor who wants his shares to be dematerialized has to open an account at the depository through Depository Participants (DP). They function as brokers in the stock market. The depository provides custodial services and also legally transfers the ownership of the securities. It minimizes the paper work in trading or transferring of the ownership of securities and its records. Investors are provided with a facility to obtain the list of DP by writing to NSDL. Any Financial institutions, banks and stockbrokers can act as depository participants.

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