Introduction and objective
The SEBI act came into effect from 30th January, 1992 and applicable to whole India. The act was enacted by the parliament with objectives-
i) to provide for the establishment of a Board to protect the interests of investors in securities;
ii) to promote the development of securities market;
iii) to regulate the securities market; and
iv) for matters connected therewith or incidental thereto.
Key takeaways-
Establishment and Management of the Securities and Exchange Board of India
Section 3(1) of the SEBI act 1992 provides for establishment of a board by the name of Securities and Exchange Board of India with effect from the date of notification by the Central Government. The head office of the Board is at Bombay but it is also allowed to open offices at other places of the country.
According to section 3 (2) of the act the board shall be a corporate body, having perpetual succession and common seal, with power to acquire, hold and dispose of both moveable and immovable property, and to contract, sue or be sued by the said name.
The management of SEBI is entrusted with board members consisting of a chairman, two official members of central government dealing with finance, one member from officials of Reserve Bank of India and five other members to be appointed by the Central Government [Section 4(1)]. The chairman and other board members shall be persons of ability, integrity and stability who have capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline useful to the board.
Section 4(2) of the Act provides the board of members the power of general superintendence, direction and management of affairs of the SEBI. Section 4(3) of the Act also provides to chairman of the board the power of general superintendence and direction of the affairs of the board.
Key takeaways
Term of office and conditions of service of Chairman and members of the Board
According to section 5(1) of the act the term of office and other conditions of service of the chairman and other members is referred in section 4(1) (d).
Section 5(2) of the act provides that the central government shall have the right to terminate the services of chairman and other members at any time before the expiry of the prescribed period by giving him notice of not less than three months in writing or three months’ salary and allowances in lieu thereof.
Key takeaways
Removal of member from office
Section 6(1) of the act empowers the central government to remove members from office if he-
(a) is, or has been, adjudicated as insolvent;
(b) is declared by a competent court as unsound mind;
(c) has been convicted of an offence;
(e) has, in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest.
Key takeaways
1. Grounds for removal of members from office
Meetings
According to section 7(1) the time, place and business at board meetings should be as per the regulations provided. All questions of board meeting shall be decided by a majority vote and in the event of equality of vote, the Chairman, or in his absence, the person presiding, shall have a second or casting vote.
Transfer of assets, liabilities, etc., of existing Securities and Exchange Board to the Board
The provisions related to transfer of assets, liabilities etc. of SEBI is provided under the section 10 (1). On or from the establishment of the board-
(a) Any reference to the existing Securities and Exchange Board in any law other than this Act or in any contract or other instrument shall be deemed as a reference to the Board;
(b) All properties and assets (movable and immovable) belongs the existing Securities and Exchange Board, shall vest in the Board;
(c) All rights and liabilities of the existing Securities and Exchange Board shall be transferred to the Board;
(d) All debts, obligations and liabilities incurred, all contracts entered into by the existing Securities and Exchange Board deemed to have been incurred, entered into, or engaged to be done by, with or for, the Board;
(e) All sums of money due to the existing Securities and Exchange Board immediately before that date shall be deemed to be due to the Board;
(f) All suits and other legal proceedings instituted or which could have been instituted by or against the existing Securities and Exchange Board immediately before that date may be continued or may be instituted by or against the Board;
(g) Every employee holding any office under the existing Securities and Exchange Board immediately before that date shall hold his office in the Board by the same tenure and upon the same terms and conditions of service as respects remuneration, leave, provident fund, retirement and other terminal benefits as he would have held such office.
Key takeaways-
1. All rights and liabilities, dues of SEBI belongs to the board
2. All suits and other legal proceedings of SEBI is entertained by the board.
Functions of SEBI (section 11)
(a) Regulating the business in stock exchanges and any other securities markets;
(b) Registering and regulating 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 and such other intermediaries who may be associated with securities markets;
c) Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds;
d) Promoting and regulating self-regulatory organisations;
(e) Prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) Promoting investors’ education and training of intermediaries of securities markets;
(g) Prohibiting insider trading in securities;
(h) Regulating substantial acquisition of shares and takeover of companies;
(i) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;
j) Levying fees or other charges for carrying out the purposes of this section;
k) Conducting research for the above purposes;
l) Performing such other functions as may be prescribed.
Key takeaways-
Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control (section 12A)
No person shall directly or indirectly—
a) Use or employ, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange;
(b) Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;
(c) Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;
(d) Engage in insider trading;
(e) Deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;
(f) Acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.
Key takeaways-
Finance, accounts and audit
After due appropriation made by the parliament, the Central Government may grant to the board sum of money which will be utilised for meeting—
(a) The salaries, allowances and other remuneration of the members, officers and other employees of the Board;
(b) The expenses of the Board in the discharge of its functions. [Section 14(2)]
Section 15 of the SEBI act provides provisions related to accounts and audit of the board-
(1) The Board shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in a format prescribed by the Central Government in consultation with the Comptroller and Auditor-General of India.
(2) The accounts of the Board shall be audited by the Comptroller and Auditor-General of India at specified intervals and any expenditure incurred in connection with such audit shall be payable by the Board to the Comptroller and Auditor-General of India.
(3) The Comptroller and Auditor-General of India and any other person appointed by him in connection with the audit of the accounts of the Board shall have same rights and privilege as the Comptroller and Auditor-General generally has in connection with the audit of the Government accounts.
(4) The audited accounts of the Board together with the audit report thereon shall be forwarded annually to the Central Government and the same is laid before each House of Parliament by the Central Government.
Key takeaways-
1. The Central Government may grant to the board sum of money which will be utilised for salaries, allowances, expenses of the board.
2. The accounts of the Board shall be audited by the Comptroller and Auditor-General of India.
Penalties and adjudication (Section 15)
Section 15A mentions that if any person required under this to furnish information, return but-
a) Fails to furnish the same or who furnishes false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
b) Fails to file return or furnish the same within the specified time or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents he shall be liable to penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
c) Fails to maintain the books of accounts or recordes, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum one crore rupee.
Section 15B of the SEBI act mentions that if any person, is required under this act to enter into an agreement with his client but fails to enter into such agreement, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Section 15C of the SEBI act mentions that if any listed company or any registered intermediary, fails to redress grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Section 15D of the SEBI act provides that a) if any person without obtaining a certificate of registration from the board is sponsoring or carrying on collective investment scheme including mutual fund he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds subject to a maximum of one crore rupees;
b) Fails to comply with the terms and conditions of certificate of registration, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
c) Fails to make an application for listing of its schemes as provided for in the regulations governing such listing, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
d) Fails to despatch unit certificates of any scheme in the manner provided in the regulation governing such despatch, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
e) Fails to refund the application monies paid by the investors within the period specified in the regulations, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
f) Fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations, he shall be liable to 85[a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Section 15E of the SEBI act provides that where an asset management company fails to observe the provided rules and regulation than such company shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Section 15F of the SEBI act mentions that if any registered stock broker fails to issue contract notes in the specified manner or fails to deliver security or fails to make payment due or charges excess brokerage he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.
Section 15G of the SEBI act mentions penalty about insider trading. If any insider deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information or communicates any unpublished price-sensitive information to any person, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
Section 15H of the SEBI act mentions about Penalty for non-disclosure of acquisition of shares and takeovers. If any person, who is required under this Act but fails to-
(i) Disclose the aggregate of his shareholding in the corporate body; or
(ii) Make a public announcement to acquire shares at a minimum price;or
iii) Make a public offer; or
(iv) Make payment of consideration to the shareholders
he shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.
Section 15HA of the act mentions that if any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.
Section 15HAA mentions about the Penalty for alteration, destruction, etc., of records and failure to protect the electronic database of Board. If any person who
(a) Knowingly alters, destroys, mutilates, conceals, falsifies, or makes a false entry in any information, record, document (including electronic records), which is required under this act.
(b) Without being authorised to do so, access or tries to access, or denies of access or modifies access parameters, to the regulatory data in the database;
(c) Without being authorised to do so, downloads, extracts, copies, or reproduces in any form the regulatory data maintained in the system database;
(d) Knowingly introduces any computer virus or other computer contaminant into the system database and brings out a trading halt;
(e) Without authorisation disrupts the functioning of system database; knowingly damages, destroys, deletes, alters, diminishes in value or utility, or affects by any means, the regulatory data in the system database; or
(f) Knowingly provides any assistance to or causes any other person to do any of the acts specified in clauses (a) to (f), shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to ten crore rupees or three times the amount of profits made out of such act, whichever is higher.
Section 15I provides for the purpose of adjudging the penalties sections 15A to 15HA. The Board may appoint any officer not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. Section 15J of the act provides that while adjudging quantum of penalty the Board or the adjudicating officer shall have due regard to the following factors —
(a) The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) The amount of loss caused to an investor or group of investors as a result of the default;
(c) The repetitive nature of the default.
Key takeaways
Securities Appellate Tribunal
Section 15K of the SEBI act mentions that the Central Government shall by notification establish a Securities Appellate Tribunal to exercise the jurisdiction, powers and authority conferred on it by or under this Act or any other law for the time being in force. According to section 15L(1) the Securities Appellate Tribunal shall consist of a presiding officer, such number of Judicial Members and Technical Members as the Central Government may determine, by notification, to exercise the powers and discharge the functions conferred on the Securities Appellate Tribunal under this Act or any other law for the time being in force.
Key takeaways
The Depositories Act, 1996 deemed to have come into force on 20th September, 1995 and it extends to the whole of India. The depositories act was enacted by parliament to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto.
Section 3(1) provides that no depository shall act as a depository unless it obtains a certificate of commencement of business from the SEBI. A depository shall enter into an agreement with one or more participants as its agent [Section 4(1)]. Any person through the participants may enter into an agreement to avail the depository services [section 4(2)]. The person can also surrender the security certificate to the issuer in a prescribed manner with the help of depository services.
Key takeaways-
1. The depositories act was enacted by parliament to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto.
Registration of transfer of securities with depository
On receipt of intimation from a participant, every depository shall register the transfer of security in the name of the transferee [section 7(1)]. On the other hand, if a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly [section 7(2)].
Rights of depositories and beneficial owner (Section 10)
Pledge or hypothecation of securities held in a depository (Section 12)
A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository and the same must be intimated to the depository to record accordingly.
Furnishing of information and records by depository and issuer (Section 13)
Every depository shall furnish to the issuer information about the transfer of securities in the name of beneficial owners at such intervals and in manner prescribed.
Option to opt out in respect of any security (Section 14)
If a beneficial owner seeks to opt out of a depository in respect of any security he shall inform the depository accordingly. Every issuer shall, within thirty days of the receipt of intimation from the depository and on fulfilment of such conditions and on payment of such fees as may be specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the case may be.
Depositories to indemnify loss in certain cases (Section 16)
Any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner.
Enquiry and Inspection
Section 18(1) of the depositories act provides that in the interest of public or investor SEBI has power
a) to call upon any issuer, depository, participant or beneficial owner to furnish information in writing relating to the securities held in a depository; or
b) to authorise any person to make an enquiry or inspection in relation to the affairs of the issuer, beneficial owner, depository or participant.
Section 19(1) of the depositories act authorises the SEBI to give directions to depository or participant or issuer if after making an enquiry or inspection, the SEBI is satisfied that it is necessary—
(i) In the interest of investors, or orderly development of securities market; or
(ii) To prevent the affairs of any depository or participant being conducted in the manner detrimental to the interests of investors or securities market.
Key takeaways-
1. Depositories act authorises SEBI to enquire and inspect issuer, depository, participant and beneficial owner for the interest of public and investor.
Penalty for failure to furnish information, return, etc. (Section 19A)
Section 19A of the SEBI act mentions that any person who is required under this act to furnish any information, document, returns or reports of the books but -
a) Fails to furnish the same within the time specified, or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents;
b) Fails to file return or furnish the same within the time specified or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents;
c) Fails to maintain the books;
he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees for each such failure.
Penalty for failure to enter into an agreement (Section 19B)
If a depository or participant or any issuer or its agent or any person or its registered intermediary fails to enter into such agreement, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees for every such failure.
Penalty for failure to redress investors’ grievances (Section 19C)
If a depository or participant or any issuer or its agent or any person or its registered intermediary after having been called upon by the SEBI in writing, to redress the grievances of the investors, fails to redress such grievances within the time specified, such depository or participant or issuer or its agents or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Penalty for delay in dematerialisation or issue of certificate of securities (Section 19D)
If a depository or participant or any issuer or its agent or any person or its registered intermediary fails to dematerialise or issue the certificate of securities on opting out of a depository by the investors, within the time specified such issuer or its agent or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Penalty for failure to reconcile records (Section 19E)
If a depository or participant or any issuer or its agent or any person or its registered intermediary fails to reconcile the records of dematerialised securities with all the securities issued by the issuer as specified in the regulations, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Penalty for failure to comply with directions issued by Board (Section 19F)
If a depository or participant or any issuer or its agent or any person or its registered intermediary he shall be liable to a penalty 16[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Penalty for failure to conduct business in a fair manner (Section 19FA)
Where a depository fails to conduct its business with its participants or any issuer or its agent or any person associated with the securities markets in a fair manner in accordance with the rules, regulations made by the SEBI or directions issued by the SEBI under this Act, it shall be liable to penalty which shall not be less than five crore rupees but which may extend to twenty-five crore rupees or three times the amount of gains made out of such failure, whichever is higher.
Power to adjudicate (Section 19H)
For the purpose of adjudging penalties the SEBI may appoint any officer not below the rank of a Division Chief of the SEBI to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. While adjudging the quantum of penalty the SEBI or the adjudicating officer shall have due regard to the following factors, namely:—
(a) The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) The amount of loss caused to an investor or group of investors as a result of the default;
(c) The repetitive nature of the default.
Key takeaways-
1. SEBI has power to impose penalty for failure and delay to furnish information, failure to enter into an agreement, delay in dematerialisation or issue of certificate of securities, failure to redress investors’ grievances, failure to reconcile records, failure to comply with directions issued by Board, failure to conduct business in a fair manner.
2. SEBI may appoint any officer not below the rank of a Division Chief of the SEBI to be an adjudicating officer for holding an inquiry in the prescribed manner.
Appeals (Section 23)
Any person aggrieved by an order of the SEBI made under this Act, or the regulations made thereunder may prefer an appeal to the Central Government within a specified time and in a prescribed format and with fees.
Section 23A mentions that any person aggrieved by an order of the SEBI made or by an order made by an adjudicating officer under this Act may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter within a period of forty-five days from the date on which a copy of the order made by the Board is received.
Power of depositories to make bye-laws (Section 26)
A depository shall, with the previous approval of the SEBI, make following bye-laws-
(a) The eligibility criteria for admission and removal of securities in the depository;
(b) The conditions subject to which the securities shall be dealt with;
(c) The eligibility criteria for admission of any person as a participant;
(d) The manner and procedure for dematerialisation of securities;
(e) The procedure for transactions within the depository;
(f) The manner in which securities shall be dealt with or withdrawn from a depository;
(g) The procedure for ensuring safeguards to protect the interests of participants and beneficial owners;
(h) The conditions of admission into and withdrawal from a participant by a beneficial owner;
(i) The procedure for conveying information to the participants and beneficial owners on dividend declaration, shareholder meetings and other matters of interest to the beneficial owners;
(j) The manner of distribution of dividends, interest and monetary benefits received from the company among beneficial owners;
(k) The manner of creating pledge or hypothecation in respect of securities held with a depository;
(l) Inter se rights and obligations among the depository, issuer, participants, and beneficial owners;
(m) The manner and the periodicity of furnishing information to the Board, issuer and other persons;
(n) The procedure for resolving disputes involving depository, issuer, company or a beneficial owner;
(o) The procedure for proceeding against the participant committing breach of the regulations and provisions for suspension and expulsion of participants from the depository and cancellation of agreements entered with the depository;
(p) The internal control standards including procedure for auditing, reviewing and monitoring.
Key takeaways-
References
