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.1TOPIC :protection of the investor in securities market ----role SEBI

“…..to protect the interests of investors in securities and to promote the

development of, and to regulate the securities market and for matters connected
therewith or incidental thereto…..”.

Preamble

Part:1

Introduction(securities)

A security is a fungible, negotiable instrument representing financial value. Securities are

broadly categorized into debt securities (such as banknotes, bonds and debentures); equity
securities, e.g., common stocks; and derivative contracts, such as forwards, futures,
options and swaps. The company or other entity issuing the security is called the issuer. A
country's regulatory structure determines what qualifies as a security. For example, private
investment pools may have some features of securities, but they may not be registered or
regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated", that is
in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle
the holder to rights under the security merely by holding the security, or registered,
meaning they entitle the holder to rights only if he or she appears on a security register
maintained by the issuer or an intermediary. They include shares of corporate stock or
mutual funds, bonds issued by corporations or governmental agencies, stock options or
other options, limited partnership units, and various other formal investment instruments
that are negotiable and fungible2.On April 12, 1992, the Securities and Exchange Board Of
India was constituted. It was constituted in accordance with the provisions of the
Securities and Exchange Board Of India Act 1992.

Definitions
The word security is derived from the Latin "Se-Cura" and literally translates to "without
fear". 'Security' is therefore the state of being secure, or the actions employed to achieve
that state, i.e. to be secure is to be without fear of harm.

The definition given in a UN study, in 1986, is interesting as a contribution to the

understanding of the concept of security, “Security is a state at which countries think that

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Security (finance) - Wikipedia, the free encyclopedia.htm
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there is no danger of military attack, political pressure, or economic coercion, so that they
can develop and progress freely.
With respect to classified matter, the condition that prevents unauthorized persons from
having access to official information that is safeguarded in the interests of national
security.
Measures taken by a military unit, an activity or installation to protect itself against
all acts designed to, or which may, impair its effectiveness.
According to Securities Contracts (Regulation) Act, 1956 Section 2 (h): “Securities”
include—shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate;

According to The Companies (Issue of Indian Depository Receipts) Rules, 2004 Rule
3 (1) (b) : “Domestic Depository” means custodian of securities registered with the
Securities and Exchange Board of India, hereinafter referred to as SEBI and authorised by
the issuing company to issue Indian Depository Receipts;
.
According to SEBI (Custodian of Securities) Regulations, 1996 Regulation 2 (d) :
“custodian of securities” means any person who carries on or proposes to carry on the
business of providing custodial services;

What and Why of Securities Market?

(a)In every economic System, some units which may be individual or Institution are
surplus-generating while others are deficit- generating.

(b)Surplus-Generating Units are called Savers while Deficit-generating units are called
spenders.
(c)Households are surplus-generating and Corporate and Government are deficit
generators.

(d)By placing the surplus funds in Financial claims or Financial securities the Spending
community gets funds at a cost and saving community gets various benefits like interest,
dividend, capital appreciation, Bonus etc.

(e)The Surplus generating units (Savers) are investors and Deficit generating units
(spenders) are issuers.

(f)These investors and issuers of financial securities constitute two important elements of
the securities markets.3
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Investment Laws Contact Programme Programme- Class I
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(g)The third critical element of markets is the intermediaries who act as conduits between
the investors and issuers Regulatory bodies, which regulate the functioning of the
securities markets, constitute the last but very significant element of securities markets.

Functions Of The Board

• The Board is responsible for the securing the interests of investors in securities and
to facilitate the growth of and to monitor the securities market in an appropriate
manner.
• To monitor and control the performance of stock exchange and derivative markets.
• Listing and monitoring the functioning 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 others
associated with securities markets by any means.
• Monitoring and Controlling the functioning of venture capital funds and mutual
funds.
• Forbid unjust and dishonest trade practices in the security markets and forbid
insider trading in the security market.
• Undertake periodic audits of stock exchanges, mutual funds, individuals and self
regulatory organizations associated with the security market.

Various Statutory enactment for securities of depository under SEBI

According to The Depositories Act, 1996 under sec2(b) "Board" means the Securities and
Exchange Board of India established under section 3 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992);

According to The Depositories Act, 1996 under sec2 (e) "depository" means a company
formed and registered under the Companies Act, 1956 (1 of 1956) and which has been
granted a certificate of registration under sub-section (1A) of section 12 of the Securities
and Exchange Board of India Act, 1992 (15 of 1992);

According to The Depositories Act, 1996 under sec2 (i) "record" includes the records
maintained in the form of books or stored in a computer or in such other form as may be
determined by regulations;
According to The Depositories Act, 1996 under sec2 (j) "registered owner" means a
depository whose name is entered as such in the register of the issuer;

………………..Prof. S.Krishnaswamy
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According to The Depositories Act, 1996 under sec2 (l) "security" means such security as
may be specified by the Board;
According to The Depositories Act, 1996 under sec2 (m) "service" means any service
connected with recording of allotment of securities or transfer of ownership of securities in
the record of a depository.

The Depositories Act, 1996

The Depositories Act, 1996 has laid down the legislative framework for facilitating the
dematerialization and book entry transfer of securities in a depository. The Act, inter alias,
provides for the following: registration with SEBI of a depository, which is required to be
a company under the Companies Act, 1956, and of depository participants, who are agents
of the depository the dematerialization of securities in a depository with the records of
beneficial ownership being recorded by the depository, and the transfer of beneficial
ownership which takes place through electronic book entry by the depository
indemnification, in the first instance by the depository, of beneficial owners for the
negligence of the participant interfaces between the depository, participants, issuers and
beneficial owners, several of which are required to be in the bye-laws which a depository
has to make with the approval of SEBI option to investors to hold securities in physical or
dematerialized form, or to rematerialize securities previously held in dematerialized form
enquiries, inspection and penalties in case of default the Act also amends other statutes to
facilitate the setting up and functioning of depositories and introduces the free
transferability of securities.

The Depositories Related Laws (Amendment) Ordinance, 1997

In January 1997, the Depositories Related Laws (Amendment) Ordinance, 1997 was
promulgated, which amended certain other statutes to further facilitate the
dematerialization and book entry transfer of securities in the depository, especially
securities of large financial institutions and public sector banks. The State Bank of India
Act, 1955, the State Bank of India (Subsidiary Banks) Act, 1959, the Industrial
Development Bank of India, 1964 and the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1980 were amended through this Ordinance to facilitate the
dematerialization and transfer by electronic book entry of the shares of the SBI, its
subsidiaries and the IDBI. The Ordinance also amends the Indian Stamp Act, 1899 to
exempt transfer of units of mutual funds through electronic book entry in a depository.

The SEBI (Depositories and Participants) Regulations, 1996

SEBI had circulated a consultative paper on the framework of the draft regulations for
depositories and participants in October 1995. Extensive discussion were then held with
the stock exchanges, market participants and investors on this issue. In addition to the
views expressed at these meetings, SEBI also had the benefit of written comments on the
Consultative Paper submitted by chambers of commerce and industry, market participants
and investors. Based on the above, the SEBI (Depositories and Participants) Regulations,
1996 were notified in May 1996. These regulations provide for the following:
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registration of depositories and participants under the SEBI Act grant of certificate of
commencement of business upon satisfaction that adequate safeguards and systems to
prevent manipulation of records and transactions have been put in place, as required by the
Depositories Act the eligibility criteria for admission of securities to a depository
the specific rights and obligations of depositories, participants and issuers in addition to
those specified in the Depositories Act periodic reports to and inspections and enquiries by
SEBI penal action and procedure in case of default In addition, the regulations contain the
following provisions: the minimum capital of the company that is to be registered as
depository, has been set at Rs. 100 crore the eligibility criteria for the sponsors of a
depository, who have been restricted to financial institutions, custodians, non-banking
finance companies and stock brokers with a minimum net worth of Rs. 50 lakh and subject
to a ceiling of 25 times their net worth on the value of the portfolios for which they act as
participant provisions for the indemnification of beneficial owners including insurance
cover for the depository and participants the adequacy of safeguards and procedures that
are to be put in place before commencement of business is allowed to the depository
the internal and external controls and audit mechanisms that are to be instituted by the
depository in order to ensure the integrity of data processing systems and the adequacy of
systems and procedures to prevent systemic failure, manipulation or loss of records

The SEBI(Depositories and Participants)(Amendment) Regulations, 1997 In February

1997, the SEBI (Depositories and Participants) Regulations, 1997 were amended to restrict
foreign ownership of a depository, whether as sponsors or participants to 20% of its 4

equity. The regulations were also amended to permit non-banking finance companies with
a minimum net worth of Rs. 50 crore in addition to the net worth specified by any other
authority to act as participants in a depository on behalf of other beneficial owners.

Substantial acquisitions of shares and take-overs The SEBI (Substantial Acquisitions of

Shares and Take-overs) Regulations, 1994 were notified in November 1994. The
regulations were aimed at making the take-over process more transparent, and to protect
the interests of minority shareholders. A committee was set up under the chairmanship of
Justice P N Bhagwati, former Chief Justice of India to examine the deficiencies in the
1994 regulations and to make them more fair, transparent and unambiguous, and to protect
the interests of investors and all parties concerned in the acquisition process. The
committee had a wide representation from chambers of commerce and industry, investor
associations, stock exchanges, market participants, legal experts and professional bodies.
The report of the committee was widely circulated, and was one of the most debated
reports on the securities markets in the country. After discussions on the comments on the
report and the draft regulations framed by the committee, the SEBI (Substantial
Acquisitions of Shares and Take-over) Regulations, 1997 were notified in February 1997.

The 1997 regulations aim at:

Investor protection in the take-over process

Greater transparency
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Fairness and equity of treatment to all investors

Timeliness and accuracy of disclosure of information to investors
Prevention of frivolous offers
Enforcement against violations

The salient features of the new regulations are:

definition of “control” and “parties acting in concert”, and requirement of a mandatory

public offer by an acquirer once he acquires more than 10% of the voting rights of a listed
company or if there is a change in control of the company
consolidation of holdings in a company at the rate of 2% in every 12 month period by any
person who holds between 10% and 51% of the shares or voting rights of a company
without triggering a mandatory public offer person holding more than 51% of the shares
or voting rights cannot consolidate unless he makes a public offer to acquire the required
number of shares elaborate and stringent disclosure requirements the introduction of the
requirement of establishing an escrow account by an acquirer in which the acquirer is
required to deposit some percentage of the consideration payable. For consideration
payable by the offer or upto and including Rs. 100 crore, 25% of the consideration payable
required to be placed in escrow, and for the consideration payable exceeding Rs. 100 core
10% of the consideration payable required to be placed in escrow. This amount would be
forfeited in case of default or non compliance by the acquirer cash as well as exchange
offers, conditional offers, competitive bidding and revision of offers indirect take-over of
companies through the acquisition of control of holding investment companies brought
under the purview of the regulations, and such a change in control requires a mandatory
public offer to be made.

According to this act THE SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSESTS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
under sec 2(1) In this Act, unless the context otherwise requires,--
(a) "Appellate Tribunal" means a Debts Recovery Appellate Tribunal established
under sub-section (1) of section 8 of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 (51 of 1993); (d) "banking company" shall have the
meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10
of 1949);
under sec 2 (e) "Board" means the Securities and Exchange Board of India established
under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (g)
"Central Registry" means the registry set up or cause to bet set up under sub-section (1) of
section 20;

under3. deal s with Registration of securitization companies or reconstruction

companies
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(1) No securitization company or reconstruction company shall commence or carry

on the business of securitizations or asset reconstruction without--
(a) obtaining a certificate of registration granted under this section; and
(b) having the owned fund of not less than two core rupees or such other
amount not exceeding fifteen per cent of total financial assets acquired or to
be acquired by the securitization company or reconstruction company, as the
Reserve Bank may, by notification, specify:

Under sec4.deals with Cancellation of certificate of registration2i

(1) The Reserve Bank may cancel a certificate of registration granted to a

securitization company or a reconstruction company, if such company--
(a) ceases to carry on the business of securitization or asset reconstruction; or
(b) ceases to receive or hold any investment from a qualified institutional buyer; or
(c) has failed to comply with any conditions subject to which the certificate of
registration has been granted to it; or
(d) at any time fails to fulfill any of the conditions referred to in clauses (a) to (g)
of sub-section (3) of section 3; or
(e) fails to--
(i) comply with any direction issued by the Reserve Bank under the
provisions of this Act; or
(ii) maintain accounts in accordance with the requirements of any law or
any direction or order issued by the Reserve Bank under the
provisions of this Act; or
(iii) submit or offer for inspection its books of account or other relevant
documents when so demanded by the Reserve Bank; or
(iv) obtain prior approval of the Reserve Bank required under subsection
(6) of section 3

Under sec7 deals with. Issue of security by raising of receipts or funds by

securitization company or reconstruction company

(1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of
1956), Securities Contracts (Regulation) Act, 1956 (42 of 1956), and the Securities and
Exchange Board of India Act, 1992 (15 of 1992), any securitization company or
reconstruction company, may, after acquisition of any financial asset under sub-section (1)
of section 5, offer security receipts to qualified institutional buyers (other than by offer to
public) for subscription in accordance with the provisions of those Acts.
(2) A securitisation company or reconstruction company may raise funds from the
qualified institutional buyers by formulating schemes for acquiring financial assets and
shall keep and maintain separate and distinct accounts in respect of each such scheme for
every financial asset acquired out of investments made by a qualified institutional buyer
and ensure that realizations of such financial asset is held and applied towards redemption
of investments and payment of returns assured on such investments under the relevant
scheme.
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(2A)(a)The scheme for the purpose of offering security receipts under sub-section (1)
or raising funds under sub-section (2), may be in the nature of a trust to be
managed by the securitizations company or reconstruction company, and the
securitizations company or reconstruction company shall hold the assets so
acquired or the funds so raised for acquiring the assets, in trust for the
benefit of the qualified institutional buyers holding the security receipts or
from whom the funds are raised.
(b) The provisions of the Indian Trust Act, 1882 (2 of 1882) shall, except insofar
as they are inconsistent with the provisions of this Act, apply with respect to
the trust referred to in clause (a) above.
(3) In the event of non-realization under sub-section (2) of financial assets, the
qualified institutional buyers of a securitization company or reconstruction company,
holding security receipts of not less than seventy-five per cent of the total value of the
security receipts issued under a scheme by such company, shall be entitled to call a
meeting of all the qualified institutional buyers and every resolution passed in such
meeting shall be binding on the company (4) The qualified institutional buyers shall, at a
meeting called under sub-section (3),
follow the same procedure, as nearly as possible as is followed at meetings of the board of
directors of the securitization company or reconstruction company, as the case may be.

Under sec11.deals with Resolution of disputes

Where any dispute relating to securitization or reconstruction or non-payment of any

amount due including interest arises amongst any of the parties, namely, the bank or
financial institution or securitization company or reconstruction company or qualified
institutional buyer, such dispute shall be settled by conciliation or arbitration as provided
in the Arbitration and Conciliation Act, 1996 (26 of 1996), as if the parties to the dispute
have consented in writing for determination of such dispute by conciliation or arbitration
and the provisions of that Act shall apply accordingly.

Under sec 14. deals with Chief Metropolitan Magistrate or District Magistrate to
assist secured creditor in taking possession of secured asset

(1) Where the possession of any secured assets is required to be taken by the secured
creditor or if any of the secured asset is required to be sold or transferred by the secured
creditor under the provisions of this Act, the secured creditor may, for the purpose of
taking possession or control of any such secured asset, request, in writing, the Chief
Metropolitan Magistrate or the District Magistrate within whose jurisdiction any
such secured asset or other documents relating thereto may be situated or found, to take
possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the
District Magistrate shall, on such request being made to him--
(a) take possession of such asset and documents relating thereto; and
(b) forward such assets and documents to the secured creditor.
(2) For the purpose of securing compliance with the provisions of sub-section (1), the
Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken
such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.
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(3) No act of the Chief Metropolitan Magistrate or the District Magistrate done in
pursuance of this section shall be called in question in any court or before any authority.
22. Register of securitization, reconstruction and security interest transactions
(1) For the purposes of this Act, a record called the Central Register shall be kept at the
head office of the Central Registry for entering the particulars of the transactions relating
to--
(a) securitization of financial assets;
(b) reconstruction of financial assets; and
(c) creation of security interest.
(2) Notwithstanding anything contained in sub-section (1), it shall be lawful for the
Central Registrar to keep the records wholly or partly in computer, floppies, diskettes or in
any other electronic form subject to such safeguards as may be prescribed.
(3) Where such register is maintained wholly or partly in computer, floppies, diskettes or
in any other electronic form, under sub-section (2), any reference in this Act to entry in the
Central Register shall be construed as a reference to any entry as maintained in computer
or in any other electronic form. (4) The register shall be kept under the control and
management of the Central Registrar.

Under sec27.deals with Penalties OFFENCES AND PENALTIES

If a default is made-- in filing under section 23, the particulars of every transaction of any
securitisation or asset 30. Cognizance of offence
No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First
Class shall try an offence punishable under this Act.85

Securities Market in India

with the onset of globalization, the securities market has been wracked with a series of
scams. both big and small, not just in India but all over the world. As a result, the
machinations of unscrupulous fraudsters have jeopardized the finances of thousands or
investors. some of whom have faced complete financial ruin. As a step towards curbing
such economic offences. the Indian Parliament amended the Securities Exchange Board of
India (SEB!) Act in 2002 in order to permit SEBl to impose heavy penalties on economic
offenders which could go up to thrice the amount of the wrongfully gained amount.
Unfortunately though. the Securities Appellate Tribunal (hereinafter referred as SAT),
regulated SEB to such an extent that it nearly deprived this regulatory authority of its
teeth. Due to an erroneous interpretation given to the provisions of SEBI act 1992 and
mistaken legislature intention inferred . many of SEBl's orders against persons indulging
in insider trading" were thrown .out outright by SAT for a long period of lime on the
ground of lack of mens rea.

The legislative intent behind amending the SEBJ Act in 2002 and deliberately raising the
upper limit of penalties to Rx 25 crore (Rs 250 million) is clearly to give more power to
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SEBI to curb unfair practices in the securities market. The lenient approach adopted by
SAT could reduce the respect for the law.

The last straw that broke the camel's back was the order of the SAT in the matter of
Rakesh Agrawal Vs. Securities Exchange Board of India. MANU/SB/020S/ 2003. The
SAT authorities went beyond every parameter to hold that the offender was not liable for
the lack of guilty mind. SAT observed that "looking from the gravity of the charge and
penal consequences that could visit the insider for indulging in insider trading. it is
difficult to accept the proposition the intention/motive of the person indulging in insider
trading is irrelevant." But SAT failed to appreciate that in view of the gravity of the
offence and the impairment it causes to society and the securities market. the delinquent
should not have been dealt with leniently. Needless to add, having to prove criminal intent
or motive beyond reasonable doubt would be essential where the punishment imposed for
the aberration is in the nature of imprisonment or fine, which is a necessary consequence
of a criminal proceeding, unlike in the case of a civil or adjudicatory proceeding
conducted by SEBI. 56

Surplus-Generating Units are called Savers while Deficit-generating units are called
spenders. Households are surplus-generating and Corporate and Government are deficit
generators. By placing the surplus funds in Financial claims or Financial securities the
Spending community gets funds at a cost and saving community gets various benefits like
interest, dividend, capital appreciation, Bonus etc. The Surplus generating units (Savers)
are investors and Deficit generating units (spenders) are issuers.
These investors and issuers of financial securities constitute two important elements of the
securities markets. The third critical element of markets is the intermediaries who act as
conduits between the investors and issuers. Regulatory bodies, which regulate the
functioning of the securities markets, constitute the last but very significant element of
securities markets.

Thus the four important elements of securities markets are:

Investors
Issuers
Intermediaries
Regulators

Primary and secondary market

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From the lawyers collective
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Primary Market is the segment in which new issues are made whereas secondary market is
the segment in which outstanding issues are traded. It is for this reason that the Primary
Market is called the New issues Market and the secondary market is called Stock Market.
The public securities markets can be divided into primary and secondary markets. The
distinguishing difference between the two markets is that in the primary market, the
money for the securities is received by the issuer of those securities from investors,
typically in an initial public offering transaction, whereas in the secondary market, the
securities are simply assets held by one investor selling them to another investor (money
goes from one investor to the other). An initial public offering is when a company issues
public stock newly to investors, called an "IPO" for short. A company can later issue more
new shares, or issue shares that have been previously registered in a shelf registration.
These later new issues are also sold in the primary market, but they are not considered to
be an IPO but are often called a "secondary offering". Issuers usually retain investment
banks to assist them in administering the IPO, obtaining SEC (or other regulatory body)
approval of the offering filing, and selling the new issue. When the investment bank buys
the entire new issue from the issuer at a discount to resell it at a markup, it is called a firm
commitment underwriting. However, if the investment bank considers the risk too great
for an underwriting, it may only assent to a best effort agreement, where the investment
bank will simply do its best to sell the new issue.
In order for the primary market to thrive, there must be a secondary market, or aftermarket
which provides liquidity for the investment security, where holders of securities can sell
them to other investors for cash. Otherwise, few people would purchase primary issues,
and, thus, companies and governments would be restricted in raising equity capital
(money) for their operations. Organized exchanges constitute the main secondary markets.
Many smaller issues and most debt securities trade in the decentralized, dealer-based over-
the-counter markets.7
In Europe, the principal trade organization for securities dealers is the International Capital
Market Association. In the U.S., the principal trade organization for securities dealers is
the Securities Industry and Financial Markets Association, which is the result of the
merger of the Securities Industry Association and the Bond Market Association represent
bond dealers globally.

History of Indian Stock Market

From Scattered and small beginning in the 19th Century, India’s stock market has risen to
great heights. By 1990, we had 19 stock exchanges in the country. There were around
6,000 listed companies and the investors population stood around 15 Million.

Role & Functions of Stock Exchange

In Union of India Vs. Allied International Products Ltd. [ (1971) 41 Comp Cas 127 SC]:
(1970) 3 SCC 5941), the Supreme Court of India has enunciated the role of the Stock
Exchanges in these words:

Role & Functions of Stock Exchange

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“ A Stock Exchange fulfills a vital function in the economic development of a nation: its
main function is to ‘liquefy’ capital by enabling a person who has invested money in, say a
factory or railway, to convert it into cash by disposing off his shares in the enterprise to
someone else.

Role & Functions of Stock Exchange

unless its shares are quoted in an approved stock exchange. All public companies are
anxious to obtain permission from reputed exchanges for securing quotations of their
shares and the management of a company is anxious to inform the investing public that the
shares of the company will be quoted on the stock exchange”.

The stock exchange is really an essential pillar of the private sector corporate economy. It
discharges three essential functions:

First, the stock exchange provides a market place for purchase and sale of securities viz.
shares, bonds, debentures etc. It, therefore, ensures the free transferability of securities
which is the essential basis for the joint stock enterprise system.

Secondly, the stock exchange provides the linkage between the savings in the household
sector and the investment in the corporate economy. It mobilizes savings, changeless them
as securities into these enterprises which are favored by the investors on the basis of such
criteria as future growth prospects, good returns and appreciation of capital

Thirdly, by providing a market quotation of the prices of shares and bonds- a sort of
collective judgment simultaneously reached by many buyers and sellers in the market- the
stock exchange serves the role of a barometer, not only of the state of health of individual
companies, but also of the nation’s economy as a whole

Since the savings of the investing community namely, public, needs to be protected from
various kinds of malpractices, frauds, defaults etc., it was obligatory on the part of the
Governing system to establish Regulatory bodies.

UK and USA had long back created separate boards for the regulation of the securities
market. U.K has the Securities and Investment Board (SIB) and U.S. has the Securities
and Exchange Commission (SEC). The Indian Government’s intention to set up a separate
board for the regulation and orderly functioning of the capital market was first declared in
the Budget speech by Shri. Rajiv Gandhi, the then Prime Minister and Minister of Finance,
while presenting the Budget for the year 1987-88. He stated:

“ The Capital Markets in India have shown tremendous growth in the last few years.
Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87. They were only
about Rs.500 Crores in 1980-81. For a healthy growth of capital markets, investors must
be fully protected. Trading malpractices must be prevented. Government have decided to
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set up a separate board for the regulation and orderly functioning of stock exchange and
the securities industry”.

By a notification issued on 12th April’1988, Securities and Exchange Board of India

(SEBI) was constituted as an interim administrative body to function under the overall
administrative control of the Ministry of Finance of the Central Government. In July 1988,
the SEBI, constituted as a foresaid, published an approach paper on comprehensive
legislation for securities market. The SEBI was given a statutory status on 30th
January,1992 by an ordinance to provide for the establishment of SEBI. A Bill to replace
the Ordinance was introduced in parliament on 3rd march, 1992 and was passed y both
houses of parliament on 1st April’1992. The Bill became an act on 4th April’1992 the date
on which it is received the President’s assent. However, as provided for in section 1(3),
this act is to be deemed to have come into force on 30th January, 1992, i.e. the date on
which the SEBI ordinance was promulgated.

Part:2

SEBI INTRODACATION

IN 1988 Securities and exchange board of India was established by the Government of
India through an executive resolution, and was subsequently upgraded as a fully
autonomous body (a statutory Board) in the year 1992 with the passing of the Securities
and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of
Government Control, a statutory and autonomous regulatory board with defined
responsibilities, to cover both development & regulation of the market, and independent
powers have been set up. .

Objectives of SEBI

The primary objective of SEBI is to promote healthy and orderly growth -of the securities
market and secure investor protection. The main objectives of SEBI are as follows:
(a)To protect the interest of investors, so that, there is a steady flow of savings into the
capital market.
(B)To regulate the securities market and ensure fair practices.

©To promote efficient services by brokers, merchant bankers, and other intermediaries, so
that, they become competitive and professional.
(d)for matters connected therewith or incidental thereto.8
Functions of SEBI (Sec. 11)

The SEBI Act, 1992 has entrusted with two functions, they are
(a)Regulatory functions
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(b)Developmental functions
Chapter 4 of the Act deals with the Regulatory and Developmental functions of SEBI.

a) Regulatory Functions: These include

Regulation of stock exchange and self regulatory organizations.
Registration and regulation of stock brokers, sub-brokers, Registrars to all issues,
merchant bankers, underwriters, portfolio managers etc.
Registration and regulation of the working of collective investment schemes including
mutual funds.
Prohibition of fraudulent and unfair trade practices relating to securities market.
Prohibition of insider trading
Regulating substantial acquisition of shares and takeover of companies.

b) Developmental Functions: These include

Promoting investor’s education

Training of intermediaries
Conducting research and publishing information useful to all market participants.
Promotion of fair practices
Promotion of self regulatory organizations

Powers of SEBI

In order to carry out its objectives, the following are the powers exercised by SEBI.
Power to call periodical returns from recognized stock exchanges.
Power to compel listing of securities by public companies.
Power to levy fees or other charges for carrying out the purposes of regulation.
Power to call information or explanation from recognized stock exchanges or their
members.
Power to grant approval to bye-laws of recognized stock exchanges.
Power to control and regulate stock exchanges.
Power to direct enquiries to be made in relation to affairs of stock exchanges or their
members.
Power to make or amend bye-laws of recognized stock exchanges.
Power to grant registration to market intermediaries.
Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act
1956, in any State or area, to grant licenses to dealers in securities.

Role of SEBI 9

The SEBI shall create a conductive atmosphere for the proper functioning of the capital
market. The atmosphere includes the rules and regulations, trade practices, customs and
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relations among institutions, brokers, investors and companies. It shall have to get the trust
of the investors in safeguarding their interest. This can be achieved by meeting the needs
of persons connected with the securities market and establishing proper co-ordination
among the three main groups - investors, corporate sector and intermediaries. SEBI shall
create proper infrastructure, so that, the market automatically facilitate expansion and
growth of business to middlemen like brokers, jobbers, merchant banks, mutual funds,
commercial banks, etc. SEBI shall also create the framework for more open, orderly and
un-prejudicial conduct in relation to takeover and mergers of corporate sector to ensure
fair and equal treatment of all security holders. SEBI plays the dual role of regulation and
development. The major roles of SEBI are discussed below:
It shall device laws with unified set of objectives, single administrative authority and an
integral frame work to deal with all the aspects of the security market.
It shall also play an active role in interacting with institution of Chartered Accountants ·of
India in upgrading and making more effective the accounting and auditing standards.
It shall introduce a system of two stage disclosure at the time of initial issue and make
compulsory for the company to provide detailed information to all the stock exchange
journals.
It will examine the feasibility of introducing a dealer’s network, by which securities can be
bought or sold over the counter like in retail shop. This will smoothen liquidity and
investment opportunities.
It shall work as an authoritative institution, to see that the intermediaries are financially
sound and equipped with professional and competent manpower.
It will ensure that the rules are versatile and not rigid to provide automatic and self
regulatory growth.

Organization of SEBI

The SEBI Act provides for the establishment of a Statutory Board consisting of six
members. The chairman and two members are to be appointed by the Central Government,
one member to be appointed by the Reserve Bank and two members having experience of
securities market to be appointed by the Central Government.
SEBI has divided the activities into four operational departments. They are primary market
department, issue management and intermediary’s department, secondary market
department and institutional department. Each department is headed by an Executive
Director.
Primary Market Department: It deals with all policy matters and regulatory issues relating
to primary market, market intermediaries and redressal of investor grievances.
Issue Management and Intermediaries Department: This department is concerned with
vetting of offer documents and other things like registration, regulation and monitoring of
issue related intermediaries.
Secondary Market Department: This department looks after all the policy and regulatory
issues for the secondary market, administration of the major stock exchanges and other
matters related to it.
Institutional Investment Department: This department is concerned with framing policy
for foreign institutional investors, mutual funds and other matters like publications,
membership in international organization etc.
 16

In addition to the above, there are two other departments - Legal Department and
Investigation Department.
SEBI has two advisory committees, one each for primary and secondary markets. The
committees are constituted from among the market players, recognized investor
associations and eminent persons associated with capital market. These committees are
non-statutory committees.
SEBI and Central Government
The Central Government has power to issue directions to SEBI Board, supersede the
Board, if necessary and to call for returns and reports as and when necessary. The Central
Government has also power to give any guideline or to make regulations and rules for
SEBI and its operations.
The activities of SEBI are financed by grants from Central Government, in addition to
fees, charges etc. collected by SEBI. The fund called SEBI General Fund is set up, to
which, all fees, charges and grants are credited. This fund is used to meet the expenses of
the Board and to pay salary of staff and members of the body.

1. Guidelines for Primary Market

New company
A new company is one which has not completed 12 months commercial production and
doesn’t have audited results or where the promoters do not have a track record. Such
companies will have to issue shares only at par.
A new company set up by existing companies with a five year track record of consistent
profitability and a contribution of at least 50 % in the equity share of new company, it can
issue its shares at premium i.e., it is free to price its issue.
Private and Closely held companies having a track record of consistent profitability for at
least three years shall be permitted to price their issues freely. The issue price shall be
fixed only after consulting with the lead managers to the issue.
Existing listed companies will be allowed to raise fresh capital by freely pricing expanded
capital, provided the promoter’s contribution is 50% on first Rs.loo crores of issue, 40%
on next Rs.2oo crores, 30% on next Rs.3oo crores and 15 % on balance issue amount.
In the case of composite issues (rights cum: public issue) by existing listed companies,
differential pricing shall be allowed. However, justification for the price difference should
be given in the offer document.
Lock in period is five years for promoter’s contribution from the date of allotment or from
the commencement of commercial production whichever is later. At present, the lock in
period has been reduced to one year
.
II. Guidelines for Public Issue

Abridged prospectus has to be attached with every application.

A company has to highlight the risk factors in the prospectus.
Objective of the issue and cost of project should be mentioned m the prospectus.
Company’s management, past history and present business of the firm should be
highlighted in the prospectus.
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Particulars regarding the company and other listed companies under the same management
which made any capital issue during last three years are to be stated in the prospectus.
Justification for premium, incase premium is to be stated.
Subscription list for public issues should be kept open for a minimum of 3 days and a
maximum of 40 working days.
The collection centers should be at least 30 which include all centers with stock
exchanges.
Collection agents are not allowed to collect application money in cash.
The quantum of issue shall not exceed the amount specified in the prospectus. No
retention of over subscription is permitted. Minimum number of shares per application has
been fixed at 500 shares of face value of Rs.loo/- The allotments have to be made in
multiples of tradable lot of 100 shares of Rs.1O each .Issues by way of bonus, rights etc. to
be made in appropriate lots to minimize odd lots. If minimum subscription of 90% has not
been received, the entire amount is to be refunded to investors within 120 days.
The capital issue should be fully paid up within 120 days.
Underwriting has been made mandatory.

III. Guidelines for Secondary Market

Stock Exchanges
Board of Directors of stock exchange has to be reconstituted so as to include non
members, public representatives and government representatives to the extent of 50% of
total number of members.
Capital adequacy norms have been laid down for members of various stock exchanges
depending upon their turnover of trade and other factors.
Working hours for all stock exchanges have been fixed uniformly.
All the recognized stock exchange will have to inform about the transaction within 24
hours.
Guidelines have been issued for introducing the system of market making in less liquid
scrips in a phased manner in all Stock Exchanges.
Brokers
Registration of brokers and sub-brokers is made compulsory.
In order to ensure professional qualification and financial solvency, capital adequacy
norms for registration of brokers have been evolved.
Compulsory audit of broker’s book and filing of audit report with SEBI have been made
mandatory.
For greater transparency and accountability in broker-client relationship, SEBI has made it
mandatory for brokers to disclose transaction price and brokerage separately in the
contract notes issued to the clients.
No broker is allowed to underwrite more than 5% of public issues
.
IV. Guidelines for Foreign Institutional Investors (FIIs)

Foreign Institutional Investors have been allowed to invest in all securities traded in
primary and secondary markets.
There would be no restriction on the volume of investment for the purpose of entry of
Foreign Institutional Investors.
 18

The holding of Single Foreign Institutional Investor in a company will not exceed the
ceiling of 5 % of the equity capital of the company.
Disinvestment will be allowed only through stock exchanges in India.
Foreign Institutional Investors have to pay a concessional tax rate of 10% on long term
capital gain (to others - 20%) and 30% on short term capital gains. A tax rate of 20% on
dividend and interest is prescribed.

V. Guidelines on Bonus Issues

The following are the SEBI guidelines relating to the issue of bonus shares.
There should be a provision in the Articles of Association of the company for the issue of
bonus shares. If not, the company should pass a resolution for capitalization of reserves
and should be recommended by the Board of Directors.
The bonus issue is made out of free reserves built out of genuine profits or share premiums
collected in cash only.
Reserves created by revaluation of fixed assets are not ‘permitted to be capitalized.
The declaration of bonus issues in lieu of dividend is not to be made.
Bonus issues are not permitted, unless the existing partly paid shares are fully paid.
No bonus issues shall be permitted, if the company has defaulted in respect of payment of
statutory dues to the employees.
No bonus issue can be made within 12 months of any public issue or right issue.
No bonus issue will be permitted if the company defaults in payment of principal or
interest on fixed deposit or on debentures.
When a company announces the issue of bonus shares, it must be implemented within 6
months from the date of such proposal and shall not have the option of changing the
decision.
The bonus issues after public or right issues shall not dilute the value or rights of the
holders of fully or partly convertible debentures.

VI. Guidelines on Right Issues 10

Where composite issues are made by listed companies, they can be issued at different
prices Gaps between the clearance dates of right issues and public issues should not
exceed 30 days. If right issues of listed companies exceed Rs.50 lakhs, issue should be
managed by an authorized merchant banker. Underwriting of right issues is not mandatory
but as per SEBI Rules right issues can be underwritten. No preferential allotment shall be
made along with the right issues. If the company doesn’t receive minimum subscription
(90% of the issue amount) within 120 days from the date of opening issue, the entire
subscription should be refunded within 128 days with interest @ 15 % p.a. for delay. .
The proposed right issue should not dilute the value or rights of fully or partly convertible
debenture holders. The issue should not exceed the quantum specified in the prospectus
i.e., no part of over subscription is retained.Within 45 days of closure of rights issue, a
report in the prescribed form along with compliance report duly signed by the statutory
auditor should be forwarded to SEBI.

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All listed companies making rights issue shall issue an advertisement in at least two All
India newspapers about the dispatch of letters of offer, opening date, closing date etc.

VII. SEBI Guidelines on Underwriters

No person can act as an underwriter, unless he holds certificate of registration granted by

SEBI.
The certificate of registration is valid for 3 years from the date of issue.
The total underwriting obligations shouldn’t exceed 20 times of his net worth.
The underwriter should subscribe securities within 30 days of the receipt of the intimation
from the company. The underwriter should furnish within six months from the end of the
financial year a copy of the Balance Sheet, Profit and Loss Account, the statement of
capital adequacy requirement etc. as required by SEBI.The books of accounts should be
maintained for a period of 5 years.

Relevance of SEBI guidelines

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) has been enacted
for the establishment of the Board with the object of protecting the interests of investors in
securities and to promote the development and to regulate the securities market
and for matters connected therewith or incidental thereto. Securities market is very
dynamic and the laws governing it have to be responsive to the market needs. The SEBI
Act was amended in the years 1995, 1999 and 2002 to meet the requirements of changing
needs of the securities market and responding to the development in the securities market.
The World Bank and the International Monetary Fund (IMF) have introduced a
benchmark i.e., Financial Services Assessment Programmed (FSAP) to strengthen the
monitoring of financial systems in the context of the IMF’s bilateral surveillance and the
World Bank’s financial sector development work. The FSAP is designed to help countries
enhance their resilience to crisis and cross-border contagion, and to foster growth by
promoting financial system soundness and financial sector diversity. The mission of SEBI
is to make India as one of the best securities market of the world and SEBI as one of the
most respected regulator in the world. SEBI endeavors to achieve the standards of
IOSCO/FSAP. Amendments will be required to be made in the Securities Laws especially
the SEBI Act, which will facilitate India and SEBI to achieve above objective. The Report
of Joint Parliamentary Committee (JPC) dated December 02, 2002 on stock market scam
also made several recommendations in respect of the securities market. These
recommendations include provisions for compensation to aggrieved investors, the concept
of Ombudsman in the capital market, establishment of special courts for financial crimes,
regulation of listed companies by SEBI, shifting of Investor. Education and Protection
Fund established under section 205C of the companies Act to SEBI, etc. Many of the
above recommendations would require changes in the SEBI Act. The amendments
effected in 2002 have sought to address certain shortcomings in the provisions of the SEBI
Act, 1992, particularly with respect to matters relating to inspection, investigation and
enhancement of penalties to serve as effective deterrents.
 20

However, it was felt that some of the amendments effected in 2002 may also require
amendments to remove ambiguities, if any.
.

Objectives of the study

This study proposes to evaluate the performance of Takeover Regulations

in the past seven years in order to examine:
a) the extent of their usage;
b) nature of the industry that availed the Regulations;
c) type of investors who disinvested and took control;
d) the process or technique used in the takeover of companies;
e) total amount changed over the period;
f) establish relationship between stock market performance and
takeover activities;
g) identify seasonality, if any, in the takeover business; and
h) identify drivers shaping the acquisition business in India.

. Main Findings/observations :

_ For the past seven years (97-98 to 03-04), since SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 a total of 493 companies had been taken over by way of
making open offers. 1479 companies availed exemptions during this period. Thus, these
two categories together accounted for 1972 companies. Under open offer category, a
maximum of ninety eight companies made public offers in 02-03. In the first six years, the
number had been continuously on a rise. Only in 03-04, it fell down to sixty-five.
Regulations pertaining to Exemptions underwent major changes in September 2002.
Therefore, the number of exemptions had been on a decline since then._ There are clear
and visible indications with regard to industry clusters. Twenty per cent of the total
number of companies changed hands belonging to Finance industry, nine per cent to the
Metal Industry and 7.5 per cent to InfoTech industry. These three industries together
accounted for about thirty seven per cent of the total takeovers. The size of the companies
in these industries is small by nature and consequently management appears to be simple
in these industry categories. _ On the basis of the amount involved, the picture throws
quite different result. Petrochemical industry with about 13.6 per cent stood at first
place, followed by Electronics and Electrical with 13.2 per cent and Metal with 11.9 per
cent. The scales might have turned in favor of Petrochemicals industry due to two highly
capital intensive acquisitions (PSU disinvestment) belonging to Petrochemical industry. In
terms of amount involved, Finance industry and InfoTech industry shared very
meager percentage. _ The Takeover Regulations classify Takeovers into three broad
categories namely ‘Change in Control’, ‘Consolidation of Holdings’ and ‘Substantial
Acquisition of Shares’. The data reveals (on the basis of number of companies) that
‘Change in Control’ has a predominant share with about sixty per cent of the companies’
acquired under this category. This is distantly followed by ‘Consolidation of Holding’
 21

at about twenty seven per cent and the third place was secured by ‘Substantial Acquisition
of Shares’ with thirteen per cent. Change in Control of management could be direct or
indirect. It could also arise due to several other reasons, one of them being ‘Substantial
Acquisition of Shares’. _ Analysis on the basis of the amount involved also provides
almost consistent results in terms of objectives of acquisition. The share of
‘Change in Control’ fell down but it retained its numerous undo slot. ‘Consolidation of
Holdings’ made progress by controlling about thirty-eight per cent of the total amount.
The third position, under this analysis also was retained by ‘Substantial Acquisition of
Shares’
objective. Year wise analysis provides some changes. _ The acquisitions are analyzed on
the basis of the background of acquirer. Acquirers are mostly Indians in almost four out of
five cases. Only one-fifth of the total number is acquired by foreigners. A different
angle of analysis i.e. promoters and non-promoters discloses that non-promoters are
dominant acquirers with a share of about seventy-three per cent. The existing promoters
played minor role with about t twenty-seven per cent while taking over companies. This
indicates that new entrepreneurs (not connected with existing management) are taking
keen interest in taking over listed companies. This is further reinforced by role of new
shareholders whose stake stood at about fifty-six per cent. Existing shareholders
(promoters and non-promoters) had a share of about forty-four per cent. Certain illusion
present such as, foreigners garnering Indian companies doesn’t appear to be
a fact _ MoU acquisition account for Rs.9, 333 crore which is slightly less than half of the
amount offered in open category. The number of companies that entered into MoU
account for 334 in the entire period. The number under this category has been
continuously on rise till 2000-01 and thereafter there is a continuous fall. This could be
due to a major change made in September 2002. _ Exemptions – Total number of 1479
companies were exempt from the making of open offers during the period. This is almost
three times the number of that made open offers. The amount involved works out to Rs.19,
908 crore. This is much higher than open offer amount of Rs.15, 308 crore. The role of
exemptions receded since September 2002 as a result of changes made to the Regulations.
The numbers have been falling since then along with the amount involved possibly due to
the hangover effect _ Preferential allotment route was dominant method used to avail
exemptions till September 2002. Thereafter, this route became a less used one._ An
attempt has been made to see the relationship between secondary market and takeover
activities. From the analysis it is found that there appears to be a relationship between
stock market performance and takeover activity. Acquisition generally precedes a rise in
the market. In other words, the predators acquired shares in falling market so that their
commitment in the open offers could work out to be less._ Seasonality was examined to
see any repeated pattern in terms of acquisition. We could not find out any seasonality

Relevant enactment for securities of investor under SEBI

 22

According to SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES,

2000 under sec 2(vii) define “Company” means the Company defined in Section 3 of the
Companies Act, 1956;
( iv) “Board” means the Securities and Exchange Board of India established under
provisions of Section 3 of the Act;
xii) “Depository” means a body corporate registered under Securities and Exchange Board
of India (Depositories and Participants) Regulations, 1996

(xiii-a) “Green Shoe Option” means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing mechanism in
accordance with the provisions of Chapter VIII-A of these Guidelines, which is granted to
a company to be exercised through a Stabilizing Agent.) “Guidelines” means Securities
and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 1999 and
includes instructions issued by the Board

Investor Protection Fund11

SEBI has been created inter alia for the purpose of protecting the interests of investors in
securities. The investor education is more relevant in the context of complexities involved
in various options and instruments of investments available in the securities market. Retail
investors are not in a position to identify and /or appreciate the risk factors associated with
certain scraps or schemes. With the result they are not able to make informed investment
decisions. Since development of securities market largely depends upon proper education
of investors, SEBI is committed to spread awareness amongst them.
The Joint Parliamentary Report (JPC) on securities scam of 2001 had recommended that in
order to enable SEBI to undertake investor education and awareness campaign effectively,
the investor education and protection fund established under section 205C of the
Companies Act and investor education resources of RBI should be shifted to SEBI and a
joint campaign for investor education and awareness under the leadership of SEBI must be
undertaken.
The Group noted that majority of the stakeholders have agreed for the setting up of a
separate investor protection fund under the SEBI Act. It is also suggested by the
stakeholders that the said fund should be utilized exclusively for the purpose of investor
education, conducting awareness programmed and for protecting the interest of investors.
The Group also noted that the proposed Investor Protection Fund is for the purpose of
achieving the objective of Investor Education and awareness In terms of section 55A of
the Companies Act, SEBI is required to administer the provisions of sections specified in
section 55A in respect of issue of capital, transfer of securities and non payment of
dividend in case of listed companies and the companies which intend to get their securities
listed on the stock exchange. Further, SEBI is required to protect the interest of investors
and enforce redressed of grievances of investors by listed companies.
In the light of the above provisions, the Group also discussed the proposition regarding
payment of compensation to investors for the purpose of investor protection. In this
regard, the Group also deliberated on the suggestion for setting up of a Fund on the lines
of Fair Fund established under the Sarbanes Oxley Act, 2002 of United States which is
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used for compensating the investors out of the penalties received. Another view was
expressed during deliberations that the investors in the equity market invest in risk capital
and no assured return or compensation for non fulfillment of every expectation may be
provided in the statute. However, compensation in respect of fraud or misrepresentations
or misstatements by companies or intermediaries may be considered. Further the Group
noted that the Pension Fund Regulatory and Development Authority, Ordinance, 2004
which mandated the Pension Fund Regulatory and Development Authority (PFRDA) to
protect the interest of subscribers to the schemes of pension funds has permitted PFRDA
to set up the Subscriber Education and Protection Fund. The said Ordinance also specifies
the monies which should be credited to the said Subscriber Education and Protection
Fund. The said Ordinance also provides that all sums realized by way of penalties by
PFRDA under the Ordinance shall be credited to the Subscriber Education and Protection
Fund. The Group felt that to achieve the objective of investor protection by investor
education and investor awareness, a separate fund under the SEBI Act on the lines of
Subscriber Education and Protection Fund under PFRDA Ordinance 2004 to be ministered
by SEBI may be set up and administered by SEBI for investor education and awareness.
Further, the compensation to small investors in respect of fraud or misrepresentations or
misstatements by companies or intermediaries may be considered as a matter of investor
protection out of the said Investor Protection Fund. In this regard it is felt desirable that
SEBI may specify guidelines and parameters for administration of the Investor Protection
Fund the for the purpose of Investor Education and Awareness and payment of pensation
to small investors. In this regard, the guidelines issued by SEBI in respect of Investor
Protection Fund of stock exchanges may be adopted with necessary changes. As regards
the monies to be credited to the said Investor Protection Fund, the Group took into
consideration the representation of the National Stock Exchange that the big stock
exchanges are utilising the monies for the purpose suitably. The Group also noted that the
monies lying with the IPF of small stock exchanges are not being utilized to the full
satisfaction. It is considered that the monies lying unutilized for substantial period in the
Investor Protection Fund of the stock exchanges should be transferred to the proposed

Sebi guidelines force funds to close schemes12

FebIn the last two months, at least 14 mutual fund schemes have closed down, according
to announcements made by fund houses. The reason: they had less than 20 investors in the
scheme or a single investor was accounting for more than 25 per cent of the corpus.
For instance, Canara Robeco Monthly Interval Plan, HSBC Interval plan 1, Fortis
Quarterly Interval Plan L and ING Quarterly Interval Plan A have all closed down
recently. According to the Securities and Exchange Board's guidelines, any scheme should
have at least 20 investors. Also, no investor can account for over 25 per cent of the
corpus.
Most of these schemes are all interval funds of fixed maturity plans. Interval plans are
both open-end and closed-end in nature. That is, once the scheme is launched, they are
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open for a few days for subscription before they close for a specific time, say a month or
three months. Then, they open again for fresh subscription or exit for another two-three
days.
Market experts said that these were small schemes with mostly high networth investors.
Earlier, fund houses would aggressively market these funds to their HNI and corporate
clients by showing a good quality 'indicative portfolio' and promising 'indicative returns.'
However, since October, heavy redemptions started in the mutual fund industry. FMPs
were hit quite severely. Their average assets under management have fallen by over Rs
20,000 core (Rs 200 billion) in the last three months. Akhilesh Singh, head, business
development, Emkay Global Financial Services said, "In times of crisis, investors find it
risky to stay in smaller funds. Therefore, they face more redemption pressure."
When the redemption pressure hit the fund houses, many risk-averse investors started
moving out of these schemes. As a result, in some cases, the stake of a single investor
went over 25 per cent of the corpus.

Protection Of The Investors By Sebi113

This paper explores the field of investor’s protection as far as the achievements of SEBI
till date are concerned and nevertheless it focuses upon the future perspectives of an
investor in the hands of SEBI. The Primary function of Securities and Exchange Board of
India under the SEBI Act, 1992 is the protection of the investors’ interest and the healthy
development of Indian financial markets. No doubt, it is very difficult and herculean task
for the regulators to prevent the scams in the markets considering the great difficulty in
regulating and monitoring each and every segment of the financial markets and the same is
true for the Indian regulator also. But what are the responsibilities of the regulators to set
the system right once the scam has taken place, especially the possibility of redressing the
grievances of the investors so that their confidence is restored? The redressed of investors’
grievances, after the scam, is the most challenging task before the regulators all over the
world and the Indian regulator is not an exception. One of the weapons in the hand of the
regulators is the collection and distribution of disgorged money to the aggrieved investors.
SEBI had issued guidelines for the protection of the investors through the Securities and
Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000. These
Guidelines have been issued by the Securities and Exchange Board of India under Section
11 of the Securities and Exchange Board of India Act, 1992.
Before proceeding further we need to be well informed about few important definitions as
stated under the guidelines, to start with is; Issuer Company- means a company which has
filed offer documents with the Board for making issue of securities in terms of these
guidelines , Listed Company- means a company which has any of its securities offered
through an offer document listed on a recognized stock exchange and also includes Public
Sector Undertakings whose securities are listed on a recognized stock exchange ,
Merchant Banker- means an entity registered under Securities and Exchange Board of
India (Merchant Bankers) Regulations, 1992 , Offer Document- means Prospectus in case
of a public issue or offer for sale and Letter of Offer in case of a rights issue , Offer for

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Sale- means offer of securities by existing shareholder(s) of a company to the public for
subscription, through an offer document.

The Zeal For Investor’s Protection

Now let’s traverse through some important guidelines that are offered by the SEBI
dedicated to the cause of investor’s protection.

Eligibility Norms For Companies Issuing Securities:-

Provisions regarding this are enshrined in Chapter-II of the said guidelines. No company
shall make any issue of a public issue of securities, unless a draft prospectus has been filed
with the Board, through an eligible Merchant Banker, at least 21 days prior to the filing of
Prospectus with the Registrar of Companies (ROCs). Provided that if, within 21 days from
the date of submission of draft Prospectus, the Board specifies changes, if any, in the draft
Prospectus (without being under any obligation to do so), the issuer or the Lead Merchant
banker shall carry out such changes in the draft prospectus before filing the prospectus
with ROCs. o listed company shall make any issue of security through a rights issue where
the aggregate value of securities, including premium, if any, exceeds Rs.50 lacs, unless the
letter of offer is filed with the Board, through an eligible Merchant Banker, at least 21
days prior to the filing of the Letter of Offer with RSE. Provided that if, within 21 days
from the date of filing of draft letter of offer, the Board specifies changes, if any, in the
draft letter of offer, (without being under any obligation to do so), the issuer or the Lead
Merchant banker shall carry out such changes before filing the draft letter of offer. No
company shall make an issue of securities if the company has been prohibited from
accessing the capital market under any order or direction passed by the Board.

Pricing By Companies Issuing Securities:-

These provisions are being dealt in the Chapter-III of the guidelines. A listed company
whose equity shares are listed on a stock exchange, may freely price its equity shares and
any security convertible into equity at a later date, offered through a public or rights issue.
An unlisted company eligible to make a public issue and desirous of getting its securities
listed on a recognised stock exchange pursuant to a public issue, may freely price its
equity shares or any securities convertible at a later date into equity shares. An eligible
company shall be free to make public or rights issue of equity shares in any denomination
determined by it in accordance with Sub-section (4) of Section 13 of the Companies Act,
1956 and in compliance with the following and other norms as may be specified by SEBI
from time to time: In case of initial public offer by an unlisted company, if the issue price
is Rs. 500/- or more, the issuer company shall have a discretion to fix the face value below
Rs. 10/- per share subject to the condition that the face value shall in no case be less than
Rs. 1 per share; and, if issue price is less than Rs. 500 per share, the face value shall be Rs.
10/- per share; The disclosure about the face value of shares (including the statement about
the issue price being “X” times of the face value) shall be made in the advertisement, offer
documents and in application forms in identical font size as that of issue price or price
band.)
 26

Pre- Issue Obligations:-

The pre issue obligations are provided in Chapter-V, they are as follows:• The lead
merchant banker shall exercise due diligence.

• The standard of due diligence shall be such that the merchant banker shall satisfy himself
about all the aspects of offering, veracity and adequacy of disclosure in the offer
documents.
• The liability of the merchant banker shall continue even after the completion of issue
process.
No company shall make an issue of security through a public or rights issue unless a
Memorandum of Understanding has been entered into between a lead merchant banker
and the issuer company specifying their mutual rights, liabilities and obligations relating to
the issue.

Contents Of Offer Document:-

In addition to the disclosures specified in Schedule II of the Companies Act, 1956, the
prospectus shall also contain all material information which shall be true and adequate so
as to enable the investors to make informed decision on the investments in the issue. The
prospectus shall also contain the information and statements specified in this chapter and
shall as far as possible follow the order in which the requirements are listed in this chapter
and summarised in Schedule VIIA.

Consequence Of Non-Observance Of The Guidelines

SEBI in case of non-observance of these guidelines (Section 11B) as it seems to be a bar

from doing such things which may prejudice the interest of the investors the board can
give the following directions:-
Direct the persons concerned to refund any money collected under an issue to the investors
with or without requisite interest, as the case may be, direct the persons concerned not to
access the capital market for a particular period, direct the stock exchange concerned not
to list or permit trading in the securities, direct the stock exchange concerned to forfeit the
security deposit deposited by the issuer company, any other direction which the Board
may deem fit and proper in the circumstances of the case.
Provided that before issuing any directions the Board may give a reasonable opportunity to
the person concerned. Provided further that if any interim direction is sought to be passed,
the Board may give post decisional hearing to such person.

Future Overcast Of The Investors

SEBI being a premiere institution for dealing with the problems relating to securities has
advanced a long way towards protecting the investors from the hazards of the predators
existing in the market. As already stated before it has compiled a great bunch of guidelines
dedicated to this cause. But the real scenario which came as a consequence was that only
 27

the big fishes could escape the net and the small ones were still striving to uphold their
existence. In this matter, according to a daily newspaper it has become clear that SEBI had
already received suggestion and advice regarding the need for a separate enactment
concerning the small investors. As far as it is concerned, the Government has thought of
introducing an independent legislation on investor protection to safeguard the interests of
small investors. A separate legislation had also been recommended in the report prepared
by Mr. Mitra, who was commissioned by the Finance Ministry to draw up the terms of
reference for a new Bill. A debate has been on over the need for a separate legislation for
protecting the interests of small investors, considering that there are multiple agencies
involved in policing companies that raise funds from the public be it public listed
companies, or NBFCs (Non Banking Financial Companies). These include the capital
markets regulator, SEBI, the banking regulator, RBI, and the Department of Company
Affairs (DCA) which is responsible for regulating unlisted companies. SEBI has been in
favour of a separate regulatory agency for the protection of small investors. The regulator
had earlier submitted a proposal to the Finance Ministry, outlining the need for a new Act.
The setting up of a comprehensive fund for the protection of investors has also been
recommended by Mr. Mitra which we see in reality to have been already existing today. In
fact, the report has suggested that the existing Investor Protection Fund, the corpus of
which is to come from unclaimed dividends, should be merged with the new fund.
Necessary for imposing penalty14

To scrutinize this statement. it would be pertinent to go into the development of the

jurisprudence relating to economic offences in India. The breach of a civil obligation
imposes a civil liability fur whichthere should be no prerequisite of mens rea per se. The
same was observed in the case of Director of Enforcement v. MCTM Corporation Pvt. LId.
and Ors, AIR 1996 SC 306, where the court held "a finding that the delinquent has
contravened the provisions of Section 10 FERA, 1947, would immediately attract the levy
of 'penalty' under Section 23, irrespective of the fact whether the contravention was made
by the defaulter with any 'guilty intention' or not." Therefore, unlike in a criminal case,
where it is essential for the prosecution to establish that the accused had the necessary
mens rea to commit the offence he is charged with before recording his conviction, such
proof does not remain essential here. A penalty imposed on a wrongdoer in such cases is
for a breach of a civil obligation, remedial and coercive in its nature, and is far different
from the fine or forfeiture provided as punishment for the violation of criminal or penal
laws. Many offences based on the principle of strict liability, which means liability
without fault or mens rea, exist in many statutes relating to economic crimes as well as in
laws concerning industry, food adulteration, prevention of pollution, etc. in India and
abroad. 'Absolute offences' are not criminal offences in any real sense, but acts which are
prohibited in the interest of welfare of the public, and the prohibition is backed by sanction
of penalty. Long ago, the Supreme Court in the case of 1. K. industries LId. and Ors. v. Chief
Inspector oj Factories aud Boilers and Ors, AIR 1965 SC 341, has categorically held that
these offences under any Act are not a part of general penal law but arise from the bre ach of a duty
provided in a special beneficial social defence legislation, which creates absolute or strict liability
not requiring proof of any mens rea. The omission or commi sion of the statutory breach is itself
an offence.
14
From the lawyers collective
 28

Coming down to the offence of insider trading, where it is very difficult to prove the wilful
involvement of an 'insider' in the unfair trade practice, the Apex Court has provided SEBI with a
sense of relief by opining in a very recent judgment (Swedish Match AB and AIlI: v .SEBI and
Am; AIR 2004 SC 393), "Section ISH of the Act mandates that a penalty of rupees twenty-five
crorcs may be imposed. The Board does not have any discretion in the matter and thus the
adjudication proceeding is a mere formality. Imposition of penalty upon the appellant would, thus,
be a forgone conclusion. Only in the criminal proceedings initiated against the appellants,
existence of mens rea on the part of the appellants will come up for consideration."

In the light of the above rulings, it can be inferred that though mens rea is an essential or sine
qua non for a criminal offence, a straitjacket formula of mens rea cannot be blindly followed in
each and every case for the eason thgj it n~a dilute th cheme 0 a lliift.klli.ar.. statute. In cases
where from the scheme bject and words used in the statute, it appears that the proceedings for
imposition of the penalty are adjudicatory in nature, in contra-distinction to criminal or quasi
criminal proceedings, the determination will be of the breach of the civil obligation. In such a case
a lenient approach towards the offender for the want of mens rea will not only frustrate the
purpose of the statute, but will also encourage the offender to continue to act in contravention of
the obligations bestowed by the statute. 15

A welcome verdict
In the matter of The Chairman, SEBI v. Shriram Mutual Fund, AIR 2006 SC 2287, the court
has unambiguously ob erved that SAT had weakened the SEBI by routinely slashing its penalties
and that it has mi. erably failed to appreciate that by setting aside the order of the adjudicating
officer (of SEBI), SAT was setting a serious wrong precedent whereby every offender would take
the shelter of alleged hardships to violate the provisions of the Act.
This case raised an important question of law as to whether once it is conclusively established that
a Mutual Fund has violated the terms of the Certificate of Registration and the statutory
regulations, the imposition of penalty becomes a sine qua non of the violation. The court
categorically held that the legislature in its wisdom had not included mens rea or deliberate or
willful nature of default a. a factor to be considered by the Adjudicating Officer in determining the
quantum of liability to be imposed on the defaulter.16

Conclusion
The apex court's order in Shriram Mutual Fund will give more elbowroom to the
regulators to enforce market discipline, but it must ensure that its adjudicating officials act
with maturity and do not misuse their powers by imposing absurdly high penalties for
minor violation . The term penalty should be differentiated from the word 'fine' -- a fine
can be an outcome of a criminal proceeding only, but the expression 'penalty' is a word of
wide significance. Sometimes, it means recovery of an amount as a penal measure even in
civil proceedings. The intention of the legislature behind imposing penalty is that the
penalty should serve as a deterrent and must discourage the repetition of the offence. This
purpose would be solved only if SEBI is empowered to impose severe penalties in cases of
the breach of statutory violations.
15
From the lawyers collective
16
sanjaychatterjee@legalserviceindia.com
 29

Since the legal scenario is clear before both the market players and legal experts. it is hoped that
the Security market will be regulated in the most desirable manner, which would not carry any
ambiguity or any space for manipulation for wily players to maneuver the law to serve their own
interests. Further. the judgment of the Supreme Court in Shrirani Mutual Fund will go a long
way in taking care of the interests of investors.

SEBI, if not 100%, than for sure it has been near to 100% success as far as the protections
of the investors are concerned. As we have seen that via different guidelines it had made it
sure that no stone remains unturned in the path of the mission of protecting the investors.
But at present the two greatest challenges are the scams relating to mutual fund and the
disgorgement of money.
As regards to the mutual fund problem, according to a current issue in a newspaper it had
become clear that, the Capital market regulator SEBI is concerned about the kind of
service mutual funds are providing to their investors and wants the industry to focus on the
hassle-free redemptions and also conduct an investor survey, in their own interest.
Furthermore Mr.C.B. Bhave while pointing towards the mutual fund institutions
commented that, “Take up investor survey to find out what they feel about your products,
why do they like certain products……….”, “Focus on what the client wants, as this will be
in your interest,” he added. He also assured that SEBI would be having an advisory
committee for the MF institutions. The SEBI Chairman also suggested setting up of a
depository that will maintain database of all mutual fund investors across the country,
much in line with the depositories for the equity market. SEBI is also planning to hold a
workshop for the trustees to get their feedback and to know their requirements. The
regulator has also decided to set up a mutual fund advisory committee to address the issues
faced by the industry.
In India, the position is not so well and hence the picture is not clear as to how the
disgorged money is to be treated. Generally, the payments received by way of penalties
are deposited in Consolidated Fund of India. In its first ever disgorgement order on 21st
November, 2006, in Karvey case, SEBI directed NSDL, CDSL and eight depository
participants (DPs) to return Rs115.81 crore in six months. The DPs include Karvey,
HDFC Bank, Khandwala Securities, IDBI Bank, Jhavei Securities, ING Vysya Bank, PR
Stock Broking and Pratik Stock Vision. On the issue of disgorgement, in the order passed
in the Karvey case, SEBI said, “It is well established worldwide that the power to disgorge
is an equitable remedy and is not a penal or even a quasi- penal action. Thus it differs from
actions like forfeiture and impounding of assets or money. Unlike damages, it is a method
of forcing a defendant to give up the amount by which he or she was unjustly enriched.
The point of importance here is that the order was passed with the need felt to restore
confidence about the market process in the minds of investors who were deprived of their
entitlement to shares under the IPO as a result of illegal cornering of shares by some
financiers. The Wadhwa Committee report of December 2007 recommended making good
deprived investors in money terms, which, it seems, went well with the SEBI, as
understood from its order of disgorgement.17

17
sanjaychatterjee@legalserviceindia.com
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