SCRA

• An Act to prevent undesirable transactions in

securities by regulating the business of dealing
therein, by providing for certain other matters
connected therewith.
– Contracts in securities,
– Recognition of Stock exchanges [SCRA + SCRR 1957 +
SEBI (stock exchange and clearing corp.) reg. 2012
2018
– Listing/delisting of securities, see section 21, 21A, 22,
22A
 Applicability of SCRA
• Private companies – BK Holding v. Premchand
1983 cal.
• Public companies
– Listed
– Unlisted
• BK Holding [cal.]
• Brook Bond India Ltd. v. UB Ltd. 1999 Bom.
• Naresh Ag. v. CanBank Financial 2010 SC
• Bhagwati Developers v. Peerless general finance 2013 SC
 Bhagwati case Issues
• Applicability of SCRA
• Spot delivery contract
– “marketability = salability” analysis
– SCRA – listed vs. unlisted
• Criticism of the case
– Factual
– Applicability of SCRA vis-à-vis definition of Stock
exchange
– Marketability = free transferability =/ salability
• Definition of spot delivery
• Indo Pacific Software & Entertainment Ltd. 2012 SEBI
• Reading s. 13 and 18 together
• Central govt notf. 1969 u/s s. 16 prohibiting all
contracts for sale or purchase other than spot
delivery contracts – rescinded on 1st march 2000 –
power to regulate given to SEBI
• SEBI direction u/s 16 SCRA – same effect as 1969
notfn.
 Option contracts
• Section 20 – prohibition of options in
securities – deleted in 1995
• Section 18A [1999 amnd.] – contracts in
derivative to be legal if traded on stock
exchange
• Combined reading of 2000 SEBI notfn. + SCRA
 Enforceability of call – put option
• Jethalal Thakkar v. RN kapoor 1986 [Bom. Div.]
• Nishkalp Investments & Trading co. ltd. v. Hinduja TMT Ltd. 2008 Bom.
• Cairn Vedanta deal – SEBI 2011
• SEBI informal guidance to vulcan engineers
• MCX stock exchange v. SEBI 2012 Bom.
“in case of an option, a concluded contract for purchase or repurchase
arises only upon the exercise of the option. A contract for sale or purchase
would fructify only upon the exercise of option in future. If option were not
to be exercised by them, no contract for sale or purchase of securities would
come in to picture. Moreover, if the option were to be exercised, there is
nothing to indicate that the performance of contract would be anything
other than a spot delivery contract.”
• History of SCRA
• Options
– Issue of free transferability – Companies act 1956 vs. 2013
– Issue of spot delivery
• MCX case
• SEBI 2013 Notfn. Following are permissible within SCRA [Notwithstanding
anything in Section 18A]
– Contract of pre emption including ROFO/ROFR/Ta/Drag in shareholder’s agreement or
AOA
– Contract in SHA or AOA for purchase or sale of sec. pursuant to exercise of option
contained therein subject to followin:
» Title and ownership of underlying securities is held continuously by selling party to
such contract for a min. period of 1 year from the date of entering in to contract.
» Price or consideration payable for sale/purchase pursuant to exercise of option is in
compliance of other laws.
» Contract is settled by way of actual delivery of underlying securities
• RBI notfn 2014
– Earlier treated as debt [ECB] – treated as redeemable
instruments - assured return
– FDI policy 2011 – prohibition on options
– Allowed - option clause can be issued to foreign
investors provided that they donot contain option to
sell at assured price -new pricing regime
• Agreements with option clause
– Listed co. – sell at market price
– Unlisted co. sell at not more than ROE based price
» ROE = profit after tax / Net worth
 Stock exchanges
• Corporatization and demutualization
• Kania report 2003 – Section 4A 2004
• Procedure for Corp. and demutual. – S. 4B
– Submit scheme to sebi for approval
– Approval with or without modifications
– Public notice of approval [official gaz. + by RSE]
– Powers of Sebi – may put restrictions as to
• Voting rights of shareholders who are also brokers of RSE
• Rights of brokers or shareholders to appoint representative on governing body of RSE
• Max. no. of representatives of brokers to be appointed on RSE governing body to a max.
of 1/4th of total strength of gov. board
– Atleast 51% of equity by public other than shareholders having trading rights
[OFS; Pvt placement]
– Reg. 45 SEBI stock exchange reg. 2012
• Shareholding in RSE – Reg 17
– 51% by public [deftn: R. 2(m) Stock exchange reg. 2012]
– No person resident in India shall hold directly or indirectly, individually or together with PAC
acquire or hold more than 5% paid up equity share capital in RSE
• (i) a stock exchange; (ii) a depository; (iii) a banking company; (iv) an insurance company; and
(v) a public financial institution, may acquire or hold, either directly or indirectly, either
individually or together with persons acting in concert, upto 15%
– Non resident cannot acquire more than 5%
– Total non resident shareholding to not exceed 49%

• Eligibility to for holding or acquiring shares in RSE – Reg 19

– fit and proper person.
– Acquisition of more than 2% - seek approval of the Board within fifteen days of the acquisition.
– Acquisition of more than 5 % for others – seek approval .
– If no approval - divest excess shareholding.
• Disclosure of shareholding – Reg 21
 De-recognition of Stock Exchanges
• SEBI cir. 2008/2012 – exit policy
– Voluntary (2 years window)/compulsory derecognition
– Annual trading turnover of 1000 cr. In a given year on its own platform
– Consequence on cos. Listed
• Not exclusively listed
• Exclusively listed –
– Option for listing in other exchanges; (listing criteria relaxed 2012 cir.)
– may opt for voluntary delisting; (MPS req. waived off - 2014 cir.
– dissemination board [features]
• Time limit for dissemination board (18 months) (2016)
• Compulsory Exit option to shareholders after 18 months (july 2016 proposal)
Challenge to sebi power to derecognise: calcutta stock exchange v. SEBI [april
2016 cal.]
• Procedure to provide exit to investors [[Annex A –
Oct 2016 cir.
– Appointment of independent valuer
– Complete the entire process wirin 75 days
– Pubic announcement by promoters
– Opening of offer and payment
• Action against cos. Remaining on DB
– Ban on access to SM
– Freezing of shares
– Attachment of bank accounts
• See,2012 cir.
http://www.sebi.gov.in/legal/circulars/may-201
2/exit-policy-for-de-recognized-non-operational
-stock-exchanges_22825.html

• See, 2015 cir.

http://icmai.in/upload/pd/SEBI-Circular-210420
15.pdf

• See, 2016 Cir.

http://www.sebi.gov.in/legal/circulars/oct-2016
 For de-recognition
• http://www.livemint.com/Money/qV3hhM78
KI3EVFbB1U9v8H/New-Sebi-norms-to-enable-
investors-exit-3000-firms-of-defun.html

• http://www.business-standard.com/article/m
arkets/hc-backs-forced-exit-of-calcutta-stock-e
xchange-116041300870_1.html

• https://indiankanoon.org/doc/124217762/
• Half of all companies listed on regional
bourses untraceable
See,
http://www.thehindubusinessline.com/markets/
stock-markets/half-of-all-50-companies-listed-on
-regional-bourses-untraceable/article9754338.e
ce
 Listing of stock exchange
• Bimal Jalan Committee 2009-12
– Stock exc. May be permitted to list subject to anti conflict
of interest measures
– Cannot list on itself CANNOT LIST ON ITSELF
• International experience
• SEBI stock exch. Reg. 2012
• See, Listing. R. 45. (1) Subject to the provisions of
applicable laws in force, a RSE may apply for listing of
its securities on any RSE other than itself and its
associated stock exchange
 Challenges in listing
• Maintaining 51% public shareholding [excludes trading
member or their associates]– challenge ensuring
compliance
– Proposal: when the total holding of trading members exceed
certain limit say 45%, further approval shall be only after
approval of SEBI
– In case of breach, corporate rights to be frozen till divested
• Ensuring fit and proper person criteria
– Proposal: each person to self-declare
– Freezing of rights in case of breach
– Person desiring to buy more than 2% will need sebi approval
• Shareholding thresholds compliance
– Proposal: depositories to maintain record; inform if
threshold is crossed; freezin of rights
– SEBI cir. Jan 2016 – agreed as proposed
• Procedures for ensuring compliance with Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations)
Regulations, 2012 (SECC Regulations) by Listed Stock Exchanges.
http://www.sebi.gov.in/sebi_data/attachdocs/1451651951883.p
df
Cross-listing concerns
 stock exchanges – imp. links
• https://www.sebi.gov.in/media/press-releases
/nov-2015/sebi-board-meeting_31145.html
• http://www.sebi.gov.in/cms/sebi_data/attach
docs/1451651951883.pdf

• http://www.business-standard.com/article/m
arkets/why-national-stock-exchange-chooses-t
o-self-list-not-cross-list-116050500479_1.html

• http://www.livemint.com/Money/OoUql4pxoz
VQzBJ0g4EviK/NSE-submits-concerns-to-Sebi-
 Settlement cycle
• Transaction cycle
– Decision to trade
– Placing order
• Day order
• Immediate or cancel order
• Stop loss order
• Disclosed quantity order
– Trade Execution
– Clearing

• Settlement = Pay-in + pay-out

• T+2 rolling settlement cycle
– Trading [T-day]
– Clearing [T+1]
• Download of obligations of members/custodians by NSCCL
• Custodial confirmation
– Settlement [T+2] – pay in, pay out, valuation of shortages based on T+1 closing
 Listing of securities
• S. 21 SCRA – listing agreement
– Listing Agreement a statutory requirement
– Provisions for initial and continuous public disclosures
– Enforceability issues with listing agreement – LODR 2015 –
ease of reference
• S. 22A SCRA – appeal to SAT - Right of appeal against
refusal by stock exchange to list [St. exch. Has to
furnish reasons for refusal in 15 days]
• Rule 19 SCRR – requirements wrt listin of securities
on RSE [list of necessary docs]
 Minimum public shareholding (MPS)
• 19(2)(b) SCRR: at least 25 per cent of each class or kind of securities to be
public
– For public sector co. 19(2)(c)
• Ensures liquidity in market; discovery of fair price; floating at least 25 per
cent of each class or kind of securities to the public reduces risk of market
manipulation
• Rule 19A added in 2010 – MPS mandatory – june 2013 deadline -
• Methods to achieve MPS proposed by SEBI (see cl. 40 A listing agreement)
– Issuance of shares through prospectus.
– OFS held by promoters through prospectus. [e. g. DHL express ltd.; Fresenius kabi
– OFS by promoters on floor of stock Exchange.
– IPP (S. 2(zd) ICDR – [godrej]
– Rights issue/ bonus issue to public shareholders [pentokey; gammon infra]
– Any other method as approved by SEBI
 manner of achieving minimum public
shareholding sebi
• listing agreement now replaced by LODR – See,
R.38 which prompted sebi to release 2015 cir.
Similar to earlier Cl.40A
• Sebi Nov 2015 cir., see,
https://www.sebi.gov.in/legal/circulars/nov-201
5/manner-of-achieving-minimum-public-shareh
olding_31141.html

• SEBI Feb 2018 Cir, in addition to 2015 cir., see,

https://www.sebi.gov.in/legal/circulars/feb-201
8/manner-of-achieving-minimum-public-shareh
• New definitions added to SCRR
– 2(e): “public shareholding” means equity shares of
the company held by public.
– (d) “public” means persons other than – (i) the
promoter and promoter group; (ii) subsidiaries
and associates of the company
– Promoter/group: for deftn see ICDR
• SEBI measures for compliance – 2013
– Freezing of rights
– Prohibition from dealing in securities –
promoter/group/directors
– Restrained from holding any new position in co.

MPS in other countries:

London st. exch. – 25% public shareholding
Singapore – 10%
Hongkong – 25%
 Achieving MPS – new ways
• Wipro technologies
– 6.1 cr. equity shares to Pioneer independent trust
• Gokaldas exports
– Promoters [Hindujas: 20%; blackstone: 68.27%]
• Gillette India 2012 – SAT order 2013
– Promoters [P&g: 75.9%; S. Poddar: 12.9%]
– July 2013 – freezing of rights
– SAT: “the underlying philosophy behind the requirement of MPS is prevention of
concentration of shares in the hands of a few market players by ensuring a sound and
healthy public float to stave off any manipulation or perpetration of other unethical
activities in the sec. market.”
– “a dispersed shareholding structure is essential for the sustenance of a continuous
market for listed securities to provide liquidity to investors and to discover fair prices.
Larger the no. of shareholders, lesser is the scope of manipulation”.
– DISPERSED SHAREHOLDING STRUCTURE IS RQUIRED
– July 2013 – freezing of rights
– New proposal:
• P&g to sell 0.9% via OFS; poddar will bring down to
below 5%; termination of SHA b/w Poddar and P&g to
extinguish any spcl rigths of poddar
• Poddar to step down from board
• Entities related to poddar will not hold KMP
• No acquisition of shares by poddar for next 1 year
Once a promoter – always a promoter?

• Discussion paper on re-classification of

promoters – jan 2015
• Need for re-classification
– In case of acquisition
– Business separation
– Management transfer

LODR – 38, 31A

 Recent news
• http://www.india.com/news/agencies/sebi-fin
es-tea-time-for-violating-mps-norms-2464127
/

• http://economictimes.indiatimes.com/market
s/stocks/news/sebi-chief-disfavours-preferenti
al-treatment-for-psus/articleshow/59426067.c
ms

• https://www.vccircle.com/cx-partners-backed-
barbeque-nations-ipo-gets-regulatory-hiccups
 Non compliance with MPS
• Sebi Oct 2017 cir., see,
https://www.sebi.gov.in/legal/circulars/oct-20
17/non-compliance-with-the-minimum-public
-shareholding-mps-requirements_36216.html

• PSU relaxation for two years, see,

http://www.cfo-india.in/article/2018/04/10/g
ovt-mulls-writing-sebi-relax-minimum-25-shar
eholding-norms-psus
• SEBI consultative paper Aug 2018 on reclassification of shareholders, see,
https://www.sebi.gov.in/reports/reports/jul-2018/consultative-paper-on-r
evision-of-provisions-pertaining-to-re-classification-of-shareholders_3966
6.html

• Does not deal with situation of reclassification of a promoter when there

are multiple promoters
• Reclassification application by listed entity may be subject to misuse –
applic from promoter mandatory
• Shareholders approval in all cases – Majority of the minority
• Cooling off period b/w BOD meeting and shareholders meeting
• Uniform and single set of conditions for re-classification
• Professionally managed cos- threshold of 1% too low
• Amended R. 31A LODR 2019