SECURITIES MARKET

REGULATION
Introduction
 State empowers a group of persons to organise
and run commercial projects for the purpose of
earning profit with the help of investments made
by a large number of investors.
 Investor is in a disadvantageous position vis-a`-vis
the management.
 Encumbent upon state to ensure adequate
protection to these vast investors against
mismanagement and questionable activities of a
few in the company known as ‘Management’.
 LEGAL FRAMEWORK OF THE INDIAN SECURITIES
MARKET
 Companies Act, 2013 (code of conduct for the corporate
sector in relation to issues, allotments and transfer of
securities)
 Securities Contracts (Regulation) Act, 1956 (regulate
transaction in securities through control over stock
exchange)
 Securities & Exchange Board Of India Act, 1992 ( develop
and regulate securities market and regulate transactions
and protect investor interests)
 The Depository Act, 1996 (provide for electronic
maintenance and transfer of ownership of dematerialised
securities)
 SEBI – AN INTRODUCTION
 The Securities and Exchange Board of India Act, 1992
(SEBI) came into force on January 30, 1992.
 governs Stock Exchanges and Securities Transactions in
India.
 Purpose of the Board - to maintain stable and efficient
markets by creating and enforcing regulations in the
marketplace
 SEBI has three functions rolled into one body:
legislative, judicial(SAT) and executive.
 Purpose and Role

Issuers:
Provides a market place in which they can raise
finance fairly and easily.
Investors:
Provides protection and supply of accurate and
correct information.
Intermediaries:
Provides a competitive professional market.
 Objectives

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to
their investment.
3. To prevent fraudulent and malpractices by having
balance between self regulation of business and its statutory
regulations.
4. To regulate and develop a code of conduct for
intermediaries such as brokers, underwriters, etc.
IMPORTANT PROVISIONS UNDER SEBI:
a. Establishment, incorporation and management of SEBI
(Chapter II): - prescribes detailed rules as to the creation of
SEBI, members of the Board, their qualifications, credentials and
term of office.

- prescribes the rules for conducting board meetings and removal of

members from office.
- Board comprises of a Chairman and five members, one each from
the department of Finance and Law of the Central Government, one
from the Reserve Bank of India and two other persons

- Head office in Bombay and regional offices in Delhi, Calcutta and

Madras.
 - The Central Government has the right to terminate the services
of the Chairman or any member of the Board.

- Board decides all questions in its meeting by majority vote

with the Chairman having a second or casting vote.

b. The powers and functions of SEBI (Chapter IV):

- Defines the role of the Board.

- Deals with the regulation of the securities market in all its

manifestations, and contains wide powers over Companies,
Venture Capital Funds, Stock Exchanges and Brokers.
c. Provisions relating to Collective Investment schemes:
- The Board has the power to regulate Collective Schemes and Mutual
Funds.
- Collective Schemes and Mutual Funds to get approval from SEBI
for floating schemes and tapping funds in the market.

d. Registration of an intermediary:
- Stock brokers, Sub-Brokers, Share Transfer Agents, Bankers to an
issue, Trustees of Debentures, Registrars to an issue, Merchant
Bankers, Underwriters, Portfolio Managers, Investment Advisers
and such other intermediaries need permission from SEBI to set up
operations.
- These are important powers that enables SEBI to ensure that all
securities transactions are subject to some measure of regulation by
forcing any intermediary to approach the Board for registration.
e. Penalties: A detailed list of penalties is listed in Chapter IVA to be
imposed upon persons who breach the Act or the rules and
regulations under the Act.
These include:
- Penalty for failure to furnish information, documents, returns or
reports to SEBI
- Penalty for failure by a broker or other intermediary to enter into an
agreement with his clients
- Penalty for failure of a broker or other intermediary to redress
investor’s grievances
- Penalty for defaults in case of Mutual Funds and Stock Brokers
- Penalty for insider trading
- For insider trading, the penalty is Rs. 5 lakh and for other offences
listed above the penalty is imprisonment for one year or a fine or
both.
f. Dispute mechanism:

- Securities Appellate Tribunal has been created to hear appeals

arising from the decisions of SEBI and also created a post of an
adjudicating officer.

- These provisions create a level of adjudication between the

Board and the High Court. An appeal from the Tribunal lies to
the High Court.

- The Tribunal is not bound by the Code of Civil Procedure, but

must follow principles of natural justice.
 FUNCTIONS OF SEBI

Protective functions

Developmental functions

Regulatory functions
 Protective
 Checks Price Rigging - manipulating the prices of
securities with the main objective of inflating or
depressing the market price of securities
 Prohibits Insider trading - insiders have sensitive
information which affects the prices of the securities
 Prohibits fraudulent and Unfair Trade Practices -
misleading statements likely to induce the sale or purchase
of securities
 Educate investors- to evaluate the securities of various
companies and select the most profitable securities
 Developmental
 Promotes training of intermediaries of the
securities market.
 Permits internet trading through registered
stock brokers.
 Underwriting optional to reduce the cost of
issue
 Regulatory
 Rules and regulations and code of conduct to
regulate the intermediaries such as merchant
bankers, brokers, underwriters, etc.
 Registers and regulates the working of stock brokers,
sub-brokers, share transfer agents, trustees,
merchant bankers and all those who are associated
with stock exchange in any manner.
 Registers and regulates the working of mutual funds
etc.
 Regulates takeover of the companies.
 Conducts inquiries and audit of stock exchanges.
 Securities Contract Regulation Act, 1956
 Contract – For purchase or sale of
securities or relating to purchase or
sale of securities
 Recognition and Grant of Stock Exchange (RSE)
 Withdrawal of recognition – to provide reasons
for withdrawal and opportunity to be heard
 Listing of Securities- S.21, 22A and 22F – Every
company applying for listing shall comply with
Listing Agreement
 Delisting of Securities – Section 21A
 Conditions for contracts in derivatives – Section
18A
 SEBI may transfer duties and functions of
reconginsed stock exchange to clearing
corporations
 Power of CG to prohibit contract of sale or
purchase of securities in certain areas
 Depositories Act, 1996
 Depository System – A system wherein the
securities of investors are held in the
electronic form with the depository at the
request of the investors and transfer of
securities takes place by means of book
entries on the ledger of the depository.
 ‘Scripless trading system’
 Depositories
 NSDL – National Securities Depository
Limited
 CDSL – Central Depository Services

Limited
Depositories –
 Hold securities in accounts

 Transfers securities between accounts

 Safe-keeping of Securities
Depository Participants
 Acts as a link between Depositories and Clients
 Representative of the investor in the depository system
 SEBI Guidelines – banks, financial institutions, stock-
brokers can become DP
 Help in instantaneous electronic transfer of securities
 Fungibility eases the transfer – having no distinct
certificate number, folio number etc.
 Registered Owner and Beneficial Owner
 Index of Registered members of Public Listed
Company – to record owners of the company
 Registered Owners are NSDL and CDSL only
 Depositories keep a track of all clients through
DPs
 Beneficial Owners – people holding securities at a
given point of time (Investors)
 Dividend
 In case company issues dividend, details of
holdings is intimated to depository by DP
 Depository directs information to Registrar
and Transfer Agents, who transfer the
amount to bank account of investors
through ECS
Registration of Companies with Depositories

 Companies are given International Securities

Identification Number (ISIN)
 SEBI (Depositories and Participants)
Regulation, 1996 – Now SEBI (Depositories
and Participants) Regulations, 2018
 provides for securities eligible to be held in
demat forms
 SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 
 Replaces the DIP Guidelines
 Relates to:
-  matters relating to issue of capital
- manner in which such matters shall be
disclosed
Trajectory

 Capital Issues (Control) Act, 1947

 Guidelines for Disclosure and Investor
Protection 1992
 SEBI (Disclosure and Investor
Protection) Guidelines, 2000
 SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009
 Applicability
 Public issue
 Rights issue
 Preferential issue
 Issue of bonus shares by a listed issuer
 Qualified institutions placement by a listed issuer
 Issue of Indian Depository Receipts where the aggregate
value of specified securities offered is Rs.50 cr. or more
Entities not eligible to make IPO
 Issuer, promoter/s, promoter group, selling shareholders are
debarred from accessing the capital market by SEBI.
 Promoter/s or director/s of the issuer of any other company
which is debarred from accessing the capital market by SEBI.
 Issuer or any of its promoters or directors is a willful defaulter.
 Promoters or directors of the issuer is a fugitive offender.
Issue of Capital
 Eligibility requirements for IPO
- net tangible assets of at least three crore rupees in each preceding 3
full years
- average operating profit of at least fifteen crore rupees
- net worth of at least one crore rupees in each of the preceding three
full years
- If it has changed its name within the last one year, at least fifty per
cent. of the revenue, calculated on a restated and consolidated basis,
for the preceding one full year has been earned by it from the activity
indicated by its new name
- Detailed provisions relating to appointment of lead managers,
intermediaries and compliance officer
- Draft offer document and offer document to contain material
disclosures which are true and adequate to enable the applicants to
take an informed investment decision
- Offer document to contain face value of shares, pricing/price band
- IPO grading by atleast one credit rating agency
- Manner of Issue related advertisements
- Minimum subscription – 90% of the offer through offer document
- Period subscription – 3 – 10 days
- Allotment procedure and basis of allotment
- Introduces – Fast Track Rights Issue and Further Public offer
- Issuer shall accept bids using only the ASBA facility
SEBI (Listing Obligations and Disclosure
Requirements)Regulations, 2018

 Disclosure for composition and role of

directors
 Gender diversity on Board
 Detailed Reports of Board Committees
 Disclosure and Transparency in Annual
Reports
 Audit/limited review of quarterly
consolidated financial results 
 SEBI (Mutual Fund) Regulations

 Emphasis on market discipline through enhanced transparency and disclosure

requirements.
 enhanced level of investor protection
 empowerment of investors
 stringent disclosure norms in the offer documents
 standardisation of norms for valuation of assets, computation of Net Asset
Values (NAVs) of schemes
 Complete freedom to asset management companies to structure schemes in
accordance with investor preferences
 Closer scrutiny through off site and on site inspections
 Code of ethics for asset management companies
 Definition of Mutual Fund
 Mutual fund means a fund established
in the form of a trust to raise monies
through the sale of units to the public
or a section of the public under one or
more schemes for investing in securities
including money market instruments or
gold or gold related instruments or real
estate assets (2013)
Salient features
 Categorization of schemes into five
groups – Equity, Debt, Hybrid, Solution
Oriented, Others
 To ensure uniformity, large, mid and
small cap has been defined clearly
 There is a lock-in period specified for
solution-oriented schemes
Eligibility Criteria

 Applicant has to fulfill the condition that

the sponsor should have a sound track
record and general reputation of
fairness and integrity in all his business
transactions
 Sponsor has contributed or contributes
at least 40% to the net worth of the
asset management company.
- Trust deed to be approved by the Board
- Sponsor or the trustee shall appoint an asset
management company, which has been approved by
the Board.
- May be terminated by majority of the trustees or by
seventy five per cent of the unit-holders of the
scheme
- Mutual fund appoints a custodian to carry out the
custodial services for the schemes of the fund and
sends intimation to the Board
- Open-ended schemes and close-ended schemes
- Provides procedures for launching of schemes and
winding up
- Liabilities in case of default
SEBI Takeover Code
Purpose of the Code
 Fair exit opportunity for shareholders
 Fair play in exit opportunity
 Fair disclosure about change in
shareholding and control in the
company
 Disclosure
 Protection of the interests of the public
shareholders of a company
 Public stakeholders do not generally
participate in the affairs of the company
 Mandatory offer and voluntary offer
 Non-compete fees included in the offer
price