Unit 1
Securities laws
Q1) Explain in brief the management of SEBI.
A1) 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. 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.
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.
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.
Q2) What are the objectives and functions of SEBI?
A2) 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.
The functions of SEBI are as follows-
(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.
Q3) State the provisions related to a) Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control and b) Finance, accounts and audit.
A3) According to section 12A of the SEBI act 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.
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.
Q4) State the provisions related to imposition of penalties for different grounds and its adjudication.
A4) 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 records, 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;
a) 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;
b) 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;
c) 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;
d) 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;
e) 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 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
E) 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.
Q5) Write a brief note on SEBI.
A5) 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.
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.
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.
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.
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.
Q6) Write a brief note on Depositories Act, 1996.
A6) 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.
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)
1) A depository shall be deemed to be the registered owner for the purposes of transfer of ownership of security on behalf of a beneficial owner.
2) The depository shall not have any voting rights or any other rights in respect of securities held by it.
3) The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository.
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.
Q7) Highlight the provisions of depositories act, 1996 regarding imposition of penalties.
A7) Depositories act provides the following provisions related to imposition of penalties-
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.
Q8) What are the different bye laws made by depository with the approval of SEBI.
A8) 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.
Q9) What are the powers of SEBI regarding adjudication of penalty and appeals of aggrieved party to the Security Appellate Tribunal?
A9) 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.
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.
Q10) How an appeal is made by an aggrieved party under the depositories act, 1996.
A10) Section 23 (1) of the depositories act provides that any person aggrieved by an order of the SEBI may prefer an appeal to the Central Government within such time as may be prescribed.
(2) No appeal shall be admitted if it is preferred after the expiry of the period prescribed. Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant satisfies the Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.
(3) Every appeal made under this section shall be made in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.
(4) The procedure for disposing of an appeal shall be such as may be prescribed. Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.
According to section 23A (1), any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act, or the regulations made thereunder, 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. Every appeal shall be filed within a period of forty-five days from the date. On receipt of an appeal, the Securities Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.